C & F FINANCIAL CORP - 10-Q Quarterly Report

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, 2004

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

For the transition period from to

Commission file number 000-23423

C&F Financial Corporation

(Exact name of registrant as specified in its charter)

Virginia

54-1680165

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Eighth and Main Streets

West Point, VA

23181

(Address of principal executive offices)

(Zip Code)

(804) 843-2360

(Registrant’s telephone number, 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). x Yes ¨ No

At November 2, 2004, the latest practicable date for determination, 3,543,354 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, 2004 and December 31, 2003	1

	Consolidated Statements of Income - Three months and nine months ended September 30, 2004 and 2003	2

	Consolidated Statements of Shareholders’ Equity - Nine months ended September 30, 2004 and 2003	3

	Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003	5

	Notes to Consolidated Financial Statements	6

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	28

Part II - Other Information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6.	Exhibits	29

Signatures		30

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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


	September 30, 2004		December 31, 2003
	(Unaudited)
ASSETS

Cash and due from banks	$	14,307	$	15,457
Interest bearing deposits in other banks		37,871		34,294

Total cash and cash equivalents		52,178		49,751
Securities-available for sale at fair value, amortized cost of $68,505 and $99,550, respectively		71,829		103,050
Loans held for sale, net		53,652		29,733
Loans, net		383,361		350,170
Federal Home Loan Bank stock		1,392		2,072
Corporate premises and equipment, net of accumulated depreciation		16,383		15,367
Accrued interest receivable		2,904		2,590
Goodwill		9,071		9,071
Other assets		11,393		11,742

Total assets	$	602,163	$	573,546

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Non-interest bearing demand deposits	$	77,453	$	64,683
Savings and interest bearing demand deposits		182,371		176,732
Time deposits		184,345		186,220

Total deposits		444,169		427,635
Borrowings		76,956		67,733
Accrued interest payable		572		583
Other liabilities		11,853		12,211

Total liabilities		533,550		508,162

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, 3,548,654 and 3,612,571 shares issued and outstanding, respectively)		3,549		3,612
Additional paid-in capital		40		1,010
Retained earnings		62,863		58,487
Accumulated other comprehensive income, net		2,161		2,275

Total shareholders’ equity		68,613		65,384

Total liabilities and shareholders’ equity	$	602,163	$	573,546

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,
	2004		2003		2004		2003
Interest income
Interest and fees on loans	$	9,556	$	9,015	$	27,278	$	26,935
Interest on other investments and fed funds		136		24		368		103
Interest on investment securities
U.S. government agencies and corporations		98		8		269		23
Tax-exempt obligations of states and political subdivisions		602		542		1,783		1,706
Corporate bonds and other		112		126		347		402

Total interest income		10,504		9,715		30,045		29,169

Interest expense
Savings and interest bearing deposits		295		380		845		1,212
Certificates of deposit, $100 or more		273		289		806		834
Other time deposits		668		858		2,076		2,675
Short-term borrowings and other		656		709		1,786		2,099

Total interest expense		1,892		2,236		5,513		6,820

Net interest income		8,612		7,479		24,532		22,349
Provision for loan losses		996		924		2,693		2,305

Net interest income after provision for loan losses		7,616		6,555		21,839		20,044

Other operating income
Gains on sales of loans		4,518		5,687		12,125		16,152
Service charges on deposit accounts		706		549		1,973		1,718
Other service charges and fees		1,093		1,304		3,058		3,638
Gains on calls of available for sale securities		7		29		40		185
Other income		266		419		907		1,234

Total other operating income		6,590		7,988		18,103		22,927

Other operating expenses
Salaries and employee benefits		6,541		6,317		18,816		18,651
Occupancy expenses		848		846		2,687		2,593
Other expenses		2,246		2,314		6,366		6,479

Total other operating expenses		9,635		9,477		27,869		27,723

Income before income taxes		4,571		5,066		12,073		15,248
Income tax expense		1,469		1,702		3,735		5,075

Net income	$	3,102	$	3,364	$	8,338	$	10,173

Per share data
Net income – basic	$	.87	$	.93	$	2.33	$	2.82
Net income – assuming dilution	$	.84	$	.89	$	2.23	$	2.69
Cash dividends paid and declared	$	.22	$	.18	$	.66	$	.52
Weighted average number of shares – basic		3,555,883		3,603,389		3,575,794		3,610,467
Weighted average number of shares – assuming dilution		3,708,549		3,790,053		3,738,040		3,776,312

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 Income			Comprehensive Income			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance December 31, 2003	$	3,612		$	1,010					$	58,487		$	2,275		$	65,384

Comprehensive income Net income							$	8,338			8,338						8,338
Other comprehensive loss, net of tax
Net change in unrealized net holding gains on securities, net of reclassification adjustment								(114	)					(114	)		(114	)

Comprehensive income							$	8,224

Repurchase of common stock		(72	)		(1,103	)					(1,608	)					(2,783	)

Stock options exercised		9			133												142

Cash dividends											(2,354	)					(2,354	)

Balance September 30, 2004	$	3,549		$	40					$	62,863		$	2,161		$	68,613

Disclosure of Reclassification Amount:

Change in unrealized net holding gains on securities during period							$	(140	)
Less: reclassification adjustment for gains included in net income								(26	)

Net change in unrealized net holding gains on securities							$	(114	)

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

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)


	Common Stock			Additional Paid-In Capital			Comprehensive Income		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance December 31, 2002	$	3,650		$	2,506				$	48,161		$	1,916	$	56,233

Comprehensive income Net income							$	10,173		10,173					10,173
Other comprehensive income, net of tax
Net change in unrealized net holding gains on securities, net of reclassification adjustment								193					193		193

Comprehensive income							$	10,366

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

Stock options exercised		37			536										573
Cash dividends										(1,870	)				(1,870	)

