UNITED
STATES SECURITITES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-QSB
 (Mark
One)
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended March 31, 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 small business issuer 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
 (Issuer’s
telephone numbe)
 (Former
      name, former address and former fiscal year, if changed since last
      report)
 
 
 Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.   ̈
 
 Note –
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.
 
 Check whether the issuer(1)
filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  xNo   ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12-2
of the Exchange Act).  Yes   ̈  No  x
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS:
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: Common stock, $1.00 par value – 2,119,382
shares outstanding as of May 13, 2008.
 
 Transitional
Small Business Disclosure Format (Check one):  Yes   ̈  No  x
  1
  INDEX
                  PagePart I – FINANCIAL INFORMATIONFinancial Statements:Consolidated Balance Sheets March 31, 2008 and December 31,
      2007
                  3Consolidated Statements of Operations Three Months Ended
      March 31, 2008 and 2007
                  4Consolidated Statements of Comprehensive Income Three Months
      Ended March 31, 2008 and 2007
                  5Consolidated Statements of Changes in Shareholders’ Equity
      Three Months Ended March 31, 2008 and 2007
                  6Consolidated Statements of Cash Flows Three Months Ended
      March 31, 2008 and 2007
                  7Notes to Consolidated Financial
    Statements
                  8Item 2 - Management’s Discussion and Analysis Financial
      Condition and Results of Operations
                  12Item 3 – Quantitative and Qualitative Disclosures About
      Market Risk
                  21Item 4T - Controls and Procedures
                  21Part II – OTHER INFORMATIONExhibit Index
                  22Signatures
                  23
  2
 Index
  PartI.
              FINANCIAL
      INFORMATION
 
 Item
      I.
              Financial
      Statements
 
 Weststar Financial Services Corporation &
      SubsidiaryConsolidated
      Balance Sheets
                
                (unaudited)March
      31, 2008
                
                
                December
      31, 2007*ASSETS:Cash
      and cash equivalents:Cash
      and due from banks
                
                $
                5,767,520
                
                
                $
                4,740,172Interest-bearing
      deposits
                
                
                62,034
                
                
                
                132,284Federal
      funds sold
                
                
                7,835,000
                
                
                
                3,665,000Total
      cash and cash equivalents
                
                
                13,664,554
                
                
                
                8,527,456Investment
      securities – available for sale, at fair value (amortized cost of
      $26,109,842 and $26,090,739, at March 31, 2008 and December 31, 2007,
      respectively)
                
                
                26,494,464
                
                
                
                26,113,294Loans
                
                
                137,192,577
                
                
                
                135,734,224Allowance
      for loan losses
                
                
                (2,110,658
                )
                
                
                (2,090,125
                )Net
      loans
                
                
                135,081,919
                
                
                
                133,644,099Premises
      and equipment, net
                
                
                2,882,230
                
                
                
                2,981,163Accrued
      interest receivable
                
                
                907,143
                
                
                
                972,603Federal
      Home Loan Bank stock, at cost
                
                
                515,800
                
                
                
                463,300Deferred
      income taxes
                
                
                451,623
                
                
                
                572,594Foreclosed
      properties
                
                
                87,787
                
                
                
                87,787Other
      assets
                
                
                882,599
                
                
                
                895,702TOTAL
                
                $
                180,968,119
                
                
                $
                174,257,998LIABILITIES
      AND SHAREHOLDERS' EQUITY:Liabilities:Deposits:Demand
                
                $
                26,291,535
                
                
                $
                28,021,869NOW
      accounts
                
                
                15,618,188
                
                
                
                15,645,860Money
      market accounts
                
                
                29,468,506
                
                
                
                28,609,220Savings
                
                
                2,261,203
                
                
                
                1,943,712Time
      deposits of $100,000 or more
                
                
                27,492,600
                
                
                
                26,584,176Other
      time deposits
                
                
                54,023,459
                
                
                
                48,386,179Total
      deposits
                
                
                155,155,491
                
                
                
                149,191,016Short-term
      borrowings
                
                
                422,101
                
                
                
                419,669Accrued
      interest payable
                
                
                570,001
                
                
                
                567,710Other
      liabilities
                
                
                903,007
                
                
                
                776,364Long-term
      debt
                
                
                8,124,000
                
                
                
                8,124,000Total
      liabilities
                
                $
                165,174,600
                
                
                $
                159,078,759COMMITMENTS
      AND CONTIGENCIES (Note 2)SHAREHOLDERS'
      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–
      2,119,382 and 2,118,437 at March 31, 2008 and December 31, 2007,
      respectively
                
                
                2,119,382
                
                
                
                2,118,437Additional
      paid-in capital
                
                
                6,136,481
                
                
                
                6,133,773Retained
      earnings
                
                
                7,301,305
                
                
                
                6,913,168Accumulated
      other comprehensive income
                
                
                236,351
                
                
                
                13,861Total
      shareholders' equity
                
                
                15,793,519
                
                
                
                15,179,239TOTAL
                
                $
                180,968,119
                
                
                $
                174,257,998
 
 
 *Derived from audited
consolidated financial statements.
 See notes
to consolidated financial statements.
  3
 Index
 
 WeststarFinancial Services Corporation &
      SubsidiaryConsolidated
      Statements of Operations(unaudited)Three
      Months Ended March 31,2008
              
              
              2007INTEREST
      INCOME:Interest
      and fees on loans
              
              $
              2,741,505
              
              
              $
              2,775,740Federal
      funds sold
              
              
              27,004
              
              
              
              24,923Interest-bearing
      deposits
              
              
              883
              
              
              
