UNITED
STATES SECURITITES AND EXCHANGE COMMISSION




Washington,
D.C. 29549





FORM
10-QSB


(Mark
One)


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





For the
quarterly period ended June 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 £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12-2
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 – 2,119,647 shares outstanding as of August 12,
2008





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












INDEX
            PagePart I – FINANCIAL INFORMATIONFinancial Statements:Consolidated Balance Sheets June 30, 2008 and December 31,
      2007
            3Consolidated Statements of Operations Three and Six Months
      Ended June 30, 2008 and 2007
            4Consolidated Statements of Comprehensive Income (Loss) Three
      and Six Months Ended June 30, 2008 and 2007
            5Consolidated Statements of Changes in Shareholders’ Equity Six
      Months Ended June 30, 2008 and 2007
            6Consolidated Statements of Cash Flows Six Months Ended June 30,
      2008 and 2007
            7Notes to Consolidated Financial Statements
            8Item
      2 –
      Management’s Discussion and AnalysisFinancial Condition and
      Results of Operations
            12Item 4(T) – Controls and Procedures
            23Part II – OTHER INFORMATIONItem 4 – Submission of Matters to a Vote of Security
      Holders
            24Item 6 – Exhibit Index
            24Signatures
            25





2





Part I.
            FINANCIAL
      INFORMATION





Item I.
            Financial
      Statements





Weststar Financial Services Corporation &
Subsidiary


Consolidated
      Balance Sheets
            
            (unaudited)June 30
            
            
            December 312008
            
            
            
            2007
            *ASSETS:Cash
      and cash equivalents:Cash
      and due from banks
            
            $
            5,850,871
            
            
            $
            4,740,172Interest-bearing
      deposits
            
            
            49,376
            
            
            
            132,284Federal
      funds sold
            
            
            -
            
            
            
            3,655,000Total
      cash and cash equivalents
            
            
            5,900,247
            
            
            
            8,527,456Investment
      securities- available for sale, at fair value(amortized
      cost of $25,171,386 and $26,090,739, respectively)
            
            
            25,076,449
            
            
            
            26,113,294Loans
            
            
            148,338,170
            
            
            
            135,734,224Allowance
      for loan losses
            
            
            (2,252,385
            )
            
            
            (2,090,125
            )Net
      loans
            
            
            146,085,785
            
            
            
            133,644,099Premises
      and equipment, net
            
            
            2,800,122
            
            
            
            2,981,163Accrued
      interest receivable
            
            
            873,550
            
            
            
            972,603Federal
      Home Loan Bank stock, at cost
            
            
            585,600
            
            
            
            463,300Deferred
      income taxes
            
            
            677,439
            
            
            
            572,594Foreclosed
      properties
            
            
            51,006
            
            
            
            87,787Other
      assets
            
            
            873,489
            
            
            
            895,702TOTAL
            
            $
            182,923,687
            
            
            $
            174,257,998LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilities:Deposits:Demand
            
            $
            24,373,516
            
            
            $
            28,021,869NOW
      accounts
            
            
            17,975,715
            
            
            
            15,645,860Money
      market accounts
            
            
            27,425,389
            
            
            
            28,609,220Savings
            
            
            2,492,569
            
            
            
            1,943,712Time
      deposits of $100,000 or more
            
            
            27,409,800
            
            
            
            26,584,176Other
      time deposits
            
            
            55,535,199
            
            
            
            48,386,179Total
      deposits
            
            
            155,212,188
            
            
            
            149,191,016Short-term
      borrowings
            
            
            2,453,260
            
            
            
            419,669Accrued
      interest payable
            
            
            558,741
            
            
            
            567,710Other
      liabilities
            
            
            793,199
            
            
            
            776,364Long-term
      debt
            
            
            8,124,000
            
            
            
            8,124,000Total
      liabilities
            
            
            167,141,388
            
            
            
            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
      2,119,647 at June 30, 2008 and 2,118,437 at December 31, 2007,
      respectively
            
            
            2,119,647
            
            
            
            2,118,437Additional
      paid-in capital
            
            
            6,137,202
            
            
            
            6,133,773Retained
      earnings
            
            
            7,583,788
            
            
            
            6,913,168Accumulated
      other comprehensive income (loss)
            
            
            (58,338
            )
            
            
            13,861Total
      shareholders’ equity
            
            
            15,782,299
            
            
            
            15,179,239Total
            
            $
            182,923,687
            
            
            $
            174,257,998





*Derived
from audited consolidated financial statements.


See notes
to consolidated financial statements.





