Weststar Financial Services (WFSC) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _____________________ to __________________________

Commission File Number: 000-30515

Weststar Financial Services Corporation

(Exact name of registrant as specified in its charter)

North Carolina	56-2181423
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

79 Woodfin Place, Asheville NC 28801

(Address of principal executive offices)

828.252.1735

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes T No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer £ Non-accelerated filer £

(Do not check if a smaller reporting company) Smaller reporting company T 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $1.00 par value – 2,124,247 shares outstanding as of November 12, 2008

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INDEX	Page
Part I – FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets September 30, 2008 and December 31, 2007	3
Consolidated Statements of Operations Three and Nine Months Ended September 30, 2008 and 2007	4
Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2008 and 2007	5
Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2008 and 2007	6
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007	7
Notes to Consolidated Financial Statements	8
Item 2 - Management’s Discussion and Analysis Financial Condition and Results of Operations	13
Item 4T – Controls and Procedures	24
Part II – OTHER INFORMATION
Item 4 – Submission of Matters to a Vote of Security Holders	25
Item 5 – Other Information	25
Item 6 –Exhibits	25
Signatures	26

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Part I.                      FINANCIAL INFORMATION

Item I.                      Financial Statements

Weststar Financial Services Corporation & Subsidiary

Consolidated Balance Sheets

	(unaudited)
	September 30,			December 31,
	2008			2007*
ASSETS:
Cash and cash equivalents:
Cash and due from banks	$	4,262,128		$	4,720,172
Interest-bearing deposits		55,467			132,284
Federal funds sold		3,419,000			3,655,000
Total cash and cash equivalents		7,736,595			8,527,456
Investment securities- available for sale, at fair value (amortized cost of $24,367,201 and $26,090,739, respectively)		23,681,294			26,113,294
Loans		157,724,566			135,734,224
Allowance for loan losses		(2,355,244	)		(2,090,125	)
Net loans		155,369,322			133,644,099
Premises and equipment, net		2,736,125			2,981,163
Accrued interest receivable		921,027			972,603
Federal Home Loan Bank stock, at cost		585,600			463,300
Deferred income taxes		1,042,783			572,594
Foreclosed properties		227,407			87,787
Other assets		772,909			895,702
TOTAL	$	193,073,062		$	174,257,998
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	26,850,689		$	28,021,869
NOW accounts		18,418,585			15,645,860
Money market accounts		29,759,909			28,609,220
Savings		2,451,996			1,943,712
Time deposits of $100,000 or more		26,274,474			26,584,176
Other time deposits		62,763,833			48,386,179
Total deposits		166,519,486			149,191,016
Short-term borrowings		1,254,477			419,669
Accrued interest payable		470,370			567,710
Other liabilities		921,581			776,364
Long-term debt		8,124,000			8,124,000
Total liabilities		177,289,914			159,078,759
SHAREHOLDERS’ EQUITY:
Preferred stock, authorized $1,000,000 shares;No shares issued and outstanding		-			-
Common stock, $1 par value, authorized- 9,000,000 shares;outstanding shares- and 2,124,247 at September 30, 2008and 2,118,437 at December 31, 2007, respectively		2,124,247			2,118,437
Additional paid-in capital		6,147,598			6,133,773
Retained earnings		7,932,792			6,913,168
Accumulated other comprehensive income (loss)		(421,489	)		13,861
Total shareholders’ equity		15,783,148			15,179,239
Total	$	193,073,062		$	174,257,998

*Derived from audited consolidated financial statements.

See notes to consolidated financial statements.

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Operations (unaudited)

