UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 FORM
10-Q
 (Mark
One)
 T
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended September 30, 2008
 
 £
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
 
 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)
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 TNo o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   Large
accelerated filer £ Accelerated
filer £ Non-accelerated
filer £
 (Do not
check if a smaller reporting company) Smaller reporting
company T
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £No T
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS:
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Common
stock, $1.00 par value – 2,124,247 shares outstanding as of November 12,
2008
  
 1
 
 INDEX
                
                PagePart
      I – FINANCIAL INFORMATIONFinancial
      Statements:Consolidated Balance Sheets September 30, 2008 and December 31,
      2007
                
                3Consolidated Statements of Operations Three and Nine Months
      Ended September 30, 2008 and 2007
                
                4Consolidated Statements of Comprehensive Income Three and Nine
      Months Ended September 30, 2008 and 2007
                
                5Consolidated Statements of Changes in Shareholders’ Equity
      Nine Months Ended September 30, 2008 and 2007
                
                6Consolidated Statements of Cash Flows Nine Months Ended
      September 30, 2008 and 2007
                
                7Notes to Consolidated Financial Statements
                
                8Item 2 - Management’s Discussion and Analysis Financial
      Condition and Results of Operations
                
                13Item 4T – Controls and Procedures
                
                24Part
      II – OTHER INFORMATIONItem 4 – Submission of Matters to a Vote of Security
      Holders
                
                25Item 5 – Other Information
                
                25Item 6 –Exhibits
                
                25Signatures
                
                26
 
  2
 Index
  Part
I.                      FINANCIAL
INFORMATION
 
 ItemI.                      Financial
Statements
 
 WeststarFinancial Services Corporation &
Subsidiary
 Consolidated
Balance Sheets
 (unaudited)September
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007*ASSETS:Cash
      and cash equivalents:Cash
      and due from banks
                    
                    $
                    4,262,128
                    
                    
                    $
                    4,720,172Interest-bearing
      deposits
                    
                    
                    55,467
                    
                    
                    
                    132,284Federal
      funds sold
                    
                    
                    3,419,000
                    
                    
                    
                    3,655,000Total
      cash and cash equivalents
                    
                    
                    7,736,595
                    
                    
                    
                    8,527,456Investment
      securities- available for sale, at fair value (amortized cost of
      $24,367,201 and $26,090,739, respectively)
                    
                    
                    23,681,294
                    
                    
                    
                    26,113,294Loans
                    
                    
                    157,724,566
                    
                    
                    
                    135,734,224Allowance
      for loan losses
                    
                    
                    (2,355,244
                    )
                    
                    
                    (2,090,125
                    )Net
      loans
                    
                    
                    155,369,322
                    
                    
                    
                    133,644,099Premises
      and equipment, net
                    
                    
                    2,736,125
                    
                    
                    
                    2,981,163Accrued
      interest receivable
                    
                    
                    921,027
                    
                    
                    
                    972,603Federal
      Home Loan Bank stock, at cost
                    
                    
                    585,600
                    
                    
                    
                    463,300Deferred
      income taxes
                    
                    
                    1,042,783
                    
                    
                    
                    572,594Foreclosed
      properties
                    
                    
                    227,407
                    
                    
                    
                    87,787Other
      assets
                    
                    
                    772,909
                    
                    
                    
                    895,702TOTAL
                    
                    $
                    193,073,062
                    
                    
                    $
                    174,257,998LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilities:Deposits:Demand
                    
                    $
                    26,850,689
                    
                    
                    $
                    28,021,869NOW
      accounts
                    
                    
                    18,418,585
                    
                    
                    
                    15,645,860Money
      market accounts
                    
                    
                    29,759,909
                    
                    
                    
                    28,609,220Savings
                    
                    
                    2,451,996
                    
                    
                    
                    1,943,712Time
      deposits of $100,000 or more
                    
                    
                    26,274,474
                    
                    
                    
                    26,584,176Other
      time deposits
                    
                    
                    62,763,833
                    
                    
                    
                    48,386,179Total
      deposits
                    
                    
                    166,519,486
                    
                    
                    
                    149,191,016Short-term
      borrowings
                    
                    
                    1,254,477
                    
                    
                    
                    419,669Accrued
      interest payable
                    
                    
                    470,370
                    
                    
                    
                    567,710Other
      liabilities
                    
                    
                    921,581
                    
                    
                    
                    776,364Long-term
      debt
                    
                    
                    8,124,000
                    
                    
                    
                    8,124,000Total
      liabilities
                    
                    
                    177,289,914
                    
                    
                    
                    159,078,759SHAREHOLDERS’
      EQUITY:Preferred
      stock, authorized $1,000,000 shares;No shares issued and
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $1 par value, authorized- 9,000,000 shares;outstanding shares- and
      2,124,247 at September 30, 2008and 2,118,437 at December 31, 2007,
      respectively
                    
                    
                    2,124,247
                    
                    
                    
                    2,118,437Additional
      paid-in capital
                    
                    
                    6,147,598
                    
                    
                    
                    6,133,773Retained
      earnings
                    
                    
                    7,932,792
                    
                    
                    
                    6,913,168Accumulated
      other comprehensive income (loss)
                    
                    
                    (421,489
                    )
                    
                    
                    13,861Total
      shareholders’ equity
                    
                    
                    15,783,148
                    
                    
                    
                    15,179,239Total
                    
                    $
                    193,073,062
                    
                    
                    $
                    174,257,998
 
 *Derived
from audited consolidated financial statements.
 See notes
to consolidated financial statements.
  3
 Index
  WeststarFinancial Services Corporation &
Subsidiary
 Consolidated Statements of Operations(unaudited)
 Three
      Months
                  
                  
                  Nine
      MonthsEnded
      September 30,
                  
                  
                  Ended
      September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007INTEREST
      INCOME:Interest
      and fees on loans
                  
                  $
                  2,780,707
                  
                  
                  $
                  2,918,193
                  
                  
                  $
                  8,096,225
                  
                  
                  $
                  8,571,817Federal
      funds sold
                  
                  
                  3,416
                  
                  
                  
                  69,012
                  
                  
                  
                  44,592
                  
                  
                  
                  107,935Interest-bearing
      deposits
                  
                  
                  336
                  
                  
                  
                  2,463
                  
                  
                  
                  1,552
                  
                  
                  
                  5,800Investments:Taxable
      interest income
                  
                  
                  196,594
                  
                  
                  
                  231,183
                  
                  
                  
                  625,533
                  
                  
                  
                  662,386Nontaxable
      interest income
                  
                  
                  91,704
                  
                  
                  
                  85,682
                  
                  
                  
                  266,425
                  
                  
                  
                  244,500Corporate
      dividends
                  
                  
                  7,451
                  
                  
                  
                  8,430
                  
                  
                  
                  21,672
                  
                  
                  
                  23,120Total
      interest income
                  
                  
                  3,080,208
                  
                  
                  
                  3,314,963
                  
                  
                  
                  9,055,999
                  
                  
                  
