C & F FINANCIAL CORP - Quarter Report: 2003 September (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-23423

C&F Financial Corporation

(Exact name of registrant as specified in its charter)

Virginia

54-1680165

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

Eighth and Main Streets		West Point, VA		23181
		(Address of principal executive offices)		(Zip Code)

(804) 843-2360

(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 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. x Yes No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes No x

At November 7, 2003, the latest practicable date for determination, 3,612,171 shares of common stock, $1.00 par value, of the registrant were outstanding.

TABLE OF CONTENTS

		Page
Part I—Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets—Three months and nine months ended September 30, 2003 and 2002	1

	Consolidated Statements of Income—September 30, 2003 and December 31, 2002	2

	Consolidated Statements of Shareholders’ Equity—Nine months ended September 30, 2003 and 2002	3

	Consolidated Statements of Cash Flows—Nine months ended September 30, 2003 and 2002	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

Part II—Other Information

Item 1.	Legal Proceedings	29

Item 6.	Exhibits and Reports on Form 8-K	29

Signatures		30

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share amounts)

	September 30, 2003		December 31, 2002
	(Unaudited)
ASSETS
Cash and due from banks	$	20,468	$	13,352
Interest-bearing deposits in other banks		31,242		4,979

Total cash and cash equivalents		51,710		18,331
Securities-available for sale at fair value, amortized cost of $51,056 and $57,726, respectively		54,252		60,629
Loans held for sale, net		70,426		107,227
Loans, net		349,226		328,634
Federal Home Loan Bank stock		2,072		2,760
Corporate premises and equipment, net of accumulated depreciation		15,268		14,060
Accrued interest receivable		2,648		2,270
Goodwill		8,060		7,860
Other assets		11,010		10,151

Total assets	$	564,672	$	551,922


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand deposits	$	62,982	$	53,402
Savings and interest-bearing demand deposits		167,160		161,002
Time deposits		185,716		169,129

Total deposits		415,858		383,533
Borrowings		75,644		94,479
Accrued interest payable		661		714
Other liabilities		9,469		16,963

Total liabilities		501,632		495,689


Commitments and contingent liabilities

Shareholders’ equity
Preferred stock ($1.00 par value, 3,000,000 shares authorized)		—		—
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,607,371 and 3,649,859 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively)		3,607		3,650
Additional paid-in capital		860		2,506
Retained earnings		56,464		48,161
Accumulated other comprehensive income net of tax of $1,087 and $987, respectively		2,109		1,916


Total shareholders’ equity		63,040		56,233


Total liabilities and shareholders’ equity	$	564,672	$	551,922

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except for share and per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2002		2003		2002
Interest income
Interest and fees on loans	$	9,015	$	6,755	$	26,935	$	17,976
Interest on other investments and fed funds		24		113		103		329
Interest on investment securities
U.S. government agencies and corporations		8		—		23		—
Tax-exempt obligations of states and political subdivisions		542		610		1,706		1,795
Corporate bonds and other		126		164		402		499

Total interest income		9,715		7,642		29,169		20,599


Interest expense
Savings and interest-bearing deposits		380		488		1,212		1,614
Certificates of deposit, $100 or more		289		302		834		969
Other time deposits		858		1,120		2,675		3,526
Other borrowings		709		334		2,099		522

Total interest expense		2,236		2,244		6,820		6,631


Net interest income		7,479		5,398		22,349		13,968

Provision for loan losses		924		291		2,305		491


Net interest income after provision for loan losses		6,555		5,107		20,044		13,477


Other operating income
Gain on sale of loans		5,687		3,729		16,152		9,368
Service charges on deposit accounts		549		523		1,718		1,407
Other service charges and fees		1,304		1,055		3,638		2,606
Gain on maturities and calls of available for sale securities		29		34		185		69
Other income		419		371		1,234		1,324

Total other operating income		7,988		5,712		22,927		14,774


Other operating expenses
Salaries and employee benefits		6,317		4,679		18,651		12,335
Occupancy expenses		846		726		2,593		2,297
Other expenses		2,314		1,482		6,479		4,043

Total other operating expenses		9,477		6,887		27,723		18,675

Income before income taxes		5,066		3,932		15,248		9,576
Income tax expense		1,702		1,242		5,075		2,769

Net income	$	3,364	$	2,690	$	10,173	$	6,807


Per share data
Net income—basic	$	.93	$	.75	$	2.82	$	1.92
Net income—assuming dilution		.89	$	.74		2.69	$	1.88
Cash dividends paid and declared		.18	$	.16		.52	$	.46
Weighted average number of shares—basic		3,603,389		3,575,576		3,610,467		3,546,348
Weighted average number of shares—assuming dilution		3,790,053		3,655,301		3,776,312		3,625,804

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Common Stock			Additional Paid-In Capital			Comprehensive Income		Retained Earnings			Accumulated Other Comprehensive Income		Total

Beginning balance December 31, 2002	$	3,650		$	2,506				$	48,161		$	1,916	$	56,233

Comprehensive income
Net income		—			—		$	10,173		10,173			—		10,173
Other comprehensive income, net of tax
Unrealized gain on securities, net of reclassification adjustment¹		—			—			193		—			193		193


Comprehensive income							$	10,366


Stock options exercised		37			536					—			—		573

Repurchase of common stock		(80	)		(2,182	)				—			—		(2,262	)

Cash dividends		—			—					(1,870	)		—		(1,870	)


Ending balance September 30, 2003	$	3,607		$	860				$	56,464		$	2,109	$	63,040

¹Disclosure of Reclassification Amount:

Unrealized net holding gains arising during period	$	316
Less: reclassification adjustment for gains included in net income		(123	)

Net unrealized gains on securities	$	193

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

	Common Stock		Additional Paid-In Capital		Comprehensive Income		Retained Earnings			Accumulated Other Comprehensive Income		Total

Beginning balance December 31, 2001	$	3,526	$	47			$	40,622		$	548	$	44,743

Comprehensive income
Net income		—		—	$	6,807		6,807			—		6,807
Other comprehensive income, net of tax
Unrealized gain on securities, net of reclassification adjustment¹		—		—		1,511		—			1,511		1,511


Comprehensive income					$	8,318


Stock options exercised		16		182				—			—		198

Issuance of common stock in connection with acquisition		100		2,189				—					2,289

Cash dividends		—		—				(1,643	)		—		(1,643	)


Ending balance September 30, 2002	$	3,642	$	2,418			$	45,786		$	2,059	$	53,905

¹Disclosure of Reclassification Amount:

