UNITED STATES
SECURITITES AND EXCHANGE COMMISSION Washington, D.C. 29549 FORM 10-QSB
                                                             (Mark One) |X|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE ACT OF 1934  For the quarterly period ended
September 30, 2004 |_|
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
(State or other jurisdiction of incorporation or organization)
        56-2181423
(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 |X|  No |_| 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 -
1,166,208 shares outstanding as of November 4, 2004. 1   INDEX
     
     PagePart I -
     
     
     FINANCIAL INFORMATIONItem 1 -
     Financial Statements:Consolidated Balance SheetsSeptember 30, 2004 and December 31, 2003
     3Consolidated Statements of OperationsThree and Nine Months Ended September 30, 2004 and 2003
     4Consolidated Statements of Comprehensive IncomeThree and Nine Months Ended September 30, 2004 and 2003
     5Consolidated Statement of Changes in Shareholders EquityNine Months Ended September 30, 2004 and 2003
     6Consolidated Statements of Cash FlowsNine Months Ended September 30, 2004 and 2003
     7Notes to Consolidated Financial Statements
     8Item 2 -
     Managements Discussion and AnalysisFinancial Condition and Results of Operations
     10Item 3 -
     Controls and Procedures
     20Part II -
     OTHER INFORMATIONItem 4 -
     Submission of Matters to a Vote of Security Holders
     21Item 6 -
     Exhibits and Reports on Form 8-K
     21Exhibit Index
     21Signatures
     222




Part I.
         FINANCIAL INFORMATION


Item I.     Financial
Statements


Weststar Financial
Services Corporation & Subsidiaries
Consolidated Balance Sheets(unaudited)


September 30,
2004
     
     December 31,
2003*ASSETS:Cash and cash equivalents:Cash and due from banks
     $3,662,833
        
     $3,657,060Interest-bearing deposits
     322,925
        
     39,617Federal funds sold
     15,206,000
        
     8,294,000Total cash and cash equivalents
     19,191,758
        
     11,990,677Investment securities -Available for sale, at fair value (amortized cost of$23,410,653 and $18,643,453, respectively)
     23,325,008
        
     18,512,297Loans
     82,041,295
        
     74,753,066Allowance for loan losses
     (1,517,760
        )
     (1,174,003
        )Net loans
     80,523,535
        
     73,579,063Premises and equipment, net
     2,658,337
        
     2,333,869Accrued interest receivable
     568,549
        
     457,814Federal Home Loan Bank stock, at cost
     272,000
        
     175,400Deferred income taxes
     293,971
        
     220,460Foreclosed properties
     601,214
        
     1,266,969Other assets
     444,309
        
     525,739TOTAL
     $127,878,681
        
     $109,062,288LIABILITIES AND SHAREHOLDERS EQUITY:Deposits:Demand
     $18,544,033
        
     $17,707,429NOW accounts
     25,079,093
        
     22,923,031Money market accounts
     34,396,378
        
     25,469,714Savings
     2,549,950
        
     1,973,225Time deposits of $100,000 or more
     6,518,072
        
     4,966,351Other time deposits
     24,524,824
        
     20,361,788Total deposits
     111,612,350
        
     93,401,538Borrowings
     2,000,000
        
     2,000,000Accrued interest payable
     137,762
        
     120,853Other liabilities
     453,344
        
     348,949Trust preferred securities
     4,000,000
        
     4,000,000Total liabilities
     118,203,456
        
     99,871,340SHAREHOLDERS EQUITY:Preferred stock; authorized $1,000,000; issued and outstanding - none
     
        
     Common stock, $1 par value, authorized - 9,000,000shares; issued and outstanding - 1,166,208 and 1,166,208, respectively
     1,166,208
        
     1,166,208Additional paid-in capital
     7,030,589
        
     7,030,589Retained earnings
     1,531,057
        
     1,074,747Accumulated other comprehensive loss
     (52,629
        )
     (80,596
        )Total shareholders equity
     9,675,225
        
     9,190,948TOTAL
     $127,878,681
        
     $109,062,288*
Derived
from audited consolidated financial statements.See notes to consolidated
financial statements.



3



Weststar Financial
Services Corporation & Subsidiaries Consolidated Statements of Operations(unaudited)


Three Months
Ended September 30,
     
     Nine Months
Ended September 30,2004
     
     2003
     
     2004
     
     2003INTEREST INCOME:Interest and fees on loans
     $1,295,595
        
     $1,200,838
        
     $3,881,414
        
     $3,588,930Federal funds sold
     36,669
        
     21,585
        
     72,096
        
     70,988Interest-bearing deposits
     3,862
        
     152
        
     6,591
        
     457Investments:Taxable interest income
     170,474
        
     110,408
        
     423,988
        
     280,920Nontaxable interest income
     13,431
        
     15,359
        
     41,038
        
     39,455Corporate dividends
     2,367
        
     2,101
        
     5,468
        
     7,547Total interest income
     1,522,398
        
     1,350,443
        
     4,430,595
        
     3,988,297INTEREST EXPENSE:Time deposits of $100,000 or more
     28,612
        
     34,153
        
     84,023
        
     149,921Other time and savings deposits
     301,276
        
     268,734
        
     828,452
        
     912,540Federal funds purchased
     
        
     