                  9,615,558INTEREST
      EXPENSE:Time
      deposits of $100,000 or more
                  
                  
                  271,069
                  
                  
                  
                  343,063
                  
                  
                  
                  930,663
                  
                  
                  
                  902,242Other
      time and savings deposits
                  
                  
                  791,346
                  
                  
                  
                  876,561
                  
                  
                  
                  2,412,338
                  
                  
                  
                  2,569,545Short-term
      borrowings
                  
                  
                  5,661
                  
                  
                  
                  3,226
                  
                  
                  
                  17,478
                  
                  
                  
                  52,077Long-term
      debt
                  
                  
                  112,921
                  
                  
                  
                  140,195
                  
                  
                  
                  352,942
                  
                  
                  
                  415,992Total
      interest expense
                  
                  
                  1,180,997
                  
                  
                  
                  1,363,045
                  
                  
                  
                  3,713,421
                  
                  
                  
                  3,939,856NET
      INTEREST INCOME
                  
                  
                  1,899,211
                  
                  
                  
                  1,951,918
                  
                  
                  
                  5,342,578
                  
                  
                  
                  5,675,702PROVISION
      FOR LOAN LOSSES
                  
                  
                  320,635
                  
                  
                  
                  137,395
                  
                  
                  
                  508,760
                  
                  
                  
                  224,970NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                  
                  
                  1,578,576
                  
                  
                  
                  1,814,523
                  
                  
                  
                  4,833,818
                  
                  
                  
                  5,450,732OTHER
      INCOME:Services
      charges on deposit accounts
                  
                  
                  291,527
                  
                  
                  
                  290,610
                  
                  
                  
                  859,546
                  
                  
                  
                  855,121Other
      service fees and commissions
                  
                  
                  119,278
                  
                  
                  
                  91,260
                  
                  
                  
                  324,082
                  
                  
                  
                  253,151Securities
      losses
                  
                  
                  -
                  
                  
                  
                  (1,093
                  )
                  
                  
                  -
                  
                  
                  
                  (1,093
                  )Equity
      in income (loss) of Bank of Asheville Mortgage Company,
LLC
                  
                  
                  814
                  
                  
                  
                  (9,051
                  )
                  
                  
                  (15,295
                  )
                  
                  
                  (43,117
                  )Other
                  
                  
                  13,999
                  
                  
                  
                  15,058
                  
                  
                  
                  48,168
                  
                  
                  
                  67,205Total
      other income
                  
                  
                  425,618
                  
                  
                  
                  386,784
                  
                  
                  
                  1,216,501
                  
                  
                  
                  1,131,267OTHER
      EXPENSES:Salaries
      and wages
                  
                  
                  659,449
                  
                  
                  
                  590,524
                  
                  
                  
                  1,945,752
                  
                  
                  
                  1,732,697Employee
      benefits
                  
                  
                  125,736
                  
                  
                  
                  91,948
                  
                  
                  
                  362,507
                  
                  
                  
                  299,715Occupancy
      expense, net
                  
                  
                  120,455
                  
                  
                  
                  118,697
                  
                  
                  
                  370,194
                  
                  
                  
                  357,399Equipment
      rentals, depreciation and maintenance
                  
                  
                  95,626
                  
                  
                  
                  108,959
                  
                  
                  
                  328,962
                  
                  
                  
                  322,778Supplies
                  
                  
                  57,850
                  
                  
                  
                  74,197
                  
                  
                  
                  196,352
                  
                  
                  
                  204,988Professional
      fees
                  
                  
                  87,468
                  
                  
                  
                  83,176
                  
                  
                  
                  309,789
                  
                  
                  
                  261,223Data
      processing fees
                  
                  
                  134,019
                  
                  
                  
                  127,480
                  
                  
                  
                  411,764
                  
                  
                  
                  446,702Marketing
                  
                  
                  86,569
                  
                  
                  
                  76,356
                  
                  
                  
                  219,555
                  
                  
                  
                  216,252(Income)
      expenses from foreclosed properties
                  
                  
                  1,523
                  
                  
                  
                  (11,917
                  )
                  
                  
                  42,744
                  
                  
                  
                  (9,288
                  )Other
                  
                  
                  109,686
                  
                  
                  
                  108,773
                  
                  
                  
                  323,742
                  
                  
                  
                  309,244Total
      other expenses
                  
                  
                  1,478,381
                  
                  
                  
                  1,368,193
                  
                  
                  
                  4,511,361
                  
                  
                  
                  4,141,710INCOME
      BEFORE INCOME TAXES
                  
                  
                  525,813
                  
                  
                  
                  833,114
                  
                  
                  
                  1,538,958
                  
                  
                  
                  2,440,289INCOME
      TAX PROVISION
                  
                  
                  176,809
                  
                  
                  
                  300,186
                  
                  
                  
                  519,334
                  
                  
                  
                  882,758NET
      INCOME
                  
                  $
                  349,004
                  
                  
                  $
                  532,928
                  
                  
                  $
                  1,019,624
                  
                  
                  $
                  1,557,531EARNINGS
      PER SHARE:Basic
                  
                  $
                  .16
                  
                  
                  $
                  .25
                  
                  
                  $
                  .48
                  
                  
                  $
                  .74Diluted
                  
                  $
                  .15
                  
                  
                  $
                  .23
                  
                  
                  $
                  .45
                  
                  
                  $
                  .68
 
 
 See notes
to consolidated financial statements.
  4
 Index
  WeststarFinancial Services Corporation &
Subsidiary
 Consolidated Statements of
Comprehensive Income(unaudited)
 Three
      Months
                  
                  
                  Nine
      MonthsEnded
      September 30,
                  
                  
                  Ended
      September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007NET
      INCOME
                  
                  $
                  349,004
                  
                  
                  $
                  532,928
                  
                  
                  $
                  1,019,624
                  
                  
                  $
                  1,557,531OTHER
      COMPREHENSIVE INCOMEUnrealized
      holding gains (losses) on securities available for sale
                  
                  
                  (590,969
                  )
                  
                  
                  452,684
                  
                  
                  
                  (708,462
                  )
                  
                  
                  (78,444
                  )Tax
      effect
                  
                  
                  227,818
                  
                  
                  
                  (174,510
                  )
                  
                  
                  273,112
                  
                  
                  
                  30,240Unrealized
      holding gains (losses) on securities available for sale, net of
      tax
                  
                  
                  (363,151
                  )
                  
                  
                  278,174
                  
                  
                  
                  (435,350
                  )
                  
                  
                  (48,204
                  )Reclassification
      adjustment for realized losses
                  
                  
                  -
                  
                  
                  
                  1,093
                  
                  
                  
                  -
                  
                  
                  
                  1,093Tax
      effect
                  
                  
                  -
                  
                  
                  
                  (421
                  )
                  
                  
                  -
                  
                  
                  
                  (421
                  )Reclassification
      adjustment for realized losses, net of tax
                  
                  
                  -
                  
                  
                  
                  672
                  
                  
                  
                  -
                  
                  
                  