3





Weststar Financial Services Corporation &
Subsidiary


Consolidated Statements of
      Operations(unaudited)
            
            Three
      Months
            
            
            Six
      MonthsEnded
      June 30,
            
            
            Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007INTEREST
      INCOME:Interest
      and fees on loans
            
            $
            2,574,013
            
            
            $
            2,877,884
            
            
            $
            5,315,518
            
            
            $
            5,653,624Federal
      funds sold
            
            
            14,172
            
            
            
            14,000
            
            
            
            41,176
            
            
            
            38,923Interest-bearing
      deposits
            
            
            333
            
            
            
            1,316
            
            
            
            1,216
            
            
            
            3,337Investments:Taxable
      interest income
            
            
            211,462
            
            
            
            222,155
            
            
            
            428,939
            
            
            
            431,203Nontaxable
      interest income
            
            
            88,184
            
            
            
            84,322
            
            
            
            174,721
            
            
            
            158,818Corporate
      dividends
            
            
            7,214
            
            
            
            7,119
            
            
            
            14,221
            
            
            
            14,690Total
      interest income
            
            
            2,895,378
            
            
            
            3,206,796
            
            
            
            5,975,791
            
            
            
            6,300,595INTEREST
      EXPENSE:Time
      deposits of $100,000 or more
            
            
            309,269
            
            
            
            276,378
            
            
            
            659,594
            
            
            
            559,179Other
      time and savings deposits
            
            
            759,155
            
            
            
            855,631
            
            
            
            1,620,992
            
            
            
            1,692,984Short-term
      borrowings
            
            
            4,683
            
            
            
            44,424
            
            
            
            11,817
            
            
            
            48,851Long-term
      debt
            
            
            112,185
            
            
            
            138,634
            
            
            
            240,021
            
            
            
            275,797Total
      interest expense
            
            
            1,185,292
            
            
            
            1,315,067
            
            
            
            2,532,424
            
            
            
            2,576,811NET
      INTEREST INCOME
            
            
            1,710,086
            
            
            
            1,891,729
            
            
            
            3,443,367
            
            
            
            3,723,784PROVISION
      FOR LOAN LOSSES
            
            
            150,680
            
            
            
            69,720
            
            
            
            188,125
            
            
            
            87,575NET
      INTEREST INCOME AFTER PROVISIONFOR
      LOAN LOSSES
            
            
            1,559,406
            
            
            
            1,822,009
            
            
            
            3,255,242
            
            
            
            3,636,209OTHER
      INCOME:Services
      charges on deposit accounts
            
            
            284,172
            
            
            
            288,689
            
            
            
            568,019
            
            
            
            564,511Other
      service fees and commissions
            
            
            118,568
            
            
            
            85,901
            
            
            
            204,804
            
            
            
            161,891Equity
      in loss of Bank of Asheville Mortgage Company, LLC
            
            
            (2,551
            )
            
            
            (11,212
            )
            
            
            (16,109
            )
            
            
            (34,066
            )Other
            
            
            15,660
            
            
            
            30,736
            
            
            
            34,169
            
            
            
            52,147Total
      other income
            
            
            415,849
            
            
            
            394,114
            
            
            
            790,883
            
            
            
            744,483OTHER
      EXPENSES:Salaries
      and wages
            
            
            661,919
            
            
            
            570,856
            
            
            
            1,286,303
            
            
            
            1,142,173Employee
      benefits
            
            
            120,259
            
            
            
            108,386
            
            
            
            236,771
            
            
            
            207,767Occupancy
      expense, net
            
            
            125,051
            
            
            
            119,080
            
            
            
            249,739
            
            
            
            238,702Equipment
      rentals, depreciation and maintenance
            
            
            119,658
            
            
            
            108,011
            
            
            
            233,336
            
            
            
            213,819Supplies
            
            
            65,039
            
            
            
            69,635
            
            
            
            138,502
            
            
            
            130,791Professional
      Fees
            
            
            100,269
            
            
            
            70,790
            
            
            
            222,321
            
            
            
            178,047Data
      Processing Fees
            
            
            135,404
            
            
            
            162,006
            
            
            
            277,745
            
            
            
            319,222Marketing
            
            
            70,608
            
            
            
            80,989
            
            
            
            132,986
            
            
            
            139,896(Income)
      expenses from foreclosed properties
            
            
            40,908
            
            
            
            (2,000
            )
            
            
            41,221
            
            
            
            2,629Other
            
            
            124,273
            
            
            
            110,494
            
            
            
            214,056
            
            
            
            200,471Total
      other expenses
            
            
            1,563,388
            
            
            
            1,398,247
            
            
            
            3,032,980
            
            
            
            2,773,517INCOME
      BEFORE INCOME TAXES
            
            
            411,867
            
            
            
            817,876
            
            
            
            1,013,145
            
            
            
            1,607,175INCOME
      TAX PROVISION
            
            
            129,384
            
            
            
            293,304
            
            
            
            342,525
            
            
            
            582,572NET
      INCOME
            
            $
            282,483
            
            
            $
            524,572
            
            
            $
            670,620
            
            
            $
            1,024,603EARNINGS
      PER SHARE:Basic
            
            $
            .13
            
            
            $
            .25
            
            
            $
            .32
            
            
            $
            .49Diluted
            
            $
            .12
            
            
            $
            .23
            
            
            $
            .29
            
            
            $
            .45





See notes
to consolidated financial statements.





