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, 2008
 
 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(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.  YES oNO
ý
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. YESoNOý
 
 Indicate
by checkmark 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.  YESýNOo
 
 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.  ý
  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):
  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   ý
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  oYes    ýNo
  The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2008 was approximately $20,878,523.
 
 The
number of shares of the Registrant’s Common Stock outstanding on March 17, 2009
was 2,146,132.
 
 Documents
Incorporated by Reference:
 
 PART III:
Definitive Proxy Statement dated March 17, 2009 as filed pursuant to Section 14
of the Securities Exchange Act of 1934 for the 2009 Annual Meeting of
Shareholders.
  1
  FORM
10-K CROSS-REFERENCE INDEX
 
 
 
 20092008
                  ProxyForm
      10-K
                  StatementPage
                  PagePART IItem 1 - Business
                  3
                  n/aItem 2 - Properties
                  6
                  n/aItem 3 - Legal Proceedings
                  6
                  n/aItem 4 - Submission of Matters to a Vote of Security
      Holders
                  6
                  n/aPART IIItem 5 - Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                  7
                  n/aItem 6 - Selected Financial Data
                  8
                  n/aItem 7 - Management’s Discussion and Analysis of Financial
      Condition and Results of Operation
                  8
                  n/aItem 8 - Financial Statements and Supplementary
      Data
                  24
                  n/aItem 9 - Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                  53
                  n/aItem 9A (T) - Controls and Procedures
                  53
                  n/aItem 9B - Other Information
                  53
                  n/aPART IIIItem 10 - Directors, Executive Officers, and Corporate
      Governance
                  54
                  5-12Item 11 - Executive Compensation
                  54
                  12-16Item 12 – Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                  54
                  3-5Item 13 -  Certain Relationships and Related
      Transactions, and Director Independence
                  54
                  6,11Item 14 – Principal Accountant Fees and
      Services
                  54
                  8-10PART IVItem 15 – Exhibits and Financial Statement
      SchedulesSignatures
                  55
                  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.
 
  2
 Index
  PART I
 
 ITEM
1:  BUSINESS
 
 General
 
 Weststar
Financial Services Corporation (the “Registrant” or the “Company”) is a bank
holding company formed in April 2000 to own all of the common stock of 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.  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 Rand
McNally Metropolitan Area.  Asheville is the county seat and the
industrial center of Buncombe County with a population of approximately
71,100.  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 224,300.  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, 2008 (the
latest date for which statistics are available) there were 88 offices 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 3.7%
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 53 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 protect depositors and borrowers, not
shareholders. To the extent that the following information describes statutory
and
  3
 Index
  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,
and each member institution is required to pay semi-annual deposit insurance
premium assessments to the FDIC. The DIF assessment rates vary based on an
institution’s capital position and other supervisory factors.  The
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 provides that the
basic deposit insurance limit will return to $100,000 per depositor after
December 31, 2009.
 
 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 is temporary and will
remain in effect until December 31, 2009.
 
 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 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, 2008, the Company was
classified as “well-capitalized” with Tier 1 and Total Risk - Based Capital of
11.37% and 12.62%, 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 director and senior management oversight, and a
determination of whether a banking organization’s procedures for comprehensive
risk
  4
 Index
  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 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
  5
 Index
  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.
 
 ITEM
2:  PROPERTIES
 
 The
following table sets forth the location of the Registrant’s offices as of
December 31, 2008.
 
 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
                        Lease199
      Charlotte HighwayAsheville,
      NC
 
 
 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.
 
 ITEM4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 Not
applicable.
  6
 Index
  PART II
 
 ITEM
5:  MARKET FOR COMMONEQUITY, 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 2,125,747 shares outstanding at
December 31, 2008 owned by approximately 800 shareholders.
 
 During
2008, 122,300 shares of the Company’s common stock were traded.  The
closing price of the stock on December 31, 2008 was $6.35.
 
 The
following table represents stock prices during the trading periods.
 
 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
                  $  6.352007
                  1st
                  2nd
                  3rd
                  4thQtr.
                  Qtr.
                  Qtr.
                  Qtr.High
                  $13.40
                  $13.76
                  $13.50
                  $12.44Low
                  $12.04
                  $12.12
                  $11.07
                  $  9.25Close
                  $12.40
                  $13.25
                  $11.95
                  $10.25
 No cash
dividends were paid in 2008 or 2007.  A 25% stock dividend effected in
the form of a 5-for-4 stock split was paid to shareholders in June
2007.  Stock prices in the table above have been adjusted to reflect
the stock dividend.
 
 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, April 28, 2009, 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.
   7
 Index
  ITEM
6 – SELECTED FINANCIAL DATA
 
 Not
applicable.
 
 ITEM
7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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
2008 was a year ruled by negative economic indicators and widespread
fear.  One of the sources of 2008’s economic troubles was that the
housing bubble burst, which sent home prices plunging and made foreclosures soar
across the nation.  In an attempt to shore up the housing market,
federal officials in September seized Fannie Mae and Freddie Mac, placing them
in a conservatorship amid concerns that steep mortgage losses were hurting their
ability to remain viable and thus constrain the mortgage market.  On
October 3, lawmakers passed the Emergency Economic Stabilization Act of 2008,
which included programs  aimed at buying up soured mortgage assets and
encouraging banks to resume lending in order to ease the growing credit
crisis.  Approximately $250 billon was used to inject equity into
banks and another $40 billion went to American Insurance Group
(“AIG”).  The “big three” automakers also pressed lawmakers for funds
to prevent a collapse in the auto industry.  In December, the National
Bureau of Economic Research confirmed that the United States had been in a
recession for a year.  In an effort to stimulate the economy, the
Federal Reserve drastically lowered interest rates by 400 basis points during
2008 to its lowest rate on record by year end.
 
 During
2008, the Company focused significant attention on maintaining asset quality,
furthering asset growth and expanding its market
share.   Management adhered to prudent underwriting standards,
expanded periodic reviews of loans of $100,000 or more, and enhanced its loan
quality monitoring systems.  Net charge-offs during 2008 totaled
$271,429 compared to $200,680 during 2007.  Non-performing assets
totaled $521,108 and $283,470 at December 31, 2008 and 2007,
respectively.  Loans outstanding grew by $35,505,468 or 26.16% to
$171,239,692 from December 31, 2007 to December 31, 2008.  The
investment portfolio decreased from $26,113,294 to $23,778,449 primarily as a
result of increased loan demand.
 
 The
Company held deposit market share in Buncombe County of approximately 3.7% as of
June 30, 2008, according to the latest Federal Deposit Insurance Corporation
statistics.  From December 31, 2007 to December 31, 2008 the Company’s
deposits grew from $149,191,016 to $170,814,106 – an increase of
14.49%.  During 2008, the majority of the Company’s deposit growth
originated from time-deposits; rate sensitive customers sought to lock in rates
during the falling interest rate environment.  Lastly, as the need for
funding loan growth intensified during the latter part of the year, the Company
increased outstanding certificates of deposits from other financial institutions
from $11,743,941 to $21,935,733.
 
 The
Company’s average interest rate spread decreased from 3.96% to 3.50% during
2008, which partially offset net earning asset growth, resulted in a 4.76%
decrease in net interest income during 2008.  As a result of loan
growth, charge-offs and a continued deterioration in the national and local
economic environment, the Company added $711,285 to its allowance for loan
losses compared to $406,725 in 2007.  The Company operates in a well
diversified market.  Major economic drivers include tourism, medical
industry and light manufacturing.  The unemployment rate remains
relatively low, and the job market appears to be stable with no major layoffs.
 Non-interest income increased $49,447 primarily as a result increased
mortgage loan origination fee income at the Bank level.  During the
second quarter, 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 the year compared to net operating losses
of $120,198 during 2007, of which $15,295 and $60,099 was the Company’s portion
during 2008 and 2007, respectively.  Securities losses totaled $1,093
during 2007 compared to none during 2008.  Non-interest expenses
totaled $6,132,224 and $5,553,236 in 2008 and 2007,
respectively.  Operating expenses increased as a result of increased
expenses associated with supporting loan and deposit
growth.  Management monitors expenses closely and reviews each expense
relative to the benefit provided.  Net income totaled $1,301,312 in
2008 compared to $2,046,006 in 2007 – a decrease of
36.40%.  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 $1,304,927 and $2,166,783 in
2008 and 2007, respectively.
 
 
  8
 Index
  RESULTS
OF OPERATIONS
 
 The
following discussion relates to operations for the year ended December 31, 2008
compared to the year ended December 31, 2007.
 
 2008
COMPARED TO 2007
 
 Net
income for 2008 totaled $1,301,312 compared to $2,046,000 in 2007 or $.57 and
$.89 per diluted share for 2008 and 2007, respectively.  The return on
average assets and equity, respectively, was .71% and 8.20% for 2008 compared to
1.24% and 14.62% in 2007.  The decrease in net income was primarily
attributable to a compression in the Company’s net interest margin following
seven Federal Open Market Committee target funds rate cut initiatives totaling
400 basis points, increased provision for loan losses to accommodate loan growth
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 income totaled
$12,227,824 for the year ended December 31, 2008 compared to $12,901,434 in
2007.  Growth in the average balance of interest-earning assets
increased from $157,701,528 to $177,046,378 or 12.27%, but was offset by a 128
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
$4,984,250 in 2008 compared to $5,295,506 in 2007.  The decrease in
interest expense was primarily attributable to lower cost of funds following
Federal Open Market Committee target funds rate cut initiatives.  The
average balance of interest-bearing liabilities grew from $122,327,327 in 2007
to $141,918,644 in 2008 or 16.02%, while the cost of funds decreased 82 basis
points.  A tight liquidity market both nationally and regionally
intensified competition among financial institutions and resulted in maintaining
a higher cost of funds than most likely would have been present during normal
market conditions and compressed the Company’s net interest margin
accordingly.  With these unprecedented challenges, the Company’s net
interest rate spread declined by 46 basis points.
 
 As a
result of loan growth, charge-offs and continued deterioration in the national
and local economies, the Company added $711,285 to its allowance for loan losses
compared to $406,725 in 2007.  Charge-offs, net of recoveries, totaled
$271,429 for 2008 compared to $200,680 for 2007.  Nonperforming assets
totaled $521,108 at the end of 2008 compared with $283,470 at the end of
2007.
 
 Non-interest
income totaled $1,624,110 in 2008 compared to $1,528,766 in
2007.  Service charge fees on deposit accounts and other fees and
commissions earned account for the majority of non-interest
income.  During 2008, the Company earned $1,139,125 from service
charges on deposit accounts compared to $1,153,611 in 2007.  The
decrease resulted primarily from less revenue from overdraft fees, which is
driven by overdraft activity.  Other service fees and commissions
totaled $435,991 in 2008 compared to $344,481 in 2007.  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 Company’s subsidiary bank assumed the role
as a mortgage broker for mortgage loan origination, which produced fee income of
$56,600.  Fees from Visa, MasterCard and ATM interchange activity
generated $288,689 and $241,304 for 2008 and 2007, respectively.  The
Mortgage Company posted a net loss of $30,590 during 2008 of which $15,295 was
the Company’s portion compared to $120,198 during 2007 of which $60,099 was the
Company’s portion.  The Company sold investment securities during
2007, which resulted in realized losses of $1,093 compared to none during
2008.  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 $64,289 in 2008 compared to $91,866 in 2007.
 
 Other
expenses totaled $6,132,224 in 2008 compared to $5,553,236 in 2007. Expenses
increased as a result of increased expenses associated with servicing the growth
in loans and deposits, and increased marketing expenses.  Salaries and
benefits accounted for $3,186,975 in 2008 or 51.97% of other expenses compared
to $2,684,511 or 48.34% in 2007.  Equipment expenses totaled $419,377
in 2008 compared to $429,588 in 2007.  (Income) expense associated
with foreclosures totaled $44,898 during 2008 compared to $(8,593) during 2007.
Data processing fees decreased by $34,539 as a result of contract negotiations
and transferring selected services to a more competitively priced
provider.  Other non-interest expenses of $1,918,835 in 2008 compared
to $1,851,052 in 2007 included sundry items such as marketing, accounting,
occupancy, and insurance.
  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
  9
 Index
  policy to
maximize net interest income, while maintaining an acceptable level of
risk.  Net interest income totaled $7,243,574 and $7,605,928 for 2008
and 2007, respectively, representing a decrease of 4.76% for 2008 over 2007 and
a 46 basis point drop in interest rate spreads.  The net interest
margin declined 73 basis points from 4.93% in 2007 to 4.20% in
2008.  Loan rates declined at a faster pace than deposit cost based on
market and competitive conditions.  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.
 