                  672OTHER
      COMPREHENSIVE INCOME (LOSS), NET OF TAX
                  
                  
                  (363,151
                  )
                  
                  
                  278,846
                  
                  
                  
                  (435,350
                  )
                  
                  
                  (47,532
                  )COMPREHENSIVE
      INCOME (LOSS)
                  
                  $
                  (14,147
                  )
                  
                  $
                  811,774
                  
                  
                  $
                  584,274
                  
                  
                  $
                  1,509,999
 
 
 See notes to consolidated financial
statements.
  5
 Index
  WeststarFinancial Services Corporation &
Subsidiary
 Consolidated
Statements of Changes in Shareholders’ Equity(unaudited)
 For
the Nine Months Ended September 30, 2008 and 2007
 AccumulatedAdditional
                          
                          
                          
                          
                          
                          Other
                          
                          
                          TotalCommon Stock
                          
                          
                          
                          
                          
                          Paid-In
                          
                          
                          Retained
                          
                          
                          Comprehensive
                          
                          
                          Shareholders’Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Earnings
                          
                          
                          Loss
                          
                          
                          EquityBalance
      December 31, 2006
                          
                          
                          1,682,290
                          
                          
                          $
                          1,682,290
                          
                          
                          $
                          6,528,387
                          
                          
                          $
                          4,869,092
                          
                          
                          $
                          (106,916
                          )
                          
                          $
                          12,972,85325%
      Stock Split
                          
                          
                          421,841
                          
                          
                          
                          421,841
                          
                          
                          
                          (421,841
                          )Net
      change in unrealized losses on securities held for sale
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (47,532
                          )
                          
                          
                          (47,532
                          )Cash
      paid in lieu of fractional shares
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,930
                          )
                          
                          
                          
                          
                          
                          
                          (1,930
                          )Issuance
      of common stock pursuant to the exercise of stock options
                          
                          
                          13,398
                          
                          
                          
                          13,398
                          
                          
                          
                          8,185
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          38,736Tax
      benefit on exercise of nonqualified stock options
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          17,153Net
      Income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,557,531
                          
                          
                          
                          
                          
                          
                          
                          1,557,531Balance
      September 30, 2007
                          
                          
                          2,117,529
                          
                          
                          $
                          2,117,529
                          
                          
                          $
                          6,131,884
                          
                          
                          $
                          6,424,693
                          
                          
                          $
                          (154,448
                          )
                          
                          $
                          14,519,658Balance
      December 31, 2007
                          
                          
                          2,118,437
                          
                          
                          $
                          2,118,437
                          
                          
                          $
                          6,133,773
                          
                          
                          $
                          6,913,168
                          
                          
                          $
                          13,861
                          
                          
                          $
                          15,179,239Net
      change in unrealized losses on securities held for sale
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (435,350
                          )
                          
                          
                          (435,350
                          )Issuance
      of common stock pursuant to the exercise of stock options
                          
                          
                          5,810
                          
                          
                          
                          5,810
                          
                          
                          
                          9,197
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          15,007Tax
      benefit on exercise of nonqualified stock options
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,628
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,628Net
      Income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,019,624
                          
                          
                          
                          -
                          
                          
                          
                          1,019,624Balance
      September 30, 2008
                          
                          
                          2,124,247
                          
                          
                          $
                          2,124,247
                          
                          
                          $
                          6,147,598
                          
                          
                          $
                          7,932,792
                          
                          
                          $
                          (421,489
                          )
                          
                          $
                          15,783,148
 
 
 See notes
to consolidated financial statements.
  6
 Index
  WeststarFinancial Services Corporation &
Subsidiary
 Consolidated
Statements of Cash Flows (unaudited)
 For
the Nine Months Ended September 30,
 2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income
                  
                  $
                  1,019,624
                  
                  
                  $
                  1,557,531Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                  
                  
                  289,812
                  
                  
                  
                  291,758Provision
      for loan losses
                  
                  
                  508,760
                  
                  
                  
                  224,970Premium
      amortization and discount accretion, net
                  
                  
                  (18,408
                  )
                  
                  
                  (23,231
                  )Deferred
      income tax provision
                  
                  
                  (197,077
                  )
                  
                  
                  (95,232
                  )(Income)
      expenses from foreclosed properties, net
                  
                  
                  36,781
                  
                  
                  
                  (11,192
                  )Losses
      on sales of securities
                  
                  
                  -
                  
                  
                  
                  1,093Gain
      on disposal/sale of premises and equipment
                  
                  
                  -
                  
                  
                  
                  (50
                  )(Increase)
      decrease in accrued interest receivable
                  
                  
                  51,576
                  
                  
                  
                  (88,964
                  )Decrease
      in other assets
                  
                  
                  122,793
                  
                  
                  
                  73,992Increase
      (decrease) in accrued interest payable
                  
                  
                  (97,340
                  )
                  
                  
                  42,966Increase
      in other liabilities
                  
                  
                  145,217
                  
                  
                  
                  155,723Net
      cash provided by operating activities
                  
                  
                  1,861,738
                  
                  
                  
                  2,129,364CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of securities available for sale
                  
                  
                  (1,530,893
                  )
                  
                  
                  (3,942,950
                  )Maturities
      of securities available for sale
                  
                  
                  3,272,839
                  
                  
                  
                  2,794,875Proceeds
      from sales of securities
                  
                  
                  -
                  
                  
                  
                  283,268Net
      increase in loans
                  
                  
                  (22,470,684
                  )
                  
                  
                  (8,291,948
                  )Proceeds
      from sales of foreclosed properties
                  
                  
                  60,300
                  
                  
                  
                  691,825Proceeds
      from sales of premises and equipment
                  
                  
                  -
                  
                  
                  
                  50FHLB
      stock purchase
                  
                  
                  (122,300
                  )
                  
                  
                  (204,300
                  )FHLB
      stock redemption
                  
                  
                  -
                  
                  
                  
                  198,000Additions
      to premises and equipment
                  
                  
                  (44,774
                  )
                  
                  
                  (320,545
                  )Net
      cash used in investing activities
                  
                  
                  (20,835,512
                  )
                  
                  
                  (8,791,725
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      Increase (decrease) in demand deposits, NOW accounts,MMDA
      and savings accounts
                  
                  
                  3,260,518
                  
                  
                  
                  (2,260,481
                  )Net
      increase in time deposits
                  
                  
                  14,067,952
                  
                  
                  
                  13,301,104Cash
      paid for fractional shares
                  
                  
                  -
                  
                  
                  
                  (1,930
                  )Issuance
      of common stock
                  
                  
                  15,007
                  
                  
                  
                  21,583Proceeds
      of FHLB advances
                  
                  
                  2,550,000
                  
                  
                  
                  5,200,000Repayment
      of FHLB advances
                  
                  
                  (2,550,000
                  )
                  
                  
                  (5,200,000
                  )Tax
      benefit from exercise on non-qualified stock options
                  
                  
                  4,628
                  
                  
                  
                  17,153Net
      increase (decrease) in short-term borrowing
                  
                  
                  834,808
                  
                  
                  