4





Weststar Financial Services Corporation &
Subsidiary


Consolidated Statements of
Comprehensive Income (Loss)(unaudited)





Three
      Months
            
            
            Six
      MonthsEnded
      June 30,
            
            
            Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007NET
      INCOME
            
            $
            282,483
            
            
            $
            524,572
            
            
            $
            670,620
            
            
            $
            1,024,603OTHER
      COMPREHENSIVE INCOMEUnrealized holding losses on
      securities available for sale
            
            
            (479,560
            )
            
            
            (518,925
            )
            
            
            (117,493
            )
            
            
            (531,128
            )Tax
      effect
            
            
            184,871
            
            
            
            200,046
            
            
            
            45,294
            
            
            
            204,750Unrealized
      holding losses on securities available for sale, net of
tax
            
            
            (294,689
            )
            
            
            (318,879
            )
            
            
            (72,199
            )
            
            
            (326,378
            )OTHER
      COMPREHENSIVE LOSS, NET OF TAX
            
            
            (294,689
            )
            
            
            (318,879
            )
            
            
            (72,199
            )
            
            
            (326,378
            )COMPREHENSIVE
      INCOME (LOSS)
            
            $
            (12,206
            )
            
            $
            205,693
            
            
            $
            598,421
            
            
            $
            698,225





See notes to consolidated financial
statements.





5





Weststar Financial Services Corporation &
Subsidiary


Consolidated
Statements of Changes in Shareholders’ Equity(unaudited)


For
the Six Months Ended June 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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (326,378
            )
            
            
            (326,378
            )Cash
      paid in lieu of fractional shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,930
            )
            
            
            
            
            
            
            (1,930
            )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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,024,603
            
            
            
            
            
            
            
            1,024,603Balance
      June 30, 2007
            
            
            2,109,833
            
            
            $
            2,109,833
            
            
            $
            6,112,814
            
            
            $
            5,891,765
            
            
            $
            (433,294
            )
            
            $
            13,681,118Balance
      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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (72,199
            )
            
            
            (72,199
            )Issuance
      of common stock pursuant to the exercise of stock options
            
            
            1,210
            
            
            
            1,210
            
            
            
            (1,199
            )
            
            
            
            
            
            
            
            
            
            
            11Tax
      benefit on exercise of non-qualified stock options
            
            
            
            
            
            
            
            
            
            
            4,628
            
            
            
            
            
            
            
            
            
            
            
            4,628Net
      Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            670,620
            
            
            
            
            
            
            
            670,620Balance
      June 30, 2008
            
            
            2,119,647
            
            
            $
            2,119,647
            
            
            $
            6,137,202
            
            
            $
            7,583,788
            
            
            $
            (58,338
            )
            
            $
            15,782,299





See notes
to consolidated financial statements.





6





Weststar Financial Services Corporation &
Subsidiary


Consolidated
Statements of Cash Flows (unaudited)


For
      the Six Months Ended June 30,
            
            2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Income
            
            $
            670,620
            
            
            $
            1,024,603Adjustments
      to reconcile net income to net cash used by operating
      activities:Depreciation
            
            
            205,656
            
            
            
            196,657Provision
      for loan losses
            
            
            188,125
            
            
            
            87,575Premium
      amortization and discount accretion, net
            
            
            (13,343
            )
            
            
            (10,816
            )Deferred
      income tax provision
            
            
            (59,551
            )
            
            
            (40,226
            )Net
      (income) expenses from foreclosed properties
            
            
            36,781
            
            
            
            1,000Gain
      on disposal/sale of premises and equipment
            
            
            -
            
            
            
            (50
            )Decrease
      in accrued interest receivable
            
            
            99,053
            
            
            
            184,876Decrease
      in other assets
            
            
            22,213
            
            
            
            31,315Increase
      (decrease) in accrued interest payable
            
            
            (8,969
            )
            
            
            33,049Increase
      in other liabilities
            
            
            16,835
            
            
            
            7,276Net
      cash provided by operating activities
            
            
            1,157,420
            
            
            
            1,515,259CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of securities available for sale
            
            
            (1,530,893
            )
            
            
            (1,471,666
            )Maturities
      of securities available for sale
            
            
            2,463,588
            
            
            
            1,414,988Net
      increase in loans
            
            
            (12,629,811
            )
            
