UNITED
STATES SECURITITES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


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




For the
quarterly period ended March 31, 2009





£
            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)











Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the of the Exchange Act 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.  S Yes £
No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   £
Yes  £
No





Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act: (Check one): Large
accelerated filer   £ Accelerated
filer  £
Non-accelerated filer   £   (Do
not check if a smaller company) Smaller reporting company   S





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




APPLICABLE
ONLY TO CORPORATE ISSUERS:





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: Common stock, $1.00 par value – 2,146,132
shares outstanding as of May 13, 2009.







1




INDEX
                                              PagePart I – FINANCIAL INFORMATIONFinancial Statements:Consolidated
      Balance Sheets March 31, 2009 and December 31, 2008
                                              3Consolidated
      Statements of Operations Three Months Ended March 31, 2009 and
      2008
                                              4Consolidated
      Statements of Comprehensive Income Three Months Ended March 31, 2009 and
      2008
                                              5Consolidated
      Statements of Changes in Shareholders’ Equity Three Months Ended March 31,
      2009 and 2008
                                              6Consolidated
      Statements of Cash Flows Three Months Ended March 31, 2009 and
      2008
                                              7Notes
      to Consolidated Financial Statements
                                              8Item
      2 - Management’s Discussion and Analysis Financial Condition and Results
      of Operations
                                              12Item
      4T - Controls and Procedures
                                              21Part II – OTHER INFORMATIONItem
      4 – Submission of Matters to a Vote of Security
Holders
                                              22Item
      5 – Other Information
                                              22Item
      6 - Exhibits
                                              22Signatures
                                              23


2
 Index


Part
      I.
            FINANCIAL INFORMATION





Item I.
            Financial Statements





Weststar
Financial Services Corporation & Subsidiary


Consolidated Balance Sheets
            
            (unaudited)March 31,
            
            
            December 31,2009
            
            
            2008ASSETS:Cash
      and cash equivalents:Cash
      and due from banks
            
            $
            4,748,579
            
            
            $
            4,200,866Interest-bearing
      deposits
            
            
            252,766
            
            
            
            218,912Federal
      funds sold
            
            
            7,408,000
            
            
            
            -Total
      cash and cash equivalents
            
            
            12,409,345
            
            
            
            4,419,778Investment
      securities – available for sale, at fair value (amortized cost of
      $23,238,956 and $23,750,009, at March 31, 2009 and December 31, 2008,
      respectively)
            
            
            23,518,059
            
            
            
            23,778,449Loans
            
            
            175,006,653
            
            
            
            171,239,692Allowance
      for loan losses
            
            
            (2,677,865
            )
            
            
            (2,529,981
            )Net
      loans
            
            
            172,328,788
            
            
            
            168,709,711Premises
      and equipment, net
            
            
            2,612,212
            
            
            
            2,652,007Accrued
      interest receivable
            
            
            959,901
            
            
            
            1,030,460Federal
      Home Loan Bank stock, at cost
            
            
            639,800
            
            
            
            585,600Deferred
      income taxes
            
            
            799,196
            
            
            
            810,921Foreclosed
      properties
            
            
            205,006
            
            
            
            205,006Other
      assets
            
            
            730,033
            
            
            
            667,040TOTAL
            
            $
            214,202,340
            
            
            $
            202,858,972LIABILITIES
      AND SHAREHOLDERS' EQUITY:Liabilities:Deposits:Demand
            
            $
            21,822,332
            
            
            $
            22,251,288NOW
      accounts
            
            
            26,238,840
            
            
            
            18,319,836Money
      market accounts
            
            
            28,853,292
            
            
            
            31,416,333Savings
            
            
            2,389,859
            
            
            
            2,207,173Time
      deposits of $100,000 or more
            
            
            26,930,991
            
            
            
            26,799,682Other
      time deposits
            
            
            80,218,567
            
            
            
            69,819,794Total
      deposits
            
            
            186,453,881
            
            
            
            170,814,106Short-term
      borrowings
            
            
            4,665,651
            
            
            
            5,919,140Accrued
      interest payable
            
            
            533,211
            
            
            
            565,105Other
      liabilities
            
            
            1,454,014
            
            
            
            926,050Long-term
      debt
            
            
            4,124,000
            
            
            
            8,124,000Total
      liabilities
            
            $
            197,230,757
            
            
            $
            186,348,401COMMITMENTS
      AND CONTIGENCIES (Note 2)SHAREHOLDERS'
      EQUITY:Preferred
      stock; authorized $1,000,000 shares; no shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, $1 par value, authorized – 9,000,000 shares; outstanding shares–
      2,146,132 and 2,125,747 at March 31, 2009 and December 31, 2008,
      respectively
            
            
            2,146,132
            
            
            
            2,125,747Additional
      paid-in capital
            
            
            6,215,519
            
            
            
            6,152,868Retained
      earnings
            
            
            8,438,423
            
            
            
            8,214,480Accumulated
      other comprehensive income
            
            
            171,509
            
            
            
            17,476Total
      shareholders' equity
            
            
            16,971,583
            
            
            
            16,510,571TOTAL
            
            $
            214,202,340
            
            
            $
            202,858,972





*Derived from audited
consolidated financial statements.


See notes
to consolidated financial statements.