Unrealized net holding gains arising during period	$	1,557
Less: reclassification adjustment for gains included in net income		(46	)

Net unrealized gains on securities	$	1,511

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities:
Net income	$	10,173		$	6,807
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,140			1,169
Amortization of intangible assets		109			141
Provision for loan losses		2,305			491
Accretion of discounts and amortization of premiums on investment securities, net		80			53
Net realized gain on securities		(185	)		(69	)
Proceeds from sale of loans		937,415			496,798
Origination of loans held for sale		(900,614	)		(503,329	)
Change in other assets and liabilities:
Accrued interest receivable		(378	)		90
Other assets		(1,268	)		(253	)
Accrued interest payable		(53	)		(85	)
Other liabilities		(7,494	)		6,062

Net cash provided by operating activities		41,230			7,875

Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale		10,501			4,495
Purchase of securities available for sale		(3,726	)		(10,979	)
Net increase in customer loans		(22,897	)		(11,724	)
Purchase of corporate premises and equipment		(2,355	)		(702	)
Sale of corporate premises and equipment		7			16
Purchase (redemption) of Federal Home Loan Bank stock		688			(95	)
Acquisition of subsidiary		—			(10,499	)

Net cash used in investing activities		(17,782	)		(29,488	)

Cash flows from financing activities:
Net increase in demand, interest bearing demand and savings deposits		15,738			34,880
Net increase in time deposits		16,587			12,881
Net decrease in other borrowings		(18,835	)		(19,313	)
Repurchase of common stock		(2,262	)		—
Proceeds from exercise of stock options		573			198
Cash dividends		(1,870	)		(1,643	)

Net cash provided by financing activities		9,931			27,003

Net increase in cash and cash equivalents		33,379			5,390
Cash and cash equivalents at beginning of period		18,331			11,057

Cash and cash equivalents at end of period	$	51,710		$	16,447

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2003		2002
Supplemental disclosure
Interest paid	$	6,873	$	6,694
Income taxes paid		5,874		2,835
Transactions related to the acquisition of subsidiary:
Issuance of common stock	$	—	$	2,289
Issuance of debt		—		3,000
Increase in assets and liabilities:
Loans		—		64,729
Other assets		—		12,095
Borrowings		—		57,193
Other liabilities		—		3,342

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission. They do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2002.

In the opinion of C&F Financial Corporation’s management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position as of September 30, 2003, the results of operations for the three and nine months ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 2003 and 2002 have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements include the accounts of C&F Financial Corporation (the “Company”) and its subsidiary, Citizens and Farmers Bank (the “Bank”), with all significant intercompany transactions and accounts being eliminated in consolidation.

Stock Compensation Plans: The Company has three stock-based compensation plans that are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share amounts).

	Three Months Ended September 30,
		2003			2002
Net income, as reported	$	3,364		$	2,690
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(94	)		(62	)

Pro forma net income	$	3,270		$	2,628
Earnings per share:
Basic—as reported	$	.93		$	.75
Basic—pro forma	$	.91		$	.73
Diluted—as reported	$	.89		$	.74
Diluted—pro forma	$	.86		$	.72

	Nine Months Ended September 30,
		2003			2002
Net income, as reported	$	10,173		$	6,807
Total stock-based compensation expense
determined under fair value based method for all awards, net of related tax effects		(266	)		(183	)

Pro forma net income	$	9,907		$	6,624

Earnings per share:
Basic—as reported	$	2.82		$	1.92
Basic—pro forma	$	2.74		$	1.87
Diluted—as reported	$	2.69		$	1.88
Diluted—pro forma	$	2.62		$	1.83

Note 2

Net income per share assuming dilution has been calculated on the basis of the weighted average number of shares of common stock and common stock equivalents outstanding for the applicable periods.

Note 3

During the first nine months of 2003, the Company repurchased 80,000 shares of its common stock in privately negotiated transactions at prices between $28.00 and $28.50 per share. The Company did not repurchase any shares of its common stock during the first nine months of 2002.

Note 4

On September 1, 2002, the Bank acquired Moore Loans, Inc. Moore Loans is a leading regional finance company providing automobile loans in Richmond, Roanoke and Hampton Roads, Virginia and portions of eastern Tennessee. Under the terms of the acquisition, the outstanding shares of Moore Loans’ common stock were purchased for $11.0 million in cash, $3.0 million in subordinated notes of the Bank, 100,000 shares of the Company’s common stock and up to an additional $3.0 million in cash contingent on Moore Loans attaining certain financial goals within the next three years, of which $337,000 was earned in 2002. Also, the Company has guaranteed a stock price of $30 per share for shares still held by the sellers on the three-year anniversary date of the transaction. The transaction was accounted for using the purchase method of accounting. The purchase price of $16.3 million was allocated to the assets acquired and liabilities assumed as follows (in thousands):

Loans	$	64,729
Other assets		4,372
Goodwill		7,723
Liabilities assumed		(60,535	)

Total purchase price	$	16,289

The results of operations of Moore Loans are included in the financial statements from the acquisition date. The following table presents pro forma combined results of operations of C&F Financial Corporation and Moore Loans for the three months and nine months ended September 30, 2002 as if the business combination had been completed as of the beginning of 2002 (in thousands, except per share amounts):

	Three Months Ended September 30, 2002		Nine Months Ended September 30, 2002

Net interest income	$	6,797	$	19,482
Net income		2,996		8,381
Earnings per share—assuming dilution		81		2.26

Note 5

The Company operates in a decentralized fashion in three principal business activities: retail banking, mortgage banking and consumer finance. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market and loan origination fee income. Revenues from consumer finance activities consist primarily of interest earned on automobile loans. The Company also has investment company, title company, settlement company and insurance company subsidiaries that derive revenues from brokerage, title insurance, mortgage loan settlement and insurance services, respectively. The results of these other subsidiaries are not significant to the Company as a whole and have been included in “Other.” The following table presents segment information for the three and nine months ended September 30, 2003 and 2002.