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

Disclosure of Reclassification Amount:

Change in unrealized net holding gains on securities during period	$	316
Less: reclassification adjustment for gains included in net income		(123	)

Net change in unrealized net holding gains on securities	$	193

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,
	2004			2003
Cash flows from operating activities:
Net income	$	8,338		$	10,173
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		1,128			1,140
Amortization of intangible assets		99			109
Provision for loan losses		2,693			2,305
Accretion of discounts and amortization of premiums on investment securities, net		110			80
Net realized gains on calls of securities		(40	)		(185	)
Proceeds from sale of loans		656,452			937,415
Origination of loans held for sale		(680,371	)		(900,614	)
Change in other assets and liabilities:
Accrued interest receivable		(314	)		(378	)
Other assets		312			(1,268	)
Accrued interest payable		(11	)		(53	)
Other liabilities		(358	)		(7,494	)

Net cash (used in) provided by operating activities		(11,962	)		41,230

Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale		45,587			10,501
Purchase of securities available for sale		(14,612	)		(3,726	)
Net increase in customer loans		(35,884	)		(22,897	)
Purchase of corporate premises and equipment		(2,156	)		(2,355	)
Proceeds from sale of corporate premises and equipment		12			7
Redemption of Federal Home Loan Bank Stock		680			688

Net cash used in investing activities		(6,373	)		(17,782	)

Cash flows from financing activities:
Net increase in demand, interest bearing demand and savings deposits		18,409			15,738
Net (decrease) increase in time deposits		(1,875	)		16,587
Net increase (decrease) in other borrowings		9,223			(18,835	)
Repurchase of common stock		(2,783	)		(2,262	)
Proceeds from exercise of stock options		142			573
Cash dividends		(2,354	)		(1,870	)

Net cash provided by financing activities		20,762			9,931

Net increase in cash and cash equivalents		2,427			33,379
Cash and cash equivalents at beginning of period		49,751			18,331

Cash and cash equivalents at end of period	$	52,178		$	51,710

Supplemental disclosure
Interest paid	$	5,524		$	6,873
Income taxes paid	$	3,945		$	5,874

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, 2003.

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, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003 and cash flows for the nine months ended September 30, 2004 and 2003 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 (the “Bank”), with all significant intercompany transactions and accounts being eliminated in consolidation.

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


(in 000’s, except per share amounts)	Three Months Ended September 30,
	2004			2003
Net income, as reported	$	3,102		$	3,364
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(153	)		(94	)

Pro forma net income	$	2,949		$	3,270

Earnings per share:
Basic – as reported	$	.87		$	.93
Basic – pro forma	$	.83		$	.91
Diluted – as reported	$	.84		$	.89
Diluted – pro forma	$	.80		$	.86


(in 000’s, except per share amounts)	Nine Months Ended September 30,
	2004			2003
Net income, as reported	$	8,338		$	10,173
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(408	)		(266	)

Pro forma net income	$	7,930		$	9,907

Earnings per share:
Basic – as reported	$	2.33		$	2.82
Basic – pro forma	$	2.22		$	2.74
Diluted – as reported	$	2.23		$	2.69
Diluted – pro forma	$	2.12		$	2.62

Note 2

Diluted earnings 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 2004, the Corporation repurchased 26,200 shares of its common stock in privately negotiated transactions and 46,350 shares in open-market transactions at prices ranging from $35.00 to $41.50 per share. During the first nine months of 2003, the Corporation repurchased 80,000 shares of its common stock in privately negotiated transactions at prices between $28.00 and $28.50 per share.

Note 4

Securities in an unrealized loss position at September 30, 2004, by duration of the period of unrealized loss, are shown below. No impairment has been recognized on any securities in a loss position because management believes that the decline in value is temporary and the Corporation has the intent and demonstrated ability to hold securities to scheduled maturity or call dates.


(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	$	4,003	$	8	$	—	$	—	$	4,003	$	8
Obligations of states and political subdivisions		1,047		4		268		8		1,315		12

Subtotal-debt securities		5,050		12		268		8		5,318		20

Preferred stock		371		22		578		50		949		72

Total temporarily impaired securities	$	5,421	$	34	$	846	$	58	$	6,267	$	92

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,
	2004			2003
Service cost	$	105		$	79
Interest cost		64			54
Expected return on plan assets		(58	)		(48	)
Amortization of net obligation at transition		(1	)		(1	)
Amortization of prior service cost		1			1
Amortization of net loss		9			6

Net periodic benefit cost	$	120		$	91


(in 000’s)	Nine Months Ended September 30,
	2004			2003
Service cost	$	315		$	237
Interest cost		192			162
Expected return on plan assets		(174	)		(144	)
Amortization of net obligation at transition		(3	)		(3	)
Amortization of prior service cost		3			3
Amortization of net loss		27			18

Net periodic benefit cost	$	360		$	273

In December 2003, the Bank made a $1,279,806 cash payment to the plan. This payment was the maximum tax-deductible contribution for 2004 allowable under the Internal Revenue Code.

Note 6

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

The Corporation’s other subsidiaries include:

•

an investment company that derives revenues from investment management,

•

an insurance company that derives revenues from insurance services,

•

a title company that derives revenues from title insurance services, and

•

a settlement company that derives revenues from residential mortgage loan settlement services.

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

The following table presents segment information for the three and nine months ended September 30, 2004 and 2003.