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2008		2007			2008			2007
INTEREST INCOME:
Interest and fees on loans	$	2,780,707	$	2,918,193		$	8,096,225		$	8,571,817
Federal funds sold		3,416		69,012			44,592			107,935
Interest-bearing deposits		336		2,463			1,552			5,800
Investments:
Taxable interest income		196,594		231,183			625,533			662,386
Nontaxable interest income		91,704		85,682			266,425			244,500
Corporate dividends		7,451		8,430			21,672			23,120
Total interest income		3,080,208		3,314,963			9,055,999			9,615,558
INTEREST EXPENSE:
Time deposits of $100,000 or more		271,069		343,063			930,663			902,242
Other time and savings deposits		791,346		876,561			2,412,338			2,569,545
Short-term borrowings		5,661		3,226			17,478			52,077
Long-term debt		112,921		140,195			352,942			415,992
Total interest expense		1,180,997		1,363,045			3,713,421			3,939,856
NET INTEREST INCOME		1,899,211		1,951,918			5,342,578			5,675,702
PROVISION FOR LOAN LOSSES		320,635		137,395			508,760			224,970
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,578,576		1,814,523			4,833,818			5,450,732
OTHER INCOME:
Services charges on deposit accounts		291,527		290,610			859,546			855,121
Other service fees and commissions		119,278		91,260			324,082			253,151
Securities losses		-		(1,093	)		-			(1,093	)
Equity in income (loss) of Bank of Asheville Mortgage Company, LLC		814		(9,051	)		(15,295	)		(43,117	)
Other		13,999		15,058			48,168			67,205
Total other income		425,618		386,784			1,216,501			1,131,267
OTHER EXPENSES:
Salaries and wages		659,449		590,524			1,945,752			1,732,697
Employee benefits		125,736		91,948			362,507			299,715
Occupancy expense, net		120,455		118,697			370,194			357,399
Equipment rentals, depreciation and maintenance		95,626		108,959			328,962			322,778
Supplies		57,850		74,197			196,352			204,988
Professional fees		87,468		83,176			309,789			261,223
Data processing fees		134,019		127,480			411,764			446,702
Marketing		86,569		76,356			219,555			216,252
(Income) expenses from foreclosed properties		1,523		(11,917	)		42,744			(9,288	)
Other		109,686		108,773			323,742			309,244
Total other expenses		1,478,381		1,368,193			4,511,361			4,141,710
INCOME BEFORE INCOME TAXES		525,813		833,114			1,538,958			2,440,289
INCOME TAX PROVISION		176,809		300,186			519,334			882,758
NET INCOME	$	349,004	$	532,928		$	1,019,624		$	1,557,531
EARNINGS PER SHARE:
Basic	$	.16	$	.25		$	.48		$	.74
Diluted	$	.15	$	.23		$	.45		$	.68

See notes to consolidated financial statements.

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
NET INCOME	$	349,004		$	532,928		$	1,019,624		$	1,557,531
OTHER COMPREHENSIVE INCOME
Unrealized holding gains (losses) on securities available for sale		(590,969	)		452,684			(708,462	)		(78,444	)
Tax effect		227,818			(174,510	)		273,112			30,240
Unrealized holding gains (losses) on securities available for sale, net of tax		(363,151	)		278,174			(435,350	)		(48,204	)
Reclassification adjustment for realized losses		-			1,093			-			1,093
Tax effect		-			(421	)		-			(421	)
Reclassification adjustment for realized losses, net of tax		-			672			-			672
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		(363,151	)		278,846			(435,350	)		(47,532	)
COMPREHENSIVE INCOME (LOSS)	$	(14,147	)	$	811,774		$	584,274		$	1,509,999

See notes to consolidated financial statements.

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2008 and 2007

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In			Retained			Comprehensive			Shareholders’
	Shares		Amount		Capital			Earnings			Loss			Equity
Balance December 31, 2006		1,682,290	$	1,682,290	$	6,528,387		$	4,869,092		$	(106,916	)	$	12,972,853
25% Stock Split		421,841		421,841		(421,841	)
Net change in unrealized losses on securities held for sale												(47,532	)		(47,532	)
Cash paid in lieu of fractional shares									(1,930	)					(1,930	)
Issuance of common stock pursuant to the exercise of stock options		13,398		13,398		8,185									38,736
Tax benefit on exercise of nonqualified stock options						17,153
Net Income									1,557,531						1,557,531
Balance September 30, 2007		2,117,529	$	2,117,529	$	6,131,884		$	6,424,693		$	(154,448	)	$	14,519,658
Balance December 31, 2007		2,118,437	$	2,118,437	$	6,133,773		$	6,913,168		$	13,861		$	15,179,239
Net change in unrealized losses on securities held for sale		-		-		-			-			(435,350	)		(435,350	)
Issuance of common stock pursuant to the exercise of stock options		5,810		5,810		9,197			-			-			15,007
Tax benefit on exercise of nonqualified stock options		-		-		4,628			-			-			4,628
Net Income		-		-		-			1,019,624			-			1,019,624
Balance September 30, 2008		2,124,247	$	2,124,247	$	6,147,598		$	7,932,792		$	(421,489	)	$	15,783,148

See notes to consolidated financial statements.

