U.S. SECURITIES AND EXCHANGE COMMISSION




Washington, D.C. 20549





FORM 10-K





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF


THE SECURITIES EXCHANGE ACT OF 1934





FOR FISCAL YEAR ENDED DECEMBER 31, 2009





Commission File Number:   000-30515





WESTSTAR FINANCIAL SERVICES CORPORATION


(Exact name of registrant as specified in its charter)





NORTH CAROLINA


(State of Incorporation)





56-2181423


(I.R.S. Employer Identification No.)





79 Woodfin Place


Asheville, North Carolina  28801


(Address of Principal Executive Office)





(828) 252-1735


(Registrant’s telephone number, including area code)





Securities registered pursuant to Section 12(b) of the Act:


Title of each class
Name of each exchange on which registeredNone
Not applicable





Securities registered pursuant to Section 12(g) of the Exchange Act:





COMMON STOCK, $1.00 PAR VALUE





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YESoNOT





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  YESoNOT





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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.  Yes T   Noo





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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o





Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  T





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   o   Accelerated filer   o   Non-accelerated filer   o   (Do not check if a smaller company) Smaller reporting company   T





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





The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 30, 2009 was approximately $12,346,009.





The number of shares of the Registrant’s Common Stock outstanding on April 13, 2010 was 2,167,517.







1


Documents Incorporated by Reference:





PART III: Definitive Proxy Statement dated May 20, 2010 as filed pursuant to Section 14 of the Securities Exchange Act of 1934 for the 2010 Annual Meeting of Shareholders.


2


FORM 10-K CROSS-REFERENCE INDEX








20102009
ProxyForm 10-K
StatementPage
PagePART IItem 1 -
Business
4
n/aItem 1A –
Risk Factors
8
n/aItem 1B –
Unresolved Staff Comments
8
n/aItem 2 -
Properties
8
n/aItem 3 -
Legal Proceedings
8
n/aItem 4 –
[Reserved]
8
n/aPART IIItem 5 -
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
9
n/aItem 6 -
Selected Financial Data
10
n/aItem 7 -
Management’s Discussion and Analysis of Financial Condition and Resultsof Operation
10
n/aItem 7A –
Quantitative and Qualitative Disclosures About Market Risk
26
n/aItem 8 -
Financial Statements and Supplementary Data
27
n/aItem 9 -
Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure
56
n/aItem 9A (T) -
Controls and Procedures
56
n/aItem 9B -
Other Information
56
n/aPART IIIItem 10 -
Directors, Executive Officers, and Corporate Governance
57
5-14Item 11 -
Executive Compensation
57
13-14, 15-18Item 12 –
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
57
3-5Item 13 -
Certain Relationships and Related Transactions, and Director Independence
57
8-9, 14Item 14 –
Principal Accountant Fees and Services
57
11-13PART IVItem 15 –
Exhibits and Financial Statement SchedulesSignatures

60
n/a








* Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included in or incorporated by reference into this filing were filed with the Securities and Exchange Commission. Weststar Financial Services Corporation provides these documents by mail upon request.


3
 Index


PART I





ITEM 1:
BUSINESS





General





Weststar Financial Services Corporation (the “Registrant” or the “Company”) was incorporated on February 8, 2000, for the purpose of becoming the holding company for The Bank of Asheville (the “Bank”), a North Carolina-chartered bank that opened for business as a community bank in Asheville, Buncombe County, North Carolina, in December 1997. Effective April 28, 2000, the Company acquired all of the outstanding shares of common stock of the Bank and became the Bank’s sole shareholder and bank holding company.  On October 8, 2003, the Company formed Weststar Financial Services Corporation I (the “Trust”), a Delaware statutory trust.  The Trust has had no operations subsequent to its formation in 2003 other than the issuance of trust preferred securities.  At this time, the Company does not engage in any business activities on its own.  It only owns the Bank, which engages in the commercial banking business, and the Trust, which was the legal entity formed for its issuance of $4.0 million in trust preferred securities in 2003.  On October 19, 2004, the Company formed Bank of Asheville Mortgage Company, LLC, a mortgage broker, of which the Company owned a 50% interest.  Bank of Asheville Mortgage Company, LLC was dissolved effective October 31, 2008.





Primary Market Area





The Registrant’s market area consists of Asheville, Buncombe County, North Carolina and surrounding areas.  Buncombe County is part of the Asheville Metropolitan Statistical Area.  Asheville is the county seat and the industrial center of Buncombe County with a population of approximately 74,770.  In addition, Asheville is the commercial hub for several other prosperous towns in Buncombe County, including Arden, Biltmore Forest, Black Mountain, Montreat, Skyland, Weaverville and Woodfin.  The total population of Buncombe County is 235,125.  Statistics are the latest issued by the Asheville Metro Business Research Center.





Competition





Commercial banking in North Carolina is extremely competitive in large part due to a long history of statewide branching. Registrant competes in its market areas with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of Registrant’s competitors have broader geographic markets and higher lending limits than Registrant and are also able to provide more services and make greater use of media advertising. In Buncombe County as of June 30, 2009 (the latest date for which statistics are available) there were 91offices of 19 different commercial and savings banks (including the largest banks in North Carolina), as well as offices of credit unions and various other entities engaged in the extension of credit.  The Registrant accounted for approximately 5.00% of total deposits held by commercial banks and savings banks in Buncombe County.





The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of the Registrant’s competitors. In addition, as a result of interstate banking, out-of-state commercial banks have acquired North Carolina banks, which has heightened the competition among banks in North Carolina.





Despite the competition in its market area, the Registrant believes that it has certain competitive advantages that distinguish it from its competition. Registrant believes that its primary competitive advantages are its strong local identity and affiliation with the community and its emphasis on providing specialized services to small- and medium-sized business enterprises, as well as professional and upper-income individuals.   Registrant is locally owned and managed, making credit and other decisions that have a direct bearing on faster service and more efficiently obtained credit.  Registrant offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. Registrant offers many personalized services and attracts customers by being responsive and sensitive to their individualized needs. Registrant also relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional newspaper and radio media to attract new customers. To enhance a positive image in the community, Registrant supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.





Employees





The Bank currently employs 55 full-time equivalent employees.  Registrant does not have any officers or employees who are not also officers or employees of the Bank.  None of the Registrant’s employees are covered by a collective bargaining agreement.  The Registrant believes its relations with its employees to be good.





Regulation





Registrant is extensively regulated under both federal and state law. Generally, these laws and regulations are intended to


4
 Index


protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Registrant.





THE BANK HOLDING COMPANY ACT. The Registrant is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is required to register as such with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”).  A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, more than 5% of the voting stock of any bank, unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company must engage, with limited exceptions, in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of a company the activities of which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.





STATE LAW. The Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail its resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and acquisitions of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.





DEPOSIT INSURANCE.  As a member institution of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s deposits are insured up to a maximum of $250,000 per depositor through the deposit insurance fund (“DIF”), administered by the FDIC. An increase in basic federal deposit insurance coverage from $100,000 to $250,000 per depositor became effective on October 3, 2008, as part of the Emergency Economic Stabilization Act of 2008. The legislation as amended provides that the basic deposit insurance limit will return to $100,000 per depositor after December 31, 2013.





Each member institution is required to pay semi-annual deposit insurance premium assessments to the FDIC. During 2009, a large number of bank failures put pressure on the DIF. In an effort to replenish the DIF, the FDIC implemented a special assessment of five basis points of each insured institution’s assets minus Tier 1 capital as of June 30, 2009. In addition, the FDIC required insured institutions to prepay their estimated quarterly risk-based deposit insurance assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. These prepayments were made on December 30, 2009. The DIF assessment rates vary based on an institution’s capital position and other supervisory factors. The assessment rate for the prepayments discussed above was equal to the Bank’s total base assessment rate in effect as of September 30, 2009. The assessment rate will be increased by three basis points for all of 2011 and 2012.





The Bank of Asheville has chosen to participate in the transaction guarantee component of the FDIC Temporary Liquidity Guarantee Program. As of October 14, 2008, all non-interest-bearing transaction deposit accounts at our participating FDIC-Insured Institution, including all personal and business checking deposit accounts that do not earn interest, are fully insured for the entire amount in the deposit account. This unlimited insurance coverage as amended is temporary and will remain in effect until June 30, 2010.





CAPITAL REQUIREMENTS. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.





A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock, minority interests in certain equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions and restricted core capital elements, including trust preferred securities. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets


5
 Index


of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2009, the Company was classified as “well-capitalized” with Tier 1 and Total Risk - Based Capital of 10.59% and 11.84%, respectively.





The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk (“IRR”) exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s IRR management include a measurement of board of directors and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.





Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the heading “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of Registrant to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.





FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. FDICIA provides for, among other things:





·
publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,





·
the establishment of uniform accounting standards by federal banking agencies,





·
the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital,





·
additional grounds for the appointment of a conservator or receiver, and





·
restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.





FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.





A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.





FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.





MISCELLANEOUS. The dividends that may be paid by Registrant are subject to legal limitations.  The Bank is the only source of dividends that may be paid by the Registrant.  In accordance with North Carolina banking law, dividends may not be paid by the Bank unless its capital surplus is at least 50% of its paid-in capital.





The earnings of Registrant will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques


6
 Index


are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.





The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Registrant. Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999 allows a bank holding company to qualify as a “financial holding company” and, as a result, be permitted to engage in a broader range of activities that are “financial in nature” and in activities that are determined to be incidental or complementary to activities that are financial in nature. The Gramm-Leach-Bliley Act amends the Bank Holding Company Act to include a list of activities that are financial in nature, and the list includes activities such as underwriting, dealing in and making a market in securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve Board is authorized to determine other activities that are financial in nature or incidental or complementary to such activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in certain of the activities permitted for financial holding companies.  The Registrant has elected not to register as a financial holding company.





Registrant cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on Registrant’s operations.





On October 26, 2001, the USA PATRIOT Act of 2001 was enacted.  This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions.  The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operation of financial institutions.  This act has increased the overall cost of our regulatory compliance activities.





The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October 3, 2008. The purpose of this law is to restore liquidity and stability to the financial system, while minimizing any potential long term negative impact on taxpayers. The law authorized the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. The program under which the asset purchase will be administered was referred to as the Troubled Asset Relief Program (TARP).





The law also temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The higher insurance limits took effect immediately and will be in effect through December 31, 2013, as amended. Additionally, the Federal Deposit Insurance Corporation (FDIC) announced on October 14, 2008, a new program aimed at strengthening consumer confidence and encouraging liquidity in the banking system.





The Temporary Liquidity Guarantee Program (TLGP) guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and provides full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. The program provides a three-year guarantee of newly issued debt and increased insurance coverage through June 30, 2010, as amended. This two-pronged program will be funded through special fees paid by the financial institutions participating. The Company elected to participate in full coverage of non-interest bearing transaction accounts, but opted not to participate in the guarantee of senior unsecured debt.





Also on October 14, 2008, the U.S. Department of Treasury (“Treasury”) announced a voluntary Capital Purchase Program (CPP) to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. The Treasury was authorized to purchase up to $250 billion of senior preferred stock in financial institutions. The program was available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities that elected to participate. Treasury determined eligibility and allocations for interested parties after consultation with the appropriate federal banking agency. The minimum subscription amount available to a participating institution was 1 percent of risk-weighted assets. The maximum subscription amount was the lesser of $25 billion or 3 percent of risk-weighted assets.





Participation in these various programs carries certain restrictions with respect to the payment of dividends to common shareholders and executive compensation.  In January 2009 the Company received notice that it had received preliminary approval for $5,075,000 under the Capital Purchase Program.  However, based upon analysis, the Company elected not to participate in the program.  The Company’s capital ratios are substantially in excess of “well capitalized” regulatory ratios, and its asset quality has been better than the industry average.  The Company concluded that the significant expense of the program and challenge to deploy the capital prudently and profitably were inconsistent with its long-term strategic objectives, and that participation in the CPP would not be in the best interest of Company shareholders.  The Treasury concluded the Capital Purchase Program on December 31, 2009.


7
 Index


ITEM 1A:
RISK FACTORS





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.





ITEM 1B:
UNRESOLVED STAFF COMMENTS





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.





ITEM 2:
PROPERTIES





The following table sets forth the location of the Registrant’s offices as of December 31, 2009.





APPROX.YEAR
SQUAREOFFICE LOCATION
OPENED
FOOTAGE
OWN/LEASEMain Office79 Woodfin Place
1997
10,000
OwnAsheville, NCCandler Office6 Dogwood Road
1999
1,900
Own building,Candler, NC


lease landLeicester Highway Office
2000
2,500
Own building,349 New Leicester Highway


lease landAsheville, NCSouth Asheville Office
2003
2,629
Lease1985 Hendersonville HighwayAsheville, NCReynolds Office
2006
3,212
Lease*199 Charlotte HighwayAsheville, NC


*In January 2010, the Bank purchased the building at this location and assumed the lease for the land on which the building sits.





ITEM 3:
LEGAL PROCEEDINGS





In the normal course of its operations, the Company from time to time is party to various legal proceedings. Based upon information currently available, and after consultation with its legal counsel, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the Company’s business, financial position or results of operations.





ITEM 4:
[RESERVED]


8
 Index


PART II





ITEM 5:
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND REGISTRANT’S  PURCHASES OF EQUITY SECURITIES





Market Summary





Weststar Financial Services Corporation stock is traded on the Over-The-Counter Bulletin Board under the symbol “WFSC.” There were 2,167,517 shares outstanding at December 31, 2009 owned by approximately 800 shareholders.





During 2009, 183,800 shares of the Company’s common stock were traded.  The closing price of the stock on December 31, 2009 was $3.50.





The following table represents stock prices during the trading periods.





2009
1st
2nd
3rd
4thQtr.
Qtr.
Qtr.
Qtr.High
$7.00
$6.50
$6.50
$5.75Low
$3.05
$5.75
$4.00
$3.50Close
$5.55
$5.75
$5.70
$3.50





2008
1st
2nd
3rd
4thQtr.
Qtr.
Qtr.
Qtr.High
$10.95
$11.40
$  9.85
$  8.00Low
$  9.35
$  9.10
$ 7.00
$  5.80Close
$10.58
$ 9.85
$ 7.50
$ 6.35





No cash dividends were paid in 2009 or 2008.





Stock Transfer Agent and Registrar





Registrar and Transfer Company


10 Commerce Drive


Cranford, NJ 07016


908.497.2300 or 800.368.5948





Shareholder Information





For information, contact Randall C. Hall, Executive Vice President and Secretary, Weststar Financial Services Corporation, 79 Woodfin Place, Asheville, North Carolina, 28801 or rhall@bankofasheville.com.





Annual Shareholders Meeting





The Annual Meeting of the shareholders of Registrant will be held at 3:00 p.m., Tuesday, June 29, 2010, at the Renaissance Asheville Hotel, One Thomas Wolfe Plaza, Asheville, North Carolina.





Independent Auditors





Dixon Hughes PLLC, 6525 Morrison Boulevard, Suite 516, Charlotte, NC 28211-3563





See Item 11 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.


9
 Index


ITEM 6 –
SELECTED FINANCIAL DATA





Not applicable.