                  (19,592
                  )Net
      cash provided by financing activities
                  
                  
                  18,182,913
                  
                  
                  
                  11,057,837NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                  
                  
                  (790,861
                  )
                  
                  
                  4,395,476CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  8,527,456
                  
                  
                  
                  5,026,627CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  7,736,595
                  
                  
                  $
                  9,422,103
 
 
 See notes
to consolidated financial statements.
  7
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORTION & SUBSIDIARY
 NOTESTO 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
      areas.  Common shares of The Bank of Asheville were exchanged
      for common shares of Weststar Financial Services Corporation on April 29,
      2000.  Weststar Financial Services Corporation formed Weststar
      Financial Services Corporation I (the “Trust”) during October 2003 in
      order to facilitate the issuance of trust preferred
      securities.  The Trust is a statutory business trust formed
      under the laws of the state of Delaware, of which all common securities
      are owned by Weststar Financial Services Corporation.  Bank of
      Asheville Mortgage Company, LLC (the “Mortgage Company”) is a state
      chartered mortgage 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, 2008 and December 31, 2007, and the
consolidated results of their operations for the three and nine-month periods
ended September 30, 2008 and 2007 and their cash flows for the nine-month
periods ended September 30 2008 and 2007.  Operating results for the
three and nine-month periods ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2008.
 
 The
accounting policies followed are set forth in Note 1 to the 2007 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 $35,882,579 and $38,206,567 at September 30, 2008
      and December 31, 2007,
respectively.
 
 3.
              Basic
      and diluted net income per share have been computed by dividing net income
      for each period by the weighted average number of shares of common stock
      outstanding during each period.
 
 Basic
earnings per common share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period.  Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any 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 2008 and 2007, there were no shares
excluded due to antidultion.
 
 Basic and
diluted net income per share have been computed based upon net income as
presented in the accompanying statements of operations divided by the
weighted
  8
 Index
  average
number of common shares outstanding or assumed to be outstanding as summarized
below:
 
 Three
      Months
                      
                      
                      Nine
      MonthsEnded
      September 30,
                      
                      
                      Ended
      September 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Weighted
      average number of common shares used in computing basic net income per
      share
                      
                      
                      2,122,147
                      
                      
                      
                      2,113,485
                      
                      
                      
                      2,120,195
                      
                      
                      
                      2,109,468Effect
      of dilutive stock options
                      
                      
                      151,241
                      
                      
                      
                      173,522
                      
                      
                      
                      157,877
                      
                      
                      
                      178,500Weighted
      average number of common shares and dilutive potential common shares used
      in computing diluted net income per common share
                      
                      
                      2,273,388
                      
                      
                      
                      2,287,007
                      
                      
                      
                      2,278,072
                      
                      
                      
                      2,287,968
 
 
 4.
              Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting
      Standards No. 159, “The Fair Value Option for Financial Assets and
      Liabilities (“SFAS 159”), but has not applied it to any financial
      instruments.  SFAS 159 permits entities to choose to measure
      many financial instruments and certain other items at fair
      value.  The objective of this standard is to improve financial
      reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions.  The Company did not elect to adopt fair value
      measurement for any additional assets or liabilities upon the adoption of
      SFAS 159.
 
 5.
              Effective
      January 1, 2008, the Company also partially adopted Statement of Financial
      Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), in
      accordance with the delayed provision of adoption for non-financial assets
      and liabilities under SFAS 157-2.  SFAS 157 defines fair value,
      establishes a framework for measuring fair value under generally accepted
      accounting principles and enhances discloses about fair value
      measurements.  Fair value is defined under SAFS 157 as the
      exchange price that would be received to sell an asset or paid to transfer
      a liability (an exit price) in the principal or most advantageous market
      for the asset or liability in an orderly transaction between market
      participants on the measurement
date.
 
 Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
values.  These levels are:
 
 Level
1    Valuation is based upon quoted prices for identical
instruments traded in active markets.
 
 Level
2    Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the
market.
  9
 Index
  Level
3    Valuation is generated from model-based techniques that
use at least one significant assumption not observable in the
market.  These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or
liability.  Valuation techniques included use of option pricing
models, discounted cash flow models and similar techniques.
 
 Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
 
 Investment
Securities Available-for-Sale
 Investment
securities available-for-sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing modes or other model-based valuation
techniques such as present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities included those traded on
an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in an active over-the-counter
markets and money market funds.  Level 2 securities included
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets.
 
 Loans
 The
Company does not record loans at fair value on a recurring
basis.  However, from time to time a loan is considered impaired and a
specific reserve is established.  Loans for which it is probable that
payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired.  Once
a loan is identified as individually impaired, management measures impairment in
accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,”
(SFAS 114).  The fair value of impaired loans is estimated using one
of several methods, including collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flow.  Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investment in
such loans.  At September 30, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the
collateral.  In accordance with SFAS 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the impaired loan as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
as nonrecurring Level 3.
 
 Foreclosed
Assets
 Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets.  Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value.  Fair value is based upon independent
market prices, appraised value of the collateral or management’s estimation of
the value of the collateral.  When the fair value of the collateral is
based on an observable market price or a current appraised value, the Company
records the foreclosed asset as nonrecurring Level 2.  When an
appraised
  10
 Index
  value is
not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market
price, the Company records the foreclosed asset as nonrecurring Level
3.
  Assets
measured at fair value on a recurring basis are summarized below:
 
 Fair Value Measurements at September 30,
      2008Description
                    
                    Quoted
      Prices in Active Markets for Identical Assets(Level 1)
                    
                    
                    Significant
      Other Observable Inputs(Level 2)
                    
                    
                    Significant
      Unobservable Inputs(Level 3)
                    
                    
                    Assets/Liabilitiesat Fair ValueAvailable-for-sale
      securities
                    
                    
                    -
                    
                    
                    $
                    23,681,294
                    
                    
                    
                    -
                    
                    
                    $
                    23,681,294
 
 
 6.
              In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133,” (SFAS 161).  SFAS 161 applies to all
      derivative instruments and related hedged items accounted for under SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” (SFAS 133). SFAS 161 requires entities to provide greater
      transparency about (a) how and why an entity uses derivative
      instruments, (b) how derivative instruments and related hedged items
      are accounted for under SFAS 133 and its related interpretations, and
      (c) how derivative instruments and related hedged items affect an
      entity’s financial position, results of operations and cash flows. To meet
      those objectives, SFAS 161 requires (1) qualitative disclosures about
      objectives for using derivatives by primary underlying risk exposure
      (e.g., interest rate, credit or foreign exchange rate) and by purpose or
      strategy (fair value hedge, cash flow hedge, net investment hedge, and
      non-hedges), (2) information about the volume of derivative activity
      in a flexible format that the preparer believes is the most relevant and
      practicable, (3) tabular disclosures about balance sheet location and
      gross fair value amounts of derivative instruments, income statement and
      other comprehensive income location of gain and loss amounts on derivative
      instruments by type of contract, and (4) disclosures about
      credit-risk related contingent features in derivative agreements. SFAS 161
      is effective for financial statements issued for fiscal years and interim
      periods beginning after November 15, 2008. Accordingly, the Company
      will adopt the provisions of SFAS 161 in the first quarter 2009. The
      Company does not expect the adoption of the provisions of SFAS 161 to have
      a material effect on the Company’s financial condition and results of
      operations.
 