	*Three Months Ended September 30, 2003*
	*(In thousands)*
	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	6,156	$	1,000	$	3,217	$	—	$	(658	)	$	9,715
Gain on sale of loans		—		5,687		—		—		—			5,687
Other		807		1,121		19		354		—			2,301

Total operating income		6,963		7,808		3,236		354		(658	)		17,703

Expenses:
Interest expense		1,866		356		672		—		(658	)		2,236
Provision for loan losses		150		—		774		—		—			924
Personnel expenses		2,153		3,511		533		120		—			6,317
Other		1,398		1,255		439		68		—			3,160

Total operating expenses		5,567		5,122		2,418		188		(658	)		12,637

Income before income taxes		1,396		2,686		818		166		—			5,066
Provision for income taxes		307		1,021		311		63		—			1,702

Net income	$	1,089	$	1,665	$	507	$	103	$	—		$	3,364

Total assets	$	481,063	$	77,355	$	88,083	$	776	$	(82,605	)	$	564,672
Capital expenditures	$	348	$	7	$	3	$	—	$	—		$	358

	*Three Months Ended September 30, 2002*
	*(In thousands)*
	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	6,230	$	692	$	961	$	—	$	(241	)	$	7,642
Gain on sale of loans		—		3,729		—		—		—			3,729
Other		766		927		10		280		—			1,983

Total operating income		6,996		5,348		971		280		(241	)		13,354

Expenses:
Interest expense		2,049		206		230		—		(241	)		2,244
Provision for loan losses		100		—		191		—		—			291
Personnel expenses		1,822		2,633		123		101		—			4,679
Other		1,296		777		82		53		—			2,208

Total operating expenses		5,267		3,616		626		154		(241	)		9,422

Income before income taxes		1,729		1,732		345		126		—			3,932
Provision for income taxes		405		658		131		48		—			1,242

Net income	$	1,324	$	1,074	$	214	$	78	$	—		$	2,690

Total assets	$	451,679	$	80,213	$	76,378	$	30	$	(96,826	)	$	511,474
Capital expenditures	$	101	$	27	$	—	$	—	$	—		$	128

	*Nine Months Ended September 30, 2003*
	*(In thousands)*
	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	18,704	$	3,185	$	9,125	$	—	$	(1,845	)	$	29,169
Gain on sale of loans		—		16,152		—		—		—			16,152
Other		2,569		3,170		35		1,001		—			6,775

Total operating income		21,273		22,507		9,160		1,001		(1,845	)		52,096

Expenses:
Interest expense		5,777		931		1,957		—		(1,845	)		6,820
Provision for loan losses		450		—		1,855		—		—			2,305
Personnel expenses		6,213		10,583		1,408		447		—			18,651
Other		4,214		3,333		1,339		186		—			9,072

Total operating expenses		16,654		14,847		6,559		633		(1,845	)		36,848

Income before income taxes		4,619		7,660		2,601		368		—			15,248
Provision for income taxes		1,036		2,911		988		140		—			5,075

Net income	$	3,583	$	4,749	$	1,613	$	228	$	—		$	10,173

Total assets	$	481,063	$	77,355	$	88,083	$	776	$	(82,605	)	$	564,672
Capital expenditures	$	2,145	$	201	$	9	$	—	$	—		$	2,355

	*Nine Months Ended September 30, 2002* *(In thousands)*
	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	18,257	$	2,021	$	961	$	—	$	(640	)	$	20,599
Gain on sale of loans		—		9,368		—		—		—			9,368
Other		2,344		2,236		10		816		—			5,406

Total operating income		20,601		13,625		971		816		(640	)		35,373

Expenses:
Interest expense		6,437		604		230		—		(640	)		6,631
Provision for loan losses		300		—		191		—		—			491
Personnel expenses		5,308		6,592		123		312		—			12,335
Other		3,898		2,217		82		143		—			6,340

Total operating expenses		15,943		9,413		626		455		(640	)		25,797

Income before income taxes		4,658		4,212		345		361		—			9,576
Provision for income taxes		900		1,601		131		137		—			2,769

Net income	$	3,758	$	2,611	$	214	$	224	$	—		$	6,807

Total assets	$	451,679	$	80,213	$	76,378	$	30	$	(96,826	)	$	511,474
Capital expenditures	$	542	$	152	$	—	$	8	$	—		$	702

The Retail Banking segment provides the Mortgage Banking segment with the funds needed to originate mortgage loans through a warehouse line of credit and charges the Mortgage Banking segment interest at the daily Federal Home Loan Bank advance rate plus 50 basis points. The Retail Banking segment also provides the Consumer Finance segment with a portion of the funds needed to originate loans and charges the Consumer Finance segment interest at LIBOR plus 250 basis points. These transactions are eliminated to reach consolidated totals. Certain corporate overhead costs incurred by the Retail Banking segment are not allocated to the Mortgage Banking, Consumer Finance and Other segments.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The statements contained in this report that are not historical facts may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in: interest rates, general economic conditions, legislation and regulations, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, including residential home mortgages, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this report.

The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of C&F Financial Corporation (the “Company”). This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements.

Critical Accounting Policies

Allowance for Loan Losses: The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when management believes that the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower’s ability to repay, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Impaired Loans: Impaired loans are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan (or, as a practical expedient, at the loan’s observable market price) or the fair value of the collateral if the loan is collateral dependent. The Company considers a loan impaired when it is probable that the Company will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of delay in payment if the ultimate collection of all amounts due is expected. A valuation allowance is maintained to the extent that the measure of the impaired loan is less than the recorded investment.

Valuation of Derivatives: The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 45 to 120 days. For such rate lock commitments, the Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby an investor commits to buy the loan at the time the borrower commits to an interest rate with the intent that the investor has assumed the interest rate risk on the loan.

The Company does not hold any derivative instruments in its securities portfolio nor has it entered into any other derivative hedging transactions.

Goodwill: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. In assessing the recoverability of the Company’s goodwill, all of which was recognized in connection with the Bank’s acquisition of Moore Loans, Inc. in September 2002, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates and related assumptions change in the future, the Company may be required to record impairment charges not previously recorded.

Defined Benefit Pension Plan: The Bank maintains a non-contributory, defined benefit pension plan for eligible full-time employees as defined by the plan. Plan assets, which consist primarily of marketable equity securities and corporate and government fixed income securities, are valued using market quotations. Plan obligations and annual pension and postretirement benefit income are determined by actuaries using a number of key assumptions. Key assumptions include the discount rate, the estimated future return on plan assets, and the anticipated rate of future salary increases. Changes in these assumptions, if any, may impact pension expense as measured in accordance with SFAS No. 87, Employers’ Accounting for Pensions.