Three Months Ended September 30, 2004


(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	6,403	$	660	$	3,939	$	—	$	(498	)	$	10,504
Gains on sales of loans		—		4,526		—		—		(8	)		4,518
Other		963		861		3		245		—			2,072

Total operating income		7,366		6,047		3,942		245		(506	)		17,094

Expenses:
Interest expense		1,411		170		810		—		(499	)		1,892
Provision for loan losses		25		—		971		—		—			996
Salaries and employee benefits		2,510		3,426		545		45		15			6,541
Other		1,336		1,078		630		50		—			3,094

Total operating expenses		5,282		4,674		2,956		95		(484	)		12,523

Income before income taxes		2,084		1,373		986		150		(22	)		4,571
Provision for income taxes		516		522		375		56		—			1,469

Net income	$	1,568	$	851	$	611	$	94	$	(22	)	$	3,102

Total assets	$	519,588	$	59,160	$	99,187	$	23	$	(75,795	)	$	602,163
Capital expenditures	$	715	$	51	$	12	$	1	$	—		$	779

Three Months Ended September 30, 2003


(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	6,156	$	1,000	$	3,217	$	—	$	(658	)	$	9,715
Gains on sales of loans		—		5,687		—		—		—			5,687
Other		807		1,121		19		354		—			2,301

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

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

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

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

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

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

Nine Months Ended September 30, 2004

(in 000’s)

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other

Eliminations

Consolidated

Revenues:

Interest income

18,605

1,701

11,037

—

(1,298

)

30,045

Gains on sales of loans

—

12,133

—

)

12,125

Other

2,750

2,442

761

—

5,978

Total operating income

21,355

16,276

11,062

761

(1,306

)

48,148

Expenses:

Interest expense

4,249

368

2,195

—

(1,299

)

5,513

Provision for loan losses

—

2,668

—

2,693

Salaries and employee benefits

7,387

9,487

1,636

291

18,816

Other

4,244

3,019

1,650

140

—

9,053

Total operating expenses

15,905

12,874

8,149

431

(1,284

)

36,075

Income before income taxes

5,450

3,402

2,913

330

(22

)

12,073

Provision for income taxes

1,210

1,293

1,107

125

—

3,735

Net income

4,240

2,109

1,806

205

(22

)

8,338

Total assets

519,588

59,160

99,187

(75,795

)

602,163

Capital expenditures

1,848

271

—

2,156

Nine Months Ended September 30, 2003


(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other		Eliminations			Consolidated
Revenues:
Interest income	$	18,704	$	3,185	$	9,125	$	—	$	(1,845	)	$	29,169
Gains on sales of loans		—		16,152		—		—		—			16,152
Other		2,569		3,170		35		1,001		—			6,775

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

Expenses:
Interest expense		5,777		931		1,987		—		(1,845	)		6,820
Provision for loan losses		450		—		1,855		—		—			2,305
Salaries and employee benefits		6,213		10,583		1,408		447		—			18,651
Other		4,214		3,333		1,339		186		—			9,072

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

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

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

Total assets	$	481,063	$	77,355	$	88,083	$	776	$	(82,604	)	$	564,672
Capital expenditures	$	2,145	$	201	$	9	$	—	$	—		$	2,355

The Retail Banking segment extends a warehouse line of credit to the Mortgage Banking segment, providing the funds needed to originate mortgage loans and on which the Retail Banking segment charges the Mortgage Banking segment interest at the daily 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 250 basis points. The Retail Banking segment acquires construction/permanent and lot 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.

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 and 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 in this Management’s Discussion and Analysis, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this report.

The following discussion 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 management to make estimates and assumptions. Those accounting policies that required management’s most difficult, subjective or complex judgments and uncertainties 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: The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when management believes that the 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 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 that may affect a borrower’s

ability to repay, overall portfolio quality and review of 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: 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 management expects the ultimate collection of all amounts due. A valuation allowance is maintained 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 decline below cost is other-than-temporary. Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market, the duration of that market decline, the financial health of and specific prospects for the issuer and management’s ability and intention with regard to holding the security to maturity.

Valuation of Derivatives: The Corporation enters into rate lock commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding. 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. As a result, the Corporation is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.

The market values of rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. The Corporation determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.

Goodwill: On January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment 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 Moore Loans, Inc. in September 2002, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Corporation completed the annual test for impairment during the fourth quarter of 2003 and determined there was no impairment to be recognized in 2003. If the underlying estimates and related assumptions change in the future, the Corporation 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 defined by the plan. Plan assets, which consist primarily of marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Bank’s actuary determines plan obligations and annual pension and postretirement benefit 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 expense as measured in accordance with SFAS No. 87, Employers’ Accounting for Pensions.

Accounting for Income Taxes: Determining the Corporation’s effective tax rate requires significant 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 management believes that the 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 historical income tax provision and accrual.

For further information concerning accounting policies, refer to Note 1 of the consolidated financial statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

OVERVIEW

The Corporation’s primary financial goals are to maximize its earnings and to deploy capital in profitable growth initiatives that will enhance shareholder value. Management tracks three primary performance measures in order to assess the level of success in achieving these goals: (i) growth in earnings, (ii) return on average assets (“ROA”) and (iii) return on average equity (“ROE”). Management considers the change in each measure and how the measure relates to the performance of the Corporation’s peer group. In addition to these financial performance measures, management tracks the performance of the Corporation’s three principal business activities: retail banking, mortgage banking and consumer finance.

The Corporation reported quarterly net income of $3.1 million, or $.84 per diluted share, for the third quarter ended September 30, 2004, compared with $3.4 million, or $.89 per diluted share, for the third quarter ended September 30, 2003. The Corporation’s annualized ROA was 2.09 percent for the third quarter of 2004, compared with 2.38 percent for the same quarter of 2003, and its annualized ROE was 18.48 percent for the third quarter of 2004, compared with 21.74 percent for the same quarter of 2003.

The Corporation reported net income of $8.3 million, or $2.23 per diluted share, for the first nine months of 2004, compared with $10.2 million, or $2.69 per diluted share, for the first nine months of 2003. The Corporation’s annualized ROA was 1.91 percent for the first nine months of 2004, compared with 2.50 percent for the same period of 2003, and its annualized ROE was 16.83 percent for the first nine months of 2004, compared to 22.8 percent for the same period of 2003.