              2,021Investments:Taxable
      interest income
              
              
              217,477
              
              
              
              209,048Non-taxable
      interest income
              
              
              86,537
              
              
              
              74,496Corporate
      dividends
              
              
              7,007
              
              
              
              7,571Total
      interest income
              
              
              3,080,413
              
              
              
              3,093,799INTEREST
      EXPENSE:Time
      deposits of $100,000 or more
              
              
              350,325
              
              
              
              282,801Other
      time and savings deposits
              
              
              861,837
              
              
              
              837,353Short-term
      borrowings
              
              
              7,134
              
              
              
              4,427Long-term
      debt
              
              
              127,836
              
              
              
              137,163Total
      interest expense
              
              
              1,347,132
              
              
              
              1,261,744NET
      INTEREST INCOME
              
              
              1,733,281
              
              
              
              1,832,055PROVISION
      FOR LOAN LOSSES
              
              
              37,445
              
              
              
              17,855NET
      INTEREST INCOME AFTER PROVISIONFOR
      LOAN LOSSES
              
              
              1,695,836
              
              
              
              1,814,200OTHER
      INCOME:Service
      charges on deposit accounts
              
              
              283,847
              
              
              
              275,822Other
      service fees and commissions
              
              
              86,236
              
              
              
              75,990Equity
      in loss of Bank of Asheville Mortgage Company, LLC
              
              
              (13,558
              )
              
              
              (22,854
              )Other
              
              
              18,509
              
              
              
              21,411Total
      other income
              
              
              375,034
              
              
              
              350,369OTHER
      EXPENSES:Salaries
      and wages
              
              
              624,384
              
              
              
              571,317Employee
      benefits
              
              
              116,512
              
              
              
              99,381Occupancy
      expense, net
              
              
              124,688
              
              
              
              119,622Equipment
      rentals, depreciation and maintenance
              
              
              113,678
              
              
              
              105,808Supplies
              
              
              73,463
              
              
              
              61,156Professional
      fees
              
              
              122,052
              
              
              
              107,257Data
      processing fees
              
              
              142,341
              
              
              
              157,216Marketing
              
              
              62,378
              
              
              
              58,907Net
      expenses from foreclosed properties
              
              
              313
              
              
              
              4,629Other
              
              
              89,783
              
              
              
              89,977Total
      other expenses
              
              
              1,469,592
              
              
              
              1,375,270INCOME
      BEFORE INCOME TAXES
              
              
              601,278
              
              
              
              789,299INCOME
      TAX PROVISION
              
              
              213,141
              
              
              
              289,268NET
      INCOME
              
              $
              388,137
              
              
              $
              500,031EARNINGS
      PER SHARE:Basic
              
              $
              0.18
              
              
              $
              0.24Diluted
              
              $
              0.17
              
              
              $
              0.22
 
 
 See notes
to consolidated financial statements
  4
 Index
 
 Weststar FinancialServices Corporation &
      SubsidiaryConsolidated Statements of
      Comprehensive Income (unaudited)Three
      Months Ended March 31,2008
              
              
              2007NET
      INCOME
              
              $
              388,137
              
              
              $
              500,031OTHER
      COMPREHENSIVE INCOMEUnrealized
      holding gains (losses) on securities available for sale
              
              
              362,067
              
              
              
              (12,203
              )Tax
      effect
              
              
              (139,577
              )
              
              
              4,704Unrealized
      holding gains (losses) on securities available for sale, net of
      tax
              
              
              222,490
              
              
              
              (7,499
              )Reclassification
      adjustment for realized gains (losses)
              
              
              -
              
              
              
              -Tax
      effect
              
              
              -
              
              
              
              -Reclassification
      adjustment for realized gains (losses), net of tax
              
              
              -
              
              
              
              -OTHER
      COMPREHENSIVE INCOME (LOSS),NET
      OF TAX
              
              
              222,490
              
              
              
              (7,499
              )COMPREHENSIVE
      INCOME
              
              $
              610,627
              
              
              $
              492,532
 
 
 See notes
to consolidated financial statements.
  5
 Index
  WeststarFinancial Services Corporation &
Subsidiary
 Consolidated
Statements of Changes in Shareholders’ Equity (unaudited)
 For
the Three Months Ended March 31, 2008 and 2007
 
 Common Stock
                  
                  
                  Additional
      Paid-In
                  
                  
                  Retained
                  
                  
                  Accumulated
      Other Comprehensive
                  
                  
                  Total
      Shareholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  Loss
                  
                  
                  EquityBALANCE,
      DECEMBER 31, 2006
                  
                  
                  1,682,290
                  
                  
                  $
                  1,682,290
                  
                  
                  $
                  6,528,387
                  
                  
                  $
                  4,869,092
                  
                  
                  $
                  (106,916
                  )
                  
                  $
                  12,972,853Net
      unrealized losses securities available for sale
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,499
                  )
                  
                  
                  (7,499
                  )Issuance
      of common stock pursuant to the exercise of stock options
                  
                  
                  5,702
                  
                  
                  
                  5,702
                  
                  
                  
                  (5,676
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  26Tax
      benefit on exercise of non- qualified stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,944
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,944Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  500,031
                  
                  
                  
                  
                  
                  
                  
                  500,031Balance
      March 31, 2007
                  
                  
                  1,687,992
                  
                  
                  $
                  1,687,992
                  
                  
                  $
                  6,534,655
                  
                  
                  $
                  5,369,123
                  
                  
                  $
                  (114,415
                  )
                  