Stock Compensation Plans: SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of Statement No. 123 (“SFAS 148”) was issued in December 2002. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to, among other things, provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Currently, the Company’s three stock-based compensation plans are accounted for under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no stock-based compensation cost is reflected in the Company’s net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. If the Company elects to adopt the recognition provisions of SFAS 148 in 2003, the change in accounting principle will result in a stock-based compensation cost to be reflected in the Company’s net income. The amount of compensation cost will be dependent on the fair value based method chosen.

Overview

Net income increased 25.1% to $3.4 million for the three months ended September 30, 2003 compared to $2.7 million for the same period of 2002. Earnings per diluted share were $.89 for the three month period of 2003, up 20.3% from $.74 per diluted share for the three months ended September 30, 2002. Net income increased 49.4% to $10.2 million for the nine months ended September 30, 2003 compared to $6.8 million for the same period of 2002. Earnings per diluted share were $2.69 for the nine month period of 2003, up 43.1% from $1.88 per diluted share for the nine months ended September 30, 2002.

Performance as measured by the Company’s annualized return on average assets (ROA) was 2.38% for the three months ended September 30, 2003 compared to 2.41% for the same period of 2002. For the first nine months of 2003, ROA was 2.50% compared to 2.08% for the first nine months of 2002. Another key indicator of performance, the annualized return on average equity (ROE), was 21.74% for the three months ended September 30, 2003 compared to 21.06% for the three months ended September 30, 2002. For the nine months ended September 30, 2003, ROE was 22.80% compared to 18.84% for the first nine months of 2002.

The increase in net income and earnings per share for both the third quarter and the nine months ended September 30, 2003 resulted primarily from an increase in the earnings of the Mortgage Banking segment and the inclusion of the earnings of the Consumer Finance segment, which was acquired in September 2002. The results of operations of each of the Company’s significant business segments are summarized below.

Retail Banking: Earnings for the Retail Banking segment were $1.1 million and $3.6 million for the third quarter and the first nine months, respectively, of 2003, as compared to $1.3 million and $3.8 million for the third quarter and the first nine months, respectively, of 2002. Included in earnings for 2002 was a non-recurring tax-free insurance benefit of $277,000, which was received in the second quarter of 2002. Excluding this benefit, recurring earnings for the Retail Banking segment were $3.5 million for the first nine months of 2002. The following table presents the reconciliation of the change in net income of the Retail Banking segment to the increase in recurring earnings for the nine months ended September 30, 2003 and 2002.

	Nine Months Ended September 30,					Increase
	2003		2002			(Decrease)
Net income, as reported	$	3,583	$	3,758		$	(175	)
Nonrecurring insurance benefit		—		(277	)		277

Recurring earnings¹	$	3,583	$	3,481		$	102

¹The presentation of this non-GAAP financial measure is meaningful to the discussion of comparative earnings for the Retail Banking segment for the nine months ended September 30, 2003 and 2002 because the decline in net income, as reported, is not indicative of the trend in earnings for the Retail Banking segment.

The decline in earnings for the comparative third quarter periods is primarily a result of an increase in the provision for loan losses resulting from a higher level of non-accrual loans and accruing loans past due 90 days or more and higher operating expenses resulting from the initial costs associated with the expansion of the Retail Banking segment. During the third quarter of 2003, the Retail Banking segment opened a new branch in Mechanicsville, Virginia and began to hire individuals for the expansion into the Virginia Peninsula region.

The increase in recurring earnings for the comparative nine month periods is primarily a result of higher average earning assets, principally funded by growth in deposits, and an increase in recurring non-interest income, partially offset by an increase in non-interest expense. The increase in average earning assets is a result of a higher average balance of loans by the Retail Banking segment to the Mortgage Banking and the Consumer Finance segments, as well as an increase in loans to third party customers. The increase in recurring non-interest income is primarily a result of the new overdraft program implemented by the Bank during 2002 and the gain on calls of securities that resulted from the low interest rate environment. The increase in non-interest expense is primarily a result of an increase in salaries and benefits as the Bank continues to add staff to support growth.

Mortgage Banking: Earnings for the Mortgage Banking segment increased approximately $591,000 to $1.7 million for the quarter ended September 30, 2003 and increased approximately $2.1 million to $4.7 million for the nine months ended September 30, 2003. The increase in earnings is a result of the continued low interest rate environment and strong demand for mortgage loans, as well as the October 2002 addition of a new loan production office in Fredericksburg, Virginia and an increase in loan officers at existing loan production offices. Income at C&F Mortgage Corporation is generally correlated to changes in interest rates and new and resale home purchases. The low interest rates and strong home sales have resulted in strong demand for both mortgage loans to refinance existing loans, as well as mortgage loans for new and resale home purchases. For the third quarter of 2003, the amount of loan originations at C&F Mortgage resulting from refinancing was $163.7 million compared to $97.2 million for the third quarter of 2002. Loans originated for new and resale home purchases for these two time periods were $174.2 million and $113.1 million, respectively. For the first nine months of 2003, the amount of loan originations at C&F Mortgage resulting from refinancing was $468.3 million compared to $191.2 million for the same period of 2002. Loans originated for new and resale home purchases for these two time periods were $432.3 million and $312.1 million, respectively. C&F Mortgage expects that future earnings of the Mortgage Banking segment will be affected by changes in interest rates and demand for new and resale home sales. The recent increase in mortgage rates has resulted in a decline in the number of applications, which will ultimately result in a decrease in originations and sales of loans.

Consumer Finance: Earnings for the Consumer Finance segment, consisting solely of Moore Loans, Inc., totaled $507,000 for the quarter ended September 30, 2003 and $1.6 million for the nine months ended September 30, 2003. Three and nine month earnings for 2002 were $214,000 from September 1, the date of acquisition, through September 30.

RESULTS OF OPERATIONS

Net Interest Income

The following table presents the average balances of interest-earning assets with related yields and interest-bearing liabilities with related rates. Loans include loans held for sale. Loans placed on a non-accrual status are included in the balances and in the computation of yields, upon which they had an immaterial effect. The yields on tax-exempt earning assets are on a taxable-equivalent basis, which converts the income on tax-free loans and investments to the equivalent yield as if taxes were paid using the federal corporate income tax rate of 34%.