3
 Index


Weststar
Financial Services Corporation & Subsidiary


Consolidated
Statements of Operations(unaudited)


Three
      MonthsEnded
      March 31,2009
            
            
            2008INTEREST
      INCOME:Interest
      and fees on loans
            
            $
            2,791,106
            
            
            $
            2,741,505Federal
      funds sold
            
            
            972
            
            
            
            27,004Interest-bearing
      deposits
            
            
            66
            
            
            
            883Investments:Taxable
      interest income
            
            
            179,882
            
            
            
            217,477Non-taxable
      interest income
            
            
            91,636
            
            
            
            86,537Corporate
      dividends
            
            
            -
            
            
            
            7,007Total
      interest income
            
            
            3,063,662
            
            
            
            3,080,413INTEREST
      EXPENSE:Time
      deposits of $100,000 or more
            
            
            228,529
            
            
            
            350,325Other
      time and savings deposits
            
            
            863,781
            
            
            
            861,837Short-term
      borrowings
            
            
            4,785
            
            
            
            7,134Long-term
      debt
            
            
            95,978
            
            
            
            127,836Total
      interest expense
            
            
            1,193,073
            
            
            
            1,347,132NET
      INTEREST INCOME
            
            
            1,870,589
            
            
            
            1,733,281PROVISION
      FOR LOAN LOSSES
            
            
            254,580
            
            
            
            37,445NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            1,616,009
            
            
            
            1,695,836OTHER
      INCOME:Service
      charges on deposit accounts
            
            
            264,655
            
            
            
            283,847Other
      service fees and commissions
            
            
            133,680
            
            
            
            86,236Equity
      in loss of Bank of Asheville Mortgage Company, LLC
            
            
            -
            
            
            
            (13,558
            )Other
            
            
            9,872
            
            
            
            18,509Total
      other income
            
            
            408,207
            
            
            
            375,034OTHER
      EXPENSES:Salaries
      and wages
            
            
            681,397
            
            
            
            624,384Employee
      benefits
            
            
            131,275
            
            
            
            116,512Occupancy
      expense, net
            
            
            185,053
            
            
            
            124,688Equipment
      rentals, depreciation and maintenance
            
            
            98,722
            
            
            
            113,678Supplies
            
            
            64,273
            
            
            
            73,463Professional
      fees
            
            
            77,258
            
            
            
            72,328Data
      processing fees
            
            
            153,988
            
            
            
            142,341FDIC
      insurance premiums
            
            
            72,404
            
            
            
            22,540Audit,
      tax and accounting
            
            
            55,164
            
            
            
            49,724Marketing
            
            
            92,687
            
            
            
            62,378Other
            
            
            83,667
            
            
            
            67,556Total
      other expenses
            
            
            1,695,888
            
            
            
            1,469,592INCOME
      BEFORE INCOME TAXES
            
            
            328,328
            
            
            
            601,278INCOME
      TAX PROVISION
            
            
            104,385
            
            
            
            213,141NET
      INCOME
            
            $
            223,943
            
            
            $
            388,137EARNINGS
      PER SHARE:Basic
            
            $
            0.10
            
            
            $
            0.18Diluted
            
            $
            0.10
            
            
            $
            0.17








See notes
to consolidated financial statements


4
 Index


Weststar
Financial Services Corporation & Subsidiary


Consolidated Statements
of Comprehensive Income (unaudited)





Three
      MonthsEnded
      March 31,2009
            
            
            2008NET
      INCOME
            
            $
            223,943
            
            
            $
            388,137OTHER
      COMPREHENSIVE INCOMEUnrealized
      holding gains on securities available for sale
            
            
            250,663
            
            
            
            362,067Tax
      effect
            
            
            (96,630
            )
            
            
            (139,577
            )Unrealized
      holding gains on securities available for sale, net of tax
            
            
            154,033
            
            
            
            222,490OTHER
      COMPREHENSIVE INCOME, NET OF TAX
            
            
            154,033
            
            
            
            222,490COMPREHENSIVE
      INCOME
            
            $
            377,976
            
            
            $
            610,627








See notes
to consolidated financial statements.


5
 Index


Weststar
Financial Services Corporation & Subsidiary


Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)


For
the Three Months Ended March 31, 2009 and 2008





AccumulatedAdditional
            
            
            
            
            
            Other
            
            
            TotalCommon Stock
            
            
            Paid-In
            
            
            Retained
            
            
            Comprehensive
            
            
            Shareholders’Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
            
            
            EquityBALANCE,
      DECEMBER 31, 2007
            
            
            2,118,437
            
            
            $
            2,118,437
            
            
            $
            6,133,773
            
            
            $
            6,913,168
            
            
            $
            13,861
            
            
            $
            15,179,239Net
      unrealized gains on securities available for sale
            
            
            222,490
            
            
            
            222,490Issuance
      of common stock pursuant to the exercise of stock options
            
            
            945
            
            
            
            945
            
            
            
            (935
            )
            
            
            10Tax
      benefit on exercise of non-qualified stock options
            
            
            3,643
            
            
            
            3,643Net
      income
            
            
            
            
            
            
            388,137
            
            
            
            388,137BALANCE
      MARCH 31, 2008
            
            
            2,119,382
            
            
            $
            2,119,382
            
            
            $
            6,136,481
            
            
            $
            7,301,305
            
            
            $
            236,351
            
            
            $
            15,793,519BALANCE,
      DECEMBER 31, 2008
            
            
            2,125,747
            
            
            $
            2,125,747
            
            
            $
            6,152,868
            
            
            $
            8,214,480
            
            
            $
            17,476
            
            
            $
            16,510,571Net
      unrealized gains on securities available for sale
            
            
            154,033
            
            
            
            154,033Issuance
      of common stock pursuant to the exercise of stock options
            
            
            20,385
            
            
            
            20,385
            
            
            
            46,070
            
            
            
            66,455Tax
      benefit on exercise of non- qualified stock options
            
            
            16,581
            
            
            
            16,581Net
      income
            
            
            223,943
            
            
            
            223,943BALANCE
      MARCH 31, 2009
            
            
            2,146,132
            
            
            $
            2,146,132
            
            
            $
            6,215,519
            
            
            $
            8,438,423
            
            
            $
            171,509
            
            
            $
            16,971,583








See notes
to consolidated financial statements.