        
     1,358
        
     Other interest expense
     56,493
        
     10,594
        
     159,462
        
     15,506Total interest expense
     386,381
        
     313,481
        
     1,073,295
        
     1,077,967NET INTEREST INCOME
     1,136,017
        
     1,036,962
        
     3,357,300
        
     2,910,330PROVISION FOR LOAN LOSSES
     127,500
        
     454,300
        
     740,300
        
     1,097,680NET INTEREST INCOME AFTER PROVISIONFOR LOAN LOSSES
     1,008,517
        
     582,662
        
     2,617,000
        
     1,812,650OTHER INCOME:Service charges on deposit accounts
     300,913
        
     305,455
        
     923,185
        
     841,490Other service fees and commissions
     81,921
        
     131,939
        
     249,300
        
     370,525Securities gains
     
        
     
        
     31,613
        
     45,482Other
     10,900
        
     8,088
        
     29,543
        
     18,643Total other income
     393,734
        
     445,482
        
     1,233,641
        
     1,276,140OTHER EXPENSES:Salaries and wages
     428,920
        
     313,505
        
     1,185,442
        
     980,523Employee benefits
     54,402
        
     60,590
        
     200,503
        
     175,412Occupancy expense, net
     95,562
        
     51,245
        
     253,291
        
     153,236Equipment rentals, depreciation andmaintenance
     81,462
        
     54,519
        
     243,186
        
     175,167Supplies
     58,754
        
     55,623
        
     183,400
        
     160,940Professional fees
     173,394
        
     175,970
        
     546,214
        
     505,008Marketing
     59,949
        
     27,410
        
     146,900
        
     83,318Other
     177,459
        
     64,786
        
     357,202
        
     261,523Total other expenses
     1,129,902
        
     803,648
        
     3,116,138
        
     2,495,127INCOME BEFORE INCOME TAXES
     272,349
        
     224,496
        
     734,503
        
     593,663INCOME TAX PROVISION
     108,810
        
     88,350
        
     278,115
        
     230,450NET INCOME
     $163,539
        
     $136,146
        
     $456,388
        
     $363,213EARNINGS PER SHARE:Basic
     $0.14
        
     $0.12
        
     $.39
        
     $.32Diluted
     $0.13
        
     $0.11
        
     $.37
        
     $.30See notes to consolidated financial
statements


4




Weststar Financial
Services Corporation & Subsidiaries Consolidated Statements of Comprehensive Income
(Loss)(unaudited)


Three Months
Ended September 30,
     
     Nine Months
Ended September 30,2004
     
     2003
     
     2004
     
     2003NET INCOME
     
     
     $163,539
        
     $136,146
        
     $456,388
        
     $363,213OTHER COMPREHENSIVE INCOME (LOSS)Unrealized holding gains (losses) on securitiesavailable for sale
     357,993
        
     (237,659
        )
     77,124
        
     (125,913
        )Tax effect
     (138,006
        )
     91,784
        
     (29,731
        )
     48,628Unrealized holding gains (losses) on securitiesavailable for sale, net of tax
     219,987
        
     (145,875
        )
     47,393
        
     (77,285
        )Reclassification adjustment for realized gains
     
        
     
        
     (31,613
        )
     (45,482
        )Tax effect
     
        
     
        
     12,187
        
     17,565Reclassification adjustment for realized gains,net of tax
     
        
     
        
     (19,426
        )
     (27,917
        )OTHER COMPREHENSIVE INCOME (LOSS),NET OF TAX
     219,987
        
     (145,875
        )
     27,967
        
     (105,202
        )COMPRHENSIVE INCOME (LOSS)
     $383,526
        
     $(9,729
        )
     $484,355
        
     $258,011See notes to consolidated financial
statements.



5



Weststar Financial
Services Corporation & Subsidiaries 
Consolidated Statements of Changes in Shareholders Equity 
For the Nine Months Ended September 30, 2004 and 2003


Common Stock
     
     Additional
Paid-In
     
     Retained
     
     Accumulated
Other
Comprehensive
     
     Total
ShareholdersShares
     
     Amount
     
     Capital
     
     Earnings
     
     Income/(Loss)
     
     EquityBalance December 31, 2002
     
     
     957,539
        
     $957,539
        
     $7,120,187
        
     $561,003
        
     $30,425
        
     $8,669,154Net change in unrealizedgain on securities held for sale
     
        
     
        
     
        
     
        
     (105,202
        )
     (105,202
        )Net income
     
        
     
        
     
        
     363,213
        
     
        
     363,213Stock options
     15,436
        
     15,436
        
     51,200
        
     
        
     
        
     66,636Stock split
     193,233
        
     193,233
        
     (193,233
        )Cash in lieu of fractional shares
     
        
     
        
     
        
     (1,718
        )
     
        
     (1,718
        )Balance September 30, 2003
     1,166,208
        
     1,166,208
        
     $6,978,154
        
     $922,498
        
     ($   74,777
        )
     $8,992,083Balance December 31, 2003
     1,166,208
        
     $1,166,208
        
     $7,030,589
        
     $1,074,747
        
     ($   80,596
        )
     $9,190,948Net change in unrealizedloss on securities held for sale
     
        
     
        
     
        
     
        
     27,967
        
     27,967Cash in lieu of fractional shares
     
        
     
        
     
        
     (78
        )
     
        
     (78
        )Net income
     
        
     
        
     
        
     456,388
        
     
        
     456,388Balance September 30, 2004
     1,166,208
        
     $1,166,208
        
     $7,030,589
        
     $1,531,057
        
     $(52,629
        )
     $9,675,225See notes to consolidated
financial statements.


