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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $73,118,955 as of June 28, 2002.

The number of shares of the registrant’s common stock outstanding as of February 14, 2003 was 3,652,359.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated March 14, 2003 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 15, 2003 are incorporated by reference into Part III.

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PART I

General

            C&F Financial Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia in March 1994.  The Corporation owns all of the stock of its sole subsidiary, Citizens and Farmers Bank (the “Bank”), which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.  The Bank was originally opened for business under the name Farmers and Mechanics Bank on January 22, 1927.  The Bank has five wholly owned subsidiaries:  C&F Mortgage Corporation (“C&F Mortgage”), C&F Title Agency, Inc., Moore Loans, Inc. (“Moore Loans”), C&F Investment Services, Inc. and C&F Insurance Services, Inc., all incorporated under the laws of the Commonwealth of Virginia.

            The Corporation operates in a decentralized fashion in three principal business activities:  retail banking, mortgage banking and consumer finance.  The following general business discussion focuses on the activities within each of these segments.  The Corporation conducts brokerage activities through C&F Investment Services, Inc., insurance activities through C&F Insurance Services, Inc. and title insurance services through C&F Title Agency, Inc.; however, the financial position and operating results of these subsidiaries are not significant to the Corporation as a whole and are not considered principal activities of the Corporation at this time.

Retail Banking

            Retail banking services are provided at the Bank’s main office located in West Point, Virginia and eleven other Virginia branches located one each in Richmond, Norge, Middlesex, Midlothian, Providence Forge, Quinton, Sandston, Varina and West Point and two in Williamsburg.  These branches provide a wide range of banking services available to both individuals and businesses.  These services include various types of checking and savings deposit accounts, as well as business, real estate, development, mortgage, home equity and installment loans.  The Bank also offers ATMs, internet banking, credit card and trust services, as well as travelers’ checks, safe deposit rentals, collections, notary public, wire services and other customary bank services to its customers.  Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and fees related to deposit services.  At and for the year ended December 31, 2002, total assets of the retail banking segment totaled $496.3 million and income before income taxes totaled $6.0 million.

Mortgage Banking

            Mortgage banking activities are conducted through C&F Mortgage, which was organized in September 1995.  C&F Mortgage provides mortgage services through eight locations in Virginia and three in Maryland.  The Virginia offices are located one each in Williamsburg, Newport News, Charlottesville, Lynchburg, Fredericksburg and Chester and two in Richmond.  The Maryland offices are located in Annapolis, Crofton and Ellicott City.  C&F Mortgage offers a wide variety of residential mortgage loans, which are originated on a pre-sold basis to numerous investors.  C&F Mortgage does not securitize loans.  Purchasers of loans include, but are not limited to Countrywide, Chase Manhattan Mortgage Corporation, Washington Mutual, Wells Fargo Home Mortgage, Principal Financial Corporation and Platinum Direct Funding Corporation.  C&F Mortgage originates conventional mortgage loans, mortgage loans insured by the Federal Housing Administration (“FHA”), mortgage loans partially guaranteed by the Department of Veterans Affairs (“VA”) and home equity loans.  A majority of the conventional loans are conforming loans that qualify to be purchased by the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).  The remainder of the conventional loans are non-conforming loans (i.e., jumbo loans with an original balance in excess of $322,700 or other loans that do not meet Fannie Mae or Freddie Mac guidelines).  Revenues from mortgage banking operations consist principally of interest earned on mortgage loans held for sale, gains on sale of loans in the secondary mortgage market and loan

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origination fee income.  At and for the year ended December 31, 2002, total assets of the mortgage banking segment totaled $112.8 million and income before income taxes totaled $6.2 million.

Consumer Finance

            Consumer finance activities are conducted through Moore Loans, which was acquired by the Bank on September 1, 2002.  Moore Loans is a leading regional finance company providing automobile loans in Richmond, Roanoke and Hampton Roads, Virginia and portions of eastern Tennessee.  Moore Loans is an indirect lender through automobile lending programs that are designed to serve customers who have limited access to traditional automobile financing.  Moore Loans generally originates loans through manufacturer-franchised dealerships with used car operations and selected independent dealerships.  Moore Loans selects these dealers based on the types of vehicles sold.  Specifically, Moore Loans prefers to finance later model, low mileage used vehicles and moderately priced new vehicles.  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 typically charges interest at higher rates than those charged by traditional financing sources.  As Moore Loans provides financing in a relatively high-risk market, it also expects to experience a higher level of credit losses than traditional automobile financing sources.  Revenues from consumer finance operations consist principally of interest earned on automobile loans.  At December 31, 2002, total assets of the consumer finance segment totaled $76.3 million and income before income taxes for the period since acquisition totaled $1.2 million.