The decreases in the Corporation’s primary performance measures for the three months and nine months ended September 30, 2004 were primarily attributable to a decrease in the earnings of the Mortgage Banking segment. The decline in earnings of the Mortgage Banking segment was partly offset by increased earnings from the Retail Banking and the Consumer Finance segments. The decrease in this year’s earnings follows record earnings in 2003, driven by Mortgage Banking segment growth that resulted from the mortgage banking industry’s high level of loan refinancings.

Retail Banking: Net income for the Retail Banking segment increased approximately $479,000 to $1.6 million for the quarter ended September 30, 2004 and approximately $657,000 to $4.2 million for the nine months ended September 30, 2004. The improvement in the performance of the Retail Banking segment resulted from an increase in net interest margin, reflecting both a higher level of earning assets and the recent increase in interest rates, and from a reduction in the provision for loan losses. The initial costs associated with the expansion of the Retail Banking segment into the Peninsula and Hanover markets of Virginia and an increase in operations and administrative personnel to support growth partly offset these improvements. Final plans are being reviewed and construction is expected to begin before the end of 2004 for two new branches on the Virginia Peninsula, and new commercial loan officers have been employed for both the Newport News and Richmond, Virginia markets. Most recently, the Retail Banking segment acquired a facility located at Stonehouse Commerce Park in James City County, Va. for the relocation of its operations departments in 2005.

Mortgage Banking: Net income for the Mortgage Banking segment decreased approximately $814,000 to $851,000 for the quarter ended September 30, 2004 and $2.6 million to $2.1 million for the nine months ended September 30, 2004. This decrease resulted from a decline in the gains on sales of loans, which was offset in part by lower production-based compensation. As mortgage rates began to increase in the third quarter of 2003, the Mortgage Banking segment began experiencing a decline in loan originations for mortgage refinancings, resulting in a decline in the gain on sales of loans. For the third quarter of 2004, loan originations at C&F Mortgage for new and resale home purchases totaled $119.8 million, compared with $174.2 million for the third quarter of 2003. Loans for refinancings were $123.9 million for this year’s third quarter and $163.7 million for the same period last year. For the first nine months of 2004, loan originations for new and resale home purchases were $403.7 million, compared with $432.3 million for the same period of 2003. Loans for refinancings were $276.7 million for the first nine months of this year and $468.3 million for the same period last year. In addition to the decrease in overall volume, the volume of variable-rate loans originated versus fixed-rate loans has increased. The gain on sales of variable-rate loans is less than that of fixed-rate loans. The volume of mortgage loan applications and the level of the mortgage loan pipeline are following a more normal seasonal pattern in 2004 than in 2003, and thus, management expects that the second and third quarters will be this year’s peak earnings periods for the Mortgage Banking segment, and that mortgage loan originations in the fourth quarter of 2004 will be more comparable to the fourth quarter of 2003 when the impact of mortgage rate increases began to reduce loan demand. Future earnings for the Mortgage Banking segment will be affected by any changes in interest rates, the composition of loans held for sale and the volume of new and resale home sales and loan refinancings.

Consumer Finance: Net income for the Consumer Finance segment increased approximately $104,000 to $611,000 for the quarter ended September 30, 2004 and approximately $193,000 to $1.8 million for the nine months ended September 30, 2004. A 14.9 percent increase in third quarter average loans outstanding and a 15.9 percent increase in nine-month average loans outstanding favorably impacted net earnings for the periods. However, net earnings in 2004 also included a $122,000 after-tax increase in the provision for loan losses for the third quarter and a $504,000 after-tax increase in the provision for loan losses for the first nine months of 2004 as a result of higher charge-offs against the allowance for loan losses versus dealer reserves in 2004. Effective January 1, 2004, the Consumer Finance segment no longer originates loans that provide for dealer reserves. In addition, net earnings for 2004 included an increase in operating expenses to support growth and technology investments. Management expects that the continuing investments in technology to create future efficiencies and that the initial salary costs associated with the expansion of the Consumer Finance segment into the Northern Virginia and Nashville, Tenn. markets will affect short-term earnings of the Consumer Finance segment.

RESULTS OF OPERATIONS

Net Interest Income

The following table presents the average balances of interest-earning assets with related annualized yields and interest bearing liabilities with related annualized rates. Loans placed on a non-accrual status are included in the balances and in the computation of yields, upon which they had no material effect. The yields on tax-exempt earning assets are on a taxable-equivalent basis, which converts the income on tax-free loans and investments to the equivalent yield as if taxes were paid using the federal corporate income tax rate of 34 percent.

Selected Average Balance Sheet Data


(dollars in 000’s)	Three Months Ended
	September 30, 2004				September 30, 2003
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
Securities	$	70,720	6.51	%	$	54,588	7.23	%
Loans held for sale		50,516	5.23			101,049	3.96
Loans held for investment		384,752	9.25			353,607	9.07
Fed funds sold / interest bearing deposits at other banks		39,981	1.35			10,727	.89

Total earning assets	$	545,969	7.94	%	$	519,971	7.71	%

Time and savings deposits	$	365,901	1.35	%	$	346,361	1.76	%
Other borrowings		75,544	3.47			80,761	3.50

Total interest bearing liabilities	$	441,445	1.71	%	$	427,122	2.09	%

Net interest margin			6.56	%			5.99	%


(dollars in 000’s)	Nine Months Ended
	September 30, 2004				September 30, 2003
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
Securities	$	70,711	6.42	%	$	57,435	7.23	%
Loans held for sale		44,978	5.04			84,440	5.04
Loans held for investment		370,406	9.13			345,911	9.18
Fed funds sold / interest bearing deposits at other banks		46,927	1.04			12,857	1.07