6




Weststar Financial
Services Corporation & Subsidiaries Consolidated Statements of Cash Flows For the Nine
Months Ended September 30,


2004
     
     2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
     $456,388
        
     $363,213Adjustments to reconcile net income to net cash provided by operatingactivities:Depreciation
     280,011
        
     204,938Provision for loan losses
     740,300
        
     1,097,680Premium amortization and discount accretion, net
     86,895
        
     53,884Deferred income tax benefit
     (91,055
        )
     (85,555
        )Loss on disposals of foreclosed properties
     104,833
        
     32,224Loss on sale of premises and equipment
     18,156
        
     Gain on sales of securities
     (31,613
        )
     (45,482
        )Increase in accrued interest receivable
     (110,735
        )
     (33,237
        )Decrease in other assets
     81,430
        
     111,753Increase (decrease) in accrued interest payable
     16,909
        
     (78,160
        )Increase in other liabilities
     104,395
        
     132,073Provision for losses on foreclosed property
     74,568
        
     59,000Loss on uninsured deposits
     
        
     64,345Net cash provided by operating activities
     1,730,482
        
     1,876,676CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of securities available for sale
     (9,885,613
        )
     (16,725,273
        )Maturities of securities available for sale
     4,509,531
        
     8,119,130Net increase in loans
     (7,924,440
        )
     (1,840,079
        )Proceeds from sales of foreclosed properties
     726,022
        
     258,639Proceeds from sales of securities
     553,600
        
     2,038,750Net expenditures on foreclosed properties
     
        
     (218,259
        )Proceeds from sales of premises and equipment
     200
        
     FHLB stock purchase
     (96,600
        )
     Redemption of Federal Home Loan Bank stock
     
        
     54,400Additions to premises and equipment
     (622,835
        )
     (489,095
        )Net cash used in investing activities
     (12,740,135
        )
     (8,801,787
        )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in demand deposits, NOW accounts, MMDA and savings accounts
     12,496,055
        
     9,918,042Net increase (decrease) in time deposits
     5,714,757
        
     (5,789,639
        )Cash paid for fractional shares
     (78
        )
     (1,718
        )Proceeds from issuance of common stock
     
        
     66,636Proceeds from issuance of trust preferred securities
     
        
     2,000,000Net cash provided by financing activities
     18,210,734
        
     6,193,321NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     7,201,081
        
     (731,790
        )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
     11,990,677
        
     14,115,822CASH AND CASH EQUIVALENTS AT END OF PERIOD
     $19,191,758
        
     $13,384,032See notes to consolidated financial
statements.


7



WESTSTAR FINANCIAL
SERVICES CORPORTION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.
Weststar
Financial Services Corporation (the Company) is a bank holding company with
two subsidiaries, The Bank of Asheville (the Bank), and Weststar Financial
Services Corporation I (the Trust). 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 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 financial consolidated statements contain all
adjustments necessary to present fairly the consolidated financial position of
the Company as of September 30, 2004 and December 31, 2003, and the consolidated
results of their operations for the three-month and nine-month periods ended
September 30, 2004 and 2003 and their cash flows for the nine-month periods
ended September 30, 2004 and 2003. Operating results for the three-month and
nine-month periods ended September 30, 2004 are not necessarily indicative of
the results expected for the period ending December 31, 2004.The accounting
policies followed are set forth in Note 1 to the 2003 Annual Report to
Shareholders (Form 10-KSB) on file with the Securities and Exchange Commission.2.
Loans at
September 30, 2004 and December 31, 2003 classified by type are as
follows:September 30,
2004
     
     December 31,
2003Real Estate:Construction
     $11,575,188
        
     $8,372,934Mortgage
     48,120,415
        
     46,014,314Commercial, financial and agricultural
     19,713,134
        
     18,603,317Consumer
     2,798,454
        
     1,909,709Subtotal
     82,207,191
        
     74,900,274Net deferred loan origination fees
     (165,896
        )
     (147,208
        )Total
     $82,041,295
        
     $74,753,0663.
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 $19,391,378
and $20,435,251 at September 30, 2004 and December 31, 2003,
respectively.4.
Basic earnings
per share have been computed using the weighted average number of shares of
common stock outstanding of 1,166,208 and 1,151,023 for the quarters ended
September 30, 2004 and 2003, respectively and 1,166,208 and 1,149,712 for the
nine-month periods ended September 30, 2004 and 2003, respectively. Diluted
earnings per share have been computed using common stock and common stock
equivalents of 1,222,024 and 1,214,191 for the quarters ended September 30, 2004
and 2003, respectively, and 1,225,303 and 1,204,892 for the nine-month periods
ended September 30, 2004 and 2003, respectively. Shares have been adjusted to
reflect a 6-for-5 stock split paid in the form of a 20% stock dividend paid
during September 2003.8




5.
Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, encourages all entities to adopt a fair value based method of
accounting for employee stock compensation plans, whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
whereby compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. The Company has elected to continue with
the accounting methodology in Opinion No. 25 and, as a result, has provided the
below pro forma disclosures of net income and earnings per share and other
disclosures as if the fair value based method of accounting had been
applied.At September 30,
2004, the Company had two stock-based compensation plans. The Company accounts
for compensation costs related to the Companys stock option plans using the
intrinsic value method. Therefore, no compensation costs has been recognized for
stock option awards because the options are granted at exercise prices based on
the market value of the Companys stock on the date of grant. Had compensation
costs for the Companys stock option plans been determined using the fair value
method, the Companys pro forma net income would have been as follows:Three Months Ended
     