                  $
                  13,477,355BALANCE,
      DECEMBER 31, 2007
                  
                  
                  2,118,437
                  
                  
                  $
                  2,118,437
                  
                  
                  $
                  6,133,773
                  
                  
                  $
                  6,913,168
                  
                  
                  $
                  13,861
                  
                  
                  $
                  15,179,239Net
      unrealized losses securities available for sale
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  222,490
                  
                  
                  
                  222,490Issuance
      of common stock pursuant to the exercise of stock options
                  
                  
                  945
                  
                  
                  
                  945
                  
                  
                  
                  (935
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10Tax
      benefit on exercise of non- qualified stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,643
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,643Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  388,137
                  
                  
                  
                  
                  
                  
                  
                  388,137Balance
      March 31, 2008
                  
                  
                  2,119,382
                  
                  
                  $
                  2,119,382
                  
                  
                  $
                  6,136,481
                  
                  
                  $
                  7,301,305
                  
                  
                  $
                  236,351
                  
                  
                  $
                  15,793,519
  6
 Index
  Weststar Financial Services Corporation &
      SubsidiaryConsolidated
      Statements of Cash Flows (unaudited)For
      the Three Months Ended March 31,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              388,137
              
              
              $
              500,031Adjustments
      to reconcile net income to net cash used by operating
      activities:Depreciation
              
              
              102,000
              
              
              
              97,283Provision
      for loan losses
              
              
              37,445
              
              
              
              17,855Premium
      amortization and discount accretion, net
              
              
              (6,102
              )
              
              
              (2,612
              )Deferred
      income tax (benefit) provision
              
              
              (18,605
              )
              
              
              16,075Expense
      from foreclosed properties
              
              
              -
              
              
              
              3,000Gain
      on sale of premises and equipment
              
              
              -
              
              
              
              (50
              )Increase
      in accrued interest receivable
              
              
              65,460
              
              
              
              6,083(Increase)
      decrease in other assets
              
              
              13,102
              
              
              
              (77,814
              )Increase
      (decrease) in accrued interest payable
              
              
              2,291
              
              
              
              (24,129
              )Increase
      in other liabilities
              
              
              126,643
              
              
              
              160,998Net
      cash provided by operating activities
              
              
              710,371
              
              
              
              696,720CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of securities available for sale
              
              
              (1,030,893
              )
              
              
              (1,455,623
              )Maturities
      of securities available for sale
              
              
              1,017,892
              
              
              
              591,452Net
      increase in loans
              
              
              (1,475,265
              )
              
              
              (3,271,738
              )Proceeds
      from sales of premises and equipment
              
              
              -
              
              
              
              50FHLB
      stock purchase
              
              
              (52,500
              )
              
              
              (42,300
              )Additions
      to premises and equipment
              
              
              (3,067
              )
              
              
              (21,252
              )Net
      cash used in investing activities
              
              
              (1,543,833
              )
              
              
              (4,199,411
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase (decrease) in demand deposits, NOW accounts,MMDA
      and savings accounts
              
              
              (581,229
              )
              
              
              2,796,286Net
      increase in time deposits
              
              
              6,545,704
              
              
              
              6,321,329Issuance
      of common stock
              
              
              10
              
              
              
              26Repayment
      of FHLB advances
              
              
              (500,000
              )
              
              
              (800,000
              )Net
      increase (decrease) in overnight borrowings
              
              
              2,432
              
              
              
              (306,000
              )Proceeds
      from FHLB advances
              
              
              500,000
              
              
              
              800,000Tax
      benefit from non-qualified stock options
              
              
              3,643
              
              
              
              11,944Net
      cash provided by financing activities
              
              
              5,970,560
              
              
              
              8,823,585NET
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              5,137,098
              
              
              
              5,320,894CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              8,527,456
              
              
              
              5,026,627CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              13,664,554
              
              
              $
              10,347,521
 
 
 See notes
to consolidated financial statements.
  7
 Index
  WESTSTAR FINANCIAL SERVICES CORPORTION &
SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
              Weststar
      Financial Services Corporation (the “Company”) is a holding company with
      one subsidiary, The Bank of Asheville (the “Bank”).  The Bank is
      a state chartered commercial bank, which was incorporated in North
      Carolina on October 29, 1997.  The Bank provides consumer and
      commercial banking services in Buncombe County and surrounding
      area.  Common shares of The Bank of Asheville were exchanged for
      common shares of Weststar Financial Services Corporation on April 29,
      2000.  Weststar Financial Services Corporation formed Weststar
      Financial Services Corporation I (the “Trust”) during October 2003 in
      order to facilitate the issuance of trust preferred
      securities.  The Trust is a statutory business trust formed
      under the laws of the state of Delaware, of which all common securities
      are owned by Weststar Financial Services Corporation.  Bank of
      Asheville Mortgage Company, LLC (the “Mortgage Company”) is a state
      chartered mortgage bank which was incorporated in North Carolina on
      October 19, 2004 of which Weststar Financial Services Corporation is a 50%
      owner.  The Mortgage Company originates conventional mortgage
      loans.
 
 In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the consolidated financial
position of the Company as of March 31, 2008 and December 31, 2007, and the
consolidated results of their operations and their cash flows for the
three-month periods ended March 31, 2008 and 2007.  Operating results
for the three-month period ended March 31, 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 $33,000,234 and $38,206,567 at March 31, 2008 and
      December 31, 2007, respectively.
 
 3.
              Basic
      and diluted net income per shave have been computed by dividing net income
      for each period by the weighted average number of shares of common stock
      outstanding during each period.
 