 
 AVERAGE
BALANCES AND INTEREST INCOME ANALYSIS
 For
the Years Ended December 31,
 
 2008
                              
                              
                              2007Average
                              
                              
                              
                              
                              
                              
                              
                              AverageAverage
                              
                              
                              Yield/
                              
                              Income/
                              
                              
                              Average
                              
                              
                              Yield/
                              
                              Income/Balance
                              
                              
                              Cost
                              
                              Expense
                              
                              
                              Balance
                              
                              
                              Cost
                              
                              ExpenseASSETS:Loans
      (1)
                              
                              $
                              149,214,736
                              
                              
                              
                              7.36
                              %
                              
                              $
                              10,983,342
                              
                              
                              $
                              127,403,492
                              
                              
                              
                              9.03
                              %
                              
                              $
                              11,507,239Taxable
      securities (2)
                              
                              
                              16,659,065
                              
                              
                              
                              5.03
                              %
                              
                              
                              838,416
                              
                              
                              
                              18,590,095
                              
                              
                              
                              4.92
                              %
                              
                              
                              914.872Non-taxable
      securities (3)
                              
                              
                              9,079,604
                              
                              
                              
                              5.98
                              %
                              
                              
                              358,109
                              
                              
                              
                              8,697,843
                              
                              
                              
                              5.76
                              %
                              
                              
                              330,868Federal
      funds sold
                              
                              
                              2,000,840
                              
                              
                              
                              2.31
                              %
                              
                              
                              46,259
                              
                              
                              
                              2,836,469
                              
                              
                              
                              4.97
                              %
                              
                              
                              140,895Interest-bearing
      deposits
                              
                              
                              92,133
                              
                              
                              
                              1.84
                              %
                              
                              
                              1,698
                              
                              
                              
                              173,629
                              
                              
                              
                              4.35
                              %
                              
                              
                              7,560Total
      interest-earning assets
                              
                              
                              177,046,378
                              
                              
                              
                              7.01
                              %
                              
                              
                              12,227,824
                              
                              
                              
                              157,701,528
                              
                              
                              
                              8.29
                              %
                              
                              
                              12,901,434All
      other assets
                              
                              
                              7,275,063
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,961,999Total
      assets
                              
                              $
                              184,321,441
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              165,663,527LIABILITIES
      AND
                                SHAREHOLDERS’
      EQUITY:Interest-bearing
      deposits
                              
                              $
                              132,715,285
                              
                              
                              
                              3.37
                              %
                              
                              
                              4,477,689
                              
                              
                              $
                              113,156,413
                              
                              
                              
                              4.14
                              %
                              
                              
                              4,684,827Short-term
      borrowings
                              
                              
                              1,079,359
                              
                              
                              
                              1.92
                              %
                              
                              
                              20,696
                              
                              
                              
                              1,046,914
                              
                              
                              
                              5.31
                              %
                              
                              
                              55,631Long-term
      debt
                              
                              
                              8,124,000
                              
                              
                              
                              5.98
                              %
                              
                              
                              485,865
                              
                              
                              
                              8,124,000
                              
                              
                              
                              6.83
                              %
                              
                              
                              555,048Total
      interest-bearing liabilities
                              
                              
                              141,918,644
                              
                              
                              
                              3.51
                              %
                              
                              
                              4,984,250
                              
                              
                              
                              122,327,327
                              
                              
                              
                              4.33
                              %
                              
                              
                              5,295,506Other
      liabilities
                              
                              
                              26,542,201
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              29,339,096Shareholders’
      equity
                              
                              
                              15,860,596
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,997,10432tal
      liabilities and shareholders’ equity
                              
                              $
                              184,321,441
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              165,663,527Net
      yield on earning-assets and net interest income (4)
                              
                              
                              
                              
                              
                              
                              4.20
                              %
                              
                              $
                              7,243,574
                              
                              
                              
                              
                              
                              
                              
                              4.93
                              %
                              
                              $
                              7,605,928Interest
      rate spread (5)
                              
                              
                              
                              
                              
                              
                              3.50
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3.96
                              %
 
 (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,
 
 2008
      Compared to 2007
                  
                  
                  2007
      Compared to 2006Volume
      (1)
                  
                  
                  Rate(1)
                  
                  
                  Total
                  
                  
                  Volume
      (1)
                  
                  
                  Rate
      (1)
                  
                  
                  TotalInterest-bearing
      deposits in other banks
                  
                  $
                  (2,525
                  )
                  
                  $
                  (3,337
                  )
                  
                  $
                  (5,862
                  )
                  
                  $
                  1,835
                  
                  
                  $
                  (930
                  )
                  
                  $
                  905Investment
      securities
                  
                  
                  (81,319
                  )
                  
                  
                  32,104
                  
                  
                  
                  (49,215
                  )
                  
                  
                  4,424
                  
                  
                  
                  69,500
                  
                  
                  
                  73,924Federal
      Funds sold
                  
                  
                  (30,414
                  )
                  
                  
                  (64,222
                  )
                  
                  
                  (94,636
                  )
                  
                  
                  35,397
                  
                  
                  
                  (599
                  )
                  
                  
                  34,798Loans
                  
                  
                  1,787,746
                  
                  
                  
                  (2,311,643
                  )
                  
                  
                  (523,897
                  )
                  
                  
                  1,439,342
                  
                  
                  
                  231,257
                  
                  
                  
                  1,670,599Increase
      in interest income
                  
                  $
                  1,673,488
                  
                  
                  $
                  (2,347,098
                  )
                  
                  $
                  (673,610
                  )
                  
                  $
                  1,480,998
                  
                  
                  $
                  299,228
                  
                  
                  $
                  1,780,226Interest-bearing
      deposits
                  
                  $
                  734,830
                  
                  
                  $
                  (941,968
                  )
                  
                  $
                  (207,138
                  )
                  
                  $
                  530,092
                  
                  
                  $
                  592,180
                  
                  
                  $
                  1,122,272Borrowings
                  
                  
                  1,973
                  
                  
                  
                  (106,091
                  )
                  
                  
                  (104,118
                  )
                  
                  
                  (38,054
                  )
                  
                  
                  15,337
                  
                  
                  
                  (22,717
                  )Increase
      in interest expense
                  
                  $
                  736,803
                  
                  
                  $
                  (1,048,959
                  )
                  
                  $
                  (311,256
                  )
                  
                  $
                  492,038
                  
                  
                  $
                  607,517
                  
                  
                  $
                  1,099,555
  10
 Index
  
 (1)
              The
      rate/volume variance for each category has been allocated equally on a
      consistent basis between rate and volume
  variance.
 
 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, 2008, such
unfunded commitments to extend credit were $31,886,835.
 
 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, 2008,
payments due under such operating lease arrangements were $184,530, $184,530,
$188,280, $193,530 and $193,530 in 2009 through 2013, 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, 2008 and 2007, core deposits totaled
$144,014,424 or 84.31%, and $122,606,840 or 82.18%, 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 $18.3
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, 2008, the Bank had investment securities of approximately $975 pledged to
secure repurchase agreements.
 
 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
  11
 Index
  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 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 slightly 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, 2008, which are
projected to reprice or mature in each of the future time periods
shown.  Except as stated below, the amounts of assets and liabilities
shown which reprice or mature within a particular period were determined in
accordance with the contractual terms of the assets or
liabilities.  Loans with adjustable rates are shown as being due at
the end of the next upcoming adjustment period.  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.
 
  12
 Index
  INTEREST
RATE SENSITIVITY (GAP ANALYSIS)
 DECEMBER
31, 2008
 
 1
      – 90
                        
                        
                        91
      – 180
                        
                        
                        181
      – 365
                        
                        
                        Total
                        
                        
                        Non-Days
                        
                        
                        Days
                        
                        
                        Days
                        
                        
                        One
      Year
                        
                        
                        Sensitive
                        
                        
                        TotalInterest-earning
      assets:Interest
      bearing deposits
                        
                        $
                        218,912
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        218,912
                        
                        
                        $
                        -
                        
                        
                        $
                        218,912Investment
      securities
                        
                        
                        380,950
                        
                        
                        
                        384,706
                        
                        
                        
                        781,101
                        
                        
                        
                        1,546,757
                        
                        
                        
                        22,203,252
                        
                        
                        
                        23,750,009Federal
      Home LoanBank
      stock
                        
                        
                        585,600
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        585,600
                        
                        
                        
                        -
                        
                        
                        
                        585,600Loans
                        
                        
                        126,712,121
                        
                        
                        
                        5,866,305
                        
                        
                        
                        12,035,493
                        
                        
                        
                        144,613,919
                        
                        
                        
                        26,625,773
                        
                        
                        
                        171,239,692Total
      interest-earning assets
                        
                        
                        127,897,583
                        
                        
                        
                        6,251,011
                        
                        
                        
                        12,816,594
                        
                        
                        
                        146,965,188
                        
                        
                        
                        48,829,025
                        
                        
                        
                        195,794,213Interest-bearing
      liabilities:Time
      deposits
                        
                        
                        33,650,037
                        
                        
                        
                        30,125,751
                        
                        
                        
                        32,649,917
                        
                        
                        
                        96,425,705
                        
                        
                        
                        193,771
                        
                        
                        
                        96,619,476All
      other deposits
                        
                        
                        51,942,741
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        51,942,741
                        
                        
                        
                        601
                        
                        
                        
                        51,943,342Short-term
      borrowings
                        
                        
                        5,919,140
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,919,140
                        
                        
                        
                        -
                        
                        
                        
                        5,919,140Long-term
      debt
                        
                        
                        4,124,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,124,000
                        
                        
                        
                        4,000,000
                        
                        
                        
                        8,124,000Total
      interest-bearing liabilities
                        
                        
                        95,635,918
                        
                        
                        
                        30,125,751
                        
                        
                        
                        32,649,917
                        
                        
                        
                        158,411,586
                        
                        
                        
                        4,193,372
                        
                        
                        
                        162,605,958Interest
      sensitivity gap
                        
                        $
                        32,261,665
                        
                        
                        $
                        (23,874,740
                        )
                        
                        $
                        (19,833,323
                        )
                        
                        $
                        (11,446,398
                        )Cumulative
      interestsensitivity
      gap
                        
                        
                        
                        
                        
                        
                        8,386,925
                        
                        
                        $
                        (11,446,398
                        )Interest-earning
      assetsas
      a percent of interestsensitive
      liabilities
                        
                        
                        133.7
                        %
                        
                        
                        20.7
                        %
                        
                        
                        39.3
                        %
                        
                        
                        92.8
                        %Cumulative
      interest-earningassets
      as a percent of interestsensitive
      liabilities
                        
                        
                        133.7
                        %
                        
                        
                        106.7
                        %
                        
                        
                        92.8
                        %
 
 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, 2008
 
 Within
                  
                  
                  One
      to
                  
                  
                  FiveOne
                  
                  
                  Five
                  
                  
                  Years
      orYear
                  
                  
                  Years
                  
                  
                  MoreCommercial,
      financial and agricultural
                  
                  $
                  17,288,971
                  
                  
                  $
                  6,645,536
                  
                  
                  $
                  3,988,494Real
      estate – mortgage
                  
                  
                  41,809,720
                  
                  
                  
                  34,620,144
                  
                  
                  
                  5,016,281Predetermined
      rate, maturitygreater
      than one year
                  
                  
                  -
                  
                  
                  
                  41,265,680
                  
                  
                  
                  9,004,775Variable
      rate or maturing withinone
      year
                  
                  
                  59,098,691
                  
                  
                  
                  -
                  
                  
                  
                  -
 
 The
Company paid an average rate of 3.37% on interest-bearing deposits during 2008
compared to 4.14% during 2007.  A tight liquidity market both
nationally and regionally intensified competition among financial institutions
and resulted in maintaining a higher cost of funds than most likely would have
been present during normal market conditions.   Significant
growth in deposits came from interest-bearing time deposit accounts as rate
conscious customers sought to lock in higher yields in light of a continued
decrease in interest rates.  Additionally, as the need for funding
loan growth increased throughout the year and liquidity tightened, the Company
increased outstanding certificates of deposits from other financial institutions
by $10,191,792 to $21,935,733.  These funds are considered to be among
the most rate sensitive, which resulted in a lower cost of funds than could have
been obtained in the local consumer market.  Total time deposits
increased from $74,970,355 to $96,619,473 or 28.88%.  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.  Approximately 51% of these
accounts represent new relationships and 49% represent existing relationships
that transferred from another deposit product.  Total
NOW
  13
 Index
  accounts
increased from $15,645,860 to $18,319,836 or 17.09%.  Savings accounts
grew by 13.55% to $2,207,173, while demand and money market accounts decreased
by $2,963,486, 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, 2008
 
 Non-interest
      bearing deposits
                    
                    $
                    25,197,933Interest-bearing
                    
                    
                    132,715,285Total
                    
                    $
                    157,913,218
 
 The above
table includes deposits of $100,000 or more, which at December 31, 2008 totaled
$26,799,682.  The table below presents the maturities of deposits of
$100,000 or more.
 