            
            (1,352,589
            )Proceeds
      from sales of foreclosed properties
            
            
            -
            
            
            
            105,000Proceeds
      from sales of premises and equipment
            
            
            -
            
            
            
            50FHLB
      stock purchase
            
            
            (122,300
            )
            
            
            (204,300
            )FHLB
      stock redemption
            
            
            -
            
            
            
            198,000Additions
      to premises and equipment
            
            
            (24,615
            )
            
            
            (114,211
            )Net
      cash used in investing activities
            
            
            (11,844,031
            )
            
            
            (1,424,728
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase in demand deposits, NOW Accounts, MMDA and savings
      accounts
            
            
            (1,953,472
            )
            
            
            (1,863,996
            )Net
      increase in time deposits
            
            
            7,974,644
            
            
            
            7,908,131Cash
      paid for fractional shares
            
            
            -
            
            
            
            (1,930
            )Issuance
      of common stock
            
            
            11
            
            
            
            26Proceeds
      of FHLB advances
            
            
            2,550,000
            
            
            
            5,200,000Repayment
      of FHLB advances
            
            
            (500,000
            )
            
            
            (5,200,000
            )Tax
      benefit from exercise of non-qualified stock options
            
            
            4,628
            
            
            
            11,944Net
      decrease in short-term borrowing
            
            
            (16,409
            )
            
            
            (12,788
            )Net
      cash provided by financing activities
            
            
            8,509,402
            
            
            
            6,041,387NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (2,627,209
            )
            
            
            6,131,918CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            8,527,456
            
            
            
            5,026,627CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            5,900,247
            
            
            $
            11,158,545





See notes
to consolidated financial statements.





7





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 June 30, 2008 and December 31, 2007, and the
consolidated results of their operations for the three and six-month periods
ended June 30, 2008 and 2007 and their cash flows for the six-month periods
ended June 30 2008 and 2007.  Operating results for the three and
six-month periods ended June 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 $39,231,025 and $38,206,567 at June 30, 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.




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




average
number of common shares outstanding or assumed to be outstanding as summarized
below:





Three
      Months
            
            
            Six
      MonthsEnded
      June 30,
            
            
            Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Weighted
      average number of common shares used in computing basic net income per
      share
            
            
            2,119,461
            
            
            
            2,104,131
            
            
            
            2,119,209
            
            
            
            2,107,427Effect
      of dilutive stock options
            
            
            160,423
            
            
            
            178,511
            
            
            
            160,514
            
            
            
            180,659Weighted
      average number of common shares and dilutive potential common shares used
      in computing diluted net income per common share
            
            
            2,279,884
            
            
            
            2,282,642
            
            
            
            2,279,723
            
            
            
            2,288,086








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.





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 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
1Valuation is based
upon quoted prices for identical instruments traded in active
markets.





Level
2Valuation 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.





Level
3Valuation 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




9




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 June 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 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.





10





Assets
measured at fair value on a recurring basis are summarized below:





Fair Value Measurements at June 30,
      2008Description
                      
                      Quoted
      Prices in Active Markets for Identical Assets
                        (Level 1)
                      
                      
                      Significant
      Other Observable Inputs
                        (Level 2)
                      
                      
                      Significant
      Unobservable Inputs
                        (Level 3)
                      
                      
                      Assets/
      Liabilities at Fair
    ValueAvailable-for-sale
      securities
                      
                      
                      -
                      
                      
                      $
                      25,076,449
                      
                      
                      
                      -
                      
                      
                      $
                      25,076,449





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





Item2.
            Management’s
      Discussion and Analysis


Financial
Condition and Results of Operations





Weststar
Financial Services Corporation & Subsidiaries


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 $238,163 at June 30, 2008
compared to $276,913 at March 31, 2008 and $283,470 at December 31,
2007.  Net charge-offs for the period totaled $25,865 compared to
$42,157 for the six-month period ended June 30, 2007.  Loans
outstanding grew by 9.29% to $148,338,170 compared to December 31,
2007.  Deposits increased 4.04% to $155,212,188.  The
increase was attributable to marketing campaigns, sales calls efforts and
product development.





Net
interest income decreased by 9.60% 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,
the Company added $150,680 to the loan loss reserve compared to $69,720 during
the comparable period in 2007.  Other non-interest income for the June
30, 2008 and 2007 quarters totaled $415,849 and $394,114,
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 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 $5,102 during the quarter compared to income of $22,422 during 2007,
of which $2,551 and $11,212 was the Company’s portion during 2008 and




12








Net
income totaled $282,483 and $524,572 for the quarters ended June 30, 2008 and
2007, respectively – a decrease of 46.15%.