 Basic
earnings per common share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period.  Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustments to income that would result from the
assumed issuance.  Potential common shares that may be issued by the
Company relate solely to outstanding stock options and are determined using the
treasury stock method.  During 2008 and 2007, there were no shares
excluded due to antidultion.
  8
 Index
  Basic and
diluted net income per share have been computed based upon net income as
presented in the accompanying statements of operations divided by the weighted
average number of common shares outstanding or assumed to be outstanding, after
retroactively adjusting for the 5-for-4 stock split effected during June 2007,
as summarized below:
 
 For
      the Period Ended March 31,
              
              2008
              
              
              2007Weighted
      average number of common shares used in computing basic net income per
      share
              
              
              2,118,956
              
              
              
              2,103,993Effect
      of dilutive stock options
              
              
              160,595
              
              
              
              182,800Weighted
      average number of common shares and dilutive potential common shares used
      in computing diluted net income per common share
              
              
              2,279,551
              
              
              
              2,286,793
 
 
 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 have to apply complex hedge accounting
      provisions.
 
 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 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 used
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
an allowance for loan losses 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 March 31,
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.
  10
 Index
  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 foreclosed asset as
nonrecurring Level 3.
 
 Assets
measured at fair value on a recurring basis are summarized below:
 
 Fair Value Measurements at March 31,
      2008Quoted
      Prices in Active Markets for Identical Assets
              
              
              Significant
      Other Observable Inputs
              
              
              Significant
      Unobservable Inputs
              
              
              Assets/
      LiabilitiesDescription
              
              (Level 1)
              
              
              (Level 2)
              
              
              (Level 3)
              
              
              at Fair ValueAvailable-for-sale
      securities
              
              
              -
              
              
              $
              26,494,464
              
              
              
              -
              
              
              $
              26,494,464
 
 
 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.
  11
 Index
  Item
      2.
              Management’s
      Discussion and Analysis Financial Condition and Results of
      Operations
 
 Weststar
Financial Services Corporation & Subsidiary
 Management’s
Discussion and Analysis
 
 Management’s
Discussion and Analysis is provided to assist in understanding and evaluating
the Company’s results of operations and financial condition. The following
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere herein. Weststar Financial
Services Corporation (the “Company”) is a holding company for The Bank of
Asheville (the “Bank”), a state chartered commercial bank incorporated in North
Carolina on October 29, 1997.  The Bank provides consumer and
commercial banking services in Buncombe County and surrounding
areas.  Common shares of the Bank were exchanged for common shares of
Weststar Financial Services Corporation on April 29, 2000.  Weststar
Financial Services Corporation formed Weststar Financial Services Corporation I
(the “Trust”) during October 2003 in order to facilitate the issuance of trust
preferred securities.  The Trust is a statutory business trust formed
under the laws of the state of Delaware, of which all common securities are
owned by Weststar Financial Services Corporation.  On October 19,
2004, the Company formed Bank of Asheville Mortgage Company, LLC (the “Mortgage
Company”), a mortgage broker, of which the Company owns a 50%
interest.  Because Weststar Financial Services Corporation has no
material operations and conducts no business on its own other than owning the
Bank, the discussion contained in Management’s Discussion and Analysis concerns
primarily the business of the Bank.  However, for ease of reading and
because the financial statements are presented on a consolidated basis, Weststar
Financial Services Corporation and the Bank are collectively referred to herein
as the Company.
 
 EXECUTIVE
OVERVIEW
 
 During
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 totaled $276,913 at March 31, 2008
compared to $283,470 at December 31, 2007.  Net charge-offs for the
period totaled $16,912 compared to $13,876 for the period ended Mach 31,
2007.  Loans outstanding grew by 1.01% to $137,192,577 from December
31, 2007.  Deposits increased 4.00% to $155,155,491.  The
increase was attributable to marketing campaigns, sales calls efforts and
product development.
 
 Net
interest income decreased by 5.39% due to a tighter net interest margin as a
result of Federal Open Market Committee interest rate cut
initiatives.  As a result of loan growth and net charge-offs, the
Company added $37,445 to the loan loss reserve.  Other non-interest
income for the March 31, 2008 and 2007 quarters totaled $375,034 and $350,369,
respectively.  The increase in other income primarily reflects
increased fees from service charges on commercial deposit accounts, increased
fees from debit/credit card interchange transactions and improved performance
from Bank of Asheville Mortgage Company.  Non-interest expenses
increased from $1,375,270 to $1,469,592.  The increase was primarily
attributable to operating expenses associated with personnel, supplies and
professional fees incurred to support loan and deposit servicing and
growth.  Data processing fees declined from $157,216 to $142,341 as a
result of contract renegotiations and outsourcing selected services to a more
competitively priced processor.
  12
 Index
  Net
income totaled $388,137 and $500,031 for the periods ended March 31, 2008 and
2007, respectively – a decrease of 22.38%.
 
 CHANGES
IN FINANCIAL CONDITION
 MARCH 31,
2008 COMPARED TO DECEMBER 31, 2007
 
 During
the period from December 31, 2007 to March 31, 2008, total assets increased
$6,710,121 or 3.85%.  This increase, reflected primarily in the cash
and cash equivalents and loans, resulted from an increase in
deposits.
 
 Securities,
federal funds sold and interest-bearing balances with other financial
institutions at March 31, 2008 totaled $34,391,498 compared to $29,910,578 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 $515,800.
 
 At March
31, 2008, the loan portfolio constituted 75.81% of the Company’s total
assets.  Loans increased $1,458,353 from December 31, 2007 to March
31, 2008.  Continued growth in real estate lending resulted in the
modest growth.  Management places a strong emphasis on loan
quality.
 