 Maturities
of Time Deposits of $100,000 or More
 December
31, 2008
 
 GreaterWithin
                  Within
                  Within
                  ThanThree
                  Six
                  Twelve
                  OneMonths
                  Months
                  Months
                  YearTime
      deposits of $100,000 or more
                  
                  $15,121,166
                  $3,744,108
                  $7,813,641
                  $120,767
 
 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 from $100,000 to
$250,000 on other accounts through December 31, 2009.  The increase in
FDIC insurance coverage will result in a 10 to 14 basis points (annualized) FDIC
base insurance premium during the first quarter of 2009 and 12 to 16 basis
points (annualized) during the second quarter of 2009 compared to 5 basis points
(annualized) for 2008.
 
 On
February 27, 2009, the FDIC proposed amendments to the restoration plan for the
Deposit Insurance Fund.  This amendment proposes the imposition of a
20 basis point emergency special assessment on insured depository institutions
as of June 30, 2009.  The assessment is proposed to be collected on
September 30, 2009.  The interim rule would also permit the FDIC to
impose an emergency special assessment after June 30, 2009 of up to 10 basis
points, if necessary, to maintain public confidence in federal deposit
insurance.  Based on average deposits for the fourth quarter, this
special assessment, if implemented as proposed, would equal approximately,
$343,000.  This special assessment if implemented as proposed will
have a significant impact on the results of operations of the Company for
2009.
 
 On March
5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special
assessment from 20 bais point to 10 basis points.  The approval
cutback is contingent on whether Congress clears legislation that would expand
the FDIC’s line of credit with the Treasury to $100
billion.  Legislation to increase the FDIC’s borrowing authority on a
permanent basis is also expected to advance to Congress, which should aid in
reducing the burden on the industry.
 
 The
assessment rates, including the special assessment, are subject to change at the
discretion o the Board of Directors of the FDIC.
 
 CAPITAL
RESOURCES
 
 In
November 2008, the Company completed an application to participate in the
Capital Purchase Program (“CPP”) of the U.S. Treasury’s Troubled Asset Relief
program, or “TARP”.  In January 2009 the Company received notice that
it had received preliminary approval for $5,075,000.  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’s
shareholders.
 
 As of
December 31, 2008 and 2007, the Company’s ratio of total capital to
risk-adjusted assets was 12.62%, and 14.29%, respectively.  Average
capital to average assets totaled 8.60% and 8.45% at December 31, 2008 and 2007,
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, 2008, 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:
  14
 Index
  
 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 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.  Additional capital
allowed the Bank 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, 2008 and 2007 were $171,239,692 and
$135,734,224, 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,
 
 2008
                  
                  
                  
                  
                  
                  2007
                  
                  
                  
                  
                  
                  2006
                  
                  
                  
                  
                  
                  2005
                  
                  
                  
                  
                  
                  2004%
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      ofTotal
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  TotalAmount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  LoansLOANSReal
      Estate-Construction
                  
                  $
                  59,486,736
                  
                  
                  
                  35
                  %
                  
                  $
                  36,559,609
                  
                  
                  
                  27
                  %
                  
                  $
                  30,224,993
                  
                  
                  
                  25
                  %
                  
                  $
                  19,350,978
                  
                  
                  
                  19
                  %
                  
                  $
                  11,470,223
                  
                  
                  
                  13
                  %Mortgage
                  
                  
                  81,446,145
                  
                  
                  
                  47
                  %
                  
                  
                  72,149,288
                  
                  
                  
                  53
                  %
                  
                  
                  67,334,420
                  
                  
                  
                  55
                  %
                  
                  
                  59,187,153
                  
                  
                  
                  59
                  %
                  
                  
                  51,633,458
                  
                  
                  
                  61
                  %Commercial,
      financial, andagricultural
                  
                  
                  27,923,001
                  
                  
                  
                  16
                  %
                  
                  
                  24,792,538
                  
                  
                  
                  18
                  %
                  
                  
                  23,318,857
                  
                  
                  
                  19
                  %
                  
                  
                  19,635,598
                  
                  
                  
                  19
                  %
                  
                  
                  20,162,307
                  
                  
                  
                  24
                  %Consumer
                  
                  
                  2,711,134
                  
                  
                  
                  2
                  %
                  
                  
                  2,569,211
                  
                  
                  
                  2
                  %
                  
                  
                  1,851,043
                  
                  
                  
                  1
                  %
                  
                  
                  2,531,935
                  
                  
                  
                  3
                  %
                  
                  
                  1,747,694
                  
                  
                  
                  2
                  %Total
      Loans
                  
                  
                  171,567,016
                  
                  
                  
                  100
                  %
                  
                  
                  136,070,646
                  
                  
                  
                  100
                  %
                  
                  
                  122,729,313
                  
                  
                  
                  100
                  %
                  
                  
                  100,705,664
                  
                  
                  
                  100
                  %
                  
                  
                  85,013,682
                  
                  
                  
                  100
                  %Deferred
      originations fees, net
                  
                  
                  (327,324
                  )
                  
                  
                  
                  
                  
                  
                  (336,422
                  )
                  
                  
                  
                  
                  
                  
                  (265,593
                  )
                  
                  
                  
                  
                  
                  
                  (212,062
                  )
                  
                  
                  
                  
                  
                  
                  (161,612
                  )Total
      loans, net of deferred fees
                  
                  
                  
                  
                  
                  $
                  171,239,692
                  
                  
                  
                  
                  
                  
                  $
                  135,734,224
                  
                  
                  
                  
                  
                  
                  $
                  122,463,720
                  
                  
                  
                  
                  
                  
                  $
                  100,493,602
                  
                  
                  
                  
                  
                  
                  $
                  84,852,070
  Real
estate loans comprised 82% of the portfolio in 2008 compared to 80% in
2007.  Commercial loans comprised 16% of the portfolio in 2008
compared to 18% in 2007, while consumer loans comprised 2% in both 2007 and
2008.  Commercial loans of $27,923,001, consumer loans of $2,711,134
and real estate mortgage loans of $81,446,145 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 $59,486,736 are loans for which the principal source of repayment comes
from the sale of real estate or from obtaining permanent financing. The Bank has
a diversified loan portfolio with no concentrations to any one
borrower.  The Bank’s loan portfolio 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 30% of commercial real estate mortgage loans
are owner-
  15
 Index
  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.
 
 NONPERFORMING
ASSETS
 December
31,
 
 2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004NONPERFORMING
      ASSETSNonaccrual
      and restructured loans
                  
                  $
                  316,102
                  
                  
                  $
                  195,683
                  
                  
                  $
                  975,190
                  
                  
                  $
                  1,754,653
                  
                  
                  $
                  2,567,816Other
      real estate owned
                  
                  
                  205,006
                  
                  
                  
                  87,787
                  
                  
                  
                  106,000
                  
                  
                  
                  127,000
                  
                  
                  
                  401,345Repossessions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  42,241Total
                  
                  $
                  521,108
                  
                  
                  $
                  283,470
                  
                  
                  $
                  1,081,190
                  
                  
                  $
                  1,881,653
                  
                  
                  $
                  3,011,402
 
 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 $30,886,835 and $38,206,567 at December 31, 2008 and 2007,
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.
 
 The
recorded investment in loans that are considered to be impaired was $349,976 and
$195,683 at December 31, 2008 and 2007, respectively.  The related
allowance for loan losses determined was none and $120 at December 31, 2008 and
2007, respectively.  The average recorded investment in impaired loans
during the years ended December 31, 2008 and 2007 was $195,935 and $400,074,
respectively.  For the years ended December 31, 2008 and 2007, the
Company recognized interest income from impaired loans of $350 and $1,535,
respectively.
 
 Potential
problem loans consist of loans that are performing in accordance with
contractual terms, but for which management has concerns about the ability of an
obligor to continue to comply with repayment terms, because of the obligor’s
potential operating or financial difficulties.  Management monitors
these loans closely and reviews their performance on a regular
basis.  These loans do not meet the standards for, and are therefore
not included in, nonperforming assets.  At December 31, 2008, the
Company identified one potential problem loan totaling $400,756.
 
 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 adequate level. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
  The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectibility of the loans in
light of the current status of the portfolio, historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral, and
prevailing economic conditions. Management 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.
   16
 Index
  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.  Impaired loans
may also include restructured loans.  A loan is considered
restructured when the Company grants a concession to a borrower in financial
difficulty.  Generally, payments are past due 90 days or more, and the
loan is considered as nonperforming.  Impaired loans are divided into
two categories: 1) loans where the borrower transfers assets to the Company; and
2) those where credit terms are modified.  The latter includes
foreclosures, 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
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, 2008 and 2007
was $2,529,981 and $2,090,125 or 1.48% and 1.54%, respectively, of gross loans
outstanding.   The ratio of net charge-offs to average loans
outstanding was .18% and .16% during 2008 and 2007, respectively.
 
 CHANGES
IN THE ALLOWANCE FOR LOAN LOSSES
 
 
 2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Balance
      at beginning of year
                  
                  $
                  2,090,125
                  
                  
                  $
                  1,884,080
                  
                  
                  $
                  1,760,377
                  
                  
                  $
                  1,608,366
                  
                  
                  $
                  1,174,003Loans
      charged-offCommercial,
      financial, andagricultural
                  
                  
                  (203,524
                  )
                  
                  
                  (171,723
                  )
                  
                  
                  (163,191
                  )
                  
                  
                  (207,106
                  )
                  
                  
                  (579,930
                  )Real
      Estate:Construction
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Mortgage
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (14,160
                  )
                  
                  
                  (129,401
                  )
                  
                  
                  (48,000
                  )Consumer
                  
                  
                  (116,409
                  )
                  
                  
                  (85,018
                  )
                  
                  
                  (41,104
                  )
                  
                  
                  (33,339
                  )
                  
                  
                  (69,682
                  )Total
      charge-offs
                  
                  
                  (319,933
                  )
                  
                  
                  (256,741
                  )
                  
                  
                  (218,455
                  )
                  
                  
                  (369,846
                  )
                  
                  
                  (697,612
                  )Recoveries
      of loans previouslycharged-off:Commercial,
      Financial, andagricultural
                  
                  
                  13,415
                  
                  
                  
                  24,600
                  
                  
                  
                  22,538
                  
                  
                  
                  28,488
                  
                  
                  
                  73,054Real
      Estate:Construction
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Mortgage
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  25,000Consumer
                  
                  
                  35,089
                  
                  
                  
                  31,461
                  
                  
                  
                  34,975
                  
                  
                  
                  27,099
                  
                  
                  
                  23,621Total
      Recoveries
                  
                  
                  48,504
                  
                  
                  
                  56,061
                  
                  
                  
                  57,513
                  
                  
                  
                  55,587
                  
                  
                  
                  121,675Net
      charge-offs
                  
                  
                  (271,429
                  )
                  
                  
                  (200,680
                  )
                  
                  
                  (160,942
                  )
                  
                  
                  (314,259
                  )
                  
                  
                  (575,937
                  )Provision
      for loan losses
                  
                  
                  711,285
                  
                  
                  
                  406,725
                  
                  
                  
                  284,645
                  
                  
                  
                  466,270
                  
                  
                  
                  1,010,300Balance
      at end of year
                  
                  $
                  2,529,981
                  
                  
                  $
                  2,090,125
                  
                  
                  $
                  1,884,080
                  
                  
                  $
                  1,760,377
                  
                  
                  $
                  1,608,366Ratio
      of net charge-offs duringthe
      year to average loansoutstanding
      during the year
                  
                  
                  .18
                  %
                  
                  
                  .16
                  %
                  
                  
                  .14
                  %
                  
                  
                  .35
                  %
                  
                  
                  .72
                  %
 
 The
Company operates in a well diversified market.  Major economic drivers
include tourism, medical industry and light manufacturing.  The
unemployment rate remains low, and the job market appears to be stable with no
major layoffs.  While the Company’s market has not experienced some of
the extreme economic hardships as portrayed nationally, the Company and its
market are not totally isolated.  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 could result in
additional
  17
 Index
  increases
in our exposure to losses if the economy continues to experience a downward
trend.
 
 Nonaccrual
and restructured loans increased from $195,683 to $316,102.  Current
nonaccrual loans represent five loans with two customers.  Although,
the 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.  Management has reviewed
each non-performing loan, supporting collateral, financial stability of each
borrower and the relevant loan loss allowance.  Throughout 2008,
management continued its in-depth underwriting analysis, training and loan
monitoring.  Management continued its engagement of third party loan
review services to supplement and validate overall loan review analytics and
portfolio risk assessments.  Based upon this analysis, management
believes the allowance is adequate to support current loans
outstanding.
 