6
 Index


Weststar
Financial Services Corporation & Subsidiary


Consolidated Statements of Cash Flows (unaudited)


For
the Three Months Ended March 31,


2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            223,943
            
            
            $
            388,137Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            86,835
            
            
            
            102,000Provision
      for loan losses
            
            
            254,580
            
            
            
            37,445Premium
      amortization and discount accretion, net
            
            
            (5,536
            )
            
            
            (6,102
            )Deferred
      income tax provision
            
            
            (84,905
            )
            
            
            (18,605
            )Decrease
      in accrued interest receivable
            
            
            70,559
            
            
            
            65,460(Increase)
      decrease in other assets
            
            
            (62,993
            )
            
            
            13,102Increase
      (decrease) in accrued interest payable
            
            
            (31,894
            )
            
            
            2,291Increase
      in other liabilities
            
            
            527,964
            
            
            
            126,643Net
      cash provided by operating activities
            
            
            978,553
            
            
            
            710,371CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of securities available for sale
            
            
            (495,880
            )
            
            
            (1,030,893
            )Maturities
      of securities available for sale
            
            
            1,012,469
            
            
            
            1,017,892Net
      increase in loans
            
            
            (3,873,657
            )
            
            
            (1,475,265
            )FHLB
      stock purchase
            
            
            (54,200
            )
            
            
            (52,500
            )Additions
      to premises and equipment
            
            
            (47,040
            )
            
            
            (3,067
            )Net
      cash used in investing activities
            
            
            (3,458,308
            )
            
            
            (1,543,833
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase (decrease) in demand deposits, NOW accounts, MMDA and savings
      accounts
            
            
            5,109,693
            
            
            
            (581,229
            )Net
      increase in time deposits
            
            
            10,530,082
            
            
            
            6,545,704Issuance
      of common stock
            
            
            66,455
            
            
            
            10Repayment
      of FHLB advances
            
            
            (2,110,000
            )
            
            
            (500,000
            )Net
      increase (decrease) in overnight borrowings
            
            
            (4,253,489
            )
            
            
            2,432Proceeds
      from FHLB advances
            
            
            1,110,000
            
            
            
            500,000Tax
      benefit from non-qualified stock options
            
            
            16,581
            
            
            
            3,643Net
      cash provided by financing activities
            
            
            10,469,322
            
            
            
            5,970,560NET
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            7,989,567
            
            
            
            5,137,098CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            4,419,778
            
            
            
            8,527,456CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            12,409,345
            
            
            $
            13,664,554








See notes
to consolidated financial statements.


7
 Index


WESTSTAR
FINANCIAL SERVICES CORPORTION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








1.
            Weststar
      Financial Services Corporation (the “Company”) is a holding company with
      one subsidiary, The Bank of Asheville (the “Bank”).  The Bank is
      a state chartered commercial bank, which was incorporated in North
      Carolina on October 29, 1997.  The Bank provides consumer and
      commercial banking services in Buncombe County and surrounding
      area.  Common shares of The Bank of Asheville were exchanged for
      common shares of Weststar Financial Services Corporation on April 29,
      2000.  Weststar Financial Services Corporation formed Weststar
      Financial Services Corporation I (the “Trust”) during October 2003 in
      order to facilitate the issuance of trust preferred
      securities.  The Trust is a statutory business trust formed
      under the laws of the state of Delaware, of which all common securities
      are owned by Weststar Financial Services
  Corporation.





In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the consolidated financial
position of the Company as of March 31, 2009 and December 31, 2008, and the
consolidated results of their operations and their cash flows for the
three-month periods ended March 31, 2009 and 2008.  Operating results
for the three-month period ended March 31, 2009 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
2009.





The
accounting policies followed are set forth in Note 1 to the 2008 Annual Report
to Shareholders (Form 10-K) 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 $29,379,524 and $31,886,835 at March 31, 2009 and
      December 31, 2008, respectively.





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





Basic
earnings per common share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period.  Diluted earnings per common share reflect additional common
shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustments to income that would result from the
assumed issuance.  Potential common shares that may be issued by the
Company relate solely to outstanding stock options and are determined using the
treasury stock method.  During 2009 and 2008, 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
average number of common shares outstanding or assumed to be outstanding as
summarized below:






For
      the Period Ended March 31,
            
            2009
            
            
            2008Weighted
      average number of common shares used in computing basic net income per
      share
            
            
            2,136,837
            
            
            
            2,118,956Effect
      of dilutive stock options
            
            
            114,388
            
            
            
            160,595Weighted
      average number of common shares and dilutive potential common shares used
      in computing diluted net income per common share
            
            
            2,251,225
            
            
            
            2,279,551


8
 Index




4.





Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
values.  These levels are:





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





Level
2    Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.





Level
3   Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.  These
unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability.  Valuation
techniques included use of option pricing models, discounted cash flow models
and similar techniques.





Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.





Investment
Securities Available-for-Sale


Investment
securities available-for-sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing modes or other model-based valuation
techniques such as present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities included those traded on
an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in an active over-the-counter
markets and money market funds.  Level 2 securities included
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets.





Impaired
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 March 31, 2009, 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


9
 Index


value is
not available or management determines the fair value of the collateral is
further impaired below the appraised value and there is no observable market
price, the Company records the impaired loan as nonrecurring Level
3.





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





Fair Value Measurements at March 31,
      2009Quoted
      Pricesin
      Active
            
            
            SignificantMarkets
      for
            
            
            Other
            
            
            SignificantIdentical
            
            
            Observable
            
            
            Unobservable
            
            
            Assets/Assets
            
            
            Inputs
            
            
            Inputs
            
            
            LiabilitiesDescription
            
            (Level 1)
            
            
            (Level 2)
            
            
            (Level 3)
            
            
            at Fair ValueAvailable-for-sale
      securities
            
            
            -
            
            
            $
            23,518,059
            
            
            
            -
            
            
            $
            23,518,059Fair Value Measurements at December 31,
      2008Available-for-sale
      securities
            
            
            -
            
            
            $
            23,778,449
            
            
            
            -
            
            
            $
            23,778,449





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




Fair Value Measurements at March 31,
      2009Quoted
      Pricesin
      Active
                  