 7.
              The
      Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October
      3, 2008. The purpose of this law is to restore liquidity and stability to
      the financial system, while minimizing any potential long term negative
      impact on taxpayers. The law authorizes the United States Secretary
      Treasury to spend up to $700 billion to purchase distressed assets,
      especially mortgage-backed securities, from the nation's banks. The
      program under which the asset purchase will be administered is referred to
      as the Troubled Asset Relief Program
(TARP).
  11
 Index
  The law
also temporarily raises the basic limit on federal deposit insurance coverage
from $100,000 to $250,000 per depositor. The higher insurance limits took effect
immediately and will be in effect through December 31, 2009. Additionally, the
Federal Deposit Insurance Corporation (FDIC) announced on October 14, 2008,
a new program aimed at strengthening consumer confidence and encouraging
liquidity in the banking system.
 
 The
Temporary Liquidity Guarantee Program (TLGP) guarantees newly issued senior
unsecured debt of banks, thrifts, and certain holding companies, and provides
full coverage of non-interest bearing deposit transaction accounts, regardless
of dollar amount. The program provides a three year guarantee of newly issued
debt and increased insurance coverage through December 31, 2009. This
two-pronged program will be funded through special fees paid by the financial
institutions participating. The Company must decide whether to participate in
one, both or none of these phases of the program by November 14,
2008.
 
 Also on
October 14, 2008, the US Department of Treasury (“Treasury”) announced a
voluntary Capital Purchase Program (CPP) to encourage U.S. financial
institutions to build capital to increase the flow of financing to U.S.
businesses and consumers and to support the U.S. economy. The Treasury will
purchase up to $250 billion of senior preferred stock. The program will be
available to qualifying U.S. controlled banks, savings associations, and certain
bank and savings and loan holding companies engaged only in financial activities
that elect to participate on November 14, 2008. Treasury will determine
eligibility and allocations for interested parties after consultation with the
appropriate federal banking agency. The minimum subscription amount available to
a participating institution is 1 percent of risk-weighted assets. The maximum
subscription amount is the lesser of $25 billion or 3 percent of risk-weighted
assets. The Treasury will fund the senior preferred shares purchased under the
program by year-end 2008.
 
 The
senior preferred shares will qualify as Tier 1 capital and will rank senior to
common stock. The senior preferred shares will pay a cumulative dividend rate of
5 percent per annum for the first five years and will reset to a rate of 9
percent per annum after year five. The senior preferred shares will be
non-voting, other than class voting rights on matters that could adversely
affect the shares. The senior preferred shares will be callable at par after
three years. Prior to the end of three years, the senior preferreds may be
redeemed with the proceeds from a qualifying equity offering of any Tier 1
perpetual preferred or common stock. The Treasury may also transfer the senior
preferred shares to a third party at any time. In conjunction with the purchase
of senior preferred shares, The Treasury will receive warrants to purchase
common stock with an aggregate market price equal to 15 percent of the senior
preferred investment. The exercise price on the warrants will be the market
price of the participating institution's common stock at the time of issuance,
calculated on a 20-trading day trailing average. Only institutions deemed to be
“healthy” will be eligible to participate in the CPP.
 
 Participation
in these various programs carries certain restrictions with respect to the
payment of dividends to common shareholders and executive compensation.
Management and the Board are currently evaluating the viability of these
programs.
  12
 Index
  Item2.
              Management’s
      Discussion and Analysis Financial Condition and Results of
      Operations
 
 Weststar
Financial Services Corporation & Subsidiaries
 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.  The Company and its partner in the Mortgage Company have
decided to close the Mortgage Company.  It is anticipated than a
dissolution agreement will be filed during November, 2008.  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
2008, the Company continued its focus on asset quality and asset
growth.  Management emphasized prudent underwriting standards,
periodic reviews of loans of $100,000 or more, and monitoring loan
quality.  During the period asset quality remained
strong.  Non-performing assets increased slightly from $283,470 at
December 31, 2007 to $310,100 at September 30, 2008.  Loans
outstanding increased from $135,734,224 at December 31, 2007 to $157,724,566 at
September 30, 2008.  Deposits increased $166,519,486.  The
increase was attributable to marketing campaigns, sales calls efforts, and
product development.
 
 Net
interest income decreased by 2.70% during the three-month period due to a
tighter net interest margin as a result of Federal Open Market committee
interest rate cut initiatives.  Primarily as a result of loan growth
and one large charge-off incurred during the quarter, the Company’s provision
for loan losses was $320,635 compared to $137,395 during the comparable quarter
in 2007.  Other non-interest income for the September 30, 2008 and
2007 quarters totaled $425,618 and $386,784, respectively.  The
increase in income primarily reflects increased fees from the origination of
mortgage loans at the Bank level and increased revenue from debit/credit card
interchange transactions.  During the 2007 quarter, the Company
realized $1,093 in losses from the sales of investment securities compared to
none during same period in 2008.  During the June 2008 quarter, the
Company and its partner in the Mortgage Company mutually agreed to terminate
their relationship, and began the process to close the Mortgage
  13
 Index
  Company.  The
Company then shifted originating mortgage loans through its subsidiary
bank.  Bank of Asheville Mortgage Company, LLC posted net operating
income of $1,628 during the quarter compared to net operating losses of
$(18,102) during 2007, of which $814 and $(9,051) was the Company’s portion
during 2008 and 2007, respectively.  Non-interest expenses increased
from $1,368,193 to $1,478,381 or 8.05%.  The increase was primarily
attributable to operating expenses associated with personnel and professional
fees, such as internal/external audits, income tax preparation and loan reviews,
incurred to support loan and deposit servicing.
 
 Net
income totaled $349,004 and $532,928 for the quarters ended September 30, 2008
and 2007, respectively – a decrease of 34.51%.
 
 The
Company’s net interest income decreased by 5.87% during the nine-month period
due to a tighter net interest margin resulting from Federal Open Market
Committee interest rate cut initiatives.  As a result of charge-offs
and loan growth, the Company added $508,760 to the allowance for loan losses
compared to $224,970 during the comparable period in 2007.  Other
non-interest income for the September 30, 2008 and 2007 periods totaled
$1,216,501 and $1,131,267, respectively.  The increase in other income
primarily reflects increased fees from the origination of mortgage loans at the
Bank level and increased revenue from debit/credit card interchange
transactions.  During the period the process began to close the
Mortgage Company.  Losses at the Mortgage Company decreased during the
period as the Company started originating loans through the Bank rather than the
Mortgage Company.   Bank of Asheville Mortgage Company, LLC
posted net operating losses of $30,590 during the period compared to $86,234
during 2007, of which $15,295 and $43,117 was the Company’s portion during 2008
and 2007, respectively.  Non-interest expenses increased from
$4,141,710 to $4,511,361 or 8.93%.  The increase was primarily
attributable to operating expenses associated with personnel, professional fees,
such as internal/external audits, income tax preparation and loan reviews,
incurred to support loan and deposit servicing and growth, and net expenses from
foreclosed properties.
 