Employees

            As of December 31, 2002, the Corporation employed a total of 362 full-time equivalent employees.  The Corporation considers relations with its employees to be excellent.

Competition

Retail Banking

            In its market area, the Bank competes with large national and regional financial institutions, savings and loans and other independent community banks, as well as credit unions, mutual funds and life insurance companies.  Competition has increasingly come from out-of-state banks through their acquisition of Virginia-based banks.

            The banking business in Virginia generally, and in the Bank’s primary service area specifically, is highly competitive with respect to both loans and deposits, and is dominated by a relatively small number of major banks with many offices operating over a wide geographic area.  Among the advantages such major banks have over the Bank are their ability to finance wide-ranging advertising campaigns and, by virtue of their greater total capitalization, to have substantially higher lending limits than the Bank.  Recent legislation expanding the array of firms that can own banks may also result in increased competition for the Bank.

            Competition for deposits and loans is affected by factors such as interest rates offered, the number and location of branches and types of products offered, as well as the reputation of the institution.  The Bank has been able to compete effectively by emphasizing customer service and technology; establishing long-term customer relationships and building customer loyalty; and providing products and services designed to address the specific needs of our customers.  The Bank targets individual and small/medium size business customers.

            No material part of the business of the Bank is dependent upon a single or a few customers, and the loss of any single customer would not have a materially adverse effect upon the business of the Bank.

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Mortgage Banking

            The mortgage lending industry has undergone rapid consolidation in recent years, due to several factors.  First, the continuing evolution of the secondary mortgage market has caused mortgages to become more commodity-like.  Second, the ever-increasing regulation imposed on the industry has resulted in significant costs and the need for higher levels of specialization.  Third, interest rate volatility has risen markedly over the last decade.  At the same time, mortgagors’ propensity to refinance their mortgages has increased significantly.  The combined result has been relatively large swings in the volume of loans originated from year to year.  These factors overall have dramatically increased the level of complexity in the business.  To operate profitably in this environment requires lenders to have a very high level of operational and risk management skills, as well as technological expertise.

            As a result, large, sophisticated financial institutions currently dominate the mortgage industry.  These are primarily commercial banks, through their mortgage banking subsidiaries.  Generally, C&F Mortgage competes by offering a wide selection of products through multiple channels; providing consistent, high quality customer service; and pricing its products at competitive rates.

            No material part of the business of C&F Mortgage is dependent upon a single or a few customers or investors, and the loss of any single customer or investor would not have a materially adverse effect upon the business of C&F Mortgage.

Consumer Finance

            Competition in the field of non-prime automobile finance is intense.  The automobile finance market is highly fragmented and is served by a variety of financial entities, including the captive finance affiliates of major automotive manufacturers, banks, thrifts, credit unions and independent finance companies.  Many of these competitors have substantially greater financial resources and lower costs of funds than Moore Loans.  In addition, Moore Loans’ competitors often provide financing on terms more favorable to automobile purchasers or dealers than Moore Loans offers.  Many of these competitors also have long standing relationships with automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer floor plan financing and leasing, which are not provided by Moore Loans.

            Providers of automobile financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and customers.  In seeking to establish itself as one of the principal financing sources at the dealers it serves, Moore Loans competes predominately on the basis of its high level of dealer service and strong dealer relationships and by offering flexible loan terms.

            No material part of the business of Moore Loans is dependent on a single or a few dealer relationships, and the loss of any single dealership would not have a materially adverse effect upon the business of Moore Loans.

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Regulation and Supervision

General

            Bank holding companies and banks are extensively regulated under both federal and state law.  The following summary briefly addresses certain provisions of applicable federal and state laws and certain regulations and the potential impact of such provisions on the Corporation and the Bank.  This summary does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.

Regulation of the Corporation

            The Corporation is subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), including the filing of annual, quarterly and other reports with the Securities and Exchange Commission (the “SEC”).  As an Exchange Act reporting company, the Corporation is directly affected by the recently enacted Sarbanes-Oxley Act of 2002 (the “SOX”), which is aimed at improving corporate governance and reporting procedures.  The Corporation is already complying with new SEC and other rules and regulations implemented pursuant to the SOX and intends to comply with any applicable rules and regulations implemented in the future.