     Nine Months Ended9/30/2004
     
     9/30/2003
     
     9/30/2004
     
     9/30/2003Net income as reported
     
     
     $163,539
        
     $136,146
        
     $456,388
        
     $363,213Less: Total stock based employeecompensation expense determinedunder fair value method for all awards,net of related tax effects
     25,716
        
     25,861
        
     76,488
        
     133,140Pro forma net income
     $137,823
        
     $110,285
        
     $379,900
        
     $230,073Net income per share:As reported:Basic
     $0.14
        
     $0.12
        
     $0.39
        
     $0.32Diluted
     $0.13
        
     $0.11
        
     $0.37
        
     $0.30Pro forma:Basic
     $0.12
        
     $0.10
        
     $0.33
        
     $0.20Diluted
     $0.11
        
     $0.09
        
     $0.31
        
     $0.199




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


Weststar Financial
Services Corporation & Subsidiaries Managements Discussion and Analysis


EXECUTIVE OVERVIEW


During 2004,  the Company  focused
 significant  attention on  improving  asset  quality,  asset  growth and  expansion.
 Management emphasized prudent  underwriting  standards,  increased periodic reviews of
loans of $100,000 or more, and expanded its loan quality monitoring  systems.  During the
 period  asset  quality  continued  to  demonstrate  signs of  improvement.
 Non-performing  assets decreased  from  $3,412,741 at December 31, 2003 to $1,533,315 at
September 30, 2004.  Net  charge-offs  for the  nine-month  period totaled  $396,544
 compared to $923,158 for the period ended September 30, 2003.  Loans  outstanding grew
by 10% to $82,041,295 from December 31, 2003, which reflected improved economic
conditions and increased market share.


Deposits  increased 20% to
$111,612,350  during the nine-month  period ended September 30, 2004.  During  September
2004, one of the Companys real estate trust account  customers  deposited and maintained
in excess of $4,700,000 into their accounts.  Funds in this account are considered
 short-term.  Excluding this deposit,  the Companys  deposits  increased 14% from
December 31, 2003. Deposit growth reflected  continued market  penetration and the
addition of a fourth banking  location,  which opened during the latter part of October,
 2003. While the Company  experienced  growth in all categories of deposits,  trends
 reflected  interest rate sensitive customers  shifting  funds from lower  interest
 paying NOW and money market  demand  accounts  into longer  time-sensitive  deposit
accounts, which have begun to pay higher rates.


During  August  2004,  the Company
 relocated  a  temporary  branch on New  Leicester  Highway to a  permanent  site within
the same community.  The new 2500 square foot facility allows for continued market
penetration and improved customer service.


Net income for the quarters  ended
 September  30, 2004 and 2003 totaled  $163,539 and $136,146,  respectively.  The
increase in net income was primarily  attributable to increased net interest income and
improved asset quality,  which resulted in a lower provision for loan losses.
 Non-interest  income  decreased  primarily as a result of lower fees from the
origination of mortgage loans due to higher mortgage loan rates.  Operating  expenses
 increased as a result of relocating a temporary branch on New Leicester Highway to a
permanent site within the same  community,  expenses  associated  with operating a fourth
 banking  location,  which opened during October 2003, and increased expenses  associated
with the supporting loan and deposit growth.  Management  monitors expenses closely and
reviews each expense relative to the benefit provided.


Net income for the nine-month
 periods ended September 30, 2004 and 2003 totaled $456,388 and $363,213,  respectively.
 The increase in net income was primarily  attributable to increase net interest  income,
 which was attributable to growth in net earning assets. Other income remained
 relatively  flat,  while other expenses  increased 25%. The increase in expense is
primarily  attributable to costs  associated with losses  associated with disposals of
 foreclosures,  supporting  loan and deposit growth,  branch  relocation expenses as well
as increased expenses from opening a fourth banking location, which opened during October
2003.


10




CHANGES IN FINANCIAL CONDITION
SEPTEMBER 30, 2004 COMPARED TO DECEMBER 31, 2003


During the period from December 31,
2003 to September 30, 2004,  assets  increased  $18,816,393  or 17%.  This  increase,
 reflected primarily in the federal funds sold, investment securities and loans, was
funded primarily by deposit growth.


Securities,  federal  funds sold and
 interest-bearing  balances  with other  financial  institutions  at September 30, 2004
totaled $38,853,933  compared to $26,845,914  at December 31, 2003.  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 $272,000.


At September 30, 2004, the loan
portfolio  constituted 64% of the Companys total assets.  Loans increased  $7,288,229
from December 31, 2003 to September  30, 2004.  Improved  economic  conditions  resulted
in the 10% increase in loan growth.  Management  places a strong  emphasis on loan
 quality.  At  September  30, 2004,  there were no loans that (i)  represented  or
resulted  from trends or uncertainties which management  reasonably expects to materially
impact future operating results,  liquidity,  or capital resources, or (ii) represented
 material credits about which  management was aware of any information  which caused
 management to have serious doubts as to the ability of such borrowers to comply with the
loan repayment terms.


The  recorded  investment  in loans
that are  considered  to be impaired in  accordance  with  criteria  set forth in
 Statement  of Financial Accounting Standards No. 114 of the Financial  Accounting
 Standards Board was $1,641,415,  $3,040,056,  and $1,838,798 at September 30, 2004 and
2003, and December 31, 2003,  respectively.  The average  recorded  balance of impaired
loans during 2004 and 2003 was not  significantly  different from the balance at
September 30, 2004 and 2003 and December 31, 2003. The related  allowance for loan losses
 determined in accordance  with SFAS No. 114 for impaired  loans was $265,300 and
$217,939 and $182,013 at September 30, 2004 and 2003,  and December 31, 2003
 respectively.  For the  nine-month  periods ended  September 30, 2004 and 2003,
 Weststar recognized  interest  income from impaired loans of  approximately  $50,145 and
$114,072.  See Asset Quality for discussion for an analysis of loan loss reserves.