The
Company’s net interest income decreased by 7.53% during the six-month period due
to a tighter net interest margin resulting from Federal Open Market Committee
interest rate cut initiatives.  Primarily as a result of loan growth,
the Company added $188,125 to the loan loss reserve compared to $87,575 during
the comparable period in 2007.  Other non-interest income for the June
30, 2008 and 2007 periods totaled $790,883 and $744,483,
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 $32,218 during the period compared to income of
$68,132 during 2007, of which $16,109 and $34,066 was the Company’s portion
during 2008 and 2007, respectively.  Non-interest expenses increased
from $2,773,517 to $3,032,980 or 9.36%.  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 $670,620 and $1,024,603 for the periods ended June 30, 2008 and
2007, respectively – a decrease of 34.55%.





CHANGES
IN FINANCIAL CONDITION


JUNE 30,
2008 COMPARED TO DECEMBER 31, 2007





During
the period from December 31, 2007 to June 30, 2008, total assets increased
$8,665,689 or 4.97%.  This increase, reflected primarily in the cash
and cash equivalents and loans, resulted from an increase in deposits and
borrowings.





Securities,
federal funds sold and interest-bearing balances with other financial
institutions at June 30, 2008 totaled $25,125,825 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 June
30, 2008, the loan portfolio constituted 81.09% of the Company’s total
assets.  Loans increased $12,603,946 from December 31, 2007 to June
30, 2008 or 9.29%.  Continued growth in real estate secured lending
resulted in the 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 $192,101, $330,297, and $195,683 at June 30, 2008 and
2007, and December 31, 2007, respectively.  The average recorded
balance of impaired loans for the six months ended June 30, 2008 and 2007
totaled $203,648 and $703,277, respectively and $400,074 for the
year




13




ended December 31,
2007.  The related allowance for loan losses determined for impaired
loans was none, $87,071 and $120 at June 30, 2008 and 2007, and December 31,
2007 respectively.  For the six-month periods ended June 30, 2008 and
2007, Weststar recognized interest income from impaired loans of approximately
none and $1,535, respectively.  See “Asset Quality” for discussion for
an analysis of loan loss reserves.




Deposits
increased $6,021,172 during the six months ended June 30, 2008.  The
increase in deposits is primarily reflected in NOW, 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 and money market accounts decreased by
8.53% during the period and totaled $51,798,905.  NOW and savings
accounts increased by $2,878,712, while time deposits increased by
$7,974,644.





Short-term
borrowings consisted of securities sold under agreements to repurchase and
federal funds purchased in the amount of $2,453,260.  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 June 30, 2008 to risk weighted assets totaled
13.74%.  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 June 30, 2008, the
Company’s capital exceeded the current regulatory capital
requirements.





RESULTS
OF OPERATIONS


FOR THE
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND
2006





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 June 30, 2008 totaled $1,710,086 compared
to $1,891,729 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




14




was
approximately 3.97% and 4.74% for the quarters ended June 30, 2008 and 2007,
respectively.




Weststar
recorded a provision for loan losses of $150,680 and $69,720 for the quarters
ended June 30, 2008 and 2007, respectively.  The provision relates to
strong loan growth experienced in 2008.  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 June 30, 2008 and 2007 quarters totaled $415,849 and
$394,114, 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 $22,996 in mortgage loan origination
fees compared to none during 2007.  Interchange revenue generated
through debit/credit card transactions produced $73,496 during 2008 compared to
$59,046 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 $5,102 during the period compared to income of $22,424 during 2007, of
which $2,551 and $11,212 was the Company’s portion during 2008 and 2007,
respectively.  Other income decreased by $15,076 primarily as a result
of fewer recoveries other than loans and less miscellaneous
income.





Other
non-interest expense totaled $1,563,388 compared to $1,398,247 in
2007.  This increase was primarily attributable to personnel and
overhead incurred to support loan and deposit servicing and
growth.  Professional fees totaled $100,269 and $70,790 during 2008
and 2007, respectively.  The increase in fees was largely attributable
to increased external loan reviews, internal/external audits and income tax
preparation services.  Data processing fees decreased from $162,006 to
$135,404 as a result of contract renegotiations and outsourcing selected item
processing services to a more cost effective provider.  Net expenses
from foreclosed properties of $40,908 primarily represent the loss incurred with
the disposal of one property.  Income before income tax provision
totaled $411,867 and $817,876 for the quarters ended June 30, 2008 and 2007,
respectively.  Income tax provision totaled $129,384 and $293,304 for
the quarters ended June 30, 2008 and 2007, respectively, which equated to an
effective tax rate of 31.41% and 35.86%.  The effective income tax
rate decreased in 2008 because of a decrease in relative taxable income during
the period.  Net income totaled $282,483 and $524,572 for the quarters
ended June 30, 2008 and 2007, respectively.