            As a bank holding company registered under the Bank Holding Company Act of 1956 (the “BHCA”), the Corporation is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).  The Federal Reserve Board has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company.  The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is so closely related to banking or to managing or controlling banks as to be a proper incident thereto. 

            Since September 1995, the BHCA has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits.  Banks are also able to branch across state lines, provided certain conditions are met, including that applicable state laws expressly permit such interstate branching.  Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is based.

            There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (the “FDIC”) insurance funds in the event the depository institution becomes in danger of default or is in default.  For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength for its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy.  In addition, “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund (“SAIF”) or the Bank Insurance Fund (“BIF”) as a result of the default of a commonly controlled insured depository institution in danger of default.  The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both.  An FDIC claim for damage is superior

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to claims of stockholders of an insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution.

            The Federal Deposit Insurance Act (the “FDIA”) also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general creditor or stockholder.  This provision would give depositors a preference over general and subordinated creditors and stockholders in the event a receiver is appointed to distribute the assets of the Bank. 

            The Corporation is also a registered bank holding company under the bank holding company laws of Virginia.  Accordingly, the Corporation is also subject to regulation and supervision by the State Corporation Commission of Virginia. 

Capital Requirements

            The Federal Reserve Board and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise.  Under the risk-based capital requirements of these federal bank regulatory agencies, the Corporation and the Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier 1 capital to risk-weighted assets of at least 4%.  At least half of the total capital is required to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles and other adjustments (“Tier 1 capital”).  The remainder (“Tier 2 capital”) may consist of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments), other qualifying preferred stock and a limited amount of the general loan loss allowance.  The Tier 1 capital to risk-weighted asset ratios of the Corporation and the Bank as of December 31, 2002 were 10.4% and 9.7%, respectively, and the total capital to risk-weighted asset ratios were 12.5% and 11.8%, respectively, exceeding the minimum requirements.

            In addition, each of the federal regulatory agencies has established leverage capital ratio guidelines for banking organizations (Tier 1 capital to average tangible assets) (“Tier l leverage ratio”).  These guidelines provide for a minimum Tier l leverage ratio of 4% for banks and bank holding companies.  The Tier l leverage ratios of the Corporation and the Bank as of December 31, 2002 were 8.8% and 8.3%, respectively.  The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Limits on Dividends

            The Corporation is a legal entity, separate and distinct from the Bank.  A significant portion of the revenues of the Corporation result from dividends paid to it by the Bank.  Both the Corporation and the Bank are subject to laws and regulations that limit the payment of dividends, including requirements to maintain capital at or above regulatory minimums.  Banking regulators have indicated that Virginia banking organizations should generally pay dividends only (1) from net undivided profits of the bank, after providing for all expenses, losses, interest and taxes accrued or due by the bank and only (2) if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.  In addition, under the FDIA, insured depository institutions such as the Bank are prohibited from making capital distributions, including the payment of

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dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the statute).

            The Corporation does not expect that any of these laws, regulations or policies will materially affect the ability of the Bank to pay dividends.  During the year ended December 31, 2002, the Bank declared $2.2 million in dividends payable to the Corporation.

Regulation of the Bank and Other Subsidiaries

            As a Virginia state bank, the Bank is subject to supervision, regulation and examination by the Virginia State Corporation Commission Bureau of Financial Institutions (the “VFBI”).  The Bank is also subject to regulation, supervision and examination by the FDIC.  The various laws and regulations administered by the regulatory agencies affect corporate practices, such as the payment of dividends, the incurrence of debt and acquisition of financial institutions and other companies, and affect business practices, such as the payment of interest on deposits, the charging of interest on loans, the types of business conducted and the location of offices.

            Community Reinvestment Act.  The Bank is subject to the requirements of the Community Reinvestment Act (the “CRA”).  The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions.  A financial institution’s efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to twelve assessment factors.  These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility.

            Insurance of Accounts, Assessments and Regulation by the FDIC.  As an institution with deposits insured by the BIF, the Bank also is subject to insurance assessments imposed by the FDIC.  There is a base assessment for all institutions.  In addition, the FDIC has implemented a risk-based assessment schedule, potentially imposing an additional assessment ranging from zero to 0.27% of an institution’s average assessment base.  The actual assessment to be paid by each BIF member is based on the institution’s assessment risk classification, which is determined by whether the institution is considered “well capitalized,” “adequately capitalized” or “undercapitalized,” as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.  In 2002, the Corporation paid only the base assessment rate through the Bank, which amounted to $58,000 in deposit insurance premiums.

