C & F FINANCIAL CORP - Quarter Report: 2007 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, 2007

¨	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.)

802 Main Street

West Point, VA

23181

(Address of principal executive offices)

(Zip Code)

(804) 843-2360

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

At November 1, 2007, the latest practicable date for determination, 3,011,991 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 - September 30, 2007 (unaudited) and December 31, 2006	1

	Consolidated Statements of Income (unaudited) - Three months and nine months ended September 30, 2007 and 2006	2

	Consolidated Statements of Shareholders’ Equity (unaudited) - Nine months ended September 30, 2007 and 2006	3

	Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2007 and 2006	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

Part II - Other Information

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits	33

Signatures		34

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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


	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS

Cash and due from banks	$	10,169		$	11,496
Interest-bearing deposits in other banks		1,572			17,010
Federal funds sold		546			—

Total cash and cash equivalents		12,287			28,506
Securities-available for sale at fair value, amortized cost of $75,487 and $66,407, respectively		76,193			67,584
Loans held for sale, net		31,826			53,504
Loans, net		583,349			517,843
Federal Home Loan Bank stock		4,522			2,093
Corporate premises and equipment, net		33,289			33,189
Accrued interest receivable		4,931			4,432
Goodwill		10,724			10,724
Other assets		17,036			16,593

Total assets	$	774,157		$	734,468


LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Noninterest-bearing demand deposits	$	86,417		$	90,260
Savings and interest-bearing demand deposits		175,350			188,450
Time deposits		272,388			254,125

Total deposits		534,155			532,835
Short-term borrowings		66,048			12,462
Long-term borrowings		84,660			92,284
Trust preferred capital notes		10,310			10,310
Accrued interest payable		2,067			1,915
Other liabilities		12,579			16,656

Total liabilities		709,819			666,462

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, 3,011,991 and 3,182,411 shares issued and outstanding, respectively)		2,989			3,159
Additional paid-in capital		—			324
Retained earnings		61,525			64,402
Accumulated other comprehensive (loss) income, net		(176	)		121

Total shareholders’ equity		64,338			68,006

Total liabilities and shareholders’ equity	$	774,157		$	734,468

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,
	2007		2006		2007		2006
Interest income
Interest and fees on loans	$	15,932	$	13,939	$	45,158	$	40,706
Interest on money market investments		16		85		425		360
Interest and dividends on securities
U.S. government agencies and corporations		70		67		199		186
Tax-exempt obligations of states and political subdivisions		672		574		1,901		1,743
Corporate bonds and other		131		98		407		311

Total interest income		16,821		14,763		48,090		43,306

Interest expense
Savings and interest-bearing deposits		704		578		2,011		1,690
Certificates of deposit, $100 or more		1,213		843		3,573		2,207
Other time deposits		1,975		1,506		5,581		4,070
Borrowings		2,193		1,918		6,038		5,354

Total interest expense		6,085		4,845		17,203		13,321

Net interest income		10,736		9,918		30,887		29,985
Provision for loan losses		1,800		1,125		4,690		3,225

Net interest income after provision for loan losses		8,936		8,793		26,197		26,760

Noninterest income
Gains on sales of loans		4,055		4,594		12,122		12,713
Service charges on deposit accounts		911		951		2,636		2,523
Other service charges and fees		981		1,243		3,168		3,595
Gains on calls of available for sale securities		1		22		10		103
Other income		498		379		1,470		1,123

Total noninterest income		6,446		7,189		19,406		20,057

Noninterest expenses
Salaries and employee benefits		7,793		7,486		22,998		21,588
Occupancy expenses		1,475		1,240		4,498		3,774
Other expenses		2,929		2,708		8,566		7,841

Total noninterest expenses		12,197		11,434		36,062		33,203

Income before income taxes		3,185		4,548		9,541		13,614
Income tax expense		901		1,436		2,784		4,250

Net income	$	2,284	$	3,112	$	6,757	$	9,364


Per share data
Net income – basic	$	.76	$	.99	$	2.21	$	2.97
Net income – assuming dilution	$	.73	$	.95	$	2.12	$	2.86
Cash dividends paid and declared	$	.31	$	.29	$	.93	$	.85
Weighted average number of shares – basic		3,010,858		3,149,938		3,056,623		3,149,643
Weighted average number of shares – assuming dilution		3,134,598		3,263,632		3,187,264		3,271,056

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 (Loss) Income, Net			Total
December 31, 2006	$	3,159		$	324					$	64,402		$	121		$	68,006
Comprehensive income
Net income							$	6,757			6,757						6,757
Other comprehensive loss, net of tax
Amortization of prepaid pension transition costs								9						9			9
Unrealized holding losses on securities, net of reclassification adjustment								(306	)					(306	)		(306	)

Comprehensive income							$	6,460

Purchase of common stock		(192	)		(1,003	)					(6,796	)					(7,991	)
Share-based compensation					224												224
Stock options exercised		22			455												477
Cash dividends											(2,838	)					(2,838	)

September 30, 2007	$	2,989		$	—					$	61,525		$	(176	)	$	64,338


Disclosure of Reclassification Amount:

Unrealized net holding losses arising during period							$	(299	)
Reclassification adjustment for gains included in net income								(7	)

Unrealized holding losses on securities, net of reclassification adjustment							$	(306	)

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, Net			Total
December 31, 2005	$	3,141		$	183					$	55,930		$	832		$	60,086
Comprehensive income
Net income							$	9,364			9,364						9,364
Other comprehensive loss, net of tax
Unrealized holding losses on securities, net of reclassification adjustment								(144	)					(144	)		(144	)

Comprehensive income							$	9,220

Purchase of common stock		(13	)		(500	)											(513	)
Share-based compensation					57												57
Stock options exercised		22			349												371
Cash dividends											(2,678	)					(2,678	)

September 30, 2006	$	3,150		$	89					$	62,616		$	688		$	66,543


Disclosure of Reclassification Amount:

Unrealized net holding losses arising during period							$	(77	)
Reclassification adjustment for gains included in net income								(67	)

Unrealized holding losses on securities, net of reclassification adjustment							$	(144	)

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,
	2007			2006
Operating activities:
Net income	$	6,757		$	9,364
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,920			1,479
Provision for loan losses		4,690			3,225
Share-based compensation		224			57
Amortization of prepaid pension transition costs		9			—
Accretion of discounts and amortization of premiums on investment securities, net		36			25
Net realized gains on calls of securities		(10	)		(103	)
Proceeds from sale of loans		680,267			700,118
Origination of loans held for sale		(658,589	)		(715,150	)
Change in other assets and liabilities:
Accrued interest receivable		(499	)		(433	)
Other assets		(279	)		(709	)
Accrued interest payable		152			446
Other liabilities		(4,077	)		3,693

Net cash provided by operating activities		30,601			2,012

Investing activities:
Proceeds from maturities and calls of securities available for sale		3,925			6,749
Purchases of securities available for sale		(13,030	)		(6,558	)
Net purchases of Federal Home Loan Bank stock		(2,429	)		(802	)
Net increase in customer loans		(70,196	)		(46,340	)
Purchases of corporate premises and equipment		(2,042	)		(4,614	)
Disposals of corporate premises and equipment		22			71

Net cash used in investing activities		(83,750	)		(51,494	)

Financing activities:
Net decrease in demand, interest-bearing demand and savings deposits		(16,943	)		(12,426	)
Net increase in time deposits		18,263			16,119
Net increase in borrowings		45,962			24,529
Purchase of common stock		(7,991	)		(513	)
Proceeds from exercise of stock options		477			371
Cash dividends		(2,838	)		(2,678	)

Net cash provided by financing activities		36,930			25,402

Net decrease in cash and cash equivalents		(16,219	)		(24,080	)
Cash and cash equivalents at beginning of period		28,506			42,878

Cash and cash equivalents at end of period	$	12,287		$	18,798

Supplemental disclosure
Interest paid	$	17,051		$	12,875
Income taxes paid	$	2,863		$	4,410

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 accounting principles generally accepted in the United States of America 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, 2006.