ITEM 7 –
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATION





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 effective April 28, 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 decided to close the Mortgage Company, which was dissolved effective 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





The year 2009 was a period ruled by mixed economic indicators.  In an effort to stabilize the economy and stimulate growth, the Federal Reserve maintained a policy of low interest rates across the board.  This was great news for creditworthy borrowers looking to purchase or refinance a home, take out a bank loan or sign for a credit card.  However, foreclosures reached record highs.  Every attempt by the government to help homeowners save their homes from foreclosure appeared to have failed.  While the foreclosures were helpful to those looking to buy, because they resulted in a historic drop in home prices, for those losing their homes, it was tragic.  Worse yet, experts predict more foreclosures in 2010.  There were 140 bank failures in 2009, including two in North Carolina, at a cost of over $1 billion to the FDIC.  The tally of bank failures in 2009 was the highest number since 1992, when 181 banks failed.  But the total is far from 1989’s record high of 534 closures, which took place during the savings and loan crisis.  President Obama’s $787 billion stimulus plan was a semi-success.  On one hand, it was deemed successful in terms of helping people buy energy-efficient cars with the Cash for Clunkers program, as well as offering a tax credits to first-time home buyers.  However, when it came to job creation, the stimulus fell short. Overall, unemployment throughout the country skyrocketed to a high of 10.2%, its highest point in 26 years.  In Buncombe County, our primary service area, unemployment was 8.2%.  Economists have gone back and forth with whether they think the economy is recovering.  There is evidence that the recession has come to an end - at least on paper.  But with unemployment still on the rise and laid-off workers still needing government assistance to survive, the effects of the recession are sure to last for some time.


During 2009, the Company focused significant attention on working with customers, who were experiencing financial difficulties, preserving asset quality, and continuing to expand market share.   The sustained economic downturn impacted many businesses in our market ranging from real estate development to retail sales, which in turn negatively impacted consumers.  The Company took proactive measures to restructure notes for businesses and individuals, where restructuring indicated an improvement in loan collectibility.  Where there was no evidence of future cash flows, the Company worked with customers as they liquidated collateral, reorganized their businesses or initiated foreclosure or repossession, if the loan was collateral- dependent, otherwise, the loan was charged-off.





Net charge-offs during 2009 totaled $2,236,118 compared to $271,429 during 2008.  Non-performing assets totaled $25,973,097 and $521,108 at December 31, 2009 and 2008, respectively.  Loans outstanding grew by $14,235,181 or 8.31% to $185,474,873 from December 31, 2008 to December 31, 2009.  Loan growth was driven by several factors during 2009.  One factor resulted from a strong migration from the larger banks to the community banks on a national level, which was also evident in our local market.  Another growth factor included construction loan draws for projects that were committed during 2008 or early 2009.  Lastly, the Company is committed to serving the needs of the individuals and businesses within its market.  The investment portfolio increased from $23,778,449 to $25,046,500 primarily as a result of increased growth in deposits.





The Company held deposit market share in Buncombe County of approximately 5.00% as of June 30, 2009, according to the latest Federal Deposit Insurance Corporation statistics.  From December 31, 2008 to December 31, 2009 the Company’s


10
 Index


deposits grew from $170,814,106 to $197,122,741 – an increase of 15.40%.  During 2009, the majority of the Company’s deposit growth originated from a new deposit product called e-Zchecking and time-deposits.  e-Zchecking is a NOW account that pays an above-market interest rate if customers receive statements electronically, conduct at least 10 debit card transactions and receive at least one electronic deposit per month.  The Company is able to significantly offset the interest rate from fees generated on the debit card transactions and reduced statement delivery cost.  Certificates of deposit grew as rate-sensitive customers sought to lock in rates during the falling interest rate environment.





The Company’s average interest rate spread decreased slightly from 3.50% to 3.43% during 2009, complemented with net earning asset growth, resulted in an 8.80% increase in net interest income during 2009.  As a result of loan growth, charge-offs, decrease in asset quality and deterioration in the national and local economic environment, the Company added $3,218,400 to its allowance for loan losses compared to $711,285 in 2008.  The Company operates in a well-diversified market; however, it is not immune from the significant decline in the national and regional economic environment.  Local economic drivers include tourism, medical industry and light manufacturing.  Non-interest income increased $143,391 primarily as a result of increased mortgage loan origination fee income at the Bank level and increased interchange fees from debit card activities.  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 $30,590 during 2008, of which $15,295 was the Company’s portion.  Non-interest expenses totaled $6,799,336 and $6,132,224 in 2009 and 2008, respectively.  The largest increase in overhead resulted from increased premium rates and a special assessment from the FDIC as a result of bank failures.  FDIC insurance premiums totaled $415,462 and $89,255 in 2009 and 2008, respectively, - an increase of 365.48%.  Excluding the FDIC insurance premiums, other expenses increased primarily as a result of supporting loan and deposit growth.  Management monitors expenses closely and reviews each expense relative to the benefit provided.  Net loss totaled $73,222 in 2009 compared to net income of $1,301,312 in 2008.  Comprehensive income, which is the change in equity during a period excluding changes resulting from investments by shareholders and distributions to shareholders, net of tax totaled $175,331 and $1,304,927 in 2009 and 2008, respectively.





RESULTS OF OPERATIONS





The following discussion relates to operations for the year ended December 31, 2009 compared to the year ended December 31, 2008.





2009 COMPARED TO 2008








Net loss for 2009 totaled $73,222 compared to net income of $1,301,312 in 2008 or $(.03) and $.57 per diluted share for 2009 and 2008, respectively.  The return on average assets and equity, respectively, was (.03%) and (.42%) for 2009 compared to .71% and 8.20% for 2008.  The decrease in net income was primarily attributable to a compression in the Company’s net yield on earning assets, increased nonperforming assets, increased provision for loan losses to accommodate loan growth and charge-offs, increased FDIC premiums in addition to a special assessment and increased overhead to support loan and deposit growth.





Interest income, the primary source of revenue for the Company, was derived from interest-earning assets such as loans, investments and federal funds sold.  The rate earned on interest-earning assets and dollar volume of the interest-earning assets drive interest income. Interest and dividend income totaled $12,197,941 for the year ended December 31, 2009 compared to $12,227,824 in 2008.  Growth in the average balance of interest-earning assets increased from $177,046,378 to $210,532,871 or 18.91%, but was offset by a 112 basis point decrease in the rate on interest-earning assets, which resulted in an overall decreased interest income.  Interest expense, derived from interest-bearing liabilities such as deposits and borrowed funds, totaled $4,316,749 in 2009 compared to $4,984,250 in 2008.  The decrease in interest expense was primarily attributable to lower cost of funds due to repricing deposits and borrowings at lower interest rates.  The average balance of interest-bearing liabilities grew from $141,918,644 in 2008 to $175,588,263 in 2009 or 23.72%, while the cost of funds decreased 105 basis points.  The combined effect resulted in a net yield on earning assets of 3.84% in 2009 compared to 4.20% in 2008, and an interest rate spread of 3.43% in 2009 compared to 3.50% in 2008.





Primarily as a result of increased nonperforming loans, charge-offs and continued deterioration in the national and local economies, the Company added $3,218,400 to its allowance for loan losses compared to $711,285 in 2008.  Charge-offs, net of recoveries, totaled $2,236,118 for 2009 compared to $271,429 for 2008.  A significant portion of the increase in provision for loan losses was directly related to growth in nonperforming loans, which increased from $316,102 to $25,461,985, and deterioration in the economy.  Impaired loans, which include both nonaccrual and nonperforming restructured loans, are measured at net realizable value (the value of supporting collateral less costs to sell) or present value of cash flows, if not collateral- dependent.   If the net realizable value or present value of cash flows is less than the carrying value of the loan, the deficit is charged against the loan loss reserve.    During 2009, real estate values and real estate sales continued to decline on the heels of the depressed national, regional and local economies.  Real estate loans that formerly reflected low loan-to-value levels now reflect higher loan-to-value levels.  Management has taken these factors among others such as a 2-year average of


11
 Index


historic charge-off rates,  concentrations of credit, delinquency trend, economic and business conditions, external factors, lending management/staff, lending policies/procedures, loss and recovery trends, nature and volume of portfolio, nonaccrual trends, and other adjustments, problem loan trend and quality of loan review system by loan sector, into account when estimating the allowance for loans losses for both performing and nonperforming loans, which resulted in an increased provision for loan losses.  Management believes real estate values have largely returned to more stable values, which should result in a less erratic change to the loan loss reserve for this component.  However, the primary area of concern continues to center around the economy and related job growth.  Sustained growth in unemployment may necessitate additional increases to the provision for loan losses.  See “PROVISION AND ALLOWANCE FOR LOAN LOSSES” for more discussion.





Non-interest income totaled $1,782,796 in 2009 compared to $1,624,110 in 2008.  Service charge fees on deposit accounts and other fees and commissions earned account for the majority of non-interest income.  During 2009, the Company earned $1,148,852 from service charges on deposit accounts compared to $1,139,125 in 2008.  The increase resulted primarily from increased revenue from overdraft fees, which is driven by overdraft activity.  Other service fees and commissions totaled $592,264 in 2009 compared to $435,991 in 2008.  The increase was primarily a result of fees from the origination of mortgage loans at the Bank level and increased fees from Visa, MasterCard and ATM interchange fees.  During 2008, the Company and its partner in Bank of Asheville Mortgage Company, LLC agreed to dissolve the company, which closed effective October 31, 2008.   Prior to June 2008, fees from the origination of mortgage loans were originated through the Mortgage Company.  Thereafter, the Bank assumed the role as a mortgage broker for mortgage loan origination, which produced fee income of $56,600 during 2008 compared to $136,615 during 2009.  Fees from Visa, MasterCard and ATM interchange activity generated $348,995 and $288,689 for 2009 and 2008, respectively.  The Mortgage Company posted a net loss of $30,590 during 2008 of which $15,295 was the Company’s portion.  Other income, primarily the fees from the sales of checks and deposit slips, net loan servicing fees and recoveries other than loans, provided additional income of $41,680 in 2009 compared to $64,289 in 2008.





Other expenses totaled $6,799,336 in 2009 compared to $6,132,224 in 2008. Expenses increased as a result of increased expenses associated with servicing the growth in loans and deposits, foreclosure expense and increased FDIC premiums.  Salaries and benefits accounted for $3,189,128 in 2009 or 46.90% of other expenses compared to $3,186,975 or 51.97% in 2008.  Data processing fees increased from $562,139 in 2008 to $658,666 in 2009.  The increase reflects an increased number of accounts as well as account activities, increased services such as remote deposit capture, and expanded internet banking activities.  Professional fees increased from $292,866 during 2008 to $342,333 during 2009.  Expenses related to foreclosed properties totaled $109,157 in 2009 compared to $44,898 in 2008, which was related to increased volume in foreclosures.  The most significant noninterest expense during the year resulted from FDIC premiums, which increased from $89,255 in 2008 to $415,462 in 2009.  The annual assessment increased from approximately 5 basis points during 2008 to 14 basis points during 2009.  In addition, the Company was charged a special assessment in the amount of 5 basis points totaling $101,617.  The primary reason for both the special assessment and increase in premium rates was to shore up FDIC’s depository insurance fund for recent and projected bank failures.





At the end of 2009, the FDIC changed its methodology in assessing financial institutions for premiums.  One change was to charge for assessments based on a 3-year prepaid basis rather than quarterly arrears.  Another change was to base the assessment on net assets rather than total deposits.  This formula change results in financial institutions with lower capital to bear a larger portion of the assessment than those institutions which are more strongly capitalized.  The Company was assessed a prepaid premium of $1,135,670 in late December 2009.  The assessment was based on a 5% per year projected growth in deposits over the next three years and premium rates of approximately 15 basis points, 18 basis points and 18 basis points for 2010, 2011 and 2012, respectively.  The prepaid expense will be amortized over 12 quarters from 2010 to 2012. The assessment rates, including the special assessment, are subject to change at the discretion o the Board of Directors of the FDIC.








NET INTEREST INCOME





Net interest income (the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, primarily deposits) represents the most significant portion of the Company’s earnings.  It is management’s on-going policy to maximize net interest income, while maintaining an acceptable level of risk.  Net interest income totaled $7,881,192 and $7,243,574 for 2009 and 2008, respectively, representing an increase of 8.80% for 2009 over 2008 and a 7 basis point decrease in interest rate spread.  A contributing factor in the Company’s decrease in yield on earning assets resulted from the Company’s policy of reversing current year accrued, but unpaid interest on nonaccrual loans, which amounted to over $388,000 during 2009 and/or deferring interest on certain troubled debt restructures.  The Company then recognizes interest income on nonaccrual loans based upon the cash basis rather than accrual basis.   Other troubled debt restructures resume interest based upon the accrual method of accounting.  During 2009, the net yield in earnings assets declined 36 basis points from 4.20% in 2008 to 3.84% in 2009.  The Company continues efforts to maximize this spread by management of both loan and deposit rates in order to support the overall earnings growth.  The following table presents the daily average balances, interest income/expense and average rates earned and paid on interest-earning assets and interest-bearing liabilities of the Company for the last two years.


12
 Index


AVERAGE BALANCES AND INTEREST INCOME ANALYSIS


For the Years Ended December 31,


2009








2008Average








AverageAverage


Yield/


Income/


Average


Yield/


Income/Balance


Cost


Expense


Balance


Cost


ExpenseASSETS:Loans (1)

$
180,310,653



6.18
%

$
11,137,125


$
149,214,736



7.36
%

$
10,983,342Taxable securities (2)


13,474,675



4.92
%


663,004



16,659,065



5.03
%


838,416Non-taxable securities (3)


9,614,804



5.98
%


379,272



9,079,604



5.98
%


358,109Federal funds sold


925,973



.13
%


1,185



2,000,840



2.31
%


46,259Interest-bearing deposits


6,206,766



.28
%


17,355



92,133



1.84
%


1,698Total interest-earningassets


210,532,871



5.89
%


12,197,941



177,046,378



7.01
%


12,227,824All other assets


8,426,456











7,275,063Total assets

$
218,959,327










$
184,321,441LIABILITIES ANDSHAREHOLDERS’EQUITY:Interest-bearing deposits

$
166,182,214



2.37
%


3,943,643


$
132,715,285



3.37
%


4,477,689Short-term borrowings


4,394,121



3.69
%


162,027



1,079,359



1.92
%


20,696Long-term debt


5,011,928



4.21
%


211,079



8,124,000



5.98
%


485,865Total interest-bearingliabilities


175,588,263



2.46
%


4,316,749



141,918,644



3.51
%


4,984,250Other liabilities


25,853,256











26,542,201Shareholders’ equity


17,517,808











15,860,596Total liabilities andshareholders’ equity

$
218,959,327










$
184,321,441Net yield on earning-






3.84
%

$
7,881,192







4.20
%

$
7,243,574assets and net interestincome (4)Interest rate spread (5)






3.43
%










3.50
%





(1)
Nonaccrual loans have been included.


(2)
Includes investment in Federal Home Loan Bank.


(3)
Yields on tax-exempt investments have been adjusted to the tax equivalent basis using 34%.


(4)
Net yield on earning assets is computed by dividing net interest earned by average earning assets.


(5)
The interest rate spread is the interest earning assets rate less the interest earning liabilities rate.