            Federal Home Loan Bank (“FHLB”) of Atlanta.  The Bank is a member of the FHLB of Atlanta, which is one of twelve regional FHLBs that provide funding to their members for making housing loans as well as for affordable housing and community development lending.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB.  As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to at least 5% of the aggregate outstanding advances made by the FHLB to the Bank.

            USA Patriot Act.  The USA Patriot Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering.  Among other provisions, the USA Patriot Act permits financial institutions, upon

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providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities.  Interim rules implementing the USA Patriot Act were issued effective March 4, 2002.  The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions.  Although it does create a reporting obligation, the Bank does not expect the USA Patriot Act to materially affect its products, services or other business activities.

            Reporting Terrorist Activities.  The Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in the September 11, 2001, terrorist attacks on New York City and Washington, DC.  The Bank has been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists.  If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

            The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts.  If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI.  The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications.  The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files.  The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

            Mortgage Banking Regulation.  The Bank’s mortgage banking segment is subject to the rules and regulations of, and examination by the Department of Housing and Urban Development (“HUD”), the FHA, the VA and state regulatory authorities with respect to originating, processing and selling mortgage loans.  Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and fees.  In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Home Ownership Equity Protection Act, and the regulations promulgated thereunder.  These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.

            Consumer Financing Regulation.  The Bank’s consumer finance segment is also regulated by the VBFI.  The VBFI regulates and enforces laws relating to consumer lenders and sales finance agencies such as Moore Loans.  Such rules and regulations generally provide for licensing of sales finance agencies, limitations on the amount, duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights.

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Other Safety and Soundness Regulations

            The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions.  The extent of these powers depends upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” All such terms are defined under uniform regulations specifying such capital levels issued by each of the federal banking agencies regulating these capital levels.

The Gramm-Leach-Bliley Act of 1999

            The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) implemented major changes to the statutory framework for providing banking and other financial services in the United States.  The GLBA, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms and other financial service providers.  A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incident or complimentary to financial activities.  The activities that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.

            To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company.  To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the CRA.  In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company.  While the Corporation satisfies these requirements, the Corporation has not elected for various reasons to be treated as a financial holding company under the GLBA.

            We do not believe that the GLBA will have a material adverse impact on the Corporation’s or the Bank’s operations.  To the extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may experience further consolidation.  The GLBA may have the result of increasing competition that we face from larger institutions and other companies offering financial products and services, many of which may have substantially greater financial resources.

            The GLBA and certain new regulations issued by federal banking agencies also provide new protections against the transfer and use by financial institutions of consumer nonpublic personal information.  A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information.  These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.

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            The following describes the location and general character of the principal offices and other materially important physical properties of the Corporation.

            The Corporation owns the headquarters building located at Eighth and Main Streets in the business district of West Point, Virginia.  The building, originally constructed in 1923, has three floors totaling 15,000 square feet.  This building houses the Bank’s main office branch and office space for the Bank’s administrative personnel. 

            The Corporation owns a building located at Seventh and Main Streets in West Point, Virginia.  The building provides space for the Bank’s operations functions and staff.  The building was originally constructed prior to 1935 and remodeled by the Corporation in 1991.   The two-story building has 14,000 square feet.

            The Corporation owns a building located at Sixth and Main Streets in West Point, Virginia.  The building provides space for the Bank’s loan operations functions and staff.  The building was bought and remodeled by the Corporation in 1998.  The building has 5,000 square feet.

            The Corporation owns a building located at 1400 Alverser Drive in Midlothian, Virginia.  The building provides space for a branch office of the Bank and for a C&F Mortgage branch office, as well as C&F Mortgage’s main administrative offices.  This two-story building has 25,000 square feet and was constructed in 2001.

            The Corporation owns ten other Bank branch locations in Virginia.

            The Corporation has nine leased offices, six in Virginia and three in Maryland for C&F Mortgage.  Rental expense for these locations totaled $373,000 for the year ended December 31, 2002.

            The Corporation has three leased offices in Virginia for Moore Loans.  Rental expense for these locations totaled $28,000 from the acquisition on September 1, 2002 through December 31, 2002.

            All of the Corporation’s properties are in good operating condition and are adequate for the Corporation’s present and anticipated future needs.