Total earning assets	$	533,022	7.71	%	$	500,643	8.05	%

Time and savings deposits	$	362,295	1.37	%	$	337,607	1.87	%
Other borrowings		72,436	3.29			76,215	3.68

Total interest bearing liabilities	$	434,731	1.69	%	$	413,822	2.20	%

Net interest margin			6.33	%			6.23	%

Net interest income, on a taxable equivalent basis, for the three months ended September 30, 2004 was $8.9 million, an increase of $1.1 million, or 14.9 percent, from $7.8 million for the three months ended September 30, 2003. Net interest income, on a taxable equivalent basis, for the nine months ended September 30, 2004 was $25.3 million, an increase of $2.0 million, or 8.5 percent, from $23.3 million for the comparable period in 2003. The net interest margin increased to 6.56 percent for the third quarter of 2004 from 5.99 percent for the third quarter of 2003 and to 6.33 percent for the first nine months of 2004 from 6.23 percent for the first nine months of 2003.

The increase in net interest margin for the third quarter and nine months ended September 30, 2004 reflects the increase in higher-yielding average earning assets. Average interest earning assets increased 5.0 percent for the third quarter of 2004 and 6.5 percent for the first nine months of 2004. Average loans held for investment for the third quarter of 2004 increased $31.1 million, which was accompanied by an 18-basis-point increase in yield. The improvement in yield reflects the impact of a 75-basis-point third quarter increase in the prime rate on the Retail Segment’s adjustable rate loan portfolio. Average loans held for investment for the first nine months of 2004 increased $24.5 million, but experienced a 5-basis-point decline in yield. This decrease was a result of the continued lower interest rate environment prior to the recent increases in the prime rate and the competitive environment for loan demand.

Average loans held for sale declined $50.5 million for the three months and $39.5 million for the nine months ended September 30, 2004 because of the increase in mortgage interest rates that began in the third quarter of 2003. This increase in interest rates caused a decline in origination levels. The yield on loans held for sale increased 127 basis points for the third quarter of 2004 and remained the same for the first nine months of 2004. The increase in the third quarter is a result of the continued upward movement in mortgage interest rates.

Average securities available for sale increased $16.1 million for the three months ended September 30, 2004, and in the same period the average yield on these securities declined 72 basis points. For the nine months ended September 30, 2004, average securities available for sale increased $13.3 million and the average yield declined 81 basis points. The decline in the tax-equivalent yields resulted from the maturities and calls of higher-yielding securities during 2003 and 2004, coupled with the reinvestment of proceeds in lower-yielding securities as a result of the lower rate environment.

For the three months ended September 30, 2004, average interest earning deposits at other banks (primarily the Federal Home Loan Bank) increased $29.3 million and their quarterly average yield increased by 46 basis points as a result of the recent increase in short-term interest rates. For the nine months ended September 30, 2004, average interest earning deposits at other banks increased $34.1 million and their year-to-date average yield declined 3 basis points. The increase in average interest earning deposits at other banks reflected deposit growth in excess of loan demand, which resulted in excess funds in lower-yielding accounts.

The 41-basis-point decrease in the cost of deposits for the third quarter and the 50-basis-point decrease for the nine months ended September 30, 2004 were a result of the falling interest rate environment in prior periods. This environment resulted in decreases in the rates paid on savings and interest bearing checking accounts and the repricing of maturing certificates of deposit at lower rates. Although interest rates increased in the third quarter of 2004, deposits will reprice gradually as existing certificates of deposit mature in future periods. The decrease in the rate on other borrowings for the nine months ended September 30, 2004 resulted from a lower LIBOR-based rate on Moore Loans’ line of credit with an unrelated third party, coupled with the repayment of $8 million in debt that carried interest rates of 6 percent to 8 percent and that was associated with the acquisition of Moore Loans. The rate on other borrowings declined in the third quarter of 2004 to a lesser extent because the

LIBOR-based rate on Moore Loans’ line of credit repriced simultaneously as interest rates rose in the third quarter. Management expects that the cost of interest bearing liabilities will continue to increase as short-term interest rates increase.

Non-Interest Income


	Three Months Ended September 30, 2004
(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations			Total
Gains on sales of loans	$	—	$	4,5268	$	—	$	(8	)	$	4,518
Service charges on deposit accounts		706		—		—		—			706
Other service charges and fees		238		855		—		—			1,093
Gain on calls of available for sale securities		7		—		—		—			7
Other income		12		6		3		245			266

Total non-interest income	$	963	$	5,387	$	3	$	237		$	6,590


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

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


	Nine Months Ended September 30, 2004

(in 000’s)	Retail Banking		Mortgage Banking		Consumer Finance		Other and Eliminations			Total
Gains on sales of loans	$	—	$	12,133	$	—	$	(8	)	$	12,125
Service charges on deposit accounts		1,973		—		—		—			1,973
Other service charges and fees		631		2,426		—		—			3,057
Gain on calls of available for sale securities		40		—		—		—			40
Other income		106		16		25		761			908

Total non-interest income	$	2,750	$	14,575	$	25	$	753		$	18,103


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

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

Total non-interest income decreased $1.4 million, or 17.5 percent, to $6.6 million for the three months ended September 30, 2004 and $4.8 million, or 21.0 percent, to $18.1 million for the nine months ended September 30, 2004. The three-month and nine-month decreases in 2004 were mainly attributable to decreases in gains on sales of loans and other service charges and fees resulting from decreases in the volume of loans closed and sold by the Mortgage Banking segment. In addition, gains on calls of available for sale securities at the Retail Banking segment decreased as a result of fewer calls in 2004. Decreases for the three-month and nine-month periods were offset in part by higher service charge income on deposit accounts resulting from deposit growth.