 During
2008, 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.  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
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004%
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      ofTotal
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  Total
                  
                  
                  
                  
                  
                  TotalAmount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  Loans
                  
                  
                  Amount
                  
                  
                  LoansReal
      Estate
                  
                  $
                  2,001,660
                  
                  
                  
                  82
                  %
                  
                  $
                  1,596,565
                  
                  
                  
                  80
                  %
                  
                  $
                  1,443,604
                  
                  
                  
                  80
                  %
                  
                  $
                  1,350,460
                  
                  
                  
                  78
                  %
                  
                  $
                  1,139,769
                  
                  
                  
                  74
                  %Commercial,
      Financialand
      Agricultural
                  
                  
                  465,388
                  
                  
                  
                  16
                  %
                  
                  
                  437,351
                  
                  
                  
                  18
                  %
                  
                  
                  401,777
                  
                  
                  
                  19
                  %
                  
                  
                  341,925
                  
                  
                  
                  19
                  %
                  
                  
                  388,559
                  
                  
                  
                  24
                  %Consumer
                  
                  
                  50,786
                  
                  
                  
                  2
                  %
                  
                  
                  56,209
                  
                  
                  
                  2
                  %
                  
                  
                  38,699
                  
                  
                  
                  1
                  %
                  
                  
                  67,992
                  
                  
                  
                  3
                  %
                  
                  
                  54,528
                  
                  
                  
                  2
                  %Unallocated
                  
                  
                  12,147
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  25,510
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      allowance
                  
                  $
                  2,529,981
                  
                  
                  
                  100
                  %
                  
                  $
                  2,090,125
                  
                  
                  
                  100
                  %
                  
                  $
                  1,884,080
                  
                  
                  
                  100
                  %
                  
                  $
                  1,760,377
                  
                  
                  
                  100
                  %
                  
                  $
                  1,608,366
                  
                  
                  
                  100
                  %
  INVESTMENT
SECURITIES
 
 In
September 2008, the U.S. Department of Treasury and the Federal Housing Finance
Agency announced that Freddie Mac and Fannie Mae were being placed under
conservatorship; control of their management was transferred to the Federal
Housing Finance Agency.  In conjunction with this action, Freddie Mac
and Fannie Mae were prohibited from paying dividends on their equity securities,
which resulted in a significant loss in value of such equity
securities.  The decrease in value resulted in “other-than-temporary
impairment” write-downs during the third quarter for those financial
institutions that held these securities in their investment
portfolios.  The Company did not and does not hold any equity shares
of either Freddie Mac or Fannie Mae in its securities portfolio, and therefore
was not exposed to any potential charge to earnings as a result of
“other-than-temporary impairment” of Freddie Mac or Fannie Mae equity
securities.
 
 At
December 31, 2008 and 2007, securities carried at market value totaled
$23,778,449 and $26,113,294, respectively, with amortized costs of $23,750,009
and $26,090,739, 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.
 
  18
 Index
  MATURITIES
AND YIELDS OF DEBT SECURITIES
 
 December
31, 2008
 Available
for sale: (1)
 
 AmortizedTYPE
                              
                              Cost
                              
                              
                              Yields
      (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
                              %Mortgage-backed
      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
                              %Mortgage-backed
      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
                              %December
      31, 2007Available
      for sale: (1)AmortizedTYPE
                              
                              Cost
                              
                              
                              Yield
      (2)Mortgage-backed
      securities- within 1 year
                              
                              $
                              787,042
                              
                              
                              
                              3.1
                              %U.S.
      Government agencies- within 1 to 5 years
                              
                              
                              500,000
                              
                              
                              
                              4.4
                              %Mortgage-backed
      securities- within 1 to 5 years
                              
                              
                              1,521,833
                              
                              
                              
                              4.0
                              %Municipal
      bonds- due within 1 to 5 years
                              
                              
                              556,685
                              
                              
                              
                              5.0
                              %Total-
      within 1 to 5 years
                              
                              
                              2,578,518
                              
                              
                              
                              4.3
                              %U.S.
      Government agencies- within 5 to 10 years
                              
                              
                              3,057,388
                              
                              
                              
                              5.3
                              %Mortgage-backed
      securities- within 5 to 10 years
                              
                              
                              2,109,757
                              
                              
                              
                              3.8
                              %Municipal
      bonds- within 5 to 10 years
                              
                              
                              1,090,077
                              
                              
                              
                              5.3
                              %Total-
      within 5 to 10 years
                              
                              
                              6,257,222
                              
                              
                              
                              4.8
                              %Mortgage-backed
      securities- greater than 10 years
                              
                              
                              9,320,592
                              
                              
                              
                              5.4
                              %Municipal
      bonds- greater than 10 years
                              
                              
                              7,147,365
                              
                              
                              
                              6.1
                              %Total-
      greater than 10 years
                              
                              
                              16,467,957
                              
                              
                              
                              5.7
                              %Total
                              
                              $
                              26,090,739
                              
                              
                              
                              5.3
                              %
  (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 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
  19
 Index
  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 and 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.
  20
 Index
  
 
 SELECTED
FINANCIAL INFORMATION AND OTHER DATA
 
 SELECTED
      AVERAGE BALANCES:2008
                    
                    
                    Yield
                    
                    
                    2007
                    
                    
                    YieldNon-interest
      bearing demand deposits
                    
                    $
                    25,197,933
                    
                    
                    
                    
                    
                    $
                    27,903,283Interest-bearing
      demand deposits
                    
                    
                    44,657,862
                    
                    
                    
                    1.84
                    %
                    
                    
                    43,204,940
                    
                    
                    
                    2.65
                    %Savings
      deposits
                    
                    
                    2,270,741
                    
                    
                    
                    .49
                    %
                    
                    
                    2,136,461
                    
                    
                    
                    .50
                    %Time
      deposits
                    
                    
                    85,786,682
                    
                    
                    
                    4.25
                    %
                    
                    
                    67,815,012
                    
                    
                    
                    5.21
                    %Total
      deposits
                    
                    $
                    157,913,218
                    
                    
                    
                    
                    
                    
                    $
                    141,059,696SELECTED
      PERFORMANCE RATIOS:Return
      on average assets
                    
                    
                    .71
                    %
                    
                    
                    
                    
                    
                    
                    1.24
                    %Return
      on average equity
                    
                    
                    8.20
                    %
                    
                    
                    
                    
                    
                    
                    14.62
                    %Dividend
      payout ratio
                    
                    
                    0
                    %
                    
                    
                    
                    
                    
                    
                    0
                    %Equity
      to assets ratio
                    
                    
                    8.60
                    %
                    
                    
                    
                    
                    
                    
                    8.45
                    %
 
 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.
  21
 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
                25Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                26Consolidated
      Statements of Operations and Comprehensive Incomefor
      the years ended December 31, 2008 and 2007
                27Consolidated
      Statements of Changes in Shareholders’ Equityfor
      the years ended December 31, 2008 and 2007
                29Consolidated
      Statements of Cash Flowsfor
      the years ended December 31, 2008 and 2007
                30Notes
      to Consolidated Financial Statements
                31
 
  22
 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, 2008 and
2007 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 the Weststar Financial
Services Corporation and Subsidiary as of December 31, 2008 and 2007 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
 March
17, 2009
 
  23
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2008 and 2007
 
 ASSETS
                  
                  2008
                  
                  
                  2007Cash
      and cash equivalents:Cash
      and due from banks
                  
                  $
                  4,200,866
                  
                  
                  $
                  4,740,172Interest-bearing
      deposits
                  
                  
                  218,912
                  
                  
                  
                  132,284Federal
      funds sold
                  
                  
                  -
                  
                  
                  
                  3,655,000Total
      cash and cash equivalents
                  
                  
                  4,419,778
                  
                  
                  
                  8,527,456Investment
      securities - available for sale, at fair value(amortized
      cost of $23,750,009 and $26,090,739 atDecember
      31, 2008 and 2007, respectively)
                  
                  
                  23,778,449
                  
                  
                  
                  26,113,294Loans
                  
                  
                  171,239,692
                  
                  
                  
                  135,734,224Allowance
      for loan losses
                  
                  
                  (2,529,981
                  )
                  
                  
                  (2,090,125
                  )Net
      loans
                  
                  
                  168,709,711
                  
                  
                  
                  133,644,099Premises
      and equipment, net
                  
                  
                  2,652,007
                  
                  
                  
                  2,981,163Accrued
      interest receivable
                  
                  
                  1,030,460
                  
                  
                  
                  972,603Federal
      Home Loan Bank stock, at cost
                  
                  
                  585,600
                  
                  
                  
                  463,300Deferred
      income taxes
                  
                  
                  810,921
                  
                  
                  
                  572,594Foreclosed
      properties
                  
                  
                  205,006
                  
                  
                  
                  87,787Other
      assets
                  
                  
                  667,040
                  
                  
                  
                  895,702TOTAL
                  
                  $
                  202,858,972
                  
                  
                  $
                  174,257,998LIABILITIES
      AND SHAREHOLDERS’ EQUITYLIABILITIES:Deposits:Demand
                  
                  $
                  22,251,288
                  
                  
                  $
                  28,021,869NOW
      accounts
                  
                  
                  18,319,836
                  
                  
                  
                  15,645,860Money
      market accounts
                  
                  
                  31,416,333
                  
                  
                  
                  28,609,220Savings
                  
                  
                  2,207,173
                  
                  
                  
                  1,943,712Time
      deposits of $100,000 or more
                  
                  
                  26,799,682
                  
                  
                  
                  26,584,176Other
      time deposits
                  
                  
                  69,819,794
                  
                  
                  
                  48,386,179Total
      deposits
                  
                  
                  170,814,106
                  
                  
                  
                  149,191,016Short-term
      borrowings
                  
                  
                  5,919,140
                  
                  
                  
                  419,669Accrued
      interest payable
                  
                  
                  565,105
                  
                  
                  
                  567,710Other
      liabilities
                  
                  
                  926,050
                  
                  
                  
                  776,364Long-term
      debt
                  
                  
                  8,124,000
                  
                  
                  
                  8,124,000Total
      liabilities
                  
                  
                  186,348,401
                  
                  
                  
                  159,078,759COMMITMENTS
      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 – 2,125,747 and 2,118,437 atDecember
      31, 2008 and 2007, respectively
                  
                  
                  2,125,747
                  
                  
                  
                  2,118,437Additional
      paid-in capital
                  
                  
                  6,152,868
                  
                  
                  
                  6,133,773Retained
      earnings
                  
                  
                  8,214,480
                  
                  
                  
                  6,913,168Accumulated
      other comprehensive income
                  
                  
                  17,476
                  
                  
                  
                  13,861Total
      shareholders’ equity
                  
                  
                  16,510,571
                  
                  
                  
                  15,179,239TOTAL
                  
                  $
                  202,858,972
                  
                  
                  $
                  174,257,998
 
  See Notes
to Consolidated Financial Statements.
 24
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Years
Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007INTEREST
      AND DIVIDEND INCOME:Interest
      and fees on loans
                  
                  $
                  10,983,342
                  
                  
                  $
                  11,507,239Federal
      funds sold
                  
                  
                  46,259
                  
                  
                  
                  140,895Interest-bearing
      deposits
                  
                  
                  1,698
                  
                  
                  
                  7,560Investments:Taxable
      interest income
                  
                  
                  812,490
                  
                  
                  
                  884,745Non-taxable
      interest income
                  
                  
                  358,109
                  
                  
                  
                  330,868Dividends
                  
                  
                  25,926
                  
                  
                  
                  30,127Total
      interest and dividend income
                  
                  
                  12,227,824
                  
                  
                  
                  12,901,434INTEREST
      EXPENSE:Time
      deposits of $100,000 or more
                  
                  
                  1,207,029
                  
                  
                  
                  1,248,784Other
      time and interest bearing-deposits
                  
                  
                  3,270,660
                  
                  
                  
                  3,436,043Short-term
      borrowings
                  
                  
                  20,696
                  
                  
                  
                  55,631Long-term
      debt
                  
                  
                  485,865
                  
                  
                  
                  555,048Total
      interest expense
                  
                  
                  4,984,250
                  
                  
                  
                  5,295,506NET
      INTEREST INCOME
                  
                  
                  7,243,574
                  
                  
                  
                  7,605,928PROVISION
      FOR LOAN LOSSES
                  
                  
                  711,285
                  
                  
                  
                  406,725NET
      INTEREST INCOME AFTER PROVISION FORLOAN
      LOSSES
                  
                  
                  6,532,289
                  
                  
                  
                  7,199,203OTHER
      INCOME:Service
      charges on deposit accounts
                  
                  
                  1,139,125
                  
                  
                  
                  1,153,611Other
      service fees and commissions
                  
                  
                  435,991
                  
                  
                  
                  344,481Securities
      losses
                  
                  
                  -
                  
                  
                  
                  (1,093
                  )Equity
      in loss of Bank of Asheville Mortgage Company, LLC
                  
                  
                  (15,295
                  )
                  
                  
                  (60,099
                  )Other
                  
                  
                  64,289
                  
                  
                  
                  91,866Total
      other income
                  
                  
                  1,624,110
                  
                  
                  
                  1,528,766OTHER
      EXPENSES:Salaries
      and wages
                  
                  
                  2,608,631
                  
                  
                  