 The
recorded investment in loans that are considered to be impaired in accordance
with SFAS No. 114 was $192,111, $782,018, and $195,683 at March 31, 2008 and
2007, and December 31, 2007, respectively.  The average recorded
balances of impaired loans were $215,195, $777,820 and $400,074 for the periods
ended March 31, 2008 and 2007, and December 31, 2007.  The related
allowance for loan losses determined for impaired loans was none, $3,000 and
$120 at March 31, 2008 and 2007, and December 31, 2007 respectively. For
the three-month periods ended March 31, 2008 and 2007, Weststar recognized
interest income from impaired loans of none and $1,535, respectively. See
“Asset Quality” for discussion for an analysis of loan loss
reserves.
 
 Deposits
increased $5,964,475 during the three months ended March 31,
2008.  The increase in deposits was primarily attributable to growth
in money market and time deposit accounts.  As rates declined
throughout 2008, rate sensitive customers shifted funds from lower
interest-bearing accounts to higher yielding accounts such as money market and
time deposit accounts.  Additionally, investors seeking to minimized
risks in the stock market deposited funds into less risky time
deposits.  Time deposits grew by a total of $6,545,704, while money
market accounts grew by $859,286.  Demand, NOW and savings accounts
decreased by $1,440,515.
 
 Long-term
borrowings consisted of one advance from the FHLB, which totaled $4,000,000, and
trust preferred securities 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 trust preferred securities bear a
rate of LIBOR plus 315 basis points (7.41% at March 31, 2008) and pay dividends
quarterly.  The rate is subject to quarterly resets.  The
trust preferred securities mature October 7, 2033, and are callable on or after
October 7, 2008.  All of the trust preferred securities were eligible
for inclusion as Tier I capital.  The Company plans to use the capital
to support growth and branch expansion.
 
 The
Company’s capital at March 31, 2008 to risk weighted assets totaled
14.39%.  Current regulations require a minimum ratio of total capital
to risk weighted assets of 8%, with at least
  13
 Index
  4% being
in the form of Tier 1 capital, as defined in the regulation.  As of
March 31, 2008, the Company’s capital exceeded the current regulatory capital
requirements.
 
 RESULTS
OF OPERATIONS
 FOR THE
THREE MONTH PERIOD ENDED MARCH 31, 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 March 31, 2008 totaled $1,733,281 compared
to $1,832,055 in 2007.  This 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 approximately
4.08% and 4.70% for the quarters ended March 31, 2008 and 2007,
respectively.
 
 Weststar
recorded a provision for loan losses of $37,445 and $17,855 for the quarters
ended March 31, 2008 and 2007, respectively.  The provision for loan
losses is charged to operations to bring the allowance to a level deemed
appropriate by management based on the factors discussed under “Asset
Quality.”
 
 Other
non-interest income for the March 31, 2008 and 2007 quarters totaled $375,034
and $350,369, respectively.  The increase in other income primarily
reflects increased fees from service charges on commercial deposit accounts,
increased fees from debit/credit card interchange transactions and improved
performance from Bank of Asheville Mortgage Company.  Interchange
revenue increased from $51,145 to $63,562 for the periods ended March 31, 2007
and 2008, respectively.  The Mortgage Company posted net operating
losses of $27,116 and $45,708 during 2008 and 2007, respectively, of which
$13,558 and $22,854 was the Company’s portion during 2007 and 2006,
respectively.  Other income remained relatively flat at
$18,509.
 
 Other
non-interest expense totaled $1,469,592 compared to $1,375,270 in
2007.  The increase was primarily attributable to personnel and
overhead incurred to support loan and deposit servicing and
growth.  Professional fees totaled $122,052 and $107,257 during 2008
and 2007, respectively.  The increase in fees was largely attributable
to increased external loan review services.  Data processing fees
decreased from $157,216 to $142,341 as a result of contract renegotiations and
outsourcing selected item processing services to a more cost effective
provider.  Income before income tax provision totaled $601,278 and
$789,299 for the quarters ended March 31, 2008 and 2007,
respectively.  Income tax provision totaled $213,141 and $289,268 for
the quarters ended March 31, 2008 and 2007, respectively, which equated to an
effective tax rate of 35.45% and 36.65%, respectively.  Net income
totaled $388,137 and $500,031 for the quarters ended March 31, 2008 and 2007,
respectively.
 
 Other
comprehensive income (loss) totaled $222,490 and $(7,499) in 2008 and 2007,
respectively.  Comprehensive income (loss), which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $610,627
and $492,532 for the quarters ended March 31, 2008 and 2007,
respectively.
  14
 Index
  ASSET/LIABILITY
MANAGEMENT
 
 The
Company’s asset/liability management, or interest rate risk management, program
is focused primarily on evaluating and managing the composition of its assets
and liabilities in view of various interest rate scenarios. Factors beyond the
Company’s control, such as market interest rates and competition, may also have
an impact on the Company’s interest income and interest expense.
 
 Interest Rate Gap Analysis.As
a part of its interest rate risk management policy, the Company calculates an
interest rate “gap.” Interest rate “gap” analysis is a common, though imperfect,
measure of interest rate risk, which measures the relative dollar amounts of
interest-earning assets and interest-bearing liabilities which reprice within a
specific time period, either through maturity or rate adjustment. The “gap” is
the difference between the amounts of such assets and liabilities that are
subject to repricing. A “positive” gap for a given period means that the amount
of interest-earning assets maturing or otherwise repricing within that period
exceeds the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a decrease in the yield on
its assets greater than the decrease in the cost of its liabilities and its
income should be negatively affected. Conversely, the cost of funds for an
institution with a positive gap would generally be expected to increase more
slowly than the yield on its assets in a rising interest rate environment, and
such institution’s net interest income generally would be expected to be
positively affected by rising interest rates. Changes in interest rates
generally have the opposite effect on an institution with a “negative
gap.”
 