Non-Interest Expense

Three Months Ended September 30, 2004

(in 000’s)

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other and
Eliminations

Total

Salaries and employee benefits

2,510

3,426

545

6,541

Occupancy expense

477

298

847

Other expenses

859

780

564

2,247

Total non-interest expense

3,846

4,504

1,175

110

9,635


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

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

Nine Months Ended September 30, 2004

(in 000’s)

Retail
Banking

Mortgage
Banking

Consumer
Finance

Other and
Eliminations

Total

Salaries and employee benefits

7,387

9,487

1,636

306

18,816

Occupancy expense

1,618

876

175

2,687

Other expenses

2,626

2,143

1,475

122

6,366

Total non-interest expense

11,631

12,506

3,286

446

27,869


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

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

Total non-interest expense increased $158,000, or 1.7 percent, to $9.6 million for the three months ended September 30, 2004 and changed less than 1 percent from last year’s level for the nine months ended September 30, 2004. The Retail Banking and the Consumer Finance segments reported increases in total non-interest expenses that were primarily attributable to higher personnel and operating expenses to support growth at both the Retail Banking and the Consumer Finance segments and technology enhancements at the Consumer Finance segment. The Retail Banking segment opened a new branch in Mechanicsville, Va. at the end of 2003 and a new branch in Newport News, Va. in January of 2004. Start-up costs associated with the Bank’s expansion efforts will continue throughout 2004 as the Bank expects to begin construction by year end of two new branches on the Virginia Peninsula. Additional costs will be incurred as the Retail Banking segment relocates its operations departments to a new facility in 2005. The Consumer Finance segment continues to invest in both technology and people to create efficiencies and serve new markets. Additional personnel have been hired to begin serving the Northern Virginia and Nashville, Tenn. markets. A decrease in non-interest expenses for the Mortgage Banking segment resulted from lower production-based compensation and operating expenses.

Income Taxes

Income tax expense for the third quarter of 2004 totaled $1.5 million, an effective tax rate of 32.1 percent, compared with $1.7 million, or 33.6 percent, for the third quarter of 2003. Income tax expense for the first nine months of 2004 totaled $3.7 million, an effective tax rate of 30.9 percent, compared with $5.1 million, or 33.3 percent, for the first nine months of 2003. The decrease in the effective tax rate for the three months and nine months ended September 30, 2004 resulted from a higher proportion of earnings from tax-exempt assets, such as obligations of states and political subdivisions The change in the composition of earnings mainly reflects the lower earnings at the Mortgage Banking segment.

ASSET QUALITY

Allowance for Loan Losses

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

Three Months Ended September 30, 2004

(in 000’s)

Retail and
Mortgage
Banking

Consumer
Finance

Total

Allowance, beginning of period

4,286

5,419

9,705

Provision for loan losses

971

996

4,311

6,390

10,701

Loans charged off

(67

)

(536

)

(603

)

Recoveries of loans previously charged off

285

323

Net loans charged off

(29

)

(251

)

(280

)

Allowance, end of period

4,282

6,139

10,421


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

		4,218			4,168			8,386

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

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

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

Nine Months Ended September 30, 2004

(in 000’s)

Retail and
Mortgage
Banking

Consumer
Finance

Total

Allowance, beginning of period

4,256

4,401

8,657

Provision for loan losses

2,668

2,693

4,281

7,069

11,350

Loans charged off

(75

)

(1,710

)

(1,785

)

Recoveries of loans previously charged off

780

856

Net loans charged off

(930

)

(929

)

Allowance, end of period

4,282

6,139

10,421


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

		4,215			4,812			9,027

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

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

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

During the three and nine months ended September 30, 2004, the allowance for loan losses at the combined Retail Banking and Mortgage Banking segments remained basically unchanged. Management believes that the current level of the allowance for loan losses is adequate to absorb any losses on existing loans that may become uncollectible.

The Consumer Finance segment, consisting solely of Moore Loans, accounted for the majority of the activity in the allowance for loan losses during the third quarter and the first nine months of 2004. In addition to maintaining the allowance for loan losses, Moore Loans has retained dealer reserves that were established at the time a loan was made and are specific to each individual dealer. Loans charged off at Moore Loans have first been charged to the dealer reserves, to the extent that an individual dealer had reserves, and the remainder has been charged to the allowance for loan losses. Dealer reserves are a liability of Moore Loans and payable to individual dealers upon the termination of the relationship with Moore Loans and the payment of outstanding loans associated with a specific dealer. In order to conform its dealer agreements to standard industry practices, Moore Loans no longer originates loans with a dealer reserve provision. However, existing dealer reserves at December 31, 2003 were retained to absorb future losses for each specific dealer. The provision for loan losses and the corresponding allowance for loan losses at the Consumer Finance segment will increase in future periods as dealer reserves are reduced by virtue of loan charge-offs or balance pay-offs to dealers. The following table summarizes the dealer reserves activity:


(in 000’s)	Three Months Ended September 30,
	2004			2003
Dealer reserves, beginning of period	$	1,584		$	2,212
Reserve holdback at loan origination		—			600
Loans charged off		(302	)		(711	)
Recoveries of loans previously charged off		—			68

Dealer reserves, end of period	$	1,282		$	2,169


(in 000’s)	Nine Months Ended September 30,
	2004			2003
Dealer reserves, beginning of period	$	2,119		$	2,071
Reserve holdback at loan origination		21			1,767
Loans charged off		(920	)		(1,834	)
Recoveries of loans previously charged off		62			165

Dealer reserves, end of period	$	1,282		$	2,169

Moore Loans serves customers who have limited access to traditional automobile financing. Moore Loans’ typical borrowers have experienced prior credit difficulties or have modest incomes. Because Moore Loans serves customers who are unable to meet the credit standards imposed by most traditional automobile financing sources, Moore Loans expects to sustain a higher level of credit losses than traditional automobile financing sources. Throughout 2003, management implemented changes to the loan underwriting guidelines to improve asset quality on new loans. As a result, aggregate charge-offs to the allowance for loan losses and dealer reserves declined in both the third quarter and the first nine months of 2004. Because Moore Loans provides financing in a relatively higher risk market, Moore Loans generally charges interest at higher rates than those charged by traditional financing sources.