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Cash Flows (unaudited)

For the Nine Months Ended September 30,

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,019,624		$	1,557,531
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		289,812			291,758
Provision for loan losses		508,760			224,970
Premium amortization and discount accretion, net		(18,408	)		(23,231	)
Deferred income tax provision		(197,077	)		(95,232	)
(Income) expenses from foreclosed properties, net		36,781			(11,192	)
Losses on sales of securities		-			1,093
Gain on disposal/sale of premises and equipment		-			(50	)
(Increase) decrease in accrued interest receivable		51,576			(88,964	)
Decrease in other assets		122,793			73,992
Increase (decrease) in accrued interest payable		(97,340	)		42,966
Increase in other liabilities		145,217			155,723
Net cash provided by operating activities		1,861,738			2,129,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(1,530,893	)		(3,942,950	)
Maturities of securities available for sale		3,272,839			2,794,875
Proceeds from sales of securities		-			283,268
Net increase in loans		(22,470,684	)		(8,291,948	)
Proceeds from sales of foreclosed properties		60,300			691,825
Proceeds from sales of premises and equipment		-			50
FHLB stock purchase		(122,300	)		(204,300	)
FHLB stock redemption		-			198,000
Additions to premises and equipment		(44,774	)		(320,545	)
Net cash used in investing activities		(20,835,512	)		(8,791,725	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (decrease) in demand deposits, NOW accounts,
MMDA and savings accounts		3,260,518			(2,260,481	)
Net increase in time deposits		14,067,952			13,301,104
Cash paid for fractional shares		-			(1,930	)
Issuance of common stock		15,007			21,583
Proceeds of FHLB advances		2,550,000			5,200,000
Repayment of FHLB advances		(2,550,000	)		(5,200,000	)
Tax benefit from exercise on non-qualified stock options		4,628			17,153
Net increase (decrease) in short-term borrowing		834,808			(19,592	)
Net cash provided by financing activities		18,182,913			11,057,837
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(790,861	)		4,395,476
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		8,527,456			5,026,627
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,736,595		$	9,422,103

See notes to consolidated financial statements.

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WESTSTAR FINANCIAL SERVICES CORPORTION & SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of September 30, 2008 and December 31, 2007, and the consolidated results of their operations for the three and nine-month periods ended September 30, 2008 and 2007 and their cash flows for the nine-month periods ended September 30 2008 and 2007.  Operating results for the three and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008.

The accounting policies followed are set forth in Note 1 to the 2007 Annual Report to Shareholders (Form 10-KSB) on file with the Securities and Exchange Commission.

2. In the normal course of business there are various commitments and contingent liabilities such as commitments to extend credit, which are not reflected on the financial statements.  The unused portions of commitments to extend credit were $35,882,579 and $38,206,567 at September 30, 2008 and December 31, 2007, respectively.

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

Basic earnings per common share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.  During 2008 and 2007, there were no shares excluded due to antidultion.

Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted

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

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Weighted average number of common shares used in computing basic net income per share		2,122,147		2,113,485		2,120,195		2,109,468
Effect of dilutive stock options		151,241		173,522		157,877		178,500
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share		2,273,388		2,287,007		2,278,072		2,287,968

4. Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), but has not applied it to any financial instruments.  SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The Company did not elect to adopt fair value measurement for any additional assets or liabilities upon the adoption of SFAS 159.

5. Effective January 1, 2008, the Company also partially adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), in accordance with the delayed provision of adoption for non-financial assets and liabilities under SFAS 157-2.  SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances discloses about fair value measurements.  Fair value is defined under SAFS 157 as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

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

Level 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.

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

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

Investment Securities Available-for-Sale

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

Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time a loan is considered impaired and a specific reserve is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  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 September 30, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Subsequently, foreclosed assets are carried at the lower of carrying value or fair value.  Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2.  When an appraised

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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 September 30, 2008
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Assets/Liabilities at Fair Value
Available-for-sale securities		-	$	23,681,294		-	$	23,681,294

6. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” (SFAS 161).  SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires (1) qualitative disclosures about objectives for using derivatives by primary underlying risk exposure (e.g., interest rate, credit or foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge, net investment hedge, and non-hedges), (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income location of gain and loss amounts on derivative instruments by type of contract, and (4) disclosures about credit-risk related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Accordingly, the Company will adopt the provisions of SFAS 161 in the first quarter 2009. The Company does not expect the adoption of the provisions of SFAS 161 to have a material effect on the Company’s financial condition and results of operations.

7. 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 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).

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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 must decide whether to participate in one, both or none of these phases of the program by November 14, 2008.

Also on October 14, 2008, the US 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 elect to participate on 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 Treasury will fund the senior preferred shares purchased under the program by year-end 2008.

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 party at any time. In conjunction with the purchase of senior preferred shares, The Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average. Only institutions deemed to be “healthy” will be eligible to participate in the CPP.

Participation in these various programs carries certain restrictions with respect to the payment of dividends to common shareholders and executive compensation. Management and the Board are currently evaluating the viability of these programs.