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, 2007 and the results of operations for the three and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007 and 2006 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 “Corporation”) and its subsidiary, Citizens and Farmers Bank (“C&F Bank” or the “Bank”), with all significant intercompany transactions and accounts being eliminated in consolidation. In addition, the Corporation owns C&F Financial Statutory Trust I, an unconsolidated subsidiary. The subordinated debt owed to the trust is reported as a liability of the Corporation.

Share-Based Compensation: Effective January 1, 2006, the Corporation adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, which requires that the Corporation recognize expense related to the fair value of share-based compensation awards in net income.

The Corporation has elected to follow the modified prospective transition method allowed by SFAS 123(R). Under the modified prospective transition method, compensation expense is recognized prospectively for all unvested options outstanding at January 1, 2006 and for all awards modified or granted after that date. Compensation expense for the three months and nine months ended September 30, 2007 included $72,000 ($45,000 after tax) and $224,000 ($139,000 after tax), respectively, for options and restricted stock granted during 2007 and 2006. As of September 30, 2007, there was $819,000 of total unrecognized compensation expense related to nonvested stock options and restricted stock that will be recognized over the remaining requisite service period.

Stock option plan activity for the nine months ended September 30, 2007 is summarized below:


	Shares		Exercise Price*		Remaining Contractual Life (in years)*	Intrinsic Value of Unexercised In-The Money Options (in 000’s)
Options outstanding, January 1, 2007	530,167		$	31.54	6.7	$	4,511
Granted	13,500			37.17
Exercised	(21,500	)		22.20
Options outstanding at September 30, 2007	522,167			32.07	6.1	$	5,072
Options exercisable at September 30, 2007	508,667			31.94	6.0	$	5,010

*	Weighted average

The total intrinsic value of in-the-money options exercised during the nine months ended September 30, 2007 was $439,000. Cash received from option exercises during the same period was $477,000. The Corporation issues new shares to satisfy the exercise of stock options.

Note 2

Diluted net income per share 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. Potentially-dilutive common stock had no effect on income available to common shareholders.

Note 3

During the first nine months of 2007, the Corporation purchased 192,020 shares of its common stock in negotiated and open-market transactions at prices ranging from $37.25 to $45.07. During the first nine months of 2006, the Corporation purchased 13,122 shares of its common stock in open-market transactions at prices from $37.27 to $40.00.

Note 4

Securities in an unrealized loss position at September 30, 2007, by duration of the period of unrealized loss, are shown below. No impairment has been recognized on any securities in a loss position based on management’s intent and demonstrated ability to hold such securities to scheduled maturity or call dates and management’s evaluation that there is no permanent impairment in the value of these securities.

(in 000’s)

Less Than 12 Months

12 Months or More

Total

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

U.S. government agencies and corporations

484

4,711

5,195

Mortgage-backed securities

377

1,061

1,438

Obligations of states and political subdivisions

11,012

5,438

16,450

136

Subtotal-debt securities

11,873

11,210

120

23,083

200

Preferred stock

1,498

104

183

1,681

109

Total temporarily impaired securities

13,371

184

11,393

125

24,764

309

The primary cause of the temporary impairments in the Corporation’s investment in debt securities was the decline in prices as market interest rates have risen. There are 61 debt securities and four equity securities totaling $23.1 million and $1.7 million, respectively, considered temporarily impaired at September 30, 2007. Because the Corporation has the intent and demonstrated ability to hold these investments until a recovery of unrealized losses, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at September 30, 2007.

Securities in an unrealized loss position at December 31, 2006 are shown below by duration of the period of unrealized loss.


(in 000’s)	Less Than 12 Months				12 Months or More				Total
(in 000’s)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S government agencies and corporations	$	476	$	2	$	4,654	$	92	$	5,130	$	94
Mortgage-backed securities		1,246		33		427		1		1,673		34
Obligations of states and political subdivisions		2,284		10		4,530		49		6,814		59

Subtotal-debt securities		4,006		45		9,611		142		13,617		187

Preferred stock		585		10		1,178		19		1,763		29

Total temporarily impaired securities	$	4,591	$	55	$	10,789	$	161	$	15,380	$	216

Note 5

The Bank has a non-contributory defined benefit plan for which the components of net periodic benefit cost are as follows:


(in 000’s)	Three Months Ended September 30,
(in 000’s)	2007			2006
Service cost	$	194		$	188
Interest cost		96			86
Expected return on plan assets		(112	)		(107	)
Amortization of net obligation at transition		(1	)		(1	)
Amortization of prior service cost		2			2
Amortization of net loss		4			11

Net periodic benefit cost	$	183		$	179


(in 000’s)	Nine Months Ended September 30,
(in 000’s)	2007			2006
Service cost	$	582		$	564
Interest cost		288			258
Expected return on plan assets		(336	)		(321	)
Amortization of net obligation at transition		(3	)		(3	)
Amortization of prior service cost		6			6
Amortization of net loss		12			33

Net periodic benefit cost	$	549		$	537

In December 2006, the Bank made a $1.18 million contribution to the plan. The estimated minimum contribution for 2007 is approximately $58,000.

Note 6

The Corporation operates in a decentralized fashion in three principal business segments: Retail Banking, Mortgage Banking and Consumer Finance. Revenues from Retail Banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage Banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from Consumer Finance consist primarily of interest earned on automobile loans.

The Corporation’s other subsidiaries include:

•

an investment company that derives revenues from brokerage services,

•

an insurance company that derives revenues from insurance services, and

•

a title company that derives revenues from title insurance services.

The results of these other subsidiaries are not significant to the Corporation as a whole and have been included in “Other.”

(in 000’s)

Three Months Ended September 30, 2007

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

10,430

628

6,783

—

(1,020

)

16,821

Gains on sales of loans

—

3,990

—

4,055

Other

1,307

630

106

348

—

2,391

Total operating income

11,737

5,248

6,889

348

(955

)

23,267

Expenses:

Interest expense

4,505

224

2,350

(1,043

)

6,085

Provision for loan losses

120

—

1,680

—

1,800

Personnel expenses

3,685

2,674

1,159

201

7,793

Other

2,133

1,571

664

—

4,404

Total operating expenses

10,443

4,469

5,853

286

(969

)

20,082

Income before income taxes

1,294

779

1,036

3,185

Provision for income taxes

188

295

394

—

901

Net income

1,106

484

642

2,284

Total assets

641,253

42,354

165,707

(75,236

)

774,157

Capital expenditures

155

—

224


(in 000’s)	Three Months Ended September 30, 2006
(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	9,492	$	755	$	5,443	$	—	$	(927	)	$	14,763
Gains on sales of loans		—		4,607		—		—		(13	)		4,594
Other		1,356		878		109		252		—			2,595