Changes in interest income and interest expense can result from changes in both volume and rates. The following table sets forth the dollar amount of increase (decrease) in interest income and interest expense resulting from changes in the volume of interest earning assets and interest bearing liabilities and from changes in yields and rates.








Interest and Rate/Volume Variance


For the Years Ended December 31,





2009 Compared to 2008


2008 Compared to 2007Volume (1)


Rate(1)


Total


Volume (1)


Rate (1)


TotalInterest-bearing deposits in other banks

$
64,895


$
(49,238
)

$
15,657


$
(2,525
)

$
(3,337
)

$
(5,862
)Investment securities


(137,363
)


(16,886
)


(154,249
)


(81,319
)


32,104



(49,215
)Federal Funds sold


(13,113
)


(31,961
)


(45,074
)


(30,414
)


(64,222
)


(94,636
)Loans


2,104,788



(1,951,005
)


153,783



1,787,746



(2,311,643
)


(523,897
)Decrease in interest income

$
2,019,207


$
(2,049,090
)

$
(29,883
)

$
1,673,488


$
(2,347,098
)

$
(673,610
)Interest-bearing deposits

$
961,671


$
(1,495,717
)

$
(534,046
)

$
734,830


$
(941,968
)

$
(207,138
)Borrowings


9,598



(143,053
)


(133,455
)


1,973



(106,091



(104,118
)Decrease in interest expense

$
971,269


$
(1,638,770
)

$
(667,501
)

$
736,803


$
(1,048,059
)

$
(311,256
)








(1)
The rate/volume variance for each category has been allocated equally on a consistent basis between rate and volume variance.


13
 Index


LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS


(INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS)





The objectives of the Company’s liquidity management policy include providing adequate funds to meet the cash needs of depositors and borrowers, as well as providing funds to meet the basic needs for on-going operations of the Company and regulatory requirements. Depositor cash needs, particularly those of commercial depositors, can fluctuate significantly depending on both business and economic cycles, while both retail and commercial deposits can fluctuate significantly based on the yields and returns available from alternative investment opportunities. Borrower cash needs are also often dependent upon business and economic cycles. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit and standby letters of credit. As of December 31, 2009, such unfunded commitments to extend credit were $26,179,686.





Neither the Company nor its subsidiaries have historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships, limited liability companies or trusts. However, the Bank has contractual off-balance sheet obligations in the form of noncancelable operating leases with unrelated vendors. As of December 31, 2009, payments due under such operating lease arrangements were $189,255, $193,005, $198,255, $198,255 and $198,255 in 2010 through 2014, respectively.





Liquidity requirements of the Company are met primarily through two categories of funds.  The first is core deposits, which includes demand deposits, savings accounts and certificates of deposit less than $100,000.  The Company considers these to be a stable portion of the Company’s liability mix and results of on-going stable commercial and consumer banking relationships.  At December 31, 2009 and 2008, core deposits totaled $169,956,254 or 86.22%, and $144,014,424 or 84.31%, respectively, of the Company’s total deposits.





The other principal methods of funding utilized by the Company are through large denomination certificates of deposit, federal funds purchased, repurchase agreements and other short-term and long-term borrowings.  The Company’s policy is to emphasize core deposit growth rather than purchased or brokered liabilities as the cost of these funds is greater.  Upstream correspondent banks, including the Federal Home Loan Bank of Atlanta, have made available to the Company lines of credit of approximately $20.5 million.  Funding can also be borrowed from the Federal Reserve Bank’s discount window.  Funds borrowed from the Federal Reserve Bank are based upon a percentage of the underlying collateral.  The Company has incurred limited need to borrow from the Federal Reserve Bank; as a result no securities have been allocated to secure borrowings.  As of December 31, 2009, the Bank had investment securities of $374,673 pledged to secure repurchase agreements compared to $975,140 at December 31, 2008.





In the normal course of business, there are various outstanding contractual obligations that will require future cash outflows.  In addition there are commitments and contingent liabilities, such as commitments to extend credit, which may or may not require future cash outflows.  It has been the experience of the Company that deposit withdrawals are generally replaced with new deposits, thus not requiring any cash outflow.  Based on that assumption, management believes that it can meet its contractual cash obligations from normal operations.  See Note 13 to the consolidated financial statements included elsewhere in this report for more information on commitments and contingent liabilities.





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.





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 net interest 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


14
 Index


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 which tend to fluctuate with market rates. These deposits, coupled with the Company’s short-term time deposits, 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 volatility experienced in national financial markets in recent years; however, the Company does realize the importance of minimizing such volatility while at the same time maintaining and improving earnings. A common method used to manage interest rate sensitivity is to measure, over various time periods, the difference or gap between the volume of interest-earning assets and interest-bearing liabilities repricing over a specific time period. However, this method addresses only the magnitude of funding mismatches and does not address the magnitude or relative timing of rate changes. 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 the loan portfolio are generally repriced to current market rates. The Company’s balance sheet is liability-sensitive in the one-year time period; meaning that in a given period there will be more liabilities than assets subject to immediate repricing as the market rates change. Theoretically, during periods of falling rates, this results in increased net interest income. The opposite occurs during periods of rising 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 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 December 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.  In addition, the table reflects scheduled principal payments which will be received throughout the lives of mortgage-backed securities.  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.


15
 Index


INTEREST RATE SENSITIVITY (GAP ANALYSIS)


DECEMBER 31, 2009





1 – 90



91 – 180



181 – 365


Total


Non-Days


Days


Days


One Year


Sensitive


TotalInterest-earning assets:Interest bearing deposits

$
1,550,240


$
-


$
-


$
1,550,240


$
-


$
1,550,240Investment securities


449,485



317,542



492,174



1,259,201



23,354,379



24,613,580Federal Home LoanBank stock


592,300



-



-



592,300



-



592,300Loans


129,629,423



5,313,291



16,722,610



151,665,324



33,809,549



185,474,873Total interest-earning assets


132,221,448



5,630,833



17,214,784



155,067,065



57,163,928



212,230,993Interest-bearing liabilities:Time deposits


37,529,668



24,894,770



35,723,469



98,147,907



2,481,439



100,629,346All other deposits


72,924,394



-



-



72,924,394



-



72,924,394Short-term borrowings


4,374,673



-



-



4,374,673



-



4,374,673Long-term debt


4,124,000



-



-



4,124,000



-



4,124,000Total interest-bearing liabilities


118,952,735



24,894,770



35,723,469



179,570,974



2,481,439



182,052,413Interest sensitivity gap

$
13,268,713


$
(19,263,937
)

$
(18,508,685
)

$
(24,503,909
)Cumulative interestsensitivity gap






(5,995,224
)

$
(24,503,909
)Interest-earning assetsas a percent of interestsensitive liabilities


111.2
%


22.6
%


48.2
%


86.4
%Cumulative interest-earningassets as a percent of interestsensitive liabilities


111.2
%


95.8
%


86.4
%





The Company has established an acceptable range of 80% to 120% for interest-earning assets as a percent of interest sensitive liabilities for the total one year gap.





The following table presents the maturity distribution of the Company’s loans by type, including fixed rate loans.





MATURITIES AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES


AS OF DECEMBER 31, 2009





Within


One to


FiveOne


Five


Years orYear


Years


MoreCommercial, financial and agricultural

$
16,472,224


$
5,742,929


$
3,618,767Real estate – mortgage


44,853,154



40,753,270



3,237,101Predetermined rate, maturitygreater than one year


-



46,496,199



6,855,868Variable rate or maturing withinone year


61,325,378



-



-





The Company paid an average rate of 2.37% on interest-bearing deposits during 2009 compared to 3.37% during 2008.  The Company was able to improve its cost of funds as regional and national financial institutions tightened up on credit extensions, which reduced the demand for deposits, and by maintaining short-durations on certificates of deposits, which allowed the Company to reprice deposits in a falling interest rate environment.  Collectively, these activities resulted in a lower cost of funds.  Additionally, with the increased availability of funds in the market, the Company decreased outstanding certificates of deposits from other financial institutions by $5,014,382 to $16,921,351.  At December 31, 2009 the average yield on certificates of deposits was 2.04% compared to 3.23% a year earlier.  Total time deposits increased from $96,619,476 to $100,629,346 or 4.15%.  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 include 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 cost efficiently than through standard U.S. mail; these two factors effectively minimize the cost of funds on the product.  At December 31, 2008, the Company had 789 eZchecking accounts totaling $9,283,769 in deposits compared to 1,818 accounts with a balance of $29,777,082 at December 31, 2009.  Approximately 69% of these accounts represent new relationships and 31% represent existing relationships that transferred from another deposit product or opened this account in addition to other accounts


16
 Index


maintained with the Company.  Total NOW accounts increased from $18,319,836 to $43,591,452 or 137.95%.  Savings accounts grew by 30.96% to $2,890,582, while demand and money market accounts decreased by $3,656,260, partly attributable to the introduction and popularity of eZchecking.  Increased customer awareness of interest rates increases the importance of rate management by the Company.  The Company’s management continuously monitors market pricing, competitor rates, and profitability.  Deposits continue to be the principal source of funds for continued growth, so the Company attempts to structure its rates so as to promote deposit and asset growth while at the same time increasing overall profit management.  The daily average amounts of deposits of the Company are summarized below.





Average Deposits


For the Year Ended December 31, 2009





Non-interest bearing deposits

$
24,393,630Interest-bearing


166,182,214Total

$
190,575,844





The above table includes deposits of $100,000 or more, which at December 31, 2009 totaled $27,166,487.  The table below presents the maturities of deposits of $100,000 or more.





Maturities of Time Deposits of $100,000 or More


December 31, 2009





GreaterWithin


Within


Within


ThanThree


Six


Twelve


OneMonths


Months


Months


YearTime deposits of $100,000 or more

$
13,279,123


$
5,459,760


$
7,428,451


$
999,153





On October 14, 2008, the FDIC announced a new program, Temporary Liquidity Guarantee Program (“TLGP”), aimed at strengthening consumer confidence and encouraging liquidity in the banking system.  Participation in the program is voluntary and funded by participating institutions; the Company has elected to participate.  As part of the TLGP full coverage of non-interest-bearing deposit transaction accounts, regardless of amount, was instituted.  Congress had previously increased the amount of deposit insurance coverage from $100,000 to $250,000 on other accounts through December 31, 2009.  The increased insurance coverage will remain in effect until December 31, 2013.





CAPITAL RESOURCES





As of December 31, 2009 and 2008, the Company’s ratio of total capital to risk-adjusted assets was 11.84%, and 12.62%, respectively.  Average capital to average assets totaled 8.00% and 8.60% at December 31, 2009 and 2008, respectively.  The Company remains well capitalized and fully expects to be able to meet future capital needs caused by growth and expansion as well as regulatory requirements.  The Company is not aware of any current recommendation by regulatory authorities which if implemented would materially affect the Company’s liquidity, capital resources or operations.





As of December 31, 2009, the Trust had the following Trust Preferred Securities outstanding, and the Company had the following issues of junior subordinated debentures, all held by the Trust, outstanding:





Trust



JuniorPreferred



SubordinatedDate of

Securities

Interest

Debt Owed

Final MaturityIssuing Entity

Issuance

Outstanding

Rate

To Trust

DateWeststar Financial Ser-vices Corporation I

10/10/2003

$
4,000,000

Floating


-

10/07/2033Weststar Financial Ser-vices Corporation

10/10/2003


-

Floating

$
4,124,000

10/07/2033








The Company owns all of the common stock of the Trust, which has issued trust preferred securities in conjunction with the Company issuing junior subordinated debentures to the Trust.  The terms of the junior subordinated debentures are substantially the same as the terms of the trust preferred securities.  The Company’s obligations under the debentures and a separate guarantee agreement constitute a full and unconditional guarantee by the Company of the obligations of the Trust.





Currently, regulatory capital rules allow trust preferred securities to be included as a component of regulatory capital.  This


17
 Index


treatment has continued despite the deconsolidation of these instruments for financial reporting purposes.





The trust preferred securities bear a rate of LIBOR plus 315 basis points and pay dividends quarterly.  The rate is subject to quarterly resets.   The Company’s source of funds for the required interest payments is derived from dividends paid by the Bank.  The trust preferred securities mature 30 years from the original date of issuance, and are callable 5 years from the date of issuance.  At this time, there are no plans to call the securities.





The Company used funds from the trust preferred securities to inject approximately $3.8 million of capital into the Bank during 2003 to support growth within its existing offices and to open two additional full-service offices within its market.





LOANS





Total loans outstanding at December 31, 2009 and 2008 were $185,474,873 and $171,239,692, respectively.  Historically, the Bank has made loans within its market areas.  The Bank generally considers its primary market to be Buncombe County in North Carolina.  Emphasis is placed on commercial loans to small- and medium-sized business and consumers.  The amounts and types of loans outstanding for the past five years are shown in the following table.





LOANS


December 31,





2009





2008





2007





2006





2005% of





% of





% of





% of





% ofTotal





Total





Total





Total





TotalAmount


Loans


Amount


Loans


Amount


Loans


Amount


Loans


Amount


LoansLOANSReal Estate-Construction

$
68,712,886



37
%

$
59,486,736



35
%

$
36,559,609



27
%

$
30,224,993



25
%

$
19,350,978



19
%Mortgage


88,843,525



48
%


81,446,145



47
%


72,149,288



53
%


67,334,420



55
%


59,187,153



59
%Commercial, financial, andagricultural


25,833,920



14
%


27,923,001



16
%


24,792,538



18
%


23,318,857



19
%


19,635,598



19
%Consumer


2,254,665



1
%


2,711,134



2
%


2,569,211



2
%


1,851,043



1
%


2,531,935



3
%Subtotal


185,644,996



100
%


171,567,016



100
%


136,070,646



100
%


122,729,313



100
%


100,705,664



100
%Deferred originations fees, net


(170,123
)






(327,324
)






(336,422
)






(265,593
)






(212,062
)Total

$
185,474,873






$
171,239,692






$
135,734,224






$
122,463,720






$
100,493,602








Real estate loans comprised 85% of the portfolio in 2009 compared to 82% in 2008.  Commercial loans comprised 14% of the portfolio in 2009 compared to 16% in 2008, while consumer loans comprised 1% in 2009 and 2% in 2008.  Commercial loans of $25,833,920, consumer loans of $2,254,665 and real estate mortgage loans of $88,843,525 are loans for which the principal source of repayment is derived from the ongoing cash flow of the business and other generally recurring sources of income.  Real estate construction loans of $68,712,886 are loans for which the principal source of repayment comes from the sale of real estate or from obtaining permanent financing.





As stated previously, the primary driving factors for loan growth included a strong migration from larger banks to community banks, and loan draws on commitments entered into during the latter part of 2008 and early 2009.  Loan growth also reflected the Company’s commitment to meet the needs of local borrowers, both existing and new.  Total non-owner occupied loans increased from $88,076,455 to $93,004,204.  These loans primarily represent residential acquisition and development (“ADC) real estate loans, which increased from $57,712,174 to $66,364,620 and commercial real estate, which decreased from $30,268,093 to $26,560,538.  Residential ADC loans consist of short-term construction facilities with the majority having takeouts for permanent financing.  Commercial real estate non-owner occupied loans decreased as a result of net loan payoffs.  Commercial real estate owner-occupied increased from $28,310,431 to $34,998,710 as a result of loan draws on new and previously committed construction projects.  Commercial and industrial loans decreased from $27,923,001 to $25,833,920 primarily due to net payoffs.  Residential mortgage loans increased from $14,508,346 to $18,223,953 primarily in the first lien, closed end loans, due to the Company’s commitment to service local customers in an economy where mortgage financing alternatives became increasingly difficult.  Home equity lines of credit increased from $10,037,649 to $11,329,544 as primarily as a result of increased draws on available lines of credit, while consumer loans remained relatively flat at $2,254,665.