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

Weststar Financial Services Corporation & Subsidiaries

Management’s Discussion and Analysis

EXECUTIVE OVERVIEW

Management’s Discussion and Analysis is provided to assist in understanding and evaluating the Company’s results of operations and financial condition. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. Weststar Financial Services Corporation (the “Company”) is a holding company for The Bank of Asheville (the “Bank”), a state chartered commercial bank incorporated in North Carolina on October 29, 1997.  The Bank provides consumer and commercial banking services in Buncombe County and surrounding areas.  Common shares of the Bank were exchanged for common shares of Weststar Financial Services Corporation on April 29, 2000.  Weststar Financial Services Corporation formed Weststar Financial Services Corporation I (the “Trust”) during October 2003 in order to facilitate the issuance of trust preferred securities.  The Trust is a statutory business trust formed under the laws of the state of Delaware, of which all common securities are owned by Weststar Financial Services Corporation.  On October 19, 2004, the Company formed Bank of Asheville Mortgage Company, LLC (the “Mortgage Company”), a mortgage broker, of which the Company owns a 50% interest.  The Company and its partner in the Mortgage Company have decided to close the Mortgage Company.  It is anticipated than a dissolution agreement will be filed during November, 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.

During 2008, the Company continued its focus on asset quality and asset growth.  Management emphasized prudent underwriting standards, periodic reviews of loans of $100,000 or more, and monitoring loan quality.  During the period asset quality remained strong.  Non-performing assets increased slightly from $283,470 at December 31, 2007 to $310,100 at September 30, 2008.  Loans outstanding increased from $135,734,224 at December 31, 2007 to $157,724,566 at September 30, 2008.  Deposits increased $166,519,486.  The increase was attributable to marketing campaigns, sales calls efforts, and product development.

Net interest income decreased by 2.70% during the three-month period due to a tighter net interest margin as a result of Federal Open Market committee interest rate cut initiatives.  Primarily as a result of loan growth and one large charge-off incurred during the quarter, the Company’s provision for loan losses was $320,635 compared to $137,395 during the comparable quarter in 2007.  Other non-interest income for the September 30, 2008 and 2007 quarters totaled $425,618 and $386,784, respectively.  The increase in income primarily reflects increased fees from the origination of mortgage loans at the Bank level and increased revenue from debit/credit card interchange transactions.  During the 2007 quarter, the Company realized $1,093 in losses from the sales of investment securities compared to none during same period in 2008.  During the June 2008 quarter, the Company and its partner in the Mortgage Company mutually agreed to terminate their relationship, and began the process to close the Mortgage

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Company.  The Company then shifted originating mortgage loans through its subsidiary bank.  Bank of Asheville Mortgage Company, LLC posted net operating income of $1,628 during the quarter compared to net operating losses of $(18,102) during 2007, of which $814 and $(9,051) was the Company’s portion during 2008 and 2007, respectively.  Non-interest expenses increased from $1,368,193 to $1,478,381 or 8.05%.  The increase was primarily attributable to operating expenses associated with personnel and professional fees, such as internal/external audits, income tax preparation and loan reviews, incurred to support loan and deposit servicing.

Net income totaled $349,004 and $532,928 for the quarters ended September 30, 2008 and 2007, respectively – a decrease of 34.51%.

The Company’s net interest income decreased by 5.87% during the nine-month period due to a tighter net interest margin resulting from Federal Open Market Committee interest rate cut initiatives.  As a result of charge-offs and loan growth, the Company added $508,760 to the allowance for loan losses compared to $224,970 during the comparable period in 2007.  Other non-interest income for the September 30, 2008 and 2007 periods totaled $1,216,501 and $1,131,267, respectively.  The increase in other income primarily reflects increased fees from the origination of mortgage loans at the Bank level and increased revenue from debit/credit card interchange transactions.  During the period the process began to close the Mortgage Company.  Losses at the Mortgage Company decreased during the period as the Company started originating loans through the Bank rather than the Mortgage Company.   Bank of Asheville Mortgage Company, LLC posted net operating losses of $30,590 during the period compared to $86,234 during 2007, of which $15,295 and $43,117 was the Company’s portion during 2008 and 2007, respectively.  Non-interest expenses increased from $4,141,710 to $4,511,361 or 8.93%.  The increase was primarily attributable to operating expenses associated with personnel, professional fees, such as internal/external audits, income tax preparation and loan reviews, incurred to support loan and deposit servicing and growth, and net expenses from foreclosed properties.

Net income totaled $1,019,624 and $1,557,531 for the nine-month periods ended September 30, 2008 and 2007, respectively – a decrease of 34.54%.

CHANGES IN FINANCIAL CONDITION

SEPTEMBER 30, 2008 COMPARED TO DECEMBER 31, 2007

During the period from December 31, 2007 to September 30, 2008, total assets increased $18,815,064 or 10.80%.  This increase, reflected primarily in loans, resulted from an increase in deposits.