Total operating income		10,848		6,240		5,552		252		(940	)		21,952


Expenses:
Interest expense		3,508		422		1,829		—		(914	)		4,845
Provision for loan losses		—		—		1,125		—		—			1,125
Personnel expenses		3,249		3,251		815		159		12			7,486
Other		1,971		1,447		500		30		—			3,948

Total operating expenses		8,728		5,120		4,269		189		(902	)		17,404


Income before income taxes		2,120		1,120		1,283		63		(38	)		4,548
Provision for income taxes		515		422		488		24		(13	)		1,436

Net income	$	1,605	$	698	$	795	$	39	$	(25	)	$	3,112

Total assets	$	572,794	$	64,597	$	132,187	$	62	$	(58,865	)	$	710,775
Capital expenditures	$	327	$	52	$	27	$	—	$	—		$	406

(in 000’s)

Nine Months Ended September 30, 2007

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

29,827

1,957

19,063

—

(2,757

)

48,090

Gains on sales of loans

—

12,135

—

(13

)

12,122

Other

3,888

2,065

344

987

—

7,284

Total operating income

33,715

16,157

19,407

987

(2,770

)

67,496

Expenses:

Interest expense

12,656

837

6,389

135

(2,814

)

17,203

Provision for loan losses

160

—

4,530

—

4,690

Personnel expenses

10,863

8,350

3,214

549

22,998

Other

6,488

4,647

1,820

109

—

13,064

Total operating expenses

30,167

13,834

15,953

793

(2,792

)

57,955

Income before income taxes

3,548

2,323

3,454

194

9,541

Provision for income taxes

512

882

1,313

2,784

Net income

3,036

1,441

2,141

120

6,757

Total assets

641,253

42,354

165,707

(75,236

)

774,157

Capital expenditures

1,612

190

240

—

2,042


(in 000’s)	Nine Months Ended September 30, 2006
(in 000’s)	Retail Banking			Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	28,125		$	1,974	$	15,588	$	—	$	(2,381	)	$	43,306
Gains on sales of loans		—			12,750		—		—		(37	)		12,713
Other		3,726			2,535		324		759		—			7,344

Total operating income		31,851			17,259		15,912		759		(2,418	)		63,363


Expenses:
Interest expense		9,771			1,029		4,939		—		(2,418	)		13,321
Provision for loan losses		(250	)		—		3,475		—		—			3,225
Personnel expenses		9,582			9,142		2,300		514		50			21,588
Other		5,787			4,246		1,474		108		—			11,615

Total operating expenses		24,890			14,417		12,188		622		(2,368	)		49,749


Income before income taxes		6,961			2,842		3,724		137		(50	)		13,614
Provision for income taxes		1,720			1,080		1,415		52		(17	)		4,250

Net income	$	5,241		$	1,762	$	2,309	$	85	$	(33	)	$	9,364

Total assets	$	572,794		$	64,597	$	132,187	$	62	$	(58,865	)	$	710,775
Capital expenditures	$	4,222		$	232	$	157	$	3	$	—		$	4,614

The Retail Banking segment extends a warehouse line of credit to the Mortgage Banking segment, providing the funds needed to originate mortgage loans. The Retail Banking segment charges the Mortgage Banking segment interest at the daily Federal Home Loan Bank (“FHLB”) 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 175 basis points. The Retail Banking segment acquires certain lot and permanent loans, second mortgage loans and home equity lines of credit from the Mortgage Banking segment at prices similar to those paid by third-party investors. 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.

Note 7

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but may change current practice for some entities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The Corporation does not expect the implementation of SFAS 157 to have a material effect on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Corporation is currently evaluating the effect SFAS 159 may have on its consolidated financial statements.

ITEM 2.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Corporation’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management and risks and uncertainties. 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 Corporation include, but are not limited to, changes in:

interest rates

general economic conditions

the legislative/regulatory climate

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board

the quality or composition of the loan and/or investment portfolios

demand for loan products

deposit flows

competition

demand for financial services in the Corporation’s market area

10)

technology

11)

reliance on third parties for key services

12)

the real estate market

13)

the Corporation’s expansion and technology initiatives and

14)

accounting principles, policies and guidelines.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue reliance on those 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 the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in

determining the adequacy of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay, overall portfolio quality and specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.

Impairment of Loans: We measure impaired loans 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. We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment.

Impairment of Securities: Impairment of investment securities results in a write-down that must be included in net income when a market price decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market price decline, the financial health of and specific prospects for the issuer and our ability and intention with regard to holding the security to maturity.

Goodwill: Goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment using a two-step process that begins with an estimation of the fair value of the reporting unit. In assessing the recoverability of the Corporation’s goodwill, all of which was recognized in connection with the Bank’s acquisition of C&F Finance Company in September 2002, we must make assumptions in order to determine the fair value of the respective assets. Major assumptions used in determining impairment were increases in future income, sales multiples in determining terminal value and the discount rate applied to future cash flows. As part of the impairment test, we performed sensitivity analyses by increasing the discount rate, lowering sales multiples and reducing increases in future income. We completed the annual test for impairment during the fourth quarter of 2006 and determined there was no impairment to be recognized in 2006. If the underlying estimates and related assumptions change in the future, we may be required to record impairment charges.

Defined Benefit Pension Plan: The Bank maintains a non-contributory defined benefit pension plan for eligible full-time employees as specified by the plan. Plan assets, which consist primarily of marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Bank’s actuary determines plan obligations and annual pension expense 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 in the future, if any, may impact pension assets, liabilities or expense.

Accounting for Income Taxes: Determining the Corporation’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that our estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

For further information concerning accounting policies, refer to Note 1 of the Corporation’s Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

OVERVIEW

Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary performance measures in order to assess the level of success in achieving these goals: (i) return on average assets (“ROA”), (ii) return on average equity (“ROE”) and (iii) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three principal business activities: retail banking, mortgage banking and consumer finance. We also actively manage our capital through growth, stock purchases and dividends.

Financial Performance Measures. For the Corporation, net income decreased 26.6 percent to $2.3 million for the third quarter of 2007 compared to the third quarter of 2006. Earnings per share assuming dilution decreased 23.2 percent to 73 cents for the third quarter of 2007 compared to the same period in 2006. Net income decreased 27.8 percent to $6.8 million for the first nine months of 2007 compared to the first nine months of 2006. Earnings per share assuming dilution decreased 25.9 percent to $2.12 for the first nine months of 2007 compared to the same period in 2006.

Net income for the first nine months of 2006 included $728,000, after tax, attributable to the recovery of past due interest and a reduction in the Corporation’s loan loss allowance in connection with the pay-off of previously nonperforming loans of one commercial relationship. Excluding the after-tax effect of this loan pay-off, the Corporation’s net income for the first nine months of 2007 decreased 21.8 percent and earnings per share assuming dilution decreased 19.7 percent. Earnings results in 2007 were negatively affected at the Retail Banking segment and the Consumer Finance segment by net interest margin compression, higher provisions for loan losses attributable in part to loan growth, and higher operating expenses associated with expansion initiatives. A decline in earnings at the Mortgage Banking segment resulted from a reduction in refinancings and a downturn in the new and resale housing markets.

For the third quarter of 2007, on an annualized basis, the Corporation’s ROE was 14.21 percent and its ROA was 1.21 percent, compared to 19.15 percent and 1.78 percent, respectively, for the third quarter of 2006. For the first nine months of 2007, on an annualized basis, the Corporation’s ROE was 13.82 percent and its ROA was 1.22 percent, compared to 19.86 percent and 1.82 percent, respectively, for the first nine months of 2006 (and 18.32 percent and 1.67 percent for the first nine months of 2006, adjusted to exclude the effect of the commercial loan pay-off in 2006). The decline in these measures resulted from lower earnings in 2007 and asset growth, offset in part by stock repurchases.