Deposits  increased  $18,210,812
 during the nine months  ended  September  30, 2004.  The 20% growth was  reflected in
all areas of deposits.  During  September  2004, one of the Companys real estate trust
account  customers  deposited and maintained in excess of $4,700,000  into one of their
 accounts.  Funds in this account are considered  short-term.  Excluding  this deposit,
 the Companys deposits  increased 14% from December 31, 2003.  Deposit growth reflected
 continued market penetration and the addition of a fourth banking location,  which
opened during the latter part of October,  2003. While the Company  experienced growth in
all categories of deposits,  trends reflected interest rate sensitive  customers shifting
funds from lower interest paying NOW and money market demand accounts into longer
time-sensitive deposit accounts, which have begun to pay higher rates.


Borrowings  consisted of only one
advance  from the FHLB  totaling  $2,000,000  on September  30,  2004.  The interest
 rate on this advance is 1.65% with a maturity  date of June 27,  2005.  The advance is
secured by a blanket  lien on 1-4 family real estate loans and certain commercial real
estate loans.


11




During 2004,  the Trust  maintained
 trust  preferred  securities  in the amount of  $4,000,000 at a floating rate of LIBOR
plus 315 basis points with dividends paid  quarterly.  The trust  preferred  securities,
 which mature on October 7, 2033, and are redeemable on or after  October 7, 2008 at par
value.  Approximately  $3 million was  eligible  for  inclusion  as Tier I capital.  The
Company plans to use the capital to support growth and branch expansion.


The Companys  capital at September
30, 2004 to risk weighted assets totaled  16.61%.  Current  regulations  require a
minimum ratio of  total  capital  to risk  weighted  assets  of 8%,  with at least 4%
being  in the  form of Tier 1  capital,  as  defined  in the regulation.  As of September
30, 2004, the Companys capital exceeded the current regulatory capital requirements.


RESULTS OF OPERATIONS FOR THE THREE
MONTH PERIOD ENDED SEPTEMBER 30, 2004 AND 2003


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


COMPARATIVE THREE MONTHS


Net interest  income for the quarter
ended September 30, 2004 totaled  $1,136,017  compared to $1,036,962 in 2003. This
increase was primarily  attributable to growth in net earning assets.  The Companys net
interest margin was approximately  3.7% and 4.0% for the quarters ended September 30,
2004 and 2003, respectively.


Weststar  recorded a provision  for
loan  losses of $127,500  and  $454,300  for the  quarters  ended  September  30, 2004
and 2003, 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.  Despite  improved  performance in credits,  the
reserve for loan losses remained relatively high due to charge-off experience during the
past two years.


Other income for the September  30,
2004 and 2003  quarters  totaled  $393,734 and  $445,482,  respectively.   The decrease
in other income primarily reflects a decrease of mortgage loan origination fee income of
$62,058.


Other  expense  totaled  $1,129,902
 compared to $803,648 in 2003.  This  increase was  primarily  attributable  to overall
 company growth,  costs  associated  with  relocating  a branch  office from a temporary
 location to a new  permanent  facility and overhead associated with the opening of a
fourth banking  location,  which opened October 2003.  Additional  expenses resulted from
losses on the sales and  disposals  of  foreclosures  totaling  $53,427  and $535  during
 the  periods  ended  September  30,  2004 and 2003, respectively.  Income  before
 income tax  provision  totaled  $272,349 and $224,496 for the quarters  ended  September
30, 2004 and 2003,  respectively.  Income tax  provision  totaled  $108,810  and  $88,350
for the  quarters  ended  September  30, 2004 and 2003, respectively,  which  equated to
an  effective  tax rate of 39.95% and 39.35%.  Net income  totaled  $163,539  and
 $136,146 for the quarters ended September 30, 2004 and 2003, respectively.


Other  comprehensive  income (loss)
totaled  $219,987 and $(145,875) in 2004 and 2003,  respectively.  Comprehensive  income
(loss), which is the change in  shareholders  equity  excluding  transactions  with
 shareholders,  totaled  $383,526  and $(9,729) for the quarters ended September 30, 2004
and 2003, respectively.


12




COMPARATIVE NINE MONTHS


Net interest  income for the
nine-month  period ended  September 30, 2004 totaled  $3,357,300  compared to $2,910,330
in 2003.  This increase is primarily  attributable to growth in net earning assets.  The
Companys net interest margin was  approximately  4.0% for the nine months ended
September 30, 2004 and 2003.


Weststar  recorded a provision  for
loan losses of $740,300 and  $1,097,680  for the nine months ended  September 30, 2004
and 2003, respectively.  The  provision  for loan losses is charged to  operations  to
bring the  allowance to a level deemed  appropriate  by management based on the factors
discussed under Asset Quality.