Securities, federal funds sold and interest-bearing balances with other financial institutions at September 30, 2008 totaled $27,155,761 compared to $29,900,578 at December 31, 2007.  Through an investment in the Federal Home Loan Bank, the Company gained access to the Federal Home Loan Bank system.  This access grants the Company sources of funds for lending and liquidity.  Investments in Federal Home Loan Bank stock to date total $585,600.

At September 30, 2008, the loan portfolio constituted 81.69% of the Company’s total assets.  Loans increased $21,990,342 from December 31, 2007 to September 30, 2008.  Continued growth in real estate secured lending resulted in the majority of the growth.  Management places strong emphasis on loan quality.

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The recorded investment in loans that are considered to be impaired in accordance with criteria set forth in Statement of Financial Accounting Standards No. 114 of the Financial Accounting Standards Board was $83,892, $98,503, and $195,683 at September 30, 2008 and 2007, and December 31, 2007, respectively.  The average recorded balance of impaired loans for the nine months ended September 30, 2008 and 2007 totaled $199,511 and $501,939, respectively and $400,074 for the year ended December 31, 2007.  The related allowance for loan losses determined in accordance with SFAS No. 114 for impaired loans was none, none and $120 at September 30, 2008 and 2007, and December 31, 2007 respectively.  For the nine-month periods ended September 30, 2008 and 2007, Weststar recognized interest income from impaired loans of approximately $350 and $1,535.  See “Asset Quality” for discussion for an analysis of loan loss reserves.

Deposits increased $17,328,470 during the nine months ended September 30, 2008.  The increase in deposits is primarily reflected in NOW, money market, savings and time accounts.  During the period, a new NOW account, eZchecking, was introduced, which pays an above market interest rate on balances up to $25,000.  Qualifiers for the account include a minimum of 10 debit card transactions, one direct deposit and receipt of electronic statement each month.  The Bank earns interchange revenue from debit card usage and can deliver electronic statements more cost efficiently than through standard U.S. mail; these two factors effectively minimize the cost of funds on the product.  As rates continued to decline throughout most of the period, some rate sensitive customers shifted funds from lower interest-bearing accounts to higher yielding accounts such as eZchecking and time deposit accounts.  Demand deposits accounts decreased by 4.18% during the period and totaled $26,850,689.  NOW, money market and savings accounts increased by $4,431,698, while time deposits increased by $14,067,952.  Time deposits grew as interest rate sensitive customers sought to lock in yields during a decreasing interest rate environment.  Additionally, during the period, the Company experienced significant certificate of deposit growth from new customers, who transferred funds from larger national banks as a result of negative publicity related to potential financial instability.  Once the FDIC increased its insurance level to $250,000, the deposit market gained stabilization.  The Company also received deposits from customers, who withdrew funds from the financial markets as a result of decreasing values.

Short-term borrowings consisted of securities sold under agreements to repurchase in the amount of $1,254,477.  These accounts bear variable rates tied to the daily federal funds rate and mature daily.

Long-term borrowings consisted of one advance from the FHLB, which totaled $4,000,000 and junior subordinated debentures of $4,124,000.  The interest rate on this advance was 5.01% and matures on March 23, 2010.  Advances from the FHLB are secured by a blanket lien on 1-4 family real estate loans and certain commercial real estate loans.  The junior subordinated debentures bear a rate of LIBOR plus 315 basis points and pay dividends quarterly.  The rate is subject to quarterly resets.  The junior subordinated debentures mature October 7, 2033, and are callable on or after October 7, 2008.  Approximately $4 million was eligible for inclusion as Tier I capital.

The Company’s capital at September 30, 2008 to risk weighted assets totaled 13.18%.  Current regulations require a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined in the regulation.  As of September 30, 2008, the Company’s capital exceeded the current regulatory capital requirements.

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RESULTS OF OPERATIONS

FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007

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

COMPARATIVE THREE MONTHS

Net interest income for the quarter ended September 30, 2008 totaled $1,899,211 compared to $1,951,918 in 2007.  The decrease was attributable to a tighter net interest margin following Federal Open Market Committee interest rate cut initiatives.  The Company’s net interest margin was 4.16% and 4.76% for the quarters ended September 30, 2008 and 2007, respectively.

Weststar recorded a provision for loan losses of $320,635 and $137,395 for the quarters ended September 30, 2008 and 2007, respectively.  The provision relates to strong loan growth experienced in 2008 coupled with net charge-offs of $217,775. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate by management based on the factors discussed under “Asset Quality.”