Principal Business Activities. An overview of the financial results for each of the Corporation’s principal segments is presented below. A more detailed discussion is included in “Results of Operations.”

Retail Banking: Pretax earnings for the Retail Banking segment were $1.3 million for the third quarter of 2007, compared with $2.1 million for the third quarter of 2006. Pretax earnings for the Retail Banking segment were $3.5 million for the first nine months of 2007, compared with $7.0 million for the first nine months of 2006 (and $5.8 million for the first nine months of 2006, adjusted to exclude the effect of the commercial loan pay-off in 2006). The decline in earnings for 2007 included (1) the effects of margin compression and competition on net interest income, (2) a higher provision for loan losses attributable to loan growth, (3) the effects

on operating expenses of the Peninsula and Richmond branch openings and the operations center relocation, (4) higher operational and administrative personnel costs to support growth and (5) the recognition of compensation expense, in accordance with accounting principles effective beginning in 2006, in connection with the Corporation’s issuance of stock options to directors and the issuance of restricted stock to employees under existing plans. Net interest margin compression continued at the Retail Banking segment as the cost of deposits continued to rise, while rates on interest-earning assets remained level. C&F Bank opened four new branches within a 15-month period beginning in the first quarter of 2006. As a result, the Retail Banking segment is incurring operating expenses for these branches before they have generated sufficient new loan and deposit growth to become profitable. Even though these costs will impact the Corporation’s short-term profits, we expect these branches will contribute to the Corporation’s long-term profitability.

Mortgage Banking: Pretax earnings for the Mortgage Banking segment were $779,000 for the third quarter of 2007, compared with $1.1 million for the third quarter of 2006. Pretax earnings for the Mortgage Banking segment were $2.3 million for the first nine months of 2007, compared with $2.8 million for the first nine months of 2006. The decline in earnings for 2007 included (1) the effects of the downturn in the housing market on loan origination volume, which declined 13.4 percent and 7.9 percent in the third quarter and the first nine months, respectively, of 2007, and (2) higher operating expenses in 2007 related to new offices and higher business development costs in order to generate more loan production. For the third quarter of 2007, the amount of loan originations at C&F Mortgage resulting from refinancings was $55.7 million compared to $54.6 million for the third quarter of 2006. Loans originated for new and resale home purchases for these two time periods were $150.9 million and $183.9 million, respectively. For the first nine months of 2007, the amount of loan originations at C&F Mortgage Corporation resulting from refinancings was $178.1 million compared to $193.1 million for the first nine months of 2006. Loans originated for new and resale home purchases for these two nine-month periods were $480.5 million compared to $522.1 million. Future earnings of the Mortgage Banking segment may continue to be negatively affected if interest rate trends and the overall condition of the housing market result in fewer new and resale home sales and loan refinancings. However, we plan to continue to expand into new and within existing markets that provide the potential for increased loan production.

Consumer Finance: Pretax earnings for the Consumer Finance segment were $1.0 million for the third quarter of 2007, compared with $1.3 million for the third quarter of 2006. Pretax earnings for the Consumer Finance segment were $3.5 million for the first nine months of 2007, compared with $3.7 million for the first nine months of 2006. Earnings of the Consumer Finance segment have benefited from an increase in net interest income resulting from average loan growth of 25.3 percent for the third quarter of 2007 and 21.7 percent for the first nine months of 2007. However, the Consumer Finance segment’s net interest margins for both the third quarter and the first nine months of 2007 declined as a result of an increase in the cost of variable-rate borrowings, which are indexed to short-term interest rates, without a corresponding increase in its fixed-rate loan portfolio. In addition, C&F Finance has entered into new markets and strengthened its position in existing markets over the past 12 months resulting in an increase in overhead expenses. The provision for loan losses increased during the third quarter and first nine months of 2007 as a result of higher charge-offs attributable to an increase in the number of vehicles repossessed in 2007, coupled with an increasing average balance per loan originated over the last several years. We believe that the investments in technology, new markets and people at the Consumer Finance segment have established a platform with the capacity to support current operations and future growth. Future earnings at the Consumer Finance segment may be impacted by economic conditions including, but not limited to, the employment market, interest rate levels and the resale market for used automobiles.

Capital Management. Total shareholders’ equity decreased $3.7 million to $64.3 million at September 30, 2007, compared to $68.0 million at December 31, 2006. This decline was attributable to dividends to shareholders of $2.8 million and the purchase of 192,020 shares of the Corporation’s common stock totaling $8.0 million during 2007, the effects of which were offset in part by earnings in 2007. The board of directors has maintained the quarterly dividend level at 31 cents per share during 2007 despite the decline in earnings, resulting in a dividend payout ratio of 42.0 percent for the first nine months of 2007 compared to 28.6 percent for the same period in 2006. The share purchases were made under a board authorization on November 3, 2006 to purchase up to 150,000 shares over the twelve months ending November 3, 2007, which was terminated and replaced by an authorization on July 17, 2007 to purchase up to 150,000 shares of the Corporation’s common stock over the twelve months ending July 16, 2008.

RESULTS OF OPERATIONS

Net Interest Income

Selected Average Balance Sheet Data and Net Interest Margin


(in 000’s)	Three Months Ended
	September 30, 2007				September 30, 2006
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
Securities	$	76,713	6.48	%	$	66,291	6.30	%
Loans held for sale		33,054	6.73			47,867	6.31
Loans		581,878	10.49			516,041	10.24
Interest-bearing deposits in other banks and federal funds sold		1,212	5.28			6,631	5.13

Total earning assets	$	692,857	9.85	%	$	636,830	9.48	%


Time and savings deposits	$	451,219	3.45	%	$	414,812	2.82	%
Borrowings		136,498	6.43			120,298	6.38

Total interest-bearing liabilities	$	587,717	4.14	%	$	535,110	3.62	%


Net interest margin			6.34	%			6.44	%


(in 000’s)	Nine Months Ended
	September 30, 2007				September 30, 2006
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
Securities	$	72,139	6.59	%	$	66,924	6.35	%
Loans held for sale		36,881	6.71			42,865	6.14
Loans		553,523	10.43			505,749	10.17
Interest-bearing deposits in other banks and federal funds sold		10,793	5.25			9,975	4.81

Total earning assets	$	673,336	9.73	%	$	625,513	9.40	%


Time and savings deposits	$	448,134	3.32	%	$	411,276	2.58	%
Borrowings		126,382	6.37			119,922	5.95

Total interest-bearing liabilities	$	574,516	3.99	%	$	531,198	3.34	%


Net interest margin			6.32	%			6.56	%

Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following tables show the direct causes of the changes in the components of net interest income on a taxable-equivalent basis from the third quarter of 2006 to the third quarter of 2007 and from the first nine months of 2006 to the first nine months of 2007. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the relationship of the absolute dollar amounts of the change in each. Loans include both nonaccrual loans and loans held for sale.