Selected Average Balance Sheet Data

(dollars in 000’s)
	Three Months Ended
	September 30, 2003				September30, 2002
	Average		Yield/		Average		Yield/
	Balance		Cost		Balance		Cost
Securities	$	54,588	7.23	%	$	61,623	7.29	%
Loans		454,656	7.93			327,408	8.25
Fed funds sold / interest bearing deposits at other banks		10,727	89			25,288	1.79

Total earning assets	$	519,971	7.71	%	$	414,319	7.71	%

Time, checking and savings deposits	$	346,361	1.76	%	$	305,659	2.50	%
Other borrowings		80,761	3.50			31,791	4.19

Total interest bearing liabilities	$	427,122	2.09	%	$	337,450	2.66	%

Net interest margin			5.99	%			5.55	%

(dollars in 000’s)
	Nine Months Ended
	September 30, 2003				September 30, 2002
	Average		Yield/		Average		Yield/
	Balance		Cost		Balance		Cost
Securities	$	57,435	7.23	%	$	59,367	7.44	%
Loans		430,351	8.37			303,472	7.90
Fed funds sold / interest bearing deposits at other banks		12,857	1.07			26,169	1.68

Total earning assets	$	500,643	8.05	%	$	389,008	7.41	%

Time, checking and savings deposits	$	337,607	1.87	%	$	298,847	2.73	%
Other borrowings		76,215	3.68			18,512	3.76

Total interest bearing liabilities	$	413,822	2.20	%	$	317,359	2.79	%

Net interest margin			6.23	%			5.14	%

Net interest income, on a taxable equivalent basis, for the three months ended September 30, 2003 was $7.8 million, an increase of $2.0 million, or 35.5%, from $5.7 million for the three months ended September 30, 2002. Net interest income, on a taxable equivalent basis, for the nine months ended September 30, 2003 was $23.3 million, an increase of $8.3 million, or 55.6%, from $15.0 million for the comparable period in 2002. These increases resulted from higher average interest earning assets, which increased 25.5% for the third quarter of 2003 and 28.7% for the first nine months of 2003, and from increases in the net interest margin, which increased to 5.99% for the third quarter of 2003 from 5.55% for the same period in 2002 and to 6.23% for the first nine months of 2003 from 5.14% for the first nine months of 2002. The increases in average earning assets for the three and nine month periods ended September 30, 2003 were a result of an increase in the average balance of loans, offset in part by a decrease in the average balance of interest earning deposits at other banks (primarily at the Federal Home Loan Bank (“FHLB”)) and a decrease in the average balance of securities.

The increase in average loans is a result of an increase in loans at the Bank, the acquisition of Moore Loans and an increase in loans held for sale at C&F Mortgage. The increase in average loans at the Bank approximated $21.4 million for the third quarter of 2003 and $25.2 million for the first nine months of 2003. This increase was a result of overall growth due to loan demand. The average balance of loans at Moore Loans, which was acquired September 1, 2002, was $77.3 million for the third quarter of 2003 and $73.3 million for the first nine months of 2003. The increase in average loans at C&F Mortgage approximated $53.3 million and $39.6 million for the third quarter and first nine months, respectively, of 2003, which resulted from an increase in originations at C&F Mortgage. Loans originated and loans sold at C&F Mortgage for the third quarter of 2003 were $337.9 million and $366.5 million, respectively, compared to $210.6 million and $182.5 million, respectively, for the third quarter of 2002. Loans originated and loans sold at C&F Mortgage for the first nine months of 2003 were $900.6 million and $937.4 million, respectively, compared to $503.3 million and $496.8 million, respectively, for the comparable period in 2002.

The decrease in the average balance of securities available for sale for the three month and nine month periods ended September 30, 2003 resulted from maturities and calls of higher-yielding securities. Funds provided from the decline in securities available for sale and from the reduction in lower-yielding interest-bearing deposits at other banks were deployed into higher-yielding loans.

The increase in the Company’s net interest margin on a taxable equivalent basis for the third quarter of 2003 compared to the third quarter of 2002 was a result a decrease in the cost of funds to 2.09% from 2.66%. The yield on interest earnings assets was 7.71% for both the third quarter of 2003 and 2002. The decline in the yield on loans to 7.93% from 8.25% was offset by the decline in the average balance of interest-bearing deposits at other banks. The decline in the yield on loans resulted from a 25 basis point decline in the Bank’s prime rate in the third quarter of 2003, coupled with an increase in the average balance of lower yielding loans held for sale at C&F Mortgage, which more than offset the increase in the average balance of higher-yielding loans of the Consumer Finance segment. The decline in the average balance of interest-bearing deposits in other banks was a result of an increase in loans held for sale. The Company’s net interest margin, on a taxable equivalent basis, for the first nine months of 2003 compared to the same period of 2002 increased as a result of an increase in the yield on interest earning assets to 8.05% from 7.41%, coupled with a decrease in the cost of funds to 2.20% from 2.79%. The yield on interest earning assets was favorably impacted by the higher yield on average loans at Moore Loans relative to the Bank and C&F Mortgage. For the three months and nine months ended September 30, 2003, Moore Loans had average loans of $77.3 million and $73.3 million, respectively, with individual loan rates ranging from 15% to 20%. The favorable impact of Moore Loans’ yield was reduced by a decrease in the yield on loans held by the Bank resulting from the low interest rate environment and an increase in the average balance of lower yielding loans held for sale at C&F Mortgage.

The taxable-equivalent yield on the Company’s securities portfolio declined from 7.29% for the third quarter of 2002 to 7.23% for the third quarter of 2003 and from 7.44% for the first nine months of 2002 to 7.23% for the comparable period in 2003 as a result of the maturities and calls of higher-yielding securities.

The decrease in the cost of funds for the Company for the third quarter and for the first nine months of 2003 was a result of the falling interest rate environment and the repricing of maturing certificates of deposit at lower rates, offset in part by higher-cost funds related to Moore Loans. Moore Loans has a line of credit with an unrelated third party, which bears interest at LIBOR plus 250 basis points. In addition, as part of the acquisition of Moore Loans, the Bank borrowed $20 million from the FHLB at rates between 2.8% and 3.3% and $5 million from an unrelated third party, which bears

interest at 6.0%. As part of the purchase price of Moore Loans, the Bank issued $3 million in subordinated debt to the former shareholders of Moore Loans, which bears interest at 8.0%.

While low interest rates have resulted in downward pressure on asset yields, banks have not been able to reduce deposit costs at the same pace.