Other non-interest income for the September 30, 2008 and 2007 quarters totaled $425,618 and $386,784, respectively.  The increase in other income primarily reflects increased fees from the origination of mortgage loans at the Bank level and increased revenue from debit/credit card interchange transactions.  The Bank generated $14,728 in mortgage loan origination fees compared to none during 2007.  Interchange revenue generated through debit/credit card transactions produced $75,335 during 2008 compared to $64,666 during 2007.  The increase in volume was partially attributable to the introduction of a new NOW account, eZchecking, which requires customers to utilize their debit card for a minimum of 10 times during a statement cycle, among other requirements, to earn an above market yield on their account.  During the 2007 quarter, the Company realized $1,093 in losses from the sales of investment securities compared to none during same period in 2008.  Bank of Asheville Mortgage Company, LLC posted net operating income (losses) of $1,628 during the period compared to $(18,102) during 2007, of which $814 and $(9,051) was the Company’s portion during 2008 and 2007, respectively.  Other income remained relatively flat at $13,999.  

Other non-interest expense totaled $1,478,381 compared to $1,368,193 in 2007.  This increase was primarily attributable to personnel and overhead incurred to support loan and deposit servicing and growth.  Salaries and benefits increased $102,713 during the periods reflecting growth in personnel, and increased wages and cost of benefits.  Growth in personnel reflects overall growth in Bank’s assets and expanded services provided.  Data processing fees increased from $127,480 to $134,019 as a result of loan and deposit account growth.  In 2007 the Company renegotiated its data processing contracts and outsources selected processes to a more cost competitive provider, thus enabling the Company to hold down its operating costs.  Net (income) expense from foreclosed properties totaled $1,523 during 2008 compared to $(11,917) during 2007.  Marketing expenses increased by $10,213 as the Bank promoted its products, services and safety.  Income before income tax provision totaled $525,813 and $833,114 for the quarters ended September 30, 2008 and 2007, respectively.  Income tax provision totaled $176,809 and $300,186 for the quarters ended September 30, 2008 and 2007, respectively, which equated to

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an effective tax rate of 33.63% and 36.03%.  The effective income tax rate decreased in 2008 because of a decrease in relative taxable income during the period.  Tax exempt interest income remained consistent from period to period, although higher as a percentage of income before taxes in the 2008 period.  Net income totaled $349,004 and $532,928 for the quarters ended September 30, 2008 and 2007, respectively.

Other comprehensive income (loss) totaled $(363,151) and $278,846 in 2008 and 2007, respectively.  Comprehensive income (loss), which is the change in shareholders’ equity excluding transactions with shareholders, totaled $(14,147) and $811,774 for the quarters ended September 30, 2008 and 2007 respectively.

COMPARATIVE NINE MONTHS

Net interest income for the nine-month period September 30, 2008 totaled $5,342,578 compared to $5,675,702 in 2007.  The decrease was attributable to a tighter net interest margin following Federal Open Market Committee interest rate cut initiatives.  The Company’s net interest margin was 4.07% and 4.74% for the nine months ended September 30, 2008 and 2007, respectively.

Weststar recorded a provision for loan losses of $508,760 and $224,970 for the nine months ended September 30, 2008 and 2007, respectively.  The increased provision relates to strong loan growth experienced in 2008 coupled with net charge-offs of $243,641.  The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate by management based on the factors discussed under “Asset Quality.”

Other non-interest income for the September 30, 2008 and 2007 periods totaled $1,216,501 and $1,131,267, respectively.  The increase in other income primarily reflects increased fees from the origination of mortgage loans at the Bank level and increased revenue from debit/credit card interchange transactions.  The Bank generated $37,724 in mortgage loan origination fees compared to none during 2007.  Interchange revenue generated through debit/credit card transactions produced $212,393 during 2008 compared to $174,907 during 2007.  The increase in volume was partially attributable to the introduction of a new NOW account, eZchecking, which requires customers to utilize their debit card for a minimum of 10 times during a statement cycle, among other requirements, to earn an above market yield on their account.  During the period the Company and its partner in the Mortgage Company mutually agreed to terminate their relationship, and began the process to close the Mortgage Company.   The Company then shifted originating mortgage loans through its subsidiary bank.  Bank of Asheville Mortgage Company, LLC posted net operating losses of $30,590 and $86,234 during 2008 and 2007, respectively, of which $15,295 and $43,117 was the Company’s portion during 2008 and 2007, respectively.  Other income decreased by $19,037 primarily as a result of lower fees earned on deposits with other financial institutions.