(in 000’s)	Three Months Ended September 30, 2007
	Increase(Decrease) Due to Changes in					Total Increase (Decrease)
	Rate		Volume			Total Increase (Decrease)
Interest income:
Securities	$	23	$	175		$	198
Loans ⁽¹⁾		512		1,465			1,977
Interest-bearing deposits in other banks		4		(73	)		(69	)

Total interest income		539		1,567			2,106


Interest expense:
Time and savings deposits		484		481			965
Borrowings		15		260			275

Total interest expense		499		741			1,240

Change in net interest income	$	40	$	826		$	866


(in 000’s)	Nine Months Ended September 30, 2007
	Increase(Decrease) Due to Changes in					Total Increase (Decrease)
	Rate			Volume		Total Increase (Decrease)
Interest income:
Securities	$	97		$	283	$	380
Loans ⁽¹⁾		1,994			2,428		4,422
Interest-bearing deposits in other banks		34			31		65

Total interest income		2,125			2,742		4,867

Interest expense:
Time and savings deposits		1,910			1,288		3,198
Borrowings		387			297		684

Total interest expense		2,297			1,585		3,882

Change in net interest income	$	(172	)	$	1,157	$	985

(1)

The change in loan interest income due to changes in interest rates includes an increase of $172,000, which was included in loan interest income in the third quarter and the first nine months of 2007 for nonaccrual interest attributable to the repayment of previously nonperforming loans, and a decline of $870,000, which was included in loan interest income in the first nine months of 2006 for nonaccrual and default interest attributable to the repayment of previously nonperforming loans of one commercial relationship.

Net interest income, on a taxable-equivalent basis, for the third quarter of 2007 was $11.1 million compared to $10.3 million for the third quarter of 2006. Net interest income, on a taxable-equivalent basis, for the first nine months of 2007 was $32.0 million compared to $31.0 million for the first nine months of 2006 ($30.1 million adjusted to exclude the $870,000 of nonaccrual and default interest attributable to the commercial loan pay-off). The net interest margin was 6.34 percent for the third quarter of 2007 compared

to 6.44 percent for the third quarter of 2006, and 6.32 percent for the first nine months of 2007 compared to 6.56 percent for the first nine months of 2006 (and 6.42 percent for the first nine months of 2006, adjusted to exclude the effect of the commercial loan pay-off in 2006).

The higher net interest income for the third quarter and for the first nine months of 2007 over the same periods in 2006 excluding the loan pay-off resulted primarily from the increases in the average balance of interest-earning assets of 8.8 percent and 7.6 percent for the third quarter and the first nine months of 2007, respectively, the effects of which were offset in part by decreases in net interest margin for those same periods.

Average loans held for investment increased $65.8 million and $47.8 million in the third quarter and the first nine months of 2007, respectively, compared to the same periods in 2006. The Retail Banking segment’s average loan portfolio increased $31.5 million in the third quarter of 2007 and $20.8 million in the first nine months of 2007. These increases were mainly attributable to commercial loan growth. The Consumer Finance segment’s average loan portfolio increased $31.2 million in the third quarter of 2007 and $25.5 million in the first nine months of 2007. These increases were attributable to overall growth at existing locations and expansion into new markets. The Mortgage Banking segment’s average loan portfolio increased $3.1 million in the third quarter of 2007 and $1.5 million in the first nine months of 2007. These increases were attributable to short-term bridge loans, a new product initiated in 2007. Average loans held for sale at the Mortgage Banking segment decreased $14.8 million in the third quarter of 2007 and $6.0 million in the first nine months of 2007, compared to the same periods in 2006. Variations in the average balances of loans held for sale occurred in response to loan demand, coupled with fluctuations in the timing of loan originations and sales within the periods. The higher yields on loans held for investment and loans held for sale during the third quarter and the first nine months of 2007 were due to a general increase in interest rates.

Average securities available for sale increased $10.4 million and $5.2 million for the third quarter and the first nine months of 2007, respectively, compared to the same periods in 2006. In addition, their average yield increased 18 basis points and 24 basis points for the third quarter and the first nine months of 2007, respectively. The increase in securities available for sale occurred predominantly in the Retail Banking segment’s municipal portfolio. Additions during 2007 focused on longer-term municipal securities. Yields for the first nine months of 2007 included the receipt of dividends from one preferred stock holding, which had previously suspended dividend payments.

Average interest-bearing deposits in other banks, primarily the FHLB, decreased $5.4 million and increased $818,000 for the third quarter and first nine months of 2007, respectively, compared to the same periods in 2006. Fluctuations in the average balance of these lower-yielding deposits occurred in response to loan demand. The average yield on interest-bearing deposits in other banks increased 15 basis points and 44 basis points for the third quarter and first nine months of 2007, respectively. The higher yields were due to increases in short-term interest rates through mid-2006.

Average interest-bearing deposits increased $36.4 million and $36.9 million for the third quarter and the first nine months of 2007, respectively, compared to the same periods in 2006. However, the increase in interest on deposits was influenced to a greater extent by the increase in deposit rates. The average cost of deposits increased 63 basis points for the third quarter of 2007 and 74 basis points for the first nine months of 2007 due to the increase in short-term interest rates, coupled with the repricing of maturing certificates of deposit at higher interest rates and a decrease in the proportion of transaction accounts relative to total interest-bearing deposits due to the competitive environment for these lower-costing deposits.

Average borrowings increased $16.2 million and $6.5 million for the third quarter and the first nine months of 2007, respectively, compared to the same periods in 2006. The increases in 2007 as compared to the same periods in the prior year resulted primarily from increased use of the third-party line of credit by the Consumer Finance segment to fund loan growth and from increased use of short-term borrowings from the FHLB by the Retail Banking segment. These borrowings are indexed to short-term interest rates and reprice as short-term interest rates change. Accordingly, the average cost of borrowings increased 42 basis points for the first nine months of 2007 due to rising short-term interest rates through mid-2006. The nominal five basis points increase in the average cost of borrowings for the third quarter of 2007 reflected the stabilization of short-term interest rates after mid-2006. In addition, unpredictable fluctuations in LIBOR, which are believed to have been triggered in part by the funding crisis in the housing markets, temporarily increased the Consumer Finance segment’s variable-rate borrowings during the third quarter of 2007.

Interest rates will be a significant factor influencing the performance of all of the Corporation’s business segments during 2007. Deposits repricing at higher rates relative to their maturing rates, coupled with continued lending competition and a flat interest rate yield curve, are contributing to net interest margin compression at the Retail Banking segment. The interest rate environment together with the sustained downturn in the housing market is resulting in lower demand for home mortgage loans at the Mortgage Banking segment.

Noninterest Income


	Three Months Ended September 30, 2007
(in 000’s)	Retail Banking		Mortgage Banking			Consumer Finance			Other and Eliminations			Total
Gains on sales of loans	$	—	$	3,990		$	—		$	65		$	4,055
Service charges on deposit accounts		911		—			—			—			911
Other service charges and fees		361		632			(12	)		—			981
Gains on calls of available for sale securities		1		—			—			—			1
Other income		34		(2	)		118			348			498

Total noninterest income	$	1,307	$	4,620		$	106		$	413		$	6,446


	Three Months Ended September 30, 2006
(in 000’s)	Retail Banking		Mortgage Banking			Consumer Finance			Other and Eliminations			Total
Gains on sales of loans	$	—	$	4,607		$	—		$	(13	)	$	4,594
Service charges on deposit accounts		951		—			—			—			951
Other service charges and fees		317		871			55			—			1,243
Gain on calls of available for sale securities		22		—			—			—			22
Other income		66		7			54			252			379