                  
                  SignificantMarkets
      for
                  
                  
                  Other
                  
                  
                  SignificantIdentical
                  
                  
                  Observable
                  
                  
                  Unobservable
                  
                  
                  Assets/Assets
                  
                  
                  Inputs
                  
                  
                  Inputs
                  
                  
                  LiabilitiesDescription
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  at Fair ValueImpaired
      Loans
                  
                  
                  -
                  
                  
                  $
                  46,980
                  
                  
                  $
                  30,390
                  
                  
                  $
                  77,370


5.
            On
      January 22, 2009, the Company received notice that its application for
      $1.5 million in capital under the Capital Purchase Program (“CPP”)
      received the U.S. Treasury’s preliminary approval.  However, the
      Company declined to participate.  The Company’s capital ratios
      are substantially in excess of the “well capitalized” regulatory ratios,
      and its asset quality has been significantly better than the industry
      average.  Based upon performed due diligence, the Company
      concluded that the significant expense of the program and challenge to
      prudently and profitably deploy the capital were inconsistent with its
      long-term strategic objectives, and that participation in the CPP would
      not be in the best interest of the Company’s
  shareholders.





6.
            In
      April 2009, FASB issued FASB Staff Position (“FSP”) No. FAS 157-4,
      “Determining Fair Value When the Volume and Level of Activity for the
      Asset or Liability Have Significantly Decreased and Identifying
      Transactions That Are Not Orderly.” Effective for interim and annual
      reporting periods ending after June 15, 2009, with early adoption
      permitted for periods ending after March 15, 2009, FSP FAS 157-4
      provides guidelines for making fair value measurements more consistent
      with the principles presented in SFAS 157, “Fair Value Measurements,” when
      the volume and level of activity for assets or liabilities have
      significantly


10
 Index


decreased.
FSP FAS 157-4 relates to determining fair values when there is no active market
or where the price inputs being used represent distressed sales. It reaffirms
what SFAS 157 states is the objective of fair value measurement – to reflect how
much an asset would be sold for in an orderly transaction (as opposed to a
distressed or forced transaction) at the date of the financial statements under
current market conditions. Specifically, it reaffirms the need to use judgment
to ascertain if a formerly active market has become inactive and in determining
fair values when markets have become inactive. The Company does not anticipate
the adoption of this FSP as of June 30, 2009 to have a material effect on its
financial position and results of operations.





In April
2009, FASB issued FASB Staff Position (“FSP”) No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments.” Effective
for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009, FSP FAS
115-2 and FAS 124-2 amended Other-Than-Temporary Impairment guidance in U.S.
GAAP to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairment on debt and equity securities in
the financial statements. FSP FAS 115-2 and FAS 124-2 is intended to bring
greater consistency to the timing of impairment recognition, and provide greater
clarity to investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold. The measure of impairment in
comprehensive income remains fair value. The FSP also requires increased and
more timely disclosures sought by investors regarding expected cash flows,
credit losses, and an aging of securities with unrealized losses. The Company
does not anticipate the adoption of this FSP as of June 30, 2009 to have a
material effect on its financial position and results of
operations.





In April
2009, FASB issued FASB Staff Position (“FSP”) No. FAS 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments.” Effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009, FSP FAS 107-1
and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. The Company does not anticipate the
adoption of this FSP as of June 30, 2009 to have a material effect on its
financial position and results of operations.


11
 Index


Item 2.
            Management’s
      Discussion and Analysis


Financial
Condition and Results of Operations





Weststar
Financial Services Corporation & Subsidiary


Management’s
Discussion and Analysis





Management’s
Discussion and Analysis is provided to assist in understanding and evaluating
the Company’s results of operations and financial condition. The following
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere herein. Weststar Financial
Services Corporation (the “Company”) is a holding company for The Bank of
Asheville (the “Bank”), a state chartered commercial bank incorporated in North
Carolina on October 29, 1997.  The Bank provides consumer and
commercial banking services in Buncombe County and surrounding
areas.  Common shares of the Bank were exchanged for common shares of
Weststar Financial Services Corporation on April 29, 2000.  Weststar
Financial Services Corporation formed Weststar Financial Services Corporation I
(the “Trust”) during October 2003 in order to facilitate the issuance of trust
preferred securities.  The Trust is a statutory business trust formed
under the laws of the state of Delaware, of which all common securities are
owned by Weststar Financial Services Corporation.  On October 19,
2004, the Company formed Bank of Asheville Mortgage Company, LLC (the “Mortgage
Company”), a mortgage broker, of which the Company owned a 50%
interest.  During 2008, the Company and its partner in the Mortgage
Company elected to dissolve the partnership and closed the Mortgage Company on
October 31, 2008.  Because Weststar Financial Services Corporation has
no material operations and conducts no business on its own other than owning the
Bank, the discussion contained in Management’s Discussion and Analysis concerns
primarily the business of the Bank.  However, for ease of reading and
because the financial statements are presented on a consolidated basis, Weststar
Financial Services Corporation and the Bank are collectively referred to herein
as the Company.





EXECUTIVE
OVERVIEW





During
2009, the Company continued its focus on asset quality, liquidity and core
deposit growth.  Management emphasized prudent underwriting standards,
periodic reviews of loans of $100,000 or more, and monitoring loan
quality.  While there was an increase in non-performing assets,
overall asset quality remained strong during the
period.  Non-performing assets totaled $1,987,328 at March 31, 2009
compared to $521,108 at December 31, 2008.  Net charge-offs for the
period totaled $106,696 compared to $16,912 for the period ended March 31,
2008.  Loans outstanding grew by 2.20% to $175,006,653 from December
31, 2008.  Deposits increased 9.16% to $186,453,881.  The
increase was attributable to marketing campaigns, sales calls efforts and
product development.