Non-Interest Income

	Three Months Ended September 30, 2003
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Gain on sale of loans	$	—	$	5,687	$	—	$	—	$	5,687
Service charges on deposit accounts		549		—		—		—		549
Other service charges and fees		205		1,099		—		—		1,304
Gain on calls of available for sale securities		29		—		—		—		29
Other income		24		22		19		354		419

Total non-interest income	$	807	$	6,808	$	19	$	354	$	7,988

	Three Months Ended September 30, 2002
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Gain on sale of loans	$	—	$	3,729	$	—	$	—	$	3,729
Service charges on deposit accounts		523		—		—		—		523
Other service charges and fees		193		862		—		—		1,055
Gain on calls of available for sale securities		34		—		—		—		34
Other income		16		65		10		280		371

Total non-interest income	$	766	$	4,656	$	10	$	280	$	5,712

	Nine Months Ended September 30, 2003
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Gain on sale of loans	$	—	$	16,152	$	—	$	—	$	16,152
Service charges on deposit accounts		1,718		—		—		—		1,718
Other service charges and fees		545		3,093		—		—		3,638
Gain on calls of available for sale securities		185		—		—		—		185
Other income		121		77		35		1,001		1,234

Total non-interest income¹	$	2,569	$	19,322	$	35	$	1,001	$	22,927

¹	Total non-interest income for the nine months ended September 30, 2003 corresponds to recurring non-interest income for the first nine months of 2002.

	Nine Months Ended September 30, 2002
dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Gain on sale of loans	$	—	$	9,368	$	—	$	—	$	9,368
Service charges on deposit accounts		1,407		—		—		—		1,407
Other service charges and fees		502		2,104		—		—		2,606
Gain on calls of available for sale securities		69		—		—		—		69
Other income		89		132		10		816		1,047

Recurring non-interest income¹		2,067		11,604		10		816		14,497
Nonrecurring insurance benefit		277		—		—		—		277

Total non-interest income	$	2,344	$	11,604	$	10	$	816	$	14,774

Recurring non-interest income for the nine months ended September 30, 2002 corresponds to total non-interest income for the first nine months of 2003. The presentation of this non-GAAP financial measure is meaningful to the discussion of comparative non-interest income for the Retail Banking segment because the nonrecurring insurance benefit was 11.8% of total non-interest income for the nine months ended September 30, 2002.

Total non-interest income increased $2.3 million or 39.8% to $8.0 million for the three months ended September 30, 2003 from $5.7 million for the three months ended September 30, 2002. Total non-interest income increased $8.2 million or 55.2% to $22.9 million for the first nine months of 2003 from $14.8 million for the same period in 2002. The three month and nine month increases in 2003 were mainly attributable to an increase in gains on the sale of loans and other service charges and fees resulting from an increase in the volume of loans closed and sold by C&F Mortgage. The increase in total non-interest income for the three and nine months ended September 30, 2003 also included an increase in service charges at the Retail Banking segment, resulting from the Bank’s new overdraft program that was started at the beginning of 2002.

Non-Interest Expense

	Three Months Ended September 30, 2003
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Salaries and employee benefits	$	2,153	$	3,511	$	533	$	120	$	6,317
Occupancy expense		518		274		47		7		846
Other expenses		880		981		392		61		2,314

Total non-interest expense	$	3,551	$	4,766	$	972	$	188	$	9,477

	Three Months Ended September 30, 2002
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Salaries and employee benefits	$	1,822	$	2,633	$	123	$	101	$	4,679
Occupancy expense		538		168		10		10		726
Other expenses		757		610		72		43		1,482

Total non-interest expense	$	3,117	$	3,411	$	205	$	154	$	6,887


	Nine Months Ended September 30, 2003
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Salaries and employee benefits	$	6,213	$	10,583	$	1,408	$	447	$	18,651
Occupancy expense		1,672		756		144		21		2,593
Other expenses		2,542		2,577		1,195		165		6,479

Total non-interest expense	$	10,427	$	13,916	$	2,747	$	633	$	27,723

	Nine Months Ended September 30, 2002
(dollars in 000’s)
	Retail		Mortgage		Consumer
	Banking		Banking		Finance		Other		Total
Salaries and employee benefits	$	5,308	$	6,592	$	123	$	312	$	12,335
Occupancy expense		1,733		531		10		23		2,297
Other expenses		2,164		1,687		72		120		4,043

Total non-interest expense	$	9,205	$	8,810	$	205	$	455	$	18,675

Total non-interest expense increased $2.6 million, or 37.6%, to $9.5 million for the three months ended September 30, 2003 from $6.9 million for the three months ended September 30, 2002. Total non-interest expenses increased $9.0 million, or 48.4%, to $27.7 million for the first nine months of 2003 from $18.7 million for the first nine months of 2002. The three month and nine month increases in 2003 were mainly attributable to the acquisition of Moore Loans in September 2002, coupled with higher variable compensation costs and other operating expenses at C&F Mortgage Corporation resulting from the increase in loan production. In addition, the increase in personnel expenses at the Retail Banking segment was a result of an increase in operations and administrative personnel, coupled with higher employee benefits expense, which were attributable to continued growth and higher pension and health care costs, respectively.

Income Taxes

Income tax expense for the third quarter of 2003 totaled $1.7 million, an effective tax rate of 33.6%, compared to $1.2 million, or 31.6%, for the third quarter of 2002. Income tax expense for the first nine months of 2003 totaled $5.1 million, an effective tax rate of 33.3%, compared to $2.8 million, or 28.9%, for the first nine months of 2002. The increase in the effective tax rate for the three months and nine months ended September 30, 2003 was a result of a decrease in earnings from tax-exempt assets as a percentage of total income mainly resulting from the increased earnings at C&F Mortgage and Moore Loans and to the receipt of a non-recurring insurance benefit in the second quarter of 2002 that was not subject to income taxes.