Other  non-interest  income for the
 September  30, 2004 and 2003 periods  totaled  $1,233,641  and  $1,276,140,
 respectively.  The increase in service charge income primarily  reflects an increase in
overdraft  charge income of $63,275.  The increase in overdraft charges was based on
higher  activity  during the period.  Other service fees and  commissions  reflected a
net decrease of $121,225 of which $165,047 was  attributable to decreased fees from the
origination of mortgage loans  resulting for lower  refinancing.  The decrease  was
 partially  offset by a $25,260  increase in  commissions  earned on credit card
 transactions.  Gains on the sales of investment securities also decreased $13,869 during
the nine-month period ended September 30, 2004 compared to September 30, 2003.


Other expense  totaled  $3,116,138
 compared to $2,495,127 in 2003.  This  increase was primarily  attributable  to overall
 company growth,  expenses  associated  with relocating from a branch office from a
temporary  banking  location to a permanent  facility and additional  overhead
 associated with the opening of a fourth banking  location  during October 2003.  During
the period the Company incurred  expenses from the sales and  dispositions  of
 foreclosures  in the amount of $104,833 and $32,224  during the nine months ended
September 30, 2004 and 2003,  respectively.  Income before income tax provision  totaled
$734,503 and $593,663 for the periods ended  September  30, 2004 and 2003,  respectively.
 Income tax  provision  totaled  $278,115  and  $230,450  for the periods  ended
September  30,  2004 and 2003,  respectively,  which  equated to an  effective  tax rate
of 37.86% and  38.82%.  Net income  totaled $456,388 and $363,213 for the nine months
ended September 30, 2004 and 2003, respectively.


Other comprehensive  income (loss)
totaled $27,967 and $(105,202) in 2004 and 2003,  respectively.  Comprehensive  income,
 which is the change in  shareholders  equity excluding  transactions  with
 shareholders,  totaled $484,355 and $258,011 for the nine months ended September 30,
2004 and 2003, 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.


In the absence of other factors,
 the yield or return  associated  with the Companys  earning  assets  generally will
increase from existing  levels when  interest  rates rise over an extended  period of
time and,  conversely,  interest  income will  decrease when interest rates decline.  In
general,  interest  expense will increase when interest rates rise over an extended
 period of time and, conversely, interest expense will decrease when interest rates
decline.


13




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 following table sets forth the
amounts of  interest-earning  assets and  interest-bearing  liabilities  outstanding at
September 30, 2004,  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.


TERMS TO REPRICING AT SEPTEMBER 30, 20041-90 Days
     
     91-180 Days
     
     181-365 Days
     
     Total One Year
     
     Non-Sensitive
     
     TotalInterest-earning assets:Interest bearing deposits
     $322,925
        
     
        
     
        
     $322,925
        
     
        
     $322,925Federal funds sold
     15,206,000
        
     
        
     
        
     15,206,000
        
     
        
     15,206,000Investment securities
     8,641,751
        
     $1,355,971
        
     $2,283,502
        
     12,281,224
        
     $11,129,429
        
     23,410,653Federal Home Loan Bank stock
     
        
     
        
     
        
     
        
     272,000
        
     272,000Loans (1)
     62,639,569
        
     1,533,574
        
     3,024,853
        
     67,197,996
        
     13,911,363
        
     81,109,359Total interest-earning assets
     86,810,245
        
     2,889,545
        
     5,308,355
        
     95,008,145
        
     25,312,792
        
     120,320,937Interest-bearing liabilities:Time deposits
     6,869,272
        
     8,135,703
        
     8,130,100
        
     23,135,075
        
     7,907,821
        
     31,042,896All other deposits
     62,025,421
        
     
        
     
        
     62,025,421
        
     
        
     62,025,421Borrowings
     
        
     
        
     2,000,000
        
     2,000,000
        
     
        
     2,000,000Trust preferred securities
     4,000,000
        
     
        
     
        
     4,000,000
        
     
        
     4,000,000Total interest-bearing liabilities
     72,894,693
        
     8,135,703
        
     10,130,100
        
     91,160,496
        
     7,907,821
        
     99,068,317Interest sensitivity gap
     $13,915,552
        
     ($5,246,158
        )
     ($4,821,745
        )
     $3,847,649
        
     $17,404,971
        
     $21,252,620Cumulative interest sensitivityGap
     $13,915,552
        
     $8,669,394
        
     $3,847,649Cumulative ratio of interest-earning assets as a percentof interest sensitive liabilities
     119.1
        %
     35.5
        %
     52.4
        %
     104.2
        %(1)
Non-accrual
loans have been excluded.Weststar  has  established  an
 acceptable  range of 80% to 120% for  interest-earning  assets as a percent  of
 interest  sensitive liabilities.



14




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-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.


15




The  provision  for loan  losses
 represents  a charge  against  income in an amount  necessary  to  maintain  the
 allowance  at an appropriate  level.  The monthly  provision for loan losses may
fluctuate  based on the results of this analysis.  The allowance for loan losses at
September 30, 2004,  2003 and December 31, 2003 and 2002 was  $1,517,760,  $1,194,720,
 $1,174,003  and $1,020,198 or 1.85%,  1.75%,  1.57%  and  1.50%,  respectively,  of
gross  loans  outstanding.  The  ratio of net  charge-offs  to  average  loans
outstanding was .51%, 1.35%,  1.82% and 1.26%, at September 30, 2004 and 2003, and
December 2003 and 2002,  respectively.  Primarily because of a recessionary  economy,
 charge-offs for the years ended 2003 and 2002 totaled  $1,357,614 and $889,565.  Despite
recent improvements  in asset  quality  and  charge-offs,  the loan  loss  reserve  was
 increased  due to  historical  asset  quality  and charge-offs.  Sustained  improvements
 in economic  conditions,  asset quality and charge-offs may justify a lower loan loss
reserve in the future.