Non-Performing Assets

Retail and Mortgage Banking


*(dollars in 000’s)*	September 30, 2004			December 31, 2003
Non-accrual loans	$	3,794		$	1,993
Real estate owned		—			8

Total non-performing assets	$	3,794		$	2,001

Accruing loans past due for 90 days or more	$	2,178		$	1,092

Allowance for loan losses	$	4,282		$	4,256

Non-performing assets to total loans* and real estate owned		1.25	%		.72	%
Allowance for loan losses to total loans* and real estate owned		1.42			1.52
Allowance for loan losses to non-performing assets		112.86			212.69

*Total

loans above does not include consumer finance loans at Moore Loans, which are shown below.

Consumer Finance


*(dollars in 000’s)*	September 30, 2004			December 31, 2003
Non-accrual loans	$	942		$	1,149

Accruing loans past due for 90 days or more	$	412		$	233

Allowance for loan losses	$	6,139		$	4,401

Dealer reserves	$	1,282		$	2,119

Non-accrual consumer finance loans to total consumer finance loans		1.03	%		1.44	%
Allowance for loan losses and dealer reserves to non-accrual consumer finance loans		787.93			567.45

Allowance for loan losses to total consumer finance loans		6.72	%		5.52	%
Dealer reserves to total consumer finance loans		1.40			2.66

Allowance for loan losses and dealer reserves to total consumer finance loans		8.12	%		8.18	%

The non-performing assets of the combined Retail and Mortgage Banking segment increased to $3.8 million as of September 30, 2004, compared with $2.0 million at December 31, 2003. This increase resulted primarily from one commercial real estate loan relationship that became more than 90 days delinquent and was placed on nonaccrual status in the first quarter of 2004. Management is closely monitoring this relationship. The non-accrual principal balance outstanding of this relationship is $2.9 million for which management allocated a reserve of $767,000 at December 31, 2003 based upon the assessment of this relationship and the fact that management expected that this relationship would become 90 days delinquent after December 31, 2003. The increase in non-accrual loans attributable to this relationship was offset in part by the removal of another commercial loan relationship approximating $996,000 from non-accrual status. While this relationship is contractually past due more than 90 days at September 30, 2004, management has determined that a return to accrual status is appropriate based on an evaluation of the net realizable value of the collateral, the improved financial strength of the borrower and a sustained period of contractual repayment performance.

Non-performing assets of the Consumer Finance segment decreased to $942,000 at September 30, 2004 from $1.1 million at December 31, 2003 and the ratio of the allowance for loan losses and dealer reserves to non-accrual loans declined slightly. Throughout 2003, management implemented changes to the loan underwriting guidelines to improve asset quality on new loans. Charge-offs during the first half of 2004 included loans that were originated under previous guidelines and that were non-performing at December 31, 2003. As previously mentioned, effective January 1, 2004, Moore Loans no longer originates loans with a dealer reserve provision. Therefore, the ratio of dealer reserves to total consumer finance loans declined from 2.66 percent at December 31, 2003 to 1.40 percent at September 30, 2004. The decline in the dealer reserves is offset in part by a higher provision for loan losses that resulted in an increase in the ratio of the allowance for loan losses to total consumer finance loans from 5.52 percent at December 31, 2003 to 6.72 percent at September 30, 2004.

FINANCIAL CONDITION

At September 30, 2004, the Corporation had total assets of $602.2 million compared with $573.5 million at December 31, 2003. The increase is principally a result of increases in loans held for sale, loans held for investment, and cash and cash equivalents. These increases were offset in part by a decline in securities available for sale. At December 31, 2003, the Bank invested in short-term securities that had a slight effective yield advantage to the Bank’s overnight interest bearing account at the FHLB. These securities matured in the first quarter of 2004, and, to the extent these funds were not used to fund the increase in loans held for sale, loans held for investment and additional securities purchases, they were held in the Bank’s overnight interest bearing account at the FHLB at September 30, 2004.

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:


(dollars in 000’s)	September 30, 2004					December 31, 2003
	Amount			Percent		Amount			Percent
Real estate - mortgage	$	82,202		21	%	$	78,638		22	%
Real estate - construction		15,091		4			9,591		3
Commercial, financial and agricultural		179,136		45			167,207		47
Equity lines		16,725		4			13,044		3
Consumer		9,888		3			11,401		3
Consumer-Moore Loans		91,442		23			79,703		22

Total loans		394,484		100	%		359,584		100	%

Less unearned loan fees		(702	)				(757	)
Less allowance for loan losses
Retail and Mortgage Banking		(4,282	)				(4,256	)
Consumer Finance		(6,139	)				(4,401	)

Total loans, net	$	383,361				$	350,170

The increase in loans held for investment occurred predominantly in (1) the variable-rate categories of real estate construction and commercial loans and (2) the fixed-rate category of consumer loans at Moore Loans. Typically, growth in the variable-rate categories will favorably impact net interest margin in a rising interest rate environment. There was also growth in fixed-rate consumer loans at Moore Loans. These loans are funded by variable-rate borrowings, so 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:


(dollars in 000’s)	September 30, 2004				December 31, 2003
	Amount		Percent		Amount		Percent
U.S. government agencies and corporations	$	10,287	14	%	$	47,088	46	%
Mortgage-backed securities		2,742	4			1,763	2
Obligations of states and political subdivisions		53,248	74			48,754	47

Total debt securities		66,277	92			97,605	95
Preferred stock		5,552	8			5,445	5

Total available for sale securities	$	71,829	100	%	$	103,050	100	%

The decline in securities available for sale reflects the January 2004 maturation of the Bank’s investment in short-term securities of U.S. government agencies and corporations.