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

            No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Corporation through a solicitation of proxies or otherwise.

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PART II

            The Corporation’s common stock is traded on the over-the-counter market and is listed on the Nasdaq National Stock Market under the symbol “CFFI.” As of March 14, 2003, there were approximately 2,000 shareholders of record.  Following are the high and low closing prices along with the dividends that were paid quarterly in 2002 and 2001.  Over-the-counter market quotations reflect interdealer prices, without retail mark up, mark down, or commission, and may not necessarily represent actual transactions.

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FIVE YEAR FINANCIAL SUMMARY

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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, 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 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 or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation’s market area and accounting principles, policies and guidelines.  These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

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 for loan losses 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 Corporation considers 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.  A loan is not considered impaired during a period of delay in payment if the ultimate collectibility 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 Corporation 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 Corporation 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.

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

OVERVIEW

          Net income for 2002 increased 22.2% to $9.8 million compared to $8.0 million for 2001.  Earnings per diluted share increased 19.7% to $2.67 per diluted share for 2002 compared to $2.23 per diluted share for 2001.  Included in net income for 2002 was a net non-recurring insurance benefit of $277,000.  Included in earnings for 2001 was a net gain on sale of a branch of $776,000.  Excluding this insurance benefit and the gain on sale of the branch, net income increased 31.5% and earnings per diluted share increased 29.3% for 2002 compared to 2001.

          Performance as measured by the Corporation’s return on average assets (ROA) was 2.13% for the year ended December 31, 2002 compared to 1.89% for 2001 (excluding the non-recurring insurance benefit in 2002 and the gain on sale of the branch in 2001).  Another key indicator of performance, the return on average equity (ROE), was 19.07% for the year ended December 31, 2002 compared to 17.09% for 2001 (excluding the non-recurring insurance benefit in 2002 and the gain on the sale of the branch in 2001).

          The increase in net income for 2002 is a result of an increase in income at all of the Corporation’s business segments.  The overview of the significant segments presented below is followed by a more detailed discussion in the section “Results of Operations.”

          Retail Banking:  Pre-tax earnings for the retail banking segment (excluding the non-recurring insurance benefit in 2002 and the gain on sale of the branch in 2001) increased 10% to $5.7 million in 2002 from $5.2 million in 2001.  The increase in income in the retail banking segment is the result of an increase in net interest income resulting from an increase in the average balance of earning assets and an increase in non-interest income (excluding the non-recurring insurance benefit in 2002 and the gain on sale of the branch in 2001), the impacts of which were partially offset by an increase in non-interest expense.

          Mortgage Banking:  Pre-taxearnings for the mortgage banking segment increased 38% to $6.2 million in 2002 from $4.5 million in 2001.  Income at C&F Mortgage is generally correlated to changes in interest rates and new and resale home purchases.  A decrease in interest rates usually results in an increase in loan volume.  From January 2001 through December 2001 the prime interest rate charged by banks decreased from 9.50% to 4.75%.  The prime rate remained steady at 4.75% for most of 2002 until it was reduced to 4.25% in November 2002.  While interest rates on mortgage loans are not directly tied to the prime rate, mortgage interest rates have generally followed the decline in the prime interest rate.  The lower 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 2002, the amount of loan originations at C&F Mortgage resulting from refinancings was $352 million compared to $238 million for 2001.  Loans for new and resale home purchases for these two time periods were $431 million and $389 million, respectively.  C&F Mortgage would expect that future loan volume will be affected by changes in interest rates and demand for new and resale home sales.

          Consumer Finance:  On September 1, 2002, the Bank acquired Moore Loans.  The consolidated results of operations include the results of Moore Loans from the date of acquisition.  For 2002, pre-tax earnings approximated $1.2 million.

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TABLE 1: Average Balances, Income and Expense, Yields and Rates

          The following table shows the average balance sheets for each of the years ended December 31, 2002, 2001 and 2000.  In addition, the amounts of interest earned on earning assets, with related yields and interest on interest-bearing liabilities, together with the rates, are shown.  Loans include loans held for sale.  Loans placed on a non-accrual status are included in the balances and were included in the computation of yields, upon which they had an immaterial effect.  Interest on tax-exempt securities is on a taxable-equivalent basis (which converts the income on loans and investments for which no taxes are paid to the equivalent yield if taxes were paid), which was computed using the federal corporate income tax rate of 34% for all three years.

