Weststar Financial Services (WFSC) 10-Q 2009 Q1 Quarterly report

UNITED STATES SECURITITES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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

For the transition period from _____________________ to __________________________

Commission File Number: 000-30515

Weststar Financial Services Corporation

(Exact name of registrant as specified in its charter)

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

79 Woodfin Place, Asheville NC 28801

(Address of principal executive offices)

828.252.1735

(Registrant’s telephone number)

(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 of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  S Yes £ No

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

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

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Part I. FINANCIAL INFORMATION

Item I. Financial Statements

Weststar Financial Services Corporation & Subsidiary

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

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

See notes to consolidated financial statements

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

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

See notes to consolidated financial statements.

5

Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

For the Three Months Ended March 31, 2009 and 2008

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

See notes to consolidated financial statements.

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Weststar Financial Services Corporation & Subsidiary

Consolidated Statements of Cash Flows (unaudited)

For the Three Months Ended March 31,

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

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 area.  Common shares of The Bank of Asheville were exchanged for common shares of Weststar Financial Services Corporation on April 29, 2000.  Weststar Financial Services Corporation formed Weststar Financial Services Corporation I (the “Trust”) during October 2003 in order to facilitate the issuance of trust preferred securities.  The Trust is a statutory business trust formed under the laws of the state of Delaware, of which all common securities are owned by Weststar Financial Services Corporation.

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

The accounting policies followed are set forth in Note 1 to the 2008 Annual Report to Shareholders (Form 10-K) on file with the Securities and Exchange Commission.

2. In the normal course of business there are various commitments and contingent liabilities such as commitments to extend credit, which are not reflected on the financial statements.  The unused portions of commitments to extend credit were $29,379,524 and $31,886,835 at March 31, 2009 and December 31, 2008, respectively.

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

Basic earnings per common share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.  During 2009 and 2008, there were no shares excluded due to antidultion.

Basic and diluted net income per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:

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

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4.

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

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

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

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

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

Investment Securities Available-for-Sale

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time a loan is considered impaired and a specific reserve is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114).  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flow.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans.  At March 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised

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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 impaired loan as nonrecurring Level 3.

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

	Fair Value Measurements at March 31, 2009
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Assets/
	Assets		Inputs		Inputs		Liabilities
Description	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Available-for-sale securities		-	$	23,518,059		-	$	23,518,059
	Fair Value Measurements at December 31, 2008
Available-for-sale securities		-	$	23,778,449		-	$	23,778,449

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

	Fair Value Measurements at March 31, 2009
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable		Assets/
	Assets		Inputs		Inputs		Liabilities
Description	(Level 1)		(Level 2)		(Level 3)		at Fair Value
Impaired Loans		-	$	46,980	$	30,390	$	77,370

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

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

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

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

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

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Item 2. Management’s Discussion and Analysis

Financial Condition and Results of Operations

Weststar Financial Services Corporation & Subsidiary

Management’s Discussion and Analysis

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

EXECUTIVE OVERVIEW

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

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

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

CHANGES IN FINANCIAL CONDITION

MARCH 31, 2009 COMPARED TO DECEMBER 31, 2008

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

Securities, federal funds sold and interest-bearing balances with other financial institutions at March 31, 2009 totaled $31,178,825 compared to $23,997,361 at December 31, 2008.  Through an investment in the Federal Home Loan Bank, the Company gained access to the Federal Home Loan Bank system.  This access grants the Company sources of funds for lending and liquidity.  Investments in Federal Home Loan Bank stock to date total $639,800.

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

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

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

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

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Short-term borrowings consisted of one advance from the FHLB, which totaled $4,000,000 and securities sold under agreements to repurchase in the amount of $665,651.  The interest rate on the FHLB advance was 5.01% and matures on March 23, 2010.  Advances from the FHLB are secured by a blanket lien on 1-4 family real estate loans and certain commercial real estate loans.  Securities sold under agreements to repurchase bear a variable rate of interest and mature daily.  At March 31, 2009, the rate on these borrowings was .25%.

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

The Company’s capital at March 31, 2009 to risk weighted assets totaled 12.66%.  Current regulations require a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined in the regulation.  As of March 31, 2009, the Company’s capital exceeded the current regulatory capital requirements.

RESULTS OF OPERATIONS

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

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

COMPARATIVE THREE MONTHS

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

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

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

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

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

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

ASSET/LIABILITY MANAGEMENT

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

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

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

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

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

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

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

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

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

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

ASSET QUALITY

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

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

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

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

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

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

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

Summary of Allowance for Loan Losses

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

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

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

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

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

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

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

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

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

CAPITAL RESOURCES

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

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

LIQUIDITY

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

As of March 31, 2009 liquid assets (cash due from banks, interest-earning bank deposits and federal funds sold) were approximately $12.4 million, which represents 5.79% of total assets and 6.66% of total deposits. Supplementing this liquidity, Weststar has available lines of credit from correspondent banks of approximately $21.4 million. At March 31, 2009, outstanding commitments to extend credit and available lines of credit were $29.4 million. Management believes that the combined aggregate liquidity position of the Company is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals in the near term.

Certificates of deposit represented 57.47% of Weststar’s total deposits at March 31, 2009. The Company’s growth strategy includes efforts focused on increasing the relative volume of transaction deposit accounts, as the branch network is expanded, making it more convenient for our banking customers. Certificates of deposit of $100,000 or more represented 14.44% of the Company’s total deposits at March 31, 2009.  These deposits are generally considered rate sensitive, but management believes most of them are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine the Company’s continued retention of these deposits.

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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

(a) Exhibits.

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

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

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

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

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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: May 13, 2009	By:	/s/     G. Gordon Greenwood
		G. Gordon Greenwood
		President and Chief Executive Officer
Date: May 13, 2009	By:	/s/     Randall C. Hall
		Randall C. Hall
		Executive Vice President and Chief Financial
		and Principal Accounting Officer

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