Net
interest income increased by 7.92% as a result of repricing time deposit
accounts following 2008 Federal Open Market Committee interest rate cut
initiatives.  As a result of loan growth, net charge-offs and a
continued deterioration in national and regional economic conditions, the
Company added $254,580 to the loan loss reserve.  Other non-interest
income for the March 31, 2009 and 2008 quarters totaled $408,207 and $375,034,
respectively.  Non-interest income increased $33,173 primarily as a
result of increased interchange revenue generated from debit/credit card
activity and mortgage loan origination fee income at the Bank
level.  During the second quarter of 2008, 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 the Bank.  Bank of
Asheville Mortgage Company, LLC posted net operating losses of $27,116 during
the March 2008 quarter, of which $13,558 was the Company’s
portion.  Non-interest expenses increased from $1,469,592 to
$1,695,888.  The increase was primarily attributable to operating
expenses associated with personnel, occupancy, FDIC insurance premiums and
marketing expenses incurred to support loan and deposit servicing and
growth.


12
 Index


Net
income totaled $223,943 and $388,137 for the periods ended March 31, 2009 and
2008, respectively – a decrease of 42.30%.





CHANGES
IN FINANCIAL CONDITION


MARCH 31,
2009 COMPARED TO DECEMBER 31, 2008





During
the period from December 31, 2008 to March 31, 2009, total assets increased
$11,343,368 or 5.59%.  This increase, reflected primarily in the cash
and cash equivalents and loans, resulted from an increase in
deposits.





Securities,
federal funds sold and interest-bearing balances with other financial
institutions at March 31, 2009 totaled $31,178,825 compared to $23,997,361 at
December 31, 2008.  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 $639,800.





At March
31, 2009, the loan portfolio constituted 81.70% of the Company’s total
assets.  Loans increased $3,766,961 from December 31, 2008 to March
31, 2009.  Continued growth in real estate lending accounted for the
majority of the loan growth.  Management places a strong emphasis on
loan quality.





The
recorded investment in loans that are considered to be impaired in accordance
with criteria set forth in SFAS No. 114 of the Financial Accounting Standards
Board was $1,818,442, $192,111, and $349,976 at March 31, 2009 and 2008, and
December 31, 2008, respectively.  The average recorded balances of
impaired loans were $1,343,760, $215,195 and $195,935 for the periods ended
March 31, 2009 and 2008, and December 31, 2008.  The related allowance
for loan losses determined for in accordance with SFAS No. 114 for impaired
loans was $26,191, none and none at March 31, 2009 and 2008, and December 31,
2008 respectively. For the three-month periods ended March 31, 2009 and
2008, Weststar recognized interest income from impaired loans of $7,563 and
none, respectively. See “Asset Quality” for discussion for an analysis of
loan loss reserves.





Potential
problem loans consist of loans that are performing in accordance with
contractual terms, but for which management has concerns about the ability of an
obligor to continue to comply with repayment terms, because of the obligor’s
potential operating or financial difficulties.  Management monitors
these loans closely and reviews their performance on a regular
basis.  These loans do not meet the standards for, and are therefore
not included in, nonperforming assets.  At March 31, 2009, the Company
identified one potential problem loan totaling $183,276 as compared one loan
totaling $400,756 at December 31, 2008.





Deposits
increased $15,639,775 during the three months ended March 31,
2009.  The increase in deposits was primarily attributable to growth
in NOW and time deposit accounts.  In an effort to increase core
deposits, during 2008, the Company introduced a new NOW account, eZchecking,
which pays an above market interest rate on balances up to
$25,000.  Qualifiers for the account included a minimum of 10 debit
card transactions, one direct deposit and receipt of electronic statement each
month.  The Company earns interchange revenue from debit card usage
and can deliver electronic statements more efficiently than through standard
U.S. mail; these two factors effectively minimize the cost of funds on the
product.  At March 31, 2009, the Company had 1,008 eZchecking accounts
totaling $12,376,260 compared to 789 accounts totaling $9,298,769 at December
31, 2008.  Other increases in NOW accounts resulted from fluctuation
in Interest on Lawyers Trust Accounts (commonly referred to as IOLTA), primarily
escrow accounts for real estate transactions, which increased from $1,521,560 at
December 31, 2008 to $4,876,506 at March 31, 2009, and general growth in other
NOW accounts.  Time deposits grew from $96,619,476 to $107,149,558 or
10.90%.  Growth in time deposits stemmed from interest-rate sensitive
customers choosing to lock in fixed rates to protect themselves from further
interest rate declines as well as customers choosing to transfer funds from the
stock market into FDIC insured fixed rate time deposit
accounts.  Demand, money market and savings accounts decreased by
$2,809,311 during the period.  Part of the decrease was attributable
to customers shifting funds to the high yielding eZchecking NOW
account.


13
 Index


Short-term
borrowings consisted of one advance from the FHLB, which totaled $4,000,000 and
securities sold under agreements to repurchase in the amount of
$665,651.  The interest rate on the FHLB 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.  Securities sold under agreements to repurchase bear a variable
rate of interest and mature daily.  At March 31, 2009, the rate on
these borrowings was .25%.




Long-term
borrowings consisted of trust preferred securities totaling
$4,124,000.  The trust preferred securities bear a rate of LIBOR plus
315 basis points (4.24% at March 31, 2009) and pay dividends
quarterly.  The rate is subject to quarterly resets.  The
trust preferred securities mature October 7, 2033, and became callable on or
after October 7, 2008.  All of the trust preferred securities were
eligible for inclusion as Tier I capital.  The Company continues to
use the capital to support growth and branch expansion.





The
Company’s capital at March 31, 2009 to risk weighted assets totaled
12.66%.  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 March 31, 2009, the
Company’s capital exceeded the current regulatory capital
requirements.





RESULTS
OF OPERATIONS


FOR THE
THREE MONTH PERIOD ENDED MARCH 31, 2009 AND 2008





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





COMPARATIVE
THREE MONTHS





Net
interest income for the quarter ended March 31, 2009 totaled $1,870,589 compared
to $1,733,281 in 2008.  This increase was attributable to growth in
net interest earning assets.  The Company’s net interest margin was
approximately 3.75% and 4.08% for the quarters ended March 31, 2009 and 2008,
respectively.