 The
majority of the Company’s deposits are rate-sensitive instruments with rates
that tend to fluctuate with market rates. These deposits, coupled with the
Company’s short-term certificates of deposit, have increased the opportunities
for deposit repricing. The Company places great significance on monitoring and
managing the Company’s asset/liability position. The Company’s policy of
managing its interest margin (or net yield on interest-earning assets) is to
maximize net interest income while maintaining a stable deposit base. The
Company’s deposit base is not generally subject to the level of volatility
experienced in national financial markets in recent years; however, the Company
does realize the importance of minimizing such volatility while at the same time
maintaining and improving earnings. Therefore, management prepares on a regular
basis earnings projections based on a range of interest rate scenarios of
rising, flat and declining rates in order to more accurately measure interest
rate risk.
 
 Interest-bearing
liabilities and variable rate loans are generally repriced to current market
rates. Based on its analysis, the Company believes that its balance sheet is
slightly liability-sensitive, meaning that in a given period there will be more
liabilities than assets subject to immediate repricing as the market rates
change. Because a significant portion of the Company’s loans are variable rate
commercial loans, they reprice more rapidly than rate sensitive interest-bearing
deposits. During periods of rising rates, this results in increased net interest
income, assuming similar growth rates and stable product mixes in loans and
deposits. The opposite occurs during periods of declining rates.
 
 The
Company uses interest sensitivity analysis to measure the sensitivity of
projected earnings to changes in interest rates. The sensitivity analysis takes
into account the current contractual agreements that the Company has on
deposits, borrowings, loans, investments and any commitments to enter into those
transactions. The Company monitors interest sensitivity by means of computer
models that incorporate the current volumes, average rates, scheduled maturities
and payments and repricing opportunities of asset and liability portfolios.
Using this
  15
 Index
  information,
the model estimates earnings based on projected portfolio balances under
multiple interest rate scenarios. In an effort to estimate the effects of pure
interest-rate risk, the Company assumes no growth in its balance sheet, because
to do so could have the effect of distorting the balance sheet’s sensitivity to
changing interest rates. The Company simulates the effects of interest rate
changes on its earnings by assuming no change in interest rates as its base case
scenario and either (1) gradually increasing or decreasing interest rates by
over a twelve-month period or (2) immediately increasing or decreasing
interest rates by .25%, .50%, 1% and 2%. Although these methods are subject to
the accuracy of the assumptions that underlie the process and do not take into
account the pricing strategies that management would undertake in response to
sudden interest rate changes, the Company believes that these methods provide a
better indication of the sensitivity of earnings to changes in interest rates
than other analyses.
 
 Income
simulation through modeling is one tool that the Company uses in the
asset/liability management process. The Company also considers a number of other
factors in determining its asset/liability and interest rate sensitivity
management strategies. Management strives to determine the most likely outlook
for the economy and interest rates by analyzing external factors, including
published economic projections and data, the effects of likely monetary and
fiscal policies as well as any enacted or prospective regulatory changes. The
Company’s current and prospective liquidity position, current balance sheet
volumes and projected growth, accessibility of funds for short-term needs and
capital maintenance are also considered. This data is combined with various
interest rate scenarios to provide management with information necessary to
analyze interest sensitivity and to aid in the development of strategies to
manage the Company’s balance sheet.
 
 The
following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 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.
  16
 Index
  TERMS TO
REPRICING AT MARCH 31, 2008
 
 Total1-90
      Days
              
              
              91-180
      Days
              
              
              181-365
      Days
              
              
              One
      Year
              
              
              Non-sensitive
              
              
              TotalInterest-earning
      assets:Interest
      bearing deposits
              
              $
              62,034
              
              
              
              -
              
              
              
              -
              
              
              $
              62,034
              
              
              
              -
              
              
              $
              62,034Federal
      funds sold
              
              
              7,835,000
              
              
              
              -
              
              
              
              -
              
              
              
              7,835,000
              
              
              
              -
              
              
              
              7,835,000Investment
      securities
              
              
              865,442
              
              
              $
              428,802
              
              
              $
              701,231
              
              
              
              1,995,475
              
              
              $
              24,114,367
              
              
              
              26,109,842Federal   Home   Loan   BankStock
              
              
              515,800
              
              
              
              -
              
              
              
              -
              
              
              
              515,800
              
              
              
              -
              
              
              
              515,800Loans
              
              
              108,670,727
              
              
              
              4,724,550
              
              
              
              5,357,038
              
              
              
              118,752,315
              
              
              
              18,440,262
              
              
              
              137,192,577Total
      interest-earning assets
              
              
              117,949,003
              
              
              
              5,153,352
              
              
              
              6,058,269
              
              
              
              129,160,624
              
              
              
              42,554,629
              
              
              
              171,715,253Interest-bearing
      liabilities:Time
      deposits
              
              
              25,791,620
              
              
              
              25,496,811
              
              
              
              29,821,369
              
              
              
              81,109,800
              
              
              
              406,259
              
              
              
              81,516,059All
      other deposits
              
              
              47,347,897
              
              
              
              -
              
              
              
              -
              
              
              
              47,347,897
              
              
              
              -
              
              
              
              47,347,897Short-term
      debt
              
              
              422,101
              
              
              