Other non-interest expense totaled $4,511,361 compared to $4,141,710 in 2007.  This increase was primarily attributable to overall company growth to support loans, deposits and branch expansion.  Professional fees increased from $261,223 during 2007 to $309,789.  The increase in fees was largely attributable to internal and external audit fees relating to  preparation for Sarbanes-Oxley Act of 2002 compliance.  Net expenses from foreclosed properties totaled $42,744 during 2008 compared to $(9,288) during 2007.  Other expenses increased $14,498 primarily attributable to FDIC insurance premiums assessed during 2008, director fees and employee travel.  Income before income tax provision totaled $1,538,958 and $2,440,289 for

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the periods ended September 30, 2008 and 2007, respectively.  Income tax provision totaled $519,334 and $882,758 for the periods ended September 30, 2008 and 2007, respectively, which equated to an effective tax rate of 33.75% and 36.17%.  The effective income tax rate decreased in 2008 because of an increase in relative tax exempt  income.  Net income totaled $1,019,624 and $1,557,531 for the periods ended September 30, 2008 and 2007, respectively.

Other comprehensive loss totaled $435,350 and $47,532 in 2008 and 2007, respectively.  Comprehensive income, which is the change in shareholders’ equity excluding transactions with shareholders, totaled $584,274 and $1,509,999 for the periods ended September 30, 2008 and 2007, respectively.

ASSET/LIABILITY MANAGEMENT

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

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

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

Interest-bearing liabilities and variable rate loans are generally repriced to current market rates. Based on its analysis, the Company believes that its balance sheet is slightly asset-sensitive, meaning that in a given period there will be more assets than liabilities subject to immediate

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repricing as the market rates change. Because a significant portion of the Company’s loans are variable rate commercial loans, they reprice more rapidly than rate sensitive interest-bearing deposits. During periods of rising rates, this results in increased net interest income, assuming similar growth rates and stable product mixes in loans and deposits. The opposite occurs during periods of declining rates.

The Company uses interest sensitivity analysis to measure the sensitivity of projected earnings to changes in interest rates. The sensitivity analysis takes into account the current contractual agreements that the Company has on deposits, borrowings, loans, investments and any commitments to enter into those transactions. The Company monitors interest sensitivity by means of computer models that incorporate the current volumes, average rates, scheduled maturities and payments and repricing opportunities of asset and liability portfolios. Using this information, the model estimates earnings based on projected portfolio balances under multiple interest rate scenarios. In an effort to estimate the effects of pure interest-rate risk, the Company assumes no growth in its balance sheet, because to do so could have the effect of distorting the balance sheet’s sensitivity to changing interest rates. The Company simulates the effects of interest rate changes on its earnings by assuming no change in interest rates as its base case scenario and either (1) gradually increasing or decreasing interest rates over a twelve-month period or (2) immediately increasing or decreasing interest rates by .25%, .50%, 1% and 2% and negatively affected in the short-term by declining interest rates.  Recent Federal Reserve actions to decrease the interest rates will likely decrease the Company’s net interest margin in the near term. The analysis shows that the net interest margin would be positively effected by an increase in interest rates.  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 September 30, 2008, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities.  Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period.  The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

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	TERMS TO REPRICING AT SEPTEMBER 30, 2008
	1-90 Days			91-180 Days			181-365 Days			Total One			Non-		Total
										Year			Sensitive
Interest-earning assets:
Interest bearing deposits	$	55,467		$	-		$	-		$	55,467		$	-	$	55,467
Federal funds sold		3,419,000									3,419,000					3,419,000
Investment securities		358,401			361,993			734,856			1,455,250			22,911,951		24,367,201
Federal Home Loan Bank stock		585,600			-			-			585,600			-		585,600
Loans		120,050,692			5,639,421			7,117,240			132,807,353			24,917,213		157,724,566
Total Interest-earning assets		124,469,160			6,001,414			7,852,096			138,322,670			47,829,164		186,151,834
Interest-bearing liabilities:
Time deposits		32,875,623			24,063,215			31,599,842			88,538,680			499,627		89,038,307
All other deposits		50,630,490			-			-			50,630,490			-		50,630,490
Short-term debt		1,254,477			-			-			1,254,477			-		1,254,477
Long-term debt		4,124,000			-			-			4,124,000			4,000,000		8,124,000
Total interest-bearing liabilities		88,884,590			24,063,215			31,599,842			144,547,647			4,499,627		149,047,274
Interest sensitivity gap	$	35,584,570		$	(18,061,801	)	$	(23,747,746	)	$	(6,224,977	)	$	43,329,537
Cumulative interest sensitivity
Gap	$	35,584,570		$	17,522,769		$	(6,224,977	)
Interest-earning assets as a percent of interest sensitive liabilities*		140.0	%		24.9	%		24.8	%		95.7	%

*Percentages shown are not cumulative.

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

ASSET QUALITY

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

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

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Therefore, while management uses the best information available to make evaluations, future adjustments to the allowance may be necessary

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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 evaluations.