The following  table contains an
analysis for the allowance for loan losses,  including the amount of charge-offs  and
recoveries by loan type, for the nine months ended September 30, 2004 and 2003, and for
the years ended December 31, 2003 and 2002.


Summary of Allowance for
Loan Losses


For the nine months
ended September 30,
     
     For the years ended
December 31,2004
     
     2003
     
     2003
     
     2002Balance, beginning of period
     
     
     $1,174,003
        
     $1,020,198
        
     $1,020,198
        
     $978,467Charge-offs:Commercial, financial and agricultural
     (388,102
        )
     (786,985
        )
     (1,075,792
        )
     (568,710
        )Real estate:Construction
     
        
     
        
     
        
     (127,810
        )Mortgage
     
        
     (117,143
        )
     (157,142
        )
     (33,574
        )Consumer
     (46,440
        )
     (78,679
        )
     (124,680
        )
     (159,471
        )Total charge-offs
     (434,542
        )
     (982,807
        )
     (1,357,614
        )
     (889,565
        )RecoveriesCommercial, financial and agricultural
     18,339
        
     32,683
        
     71,942
        
     19,753Real estate:Construction
     
        
     
        
     
        
     1,531Mortgage
     
        
     
        
     
        
     13,322Consumer
     19,660
        
     26,966
        
     33,677
        
     18,770Total recoveries
     37,999
        
     59,649
        
     105,619
        
     53,376Net charge-offs
     (396,543
        )
     (923,158
        )
     (1,251,995
        )
     (836,189
        )Provision charged to operations
     740,300
        
     1,097,680
        
     1,405,800
        
     877,920Balance, end of period
     $1,517,760
        
     $1,194,720
        
     $1,174,003
        
     $1,020,198Percentage of net charge-offs toaverage loans
     .51
        %
     1.35
        %
     1.82
        %
     1.26
        %Percentage of allowance toperiod-end loans
     1.85
        %
     1.75
        %
     1.57
        %
     1.50
        %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.


16




September 30, 2004
     
     December 31, 2003Amount of
Allowance
     
     Percent of
Total Loans
     
     Amount of
Allowance
     
     Percent of
Total LoansTYPE OF LOAN:Real estate
     $995,783
        
     73
        %
     $863,606
        
     72
        %Commercial and industrial loans
     442,665
        
     24
        %
     267,584
        
     25
        %Consumer
     58,535
        
     3
        %
     23,722
        
     3
        %Unallocated
     20,777
        
     
        
     19,091
        
     Total allowance
     $1,517,760
        
     100
        %
     $1,174,003
        
     100
        %The Company does not have any
 significant  loan  concentrations.  During the period,  loan quality  demonstrated
 improvement  over September 30, 2003 and December 31, 2003.


During  2004,  there were no changes
 in  estimation  methods or  assumptions  that  affected  our  methodology  for
 assessing  the appropriateness  of the formula and specific  allowance  for credit
 losses.  Changes in estimates  and  assumptions  regarding  the effect of economic and
business conditions on borrowers affect the assessment of the allowance.


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.


During October 2003, the Company
raised  $4,000,000 in trust preferred  securities.  The Company used funds from the trust
preferred securities to inject  approximately  $3.8 million of capital into the Bank.
 Additional  capital  allows the Bank to support  growth within its existing offices and
through opening additional offices within its market.


REGULATORY CAPITAL


Actual
     For CapitalAdequacy Purposes
     To Be Well
Capitalized Under
Prompt Corrective
Action ProvisionsAmount
     
     Ratio
     Amount
     
     Ratio
     Amount
     
     Ratio(Dollars in Thousands)As of September 30, 2004Total Capital (to Risk Weighted Assets)Consolidated
     $14,851
        
     16.61
        %
     $7,152
        
     8.00
        %
     $8,941
        
     10.00
        %Bank
     $14,337
        
     16.06
        %
     $7,142
        
     8.00
        %
     $8,928
        
     10.00
        %Tier 1 Capital (to Risk Weighted Assets)Consolidated
     $13,044
        
     14.59
        %
     $3,576
        
     4.00
        %
     $5,364
        
     6.00
        %Bank
     $13,216
        
     14.80
        %
     $3,571
        
     4.00
        %
     $5,357
        
     6.00
        %Tier 1 Capital (to Average Assets)Consolidated
     $13,044
        
     10.71
        %
     $4,872
        
     4.00
        %
     $6,090
        
     5.00
        %Bank
     $13,216
        
     10.86
        %
     $4,867
        
     4.00
        %
     $6,084
        
     5.00
        %17




LIQUIDITY


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


As of  September  30,  2004 liquid
 assets  (cash due from  banks,  interest-earning  bank  deposits  and  federal  funds
sold) were approximately  $19.2 million,  which  represents  15.0% of total assets and
17.2% of total deposits.  Supplementing  this liquidity, Weststar has available lines of
credit from correspondent banks of approximately  $15.8 million. At September 30, 2004,
 outstanding commitments  to extend credit and available  lines of credit were $19.4
 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
 approximately  27.8% of Weststars  total deposits at September 30, 2004. The Companys
growth strategy will include 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 5.8% of the Companys total deposits at September 30, 2004.  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.