Other
comprehensive loss totaled $294,689 and $318,879 in 2008 and 2007,
respectively.  Comprehensive income (loss), which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $(12,206)
and $205,693 for the quarters ended June 30, 2008 and 2007,
respectively.





COMPARATIVE
SIX MONTHS





Net
interest income for the six-month period June 30, 2008 totaled $3,443,367
compared to $3,723,784 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




15




was approximately 4.02%
and 4.73% for the six months ended June 30, 2008 and 2007,
respectively.




Weststar
recorded a provision for loan losses of $188,125 and $87,575 for the six months
ended June 30, 2008 and 2007, respectively.  The increased provision
relates to strong loan growth experienced in 2008.  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 June 30, 2008 and 2007 periods totaled $790,883 and
$744,483, 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 $22,996 in mortgage loan origination
fees compared to none during 2007.  Interchange revenue generated
through debit/credit card transactions produced $137,058 during 2008 compared to
$110,191 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 $32,218 and $68,132 during 2008 and 2007,
respectively, of which $16,109 and $34,066 was the Company’s portion during 2008
and 2007, respectively.  Other income decreased by $17,978 primarily
as a result of fewer recoveries other than loans and less miscellaneous
income.





Other
non-interest expense totaled $3,032,980 compared to $2,773,517 in
2008.  This increase was primarily attributable to personnel and
overhead incurred to support loan and deposit servicing and
growth.  Professional fees totaled $222,321 and $178,047 during 2008
and 2007, respectively.  The increase in fees was largely attributable
to increased external loan reviews, internal/external audits and income tax
preparation services.  Data processing fees decreased from $319,222 to
$277,745 as a result of contract renegotiations and outsourcing selected item
processing services to a more cost effective provider.  Net expenses
of $41,221 from foreclosed properties primarily represent the loss incurred with
the disposal of one property.  Income before income tax provision
totaled $1,013,145 and $1,607,175 for the periods ended June 30, 2008 and 2007,
respectively.  Income tax provision totaled $342,525 and $582,572 for
the periods ended June 30, 2008 and 2007, respectively, which equated to an
effective tax rate of 33.81% and 36.25%.  The effective income tax
rate decreased in 2008 because of a decrease in relative taxable income during
the period.  Net income totaled $670,620 and $1,024,603 for the
periods ended June 30, 2008 and 2007, respectively.





Other
comprehensive loss totaled $72,199 and $326,378 in 2008 and 2007,
respectively.  Comprehensive income, which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $598,421
and $698,225 for the periods ended June 30, 2008 and 2007,
respectively.





16





ASSET/LIABILITY
MANAGEMENT








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





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





The
majority of the Company’s deposits are rate-sensitive instruments with rates
that tend to fluctuate with market rates. These deposits, coupled with the
Company’s short-term certificates of deposit, have increased the opportunities
for deposit repricing. The Company places great significance on monitoring and
managing the Company’s asset/liability position. The Company’s policy of
managing its interest margin (or net yield on interest-earning assets) is to
maximize net interest income while maintaining a stable deposit base. The
Company’s deposit base is not generally subject to the level of volatility
experienced in national financial markets in recent years; however, the Company
does realize the importance of minimizing such volatility while at the same time
maintaining and improving earnings. Therefore, management prepares on a regular
basis earnings projections based on a range of interest rate scenarios of
rising, flat and declining rates in order to more accurately measure interest
rate risk.





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





The
Company uses interest sensitivity analysis to measure the sensitivity of
projected earnings to changes in interest rates. The sensitivity analysis takes
into account the current contractual agreements that the Company has on
deposits, borrowings, loans, investments and any commitments to enter into those
transactions. The Company monitors interest sensitivity by means of computer
models that incorporate the current volumes, average rates, scheduled




17




maturities and payments
and repricing opportunities of asset and liability portfolios. Using this
information, the model estimates earnings based on projected portfolio balances
under multiple interest rate scenarios. In an effort to estimate the effects of
pure interest-rate risk, the Company assumes no growth in its balance sheet,
because to do so could have the effect of distorting the balance sheet’s
sensitivity to changing interest rates. The Company simulates the effects of
interest rate changes on its earnings by assuming no change in interest rates as
its base case scenario and either (1) gradually increasing or decreasing
interest rates by over a twelve-month period or (2) immediately increasing or
decreasing interest rates by .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 June 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.