The Bank has a diversified loan portfolio with two notable concentrations.  While management believes there is no concentration to any one borrower, a concentration does exist among a group of interrelated parties.  The Bank has funded a total of 14 commercial notes totaling in excess of $13,000,000 to individuals, who appear to have interrelated business connections; a portion of which is secured by residential lots in an upscale development that has filed for protection under Chapter 11 bankruptcy.  The individual borrowers, however, had not filed bankruptcy.  All notes to group of related parties were classified as nonaccrual at year end, and had been written-down to net realizable values.  Management monitors these loans closely and meets with the borrowers on a frequent basis.


18
 Index


The Bank’s loan portfolio also reflects a concentration in real estate lending; however, that lending is spread across a diverse group of businesses and industries.  The Bank further 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 27% 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.  Additionally, in the normal owner-occupied loan situation, personal guarantees for the loan are present. Lastly, the Bank also contracts with a third party loan reviewer to evaluate a selection of loans on a quarterly basis.  The reviewer provides feedback on quality of loan underwriting, timeliness of customer financial statements, independent global cash flow analysis, concentrations of credit risk and loan risk grading, among others.  Management believes this third party review to be an integral part of its internal controls and risk monitoring systems.





The following tables provide a more detailed analysis of the Company’s loan portfolio and allocation of the allowance for loan losses at December 31, 2009.





Loan Type





Loans

Outstanding


Nonaccrual

Loans


Nonaccrual

Loans to Loans

Outstanding


Allowance

for Loan

Losses


Allowance

to Loans

OutstandingCommercial real estate:Residential ADC

$
66,364,620


$
13,727,832



20.69
%

$
1,155,897



1.74
%Other Commercial


26,560,538



1,978,194



7.45
%


426,547



1.61
%Agricultural


79,046



-



-



1,255



1.59
%Total non-owner occupied


93,004,204



15,706,026



16.89
%


1,583,699



1.70
%Commercial real estateowner-occupied


34,998,710



4,954,493



14.16
%


492,379



1.41
%Commercial:Construction and industrial


25,833,920



3,750,470



14.52
%


878,086



3.40
%Residential mortgage:1st lien; closed end


15,981,062



826,975



5.17
%


212,297



1.33
%Junior lien; closed end


2,242,891



-



-
%


46,136



2.06
%Total residential mortgage


18,223,953



826,975



4.54
%


258,433



1.42
%Home equity lines


11,329,544



224,021



-
%


147,067



1.30
%Consumer - other


2,254,665



-



-
%


152,599



6.77
%Deferred fees/costs andunallocated reserve


(170,123
)


-



-
%


-



-
%Total

$
185,474,873


$
25,461,985



13.73
%

$
3,512,263



1.89
%








At December 31, 2009, restructured loans, including both nonaccrual and performing, were largely concentrated in the residential ADC sector of commercial real estate notes followed by owner-occupied commercial real estate notes as shown below.





Loan Type





RestructuredLoans


Restructured


Loans to LoansOutstanding


Loans


OutstandingCommercial real estate:Residential ADC

$
66,364,620


$
6,841,817



10.31
%Other Commercial


26,560,538



459,308



1.73
%Agricultural


79,046



-



-Total non-owner occupied


93,004,204



7,301,125



7.85
%Commercial real estateowner-occupied


34,998,710



1,695,614



4.84
%Commercial:Construction and industrial


25,833,920



243,835



.94
%Residential mortgage:1st lien; closed end


15,981,062



696,007



4.36
%Junior lien; closed end


2,242,891



-



-
%Total residential mortgage


18,223,953



696,007



3.82
%Home equity lines


11,329,544



394,466



3.48
%Consumer - other


2,254,665



8,804



.39
%Deferred fees/costs


(170,123
)


-



-
%Total

$
185,474,873


$
10,339,851



5.57
%


19
 Index


Restructured owner-occupied commercial real estate was comprised of four large commercial customers with combined balances of approximately $1.7 million.  Four of the six loans totaling approximately $1.1 million were in compliance with modified terms.  Restructured non-owner occupied commercial real estate of approximately $7.3 million is comprised of eight customers with a total of 12 notes.  One customer, who has loans of $1.9 million, has negotiated a sale with a potential buyer, who plans to offer an amount well in excess of the outstanding debt.  Management has been actively involved with both the buyer and seller of this project.





NONPERFORMING ASSETS





December 31,2009


2008


2007


2006


2005NONPERFORMING ASSETSNonaccrual

$
22,870,696


$
268,053


$
195,683


$
975,190


$
1,754,653Restructured loans


2,591,289



48,049



-



-



-Nonperforming loans


25,461,985



316,102



195,683



975,190



1,754,653Other real estate owned


511,112



205,006



87,787



106,000



127,000Repossessions


-



-



-



-



-Total

$
25,973,097


$
521,108


$
283,470


$
1,081,190


$
1,881,653Restructured loans not included incategories above

$
7,748,562


$
-


$
-


$
-


$
-





The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally are issued at then current market rates and have fixed expiration dates of 1 year or other termination clauses.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts outstanding do not necessarily represent future cash requirements.  Standby letters of credit represent conditional commitments issued by the Company to assure the performance of a customer to a third party. The unused portion of commitments to extend credit was $26,179,686 and $30,886,835 at December 31, 2009 and 2008, respectively.





Any loans classified by regulatory examiners as loss, doubtful, substandard or special mention that have not been disclosed hereunder, or under the “Loans” or “Asset Quality” narrative discussions do not (i) represent or result from trends or uncertainties that management expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.





For real estate loans that are collateral dependent, management may order new appraisals or utilize the most recent third party appraisals on-hand to determine the retail collateral values.  If recent appraisals have not been received by the measurement date, discounts are applied at increasing rates based upon age against the valuation on file.  Physical inspections are performed to supplement the valuation process.   If third party appraisals are not available, management may utilize in-house appraisals.   In-house appraisals are based upon most current available tax valuations supplemented with visual inspection of the property.  Tax valuations are adjusted for changes in market conditions, if needed.  Often, these are interim steps before receiving an outside appraisal.  For collateral dependent loans other than real estate, management assesses the valuation based upon borrower’s most recent financial statements or tax returns.  Liquidation costs are deducted from the valuations to determine the net realizable value.  For loans that are not collateral dependent, the Company estimates the value by discounting cash flows to present value.  The difference between the net realizable value of the loan and its carrying value, which includes any accrued and unpaid interest, if applicable, is considered to be impaired and generally charged-off against the allowance for loan losses.





During 2009, the Company took proactive measures to restructure notes for businesses and individuals, where there was evidence that restructuring would improve the collectibility of the loan.  Where there was no evidence of improving collectibility, the Company exhausted all other efforts such as placing the loan on nonaccrual and allowing the customer time to liquidate assets or pursued foreclosure/repossession, if the loan was collateral dependent, otherwise, the loan was charged-off.  Troubled debt restructures are by their nature considered impaired loans.  A troubled debt restructure classified as nonaccrual can return to accrual status after a period of consistent performance, generally 6 months. The Company automatically places a loan on nonaccrual status when principal or interest becomes 90 days delinquent.  A nonaccrual loan is considered an impaired


20
 Index


loan, but may be returned to accrual status after the borrower has demonstrated an ability to resume principal and/or interest payments in accordance with the terms of the note for a period of approximately 6 months and has provided evidence of financial strength indicating payments are likely to continue.





The recorded investment in loans that are considered to be impaired (primarily nonaccrual and restructured loans) was $33,329,137 and $349,976 at December 31, 2009 and 2008, respectively.  There was no related allowance for loan losses at December 31, 2009 or 2008, because loans either had sufficient collateral and/or cash flows or the loan had been written down to net realizable value.  The average recorded investment in impaired loans during the years ended December 31, 2009 and 2008 was $7,356,699 and $195,935, respectively.  For the years ended December 31, 2009 and 2008, the Company recognized interest income from impaired loans of $44,268 and $350 respectively.  Of the loans classified as impaired, $15,871,141 were in compliance with modified terms at December 31, 2009.





The following table presents the recorded investments in troubled debt restructure loans performing in accordance with modified terms by category at December 31, 2009:





Commercial real estate:Residential ADC

$
5,527,742Other commercial real estate


464,270Total non-owner occupied commercialreal estate


5,992,012Commercial owner occupied real estate


1,172,095Commercial, financial and agricultural


167,341Residential mortgage:First lien, closed end


274,151Junior lien, closed end


-Home equity lines of credit


198,602Consumer


8,987Total

$
7,813,188





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 or impaired loans.  At December 31, 2009, the Company identified one potential problem loan totaling $2,756 compared to one potential problem loan totaling $400,756 at December 31, 2008.





PROVISION AND ALLOWANCE FOR LOAN LOSSES





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 appropriate level in light of the inherent risk in the Company’s loan portfolio. 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 analyzes 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.  Loans are also considered impaired when the borrower is experiencing financial difficulty, and the lender grants concessions to the original note by the modification of credit terms, which is termed troubled debt restructure.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Impaired loans are divided into two categories: 1) loans where the borrower


21
 Index


transfers assets to the Company; and 2) those where credit terms are modified.  The latter includes reductions in the interest rate, extension of the maturity date and forgiveness of principal and/or interest payments.  Typically, the Company negotiates a workout agreement with the borrower to modify the original credit terms rather than initiate foreclosure proceedings against the delinquent borrower.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.  The deficit between the loan’s collateral value, if collateral dependent, or present value of cash flows, if not collateral dependent, and the amount of the loan is considered the impaired amount, which is charged against the allowance for loan losses.





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 December 31, 2009 and 2008 was $3,512,263 and $2,529,981 or 1.89% and 1.48%, respectively, of gross loans outstanding.   The ratio of net charge-offs to average loans outstanding was 1.24% and .18% during 2009 and 2008, respectively.  The allowance to nonperforming loans was 13.79% and 800.37% at December 31, 2009 and 2008, respectively.  During 2009, there was a significant increase in nonperforming loan, none of which have a loan loss reserve.  As discussed previously, these loans were written down to net realizable values.  The total allowance to performing loans was 2.19% and 1.48% at December 31, 2009 and 2008, respectively.





CHANGES IN THE ALLOWANCE FOR LOAN LOSSES








2009


2008


2007


2006


2005Balance at beginning of year

$
2,529,981


$
2,090,125


$
1,884,080


$
1,760,377


$
1,608,366Loans charged-offCommercial, financial, andagricultural


(994,756
)


(203,524
)


(171,723
)


(163,191
)


(207,106
)Real Estate:Construction


(693,002
)


-



-



-



-Mortgage


(493,467
)


-



-



(14,160
)


(129,401
)Consumer


(85,257
)


(116,409,
)


(85,018
)


(41,104
)


(33,339
)Total charge-offs


(2,266,482
)


(319,933
)


(256,741
)


(218,455
)


(369,846
)Recoveries of loans previouslycharged-off:Commercial, Financial, andagricultural


28



13,415



24,600



22,538



28,488Real Estate:Construction


-



-



-



-



-Mortgage


-



-



-



-



-Consumer


30,336



35,089



31,461



34,975



27,099Total Recoveries


30,364



48,504



56,061



57,513



55,587Net charge-offs


(2,236,118
)


(271,429
)


(200,680
)


(160,942
)


(314,259
)Provision for loan losses


3,218,400



711,285



406,725



284,645



466,270Balance at end of year

$
3,512,263


$
2,529,981


$
2,090,125


$
1,884,080


$
1,760,377Ratio of net charge-offs duringthe year to average loansoutstanding during the year


1.24
%


.18
%


.16
%


.14
%


.35
%Allowance coverage of non-performing loans


13.79
%


800.37
%


1,068.12
%


193.20
%


100.33
%





The Company operates in a well diversified market.  Major economic drivers include tourism, medical industry and light manufacturing.  While the Company’s market area has not experienced some of the extreme economic hardships portrayed nationally or within North Carolina as a whole, it has not been immune.  The unemployment rate increased from 4.8% at December 31, 2008 to 8.2% at December 31, 2009 compared to a national unemployment rate of 10.2% at December 31,


22
 Index


2009.  During 2009, lost jobs/closings/layoffs totaled 941 compared to none during 2008.  Residential mortgage sales in the market have slowed down; however the Company has not experienced the same magnitude as the national market.  While 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 resulted in additional increases in our exposure to losses during 2009 and could bear similar or higher results during 2010, if the economy does not begin to demonstrate tangible increased performance.





Nonperforming loans increased from $316,102 to $25,461,985.  Current nonaccrual loans represent 64 loans with 35 customers compared to five loans with two customers at December 31, 2008.  Although,  several customers have resumed payments, management has continued to classify the relationships as nonaccrual until such time as the borrowers demonstrate a consistent and consecutive payment history.  Restructured notes totaled $10,339,851 of which $2,591,289 was on nonaccrual and $7,748,562 was in conformance with modified terms at December 31, 2009.  This classification represents 22 loans with 14 customers.  Loans in this category were substantially in compliance with modified terms and conditions; no loan was delinquent 30 days or more at December 31, 2009.  Management has reviewed each nonperforming and restructured loan, supporting collateral, financial stability of each borrower and the relevant loan loss allowance.  Throughout 2009, management focused on working with customers, who were experiencing temporary cash flow problems, and maintained 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 the estimation methods that affected our methodology for assessing the appropriateness of the formula and specific allowance for credit losses.  However, during 2008, the Company initiated a more granular analysis to the loan portfolio.  Broad loan categories were subdivided into smaller categories with similar risks and assigned a risk weighting.  As a result, a more precise reserve was estimated that resulted in a slight decrease in the overall reserve as a percent to gross loans outstanding from 2007 to 2008.  Changes in estimates and assumptions regarding the effects 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.








ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES





December 31,


2009


2008


2007


2006


2005% of





% of





% of





% of





% ofTotal





Total





Total





Total





TotalAmount


Loans


Amount


Loans


Amount


Loans


Amount


Loans


Amount


LoansReal Estate

$
2,481,578



85
%

$
2,001,660



82
%

$
1,596,565



80
%

$
1,443,604



80
%

$
1,350,460



78
%Commercial, Financialand Agricultural


878,086



14
%


465,388



16
%


437,351



18
%


401,777



19
%


341,925



19
%Consumer


152,599



1
%


50,786



2
%


56,209



2
%


38,699



1
%


67,992



3
%Unallocated


-



-



12,147



-



-



-



-



-



-



-Total allowance

$
3,512,263



100
%

$
2,529,981



100
%

$
2,090,125



100
%

$
1,884,080



100
%

$
1,760,377



100
%








INVESTMENT SECURITIES





At December 31, 2009 and 2008, securities carried at market value totaled $25,046,500 and $23,778,449, respectively, with amortized costs of $24,613,580 and $23,750,009, respectively.  All investment securities are available for sale.  Securities available for sale are securities which will be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk or the need to increase regulatory capital or other similar factors.