              -
              
              
              
              -
              
              
              
              422,101
              
              
              
              -
              
              
              
              422,101Long-term
      debt
              
              
              4,124,000
              
              
              
              -
              
              
              
              -
              
              
              
              4,124,000
              
              
              
              4,000,000
              
              
              
              8,124,000Total
      interest-bearing liabilities
              
              
              77,685,618
              
              
              
              25,496,811
              
              
              
              29,821,369
              
              
              
              133,003,798
              
              
              
              4,406,259
              
              
              
              137,410,057Interest
      sensitivity gap
              
              $
              40,263,385
              
              
              $
              (20,343,459
              )
              
              $
              (23,763,100
              )
              
              $
              (3,843,174
              )
              
              $
              38,148,370Cumulative
      interest sensitivity gap
              
              $
              40,263,385
              
              
              $
              19,919,926
              
              
              $
              (3,843,174
              )Interest
      earning assets as a percent of interest sensitive
    liabilities
              
              
              151.8
              %
              
              
              20.2
              %
              
              
              20.3
              %
              
              
              97.1
              %
 
 
 Weststar
has established an acceptable range of 80% to 120% for interest-earning assets
as a percent of interest sensitive liabilities in the one year
horizon.
 
 ASSET
QUALITY
 
 Management
considers Weststar’s asset quality to be of primary importance.  We
maintain an allowance for loan losses to absorb probable losses inherent in the
loan portfolio. The loan portfolio is analyzed monthly in an effort to identify
potential problems before they actually occur.  The allowance for loan
losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. The provision for loan losses is
based upon management’s best estimate of the amount needed to maintain the
allowance for loan losses at an adequate level. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
 
 The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of the current status of the portfolio, historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions. Management segments the loan portfolio by loan
type in considering each of the aforementioned factors and their impact upon the
level of the allowance for loan losses.
 
 This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
Therefore, while management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In
addition, regulatory examiners may require the Company to recognize changes to
the 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-
  17
 Index
  case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay,
the borrower’s prior payment record, and the amount of the shortfall in relation
to the principal and interest owed.  Impairment is measured on a loan
by loan basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan’s effective interest rate,
the loan’s obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.  Large groups of smaller balance
homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
disclosures.
 
 The
provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level.  The
monthly provision for loan losses may fluctuate based on the results of this
analysis.  The allowance for loan losses at March 31, 2008 and 2007,
and December 31, 2007 was $2,110,658, $1,888,059 and $2,090,125 or 1.54%, 1.50%
and 1.54%, respectively, of gross loans outstanding.   The ratio
of annualized net charge-offs to average loans outstanding was .05%, .05% and
..16% at March 31, 2008 and 2007, and December 2007, respectively.
 
 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
three-months ended March 31, 2008 and 2007, and for the year ended December 31,
2007.
 
 Summary
of Allowance for Loan Losses
 
 For
      the three months ended March 31,
              
              
              For the year ended
      December 31,2008
              
              
              2007
              
              
              2007Balance,
      beginning of period
              
              $
              2,090,125
              
              
              $
              1,884,080
              
              
              $
              1,884,080Charge-offs:Commercial,
      financial and agricultural
              
              
              -
              
              
              
              (9,490
              )
              
              
              (171,723
              )Real
      estate:Construction
              
              
              -
              
              
              
              -Mortgage
              
              
              -
              
              
              
              -
              
              
              
              -Consumer
              
              
              (29,902
              )
              
              
              (10,681
              )
              
              
              (85,018
              )Total
      charge-offs
              
              
              (29,902
              )
              
              
              (20,171
              )
              
              
              (256,741
              )RecoveriesCommercial,
      financial and agricultural
              
              
              2,476
              
              
              
              2,533
              
              
              
              24,600Real
      estate:Construction
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage
      -
              
              
              
              
              
              
              -
              
              
              
              -Consumer
              
              
              10,514
              
              
              
              3,762
              
              
              
              31,461Total
      recoveries
              
              
              12,990
              
              
              
              6,295
              
              
              
              56,061Net
      (charge-offs) recoveries
              
              
              (16,912
              )
              
              
              (13,876
              )
              
              
              (200,680
              )Provision
      charged to operations
              
              
              37,445
              
              
              
              17,855
              
              
              
              406,725Balance,
      end of period
              
              $
              2,110,658
              
              
              $
              1,888,059
              
              
              $
              2,090,125Percentage
      of net charge-offs to average loans
              
              
              .05
              %
              
              
              .05
              %
              
              
              .16
              %Percentage
      of allowance to period-end loans
              
              
              1.54
              %
              
              
              1.50
              %
              
              
              1.54
              %
 
 The
Company does not have any significant loan concentrations.  During the
period, loan quality demonstrated improvement over March 31, 2007, and December
31, 2007.
  18
 Index
  During
2008, there were no changes in estimation methods or assumptions that affected
our methodology for assessing the appropriateness of the general and specific
allowance for credit losses.  Changes in estimates and assumptions
regarding the effect of economic and business conditions on borrowers affect the
assessment of the allowance.
 
 The
Company has not engaged in any subprime lending and does not hold traditionally
defined subprime loans in either its loan or investment portfolios; however
there are subprime loans in the Company’s market.
 
 The
Federal Reserve Bank of New York reported total foreclosures per 1,000 housing
units listed .00 or none for Buncombe County, .80 for North Carolina and 2.20
for the United States.  The percent of owner-occupied loans in
foreclosure totaled 3.5% for Buncombe County, 4.7% for North Carolina and 8.5%
for the United States as of December 31, 2007.  While housing sales in
Buncombe County have been slower than the prior year resulting in an increased
level of inventory, housing values continue to be relatively
stable.
 