18








TERMS
      TO REPRICING AT JUNE 30, 20081-90
      Days
            
            
            91-180
      Days
            
            
            181-365
      Days
            
            
            Total
      One
            
            
            Non-
            
            
            TotalYear
            
            
            SensitiveInterest-earning
      assets:Interest
      bearing deposits
            
            $
            49,376
            
            
            
            
            
            
            
            
            $
            49,376
            
            
            
            
            
            $
            49,376Investment
      securities
            
            
            449,699
            
            
            $
            350,973
            
            
            $
            712,461
            
            
            
            1,513,133
            
            
            $
            23,658,253
            
            
            
            25,171,386Federal
      Home Loan Bank stock
            
            
            585,600
            
            
            
            -
            
            
            
            -
            
            
            
            585,600
            
            
            
            -
            
            
            
            585,600Loans
      (1)
            
            
            118,840,523
            
            
            
            3,580,887
            
            
            
            5,640,510
            
            
            
            128,061,920
            
            
            
            20,276,250
            
            
            
            148,338,170Total
      Interest-earning assets
            
            
            119,925,198
            
            
            
            3,931,860
            
            
            
            6,352,971
            
            
            
            130,210,029
            
            
            
            43,934,503
            
            
            
            174,144,532Interest-bearing
      liabilities:Time
      deposits
            
            
            32,046,828
            
            
            
            24,716,622
            
            
            
            25,675,657
            
            
            
            82,439,107
            
            
            
            505,892
            
            
            
            82,944,999All
      other deposits
            
            
            47,893,673
            
            
            
            -
            
            
            
            -
            
            
            
            47,893,673
            
            
            
            -
            
            
            
            47,893,673Short-term
      debt
            
            
            2,453,260
            
            
            
            -
            
            
            
            -
            
            
            
            2,453,260
            
            
            
            -
            
            
            
            2,453,260Long-term
      debt
            
            
            4,124,000
            
            
            
            -
            
            
            
            -
            
            
            
            4,124,000
            
            
            
            4,000,000
            
            
            
            8,124,000Total
      interest-bearing liabilities
            
            
            86,517,761
            
            
            
            24,716,622
            
            
            
            25,675,657
            
            
            
            136,910,040
            
            
            
            4,505,892
            
            
            
            141,415,932Interest
      sensitivity gap
            
            $
            33,407,437
            
            
            $
            (20,784,762
            )
            
            $
            (19,322,686
            )
            
            $
            (6,700,011
            )
            
            $
            39,428,611Cumulative
      interest sensitivityGap
            
            $
            33,407,437
            
            
            $
            12,622,675
            
            
            $
            (6,700,011
            )Interest-earning
      assets asA
      percent of interest sensitive liabilities*
            
            
            138.6
            %
            
            
            15.9
            %
            
            
            24.7
            %
            
            
            95.1
            %





*Percentages
shown are not cumulative.





Weststar
has established an acceptable range of 80% to 120% 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 if conditions
differ substantially from the assumptions used in making the evaluations. In
addition,




19




regulatory
examiners may require the Company to recognize changes to the allowance for loan
losses based on their judgments about information available to them at the time
of their examination.


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





The
provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level.  The
monthly provision for loan losses may fluctuate based on the results of this
analysis.  The allowance for loan losses at June 30, 2008 and 2007,
and December 31, 2007 was $2,252,385, $1,929,498 and $2,090,125 or 1.52%, 1.57%
and 1.54%, respectively, of gross loans outstanding.   The ratio
of net charge-offs to average loans outstanding was .04%, .07% and .16% during
the periods ended June 30, 2008 and 2007, and December 31, 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 six
months ended June 30, 2008 and 2007, and for the year ended December 31,
2007.





Summary
of Allowance for Loan Losses





For
      the six months
            
            
            For
      the year endedEnded
      June 30,
            
            
            December 31,2008
            
            
            2007
            
            
            2007Balance,
      beginning of period
            
            $
            2,090,125
            
            
            $
            1,884,080
            
            
            $
            1,884,080Charge-offs:Commercial,
      financial and agricultural
            
            
            -
            
            
            
            (21,490
            )
            
            
            (171,723
            )Real
      Estate:Construction
            
            
            -
            
            
            
            -
            
            
            
            -Mortgage
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            (46,811
            )
            
            
            (37,528
            )
            
            
            (85,018
            )Total
      charge-offs
            
            
            (46,811
            )
            
            
            (59,018
            )
            
            
            (256,741
            )RecoveriesCommercial,
      financial, and agricultural
            
            
            2,568
            
            
            
            3,538
            
            
            
            24,600Real
      Estate:Construction
            
            
            -
            
            
            
            -
            
            
            
            -Mortgage
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
            
            
            18,378
            
            
            
            13,323
            
            
            
            31,461Total
      Recoveries
            
            
            20,946
            
            
            
            16,861
            
            
            
            56,061Net
      (charge-offs) recoveries
            
            
            (25,865
            )
            
            
            (42,157
            )
            
            
            (200,680
            )Provision
      charged to operations
            
            
            188,125
            
            
            
            87,575
            
            
            
            406,725Balance,
      end of period
            
            $
            2,252,385
            
            
            $
            1,929,498
            
            
            $
            2,090,125Percentage
      of net charge-offs toAverage
      loans
            
            
            .04
            %
            
            
            .07
            %
            
            
            .16
            %Percentage
      of allowance toPeriod-end
      loans
            
            
            1.52
            %
            
            
            1.57
            %
            
            
            1.54
            %





20





The
Company does not have any significant loan concentrations.  During the
period, loan quality demonstrated improvement over June 30, 2007, December 31,
2007 and March 31, 2008.