23
 Index


MATURITIES AND YIELDS OF DEBT SECURITIES





December 31, 2009


Available for sale: (1)





AmortizedTYPE

Cost


Yields (2)Residential mortgage-backed securities-within 1 year

$
501,935



3.4
%U.S. Government agencies- within 1 to 5 years


1,019,655



5.0
%Residential mortgage-backed U.S. governmentagencies securities- within 1 to 5 years


999,939



3.8
%Municipal bonds- due within 1 to 5 years


1,549,329



4.9
%Total- within 1 to 5 years


3,568,923



4.6
%U.S. Government agencies- within 5 to 10 years


1,265,259



5.5
%Residential mortgage-backed U.S. governmentagencies securities- within 5 to 10 years


722,932



4.7
%Municipal bonds- within 5 to 10 years


1,642,396



5.2
%Total- within 5 to 10 years


3,630,587



5.2
%Residential mortgage-backed U.S. governmentagencies securities- greater than 10 years


9,227,386



4.8
%Municipal bonds- greater than 10 years


7,684,749



6.2
%Total- greater than 10 years


16,912,136



5.5
%Total

$
24,613,580



5.3
%








December 31, 2008


Available for sale: (1)





AmortizedTYPE

Cost


Yield (2)Mortgage-backed securities- within 1 year

$
240,221



4.2
%Mortgage-backed securities- within 1 to 5 years


2,103,448



3.7
%Municipal bonds- due within 1 to 5 years


556,143



5.0
%Total- within 1 to 5 years


2,659,591



4.0
%U.S. Government agencies- within 5 to 10 years


2,763,368



5.3
%Residential mortgage-backed U.S. governmentagencies securities- within 5 to 10 years


1,271,173



4.7
%Municipal bonds- within 5 to 10 years


1,087,083



5.5
%Total- within 5 to 10 years


5,121,624



5.2
%Residential mortgage-backed U.S. governmentagencies securities- greater than 10 years


8,095,315



5.7
%Municipal bonds- greater than 10 years


7,633,258



6.1
%Total- greater than 10 years


15,728,573



5.9
%Total

$
23,750,009



5.5
%








(1)
Securities available for sale are stated at amortized cost.


(2)
Yields on tax-exempt securities have been adjusted to the tax equivalent basis using 34%.





SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES





Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and


24
 Index


judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates which are based upon historical experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.





The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements. The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations:





ALLOWANCE FOR LOAN LOSSES





The most critical estimate concerns the Company’s allowance for loan losses. The Company records provisions for loan losses based upon known problem loans and estimated deficiencies in the existing loan portfolio. The Company’s methodology for assessing the appropriations of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a formula allowance for the remainder of the portfolio.





Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio; trends in portfolio credit quality, including delinquency and charge-off rates; and current economic conditions that may affect a borrower’s ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.





INTEREST INCOME RECOGNITION





Interest on loans is included in income as earned based upon interest rates applied to unpaid principal. Interest is not accrued on commercial and mortgage loans 90 days or more past due.  Interest is not accrued on other loans when management believes collection is doubtful.  Interest accrued during the current calendar year but not collected for loans that are charged-off or placed on non-accrual is reversed against interest income.  Accrued but uncollected interest from prior periods is charged-off against the allowance for loan losses.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.





ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES





Investments are reviewed quarterly for indicators of other-than-temporary impairment.  This determination requires significant judgment.  In making this judgment, management employs a systematic methodology quarterly that considers available quantitative and qualitative evidence in evaluating potential impairment of investments.  If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and the intent and ability to hold the investment.  Management also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, operational and financing cash flow factors, and rating agency actions.  Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other comprehensive income and/or to earnings, for the portion of loss that is credit related.  If a charge results from credit related issues, a new cost basis in the investment is established.  If market, industry and/or investee conditions deteriorate, management may incur future impairments.  No investments have been deemed other-than-temporarily impaired.





INFLATION





Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than inflation.  Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.





While the effect of inflation is normally not as significant as it is on those businesses that have large investments in plant and inventories, it does have an effect.  There are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits.  Also, general increases in the prices of goods and services will result in increased operating expense.


25
 Index


SELECTED FINANCIAL INFORMATION AND OTHER DATA





SELECTED AVERAGE BALANCES:





2009


Yield


2008


YieldNon-interest bearing demand deposits

$
24,393,630





$
25,197,933Interest-bearing demand deposits


60,333,446



1.14
%


44,657,862



1.84
%Savings deposits


2,482,344



.40
%


2,270,741



.49
%Time deposits


103,366,424



2.78
%


85,786,682



4.25
%Total deposits

$
190,575,844






$
157,913,218








SELECTED PERFORMANCE RATIOS:





Return on average assets


(.03
)%


.71
%Return on average equity


(.42
)%


8.20
%Dividend payout ratio


0
%


0
%Equity to assets ratio


8.00
%


8.60
%





FORWARD LOOKING STATEMENTS





The discussions presented in this annual report contain statements that are forward looking statements within the meaning of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward looking statements are statements 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 words (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.





OFF-BALANCE SHEET ARRANGEMENTS





The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to the meet the financing needs of its customers. See Note 13 to the consolidated financial statements included elsewhere in this report for more information regarding these commitments and contingent liabilities.





ITEM 7A:
QUANTITATIVE AND QUALITATIVEDISCLOSURESABOUT MARKET RISK





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.


26
 Index


ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS





Page No.Report of Independent Registered Public Accounting Firm
28Consolidated Balance Sheets as of December 31, 2009 and 2008
29Consolidated Statements of Operations and Comprehensive Incomefor the years ended December 31, 2009 and 2008
30Consolidated Statements of Changes in Shareholders’ Equityfor the years ended December 31, 2009 and 2008
32Consolidated Statements of Cash Flowsfor the years ended December 31, 2009 and 2008
33Notes to Consolidated Financial Statements
34


27
 Index











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board of Directors and Shareholders of


Weststar Financial Services Corporation:





We have audited the accompanying consolidated balance sheets of Weststar Financial Services Corporation and Subsidiary (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Weststar Financial Services Corporation and Subsidiary as of December 31, 2009 and 2008 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.








Charlotte, North Carolina


April 13, 2010


28
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED BALANCE SHEETS
 December 31, 2009 and 2008





ASSETS

2009


2008Cash and cash equivalents:Cash and due from banks

$
6,785,293


$
4,200,866Interest-bearing deposits


1,550,240



218,912Total cash and cash equivalents


8,335,533



4,419,778Investment securities - available for sale, at fair value(amortized cost of $24,613,580 and $23,750,009 atDecember 31, 2009, and 2008, respectively)


25,046,500



23,778,449Loans


185,474,873



171,239,692Allowance for loan losses


(3,512,263
)


(2,529,981
)Net loans


181,962,610



168,709,711Premises and equipment, net


2,415,933



2,652,007Accrued interest receivable


886,471



1,030,460Federal Home Loan Bank stock, at cost


592,300



585,600Deferred income taxes


985,802



810,921Foreclosed properties


511,112



205,006Other assets


3,019,479



667,040TOTAL

$
223,755,740


$
202,858,972LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES:Deposits:Demand

$
23,569,001


$
22,251,288NOW accounts


43,591,452



18,319,836Money market accounts


26,442,360



31,416,333Savings


2,890,582



2,207,173Time deposits of $100,000 or more


27,166,487



26,799,682Other time deposits


73,462,859



69,819,794Total deposits


197,122,741



170,814,106Short-term borrowings


4,374,673



5,919,140Accrued interest payable


372,356



565,105Other liabilities


917,762



926,050Long-term debt


4,124,000



8,124,000Total liabilities


206,911,532



186,348,401COMMITMENTS AND CONTINGENCIES (Note 13)SHAREHOLDERS’ EQUITY:Preferred stock, no par value, authorized - 1,000,000 shares;no shares issued and outstanding


-



-Common stock, $1 par value, authorized - 9,000,000 shares;outstanding shares – 2,167,517 and 2,125,747 atDecember 31, 2009 and 2008, respectively


2,167,517



2,125,747Additional paid-in capital


6,269,404



6,152,868Retained earnings


8,141,258



8,214,480Accumulated other comprehensive income


266,029



17,476Total shareholders’ equity


16,844,208



16,510,571TOTAL

$
223,755,740


$
202,858,972





See Notes to Consolidated Financial Statements


29
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


Years Ended December 31, 2009 and 2008





2009


2008INTEREST AND DIVIDEND INCOME:Interest and fees on loans

$
11,137,125


$
10,983,342Federal funds sold


1,185



46,259Interest-bearing deposits


17,355



1,698Investments:Taxable interest income


661,149



812,490Non-taxable interest income


379,272



358,109Dividends


1,855



25,926Total interest and dividend income


12,197,941



12,227,824INTEREST EXPENSE:Time deposits of $100,000 or more


764,558



1,207,029Other time and interest bearing-deposits


3,179,085



3,270,660Short-term borrowings


162,027



20,696Long-term debt


211,079



485,865Total interest expense


4,316,749



4,984,250NET INTEREST INCOME


7,881,192



7,243,574PROVISION FOR LOAN LOSSES


3,218,400



711,285NET INTEREST INCOME AFTER PROVISION FORLOAN LOSSES


4,662,792



6,532,289OTHER INCOME:Service charges on deposit accounts


1,148,852



1,139,125Other service fees and commissions


592,264



435,991Equity in loss of Bank of Asheville Mortgage Company, LLC


-



(15,295
)Other


41,680



64,289Total other income


1,782,796



1,624,110OTHER EXPENSES:Salaries and wages


2,816,586



2,608,631Employee benefits


372,542



578,344Occupancy expense, net


558,118



484,065Equipment rentals, depreciation and maintenance


368,534



419,377Supplies


263,353



265,176Data processing fees


658,666



562,139Professional fees


342,333



292,866Marketing


320,149



312,234FDIC insurance premiums


415,462



89,255Audit, tax and accounting expenses


159,040



136,563(Income) expense from foreclosed properties


109,157



44,898Other


415,396



338,676Total other expenses


6,799,336



6,132,224INCOME (LOSS) BEFORE INCOME TAX PROVISION(BENEFIT)


(353,748
)


2,024,175INCOME TAX PROVISION (BENEFIT)


(280,526
)


722,863NET INCOME (LOSS)

$
(73,222
)

$
1,301,312





See Notes to Consolidated Financial Statements


30
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)


Years Ended December 31, 2009 and 2008





2009


2008OTHER COMPREHENSIVE INCOME BEFORE TAX:Unrealized holding gains on securities available for sale

$
404,480


$
5,885Tax effect


(155,927
)


(2,270
)OTHER COMPREHENSIVE INCOME, NET OF TAX


248,553



3,615COMPREHENSIVE INCOME

$
175,331


$
1,304,927BASIC NET INCOME (LOSS) PER COMMON SHARE

$
(.03
)

$
.61DILUTED NET INCOME (LOSS) PER COMMON SHARE

$
(.03
)

$
.57





See Notes to Consolidated Financial Statements


31
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


Years Ended December 31, 2009 and 2008





AccumulatedOtherAdditional





Compre-


TotalCommon Stock


Paid-In


Retained


hensive


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 gainssecurities available for sale


-



-



-



-



3,615



3,615Issuance of common stock pursuantto the exercise of stock options


7,310



7,310



12,587



-



-



19,897Tax benefit on exercise of non-qualified stock options


-



-



6,508



-



-



6,508Net income


-



-



-



1,301,312



-



1,301,312BALANCE, DECEMBER 31, 2008


2,125,747



2,125,747



6,152,868



8,214,480



17,476



16,510,571Net unrealized gainssecurities available for sale


-



-



-



-



248,553



248,553Issuance of common stock pursuantto the exercise of stock options


41,770



41,770



94,400



-



-



136,170Tax benefit on exercise of non-qualified stock options


-



-



22,136



-



-



22,136Net loss


-



-



-



(73,222
)


-



(73,222
)BALANCE, DECEMBER 31, 2009


2,167,517


$
2,167,517


$
6,269,404


$
8,141,258


$
266,029


$
16,844,208





See Notes to Consolidated Financial Statements


32
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


Years Ended December 31, 2009 and 2008





2009


2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income / (loss)

$
(73,222
)

$
1,301,312Adjustments to reconcile net income to netcash provided by operating activities:Depreciation


325,663



374,363Provision for loan losses


3,218,400



711,285Premium amortization and discount accretion, net


(28,909
)


(21,429
)Deferred income tax provision


(330,808
)


(240,597
)Loss from foreclosed properties


103,628



38,935Gain on disposals of premises and equipment


-



499(Increase) decrease in accrued interest receivable


143,989



(57,857
)(Increase) decrease in other assets


(2,352,439
)


228,662Decrease in accrued interest payable


(192,749
)


(2,605
)Increase (decrease) in other liabilities


(8,288
)


149,686Net cash provided by operating activities


805,265



2,482,254CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of securities available for sale


(5,584,936
)


(2,032,005
)Maturities of securities available for sale


4,750,274



4,394,164Net increase in loans


(16,940,512
)


(36,013,598
)Proceeds from the sales of foreclosed properties


59,479



80,547Additions to premises and equipment


(89,589
)


(45,706
)Purchase of Federal Home Loan Bank Stock


(54,200
)


(122,300
)FHLB Stock Redemption


47,500



-Net cash used in investing activities


(17,811,984
)


(33,738,898
)CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in demand deposits, NOW accountsand savings accounts


22,298,765



(26,031
)Net increase in certificates of deposits


4,009,870



21,649,121Net increase (decrease) in short-term borrowings


(4,544,467
)


4,499,471Issuance of common stock


136,170



19,897Tax benefit on exercise of nonqualified stock options


22,136



6,508Proceeds from Federal Home Loan Bank advances


1,110,000



3,550,000Maturities of Federal Home Loan Bank advances


(2,110,000
)


(2,550,000
)Net cash provided by financing activities


20,922,474



27,148,966NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


3,915,755



(4,107,678
)CASH AND CASH EQUIVALENTS:Beginning of year


4,419,778



8,527,456End of year

$
8,335,533


$
4,419,778SUPPLEMENTAL DISCLOSURE:Cash paid for interest

$
4,509,498


$
4,986,855Cash paid for income taxes

$
1,119,650


$
859,756NONCASH TRANSACTIONS:Loans transferred to foreclosed properties

$
469,213


$
236,701Net unrealized gain on investment securities availablefor sale, net of deferred income tax expense

$
248,553


$
3,615





See Notes to Consolidated Financial Statements


33
 Index


WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008





1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization - Weststar Financial Services Corporation is a holding company with one subsidiary, The Bank of Asheville (the “Bank”).  The Bank is a state-chartered commercial bank which was incorporated in North Carolina on October 29, 1997. The Bank provides consumer and commercial banking services in Buncombe County and surrounding areas. Common shares of The Bank of Asheville were exchanged for common shares of Weststar Financial Services Corporation on April 28, 2000. Weststar Financial Services Corporation formed Weststar Financial Services Corporation I (the “Trust”) during October 2003 in order to facilitate the issuance of trust preferred securities.  The Trust is a statutory business trust formed under the laws of the state of Delaware, of which all common securities are owned by Weststar Financial Services Corporation.  Bank of Asheville Mortgage Company, LLC (the “Mortgage Company”) was a state-chartered limited liability company which was organized under the laws of North Carolina on October 19, 2004 of which Weststar Financial Services Corporation was a 50% owner.  The Mortgage Company originated conventional mortgage loans.  During 2008, the Company and its partner in the Mortgage Company elected to dissolve the partnership and dissolved the Mortgage Company effective October 31, 2008.