                  2,341,046Employee
      benefits
                  
                  
                  578,344
                  
                  
                  
                  343,465Occupancy
      expense, net
                  
                  
                  484,065
                  
                  
                  
                  472,912Equipment
      rentals, depreciation and maintenance
                  
                  
                  419,377
                  
                  
                  
                  429,588Supplies
                  
                  
                  265,176
                  
                  
                  
                  277,799Data
      processing fees
                  
                  
                  562,139
                  
                  
                  
                  596,678Professional
      fees
                  
                  
                  429,429
                  
                  
                  
                  355,529Marketing
                  
                  
                  312,234
                  
                  
                  
                  310,073(Income)
      expense from foreclosed properties
                  
                  
                  44,898
                  
                  
                  
                  (8,593
                  )Other
                  
                  
                  427,931
                  
                  
                  
                  434,739Total
      other expenses
                  
                  
                  6,132,224
                  
                  
                  
                  5,553,236INCOME
      BEFORE INCOME TAX PROVISION
                  
                  
                  2,024,175
                  
                  
                  
                  3,174,733INCOME
      TAX PROVISION
                  
                  
                  722,863
                  
                  
                  
                  1,128,727NET
      INCOME
                  
                  $
                  1,301,312
                  
                  
                  $
                  2,046,006
  See Notes
to Consolidated Financial Statements.
 25
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
 Years
Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007OTHER
      COMPREHENSIVE INCOME BEFORE TAX:Unrealized
      holding gains on securities available for sale
                  
                  $
                  5,885
                  
                  
                  $
                  195,452Tax
      effect
                  
                  
                  (2,270
                  )
                  
                  
                  (75,347
                  )Unrealized
      holding gains on securities availablefor
      sale, net of tax
                  
                  
                  3,615
                  
                  
                  
                  120,105Reclassification
      adjustment for realized losses
                  
                  
                  -
                  
                  
                  
                  1,093Tax
      effect
                  
                  
                  -
                  
                  
                  
                  (421
                  )Reclassification
      adjustment for realized losses,net
      of tax
                  
                  
                  -
                  
                  
                  
                  672OTHER
      COMPREHENSIVE INCOME, NET OF TAX
                  
                  
                  3,615
                  
                  
                  
                  120,777COMPREHENSIVE
      INCOME
                  
                  $
                  1,304,927
                  
                  
                  $
                  2,166,783BASIC
      NET INCOME PER COMMON SHARE
                  
                  $
                  .61
                  
                  
                  $
                  .97DILUTED
      NET INCOME COMMON PER SHARE
                  
                  $
                  .57
                  
                  
                  $
                  .89
 
  See Notes
to Consolidated Financial Statements.
 26
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 Years
Ended December 31, 2008 and 2007
 
 AccumulatedOtherAdditional
                        
                        
                        
                        
                        
                        Compre-
                        
                        
                        TotalCommon Stock
                        
                        
                        Paid-In
                        
                        
                        Retained
                        
                        
                        hensive
                        
                        
                        Shareholders’Shares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Earnings
                        
                        
                        (Loss) Income
                        
                        
                        EquityBALANCE,
      DECEMBER 31, 2006
                        
                        
                        1,682,290
                        
                        
                        $
                        1,682,290
                        
                        
                        $
                        6,528,387
                        
                        
                        $
                        4,869,092
                        
                        
                        $
                        (106,916
                        )
                        
                        $
                        12,972,853Six-for-five
      stock split
                        
                        
                        421,841
                        
                        
                        
                        421,841
                        
                        
                        
                        (421,841
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      unrealized gainssecurities
      available for sale
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        120,777
                        
                        
                        
                        120,777Issuance
      of common stock pursuantto
      the exercise of stock options
                        
                        
                        14,306
                        
                        
                        
                        14,306
                        
                        
                        
                        7,281
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        21,587Tax
      benefit on exercise of non-qualified
      stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        19,946
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        19,946Cash
      paid in lieu of fractional shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,930
                        )
                        
                        
                        -
                        
                        
                        
                        (1,930
                        )Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,046,006
                        
                        
                        
                        -
                        
                        
                        
                        2,046,006BALANCE,
      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
                        
                        
                        $
                        16,510,571
 
 
  See Notes
to Consolidated Financial Statements.
 27
 Index
  WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
Ended December 31, 2008 and 2007
 
 2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  1,301,312
                  
                  
                  $
                  2,046,006Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
                  
                  
                  374,363
                  
                  
                  
                  395,947Provision
      for loan losses
                  
                  
                  711,285
                  
                  
                  
                  406,725Premium
      amortization and discount accretion, net
                  
                  
                  (21,429
                  )
                  
                  
                  (29,621
                  )Deferred
      income tax provision
                  
                  
                  (240,597
                  )
                  
                  
                  (128,906
                  )(Income)
      expense from foreclosed properties
                  
                  
                  38,935
                  
                  
                  
                  (11,192
                  )(Gain)
      loss on disposals of premises and equipment
                  
                  
                  499
                  
                  
                  
                  (50
                  )Losses
      on sales of securities
                  
                  
                  -
                  
                  
                  
                  1,093Increase
      in accrued interest receivable
                  
                  
                  (57,857
                  )
                  
                  
                  (53,823
                  )(Increase)
      decrease in other assets
                  
                  
                  228,662
                  
                  
                  
                  (104,343
                  )Increase
      (decrease) in accrued interest payable
                  
                  
                  (2,605
                  )
                  
                  
                  69,320Increase
      (decrease) in other liabilities
                  
                  
                  149,686
                  
                  
                  
                  (95,774
                  )Net
      cash provided by operating
      activities
                  
                  
                  2,482,254
                  
                  
                  
                  2,495,382CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of securities available for sale
                  
                  
                  (2,032,005
                  )
                  
                  
                  (4,442,950
                  )Maturities
      of securities available for sale
                  
                  
                  4,394,164
                  
                  
                  
                  4,512,471Net
      increase in loans
                  
                  
                  (36,013,598
                  )
                  
                  
                  (14,133,604
                  )Proceeds
      from the sales of foreclosed properties
                  
                  
                  80,547
                  
                  
                  
                  691,825Proceeds
      from sales of securities
                  
                  
                  -
                  
                  
                  
                  283,268Proceeds
      from sales of premises and equipment
                  
                  
                  -
                  
                  
                  
                  50Additions
      to premises and equipment
                  
                  
                  (45,706
                  )
                  
                  
                  (372,520
                  )Purchase
      of Federal Home Loan Bank Stock
                  
                  
                  (122,300
                  )
                  
                  
                  (204,300
                  )FHLB
      Stock Redemption
                  
                  
                  -
                  
                  
                  
                  198,000Net
      cash used in investing activities
                  
                  
                  (33,738,898
                  )
                  
                  
                  (13,467,760
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      decrease in demand deposits, NOW accountsand
      savings accounts
                  
                  
                  (26,031
                  )
                  
                  
                  (1,766,056
                  )Net
      increase in certificates of deposits
                  
                  
                  21,649,121
                  
                  
                  
                  16,085,991Net
      increase in short-term borrowings
                  
                  
                  4,499,471
                  
                  
                  
                  113,669Cash
      paid in lieu of fractional shares
                  
                  
                  -
                  
                  
                  
                  (1,930
                  )Issuance
      of common stock
                  
                  
                  19,897
                  
                  
                  
                  21,587Tax
      benefit on exercise of nonqualified stock options
                  
                  
                  6,508
                  
                  
                  
                  19,946Proceeds
      from Federal Home Loan Bank advances
                  
                  
                  3,550,000
                  
                  
                  
                  5,200,000Maturities
      of Federal Home Loan Bank advances
                  
                  
                  (2,550,000
                  )
                  
                  
                  (5,200,000
                  )Net
      cash provided by financing activities
                  
                  
                  27,148,966
                  
                  
                  
                  14,473,207NET
      INCREASE (DECREASE) IN      CASH AND CASH
      EQUIVALENTS
                  
                  
                  (4,107,678
                  )
                  
                  
                  3,500,829CASH
      AND CASH EQUIVALENTS:Beginning
      of year
                  
                  
                  8,527,456
                  
                  
                  
                  5,026,627End of year
                  
                  $
                  4,419,778
                  
                  
                  $
                  8,527,456SUPPLEMENTAL
      DISCLOSURE:Cash
      paid for interest
                  
                  $
                  4,986,855
                  
                  
                  $
                  5,226,186Cash
      paid for income taxes
                  
                  $
                  859,756
                  
                  
                  $
                  1,332,740NONCASH
      TRANSACTIONS:Loans
      transferred to foreclosed properties
                  
                  $
                  236,701
                  
                  
                  $
                  662,420Net
      unrealized gain on investment securities availablefor
      sale, net of deferred income tax expense
                  
                  $
                  3,615
                  
                  
                  $
                  120,777
 See Notes
to Consolidated Financial Statements.
 28
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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”) is 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 closed the
Mortgage Company on 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.
  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. The related writedowns are included in earnings as realized losses.
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 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.
   29
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 Allowance
for Loan Losses (Continued)
 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.
  Mortgage
Servicing Rights
  When
mortgage loans are sold, the proceeds are allocated between the related loans
and the retained servicing rights based on their relative fair
values.  Servicing assets are amortized over the average period of
estimated net servicing income.  The Company recorded amortization of
mortgage servicing rights of $3,039 and $27,957 during the years ended December
31, 2008 and 2007, respectively.
  All
servicing assets are assessed for impairment based on their fair
value.  The Company recognized no impairment during the years ended
December 31, 2008 and 2007.
  Stock
Compensation Plans - Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment," ("SFAS No.  123R") which was issued by the
Financial Accounting Standards Board (“FASB”) in December 2004.  SFAS
No. 123R revises SFAS No. 123 "Accounting for Stock Based Compensation," and
supersedes APB No. 25, "Accounting for Stock Issued to Employees," (APB No. 25)
and its related interpretations. SFAS No.123R requires recognition of 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).  SFAS No. 123R also requires measurement of the cost of
employee services received in exchange for an award based on the grant-date fair
value of the award.  SFAS No. 123R also amends SFAS No. 95 "Statement
of Cash Flows," to require that excess tax benefits be reported as financing
cash inflows, rather than as a reduction of taxes paid, which is included within
operating cash flows.
 
 The
Company adopted SFAS No. 123R using the modified prospective application as
permitted under SFAS No. 123R.  Accordingly, prior period amounts have
not been restated.  Under this application, the Company is required to
record compensation expense for all awards granted after the date of adoption
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption.  Prior to the adoption of SFAS
No. 123R, the Company used the intrinsic value method as prescribed by APB No.
25 and thus recognized no compensation expense for options granted with exercise
prices equal to the fair market value of the Company's common stock on the date
of grant.
  
  30
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  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 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 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 SFAS
109.  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.
 
 In July
2006, the FASB issued Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies
how tax benefits for uncertain tax positions are to be recognized, measured, and
derecognized in financial statements; requires certain disclosures of uncertain
tax matters; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim period
guidance, among other provisions. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and as a result, was effective for the Company in
the first quarter of fiscal 2007. The adoption of FIN 48 did not have a material
impact on the Company’s Consolidated Financial Statements.
 
 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.
  31
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 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 and mortgage serving assets.
  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 2008 and 2007, 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, after
retroactively adjusting for the 5-for-4 stock split paid June 2007, as
summarized below:
  2008
                      
                      
                      2007Weighted
      average number of common shares used inin
      computing basic net income per share
                      
                      
                      2,121,308
                      
                      
                      
                      2,111,612Effect
      of dilutive stock options
                      
                      
                      150,669
                      
                      
                      
                      175,050Weighted
      average number of common shares and dilutive potentialcommon
      shares used in computing diluted net income per share
                      
                      
                      2,271,977
                      
                      
                      
                      2,286,662
 
 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 – In December 2007, the FASB issued SFAS 141(R), Business
Combinations.  SFAS 141(R) will significantly change how
entities apply the acquisition method to business combinations. The most
significant changes affecting how the Corporation will account for business
combinations under this Statement include: the acquisition date will be date the
acquirer obtains control; all (and only) identifiable assets acquired,
liabilities assumed, and noncontrolling interests in the acquiree will be stated
at fair value on the acquisition date; assets or liabilities arising from
noncontractual contingencies will be measured at their acquisition date fair
value only if it is more likely than not that they meet the definition of an
asset or liability on the acquisition date; adjustments subsequently made to the
provisional amounts recorded on the acquisition date will be made retroactively
during a measurement period not to exceed one year; acquisition-related
restructuring costs that do not meet the criteria in SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, will be expensed as incurred;
transaction costs will be expensed as incurred; reversals of deferred income tax
valuation allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period; and the allowance for loan losses of an
acquiree will not be permitted to be recognized by the acquirer. Additionally,
SFAS 141(R) will require new and modified disclosures surrounding subsequent
changes to acquisition-related contingencies, contingent consideration,
noncontrolling interests, acquisition-related transaction costs, fair values and
cash flows not expected to be collected for acquired loans, and an enhanced
goodwill rollforward.
   32
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 The
Company will be required to prospectively apply SFAS 141(R) to all business
combinations completed on or after January 1, 2009. Early adoption is not
permitted. For business combinations in which the acquisition date was before
the effective date, the provisions of SFAS 141(R) will apply to the subsequent
accounting for deferred income tax valuation allowances and income tax
contingencies and will require any changes in those amounts to be recorded in
earnings.  Management is currently evaluating the effects that SFAS
141(R) will have on the financial condition, results of operations, liquidity,
and the disclosures that will be presented in the consolidated financial
statements.
 
 SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.”SFAS 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and
losses on items for which the fair value 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, (ii) is irrevocable
(unless a new election date occurs) and (iii) is applied only to entire
instruments and not to portions of instruments. SFAS 159 became effective for
the Company on January 1, 2008 (see Note 14 - Fair Value
Measurements).
 
 SFAS No. 157, “Fair Value
Measurements.”SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157, with the exception of
certain provisions, became effective for the Company on January 1, 2008
(see Note 14 - Fair Value Measurements).
 
 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 authorizes 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 is referred to as the Troubled Asset Relief
Program (TARP).
 
 The law
also temporarily raises 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, 2009. 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 December 31, 2009. 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 will
purchase up to $250 billion of senior preferred stock. The program will be
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 by November 14, 2008. Treasury will determine
eligibility and allocations for interested parties after consultation with the
appropriate federal banking agency. The minimum subscription amount available to
a participating institution is 1 percent of risk-weighted assets. The maximum
subscription amount is the lesser of $25 billion or 3 percent of risk-weighted
assets.
 
 The
senior preferred shares will qualify as Tier 1 capital and will rank senior to
common stock. The senior preferred shares will pay a cumulative dividend rate of
5 percent per annum for the first five years and will reset to a rate of 9
percent per annum after year five. The senior preferred shares will be
non-voting, other than class voting rights on matters that could adversely
affect the shares. The senior preferred shares will be callable at par after
three years. Prior to the end of three years, the senior preferreds may be
redeemed with the proceeds from a qualifying equity offering of any Tier 1
perpetual preferred or common stock. The Treasury may also transfer the senior
preferred shares to a third
  33
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  1.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
 
 party at
any time.  In conjunction with the purchase of senior preferred shares, the
Treasury will receive warrants to purchase a number of shares of preferred stock
having an aggregate liquidation preference equal to 5% of the amount
of
 senior
preferred shares purchased.  The initial exercise price of the
warrants will be $0.01 per share.  The Treasury intends to immediately
exercise the warrants.  Only institutions deemed to be “healthy” will
be eligible to purchase CPP.
 
 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.  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.
 
 On
January 12, 2009, FASB released final FSP No. EITF 99-20-1, EITF 99-20-a, Amendments to the Impairment
Guidance of EITF Issue No. 99-20. According to FASB, the FSP amends the
impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-than-temporary impairment
(OTTI) has occurred.
 
 The FSP
retains and emphasizes the OTTI guidance and required disclosures in Statement
115, FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments, SEC Staff Accounting Bulletin (SAB)
Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and
Equity Securities, and other related literature.
 
 On
December 11, 2008, FASB released FSP 140-4, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities.  This statement applies to public entities that
are subject to the disclosure requirements of Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishements of Liabilities, and
public enterprises that are subject to the disclosure requirement of
Interpretation 46(R), Consolidation of Variable Interest
Entities, as amended by this FSP.  This FSP amends
Interpretation 46(R) and highlights disclosure objectives that assist a user of
the financial statements in understanding the nature of the transferor’s
continuing involvement with transferred assets and involvement with variable
interest entities and qualifying special purpose entities.
 
 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.
 
 2.
              INVESTMENT
      SECURITIES
 
 The
amortized cost, gross unrealized gains and losses and fair values of investment
securities at December 31, 2008 and 2007 are as follows:
 
 
  34
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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
                    )
                    
                    $
                    240,128Mortgage-backed
      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
                    
                    
                    
                    -
                    
                    
                    
                    2,818,309Mortgage-backed
      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
                    )
                    
                    
                    5,210,744Mortgage-backed
      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
 
 
  35
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  2.
              INVESTMENT
      SECURITIES (Continued)
 
 Available-for-sale
securities consist of the following at December 31, 2007:
 
 Gross
                    
                    
                    GrossAmortized
                    
                    
                    unrealized
                    
                    
                    unrealized
                    
                    
                    Faircost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    valueType
      and Maturity GroupU.S.
      Government agencies due -Within
      1 year
                    
                    $
                    787,042
                    
                    
                    $
                    -
                    
                    
                    $
                    (6,884
                    )
                    
                    $
                    780,158U.S.
      Government agencies due –Within
      1 year
                    
                    
                    500,000
                    
                    
                    
                    -
                    
                    
                    
                    (84
                    )
                    
                    
                    499,916Mortgage-backed
      securities due -Within
      1 to 5 years
                    
                    
                    1,521,833
                    
                    
                    
                    -
                    
                    
                    
                    (13,011
                    )
                    
                    
                    1,508,822Municipal
      bonds due –Within
      1 to 5 years
                    
                    
                    556,685
                    
                    
                    
                    2,208
                    
                    
                    
                    -
                    
                    
                    
                    558,893Total
      due within 1 to 5 years
                    
                    
                    2,578,518
                    
                    
                    
                    2,208
                    
                    
                    
                    (13,095
                    )
                    
                    
                    2,567,631U.S.
      Government agencies due -Within
      5 to 10 years
                    
                    
                    3,057,388
                    
                    
                    
                    38,185
                    
                    
                    
                    (8,564
                    )
                    
                    
                    3,087,009Mortgage-backed
      securities due -Within
      5 to 10 years
                    
                    
                    2,109,757
                    
                    
                    
                    1,274
                    
                    
                    
                    (19,676
                    )
                    
                    
                    2,091,355Municipal
      bonds due –Within
      5 to 10 years
                    
                    
                    1,090,077
                    
                    
                    
                    1,933
                    
                    
                    
                    (15,749
                    )
                    
                    
                    1,076,261Total
      due within 5 to 10 years
                    
                    
                    6,257,222
                    
                    
                    
                    41,392
                    
                    
                    
                    (43,989
                    )
                    
                    
                    6,254,625Mortgage-backed
      securities due -after
      10 years
                    
                    
                    9,320,592
                    
                    
                    
                    103,906
                    
                    
                    
                    (6,887
                    )
                    
                    
                    9,417,611Municipal
      bonds due –after
      10 years
                    
                    
                    7,147,365
                    
                    
                    
                    5,302
                    
                    
                    
                    (59,398
                    )
                    
                    
                    7,093,269Total
      due after 10 years
                    
                    
                    16,467,957
                    
                    
                    
                    109,208
                    
                    
                    
                    (66,285
                    )
                    
                    
                    16,510,880Total
      at December 31, 2007
                    
                    $
                    26,090,739
                    
                    
                    $
                    152,808
                    
                    
                    $
                    (130,253
                    )
                    
                    $
                    26,113,294
  For the
year ended December 31, 2008 and 2007, proceeds from the sales of investment
securities available for sale totaled none and $283,268,
respectively.  Gross realized losses from the sales in 2008 and 2007
amounted to none and $1,093, respectively.
 
 Securities
with carrying values of $1,418,608 and $1,915,652 at December 31, 2008 and 2007,
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, 2008 and
2007.  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, 2008 and 2007 are a result of
volatility in the market during 2008 and 2007 and relate to 15 Municipal bonds
and four Mortgage-backed securities at December 31, 2008 and two U.S. Government
agency bonds, 15 Municipal bonds and 15 Mortgage-backed securities at December
31, 2007. 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.
 
 
  36
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  2.
              INVESTMENT
      SECURITIES (Continued)
 
 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
                                                                        )December
      31, 2007:Less Than 12 Months
                                                                        
                                                                        
                                                                        12 Months or More
                                                                        
                                                                        
                                                                        TotalFair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        Unrealized
                                                                        
                                                                        
                                                                        Fair
                                                                        
                                                                        
                                                                        Unrealizedvalue
                                                                        
                                                                        
                                                                        losses
                                                                        
                                                                        
                                                                        value
                                                                        
                                                                        
                                                                        losses
                                                                        
                                                                        
                                                                        value
                                                                        
                                                                        
                                                                        lossesSecurities
      available for sale:U.S.
      government agencies
                                                                        
                                                                        $
                                                                        1,915,243
                                                                        
                                                                        
                                                                        $
                                                                        (8,648
                                                                        )
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        1,915,243
                                                                        
                                                                        
                                                                        $
                                                                        (8,648
                                                                        )Mortgage-backed
      securities
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        4,697,677
                                                                        
                                                                        
                                                                        
                                                                        (46,458
                                                                        )
                                                                        
                                                                        
                                                                        4,697,677
                                                                        
                                                                        
                                                                        
                                                                        (46,458
                                                                        )Municipal
      bonds
                                                                        
                                                                        
                                                                        3,667,339
                                                                        
                                                                        
                                                                        
                                                                        (41,765
                                                                        )
                                                                        
                                                                        
                                                                        2,342,558
                                                                        
                                                                        
                                                                        
                                                                        (33,382
                                                                        )
                                                                        
                                                                        
                                                                        6,009,897
                                                                        
                                                                        
                                                                        
                                                                        (75,147
                                                                        )Total
      temporarily impairedsecurities
                                                                        
                                                                        $
                                                                        5,582,582
                                                                        
                                                                        
                                                                        $
                                                                        (50,413
                                                                        )
                                                                        
                                                                        $
                                                                        7,040,235
                                                                        
                                                                        
                                                                        $
                                                                        (79,840
                                                                        )
                                                                        
                                                                        $
                                                                        12,622,817
                                                                        
                                                                        
                                                                        $
                                                                        (130,253
                                                                        )
 
  The
      aggregate cost of the Company’s cost method investment, Federal Home Loan
      Bank stock, totaled $585,600 and $463,300 at December 31, 2008 and 2007,
      respectively.  The Company estimated that the fair value equaled
      the cost of the investment (that is, the investment was not
      impaired).  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, 2008 and 2007 classified by type are as follows:
  2008
                    
                    
                    2007Real
      estate:Construction
                    
                    $
                    59,486,736
                    
                    
                    $
                    36,559,609Mortgage
                    
                    
                    81,446,145
                    
                    
                    
                    72,149,288Commercial,
      financial and agricultural
                    
                    
                    27,923,001
                    
                    
                    
                    24,792,538Consumer
                    
                    
                    2,711,134
                    
                    
                    
                    2,569,211Subtotal
                    
                    
                    171,567,016
                    
                    
                    
                    136,070,646Net
      deferred loan origination fees
                    
                    
                    (327,324
                    )
                    
                    
                    (336,422
                    )Total
                    
                    $
                    171,239,692
                    
                    
                    $
                    135,734,224
 
  
   37
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  3.
              LOANS
      (Continued)
  Nonperforming
assets at December 31, 2008 and 2007:
  2008
                    
                    
                    2007Nonaccrual
      and restructured loans
                    
                    $
                    316,102
                    
                    
                    $
                    195,683Foreclosed
      properties
                    
                    
                    205,006
                    
                    
                    
                    87,787Repossessions
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    521,108
                    
                    
                    $
                    283,470
 
 One loan
in the amount of $48,049 was restructured during 2008 compared to none during
2007.  Loans totaling $349,976 and $195,683 were considered impaired
as of December 31, 2008 and 2007, respectively.  Impaired loans of
$349,976 and $195,683 had related allowances for loan losses of none and $120 at
December 31, 2008 and 2007, respectively. The average recorded investment in
impaired loans during the years ended December 31, 2008 and 2007 was $195,935
and $400,074, respectively.  For the years ended December 31, 2008 and
2007, the Company recognized interest income from impaired loans of
approximately $350 and $1,535, respectively.
 