During
2008 there were no significant changes in estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the formula and
specific allowance for credit losses.  Changes in estimates and
assumptions regarding the effect of economic and business conditions on
borrowers affect the assessment of the allowance. The Company does not have any
significant loan concentrations.





The
Company has not engaged in any subprime lending and does not hold traditionally
defined subprime loans in either its loan or investment
portfolios  While housing sales in the Company’s market have been
slower than the prior year resulting in an increased level of inventory, housing
values have not experienced any significant loss in value.





Improved
asset quality and certain qualitative factors such as increased knowledge of
lending staff and improved loss/recovery trends resulted in a slight reducing
the loan loss reserve from 1.54% at March 31, 2008 to 1.52% at June 30,
2008.  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.





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.





21





REGULATORY
CAPITAL





To
      Be WellFor
      Capital
            
            
            
            
            
            Capitalized
      UnderActual
            
            
            
            
            
            Adequacy
            
            
            
            
            
            Prompt
      CorrectivePurposes
            
            
            
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in Thousands)As
      of June 30, 2008Total
      Capital (to Risk Weighted Assets)Consolidated
            
            $
            21,830
            
            
            
            13.74
            %
            
            $
            12,712
            
            
            
            8.00
            %
            
            $
            15,890
            
            
            
            10.00
            %Bank
            
            $
            20,713
            
            
            
            13.06
            %
            
            $
            12,692
            
            
            
            8.00
            %
            
            $
            15,865
            
            
            
            10.00
            %Tier
      1 Capital (to Risk Weighted Assets)Consolidated
            
            $
            19,840
            
            
            
            12.49
            %
            
            $
            6,356
            
            
            
            4.00
            %
            
            $
            9,534
            
            
            
            6.00
            %Bank
            
            $
            18,726
            
            
            
            11.80
            %
            
            $
            6,346
            
            
            
            4.00
            %
            
            $
            9,519
            
            
            
            6.00
            %Tier
      1 Capital (to Average Assets)Consolidated
            
            $
            19,840
            
            
            
            11.16
            %
            
            $
            7,108
            
            
            
            4.00
            %
            
            $
            8,885
            
            
            
            5.00
            %Bank
            
            $
            18,726
            
            
            
            10.55
            %
            
            $
            7,098
            
            
            
            4.00
            %
            
            $
            8,872
            
            
            
            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
June 30, 2008 liquid assets (cash and due from banks and interest-earning bank
deposits) were approximately $5.9 million, which represents 3.23% of total
assets and 3.08% of total deposits. Supplementing this liquidity, Weststar has
available lines of credit from correspondent banks of approximately $15.7
million; and unpledged investment securities of $23.2 million. At June 30, 2008,
outstanding commitments to extend credit and available lines of credit
were $39.3 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 53.44% of Weststar’s total deposits at June
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 17.66% of the Company’s total deposits
at June 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.





22





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.





Item 4T. 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.





23





PartII.
            OTHER
      INFORMATION





Item4.
            Submission
      of Matters to a Vote of Security
Holders





The
annual meeting of stockholders was held on April 15, 2008.  Of the
2,118,437 shares entitled to vote at the meeting, 1,865,650 or 88.07%
voted.  The following matters were voted on at the
meeting:





Proposal
      #1
            For
            WithheldPatricia
      P. Grimes
            1,861,795
            3,855Carol
      L. King
            1,859,339
            6,311David
      N. Wilcox
            1.858,685
            6,965





In
addition, the following directors’ terms continued after the annual meeting: W.
Edward Anderson, M. David Cogburn, Steven D. Cogburn, G. Gordon Greenwood,
Darryl J. Hart, Stephen L. Pigantiello and Laura A. Webb.





Proposal
      #2
            For
            Against
            Abstain
            Broker
      NonvoteDixon
      Hughes PLLC
            1,850,575
            3,056
            12,018
            1








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 2002





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





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





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





24





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:
      August 12, 2008
            
            By:
            /s/   G. Gordon
      GreenwoodG.
      Gordon GreenwoodPresident
      and Chief Executive OfficerDate:
      August 12, 2008
            
            By:
            /s/   Randall C.
      HallRandall
      C. HallExecutive
      Vice President and Chief Financialand
      Principal Accounting Officer






25