Basis of Presentation - The consolidated financial statements include the accounts of Weststar Financial Services Corporation and its subsidiary, The Bank of Asheville (herein referred to collectively as the “Company”).  All significant intercompany accounts and transactions have been eliminated.





Accounting Standards Codification - The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009.  At that date, the ASC became FASB’s official recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The switch to ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through Topic, Subtopic, Section and Paragraph structure.





Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.





Investment Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held-to-maturity securities” and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as “trading securities” and reported at fair value, with unrealized gains and losses included in earnings. Debt securities not classified as either held-to-maturity securities or trading securities and equity securities not classified as trading securities are classified as “available-for-sale securities” and reported at fair value, with unrealized gains and losses reported as a component of other comprehensive income. Gains and losses on held for investment securities are recognized at the time of sale based upon the specific identification method. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in writedowns of the individual securities to their fair value.  In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  Premiums and discounts are recognized in interest expense or interest income, respectively, using the interest method over the period to maturity. Transfers of securities between classifications are accounted for at fair value. The Company has not classified any securities as trading or held-to-maturity securities.





Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs and any deferred fees or costs on originated loans.





Allowance for Loan Losses - 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


34
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





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.





Stock Compensation Plans - The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  The Company measures and accounts for the cost of employee services received in exchange for an award based on the grant-date fair value of the award.  The Company discloses the excess tax benefits as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.





Stock in Federal Home Loan Bank - As a requirement for membership, the Bank invested in stock of the Federal Home Loan Bank of Atlanta.  This investment is carried at cost.





Premises and Equipment and Other Long-Lived Assets - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization, computed by the straight-line method, are charged to operations over the assets’ estimated useful lives, which range from 25 to 39 years for buildings, 5 to 15 years for furniture and equipment or, in the case of leasehold improvements, the term of the lease, if shorter. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations.





The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows related to the asset is less than the stated amount of the asset, an impairment loss is recognized.





Foreclosed Properties - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying


35
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed properties.





Income Taxes - Deferred income taxes are computed using the asset and liability approach. The tax effects of differences between the tax and financial accounting bases of assets and liabilities are reflected in the balance sheet at the tax rates expected to be in effect when the differences reverse. A valuation allowance is provided against deferred tax assets when realization is deemed not to be likely. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.





Uncertainty in income taxes applies to all “tax positions” within the scope of FASB ASC 740, “Income Taxes.”  The Company applies a “more-likely-than-not” threshold for initial recognition of a tax benefit in the financial statements, and requires measurement of the amount of benefit to be recognized based upon the larger amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority.





Interest Income and Expense - The Company utilizes the accrual method of accounting. Substantially all loans earn interest on the level yield method based on the daily outstanding balance. The accrual of interest is discontinued when, in management’s judgment, the interest may not be collected.




The accrual of interest on mortgage, commercial and consumer loans is discontinued at the time the loan is 90 days delinquent.  Other personal loans are typically charged off no later than 180 days past due.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.





Interest accrued during the current calendar year but not collected for loans that are charged-off is reversed against interest income.  Accrued but uncollected interest from prior periods is charged-off against the allowance for loan losses.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, generally a period of six months.





Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.





Net Income Per Share- Basic and diluted net income per common 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 represent 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 adjustment 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 antidilution.





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:


36
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





2009


2008Weighted average number of common shares used inin computing basic net income per share


2,144,658



2,121,308Effect of dilutive stock options


-



150,669Weighted average number of common shares and dilutive potentialcommon shares used in computing diluted net income per share


2,144,658



2,271,977





Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.  The Company’s sole component of accumulated other comprehensive income is unrealized gains (losses) on securities available for sale.





New Accounting Standards – On May 15, 2008, the SEC issued a proposed rule that would require domestic and foreign companies that prepare their financial statements in accordance with U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards to submit their financial information using XBRL for periods ending on or after December 15, 2008 for the largest public companies, and within two years after that for all public companies.  In December 2008, the SEC voted to issue the final XBRL rules, which would require XBRL reporting by registrants with public float of more than $5 billion in periods ending after June 15, 2009; all other large accelerated files in periods ending after June 15, 2010; and all remaining registrants in periods ending after June 15, 2011.  XBRL reporting would apply to all periodic quarterly and annual reports, registration statements, and Form 8-K reports that contain updated or revised financial statements that appear in a periodic report.





FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  The provision of ASC Topic 820 became effective for the Company on January 1, 2008 for financial assets and financial liabilities and on January 1, 2009 for non-financial assets and non-financial liabilities (see Note 14 - Fair Value of Financial Instruments).





Additional new authoritative accounting guidance under ASC Topic 820 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to the sell the asset in an orderly transaction, and clarifies  and includes additional factors for determining when there has been a significant decrease in the market activity for an asset when the market for that asset is not active.  ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.  The new accounting guidance amended prior guidance to expand certain disclosure requirements.  The Company adopted the new authoritative accounting guidance under ASC Topic 820 during the first quarter of 2009.  Adoption of the new guidance did not significantly impact the Company’s financial statements.





In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (“ASU No. 2010-09”).  ASU No. 2010-09 establishes that an entity that is an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued.  An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated.  The amendments in ASU No. 2010-09 are effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors.  That amendment is effective for interim or annual periods ending after June 15, 2010.  Effective with the adoption of ASU No. 2010-09 on December 31, 2009, the Bank no longer discloses the date through which subsequent events have been evaluated, as the Bank evaluated subsequent events through the date the financial statements were issued.





Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available.  In such instances, a reporting entity is required to measure the fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as an asset, or (iii) another valuation technique that is


37
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





consistent with the existing principles of ASC Topic 820, such as an income approach or market approach.  The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  The foregoing authoritative accounting guidance under ASC Topic 820 became effective for the Company’s financial statements for periods ending after October 1, 2009 and did not have a significant impact on the Company’s financial position or results of operations.





An update to FSP ASC 320, “Investments in Debt and Equity Securities,” was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The update provides further guidance on Other-Than-Temporary Impairment and effects improved presentation and disclosure of other-than-temporary impairment on debt and equity securities in the financial statements. This amendment 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 other-than-temporary impairment is the difference between a security’s amortized cost basis and 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 adoption of this new guidance did not have a material effect on its financial position and results of operations.





An update to FSP ASC 825, “Financial Instruments,”was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The amendment requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  The Company’s adoption of this new guidance did not have a material effect on the Company’s financial position and results of operations.





In June 2009, FASB issued ASC 860, “Transfers and Servicing,” which eliminates the concept of a qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures, including information about continuing exposure to risks related to transferred financial assets.  This standard is effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009.  The disclosure requirements must be applied to transfers that occurred before and after the effective date.  The Company does not anticipate the adoption of this statement as of January 1, 2010 to have a material effect on its financial position and results of operations.





In June 2009, FASB issued ASC 810, “Consolidation,” which contains new criteria for determining the primary beneficiary, eliminates the exception to consolidating QSPEs, requires continual reconsideration of conclusions reached in determining the primary beneficiary, and requires additional disclosures.  This standard is effective as of the beginning of fiscal years beginning after November 15, 2009 and is applied using a cumulative effect adjustment to retained earnings for any carrying amount adjustments (e.g., for newly-consolidated Variable Interest Entities).  The Company’s adoption of this new guidance did not have a material effect on the Company’s financial position and results of operations.


38
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


2.
INVESTMENT SECURITIES





The amortized cost, gross unrealized gains and losses and fair values of investment securities at December 31, 2009 and 2008 are as follows:








Available-for-sale securities consist of the following at December 31, 2009:





Gross


GrossAmortized


unrealized


unrealized


Faircost


gains


losses


valueType and Maturity GroupResidential mortgage-backed securities -Within 1 year

$
501,935


$
-


$
(176
)

$
501,759U.S. Government agencies due –Within 1 to 5 years


1,019,655



63,885



-



1,083,540Residential mortgage-backed U.S.Government agencies securities due -Within 1 to 5 years


999,939



20,929



-



1,020,868Municipal bonds due –Within 1 to 5 years


1,549,329



60,297



-



1,609,626Total due within 1 to 5 years


3,568,923



145,111



-



3,714,034U.S. Government agencies due -Within 5 to 10 years


1,265,259



101,087



-



1,366,346Residential mortgage-backed U.S.Government agencies securities due -Within 5 to 10 years


722,932



32,432



-



755,364Municipal bonds due –Within 5 to 10 years


1,642,396



5,684



(9,887
)


1,638,193Total due within 5 to 10 years


3,630,587



139,203



(9,887
)


3,759,903Residential mortgage-backed U.S.Government agencies securities due -after 10 years


9,227,386



308,305



(48,795
)


9,486,896Municipal bonds due –after 10 years


7,684,749



50,973



(151,814
)


7,583,908Total due after years


16,912,135



359,278



(200,609
)


17,070,804Total at December 31, 2009

$
24,613,580


$
643,592


$
(210,672
)

$
25,046,500


39
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


2.
INVESTMENT SECURITIES (Continued)





Available-for-sale securities consist of the following at December 31, 2008:





Gross


GrossAmortized


unrealized


unrealized


Faircost


gains


losses


valueType and Maturity GroupMortgage-backed securities -Within 1 year

$
240,221


$
-


$
(93
)

$
240,128Residential mortgage-backed U.S.Government agencies securities due -Within 1 to 5 years


2,103,448



14,681



(2,832
)


2,115,297Municipal bonds due –Within 1 to 5 years


556,143



12,030



-



568,173Total due within 1 to 5 years


2,659,591



26,711



(2,832
)


2,683,470U.S. Government agencies due -Within 5 to 10 years


2,763,368



54,941



-



2,818,309Residential mortgage-backed U.S.Government agencies securities due -Within 5 to 10 years


1,271,173



35,494



-



1,306,667Municipal bonds due –Within 5 to 10 years


1,087,083



2,003



(3,318
)


1,085,768Total due within 5 to 10 years


5,121,624



92,438



(3,318
)


5,210,744Residential mortgage-backed U.S.Government agencies securities due -after 10 years


8,095,315



241,242



(7,095
)


8,329,462Municipal bonds due –after 10 years


7,633,258



7,573



(326,186
)


7,314,645Total due after years


15,728,573



248,815



(333,281
)


15,644,107Total at December 31, 2008

$
23,750,009


$
367,964


$
(339,524
)

$
23,778,449








For the years ended December 31, 2009 and 2008, there were no proceeds nor realized gains or losses from the sales of investment securities available for sale.





Securities with carrying values of $2,096,628 and $1,418,608 at December 31, 2009 and 2008, respectively, were pledged to secure public monies on deposit as required by law.





The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008.  These investments represent securities that the Company has the positive intent and ability to hold to maturity.  The unrealized losses on investment securities as of December 31, 2009 and 2008 are a result of volatility in the market during 2009 and 2008 and relate to 13 municipal bonds and three residential mortgage-backed securities at December 31, 2009 and 15 municipal bonds and four residential mortgage-backed securities at December 31, 2008. All unrealized losses on investment securities resulted from changes in interest rates and are considered by management to be temporary given the credit ratings on these investment securities, the duration of the unrealized loss, and our intent and ability to retain our investment in a security for a period of time sufficient to allow for any anticipated recovery in market value as well as our belief that it is more likely than not that the Company will not have to sell any such securities before recovery of cost.


40
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


2.
INVESTMENT SECURITIES (Continued)





December 31, 2009:





Less Than 12 Months


12 Months or More


TotalFair


Unrealized


Fair


Unrealized


Fair


Unrealizedvalue


losses


value


losses


value


lossesSecurities available for sale:Residential mortgage-backed U.S. Governmentagencies securities

$
2,912,885


$
(48,971
)

$
-


$
-


$
2,912,885


$
(48,971
)Municipal bonds


3,998,244



(53,226
)


1,377,766



(108,475
)


5,376,010



(161,701
)Total temporarily impairedsecurities

$
6,911,129


$
(102,197
)

$
1,377,766


$
(108,475
)

$
8,288,895


$
(210,672
)








December 31, 2008:





Less Than 12 Months


12 Months or More


TotalFair


Unrealized


Fair


Unrealized


Fair


Unrealizedvalue


losses


value


losses


value


lossesSecurities available for sale:Mortgage-backed securities

$
1,185,435


$
(10,020
)

$
-


$
-


$
1,185,435


$
(10,020
)Municipal bonds


5,123,390



(285,022
)


568,006



(44,482
)


5,691,396



(329,504
)Total temporarily impairedsecurities

$
6,308,825


$
(295,042
)

$
568,006


$
(44,482
)

$
6,876,831


$
(339,524
)








The aggregate cost of the Company’s cost method investment, Federal Home Loan Bank-Atlanta stock, totaled $592,300 and $585,600 at December 31, 2009 and 2008, respectively.  The Company estimated that the fair value equaled the cost of the investment (that is, the investment was not impaired).  In determining the impairment or lack thereof for Federal Home Loan Bank stock, the Company reviewed changes in net assets as compared to the capital stock amount of the Federal Home Loan Bank, commitments by the Federal Home Loan Bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the Federal Home Loan Bank, the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the Federal Home Loan Bank, and the liquidity position of the Federal Home Loan Bank.  Based upon management’s analysis, no impairment had occurred.  The investment in Federal Home Loan Bank stock is not reflected in investment securities; the investment is carried as a separate line item in the financial statements.








3.
LOANS





Loans at December 31, 2009 and 2008 classified by type are as follows:





2009


2008Real estate:Construction

$
68,712,886


$
59,486,736Mortgage


88,843,525



81,446,145Commercial, financial and agricultural


25,833,920



27,923,001Consumer


2,254,665



2,711,134Subtotal


185,644,996



171,567,016Net deferred loan origination fees


(170,123
)


(327,324
)Total

$
185,474,873


$
171,239,692


41
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


3.
LOANS (Continued)





Nonperforming assets at December 31, 2009 and 2008:





2009


2008Nonaccrual loans

$
22,870,696


$
268,053Restructured loans


2,591,289



48,049Nonperforming loans


25,461,985



316,102Foreclosed properties


511,112



205,006Repossessions


-



-Total

$
25,973,097


$
521,108Restructured loans not included in categories above

$
7,748,562


$
-





The recorded investment in loans totaling $33,329,137 and $349,976, which includes nonperforming and restructured loans, were considered impaired as of December 31, 2009 and 2008, respectively.  Impaired loans of $33,329,137 and $349,976 had no related allowances for loan losses at December 31, 2009 and 2008. The Company compares the net realizable value of impaired loans against the recorded investment in such loans and generally charge-off any deficit to the allowance for loan losses.  The average recorded investment in impaired loans during the years ended December 31, 2009 and 2008 was $7,356,699 and $195,935, respectively.  For the years ended December 31, 2009 and 2008, the Company recognized interest income from impaired loans of approximately $44,268 and $350, respectively.  There were no loans 90+ days past due and still accruing interest at December 31 2009 and 2008, respectively.  Impaired loans are recorded at net realizable value and therefore have no related allowance for loan losses.