Asset Quality

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The allowance is increased by the provision for loan losses and reduced by loans charged off, net of recoveries. The following table summarizes the allowance activity for periods indicated:

	Three Months Ended September 30, 2003
(dollars in 000’s)
	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	4,068		$	3,394		$	7,462
Provision for loan losses		150			774			924

		4,218			4,168			8,386

Loans charged off		(24	)		(416	)		(440	)
Recoveries of loans previously charged off		7			195			202

Net loans charged off		(17	)		(221	)		(238	)

Allowance, end of period	$	4,201		$	3,947		$	8,148

	Three Months Ended September 30, 2002
(dollars in 000’s)
	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	3,874		$	—		$	3,874
Provision for loan losses		100			191			291

		3,974			191			4,165

Acquisition of Moore Loans		—			2,693			2,693

Loans charged off		(274	)		(130	)		(404	)
Recoveries of loans previously charged off		15			52			67

Net loans charged off		(259	)		(78	)		(337	)

Allowance, end of period	$	3,715		$	2,806		$	6,521

	Nine Months Ended September 30, 2003
(dollars in 000’s)
	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	3,765		$	2,957		$	6,722
Provision for loan losses		450			1,855			2,305

		4,215			4,812			9,027

Loans charged off		(75	)		(1,341	)		(1,416	)
Recoveries of loans previously charged off		61			476			537

Net loans charged off		(14	)		(865	)		(879	)

Allowance, end of period	$	4,201		$	3,947		$	8,148

	Three Months Ended September 30, 2002
(dollars in 000’s)
	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	3,684		$	—		$	3,684
Provision for loan losses		300			191			491

		3,984			191			4,175

Acquisition of Moore Loans		—			2,693			2,693
Loans charged off		(322	)		(130	)		(452	)
Recoveries of loans previously charged off		53			52			105

Net loans charged off		(269	)		(78	)		(347	)

Allowance, end of period	$	3,715		$	2,806		$	6,521

The Consumer Finance segment, consisting solely of Moore Loans, accounted for the majority of the activity in the allowance for loan losses during the third quarter and the first nine months of 2003. Moore Loans serves customers who have limited access to traditional automobile financing. Moore Loans’ typical borrowers have experienced prior credit difficulties or have modest income. Because Moore Loans serves customers who are unable to meet the credit standards imposed by most traditional automobile financing sources, Moore Loans expects to sustain a higher level of credit losses than traditional automobile financing sources. As Moore Loans provides financing in a relatively higher risk market, Moore Loans generally charges interest at higher rates than those charged by traditional financing sources.

In addition to maintaining the allowance for loan losses, Moore Loans retains dealer reserves that are established at the time a loan is made and are specific to each individual dealer. Loans charged off at Moore Loans are first charged to the dealer reserves, to the extent that an individual dealer has reserves, and the remainder is charged to the allowance for loan losses. Dealer reserves are a liability of Moore Loans and payable to individual dealers upon the termination of the relationship with Moore Loans and the payment of outstanding loans associated with a specific dealer.

The following table summarizes the dealer reserves activity (dollars in 000’s):

	Nine Months Ended September 30, 2003			Nine Months Ended September 30, 2003
Dealer reserves, beginning of period	$	2,212		$	2,071
Reserve holdback at loan origination		600			1,767
Loans charged off		(711	)		(1,834	)
Recoveries of loans previously charged off		68			165

Dealer reserves, end of period	$	2,169		$	2,169

During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses generally increase at the Consumer Finance segment. These periods also may be accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.

Non-Performing Assets

Retail and Mortgage Banking

*(dollars in 000’s)*	September 30, 2003			December 31, 2002
Non-accrual loans	$	1,976		$	1,656
Real estate owned		702			703
Total non-performing assets	$	2,678		$	2,359

Accruing loans past due for 90 days or more	$	824		$	69

Allowance for loan losses	$	4,201		$	3,765

Non-performing assets to total loans* and real estate owned		.96	%		.88	%
Allowance for loan losses to total loans* and real estate owned		1.50			1.40
Allowance for loan losses to non-performing assets		156.87			159.60
*Total loans above excludes consumer finance loans at Moore Loans.

Consumer Finance

*(dollars in 000’s)*	September 30, 2003			December 31, 2002
Non-accrual loans	$	1,072		$	688

Accruing loans past due for 90 days or more	$	300		$	293

Allowance for loan losses	$	3,947		$	2,957

Dealer reserves	$	2,169		$	2,071

Non-accrual loans to total loans		1.36	%		1.02	%
Allowance for loan losses and dealer reserves to non-accrual loans		570.52	%		730.81	%
Allowance for loan losses to total consumer finance loans		5.01	%		4.40	%
Dealer reserves to total consumer finance loans		2.75			3.08

Allowance for loan losses and dealer reserves to total consumer finance loans		7.76	%		7.48	%

There has been no significant change in non-performing assets of the combined Retail and Mortgage Banking segments, which increased to $2.7 million at September 30, 2003 from $2.4 million at December 31, 2002. Accruing loans past due for 90 days or more increased to $824,000 at September 30, 2003 from $69,000 at December 31, 2002. This increase did not result from a single relationship or concentration; rather it occurred in individually small-balance loans. Real estate owned consists primarily of two commercial properties, one of which was sold after September 30, 2003. A reserve for the projected loss on this sale, while not significant, was included in earnings for the third quarter and

the first nine months of 2003. The allowance for loan losses was $4.2 million at September 30, 2003 and $3.8 million at December 31, 2002, which approximates 1.50% and 1.40%, respectively, of total loans and real estate owned. This increase is a result of the slightly higher level of non-accrual loans and accruing loans past due 90 days or more. Management believes that the current allowance is adequate to absorb any losses on existing loans that may become uncollectible in the combined Retail and Mortgage Banking segments.

Non-accrual assets of the Consumer Finance segment increased to $1.1 million at September 30, 2003 from $688,000 at December 31, 2002. The corresponding allowance for loan losses was $3.9 million at September 30, 2003 and $3.0 million at December 31, 2002, and dealer reserves were $2.2 million at September 30, 2003 and $2.1 million at December 31, 2002. The ratio of the combined allowance for loan losses and dealer reserves to total consumer finance loans increased to 7.76% at September 30, 2003 from 7.48% at December 31, 2002 as a result of the higher level of non-accrual loans and the increase in charge-off activity. Because Moore Loans focuses on non-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by a general economic downturn. While Moore Loans seeks to manage the higher risk inherent in loans made to non-prime borrowers through underwriting criteria and collection methods it employs, no assurance can be given that these criteria or methods will afford adequate protection against these risks. However, management believes that the current allowance for loan losses and dealer reserves are adequate to absorb any losses on existing loans in the Consumer Finance segment that may become uncollectible.

FINANCIAL CONDITION

At September 30, 2003, the Company had total assets of $564.7 million compared to $551.9 million at December 31, 2002. The increase was principally a result of a $33.4 million increase in total cash and cash equivalents and a $20.6 million increase in total loans held for investment as presented below. These increases were partially offset by a $6.4 million decline in available-for-sale securities resulting from maturities and calls of higher-yielding securities in the low interest rate environment, and a $36.8 million decline in the balance of loans held for sale, which fluctuates based on originations and loan sales at C&F Mortgage. During the first nine months of 2003 loan sales were $937.4 million and loan originations were $900.6 million.