Total noninterest income	$	1,356	$	5,485		$	109		$	239		$	7,189


	Nine Months Ended September 30, 2007
(in 000’s)	Retail Banking		Mortgage Banking			Consumer Finance		Other and Eliminations			Total
Gains on sales of loans	$	—	$	12,135		$	—	$	(13	)	$	12,122
Service charges on deposit accounts		2,636		—			—		—			2,636
Other service charges and fees		1,009		2,067			92		—			3,168
Gains on calls of available for sale securities		10		—			—		—			10
Other income		233		(2	)		252		987			1,470

Total noninterest income	$	3,888	$	14,200		$	344	$	974		$	19,406


	Nine Months Ended September 30, 2006
(in 000’s)	Retail Banking		Mortgage Banking			Consumer Finance		Other and Eliminations			Total
Gains on sales of loans	$	—	$	12,750		$	—	$	(37	)	$	12,713
Service charges on deposit accounts		2,523		—			—		—			2,523
Other service charges and fees		896		2,515			184		—			3,595
Gain on calls of available for sale securities		103		—			—		—			103
Other income		204		20			140		759			1,123

Total noninterest income	$	3,726	$	15,285		$	324	$	722		$	20,057

Total noninterest income decreased $743,000, or 10.3 percent, to $6.4 million during the third quarter of 2007 and decreased $651,000, or 3.3 percent, to $19.4 million during the first nine months of 2007. The decrease in noninterest income during the third quarter of 2007 occurred primarily at the Mortgage Banking segment and was attributable to lower gains on loan sales and lower ancillary fees due to the ongoing effects of lower demand for home mortgage loans, tightening secondary market underwriting criteria and increased competition. During the first nine months of 2007, the decline in noninterest income at the Mortgage Banking segment resulting from the 7.9 percent decrease in loan origination volume was offset in part by an increase in noninterest income at the Retail Banking segment attributable to higher service charges and fees on deposit accounts resulting from deposit account growth and the expansion of our overdraft protection services. Increased revenue from brokerage services further offset the decline in the Mortgage Banking segment.

Noninterest Expenses

Three Months Ended September 30, 2007

(in 000’s)

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other

and
Eliminations

Total

Salaries and employee benefits

3,685

2,674

1,159

275

7,793

Occupancy expense

935

431

103

1,475

Other expenses

1,198

1,140

561

2,929

Total noninterest expense

5,818

4,245

1,823

311

12,197


	Three Months Ended September 30, 2006
(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Salaries and employee benefits	$	3,249	$	3,251	$	815	$	171	$	7,486
Occupancy expense		736		423		75		6		1,240
Other expenses		1,235		1,024		425		24		2,708

Total noninterest expense	$	5,220	$	4,698	$	1,315	$	201	$	11,434


	Nine Months Ended September 30, 2007
(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Salaries and employee benefits	$	10,863	$	8,350	$	3,214	$	571	$	22,998
Occupancy expense		2,849		1,356		273		20		4,498
Other expenses		3,639		3,291		1,547		89		8,566

Total noninterest expense	$	17,351	$	12,997	$	5,034	$	680	$	36,062


	Nine Months Ended September 30, 2006
(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations		Total
Salaries and employee benefits	$	9,582	$	9,142	$	2,300	$	564	$	21,588
Occupancy expense		2,307		1,240		209		18		3,774
Other expenses		3,480		3,006		1,265		90		7,841

Total noninterest expense	$	15,369	$	13,388	$	3,774	$	672	$	33,203

Total noninterest expense increased $763,000, or 6.7 percent, to $12.2 million during the third quarter of 2007 and increased $2.9 million, or 8.6 percent, to $36.1 million during the first nine months of 2007. The Retail Banking and the Consumer Finance segments reported increases in total noninterest expense that were primarily attributable to higher personnel and operating expenses to support growth and technology enhancements at both segments. Noninterest expense of the Retail Banking segment included operating expenses associated with our new Patterson Avenue and Chester retail banking branches in the Richmond, Virginia area, which opened in the first quarter of 2007, our Hampton and Yorktown retail banking branches on the Virginia Peninsula, which opened in 2006, and our new operations center, which opened in late 2005. Noninterest expenses of the Consumer Finance segment included costs associated with building depth in our sales force, entering new markets and increasing the administrative staff to support the increase in the loan portfolio. Total noninterest expense decreased during the third quarter and the first nine months of 2007 at the Mortgage Banking segment because of lower production-based personnel expenses as a result of the decline in loan production. These declines were offset in part by higher occupancy and other expenses, associated with opening new loan production offices in 2007 and 2006, and higher business development costs to generate more loan production.

Income Taxes

Income tax expense for the third quarter of 2007 totaled $901,000, resulting in an effective tax rate of 28.3 percent, compared to $1.4 million, or 31.6 percent, for the third quarter of 2006. Income tax expense for the first nine months of 2007 totaled $2.8 million, resulting in an effective tax rate of 29.2 percent, compared to $4.3 million, or 31.2 percent, for the first nine months of 2006. The decline in the effective tax rate during the third quarter and first nine months of 2007 resulted from higher tax-exempt income on securities and loans as a percentage of pretax income.

ASSET QUALITY

Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduces the allowance. The following tables summarize the allowance activity for periods indicated:


	Three Months Ended September 30, 2007
(in 000’s)	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	4,301		$	10,528		$	14,829
Provision for loan losses		120			1,680			1,800

		4,421			12,208			16,629

Loans charged off		(41	)		(1,708	)		(1,749	)
Recoveries of loans previously charged off		137			422			559

Net loans charged off		96			(1,286	)		(1,190	)

Allowance, end of period	$	4,517		$	10,922		$	15,439


	Three Months Ended September 30, 2006
(in 000’s)	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	4,403		$	9,187		$	13,590
Provision for loan losses		—			1,125			1,125

		4,403			10,312			14,715

Loans charged off		(112	)		(1,152	)		(1,264	)
Recoveries of loans previously charged off		47			355			402

Net loans charged off		(65	)		(797	)		(862	)

Allowance, end of period	$	4,338		$	9,515		$	13,853


	Nine Months Ended September 30, 2007
(in 000’s)	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	4,326		$	9,890		$	14,216
Provision for loan losses		160			4,530			4,690

		4,486			14,420			18,906

Loans charged off		(172	)		(4,759	)		(4,931	)
Recoveries of loans previously charged off		203			1,261			1,464

Net loans charged off		31			(3,498	)		(3,467	)

Allowance, end of period	$	4,517		$	10,922		$	15,439


	Nine Months Ended September 30, 2006
(in 000’s)	Retail and Mortgage Banking			Consumer Finance			Total
Allowance, beginning of period	$	4,718		$	8,346		$	13,064
Provision for loan losses		(250	)		3,475			3,225

		4,468			11,821			16,289

Loans charged off		(338	)		(3,276	)		(3,614	)
Recoveries of loans previously charged off		208			970			1,178

Net loans charged off		(130	)		(2,306	)		(2,436	)

Allowance, end of period	$	4,338		$	9,515		$	13,853

There has been an increase in the allowance for loan losses at the combined Retail Banking and Mortgage Banking segments since December 31, 2006. This increase resulted from net recoveries in 2007, coupled with a $160,000 provision for loan losses attributable to loan growth. We believe that the current level of the allowance for loan losses is appropriate to cover any losses on existing loans that may become uncollectible.