 Net
income totaled $1,019,624 and $1,557,531 for the nine-month periods ended
September 30, 2008 and 2007, respectively – a decrease of 34.54%.
 
 CHANGES
IN FINANCIAL CONDITION
 SEPTEMBER
30, 2008 COMPARED TO DECEMBER 31, 2007
 
 During
the period from December 31, 2007 to September 30, 2008, total assets increased
$18,815,064 or 10.80%.  This increase, reflected primarily in loans,
resulted from an increase in deposits.
 
 Securities,
federal funds sold and interest-bearing balances with other financial
institutions at September 30, 2008 totaled $27,155,761 compared to $29,900,578
at December 31, 2007.  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 $585,600.
 
 At
September 30, 2008, the loan portfolio constituted 81.69% of the Company’s total
assets.  Loans increased $21,990,342 from December 31, 2007 to
September 30, 2008.  Continued growth in real estate secured lending
resulted in the majority of the growth.  Management places strong
emphasis on loan quality.
  14
 Index
  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 $83,892, $98,503, and $195,683
at September 30, 2008 and 2007, and December 31, 2007,
respectively.  The average recorded balance of impaired loans for the
nine months ended September 30, 2008 and 2007 totaled $199,511 and
$501,939, respectively and $400,074 for the year ended December 31,
2007.  The related allowance for loan losses determined in accordance
with SFAS No. 114 for impaired loans was none, none and $120 at September 30,
2008 and 2007, and December 31, 2007 respectively.  For the nine-month
periods ended September 30, 2008 and 2007, Weststar recognized interest income
from impaired loans of approximately $350 and $1,535.  See “Asset
Quality” for discussion for an analysis of loan loss reserves.
 
 Deposits
increased $17,328,470 during the nine months ended September 30,
2008.  The increase in deposits is primarily reflected in NOW, money
market, savings and time accounts.  During the period, a new NOW
account, eZchecking, was introduced, which pays an above market interest rate on
balances up to $25,000.  Qualifiers for the account include a minimum
of 10 debit card transactions, one direct deposit and receipt of electronic
statement each month.  The Bank earns interchange revenue from debit
card usage and can deliver electronic statements more cost efficiently than
through standard U.S. mail; these two factors effectively minimize the cost of
funds on the product.  As rates continued to decline throughout most
of the period, some rate sensitive customers shifted funds from lower
interest-bearing accounts to higher yielding accounts such as eZchecking and
time deposit accounts.  Demand deposits accounts decreased by 4.18%
during the period and totaled $26,850,689.  NOW, money market and
savings accounts increased by $4,431,698, while time deposits increased by
$14,067,952.  Time deposits grew as interest rate sensitive customers
sought to lock in yields during a decreasing interest rate
environment.  Additionally, during the period, the Company experienced
significant certificate of deposit growth from new customers, who transferred
funds from larger national banks as a result of negative publicity related to
potential financial instability.  Once the FDIC increased its
insurance level to $250,000, the deposit market gained
stabilization.  The Company also received deposits from customers, who
withdrew funds from the financial markets as a result of decreasing
values.
 
 Short-term
borrowings consisted of securities sold under agreements to repurchase in the
amount of $1,254,477.  These accounts bear variable rates tied to the
daily federal funds rate and mature daily.
 
 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 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, 2008 to risk weighted assets totaled
13.18%.  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, 2008, the
Company’s capital exceeded the current regulatory capital
requirements.
  15
 Index
  RESULTS
OF OPERATIONS
 FOR THE
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND
2007
 
 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, 2008 totaled $1,899,211
compared to $1,951,918 in 2007.  The decrease was attributable to a
tighter net interest margin following Federal Open Market Committee interest
rate cut initiatives.  The Company’s net interest margin was 4.16% and
4.76% for the quarters ended September 30, 2008 and 2007,
respectively.
 
 Weststar
recorded a provision for loan losses of $320,635 and $137,395 for the quarters
ended September 30, 2008 and 2007, respectively.  The provision
relates to strong loan growth experienced in 2008 coupled with net charge-offs
of $217,775. 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, 2008 and 2007 quarters totaled
$425,618 and $386,784, respectively.  The increase in other income
primarily reflects increased fees from the origination of mortgage loans at the
Bank level and increased revenue from debit/credit card interchange
transactions.  The Bank generated $14,728 in mortgage loan origination
fees compared to none during 2007.  Interchange revenue generated
through debit/credit card transactions produced $75,335 during 2008 compared to
$64,666 during 2007.  The increase in volume was partially
attributable to the introduction of a new NOW account, eZchecking, which
requires customers to utilize their debit card for a minimum of 10 times during
a statement cycle, among other requirements, to earn an above market yield on
their account.  During the 2007 quarter, the Company realized $1,093
in losses from the sales of investment securities compared to none during same
period in 2008.  Bank of Asheville Mortgage Company, LLC posted net
operating income (losses) of $1,628 during the period compared to $(18,102)
during 2007, of which $814 and $(9,051) was the Company’s portion during 2008
and 2007, respectively.  Other income remained relatively flat at
$13,999.
 
 Other
non-interest expense totaled $1,478,381 compared to $1,368,193 in
2007.  This increase was primarily attributable to personnel and
overhead incurred to support loan and deposit servicing and
growth.  Salaries and benefits increased $102,713 during the periods
reflecting growth in personnel, and increased wages and cost of
benefits.  Growth in personnel reflects overall growth in Bank’s
assets and expanded services provided.  Data processing fees increased
from $127,480 to $134,019 as a result of loan and deposit account
growth.  In 2007 the Company renegotiated its data processing
contracts and outsources selected processes to a more cost competitive provider,
thus enabling the Company to hold down its operating costs.  Net
(income) expense from foreclosed properties totaled $1,523 during 2008 compared
to $(11,917) during 2007.  Marketing expenses increased by $10,213 as
the Bank promoted its products, services and safety.  Income before
income tax provision totaled $525,813 and $833,114 for the quarters ended
September 30, 2008 and 2007, respectively.  Income tax provision
totaled $176,809 and $300,186 for the quarters ended September 30, 2008 and
2007, respectively, which equated to
  16
 Index
  an
effective tax rate of 33.63% and 36.03%.  The effective income tax
rate decreased in 2008 because of a decrease in relative taxable income during
the period.  Tax exempt interest income remained consistent from
period to period, although higher as a percentage of income before taxes in the
2008 period.  Net income totaled $349,004 and $532,928 for the
quarters ended September 30, 2008 and 2007, respectively.
 
 Other
comprehensive income (loss) totaled $(363,151) and $278,846 in 2008 and 2007,
respectively.  Comprehensive income (loss), which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $(14,147)
and $811,774 for the quarters ended September 30, 2008 and 2007
respectively.
 