Directors and officers of the Company and companies with which they are affiliated are customers of and borrowers from the Company in the ordinary course of business.  At December 31, 2008, directors’ direct and indirect indebtedness to the Company aggregated $2,194,202.  During 2009, $594,115 in new loans were made and repayments of $1,047,776 were collected, resulting in a balance of $1,740,541 at December 31, 2009.  These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transaction with other non-related borrowers.  Management does not believe these loans involve more than the normal risk of uncollectibility or present other unfavorable features.








4.
ALLOWANCE FOR LOAN LOSSES





Changes in the allowance for loan losses for the years ended December 31, 2009 and 2008 are as follows:





2009


2008Balance at beginning of year

$
2,529,981


$
2,090,125Provision for loan losses


3,218,400



711,285Charge-offs


(2,266,482
)


(319,933
)Recoveries


30,364



48,504Balance at end of year

$
3,512,263


$
2,529,981


42
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


5.
PREMISES AND EQUIPMENT





Premises and equipment at December 31, 2009 and 2008 are as follows:





2009


2008Land

$
113,900


$
113,900Land improvements


121,873



121,873Building and improvements


2,144,532



2,144,532Furniture and equipment


2,147,298



2,123,032Leasehold improvements


783,718



783,718Construction in progress


6,750



13,158Total


5,318,071



5,300,213Less accumulated depreciation and amortization


(2,902,138
)


(2,648,206
)Total

$
2,415,933


$
2,652,007





Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $325,663 and $374,363, respectively.








6.
DEPOSIT ACCOUNTS





At December 31, 2009, the scheduled maturities of time deposits are as follows:





2010

$
98,147,9072011


1,996,6402012


43,6152013


441,184Total

$
100,629,346





The Company does not hold any brokered deposits in its deposit portfolio.  Overdrawn deposit accounts totaling $281,656 were reclassified as loan balances at December 31, 2009.





7.
INCOME TAXES





The significant components of the income tax provision for the years ended December 31, 2009 and 2008 follow:





2009


2008Current tax provisionFederal

$
33,472


$
778,256State


16,810



185,204Total current provision


50,282



963,460Deferred tax provisionFederal


(274,264
)


(200,000
)State


(56,544
)


(40,597
)Total deferred tax provision


(330,808
)


(240,597
)Net provision (benefit) for income taxes

$
(280,526
)

$
722,863


43
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


7.
INCOME TAXES (Continued)





The difference between the provision for income taxes and the amounts applied by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:





2009


2008Expense computed at statutory rate of 34%

$
(120,274
)

$
688,219Effect of state income taxes


(26,224
)


95,441Tax-exempt income


(116,332
)


(110,084
)Other


(17,696
)


49,287$
(280,526
)

$
722,863








Significant components of deferred taxes at December 31, 2009 and 2008 are as follows:





2009


2008Deferred tax assets:Allowance for loan losses

$
1,025,125


$
723,071Deferred compensation


107,631



113,923Premises and equipment


17,698



-Other


56,904



29,011Total deferred tax assets


1,207,358



866,005Deferred tax liabilities:Premises and equipment


-



(7,656
)Prepaid expenses


(54,663
)


(36,462
)Net unrealized gains on available for sale securities


(166,893
)


(10,966
)Total deferred tax liabilities


(221,556
)


(55,084
)Net recorded deferred tax asset

$
985,802


$
810,921





It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes.  There were no interest or penalties accrued during the year.  The Company’s federal and state tax returns are subject to examination for the years 2006, 2007 and 2008.





8.
LEASES





The Company leases certain banking facility premises and equipment under operating lease agreements. Future minimum rental payments are as follows:





2010

$
189,2552011


193,0052012


198,2552013


198,2552014


198,255Total

$
977,023





The land for a branch office is leased from a partnership that includes a director of the Company.  The monthly rent is


44
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


8.
LEASES (continued)





$3,600, and operates on a month-to-month basis.  The terms of the lease are substantially the same as those offered for comparable transactions with non-related parties at the time the lease transition was consummated.  Rental expense charged to operations under all operating lease agreements was $245,010 and $238,125 for the years ended December 31, 2009 and 2008, respectively.








9.
STOCK OPTIONS





In 2007, the Company’s shareholders approved the Weststar Financial Services Corporation 2007 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services Corporation 2007 Incentive Stock Option Plan (“Incentive Plan”). The maximum number of shares available for grant under the Nonstatutory Plan and Incentive Plan is 50,000 and 75,000, respectively. No options were granted from the respective pools or were outstanding at December 31, 2009.





In 2001, the Company’s shareholders approved the Weststar Financial Services Corporation 2001 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services Corporation 2001 Incentive Stock Option Plan (“Incentive Plan”). Under these plans, non-employee directors and employees were granted stock options on June 20, 2001. The maximum number of shares available for grant under the Nonstatutory Plan and Incentive Plan is 164,645 and 166,485, respectively. Of the maximum number of shares available for grant, 72,943 were outstanding under the Nonstatutory Plan and 138,672 were outstanding under the Incentive Plan at December 31, 2009. Option prices for both plans are established at market value, which was $3.26, on the dates granted by the Board of Directors.





Options granted became exercisable in accordance with the vesting schedule specified by the Board of Directors in the Plan agreements. Nonstatutory stock options vested over a two-year period with 46% vested at the date of grant and 27% per year beginning one year from the date of grant. Incentive stock options vested over a four-year period with 20% vested at the date of grant and 20% per year beginning one year from the date of grant.  No vested option may be exercised more than ten years after the date of grant.





Stock option information related to the plans for the years ended December 31, 2009 and 2008 follows:





Exercise PriceShares


Per ShareNonstatutory PlanOutstanding, December 31, 2006


123,875



3.26Exercised


(5,862
)


3.26Outstanding, December 31, 2007


118,013



3.26Exercised


(3,300
)


3.26Outstanding, December 31, 2008


114,713



3.26Exercised


(41,770
)


3.26Outstanding, December 31, 2009


72,943



3.26Incentive PlanOutstanding, December 31, 2006


156,402



3.26Exercised


(13,130
)


3.26Outstanding, December 31, 2007


143,272



3.26Exercised


(4,600
)


3.26Outstanding, December 31, 2008


138,672



3.26Outstanding, December 31, 2009


138,672



3.26


45
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


9.
STOCK OPTIONS (Continued)





At December 31, 2009Outstanding Options


Exercisable OptionsRemaining


Weighted





WeightedLife


Average





AverageExercise Price


Shares


(Years)


Price


Shares


PriceNonstatutory Plan$  3.26



72,943



1.5


$
3.26



72,943


$
3.26Incentive Plan$  3.26



138,672



1.5


$
3.26



138,672


$
3.26





There were 128,933 shares available for future grants at December 31, 2009.  The aggregate intrinsic values of outstanding and exercisable shares at December 31, 2009 and 2008, respectively, were $50,787 and $782,960.  All options were vested prior to the adoption of accounting for options through expensing.








10.
EMPLOYEE BENEFIT PLANS





The Company sponsors a defined contribution 401(k) plan which allows those employees who have attained the age of 21 years and worked 1,000 hours to elect to contribute a portion of their salary to the plan in accordance with the provisions and limits set forth in the plan document. The plan was established in March 1999. The Company makes discretionary matching contributions in an amount determined each plan year to each participant who makes 401(k) savings contributions during the year. The Company may also make a discretionary profit-sharing contribution for a plan year to those participants employed during the year. The Company’s contribution to the plan was $91,463 and $94,228 for the years ended December 31, 2009 and 2008, respectively.





During 2001, a key employee entered into a salary continuation agreement with the Company providing for periodic payments at the retirement or death of the employee. The present value of the estimated liability, which was $279,196 and $295,523 at December 31, 2009 and 2008, respectively, is being accrued over the vesting period defined in the agreement, which has fully vested. The related expense (benefit) was $(16,327) and $20,635 based upon a discount rate of 5.908% and 5.920% for the years ended December 31, 2009 and 2008, respectively. The Company is the owner and beneficiary of a life insurance policy on this key employee which will be used to fund the Company’s liability under the salary continuation agreement. The total net cash surrender value of this policy at December 31, 2009 was $360,659.





11.
BORROWINGS





SHORT-TERM BORROWINGS





The Company has $2,000,000 available in overnight federal fund lines of credit and an approximately $18,460,000 open line of credit with the Federal Home Loan Bank (FHLB).  Pursuant to a collateral agreement with the FHLB, advances are collateralized by qualifying first mortgage loans.  Federal funds purchased generally represent overnight borrowing by the Company for temporary funding requirements.   Securities sold under agreements to repurchase represent short-term borrowings by the Bank collateralized by municipal securities.





There was one short-term advance from the FHLB in the amount of $4,000,000 at a fixed rate of 5.01% outstanding at December 31, 2009 with a maturity date of March 24, 2010; interest is payable monthly.  There was one overnight advance from the FHLB in the amount of $1,000,000 at a fixed rate of .46% outstanding at December 31, 2008 with a maturity date of January 2, 2008; interest at maturity.


46
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


11.
BORROWINGS (Continued)





Short-term borrowings at December 31 are summarized as follows:





2009


2008Short-term borrowings:Federal funds purchased

$
-


$
3,944,000Securities sold under agreements to repurchase


374,673



975,140Short-term borrowings


4,000,000



1,000,000Total overnight and short-term borrowings

$
4,374,673


$
5,919,140





A summary of selected data related to federal funds purchased, securities sold under agreements to repurchase and other short-term borrowed funds follows:





2009


2008Federal funds purchased:Weighted average interest rate at December 31


-
%


.95
%Maximum amount outstanding at any month-end during the year


1,788,000



3,944,000Average daily balance outstanding during the year


271,287



496,683Average annual interest rate paid during the year


.99
%


2.66
%Securities sold under agreements to repurchase:Weighted average interest rate at December 31


.25
%


.25
%Maximum amount outstanding at any month-end during the year


1,005,320



1,254,477Average daily balance outstanding during the year


730,171



510,272Average annual interest rate during the year


.25
%


1.07
%Other Short-term borrowings:Maximum outstanding at any month-end during the year


4,000,000



4,400,000Average daily balance


3,392,662



72,404Average interest rate during the year


4.64
%


2.77
%Average interest rate at end of year


5.01
%


.46
%





LONG-TERM DEBT





There were no long-term advances outstanding from the FHLB at December 31, 2009.  There was one advance from the FHLB in the amount of $4,000,000 at a fixed rate of 5.01% outstanding at December 31, 2008.  The 4,000,000 advance is due in full on March 24, 2010; interest is payable monthly.





The Company reports Weststar Financial Services Corporation I, a statutory trust (the “Trust”), which was created for the sole purpose of issuing trust preferred securities, on a deconsolidated basis.  This method of accounting results in the Company’s $124,000 investment in the common equity of the Trust being included in the condensed consolidated balance sheets as other assets with a corresponding increase to long-term debt.  The Company records greater interest expense and income received from the Trust with no effect on net income.  The income and interest expensed received from and paid to the Trust, respectively, is being included in the consolidated statements of income and comprehensive income as other noninterest income and interest expense.





As of December 31, 2009, the Trust had the following Trust Preferred Securities outstanding, and the Company had the following issues of junior subordinated debentures, all held by the Trust, outstanding:


47
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


11.
BORROWINGS (Continued)





LONG-TERM DEBT (Continued)





Trust



JuniorPreferred



SubordinatedDate of

Securities

Interest

Debt Owed

Final MaturityIssuing Entity

Issuance

Outstanding

Rate

To Trust

DateWeststar Financial Ser-vices Corporation I

10/10/2003

$
4,000,000

Floating


-

10/07/2033Weststar Financial Ser-vices Corporation

10/10/2003


-

Floating

$
4,124,000

10/07/2033





The Company owns all of the common stock of the Trust, which has issued trust preferred securities in conjunction with the Company issuing junior subordinated debentures to the Trust.  The terms of the junior subordinated debentures are substantially the same as the terms of the trust preferred securities.  The interest rate in effect is LIBOR plus 3.15%.  At December 31, 2009 the effective rate was 3.43%.  The Company’s obligations under the debentures and a separate guarantee agreement constitute a full and unconditional guarantee by the Company of the obligations of the Trust.





Currently, regulatory capital rules allow trust preferred securities to be included as a component of regulatory capital for the Company up to certain limits.  This treatment has continued despite the deconsolidation of these instruments for financial reporting purposes.





12.
REGULATION AND REGULATORY RESTRICTIONS





The Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”) and is subject to securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks.





The Company is not presently subject to any regulatory restrictions on dividends.  The Company’s ability to pay dividends depends to a large extent on the amount of dividends paid by the Bank and any other subsidiaries.  The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87.  As of December 31, 2009, the Bank had undivided profits of $7,571,272.  Additionally, current federal regulations require that the Bank maintain a ratio of total capital to assets, as defined by regulatory authorities, in excess of 6%.  As of December 31, 2009, the ratio was 8.60% for the Bank, leaving all $5,821,963 of the Bank’s undivided profits available for the payment of dividends.





The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.





Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2009, the most recent regulatory notifications categorized the Company as well capitalized under the regulatory framework for prompt corrective action.  Management believes, as of December 31, 2009 and 2008, that the Company meets all capital adequacy requirements to which it is subject. To be categorized as adequately capitalized under the regulatory framework for prompt corrective action, the Company must monitor the minimum capital ratios as set forth in the table below.


48
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


12.
REGULATION AND REGULATORY RESTRICTIONS (Continued)





The Company’s actual capital amounts and ratios are also presented in the table (dollar amounts in thousands):





Minimum To Be WellMinimum


Capitalized UnderFor Capital


Prompt CorrectiveActual


Requirement


Action ProvisionsAmount


Ratio


Amount


Ratio


Amount


RatioAs of December 31, 2009:Total Capital (to RiskWeighted Assets)Consolidated

$
23,021



11.84
%

$
N/A



N/A


$
N/A



N/ABank


21,675



11.16
%


15,534



8.00
%


19,417



10.00
%Tier 1 Capital (to RiskWeighted Assets)Consolidated


20,578



10.59
%


N/A



N/A



N/A



N/ABank


19,234



9.91
%


7,767



4.00
%


11,650



6.00
%Tier 1 Capital (toAverage Assets)Consolidated


20,578



9.11
%


N/A



N/A



N/A



N/ABank


19,234



8.52
%


9,028



4.00
%


11,284



5.00
%





Minimum To Be WellMinimum


Capitalized UnderFor Capital


Prompt CorrectiveActual


Requirement


Action ProvisionsAmount


Ratio


Amount


Ratio


Amount


RatioAs of December 31, 2008:Total Capital (to RiskWeighted Assets)Consolidated

$
22,750



12.62
%

$
N/A



N/A


$
N/A



N/ABank


21,647



12.02
%


14,406



8.00
%


18,007



10.00
%Tier 1 Capital (to RiskWeighted Assets)Consolidated


20,493



11.37
%


N/A



N/A



N/A



N/ABank


19,393



10.77
%


7,203



4.00
%


10,804



6.00
%Tier 1 Capital (toAverage Assets)Consolidated


29,493



10.33
%


N/A



N/A



N/A



N/ABank


19,393



9.79
%


7,922



4.00
%


9,902



5.00
%





13.
COMMITMENTS AND CONTINGENCIES





The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts outstanding do not necessarily represent future cash requirements. Standby letters of credit represent conditional commitments issued by the Company to assure the performance of a customer to a third party. The unused portion of commitments to extend credit at December 31, 2009 and 2008 was $26,179,686 and $31,886,835, respectively.