The Consumer Finance segment accounted for the majority of the activity in the allowance for loan losses during 2007. The increase in the provision for loan losses occurred as a result of loan growth and higher charge-offs. The increase in net charge-offs during 2007 was attributable to an increase in the number of vehicles repossessed in 2007, coupled with a higher average balance per loan originated over the last several years. Despite the increase in net charge-offs, our ratio of charge-offs as a percentage of average loans continues to be below the industry average. We diligently monitor credit quality and we believe that the allowance for loan losses is appropriate to cover any losses on existing loans that may become uncollectible.

Nonperforming Assets

Retail and Mortgage Banking


(in 000’s)	September 30, 2007			December 31, 2006
Nonperforming assets*	$	614		$	955
Accruing loans past due for 90 days or more*		1,557			1,629
Total loans**		440,011			399,195
Allowance for loan losses		4,517			4,326
Nonperforming assets* to total loans**		0.14	%		0.24	%
Allowance for loan losses to total loans**		1.03			1.08
Allowance for loan losses to nonperforming assets*		735.67			452.98

*	Nonperforming assets consist solely of nonaccrual loans for each period presented.

**	Loans exclude Consumer Finance segment loans presented below.

***	Balance includes a $1.2 million loan that was administratively past due at September 30, 2007. Subsequent to September 30, 2007, the loan renewal process was completed.

Consumer Finance


(in 000’s)	September 30, 2007			December 31, 2006
Nonaccrual loans	$	908		$	880
Accruing loans past due for 90 days or more		9		$	8
Total loans		158,777		$	132,864
Allowance for loan losses		10,922		$	9,890
Nonaccrual consumer finance loans to total consumer finance loans		0.57	%		0.66	%
Allowance for loan losses to total consumer finance loans		6.88			7.44

At the combined Retail and Mortgage Banking segments, the ratio of the allowance for loan losses to total loans declined five basis points since December 31, 2006 as a result of loan growth. Nonetheless, the ratio of the allowance for loan losses to nonperforming assets increased because nonperforming assets have declined since December 31, 2006 primarily as a result of loan repayments.

At the Consumer Finance segment, the ratio of the allowance for loan losses to total consumer finance loans declined 56 basis points as a result of loan growth and higher charge-offs during 2007. Based on our evaluation of the Consumer Finance segment’s rates of delinquencies, defaults, repossessions and losses, we believe that the current level of the allowance for loan losses at the Consumer Finance segment is appropriate to cover any losses on existing loans that may become uncollectible.

FINANCIAL CONDITION

At September 30, 2007, the Corporation had total assets of $774.2 million compared to $734.5 million at December 31, 2006. The increase was principally a result of an increase in loans held for investment at the Retail Banking and Consumer Finance segments and an increase in investment securities at the Retail Banking segment, which were offset in part by a decline in interest-bearing deposits in other banks used to partially fund loan growth and a decline in loans held for sale.

Loan Portfolio

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


(in 000’s)	September 30, 2007					December 31, 2006
(in 000’s)	Amount			Percent		Amount			Percent
Real estate - mortgage	$	124,815		21	%	$	115,885		22	%
Real estate - construction		14,338		2			13,650		2
Commercial, financial and agricultural		267,755		45			236,157		44
Equity lines		24,886		4			24,880		5
Consumer		8,583		1			8,951		2
Consumer - C&F Finance		158,777		27			132,864		25

Total loans		599,154		100	%		532,387		100	%

Less unearned loan fees		(366	)				(328	)
Less allowance for loan losses
Retail and Mortgage Banking		(4,517	)				(4,326	)
Consumer Finance		(10,922	)				(9,890	)

Total loans, net	$	583,349				$	517,843

The increase in loans held for investment occurred predominantly in (1) the variable-rate category of commercial loans and (2) the fixed-rate category of consumer loans at C&F Finance. Typically, growth in the variable-rate categories will negatively impact net interest margin in a declining interest rate environment. Fixed-rate consumer loans at C&F Finance are funded by variable-rate borrowings; therefore, net interest margin will be negatively impacted in a rising interest rate environment.

Investment Securities

The following table sets forth the composition of the Corporation’s securities available for sale in dollar amounts at fair value and as a percentage of the Corporation’s total securities available for sale at the dates indicated:


(in 000’s)	September 30, 2007				December 31, 2006
(in 000’s)	Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	7,265	10	%	$	6,222	9	%
Mortgage-backed securities		1,843	2			2,208	3
Obligations of states and political subdivisions		62,997	83			55,027	82

Total debt securities		72,105	95			63,457	94
Preferred stock		4,088	5			4,127	6

Total available for sale securities	$	76,193	100	%	$	67,584	100	%

The increase in securities available for sale occurred predominantly in the municipal portfolio. Additions since December 31, 2006 focused on longer-term municipal securities.

Deposits

Deposits totaled $534.2 million at September 30, 2007 compared to $532.8 million at December 31, 2006. The increase in deposits predominantly occurred at the new branches opened in 2006 and 2007. An increase of $18.3 million in time deposits was offset in part by a $3.8 million decline in noninterest-bearing demand deposits and a $13.1 million decline in savings and interest-bearing demand deposits. This shift is a result of the competitive environment for lower-costing transaction deposits.

Borrowings

Borrowings totaled $161.0 million at September 30, 2007 compared to $115.1 million at December 31, 2006. This increase was attributable to funding loan growth at the Retail Banking and Consumer Finance segments with wholesale funds, primarily advances from the FHLB.

Off-Balance Sheet Arrangements

As of September 30, 2007, there have been no material changes to the off-balance sheet arrangements disclosed in “Management’s Discussion and Analysis” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Contractual Obligations

As of September 30, 2007, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in “Management’s Discussion and Analysis” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Liquidity

Liquid assets, which include unrestricted cash and due from banks, interest-bearing deposits in other banks, federal funds sold and nonpledged securities available-for-sale, at September 30, 2007 totaled $52.7 million. The Corporation’s funding sources consist of an established federal funds line with a regional correspondent bank of $14.0 million that had no outstanding balance as of September 30, 2007, an established line with the FHLB that had $71.5 million outstanding under a total line of $125.6 million as of September 30, 2007, an unsecured revolving line of credit with a third-party lender that had $7.0 million outstanding under a total line of $7.0 million as of September 30, 2007 and a revolving line of credit with a third-party bank that had $69.7 million outstanding under a total line of $100.0 million as of September 30, 2007. We have no reason to believe these arrangements will not be renewed at maturity.

As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its operational requirements and contractual obligations.

Capital Resources

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

(in 000’s)

Actual

Minimum
Capital
Requirements

Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2007:

Total Capital (to Risk-Weighted Assets)

Corporation

71,871

11.3

51,122

8.0

N/A

Bank

73,449

11.6

50,673

8.0

63,342

10.0

Tier I Capital (to Risk-Weighted Assets)

Corporation

63,791

9.9

25,561

4.0

N/A

Bank

65,438

10.3

25,337

4.0

38,005

6.0

Tier I Capital (to Average Assets)

Corporation

63,791

8.6

29,776

4.0

N/A

Bank

65,438

8.9

29,575

4.0

36,968

5.0

As of December 31, 2006:

Total Capital (to Risk-Weighted Assets)

Corporation

74,646

12.6

47,413

8.0

N/A

Bank

76,571

13.0

46,992

8.0

58,740

10.0

Tier I Capital (to Risk-Weighted Assets)

Corporation

67,161

11.3

23,707

4.0

N/A

Bank

69,144

11.8

23,496

4.0

35,244

6.0

Tier I Capital (to Average Assets)

Corporation

67,161

9.6

28,123

4.0

N/A

Bank

69,144

9.9

27,918

4.0

34,897

5.0

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Corporation’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.