The provision for loan losses represents a charge against income in an amount necessary to maintain the allowance at an appropriate level.  The monthly provision for loan losses may fluctuate based on the results of this analysis.  The allowance for loan losses at September 30, 2008 and 2007, and December 31, 2007 was $2,355,244, $1,968,455 and $2,090,125 or 1.49%, 1.51% and 1.54%, respectively, of gross loans outstanding.  The ratio of net charge-offs to average loans outstanding was .23%, .15% and .16% during the periods ended September 30, 2008 and 2007, and December 31, 2007, respectively.  The increase in net –charge offs for the nine month period ended September 30, 2008 was primarily attributable to a single charge-off of approximately $167,000.  The business failed as a result of owner health issues as opposed to economic conditions or loan quality trends.

The following table contains an analysis for the allowance for loan losses, including the amount of charge-offs and recoveries by loan type, for the nine months ended September 30, 2008 and 2007, and for the year ended December 31, 2007.

Summary of Allowance for Loan Losses

	For the nine months						For the year ended
	Ended September 30,						December 31,
	2008			2007			2007
Balance, beginning of period	$	2,090,125		$	1,884,080		$	1,884,080
Charge-offs:
Commercial, financial and agricultural		(200,091	)		(105,129	)		(171,723	)
Real Estate:
Construction		-			-			-
Mortgage		-			-			-
Consumer		(83,083	)		(62,063	)		(85,018	)
Total charge-offs		(283,174	)		(167,192	)		(256,741	)
Recoveries
Commercial, financial, and agricultural		13,415			3,838			24,600
Real Estate:
Construction		-			-			-
Mortgage		-			-			-
Consumer		26,118			22,759			31,461
Total Recoveries		39,533			26,597			56,061
Net (charge-offs) recoveries		(243,641	)		(140,595	)		(200,680	)
Provision charged to operations		508,760			224,970			406,725
Balance, end of period	$	2,355,244		$	1,968,455		$	2,090,125
Percentage of net charge-offs to average loans		.23	%		.15	%		.16	%
Percentage of allowance to period-end loans		1.49	%		1.51	%		1.54	%

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CAPITAL RESOURCES

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

REGULATORY CAPITAL

											To Be Well
						For Capital					Capitalized Under
	Actual					Adequacy					Prompt Corrective
						Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of September 30, 2008
Total Capital (to Risk Weighted Assets)
Consolidated	$	22,325		13.18	%	$	13,553		8.00	%	$	16,941		10.00	%
Bank	$	21,211		12.54	%	$	13,533		8.00	%	$	16,917		10.00	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	20,204		11.93	%	$	6,776		4.00	%	$	10,165		6.00	%
Bank	$	19,093		11.29	%	$	6,767		4.00	%	$	10,150		6.00	%
Tier 1 Capital (to Average Assets)
Consolidated	$	20,204		10.85	%	$	7,447		4.00	%	$	9,309		5.00	%
Bank	$	19,093		10.27	%	$	7,437		4.00	%	$	9,297		5.00	%

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LIQUIDITY

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

As of September 30, 2008 liquid assets (cash due from banks, interest-earning bank deposits and federal funds sold) were approximately $7.7 million, which represents 4.01% of total assets and 4.65% of total deposits. Supplementing this liquidity, Weststar has available lines of credit from correspondent banks of approximately $19.3 million. At September 30, 2008, outstanding commitments to extend credit and available lines of credit were $35.9 million. Management believes that the combined aggregate liquidity position of the Company is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Certificates of deposit represented approximately 53.47% of Weststar’s total deposits at September 30, 2008. The Company’s growth strategy includes efforts focused on increasing the relative volume of transaction deposit accounts, as the branch network is expanded, making it more convenient for our banking customers. Certificates of deposit of $100,000 or more represented 15.78% of the Company’s total deposits at September 30, 2008.  These deposits are generally considered rate sensitive, but management believes most of them are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine the Company’s continued retention of these deposits.

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IMPACT OF INFLATION AND CHANGING PRICES

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

Item 4T. Controls and Procedures

At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s   management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

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Part II. OTHER INFORMATION

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

None.

Item 5. Other Information

(a) None.

(b) None.

Item 6. Exhibits

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

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

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

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

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SIGNATURES

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

	WESTSTAR FINANCIAL SERVICES CORPORATION
Date: November 12, 2008	By:	/s/  G. Gordon Greenwood
		G. Gordon Greenwood
		President and Chief Executive Officer
Date: November 12, 2008	By:	/s/  Randall C. Hall
		Randall C. Hall
		Executive Vice President and Chief Financial and Principal Accounting Officer

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