 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, 2007, directors’ direct and indirect
indebtedness to the Company aggregated $1,668,666.  During 2008,
$1,939,074 in new loans were made and repayments of $1,413,538 were collected,
resulting in a balance of $2,194,202 at December 31, 2008.  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, 2008 and
2007 are as follows:
  2008
                    
                    
                    2007Balance
      at beginning of year
                    
                    $
                    2,090,125
                    
                    
                    $
                    1,884,080Provision
      for loan losses
                    
                    
                    711,285
                    
                    
                    
                    406,725Charge-offs
                    
                    
                    (319,933
                    )
                    
                    
                    (256,741
                    )Recoveries
                    
                    
                    48,504
                    
                    
                    
                    56,061Balance
      at end of year
                    
                    $
                    2,529,981
                    
                    
                    $
                    2,090,125
  38
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  5.
              PREMISES
      AND EQUIPMENT
  Premises
and equipment at December 31, 2008 and 2007 are as follows:
  2008
                    
                    
                    2007Land
                    
                    $
                    113,900
                    
                    
                    $
                    113,900Land
      improvements
                    
                    
                    121,873
                    
                    
                    
                    121,873Building
      and improvements
                    
                    
                    2,144,532
                    
                    
                    
                    2,127,532Furniture
      and equipment
                    
                    
                    2,123,032
                    
                    
                    
                    2,046,200Leasehold
      improvements
                    
                    
                    783,718
                    
                    
                    
                    783,718Construction
      in progress
                    
                    
                    13,158
                    
                    
                    
                    62,447Total
                    
                    
                    5,300,213
                    
                    
                    
                    5,255,670Less
      accumulated depreciation and amortization
                    
                    
                    (2,648,206
                    )
                    
                    
                    (2,274,507
                    )Total
                    
                    $
                    2,652,007
                    
                    
                    $
                    2,981,163
 
 Depreciation
expense for the years ended December 31, 2008 and 2007 amounted to $374,363 and
$395,947, respectively.
 
 
 6.
              DEPOSIT
      ACCOUNTS
  At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
  2009
                    
                    $
                    96,425,7052010
                    
                    
                    159,2452011
                    
                    
                    28,3772012
                    
                    
                    6,149Total
                    
                    $
                    96,619,476
 
 
 7.      INCOME
TAXES
  The
significant components of the income tax provision for the years ended
December 31, 2008 and 2007 follow:
 
 2008
                    
                    
                    2007Current
      tax provisionFederal
                    
                    $
                    778,256
                    
                    
                    $
                    1,016,221State
                    
                    
                    185,204
                    
                    
                    
                    241,412Total
      current provision
                    
                    
                    963,460
                    
                    
                    
                    1,257,633Deferred
      tax provisionFederal
                    
                    
                    (200,000
                    )
                    
                    
                    (108,302
                    )State
                    
                    
                    (40,597
                    )
                    
                    
                    (20,604
                    )Total
      deferred tax provision
                    
                    
                    (240,597
                    )
                    
                    
                    (128,906
                    )Net
      provision for income taxes
                    
                    $
                    722,863
                    
                    
                    $
                    1,128,727
 
   39
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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:
 
 2008
                    
                    
                    2007Expense
      computed at statutory rate of 34%
                    
                    $
                    688,219
                    
                    
                    $
                    1,079,409Effect
      of state income taxes
                    
                    
                    95,441
                    
                    
                    
                    145,733Tax-exempt
      income
                    
                    
                    (110,084
                    )
                    
                    
                    (95,775
                    )Other
                    
                    
                    49,287
                    
                    
                    
                    (640
                    )$
                    722,863
                    
                    
                    $
                    1,128,727
 
  Significant
      components of deferred taxes at December 31, 2008 and 2007 are as
      follows:
  2008
                    
                    
                    2007Deferred
      tax assets:Allowance
      for loan losses
                    
                    $
                    723,071
                    
                    
                    $
                    521,108Deferred
      compensation
                    
                    
                    113,923
                    
                    
                    
                    105,968Other
                    
                    
                    29,011
                    
                    
                    
                    36,816Total
      deferred tax assets
                    
                    
                    866,005
                    
                    
                    
                    663,892Deferred
      tax liabilities:Premises
      and equipment
                    
                    
                    (7,656
                    )
                    
                    
                    (37,642
                    )Prepaid
      expenses
                    
                    
                    (36,462
                    )
                    
                    
                    (44,960
                    )Net
      unrealized gains on available for sale securities
                    
                    
                    (10,966
                    )
                    
                    
                    (8,696
                    )Total
      deferred tax liabilities
                    
                    
                    (55,084
                    )
                    
                    
                    (91,298
                    )Net
      recorded deferred tax asset
                    
                    $
                    810,921
                    
                    
                    $
                    572,594
 
 The
Company adopted the provisions of FASB Interpretation No. 48 (FIN
48).  There was no material impact from the adoption of FIN
48.  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 2005, 2006 and 2007.
  8.
              LEASES
  The
Company leases certain banking facility premises and equipment under operating
lease agreements. Future minimum rental payments are as follows:
 
 2009
                      
                      $
                      184,5302010
                      
                      
                      184,5302011
                      
                      
                      188,2802012
                      
                      
                      193,5302013
                      
                      
                      193,530Total
                      
                      $
                      944,400
  The land
for a branch office is leased from a partnership that includes a director of the
Company.  The monthly rent is
  40
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  8.
              LEASES
      (continued)
  $3,600.  Rental
expense charged to operations under all operating lease agreements was $238,125
and $237,706 for the years ended December 31, 2008 and 2007,
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,
2008.
 
 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, 114,713 were
outstanding under the Nonstatutory Plan and 138,672 were outstanding under the
Incentive Plan at December 31, 2008. 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, 2008
and 2007 follows:
 
 Exercise
      PriceShares
                              
                              
                              Per ShareNonstatutory
      PlanOutstanding,
      December 31, 2005
                              
                              
                              123,875
                              
                              
                              $
                              3.26Outstanding,
      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
                              
                              
                              
                              3.26Incentive PlanOutstanding,
      December 31, 2005
                              
                              
                              157,652
                              
                              
                              $
                              3.26Exercised
                              
                              
                              (1,250
                              )
                              
                              
                              3.26Outstanding,
      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
                              
                              
                              
                              3.26
 
  41
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  9.
              STOCK
      OPTIONS (Continued)
 
 At December 31, 2008Outstanding Options
                      
                      
                      Exercisable OptionsRemaining
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedLife
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageExercise
      Price
                      
                      Shares
                      
                      
                      (Years)
                      
                      
                      Price
                      
                      
                      Shares
                      
                      
                      PriceNonstatutory
      Plan$     3.26
                      
                      
                      114,713
                      
                      
                      
                      2.5
                      
                      
                      $
                      3.26
                      
                      
                      
                      114,743
                      
                      
                      $
                      3.26Incentive
      Plan$     3.26
                      
                      
                      138,672
                      
                      
                      
                      2.5
                      
                      
                      $
                      3.26
                      
                      
                      
                      138,672
                      
                      
                      $
                      3.26
 
 There
were 128,933 shares available for future grants at December 31,
2008.  The aggregate intrinsic values of outstanding and exercisable
shares at December 31, 2008 and 2007, respectively, were $782,960 and
$1,826,382.  All options were vested prior to adoption of SFAS No.
123(R).
  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 $94,228 and $69,102
for the years ended December 31, 2008 and 2007, 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 $295,523 and
$274,888 at December 31, 2008 and 2007, respectively, is being accrued over the
vesting period defined in the agreement, which has fully vested. The related
expense was $20,635 and $9,721 based upon a discount rate of 5.920% and 6.182%
for the years ended December 31, 2008 and 2007, 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, 2008 was
$224,936.
 
 11.
              BORROWINGS
 
 SHORT-TERM
      BORROWINGS
 
 The
      Company has $3,000,000 available in overnight federal fund lines of credit
      and an approximately $15,260,000 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.
 
  42
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  11.
              BORROWINGS
      (Continued)
 
 Short-term
borrowings at December 31 are summarized as follows:
 
 2008
                    
                    
                    2007Short-term
      borrowings:Federal
      funds purchased
                    
                    $
                    3,944,000
                    
                    
                    $
                    -Securities
      sold under agreements to repurchase
                    
                    
                    975,140
                    
                    
                    
                    419,669Short-term
      borrowings
                    
                    
                    1,000,000
                    
                    
                    
                    -Total
      overnight and short-term borrowings
                    
                    $
                    5,919,140
                    
                    
                    $
                    419,669
 
 A summary
of selected data related to federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowed funds
follows:
 
 2008
                      
                      
                      2007Federal
      funds purchased:Weighted
      average interest rate at December 31
                      
                      
                      .95
                      %
                      
                      
                      4.60
                      %Maximum
      amount outstanding at any month-end during the year
                      
                      
                      3,944,000
                      
                      
                      
                      464,000Average
      daily balance outstanding during the year
                      
                      
                      496,683
                      
                      
                      
                      299,493Average
      annual interest rate paid during the year
                      
                      
                      2.66
                      %
                      
                      
                      5.71
                      %Securities
      sold under agreements to repurchase:Weighted
      average interest rate at December 31
                      
                      
                      .25
                      %
                      
                      
                      3.42
                      %Maximum
      amount outstanding at any month-end during the year
                      
                      
                      1,254,477
                      
                      
                      
                      419,669Average
      daily balance outstanding during the year
                      
                      
                      510,272
                      
                      
                      
                      230,435Average
      annual interest rate during the year
                      
                      
                      1.07
                      %
                      
                      
                      4.20
                      %Other
      Short-term borrowings:Maximum
      outstanding at any month-end during the year
                      
                      
                      4,400,000
                      
                      
                      
                      4,400,000Average
      daily balance
                      
                      
                      72,404
                      
                      
                      
                      516,986Average
      interest rate during the year
                      
                      
                      2.77
                      %
                      
                      
                      5.58
                      %Average
      interest rate at end of year
                      
                      
                      .46
                      %
                      
                      
                      -
 
 LONG-TERM
DEBT
 
 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.
 
 In 2004,
the Company adopted FIN 46R, with no restatement of prior periods, resulting in
the deconsolidation of Weststar Financial Services Corporation I, a statutory
trust (the “Trust”), which was created for the sole purpose of issuing trust
preferred securities.  The implementation of FIN 46R resulted 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 is now
recording 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, 2008, 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:
  43
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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, 2008 the effective rate was
7.97%.  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, 2008, the
Bank had undivided profits of $7,731,464.  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, 2008, the ratio was 10.19% for the Bank, leaving all $7,731,464 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 I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
As of December 31, 2008, 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, 2008 and 2007, 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.
  44
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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, 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
      I 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
      I 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
                                                                                                                                          %Minimum
      To Be WellMinimum
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Capitalized
      UnderFor
      Capital
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Prompt
      CorrectiveActual
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Requirement
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Action ProvisionsAmount
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Ratio
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Amount
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Ratio
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          Amount
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          RatioAs
      of December 31, 2007:Total
      Capital (to RiskWeighted
      Assets)Consolidated
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          21,005
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14.29
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/ABank
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          19,888
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13.55
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          11,738
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8.00
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          14,673
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10.00
                                                                                                                                          %Tier
      I Capital (to RiskWeighted
      Assets)Consolidated
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          19,165
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13.04
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/ABank
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          18,051
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12.30
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,869
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.00
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8,804
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6.00
                                                                                                                                          %Tier
      I Capital (toAverage
      Assets)Consolidated
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          19,165
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          11.17
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/A
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          N/ABank
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          18,051
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10.54
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          6,851
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4.00
                                                                                                                                          %
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8,564
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          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, 2008 and 2007 was
$31,886,835 and $38,206,567, respectively.
 
  45
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  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, 2008. These fair values estimates are based on
relevant market information and information about fthe 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 SFAS 157.
 
 2008
                    
                    
                    2007Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    Estimatedamount
                    
                    
                    fair value
                    
                    
                    amount
                    
                    
                    fair value(In
      thousands)Assets:Cash
      and cash equivalents
                    
                    $
                    4,420
                    
                    
                    $
                    4,420
                    
                    
                    $
                    8,527
                    
                    
                    $
                    8,527Investment
      securities
                    
                    
                    23,778
                    
                    
                    
                    23,778
                    
                    
                    
                    26,113
                    
                    
                    
                    26,113Federal
      Home Loan Bank stock
                    
                    
                    586
                    
                    
                    
                    586
                    
                    
                    
                    463
                    
                    
                    
                    463Loans,
      net
                    
                    
                    168,710
                    
                    
                    
                    171,856
                    
                    
                    
                    133,644
                    
                    
                    
                    134,659Interest
      receivable
                    
                    
                    1,030
                    
                    
                    
                    1,030
                    
                    
                    
                    973
                    
                    
                    
                    973Bank
      owned life insurance
                    
                    
                    225
                    
                    
                    
                    225
                    
                    
                    
                    351
                    
                    
                    
                    351Liabilities:Demand
      deposits, NOW accounts,money
      market accounts, savings
                    
                    
                    74,195
                    
                    
                    
                    74,195
                    
                    
                    
                    74,221
                    
                    
                    
                    74,221Time
      deposits
                    
                    
                    96,619
                    
                    
                    
                    97,039
                    
                    
                    
                    74,970
                    
                    
                    
                    74,898Short-term
      borrowings
                    
                    
                    5,919
                    
                    
                    
                    5,919
                    
                    
                    
                    420
                    
                    
                    
                    420Interest
      payable
                    
                    
                    565
                    
                    
                    
                    565
                    
                    
                    
                    568
                    
                    
                    
                    568Long-term
      debt
                    
                    
                    8,124
                    
                    
                    
                    8,297
                    
                    
                    
                    8,124
                    
                    
                    
                    8,275
 
 Fair
Value of Financial Instruments - SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, requires that the Company disclose estimated fair
values for its financial instruments. Fair value methods and assumptions are set
forth below for the Company’s consolidated financial instruments.
  Cash and
Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable -
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.
   46
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
   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 loans 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 and a liquidity adjustment related to the current market
environments.
 