Use of Certain Non-GAAP Financial Measures

In addition to results presented in accordance with United States generally accepted accounting principles (GAAP) for the nine months ended September 30, 2006, we have presented certain non-GAAP financial measures throughout this Form 10-Q, which are reconciled to their equivalent GAAP financial measures below. We believe these non-GAAP financial measures provide information useful to investors in understanding the Corporation’s performance trends and facilitate comparisons with its peers. Specifically, we believe the exclusion from net income of a significant recovery of income recognized in a single accounting period in 2006 permits a comparison of results for ongoing business operations, and it is on this basis that we internally assess the Corporation’s performance and establish goals for future periods. Although we believe the non-GAAP financial measures presented in this Form 10-Q enhance investors’ understandings of the Corporation’s performance, these non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements.

Reconciliation of Non-GAAP Financial Measures

(in thousands, except for per share data)


	(1)	For the Nine Months Ended
	(1)	9/30/07		9/30/06
Net Income and Earnings Per Share
Net income (GAAP)	A	$	6,757	$	9,364
Nonaccrual and default interest attributable to loan transaction, net of income taxes (GAAP)			—		(565	)
Reduction in loan loss allowance attributable to loan transaction, net of income taxes (GAAP)			—		(163	)

Net income, excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction	B	$	6,757	$	8,636

Weighted average shares – assuming dilution (GAAP)	C		3,187		3,271
Weighted average shares – basic (GAAP)	D		3,057		3,150

Earnings per share – assuming dilution
GAAP	A/C	$	2.12	$	2.86
Excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction	B/C	$	2.12	$	2.64

Earnings per share – basic
GAAP	A/D	$	2.21	$	2.97
Excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction	B/D	$	2.21	$	2.74

Reconciliation of Non-GAAP Financial Measures (Continued)

(in thousands, except for per share data)


	(1)	For the Nine Months Ended
	(1)	9/30/07			9/30/06
Annualized Return on Average Assets
Average assets (GAAP)	E	$	737,204		$	687,748
Annualized return on average assets
GAAP	(A/E)/.75		1.22	%		1.82	%
Excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction	(B/E)/.75		1.22	%		1.67	%

Annualized Return on Average Equity
Average equity (GAAP)	F	$	65,185		$	62,852
Annualized return on average equity
GAAP	(A/F)/.75		13.82	%		19.86	%
Excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction	(B/F)/.75		13.82	%		18.32	%

Retail Banking Segment Pretax Income
Pretax income (GAAP)		$	3,548		$	6,961
Nonaccrual and default interest attributable to loan transaction			—			(870	)
Reduction in loan loss allowance attributable to loan transaction			—			(250	)

Pretax income, excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction		$	3,548		$	5,841


Retail Banking Segment Net Income
Net income (GAAP)		$	3,036		$	5,241
Nonaccrual and default interest attributable to loan transaction, net of income taxes (GAAP)			—			(565	)
Reduction in loan loss allowance attributable to loan transaction, net of income taxes (GAAP)			—			(163	)

Net income, excluding nonaccrual and default interest and reduction in loan loss allowance attributable to loan transaction		$	3,036		$	4,513

Reconciliation of Non-GAAP Financial Measures (Continued)

(in thousands, except for per share data)


	(1)	For the Nine Months Ended
	(1)	9/30/07			9/30/06
Net Interest Income and Net Interest Margin
Net interest income (GAAP)		$	30,887		$	29,985
Taxable-equivalent adjustment			1,087			1,006
Nonaccrual and default interest attributable to loan transaction (GAAP)			—			(870	)

Taxable-equivalent net interest income, excluding nonaccrual and default interest attributable to loan transaction	G	$	31,974		$	30,121

Average interest-earning assets (GAAP)	H	$	673,336		$	625,513
Net interest margin (GAAP)	(G/H)/.75		6.32	%
Net interest margin (GAAP)	((G/.75)+870)/H					6.56	%
Net interest margin, excluding nonaccrual and default
Interest attributable to loan transaction	(G/H)/.75		6.32	%		6.42	%

(1)	The letters included in this column are provided to show how the various ratios presented in the Reconciliation of Non-GAAP Financial Measures are calculated.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes from the quantitative and qualitative disclosures made in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4.

CONTROLS AND PROCEDURES

The Corporation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2007 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and regulations and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information otherwise required to be set forth in the Corporation’s periodic reports.

Management of the Corporation is also responsible for establishing and maintaining adequate internal control over financial reporting and control of the Corporation’s assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. There were no changes in the Corporation’s internal control over financial reporting during the Corporation’s third quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1A.

RISK FACTORS

The following is added to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Corporation’s 2006 Annual Report on Form 10-K:

Certain credit markets have experienced difficult conditions and volatility during 2007 and there has been an increase in mortgage loan foreclosures throughout the United States. The majority of these foreclosures appear to involve borrowers who had financed home purchases or refinanced existing home mortgage loans with so-called subprime mortgage loans or alternative loan products. Mortgage loan foreclosures can result in increases in loan losses and require mortgage lenders to take ownership of the foreclosed real properties in order to mitigate potential loan losses, which can result in increased noninterest expenses.

The Corporation originates a variety of residential loan products for sale into the secondary market through its Mortgage Banking segment. These products include conventional residential mortgages, which are generally considered prime loans, and alternative loan products. This latter category of loans includes loans with higher loan to value ratios, loans with no or limited verification of a borrower’s income or net worth stated on the loan application, and loans to borrowers with lower credit ratings, referred to as FICO scores. The general market for these alternative loan products across the country has declined as a result of increasing market rates of interest, moderating real estate prices, increased payment defaults by borrowers and increased loan foreclosures. These factors may result in potential repurchase liability to our mortgage company on residential mortgage loans originated and sold into the secondary market. While we mitigate the risk of repurchase requests by underwriting to the purchasers’ guidelines and do not believe that our exposure to this liability is significant at this time, we cannot be assured that a prolonged period of payment defaults and foreclosures will not result in requests for repurchases, which would adversely affect the Corporation’s net income.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities



	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program¹	Maximum Number of Shares that May Yet Be Purchased Under the Program¹
July 1-31, 2007	—	$	—	—	150,000
August 1-31, 2007	30,500		40.99	30,500	119,500
September 1-30, 2007	11,800		42.67	11,800	107,700

Total	42,300	$	41.45	42,300

On November 3, 2006, the Corporation’s board of directors authorized the purchase of up to 150,000 shares of the Corporation’s common stock over the twelve months ending November 3, 2007. Through June 30, 2006, 149,855 shares had been purchased under this authorization. On July 17, 2007, the Corporation’s board of directors terminated this authorization and approved a new authorization to purchase up to 150,000 shares of the Corporation’s common stock over the twelve months ending July 16, 2008. The stock may be purchased in the open market or through privately negotiated transactions, as management and the board of directors deem prudent.

ITEM 6.

EXHIBITS


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		Amended and Restated Bylaws of C&F Financial Corporation, as adopted October 16, 2007 (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 22, 2007)

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

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

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

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 2, 2007		/s/ Larry G. Dillon
		Larry G. Dillon
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Date November 2, 2007		/s/ Thomas F. Cherry
		Thomas F. Cherry
		Executive Vice President,
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

C & F FINANCIAL CORP - Quarter Report: 2007 September (Form 10-Q)

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