 COMPARATIVE
NINE MONTHS
 
 Net
interest income for the nine-month period September 30, 2008 totaled $5,342,578
compared to $5,675,702 in 2007.  The decrease was attributable to a
tighter net interest margin following Federal Open Market Committee interest
rate cut initiatives.  The Company’s net interest margin was 4.07% and
4.74% for the nine months ended September 30, 2008 and 2007,
respectively.
 
 Weststar
recorded a provision for loan losses of $508,760 and $224,970 for the nine
months ended September 30, 2008 and 2007, respectively.  The increased
provision relates to strong loan growth experienced in 2008 coupled with net
charge-offs of $243,641.  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, 2008 and 2007 periods totaled
$1,216,501 and $1,131,267, respectively.  The increase in other income
primarily reflects increased fees from the origination of mortgage loans at the
Bank level and increased revenue from debit/credit card interchange
transactions.  The Bank generated $37,724 in mortgage loan origination
fees compared to none during 2007.  Interchange revenue generated
through debit/credit card transactions produced $212,393 during 2008 compared to
$174,907 during 2007.  The increase in volume was partially
attributable to the introduction of a new NOW account, eZchecking, which
requires customers to utilize their debit card for a minimum of 10 times during
a statement cycle, among other requirements, to earn an above market yield on
their account.  During the period the Company and its partner in the
Mortgage Company mutually agreed to terminate their relationship, and began the
process to close the Mortgage Company.   The Company then shifted
originating mortgage loans through its subsidiary bank.  Bank of
Asheville Mortgage Company, LLC posted net operating losses of $30,590 and
$86,234 during 2008 and 2007, respectively, of which $15,295 and $43,117 was the
Company’s portion during 2008 and 2007, respectively.  Other income
decreased by $19,037 primarily as a result of lower fees earned on deposits with
other financial institutions.
 
 Other
non-interest expense totaled $4,511,361 compared to $4,141,710 in
2007.  This increase was primarily attributable to overall company
growth to support loans, deposits and branch expansion.  Professional
fees increased from $261,223 during 2007 to $309,789.  The increase in
fees was largely attributable to internal and external audit fees relating
to  preparation for Sarbanes-Oxley Act of 2002
compliance.  Net expenses from foreclosed properties totaled $42,744
during 2008 compared to $(9,288) during 2007.  Other expenses
increased $14,498 primarily attributable to FDIC insurance premiums assessed
during 2008, director fees and employee travel.  Income before income
tax provision totaled $1,538,958 and $2,440,289 for
  17
 Index
  the
periods ended September 30, 2008 and 2007, respectively.  Income tax
provision totaled $519,334 and $882,758 for the periods ended September 30, 2008
and 2007, respectively, which equated to an effective tax rate of 33.75% and
36.17%.  The effective income tax rate decreased in 2008 because of an
increase in relative tax exempt  income.  Net income totaled
$1,019,624 and $1,557,531 for the periods ended September 30, 2008 and 2007,
respectively.
 
 Other
comprehensive loss totaled $435,350 and $47,532 in 2008 and 2007,
respectively.  Comprehensive income, which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $584,274
and $1,509,999 for the periods ended September 30, 2008 and 2007,
respectively.
 
 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
  18
 Index
  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 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 over a twelve-month period or (2) immediately
increasing or decreasing interest rates by .25%, .50%, 1% and 2% and negatively
affected in the short-term by declining interest rates.  Recent
Federal Reserve actions to decrease the interest rates will likely decrease the
Company’s net interest margin in the near term. The analysis shows that the net
interest margin would be positively effected by an increase in interest
rates.  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, 2008, 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.
  19
 Index
  
 TERMS
      TO REPRICING AT SEPTEMBER 30, 20081-90
      Days
                    
                    
                    91-180
      Days
                    
                    
                    181-365
      Days
                    
                    
                    Total
      One
                    
                    
                    Non-
                    
                    
                    TotalYear
                    
                    
                    SensitiveInterest-earning
      assets:Interest
      bearing deposits
                    
                    $
                    55,467
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    55,467
                    
                    
                    $
                    -
                    
                    
                    $
                    55,467Federal
      funds sold
                    
                    
                    3,419,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,419,000
                    
                    
                    
                    
                    
                    
                    
                    3,419,000Investment
      securities
                    
                    
                    358,401
                    
                    
                    
                    361,993
                    
                    
                    
                    734,856
                    
                    
                    
                    1,455,250
                    
                    
                    
                    22,911,951
                    
                    
                    
                    24,367,201Federal
      Home Loan Bank stock
                    
                    
                    585,600
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    585,600
                    
                    
                    
                    -
                    
                    
                    
                    585,600Loans
                    
                    
                    120,050,692
                    
                    
                    
                    5,639,421
                    
                    
                    
                    7,117,240
                    
                    
                    
                    132,807,353
                    
                    
                    
                    24,917,213
                    
                    
                    
                    157,724,566Total
      Interest-earning assets
                    
                    
                    124,469,160
                    
                    
                    
                    6,001,414
                    
                    
                    
                    7,852,096
                    
                    
                    
                    138,322,670
                    
                    
                    
                    47,829,164
                    
                    
                    
                    186,151,834Interest-bearing
      liabilities:Time
      deposits
                    
                    
                    32,875,623
                    
                    
                    
                    24,063,215
                    
                    
                    
                    31,599,842
                    
                    
                    
                    88,538,680
                    
                    
                    
                    499,627
                    
                    
                    
                    89,038,307All
      other deposits
                    
                    
                    50,630,490
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,630,490
                    
                    
                    
                    -
                    
                    
                    
                    50,630,490Short-term
      debt
                    
                    
                    1,254,477
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,254,477
                    
                    
                    
                    -
                    
                    
                    
                    1,254,477Long-term
      debt
                    
                    
                    4,124,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,124,000
                    
                    
                    
                    4,000,000
                    
                    
                    
                    8,124,000Total
      interest-bearing liabilities
                    
                    
                    88,884,590
                    
                    
                    
                    24,063,215
                    
                    
                    
                    31,599,842
                    
                    
                    
                    144,547,647
                    
                    
                    
                    4,499,627
                    
                    
                    
                    149,047,274Interest
      sensitivity gap
                    
                    $
                    35,584,570
                    
                    
                    $
                    (18,061,801
                    )
                    
                    $
                    (23,747,746
                    )
                    
                    $
                    (6,224,977
                    )
                    
                    $
                    43,329,537Cumulative
      interest sensitivityGap
                    
                    $
                    35,584,570
                    
                    
                    $
                    17,522,769
                    
                    
                    $
                    (6,224,977
                    )Interest-earning
      assets as a percent of interest sensitive liabilities*
                    
                    
                    140.0
                    %
                    
                    
                    24.9
                    %
                    
                    
                    24.8
                    %
                    
                    
                    95.7
                    %
 
 *Percentages
shown are not cumulative.
 
 Weststar
has established an acceptable range of 80% to 120% for the one year period, for
interest-earning assets as a percent of interest sensitive
liabilities.
 