 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 SFAS No. 157, “Fair
Value Measurements,” for financial assets and financial
liabilities.  In accordance with Financial Accounting Standards Board
Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157,”
the Company will delay application of SFAS 157 for non-financial assets and
non-financial liabilities, until January 1, 2009. SFAS 157 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 SFAS 157 in situations where the market for a financial asset is
not active was clarified by the issuance of FSP No. SFAS 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active,”
in October 2008. FSP No. SFAS 157-3 became effective immediately and did not
significantly impact the methods by which the Company determines the fair
values of its financial assets.
 
 Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
values.  These levels are:
 
 Level
1               Valuation
is based upon quoted prices for identical instruments traded in active
markets.
 
 Level
2               Valuation
is based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are
observable in the market.
 
 Level
3               Valuation
is generated from model-based techniques that use at least one significant
assumption not observable in the market.  These unobservable
assumptions reflect estimates of assumptions that market participants would use
in pricing the asset or liability.  Valuation techniques included use
of option pricing models, discounted cash flow models and similar
techniques.
 
 Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
 
 Investment
Securities Available-for-Sale
 Investment
securities available-for-sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing modes or other model-based valuation
techniques such as present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities included those traded on
an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in an active over-the-counter
markets and money market funds.  Level 2 securities included
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets.
 
  47
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  14.
              FAIR
      VALUE OF FINANCIAL INSTRUMENTS
(Continued)
 
 Loans
 The
Company does not record loans at fair value on a recurring
basis.  However, from time to time a loan is considered impaired and a
specific reserve is established.  Loans for which it is probable that
payment of interest and principal will not be made in accordance with the
contractual terms of the loan agreement are considered impaired.  Once
a loan is identified as individually impaired, management measures impairment in
accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,”
(SFAS 114).  The fair value of impaired loans is estimated using one
of several methods, including collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flow.  Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investment in
such loans.  At December 31, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the
collateral.  In accordance with SFAS 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the impaired loan as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
as nonrecurring Level 3.
 
 Foreclosed
Assets
 Foreclosed
assets are adjusted to fair value 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,
      2008Quoted
      Pricesin
      Active
                              
                              
                              SignificantMarkets
      for
                              
                              
                              Other
                              
                              
                              SignificantIdentical
                              
                              
                              Observable
                              
                              
                              Unobservable A
                              
                              
                              ssets/Assets
                              
                              
                              Inputs
                              
                              
                              Inputs
                              
                              
                              LiabilitiesDescription
                              
                              (Level 1)
                              
                              
                              (Level 2)
                              
                              
                              (Level 3)
                              
                              
                              at Fair ValueAvailable-for-salesecurities
                              
                              
                              -
                              
                              
                              $
                              23,778,449
                              
                              
                              
                              -
                              
                              
                              $
                              23,778,449
 
 Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities -Including an
amendment of FASB Statement No. 115.” SFAS 159 permits the Company 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 SFAS 159 on January 1, 2008 did not have a
significant impact on the Company’s consolidated financial
statements.
  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, 2008 and
2007:
  48
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  15.
              PARENT
      COMPANY FINANCIAL DATA (continued)
 
 Condensed
Balance Sheets
 December
31, 2008 and 2007
 
 2008
                  
                  
                  2007AssetsCash
      and due from banks
                  
                  $
                  1,021,043
                  
                  
                  $
                  1,002,851Investment
      in The Bank of Asheville, at equity
                  
                  
                  19,411,593
                  
                  
                  
                  18,065,846Investment
      in Weststar Financial Services Corporation I
                  
                  
                  124,000
                  
                  
                  
                  124,000Investment
      in Bank of Asheville Mortgage Company, LLC, at equity
                  
                  
                  -
                  
                  
                  
                  (992
                  )Other
      assets
                  
                  
                  155,115
                  
                  
                  
                  192,217Total
      assets
                  
                  $
                  20,711,751
                  
                  
                  $
                  19,383,922Liabilities
      and Shareholders’ EquityLiabilities:Junior
      subordinated debentures payable toWeststar
      Financial Services Corporation I
                  
                  $
                  4,124,000
                  
                  
                  $
                  4,124,000Other
                  
                  
                  77,180
                  
                  
                  
                  80,683Shareholders’
      equity
                  
                  
                  16,510,571
                  
                  
                  
                  15,179,239Total
      liabilities and shareholders’ equity
                  
                  $
                  20,711,751
                  
                  
                  $
                  19,383,922
 
  49
 Index
 WESTSTAR
FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008 and 2007
  15.           PARENT
COMPANY FINANCIAL DATA (Continued)
 
 Condensed
      Statements of OperationsYears
      Ended December 31, 2008 and 20072008
                      
                      
                      2007Interest
      Income:Interest-bearing
      deposits
                      
                      $
                      84,238
                      
                      
                      $
                      78,633Interest
      Expense:Junior
      subordinated debentures issued toWeststar
      Financial Services Corporation I
                      
                      
                      285,465
                      
                      
                      
                      354,648Non-interest
      Income:Equity
      in earnings of subsidiary bank
                      
                      
                      1,418,127
                      
                      
                      
                      2,274,357Equity
      in income (loss) of Bank of AshevilleMortgage
      Company, LLC
                      
                      
                      (15,295
                      )
                      
                      
                      (60,099
                      )Other
                      
                      
                      137,170
                      
                      
                      
                      133,063Total
      Non-interest Income
                      
                      
                      1,540,002
                      
                      
                      
                      2,347,321Non-interest
      Expenses:Other
                      
                      
                      80,990
                      
                      
                      
                      84,469Income
      before income tax benefit
                      
                      
                      1,257,785
                      
                      
                      
                      1,986,837Income
      tax benefit
                      
                      
                      (43,527
                      )
                      
                      
                      (59,169
                      )Net
      income
                      
                      $
                      1,301,312
                      
                      
                      $
                      2,046,006Condensed
      Statements of Cash FlowsYears
      Ended December 31, 2008 and 20072008
                      
                      
                      2007Cash
      Flows from Operating Activities:Net
      income
                      
                      $
                      1,301,312
                      
                      
                      $
                      2,046,006Noncash
      items included in net income:Equity
      in undistributed earnings of TheBank
      of Asheville
                      
                      
                      (1,481,127
                      )
                      
                      
                      (2,274,357
                      )Equity
      in undistributed (income) loss of Bank of AshevilleMortgage
      Company, LLC
                      
                      
                      15,295
                      
                      
                      
                      60,099(Increase)
      decrease in other assets
                      
                      
                      43,610
                      
                      
                      
                      15,743Increase
      (decrease) in other liabilities
                      
                      
                      (3,503
                      )
                      
                      
                      (1,169
                      )Net
      cash used in operating activities
                      
                      
                      (61,413
                      )
                      
                      
                      (150,678
                      )Cash
      Flows from Investing Activities:Upstream
      dividends received from The Bank of Asheville
                      
                      
                      75,995
                      
                      
                      
                      360,980Investment
      in Bank of Asheville Mortgage Company, LLC
                      
                      
                      (20,000
                      )
                      
                      
                      (15,000
                      )Distribution
      of capital from Bank of Asheville MortgageCompany,
      LLC
                      
                      
                      3,713
                      
                      
                      
                      -Net
      cash provided by investing activities
                      
                      
                      59,708
                      
                      
                      
                      345,980Cash
      Flows from Financing Activities:Cash
      paid for fractional shares
                      
                      
                      -
                      
                      
                      
                      (1,930
                      )Exercise
      of stock options
                      
                      
                      19,897
                      
                      
                      
                      21,587Net
      cash provided (used) in financing activities
                      
                      
                      19,897
                      
                      
                      
                      19,657Net
      increase in cash
                      
                      
                      18,192
                      
                      
                      
                      214,959Beginning
                      
                      
                      1,002,851
                      
                      
                      
                      790,892Ending
                      
                      $
                      1,021,043
                      
                      
                      $
                      1,002,851
  50
 Index
  ITEM
9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE
 
 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, 2008. 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 ot 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, 2008.  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, 2008, 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.
 
  51
 Index
  PART
III
 
 ITEM
      10:
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 See pages
5 - 12 of Registrant’s 2009 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
12 - 16 of Registrant’s 2009 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,
2008.
 
 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, 114,713 were
outstanding under the Nonstatutory Plan and 138,672 were outstanding under the
Incentive Plan at December 31, 2008. 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
      – 114,713
                  $3.26
                  50,000security
      holders
                  Incentive
      – 138,672
                  $3.26
                  78,933Equity
      compensationplans
      not approvedby
      security holders
                  None
                  None
                  NoneTotal
                  253,385
                  $3.26
                  128,933
 
 All share
and per share amounts have been adjusted to reflect a 5-for-4 stock paid during
2007.
 
 See pages
3 – 5 of Registrant’s 2009 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
6 and 11 of Registrant’s 2009 Annual Meeting Proxy Statement, as filed with the
SEC pursuant to Rule 14a-6(b).
 
 ITEM
14:  PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
 See pages
8 - 10 of Registrant’s 2009 Annual Meeting Proxy Statement, as filed with the
SEC pursuant to Rule 14a-6(b).
 
 
  52
 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, 2008 and 2007
 
 Consolidated
      Statements of Operations and Comprehensive Income for the years ended
      December 31, 2008 and 2007
 
 Consolidated
      Statements of Changes in Shareholders’ Equity for the years ended December
      31, 2008 and 2007
 
 Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
 
 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
 
 10.1
              Employment
      Agreement between the Bank and G. Gordon Greenwood, dated February 9, 2000
      (a management contract)1
 
 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
      10.8)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
 
 10.12
              2007
      Nonstatutory Stock Option Plan (a compensatory plan)5
  53
 Index
  
 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
              2009
      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 Registration Statement on Form S-8 (Registration No.
      333-14500, filed with the Securities and Exchange Commission on August 16,
      2007)
 
 6.
              As
      filed with the Securities and Exchange Commission pursuant to Rule
      14a-6(b)
 
  54
 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:
                  March
      17, 2009
 
  55
 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
                  March
      17, 2009/s/M. David Cogburn,
      M.D.
                    M.
      David Cogburn, M.D.
                    Director
                  March
      17, 2009/s/Steven D.
      Cogburn
                    Steven
      D. Cogburn
                    Director
                  March
      17, 2009/s/G. Gordon
      Greenwood
                    G.
      Gordon Greenwood
                    President
      & Chief Executive Officer
                  March
      17, 2009/s/Patricia P.
      Grimes
                    Patricia
      P. Grimes
                    Director
                  March
      17, 2009/s/Randall C.
      Hall
                    Randall
      C. Hall
                    Secretary/Treasurer
                    Chief
      Financial Officer and
                    Principal
      Accounting Officer
                  March
      17, 2009/s/Darryl J.
      Hart
                    Darryl
      J. Hart
                    Director
                  March
      17, 2009/s/Carol L.
      King
                    Carol
      L. King
                    Director
                  March
      17, 2009/s/Stephen L.
      Pignatiello
                    Stephen
      L. Pignatiello
                    Director
                  March
      17, 2009/s/Laura A.
      Webb
                    Laura
      A. Webb
                    Director
                  March
      17, 2009/s/David N.
      Wilcox
                    David
      N. Wilcox
                    Director
                  March
      17, 2009
  
  56
 Index
  
 EXHIBIT
INDEX
 
 Exhibit
                    Number
                  Exhibit
                  Page
                    Number3.1
                  Articles
      of Incorporation
                  *3.2
                  Bylaws
                  *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
                    
                    10.10
                    
                    10.11
                    
                    10.12
                  Floating
      Rate Junior Subordinated Debenture of Weststar Financial Services
      Corporation
                    
                    Employment
      Agreement of John R. Hamrick.
                    
                    2007
      Incentive Stock Option Plan
                    
                    2007
      Nonstatutory Stock Option Plan
                  *
                    
                    *
                    
                    *
                    
                    *21.1
                  Subsidiaries
                  Filedherewith23.1
                  Consent
      of Independent Registered Public Accounting Firm
                  Filedherewith31.1
                  Certification
      of Principal Executive Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act of 2002
                  Filedherewith31.2
                  Certification
      of Principal Financial Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act of 2002
                  Filedherewith32.1
                  Certification
      of Principal Executive Officer Pursuant to Section 906 of the Sarbanes
      Oxley Act of 2002
                  Filedherewith32.2
                  Certification
      of Principal Financial Officer Pursuant to Section 906 of the Sarbanes
      Oxley Act of 2002
                  Filedherewith99.1
                  2009
      Proxy Statement
                  **
 
 *              Incorporated
by reference.
 **           As
filed with the SEC pursuant to Rule 14a-6(b).
  57