Weststar
recorded a provision for loan losses of $254,580 and $37,445 for the quarters
ended March 31, 2009 and 2008, respectively.  The provision for loan
losses is charged to operations to bring the allowance to a level deemed
appropriate by management based on the factors discussed under “Asset
Quality.”





Other
non-interest income for the March 31, 2009 and 2008 quarters totaled $408,207
and $375,034, respectively.  The increase in other income primarily
reflects increased fees from debit/credit card interchange transactions and fees
from the origination of mortgage loans at the Bank level.  Interchange
revenue increased from $63,562 to $73,476 for the periods ended March 31, 2008
and 2009, respectively; fees from the originations of mortgage loans produced
$36,542 during 2009 compared to none during 2008.  During the second
quarter of 2008, 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 the Bank.  Bank of Asheville Mortgage Company, LLC posted net
operating losses of $27,116 during the March 2008 quarter, of which $13,558 was
the Company’s portion.  Other income decreased from $18,509 during
2008 to $9,872 during 2009.  The decrease primarily reflects lower
revenue earned from balances maintained at  correspondent
banks.





Other
non-interest expense totaled $1,695,888 compared to $1,469,592 in
2008.  The increase was primarily attributable to personnel and
overhead incurred to support loan and deposit servicing and growth and
increased


14
 Index


FDIC
insurance premiums. Occupancy expense increased from $124,688 to $185,053
primarily as a result of a real estate finder’s fee paid to secure a permanent
branch location.  Data processing fees increased by $11,647 as a
result of growth in loans, deposits and expanded services.  FDIC
insurance premiums increased from $22,540 to $72,404 in 2009 as a result of
increased premium rates, which increased from 5 cents per $100 of deposits for
the March 31, 2008 quarter to an estimated 12.22 cents per $100 for the March
31, 2009 quarter.  As a result of banking failures during 2008 and
projected failures during 2009, the FDIC increased the premium to ensure
adequate funding for the depository insurance fund.  FDIC’s Treasury
borrowing authority was increased to $100 billion, which will allow the agency
to cut its planned assessment from 20 to 10 basis points.  Based on
average deposits for the first quarter 2009, this special assessment at 10 basis
points would equal approximately $185,000.  This special assessment
will have a significant impact on the results of operations of the Company for
2009.  Marketing expenses increased from $62,378 to $92,687, which
reflects increased marketing efforts for products and services.  Other
expenses totaled $83,667 in 2009 compared to $67,243 in 2008.  The
increase was primarily attributable to increases in fees assessed by the office
of the NC Commissioner of Banks, increased charitable contributions and taxes
other than income taxes.  Income before income tax provision totaled
$328,328 and $601,278 for the quarters ended March 31, 2009 and 2008,
respectively.  Income tax provision totaled $104,385 and $213,141 for
the quarters ended March 31, 2009 and 2008, respectively, which equated to an
effective tax rate of 31.79% and 35.45%, respectively.  The decrease
in the effective tax rate was primarily attributable to higher relative
tax-exempt income to total income in 2009.  Net income totaled
$223,943 and $388,137 for the quarters ended March 31, 2009 and 2008,
respectively.





Other
comprehensive income totaled $154,033 and $222,490 in 2009 and 2008,
respectively.  Comprehensive income, which is the change in
shareholders’ equity excluding transactions with shareholders, totaled $377,976
and $610,627 for the quarters ended March 31, 2009 and 2008,
respectively.





ASSET/LIABILITY
MANAGEMENT





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





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





The
majority of the Company’s deposits are rate-sensitive instruments with rates
that tend to fluctuate with market rates. These deposits, coupled with the
Company’s short-term certificates of deposit, have increased the opportunities
for deposit repricing. The Company places great significance on monitoring and
managing the Company’s asset/liability position. The Company’s policy of
managing its interest margin (or net yield on interest-earning assets) is to
maximize net interest income while maintaining a stable deposit base. The
Company’s deposit base is not generally subject to the level of volatility
experienced in national financial markets in recent


15
 Index


years;
however, the Company does realize the importance of minimizing such volatility
while at the same time maintaining and improving earnings. Therefore, management
prepares on a regular basis earnings projections based on a range of interest
rate scenarios of rising, flat and declining rates in order to more accurately
measure interest rate risk.





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





The
Company uses interest sensitivity analysis to measure the sensitivity of
projected earnings to changes in interest rates. The sensitivity analysis takes
into account the current contractual agreements that the Company has on
deposits, borrowings, loans, investments and any commitments to enter into those
transactions. The Company monitors interest sensitivity by means of computer
models that incorporate the current volumes, average rates, scheduled maturities
and payments and repricing opportunities of asset and liability portfolios.
Using this information, the model estimates earnings based on projected
portfolio balances under multiple interest rate scenarios. In an effort to
estimate the effects of pure interest-rate risk, the Company assumes no growth
in its balance sheet, because to do so could have the effect of distorting the
balance sheet’s sensitivity to changing interest rates. The Company simulates
the effects of interest rate changes on its earnings by assuming no change in
interest rates as its base case scenario and either (1) gradually increasing or
decreasing interest rates by over a twelve-month period or (2) immediately
increasing or decreasing interest rates by .25%, .50%, 1% and 2%. Although these
methods are subject to the accuracy of the assumptions that underlie the process
and do not take into account the pricing strategies that management would
undertake in response to sudden interest rate changes, the Company believes that
these methods provide a better indication of the sensitivity of earnings to
changes in interest rates than other analyses.





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





The
following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2009, which are projected
to reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period.  The
interest rate sensitivity of the Company’s assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such
assumptions.