 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
  20
 Index
  if
conditions differ substantially from the assumptions used in making the
evaluations. In addition, regulatory examiners may require the Company to
recognize changes to the allowance for loan losses based on their judgments
about information available to them at the time of their
examination.
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.  Large groups of smaller balance homogeneous
loans are collectively evaluated for impairment.  Accordingly, the
Company does not separately identify individual consumer and residential loans
for impairment evaluations.
 
 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, 2008 and
2007, and December 31, 2007 was $2,355,244, $1,968,455 and $2,090,125 or 1.49%,
1.51% and 1.54%, respectively, of gross loans outstanding.  The ratio
of net charge-offs to average loans outstanding was .23%, .15% and .16% during
the periods ended September 30, 2008 and 2007, and December 31, 2007,
respectively.  The increase in net –charge offs for the nine month
period ended September 30, 2008 was primarily attributable to a single
charge-off of approximately $167,000.  The business failed as a result
of owner health issues as opposed to economic conditions or loan quality
trends.
 
 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, 2008 and 2007, and for the year ended December 31,
2007.
 
 Summary
of Allowance for Loan Losses
 
 For
      the nine months
                    
                    
                    For
      the year endedEnded
      September 30,
                    
                    
                    December 31,2008
                    
                    
                    2007
                    
                    
                    2007Balance,
      beginning of period
                    
                    $
                    2,090,125
                    
                    
                    $
                    1,884,080
                    
                    
                    $
                    1,884,080Charge-offs:Commercial,
      financial and agricultural
                    
                    
                    (200,091
                    )
                    
                    
                    (105,129
                    )
                    
                    
                    (171,723
                    )Real
      Estate:Construction
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Mortgage
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Consumer
                    
                    
                    (83,083
                    )
                    
                    
                    (62,063
                    )
                    
                    
                    (85,018
                    )Total
      charge-offs
                    
                    
                    (283,174
                    )
                    
                    
                    (167,192
                    )
                    
                    
                    (256,741
                    )RecoveriesCommercial,
      financial, and agricultural
                    
                    
                    13,415
                    
                    
                    
                    3,838
                    
                    
                    
                    24,600Real
      Estate:Construction
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Mortgage
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Consumer
                    
                    
                    26,118
                    
                    
                    
                    22,759
                    
                    
                    
                    31,461Total
      Recoveries
                    
                    
                    39,533
                    
                    
                    
                    26,597
                    
                    
                    
                    56,061Net
      (charge-offs) recoveries
                    
                    
                    (243,641
                    )
                    
                    
                    (140,595
                    )
                    
                    
                    (200,680
                    )Provision
      charged to operations
                    
                    
                    508,760
                    
                    
                    
                    224,970
                    
                    
                    
                    406,725Balance,
      end of period
                    
                    $
                    2,355,244
                    
                    
                    $
                    1,968,455
                    
                    
                    $
                    2,090,125Percentage
      of net charge-offs to average loans
                    
                    
                    .23
                    %
                    
                    
                    .15
                    %
                    
                    
                    .16
                    %Percentage
      of allowance to period-end loans
                    
                    
                    1.49
                    %
                    
                    
                    1.51
                    %
                    
                    
                    1.54
                    %
  21
 Index
  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.
 
 REGULATORY
CAPITAL
 
 To
      Be WellFor
      Capital
                                
                                
                                Capitalized
      UnderActual
                                
                                
                                Adequacy
                                
                                
                                Prompt
      CorrectivePurposes
                                
                                
                                Action
      ProvisionsAmount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio
                                
                                
                                Amount
                                
                                
                                Ratio(Dollars
      in Thousands)As
      of September 30, 2008Total Capital (to
      Risk Weighted Assets)Consolidated
                                
                                $
                                22,325
                                
                                
                                
                                13.18
                                %
                                
                                $
                                13,553
                                
                                
                                
                                8.00
                                %
                                
                                $
                                16,941
                                
                                
                                
                                10.00
                                %Bank
                                
                                $
                                21,211
                                
                                
                                
                                12.54
                                %
                                
                                $
                                13,533
                                
                                
                                
                                8.00
                                %
                                
                                $
                                16,917
                                
                                
                                
                                10.00
                                %Tier 1 Capital (to
      Risk Weighted Assets)Consolidated
                                
                                $
                                20,204
                                
                                
                                
                                11.93
                                %
                                
                                $
                                6,776
                                
                                
                                
                                4.00
                                %
                                
                                $
                                10,165
                                
                                
                                
                                6.00
                                %Bank
                                
                                $
                                19,093
                                
                                
                                
                                11.29
                                %
                                
                                $
                                6,767
                                
                                
                                
                                4.00
                                %
                                
                                $
                                10,150
                                
                                
                                
                                6.00
                                %Tier
      1 Capital (to Average Assets)Consolidated
                                
                                $
                                20,204
                                
                                
                                
                                10.85
                                %
                                
                                $
                                7,447
                                
                                
                                
                                4.00
                                %
                                
                                $
                                9,309
                                
                                
                                
                                5.00
                                %Bank
                                
                                $
                                19,093
                                
                                
                                
                                10.27
                                %
                                
                                $
                                7,437
                                
                                
                                
                                4.00
                                %
                                
                                $
                                9,297
                                
                                
                                
                                5.00
                                %
  22
 Index
  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, 2008 liquid assets (cash due from banks, interest-earning bank
deposits and federal funds sold) were approximately $7.7 million, which
represents 4.01% of total assets and 4.65% of total deposits. Supplementing this
liquidity, Weststar has available lines of credit from correspondent banks of
approximately $19.3 million. At September 30, 2008, outstanding commitments to
extend credit and available lines of credit were $35.9
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 53.47% of Weststar’s total deposits at
September 30, 2008. 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 15.78% of the Company’s
total deposits at September 30, 2008.  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.
  23
 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.
 
 Item4T.
              Controls
      and Procedures
 
 At the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures pursuant to Securities Exchange Act Rule
13a-14.
 
 Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
(1) to provide reasonable assurance that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act was recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and (2) to provide reasonable
assurance that information required to be disclosed by the Company in such
reports is accumulated and communicated to the
Company’s   management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate to allow for timely decisions regarding
required disclosure.
 
 There
were no changes in the Company’s internal control over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting. The Company reviews its disclosure controls and procedures,
which may include its internal control over financial reporting, on an ongoing
basis, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that the Company’s systems evolve with its
business.
  24
 Index
  Part
      II.
              OTHER
      INFORMATION
 
 Item4.
              Submission
      of Matters to a Vote of Security
Holders
 
 None.
 
 Item5.
              Other
      Information
 (a)
              None.
 (b)
              None.
 
 Item6.
              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
  25
 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 CORPORATIONDate:
      November 12, 2008
                
                By:
                /s/  G. Gordon
      GreenwoodG.
      Gordon GreenwoodPresident
      and Chief Executive OfficerDate:
      November 12, 2008
                
                By:
                /s/  Randall C.
    HallRandall
      C. HallExecutive
      Vice President and Chief Financial and Principal Accounting
      Officer






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