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RESULTS OF OPERATIONS

NET INTEREST INCOME

          During 2002, net interest income, on a taxable equivalent basis, increased 30.0% to $22.8 million from $17.5 million in 2001.  This was a result of an increase of 16.5% in the average balance of interest earning assets and an increase in the net interest margin to 5.50% in 2002 from 4.93% in 2001.  The increase in average earning assets was a result of a $41.3 million increase in the average balance of loans and a $17.3 million increase in the average balance of interest earning deposits at other banks (primarily at the FHLB).

          The increase in average loans is a result of an increase in loans at the Bank, Moore Loans and loans held for sale at C&F Mortgage.  The increase in average loans at the Bank approximated $6.7 million.  This increase was a result of overall growth.  The average balance of loans at Moore Loans, which was acquired September 1, 2002, was $22.8 million.  The increase in average loans at C&F Mortgage approximated $11.8 million.  The increase in the average balance of loans held for sale is a result of an increase in originations at C&F Mortgage. Loans originated at C&F Mortgage for 2002 were $783.0 million compared to $627.3 million for 2001.  Loans sold during 2002 were $745.0 million compared to $575.6 million for 2001.

          The increase in the average balance of interest bearing deposits at other banks was the result of an increase in liquidity caused by an increase in deposits as investors moved funds from stocks and mutual funds to banks, offset in part by the increase in the loan portfolio.

          The increase in the Corporation’s net interest margin on a taxable-equivalent basis was the result of a decrease in the cost of funds for 2002 to 2.71% from 4.14% for 2001, the impact of which was partially offset by a decrease in the yield on interest earning assets to 7.72% for 2002 from 8.31% for 2001.   The decrease in the yield on interest earning assets was a result of a decrease in the yield on loans held by the Bank resulting from the lower interest rate environment, an increase in the average balance of lower yielding interest bearing deposits at other banks and an increase in the average balance of lower yielding loans held for sale at C&F Mortgage offset, in part, by  the higher yield on average loans at Moore Loans relative to the Bank and C&F Mortgage.  For 2002, Moore Loans had an average balance of loans of $22.8 million with a yield of approximately 16.5%.   The taxable-equivalent yield on the Corporation’s securities portfolio declined to 7.39% for 2002 compared to 7.85% for 2001 as a result of the maturities and calls of higher yielding securities. 

          The decrease in the cost of funds for the Corporation was a result of the falling interest rate environment and the repricing of maturing certificates of deposit at lower rates, the effects of which were partially offset by higher costing 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 shareholders of Moore Loans, which bears interest at 8.0%.

          During 2001, net interest income, on a taxable equivalent basis, increased 6.3% to $17.5 million from $16.5 million in 2000.  This was a result of a 13.7% increase in the average balance of interest earning assets offset by a decrease in the net interest margin to 4.93% in 2001 from 5.27% in 2000.  The increase in average earning assets was the result of an increase in the average balance of the loan portfolio at the Bank and an increase in the average

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balance of loans held for sale by C&F Mortgage offset by a decrease in the Bank’s securities portfolio and an increase in non-earning assets.

          The increase in loans at the Bank was a result of overall higher loan demand.  The increase in loans held for sale at C&F Mortgage was a result of an increase in loan originations to $627.3 million in 2001 from $294.5 million in 2000 and an increase in loan sales to $575.6 million in 2001 from $301.8 million in 2000.  The decrease in the average balance of securities was a result of calls and maturities of securities during 2001.  Numerous securities were called as a result of the lower interest rate environment in 2001.  The increase in non-earning assets principally resulted from the addition of new branch locations.

          The decrease in the net interest margin was a result of a decrease in the yield on average earning assets from 8.89% in 2000 to 8.31% in 2001 offset, in part, by a decrease in the cost of funds from 4.34% in 2000 to 4.14% in 2001.  The decrease in the average yield on interest earning assets was primarily a result of the declining interest rate environment.  The decrease in the cost of funds was primarily a result of the declining interest rate environment during 2001 and a decrease in the average balance of higher-costing borrowings from the FHLB.  During 2001, the Federal Reserve decreased the federal funds rate 11 times for a total of 475 basis points.

          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 analysis shows the direct causes of the year-to-year changes in the components of net interest earnings on a taxable-equivalent basis.  The rate and volume variances are calculated by a formula prescribed by the SEC.  Rate/volume variances, the third element in the calculation, are not shown separately, 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 non-accrual loans and loans held for sale.

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TABLE 2: Rate-Volume Recap