 A slight
slow down in local economic growth partially offset with improved asset quality
resulted in maintaining a 1.54% loan loss reserve at March 31, 2008 compared to
the same level at December 31, 2007.  Management has reviewed each
non-performing loan, supporting collateral, financial stability of each borrower
and the relevant loan loss allowance.  Based upon this analysis,
management believes the allowance is adequate to support current loans
outstanding.  Management has continued its in-depth underwriting
analysis, training and loan monitoring.
 
 The
following table allocates the allowance for loan losses by loan category at the
dates indicated.  The allocation of the allowance to each category is
not necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
 
 
 March
      31, 2008
              
              
              December
      31, 2007Amount
      of Allowance
              
              
              Percent
      of Total Loans
              
              
              Amount
      of Allowance
              
              
              Percent
      of Total LoansTYPE
      OF LOAN:Real
      Estate
              
              $
              1,620,183
              
              
              
              80
              %
              
              $
              1,596,565
              
              
              
              80
              %Commercial
      and industrial loans
              
              
              447,507
              
              
              
              19
              %
              
              
              437,351
              
              
              
              18
              %Consumer
              
              
              42,968
              
              
              
              1
              %
              
              
              56,209
              
              
              
              2
              %Total
      Allowance
              
              $
              2,110,658
              
              
              
              100
              %
              
              $
              2,090,125
              
              
              
              100
              %
 
 
 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.
  19
 Index
  REGULATORY
CAPITAL
 
 Actual Purposes
                  
                  
                  For
      Capital Adequacy
                  
                  
                  To
      Be Well Capitalized Under Prompt Corrective Action
      ProvisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio(Dollars
      in Thousands)As
      of March 31, 2008Total
      Capital (to Risk Weighted Assets)Consolidated
                  
                  $
                  21,422
                  
                  
                  
                  14.39
                  %
                  
                  $
                  11,911
                  
                  
                  
                  8.00
                  %
                  
                  $
                  14,888
                  
                  
                  
                  10.00
                  %Bank
                  
                  $
                  20,288
                  
                  
                  
                  13.65
                  %
                  
                  $
                  11,890
                  
                  
                  
                  8.00
                  %
                  
                  $
                  14,862
                  
                  
                  
                  10.00
                  %Tier
      1 Capital (to Risk Weighted Assets)Consolidated
                  
                  $
                  19,558
                  
                  
                  
                  13.14
                  %
                  
                  $
                  5,955
                  
                  
                  
                  4.00
                  %
                  
                  $
                  8,933
                  
                  
                  
                  6.00
                  %Bank
                  
                  $
                  18,427
                  
                  
                  
                  12.40
                  %
                  
                  $
                  5,945
                  
                  
                  
                  4.00
                  %
                  
                  $
                  8,917
                  
                  
                  
                  6.00
                  %Tier
      1 Capital (to Average Assets)Consolidated
                  
                  $
                  19,558
                  
                  
                  
                  11.17
                  %
                  
                  $
                  7,007
                  
                  
                  
                  4.00
                  %
                  
                  $
                  8,758
                  
                  
                  
                  5.00
                  %Bank
                  
                  $
                  18,427
                  
                  
                  
                  10.53
                  %
                  
                  $
                  6,997
                  
                  
                  
                  4.00
                  %
                  
                  $
                  8,746
                  
                  
                  
                  5.00
                  %
 
 
 LIQUIDITY
 
 Maintaining
adequate liquidity while managing interest rate risk is the primary goal of
Weststar’s asset and liability management strategy. Liquidity is the ability to
fund the needs of the Company’s borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Loan repayments, deposit
growth, federal funds purchased and borrowings from the Federal Home Loan Bank
are presently the main sources of the Company’s liquidity. The Company’s primary
uses of liquidity are to fund loans and to make investments.
 
 As of
March 31, 2008 liquid assets (cash due from banks, interest-earning bank
deposits and federal funds sold) were approximately $13.7 million, which
represents 7.55% of total assets and 8.81% of total deposits. Supplementing this
liquidity, Weststar has available lines of credit from correspondent banks of
approximately $17.1 million. At March 31, 2008, outstanding commitments to
extend credit and available lines of credit were $33.0
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 52.54% of Weststar’s total deposits at March 31, 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 17.72% of the Company’s total deposits
at March 31, 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.
 
 
 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
  20
 Index
  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.
 
 Item3.
              Quantitative
      and Qualitative Disclosures about Market
Risk
 We have
no material changes in our quantitative and qualitative disclosures about market
risk as of March 31, 2008 from that presented in the Annual Report on Form
10-KSB for the year ended December 31, 2007.
 
 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.
  21
 Index
  Part II.
              OTHER
      INFORMATION
 
 Item
      4.
              Submission
      of Matters to a Vote of Security
Holders
 None.
 
 Item
      5.
              Other
      Information
 (a)
                None.
 (b)
                None.
 
 Item
      6.
              Exhibits
 (a)
                Exhibits.
 
  31.1
                –
                Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                –
                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 200232.1
                –
                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
  200232.2
                –
                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
  22
 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:
      May 13, 2008
              By:
              /s/   G. Gordon
      GreenwoodG.
      Gordon GreenwoodPresident
      and Chief Executive OfficerDate:
      May 13, 2008
              By:
              /s/   Randall C.
      HallRandall
      C. HallExecutive
      Vice President and Chief Financialand
      Principal Accounting Officer






23