Deposits

Deposits totaled $444.2 million at September 30, 2004, compared with $427.6 million at December 31, 2003. This increase was primarily attributable to the increase in non-interest bearing deposits, which totaled $77.5 million at September 30, 2004, compared with $64.7 million at December 31, 2003. The increase in deposits is primarily a result of an increase in deposits at the new branch in Newport News, Va. and at branches in the Richmond, Va. market.

Other Borrowings

Borrowings totaled $77.0 million at September 30, 2004, compared with $67.7 million at December 31, 2003. This increase occurred in the Consumer Finance segment’s line of credit and was used to fund this segment’s loan growth.

Liquidity

Liquid assets, which include cash and due from banks, interest bearing deposits at other banks and nonpledged securities available-for-sale, totaled $92.5 million at September 30, 2004. The Corporation’s borrowing sources consist of (1) an established federal funds line with a regional correspondent bank that had no outstanding balance under a total line of $14.0 million as of September 30, 2004, (2) an established line with the FHLB that had $20.0 million outstanding under a total line of $113.9 million as of September 30, 2004 and (3) a revolving line of credit with a third party bank that had $48.6 million outstanding under a total line of $60 million as of September 30, 2004. Management has 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.

Actual

Minimum
Capital
Requirements

Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions

(dollars in 000’s)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2004:

Total Capital (to Risk-Weighted Assets)

Corporation

63,272

13.6

37,264

8.0

N/A

Bank

56,974

12.4

36,779

8.0

45,974

10.0

Tier I Capital (to Risk-Weighted Assets)

Corporation

57,293

12.3

18,632

4.0

N/A

Bank

51,170

11.1

18,390

4.0

27,584

6.0

Tier I Capital (to Average Assets)

Corporation

57,293

9.8

23,385

4.0

N/A

Bank

51,170

8.9

23,127

4.0

28,908

5.0

As of December 31, 2003:

Total Capital (to Risk-Weighted Assets)

Corporation

59,320

13.7

34,753

8.0

N/A

Bank

52,602

12.3

34,279

8.0

42,848

10.0

Tier I Capital (to Risk-Weighted Assets)

Corporation

53,850

12.4

17,377

4.0

N/A

Bank

47,206

11.0

17,151

4.0

25,709

6.0

Tier I Capital (to Average Assets)

Corporation

53,850

9.6

22,505

4.0

N/A

Bank

47,206

8.5

22,202

4.0

27,753

5.0

Recent Accounting Pronouncements

On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (“SAB 105”). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (“IRLC”), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, “Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133.” Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The Corporation has adopted SAB 105. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not anticipate that this guidance will have a material effect on either the Corporation’s consolidated financial position or consolidated results of operations.

Effective March 31, 2004, Emerging Issues Task Force (“EITF”) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”), was issued. EITF 03-1 provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Corporation can assert and demonstrate its intention to hold the securities for a period of time sufficient

to allow for a recovery of fair value up to or beyond the cost of the investments, which might mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines than an investment with a fair value less than cost is not other-than-temporarily impaired.

On September 30, 2004, the Financial Accounting Standards Board (“FASB”) decided to delay the effective date for the measurement and recognition guidance contained in EITF 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The disclosure guidance in EITF 03-1 was not delayed. Management does not anticipate that this guidance will have a material effect on either the Corporation’s consolidated financial position or consolidated results of operations.

EITF No. 03-16, Accounting for Investments in Limited Liability Companies, was ratified by the FASB and is effective for reporting periods beginning after June 15, 2004. APB Opinion No. 18, The Equity Method of Accounting Investments in Common Stock (“APB 18”), prescribes the accounting for investments in common stock of corporations that are not consolidated. AICPA Accounting Interpretation 2, Investments in Partnership Ventures, of APB 18, indicates that “many of the provisions of the Opinion would be appropriate in accounting” for partnerships. In EITF Abstracts Topic No. D-46, Accounting for Limited Partnership Investments, the SEC staff clarified its view that investments of more than 3 to 5 percent are considered to be more than minor and, therefore, should be accounted for using the equity method. Limited liability companies (“LLCs”) have characteristics of both corporations and partnerships, but are dissimilar from both in certain respects. Due to those similarities and differences, diversity in practice exists with respect to accounting for non-controlling investments in LLCs. The consensus reached was that an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a non-controlling investment should be accounted for using the cost method or the equity method of accounting. Management does not anticipate that this requirement will have a material effect on either the Corporation’s consolidated financial position or consolidated results of operations.

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 primarily monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes is directly related to price level indices. Impacts of inflation on interest rates, loan demand and deposits are reflected in the consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes from the quantitative and qualitative disclosures made in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

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. 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, 2004 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. 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 controls 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, 2004 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

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, 2004	3,200	$	35.23	3,200	127,679
August 1-31, 2004	19,100		35.54	19,100	108,579
September 1-30, 2004	500		36.00	500	108,079

Total	22,800		35.51	22,800

On January 20, 2004, the Corporation’s board of directors authorized the repurchase of up to 5 percent of the Corporation’s common stock (approximately 180,629 shares) over the twelve months ending January 19, 2005. The stock may be purchased in the open market and/or in privately negotiated transactions, as management and the board of directors deem prudent.

ITEM 6. EXHIBITS

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

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

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

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 5, 2004		/s/ Larry G. Dillon
		Larry G. Dillon
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

Date November 5, 2004		/s/ Thomas F. Cherry
		Thomas F. Cherry
		Senior Vice President,
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

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