49
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


13.
COMMITMENTS AND CONTINGENCIES (Continued)





The Company’s exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer’s creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral held varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments.





In the normal course of its operations, the Company from time to time is party to various legal proceedings. Based upon information currently available, and after consultation with its legal counsel, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the Company’s business, financial position or results of operations.





14.
FAIR VALUE OF FINANCIAL INSTRUMENTS





The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2009. These fair values estimates are based on relevant market information and information about the financial instruments.  Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for.  However, given there is no active market or observable market transaction for many of the Company’s financial instruments, the Company has made estimates of many of these fair values, which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significant affect the estimated values.  Beginning with the year ended December 31, 2008, the fair value estimates are determined in accordance with FASB ASC 820.





2009


2008Carrying


Estimated


Carrying


Estimatedamount


fair value


amount


fair value(In thousands)Assets:Cash and cash equivalents

$
8,336


$
8,336


$
4,420


$
4,420Investment securities


25,047



25,047



23,778



23,778Federal Home Loan Bank stock


592



592



586



586Loans, net


181,963



183,328



168,710



171,856Interest receivable


886



886



1,030



1,030Bank owned life insurance


361



361



225



225Liabilities:Demand deposits, NOW accounts,money market accounts, savings


96,493



96,493



74,195



74,195Time deposits


100,629



100,799



96,619



97,039Short-term borrowings


4,375



4,417



5,919



5,919Interest payable


372



372



565



565Long-term debt


4,124



4,039



8,124



8,297





Fair Value of Financial Instruments - Fair value methods and assumptions are set forth below for the Company’s consolidated financial instruments.





Cash and Cash Equivalents and Accrued Interest Receivable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments.





Investment Securities - The fair value of securities, excluding the Federal Home Loan Bank stock, is based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.


50
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


14.
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)





Loans - Fair value of loans are estimated based on discounted expected cash flows.  These cash flows include assumptions for prepayment estimates over the loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio credit, a credit risk component based on historical and expected performance of each portfolio.





Deposits - The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.





Short-term borrowings and long-term debt – The fair values are based on discounting expected cash flows at the interest rate for debt with same or similar remaining maturities and collateral requirements.





Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820, “Fair Value Measurements and Disclosures,” for financial assets and financial liabilities, which became effective January 1, 2009 for non-financial assets and non-financial liabilities.  This pronouncement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The application of ASC 820 in situations where the market for a financial asset is not active was further clarified.  The adoption of ASC 820 did not significantly impact the methods by which the Company determines the fair values of its financial assets.





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.





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.  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


51
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


14.
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)





investment in such loans.  At December 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.





Foreclosed Properties


Foreclosed assets are adjusted to fair value less estimated selling costs upon transfer of the loans to foreclosed assets.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.





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





Fair Value Measurements at December 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-salesecurities


-


$
25,046,500



-


$
25,046,500





Fair Value Measurements at December 31, 2008Quoted Pricesin Active


SignificantMarkets for


Other


SignificantIdentical


Observable


Unobservable


Assets/Assets


Inputs


Inputs


LiabilitiesDescription

(Level 1)


(Level 2)


(Level 3)


at Fair ValueAvailable-for-salesecurities


-


$
23,778,449



-


$
23,778,449


52
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


14.
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)





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





Fair Value Measurements at December 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 (1)


-


$
5,820,701


$
313,776


$
6,134,477Foreclose Properties


-



-



511,112



511,112





Fair Value Measurements at December 31, 2008Quoted Pricesin Active


SignificantMarkets for


Other


SignificantIdentical


Observable


Unobservable


Assets/Assets


Inputs


Inputs


LiabilitiesDescription

(Level 1)


(Level 2)


(Level 3)


at Fair ValueImpaired loans (1)


-



-



-



-Foreclose Properties


-



154,000



51,006



205,006


(1) Principal balances.





Effective January 1, 2008, the Company adopted the provisions of FASB ASC 825, “Financial Instruments.” Under this statement, the Company was permitted to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of this statement did not have a significant impact on the Company’s consolidated financial statements.


53
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


15.
PARENT COMPANY FINANCIAL DATA





The following is a summary of the condensed financial statements of Weststar Financial Corporation as of and for the years ended December 31, 2009 and 2008:





Condensed Balance Sheets


December 31, 2009 and 2008





2009


2008AssetsCash and due from banks

$
1,283,583


$
1,021,043Investment in The Bank of Asheville, at equity


19,499,954



19,411,593Investment in Weststar Financial Services Corporation I


124,000



124,000Other assets


102,468



155,115Total assets

$
21,010,005


$
20,711,751Liabilities and Shareholders’ EquityLiabilities:Junior subordinated debentures payable toWeststar Financial Services Corporation I

$
4,124,000


$
4,124,000Other


41,797



77,180Shareholders’ equity


16,844,208



16,510,571Total liabilities and shareholders’ equity

$
21,010,005


$
20,711,751








Condensed Statements of Operations


Years Ended December 31, 2009 and 2008





2009


2008Interest Income:Interest-bearing deposits

$
120,845


$
84,238Interest Expense:Junior subordinated debentures issued toWeststar Financial Services Corporation I


166,596



285,465Non-interest Income:Equity in earnings / (loss) of subsidiary bank


(33,532
)


1,418,127Equity in income (loss) of Bank of AshevilleMortgage Company, LLC


-



(15,295
)Other


127,223



137,170Total Non-interest Income


93,691



1,540,002Non-interest Expenses:Other


94,585



80,990Income / (loss) before income tax / (benefit)


(46,645
)


1,257,785Income tax / (benefit)


26,577



(43,527
)Net income

$
(73,222
)

$
1,301,312


54
 Index





WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2009 and 2008


15.
PARENT COMPANY FINANCIAL DATA (Continued)





Condensed Statements of Cash Flows


Years Ended December 31, 2009 and 2008





2009


2008Cash Flows from Operating Activities:Net income / (loss)

$
(73,222
)

$
1,301,312Noncash items included in net income:Equity in undistributed (earnings) / loss of TheBank of Asheville


33,532



(1,418,127
)Equity in undistributed loss of Bank of AshevilleMortgage Company, LLC


-



15,295Decrease in other assets


52,647



43,610Decrease in other liabilities


(13,247
)


(3,503
)Net cash used in operating activities


(290
)


(61,413
)Cash Flows from Investing Activities:Upstream dividends received from The Bank of Asheville


126,660



75,995Investment in Bank of Asheville Mortgage Company, LLC


-



(20,000
)Distribution of capital from Bank of Asheville MortgageCompany, LLC


-



3,713Net cash provided by investing activities


126,660



59,708Cash Flows from Financing Activities:Exercise of stock options


136,170



19,897Net cash provided by financing activities


136,170



19,897Net increase in cash


262,540



18,192Beginning


1,021,043



1,002,851Ending

$
1,283,583


$
1,021,043


55
 Index


ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE





None.





ITEM 9A(T):
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.





MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the Company's internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control−−Integrated Framework. In accordance with Section 404 of the Sarbanes−Oxley Act of 2002, management makes the following assertions:





·
Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting.





·
All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.





·
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.  In making this assessment, it used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.  Based on that assessment, we believe that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.





This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.








ITEM 9B:
OTHER INFORMATION





None.


56
 Index


PART III





ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





See pages 5-14 of Registrant’s 2010 Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b).





Code of Ethics





The Company has adopted a Code of Ethics that applies among others, to its principal executive officer and principal financial officer.  The Company’s Code of Ethics is available at http://www.bankofasheville.com.





ITEM 11:
EXECUTIVE COMPENSATION





See pages 13-14, 15-18 of Registrant’s 2010 Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b).





ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





In 2007, the Company’s shareholders approved the Weststar Financial Services Corporation 2007 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services Corporation 2007 Incentive Stock Option Plan (“Incentive Plan”). The maximum number of shares available for grant under the Nonstatutory Plan and Incentive Plan is 50,000 and 75,000, respectively. No options were granted from the respective pools or outstanding at December 31, 2009.





In 2001, the Company’s shareholders approved the Weststar Financial Services Corporation 2001 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services Corporation 2001 Incentive Stock Option Plan (“Incentive Plan”). Under these plans, non-employee directors and employees were granted stock options on June 20, 2001. The maximum number of shares available for grant under the Nonstatutory Plan and Incentive Plan is 164,645 and 166,485, respectively. Of the maximum number of shares available for grant, 72,943 were outstanding under the Nonstatutory Plan and 138,672 were outstanding under the Incentive Plan at December 31, 2009. Option prices for both plans are established at market value, which was $3.26, on the dates options were granted by the Board of Directors.  The following chart contains details of the grants:





Plan Category
Number of securities

Weighted-average


Number of securitiesto be issued upon

exercise price of


remaining availableexercise of

outstanding options,


for future issuanceoutstanding options,

warrants and rights


under equitywarrants and rights




compensation plans(excluding securitiesreflected in column (a))(a)

(b)


(c)Equity compensationplans approved by
Nonstatutory – 72,943

$
3.26



50,000security holders
Incentive – 138,672

$
3.26



78,933Equity compensationplans not approvedby security holders
None

None


NoneTotal
211,615

$
3.26



128,933





See pages 3 – 5 of Registrant’s 2010 Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b), for additional information regarding Security Ownership of Certain Beneficial Owners and Management.





ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





See pages 8-9, 14 of Registrant’s 2010 Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b).





ITEM 14:
PRINCIPAL ACCOUNTANT FEES AND SERVICES





See pages 11-13 of Registrant’s 2010 Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b).


57
 Index


PART IV





ITEM 15:
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





1.
Financial statements filed as a part of this report:





Report of Independent Registered Public Accounting Firm





Consolidated Balance Sheets as of December 31, 2009 and 2008





Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2009
 and 2008





Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2009 and
 2008





Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008





Notes to Consolidated Financial Statements





2.
Financial statement schedules required to be filed by Item 8 of this Form:





None





3.
Exhibits:





3.1
Articles of Incorporation of the Registrant1





3.2
Bylaws of the Registrant1





4.1
Specimen Certificate for Common Stock of the Registrant1





10.1
Employment Agreement between the Registrant, the Bank and G. Gordon Greenwood, dated February 9, 2008 (a management contract)7





10.2
Employment Agreement between the Bank and Randall C. Hall, dated March 20, 1998 (a management contract)1





10.3
401(k) Savings Plan of the Bank (a compensatory plan)1





10.4
2001 Incentive Stock Option Plan (a compensatory plan)2





10.5
2001 Nonstatutory Stock Option Plan (a compensatory plan)2





10.6
Amended and Restated Declaration of Trust by and between Wells Fargo Bank, N.A., as Delaware Trustee and Institutional Trustee, Weststar Financial Services Corporation, as Sponsor, and certain Administrative Trustees, dated October 10, 20033





10.7
Indenture between Weststar Financial Services Corporation and Wells Fargo Bank, N.A., as Indenture Trustee, dated October 10, 20033





10.8
Guarantee Agreement by and between Weststar Financial Services Corporation and Wells Fargo Bank, N.A., as Guarantee Trustee, dated October 10, 20033





10.9
Floating Rate Junior Subordinated Debenture of Weststar Financial Services Corporation, dated October 10, 2003 (included as Exhibit A to Exhibit 10.2)3





10.10
Employment Agreement between the Bank and John R. Hamrick, dated February 18, 2005 (a management contract)4





10.11
2007 Incentive Stock Option Plan (a compensatory plan)5


58
 Index


10.12
2007 Nonstatutory Stock Option Plan (a compensatory plan)5





21.1
Subsidiaries





23.1
Consent of Independent Registered Public Accounting Firm





31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002





31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002





32.1
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





32.2
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





99.1
2010 Proxy Statement6








1.
Incorporated by reference to the Registration Statement on Form S-4 (Registration No. 333-30200, filed with the Securities and Exchange Commission on February 11, 2000)





2.
Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 22, 2002





3.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 5, 2003





4.
Incorporated by reference to Registrant’s Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on March 7, 2007





5.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB, filed with the Securities and Exchange Commission on August 13, 2007)





6.
As filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b)





7.
Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on June 11, 2008.


59
 Index


SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATION


(Registrant)By:
/s/Randall C. HallRandall C. HallExecutive Vice PresidentChief Financial Officer and PrincipalAccounting OfficerDate:
April 13, 2010


60
 Index


In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.








/s/W. Edward Anderson

W. Edward Anderson

Director
April 13, 2010/s/M. David Cogburn, M.D.

M. David Cogburn, M.D.

Director
April 13, 2010/s/Steven D. Cogburn

Steven D. Cogburn

Director
April 13, 2010/s/G. Gordon Greenwood

G. Gordon Greenwood

Director, President & Chief Executive Officer
April 13, 2010/s/Patricia P. Grimes

Patricia P. Grimes

Director
April 13, 2010/s/Randall C. Hall

Randall C. Hall

Secretary/Treasurer

Chief Financial Officer and

Principal Accounting Officer
April 13, 2010/s/Darryl J. Hart

Darryl J. Hart

Director
April 13, 2010/s/Carol L. King

Carol L. King

Director
April 13, 2010/s/Stephen L. Pignatiello

Stephen L. Pignatiello

Director
April 13, 2010/s/Laura A. Webb

Laura A. Webb

Director
April 13, 2010/s/David N. Wilcox

David N. Wilcox

Director
April 13, 2010


61
 Index


EXHIBIT INDEX








Exhibit

Number
Exhibit
Page

Number3.1
Articles of Incorporation
*3.2
Bylaws
*4.1
Specimen Certificate for Common Stock of the Registrant
*10.1
Employment Agreement of G. Gordon Greenwood
*10.2
Employment Agreement of Randall C. Hall
*10.3
401 (k) Savings Plan
*10.4
2001 Incentive Stock Option Plan
*10.5
2001 Nonstatutory Stock Option Plan
*10.6
Amended and Restated Declaration of Trust
*10.7
Indenture between Weststar Financial Services Corporation and Wells Fargo Bank, N.A.
*10.8
Guarantee Agreement by and between Weststar Financial Services Corporation and Wells Fargo Bank, N.A.
*10.9
Floating Rate Junior Subordinated Debenture of Weststar Financial Services Corporation
*10.10
Employment Agreement of John R. Hamrick.
*10.11
2007 Incentive Stock Option Plan
*10.12
2007 Nonstatutory Stock Option Plan
*21.1
Subsidiaries
Filed

herewith23.1
Consent of Independent Registered Public Accounting Firm
Filed

herewith31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Filed

herewith31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Filed

herewith32.1
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Filed

herewith32.2
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Filed

herewith99.1
2010 Proxy Statement
**


62
 Index


*
Incorporated by reference.


**
As filed with the SEC pursuant to Rule 14a-6(b).






63