16
 Index





TERMS
      TO REPRICING AT MARCH 31, 2009Total1-90
      Days
            
            
            91-180
      Days
            
            
            181-365
      Days
            
            
            One
      Year
            
            
            Non-sensitive
            
            
            TotalInterest-earning
      assets:Interest
      bearing deposits
            
            $
            252,766
            
            
            
            -
            
            
            
            -
            
            
            $
            252,766
            
            
            
            -
            
            
            $
            252,766Federal
      funds sold
            
            
            7,408,000
            
            
            
            -
            
            
            
            -
            
            
            
            7,408,000
            
            
            
            -
            
            
            
            7,408,000Investment
      securities
            
            
            395,673
            
            
            $
            399,613
            
            
            $
            733,522
            
            
            
            1,528,808
            
            
            $
            21,710,148
            
            
            
            23,238,956Federal
      Home Loan Bank Stock
            
            
            639,800
            
            
            
            -
            
            
            
            -
            
            
            
            639,800
            
            
            
            -
            
            
            
            639,800Loans
            
            
            128,400,029
            
            
            
            8,786,921
            
            
            
            12,025,671
            
            
            
            149,212,621
            
            
            
            25,794,032
            
            
            
            175,006,653Total
      interest-earning assets
            
            
            137,096,268
            
            
            
            9,186,534
            
            
            
            12,759,193
            
            
            
            159,041,995
            
            
            
            47,504,180
            
            
            
            206,546,175Interest-bearing
      liabilities:Time
      deposits
            
            
            36,165,525
            
            
            
            41,767,571
            
            
            
            28,872,031
            
            
            
            106,805,127
            
            
            
            344,431
            
            
            
            107,149,558All
      other deposits
            
            
            57,481,991
            
            
            
            -
            
            
            
            -
            
            
            
            57,481,991
            
            
            
            -
            
            
            
            57,481,991Short-term
      debt
            
            
            665,651
            
            
            
            -
            
            
            
            4,000,000
            
            
            
            4,665,651
            
            
            
            -
            
            
            
            4,665,651Long-term
      debt
            
            
            4,124,000
            
            
            
            -
            
            
            
            -
            
            
            
            4,124,000
            
            
            
            -
            
            
            
            4,124,000Total
      interest-bearing liabilities
            
            
            98,437,167
            
            
            
            41,767,571
            
            
            
            32,872,031
            
            
            
            173,076,769
            
            
            
            344,431
            
            
            
            173,421,200Interest
      sensitivity gap
            
            $
            38,659,101
            
            
            $
            (32,581,037
            )
            
            $
            (20,112,838
            )
            
            $
            (14,034,774
            )
            
            $
            47,159,749Cumulative
      interest sensitivity gap
            
            $
            38,659,101
            
            
            $
            6,078,064
            
            
            $
            (14,034,774
            )Interest
      earning assets as a percent of interest sensitive
    liabilities
            
            
            139.3
            %
            
            
            22.0
            %
            
            
            38.8
            %
            
            
            91.9
            %








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





ASSET
QUALITY





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





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





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





A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due.  Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-


17
 Index


case
basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay,
the borrower’s prior payment record, and the amount of the shortfall in relation
to the principal and interest owed.  Impairment is measured on a loan
by loan basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan’s effective interest rate,
the loan’s obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.  Large groups of smaller balance
homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
disclosures.





The
provision for loan losses represents a charge against income in an amount
necessary to maintain the allowance at an appropriate level.  The
monthly provision for loan losses may fluctuate based on the results of this
analysis.  The allowance for loan losses at March 31, 2009 and 2008,
and December 31, 2008 was $2,677,865, $2,110,658 and $2,529,981 or 1.53%, 1.54%
and 1.48%, respectively, of gross loans outstanding.   The ratio
of annualized net charge-offs to average loans outstanding was .25%, .05% and
..18% at March 31, 2009 and 2008, and December 2008, respectively.





The
following table contains an analysis for the allowance for loan losses,
including the amount of charge-offs and recoveries by loan type, for the
three-months ended March 31, 2009 and 2008, and for the year ended December 31,
2008.





Summary
of Allowance for Loan Losses





For
      the three monthsended March
      31,
              
              
              For
      the year endedDecember
      31,2009
              
              
              2008
              
              
              2008Balance,
      beginning of period
              
              $
              2,529,981
              
              
              $
              2,090,125
              
              
              $
              2,090,125Charge-offs:Commercial,
      financial and agricultural
              
              
              (77,754
              )
              
              
              -
              
              
              
              (203,524
              )Real
      estate:Construction
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage
              
              
              -
              
              
              
              -
              
              
              
              -Consumer
              
              
              (39,939
              )
              
              
              (29,902
              )
              
              
              (116,409
              )Total
      charge-offs
              
              
              (117,693
              )
              
              
              (29,902
              )
              
              
              (319,933
              )RecoveriesCommercial,
      financial and agricultural
              
              
              -
              
              
              
              2,476
              
              
              
              13,415Real
      estate:Construction
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage
              
              
              -
              
              
              
              -
              
              
              
              -Consumer
              
              
              10,997
              
              
              
              10,514
              
              
              
              35,089Total
      recoveries
              
              
              10,997
              
              
              
              12,990
              
              
              
              48,504Net
      (charge-offs) recoveries
              
              
              (106,696
              )
              
              
              (16,912
              )
              
              
              (271,429
              )Provision
      charged to operations
              
              
              254,580
              
              
              
              37,445
              
              
              
              711,285Balance,
      end of period
              
              $
              2,677,865
              
              
              $
              2,110,658
              
              
              $
              2,529,981








Percentage
      of net charge-offs to average loans
            
            
            .25
            %
            
            
            .05
            %
            
            
            .18
            %Percentage
      of allowance to period-end loans
            
            
            1.53
            %
            
            
            1.54
            %
            
            
            1.48
            %





The Bank
operates in a well diversified market.  Major economic drivers include
tourism, medical industry and light manufacturing.  While the
Company’s market has not experienced some of the extreme hardships as portrayed
nationally, the Bank and its market are not totally
isolated.  Residential mortgage sales in the market have slowed down;
however, the Bank has not experienced the same magnitude as the national
market.  While


18
 Index


the
Bank’s losses related to real estate lending have been low historically, the
volatility of the real estate development market loans in our market could
result in additional increases in our exposure to losses if the economy
continues to experience a downward trend.