INVESTMENT ACTIVITIES


At September 30, 2004, Weststars
 investments  consisted of U.S. Government agency securities,  and North Carolina
municipal bonds. The  investments,  with aggregate  amortized  cost of $23.4  million,
 are classified as available for sale and are presented in the consolidated  financial
 statements  at their market  values of $23.3  million at September  30,  2004.  At
September  30, 2004 U.S. Government agency securities and North Carolina  municipal bonds
had tax equivalent  yields of 3.4% and 5.3%  respectively,  with an aggregate  remaining
term of  approximately  60 months.  The Companys  investment in stock of the Federal
Home Loan Bank,  which is required of every member and is  redeemable  only by the
Federal Home Loan Bank,  was $272,000 with a yield of 3.5% at September 30, 2004.
 Because the investment is redeemable only by the Federal Home Loan Bank, it is listed
 separately  rather than a component of the Companys investment portfolio.


18




IMPACT OF INFLATION
AND CHANGING PRICES


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


RECENT ACCOUNTING
PRONOUNCEMENTS


In  January  2003,  the  FASB
 issued  FASB  Interpretation  No.  (FIN)  46,  Consolidation  of  Variable  Interest
 Entities.  This interpretation   addresses  the   consolidation  by  business
  enterprises  of  variable   interest  entities  as  defined  in  the interpretation.
 In December  2003,  the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of
the  provisions of FIN 46 and to exempt certain entities from its  requirements.  Public
entities,  other than small business issues,  must apply FIN 46R no later than the first
reporting  period ending after March 15, 2004.  (Small  business  issuers must apply FIN
46R no later than the end of the first  reporting  period  ending  after  December 15,
 2004.) FIN 46 is  effective  for public  entities  that have  interest in structures
that are commonly referred to as special-purpose entities for periods ending after
December 15, 2004.


Adoption of FIN 46R will result in
 deconsolidation  of the  Companys  trust  preferred  subsidiary,  Weststar  Financial
 Services Corporation I. Upon  deconsolidation,  the junior  subordinated  debentures
issued by the Company to the trust will be included in a new caption  entitled  long-term
debt (instead of the trust  preferred  securities)  and the Companys  equity interest in
the trust will be included in other assets.  If this trust was  deconsolidated  as of
September 30, 2004 and December 31, 2003,  the effect on the  Companys  balance  sheets
for both dates would be an increase in other  assets of $124,000  with a  corresponding
 increase in long-term debt. The deconsolidation of the trust will not materially impact
net income.


The trust  preferred  securities
 presently  qualify as Tier 1  regulatory  capital and are reported in Federal  Reserve
 regulatory reports  as a  minority  interest  in a  consolidated  subsidiary.  The
 junior  subordinated  debentures  do not  qualify as Tier 1 regulatory  capital.  On
July 2, 2003,  the Board of  Governors  of the Federal  Reserve  issued a letter,  SR
03-13,  stating  that notwithstanding  FIN 46, trust  preferred  securities  will
 continue to be included in Tier 1 capital  until notice is given to the contrary.  There
can be no assurance  that the Federal  Reserve  will  continue to allow  institutions  to
include  trust  preferred securities in Tier I capital for regulatory  capital  purposes.
 In the event of a  disallowance,  there would be a reduction in the Companys
 consolidated  capital ratios.  However,  the Company  believes that its subsidiary  bank
would remain well  capitalized under  Federal  Reserve  Board  guidelines  and that the
Company  would still exceed the  regulatory  required  minimums for capital adequacy
purposes.


Forward Looking
Statements


The discussions  presented in this
quarterly  report contain  statement that could be deemed forward looking  statements
 within the meaning of the  Securities  Exchange  Act of 1934 and  Private  Securities
 Litigation  Reform  Act of 1995,  which  statements  are inherently  subject to risks
and  uncertainties.  Forward looking  statements are statement that include  projections,
 predictions, expectations  or beliefs about future events or results or otherwise are
not  statements of historical  fact.  Such  statements  are often  characterized  by the
use of  qualifying  works  (and  their  derivatives)  such  as  expects,
 anticipates,  believes, estimates,  plans,  projects, or other  statements
 concerning  opinions or judgments of the Company and its management  about future
events.  Factors that could influence the accuracy of such forward looking  statements
 include,  but are not limited to, the financial  success or changing  strategies of the
Companys  customers or vendors,  actions of government  regulators,  the level of market
interest rates, and general economic conditions.


19




Item 3.     Controls and
Procedures


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


20




Part II. OTHER
INFORMATION


Item 4.
Submission
of Matters to a Vote of Security HoldersNone.Item 6.
Exhibits(a)
Exhibits.31.1  
Certification of the Chief Executive  Officer  pursuant to Rule 13a-14(a) under the
Securities  Exchange Act                           of 1934 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2  
Certification of the Chief Financial  Officer  pursuant to Rule 13a-14(a) under the
Securities  Exchange Act                           of 1934 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1  
Certification by the Chief Executive  Officer pursuant to 18 U.S.C.  1350 as adopted
pursuant to Section 906                           of the Sarbanes-Oxley Act of 200232.2  
Certification by the Chief Financial  Officer pursuant to 18 U.S.C.  1350 as adopted
pursuant to Section 906                           of the Sarbanes-Oxley Act of 200221




SIGNATURES



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



WESTSTAR FINANCIAL SERVICES CORPORATIONDate: November 4, 2004
        By:
        /s/ G. Gordon Greenwood

G. Gordon Greenwood
President and Chief Executive OfficerDate: November 4, 2004
        By:
        /s/ Randall C. Hall

Randall C. Hall
Executive Vice President and Chief Financial
and Principal Accounting Officer22