Loan Portfolio

The following table sets forth the composition of the Company’s loans held for investment in dollar amounts and as a percentage of the Company’s total gross loans held for investment at the dates indicated (dollars in 000’s):

	September 30, 2003					December 31, 2002
	Amount			Percent		Amount			Percent
Real estate—mortgage	$	78,136		22	%	$	76,472		23	%
Real estate—construction		8,942		2			8,575		3
Commercial, financial and agricultural		167,974		47			158,350		47
Equity lines		12,780		4			12,181		4
Consumer		11,512		3			13,376		3
Consumer—Moore Loans		78,788		22			67,194		20

Total loans		358,132		100	%		336,148		100	%

Less unearned loan fees		(758	)				(792	)
Less allowance for loan losses
Retail and Mortgage Banking		(4,201	)				(3,765	)
Consumer Finance		(3,947	)				(2,957	)

Total loans, net	$	349,226				$	328,634

Investment Securities

At September 30, 2003, total investment securities were $54.3 million compared to $60.6 million at December 31, 2002. Mortgage backed securities represented 4.4% of the total securities portfolio, obligations of state and political subdivisions were 82.6%, U.S. government agency notes were 2.0% and preferred stocks were 11.0% at September 30, 2003. Mortgage backed securities represented 7.2% of the total securities portfolio, obligations of states and political subdivisions were 83.5% and preferred stocks were 9.3% at December 31, 2002.

Deposits

Deposits totaled $415.9 million at September 30, 2003 compared to $383.5 million at December 31, 2002. Non-interest bearing deposits totaled $63.0 million at September 30, 2003 compared to $53.4 million at December 31, 2002. The increase in deposits is primarily a result of an increase in deposits at branches that were opened in the last quarter of 2001, and the result of investors moving funds from stocks and mutual funds to banks.

Other Borrowings

Borrowings totaled $75.6 million at September 30, 2003 compared to $94.5 million at December 31, 2002. This decrease occurred in short-term borrowings from the FHLB. There were no short-term advances from the FHLB outstanding on September 30, 2003 compared to $29.0 million outstanding on December 31, 2002. The decrease in short-term advances was primarily a result of the decline in loans held for sale, which are funded in part by FHLB advances, and an increase in deposits. The decline in FHLB advances was offset in part by a $10.0 million increase in the non-recourse revolving line of credit with a third party bank that partially funds loans at Moore Loans.

Liquidity

At September 30, 2003, cash, securities classified as available for sale and interest-bearing deposits in other banks were 20.1% of total earning assets compared to 15.3% at December 31, 2002. Asset liquidity is also provided by managing the investment maturities.

Additional sources of liquidity available to the Company include the Bank’s capacity to borrow additional funds through an established federal funds line with a regional correspondent bank, an established line with the FHLB and a revolving line of credit with a third party bank.

Capital Resources

The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table.

Actual

Minimum Capital

Requirements

Minimum To Be

Well Capitalized

Under Prompt

Corrective Action

Provisions

(dollars in 000’s)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2003:

Total Capital (to Risk-Weighted Assets)

Company

62,202

13.5

36,945

8.0

N/A

Bank

58,806

12.9

36,352

8.0

45,440

10.0

Tier I Capital (to Risk-Weighted Assets)

Company

52,650

11.4

18,472

4.0

N/A

Bank

49,347

10.9

18,176

4.0

27,264

6.0

Tier I Capital (to Average Assets)

Company

52,650

9.5

22,255

4.0

N/A

Bank

49,347

9.0

21,924

4.0

27,155

5.0

As of December 31, 2002:

Total Capital (to Risk-Weighted Assets)

Company

55,322

12.5

35,548

8.0

N/A

Bank

51,441

11.8

34,870

8.0

43,588

10.0

Tier I Capital (to Risk-Weighted Assets)

Company

46,002

10.4

17,774

4.0

N/A

Bank

42,228

9.7

17,435

4.0

26,153

6.0

Tier I Capital (to Average Assets)

Company

46,002

8.8

20,805

4.0

N/A

Bank

42,228

8.3

20,450

4.0

25,562

5.0

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 were effective beginning

January 1, 2003. Management does not anticipate that the recognition requirements of FIN 45 will have a material impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporation’s consolidated financial statements. FIN 46 requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity’s activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46 but the adoption of FIN 46 is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Company’s consolidated financial statements.

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes is directly related to price level indices. Impacts of inflation on interest rates, loan demand and deposits are reflected in the consolidated financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

ITEM 4.

CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are operating effectively in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. No significant changes in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

There are no material pending or threatened legal proceedings to which the Company is a party or of which property of the Company is subject.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits–


2.1		Stock Purchase Agreement by and between Citizens and Farmers Bank, C&F Financial Corporation, Moore Loans, Inc., Abby W. Moore, Joanne Moore and John D. Moore dated as of August 30, 2002 (incorporated by reference to Exhibit 2.1 to Form 8-K filed on September 3, 2002)

3.1		Articles of Incorporation of C&F Financial Corporation (incorporated by reference to Exhibit 3.1 to Form 10-KSB filed March 29, 1996)

3.2		By laws of C&F Financial Corporation (incorporated by reference to Exhibit 3.2 to Form 10-KSB filed March 29, 1996)

10.1.1		Amendment to Change in Control Agreement dated July 23, 2003 between C&F Financial Corporation and Larry G. Dillon, filed herewith

10.3.1		Amendment to Change in Control Agreement dated July 23, 2003 between C&F Financial Corporation and Thomas F. Cherry, filed herewith

31.1		Certification of CEO pursuant to Rule 13a-14(a), filed herewith

31.2		Certification of CFO pursuant to Rule 13a-14(a), filed herewith

32		Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350, filed herewith

(b)

Reports on Form 8-K–

On July 24, 2003, the Company filed a report on Form 8-K to announce the Company’s financial results for the second quarter ended June 30, 2003.

On August 21, 2003, the Company filed a report on Form 8-K to announce its declaration of a cash dividend payable October 1, 2003.

SIGNATURES

Pursuant to 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.

C&F FINANCIAL CORPORATION
	(Registrant)



Date:	November 12, 2003	/s/ Larry G. Dillon

		Larry G. Dillon
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Date:	November 12, 2003	/s/ Thomas F. Cherry

		Thomas F. Cherry
		Senior Vice President,
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

C & F FINANCIAL CORP - Quarter Report: 2003 September (Form 10-Q)

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