The Bank
mitigates its exposure to real estate construction lending by limiting the
number of unsold houses to four per developer.  Currently, home
developer loans have an average balance of approximately $300,000 per
unit.  The Bank uses third party building inspectors to evaluate
construction progress.  Based upon reports provided by the inspectors
the Bank stands better equipped to monitor and distribute loan draws according
to percent of project completed.  Approximately 30% of commercial real
estate mortgage loans are owner-occupied.  In general, owner-occupied
loans pose lower risks than non-owner-occupied loans as there is lower risk of
the borrower-tenant leaving the building for a better lease and generally there
are business-related cash flows which provide debt service
capacity.  Additionally, in the normal owner-occupied loan situation,
personal guarantees for the loan are present.





Nonaccrual
and restructured loans increased from $316,102 at December 31, 2008 to
$1,782,322 at March 31, 2009.  Current non-accrual loans represent
nine loans with five customers; restructured loans represent five loans with
four customers.  Although some of the customers have resumed payments,
management has continued to classify the relationships until such time as the
borrowers demonstrate a consistent and consecutive payment
history.  Management has reviewed each non-performing loan, supporting
collateral, financial stability of each borrower and the relevant loan loss
allowance.  During the first quarter of 2009, management continued its
in-depth underwriting analysis, training and loan
monitoring.  Management continued its engagement of third party loan
review services to supplement and validate overall loan review analytics and
portfolio risk assessments.  Based upon this analysis, management
believes the allowance is adequate to support current loans
outstanding.





During
2009, there were no changes in estimation methods or assumptions that affected
our methodology for assessing the appropriateness of the general and specific
allowance for credit losses.  Changes in estimates and assumptions
regarding the effect of economic and business conditions on borrowers affect the
assessment of the allowance.





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








March
      31, 2009
            
            
            December
      31, 2008Amount
      of
            
            
            Percent
      of
            
            
            Amount
      of
            
            
            Percent
      ofAllowance
            
            
            Total
      Loans
            
            
            Allowance
            
            
            Total
      LoansTYPE
      OF LOAN:Real
      Estate
            
            $
            2,118,727
            
            
            
            83
            %
            
            $
            2,001,660
            
            
            
            82
            %Commercial
      and industrial loans
            
            
            518,103
            
            
            
            16
            %
            
            
            465,388
            
            
            
            16
            %Consumer
            
            
            41,035
            
            
            
            1
            %
            
            
            50,786
            
            
            
            2
            %Unallocated
            
            
            -
            
            
            
            -
            
            
            
            12,147
            
            
            
            -Total
      Allowance
            
            $
            2,677,865
            
            
            
            100
            %
            
            $
            2,529,981
            
            
            
            100
            %








CAPITAL
RESOURCES





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


19
 Index


guidelines.
As shown in the following table, Weststar and The Bank of Asheville both
maintained capital levels exceeding the minimum levels for "well capitalized"
banks and bank holding companies.







REGULATORY
CAPITAL








To
      Be WellFor
      Capital
            
            
            Capitalized
      UnderAdequacy
            
            
            Prompt
      CorrectiveActual
            
            
            Purposes
            
            
            Action
      ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in Thousands)As
      of March 31, 2009Total
      Capital (to Risk Weighted Assets)Consolidated
            
            $
            23,084
            
            
            
            12.66
            %
            
            $
            14,583
            
            
            
            8.00
            %
            
            $
            18,229
            
            
            
            10.00
            %Bank
            
            $
            21,886
            
            
            
            12.02
            %
            
            $
            14,563
            
            
            
            8.00
            %
            
            $
            18,204
            
            
            
            10.00
            %Tier
      1 Capital (to Risk Weighted Assets)Consolidated
            
            $
            20,800
            
            
            
            11.41
            %
            
            $
            7,291
            
            
            
            4.00
            %
            
            $
            10,937
            
            
            
            6.00
            %Bank
            
            $
            19,605
            
            
            
            10.77
            %
            
            $
            7,281
            
            
            
            4.00
            %
            
            $
            10,922
            
            
            
            6.00
            %Tier
      1 Capital (to Average Assets)Consolidated
            
            $
            20,800
            
            
            
            10.05
            %
            
            $
            8,277
            
            
            
            4.00
            %
            
            $
            10,347
            
            
            
            5.00
            %Bank
            
            $
            19,605
            
            
            
            9.48
            %
            
            $
            8,268
            
            
            
            4.00
            %
            
            $
            10,335
            
            
            
            5.00
            %








LIQUIDITY





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





As of
March 31, 2009 liquid assets (cash due from banks, interest-earning bank
deposits and federal funds sold) were approximately $12.4 million, which
represents 5.79% of total assets and 6.66% of total deposits. Supplementing this
liquidity, Weststar has available lines of credit from correspondent banks of
approximately $21.4 million. At March 31, 2009, outstanding commitments to
extend credit and available lines of credit were $29.4
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 57.47% of Weststar’s total deposits at March 31, 2009.
The Company’s growth strategy includes efforts focused on increasing the
relative volume of transaction deposit accounts, as the branch network is
expanded, making it more convenient for our banking customers. Certificates of
deposit of $100,000 or more represented 14.44% of the Company’s total deposits
at March 31, 2009.  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.


20
 Index


IMPACT
OF INFLATION AND CHANGING PRICES





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





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.


21
 Index


Part
      II.
            OTHER
      INFORMATION





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


None.





Item 5.
            Other
      Information


(a)
            None.


(b)
            None.





Item 6.
            Exhibits





(a)
            Exhibits.





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


22
 Index


SIGNATURES








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








WESTSTAR
      FINANCIAL SERVICES CORPORATIONDate:
      May 13, 2009
            By:
            /s/     G. Gordon
      GreenwoodG.
      Gordon GreenwoodPresident
      and Chief Executive OfficerDate:
      May 13, 2009
            By:
            /s/     Randall C.
      HallRandall
      C. HallExecutive
      Vice President and Chief Financialand
      Principal Accounting Officer







23