Charter Financial 10-Q 2002 Q2 Quarterly report

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 March 31, 2002

OR

¨ 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 000-33071

Charter Financial Corporation

(Exact name of registrant as specified in its charter)

United States (State or other jurisdiction of incorporation or organization) 58-2659667 (IRS Employer Identification No.)

600 Third Avenue, West Point, Georgia 31833

(Address of principal executive offices) (Zip Code)

(706) 645-1391

(Registrant’s telephone number including area code)

NA

(Former name, former address and former fiscal year, if changed from 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 requirement for the past 90 days.  Yes  x  No  ¨

As of May 3, 2002, the registrant had 19,822,405 shares of common stock, $0.01 par value, outstanding. Of such shares outstanding, 15,857,924 shares were held by First Charter, MHC, the registrant’s mutual holding company and 3,964,481 shares were held by the public and directors, officers and employees of the registrant.

TABLE OF CONTENTS

Item 1.	Financial Statements of Charter Financial Corporation
	Consolidated Statements of Financial Condition (Unaudited) March 31, 2002 and September 30, 2001	Page 1
	Consolidated Statements of Income (Unaudited)—Three and Six months ended March 31, 2002 and 2001	Page 2
	Consolidated Statements of Cash Flows (Unaudited)—Six months ended March 31, 2002 and 2001	Page 3
	Notes to Unaudited Consolidated Financial Statements	Page 4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 22
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	Page 23
Item 2.	Changes in Securities and Use of Proceeds	Page 23
Item 3.	Defaults Upon Senior Securities	Page 23
Item 4.	Submission of Matters to a Vote of Security Holders	Page 23
Item 5.	Other Information	Page 23
Item 6.	Exhibits and Reports on Form 8-K	Page 23
	Signatures	Page 24

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition and results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

• general and local economic conditions;

• changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values, and competition;

• changes in accounting principles, policies, or guidelines;

• changes in legislation or regulation; and

• other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products, and services.

Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed.

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CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 31, 2002 and September 30, 2001

(unaudited)

	March 31, 2002			September 30, 2001
Assets
Cash and amounts due from depository institutions	$	12,744,275		10,761,296
Interest-bearing deposits in other financial institutions		703,212		5,367,428
Cash and cash equivalents		13,447,487		16,128,724
Loans held for sale, market value of $155,000 and $1,300,000 at March 31, 2002 and September 30, 2001, respectively		154,867		1,299,913
Freddie Mac common stock and other equity securities		295,041,476		302,623,174
Mortgage-backed securities and collateralized mortgage obligations available for sale		382,353,609		326,613,736
Other investment securities available for sale		15,203,064		—
Federal Home Loan Bank stock		14,115,000		11,587,500
Loans receivable		216,615,407		229,946,625
Less:
Unamortized loan origination fees, net		(145,407	)	(66,025	)
Allowance for loan losses		(5,213,195	)	(5,289,778	)
Loans receivable, net		211,256,805		224,590,822
Real estate owned		1,054,285		434,142
Accrued interest and dividends receivable		3,780,455		3,175,819
Premises and equipment, net		5,525,056		4,825,304
Other assets		2,501,452		3,640,791
Total assets	$	944,433,556		894,919,925
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	203,946,579		200,354,967
Borrowings		354,846,000		309,424,000
Advance payments by borrowers for taxes and insurance		1,149,009		1,794,285
Deferred income taxes		108,126,730		112,378,627
Offering proceeds in escrow		—		19,978,915
Other liabilities		9,998,711		14,073,306
Total liabilities		678,067,029		658,004,100
Stockholders’ Equity:
Common stock—$0.01 par value; 19,822,405 shares issued and outstanding at March 31, 2002		198,224		—
Additional paid-in capital		37,278,304		—
Unearned compensation		(2,793,449	)	—
Retained earnings		57,589,292		56,058,287
Accumulated other comprehensive income—net unrealized holding gains on securities available for sale		174,094,156		180,857,538
Total stockholders’ equity		266,366,527		236,915,825
Total liabilities and stockholders’ equity	$	944,433,556		894,919,925

See accompanying notes to the unaudited consolidated financial statements.

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CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

For the Three and Six Months ended March 31, 2002 and 2001

(unaudited)

	Three Months Ended March 31, 2002		Three Months Ended March 31, 2001		Six Months Ended March 31, 2002		Six Months Ended March 31, 2001
Interest and dividend income:
Debt securities	$	170,336	235,749			249,070	480,958
Equity securities		1,246,164	1,158,787			2,368,074	2,195,615
Mortgage-backed securities and collateralized mortgage obligations		3,155,429	5,397,916			6,908,673	11,861,480
Loans receivable		4,271,831	5,556,580			8,827,207	11,248,324
Interest-bearing deposits in other financial institutions		16,863	186,307			50,071	232,949
Total interest and dividend income		8,860,623	12,535,339			18,403,095	26,019,326
Interest expense:
Deposits		1,734,699	2,729,684			3,771,138	6,164,257
Borrowings		3,596,669	5,614,158			7,278,664	11,720,486
Total interest expense		5,331,368	8,343,842			11,049,802	17,884,743
Net interest income		3,529,255	4,191,497			7,353,293	8,134,583
Provision for loan losses		25,000	150,000			175,000	300,000
Net interest income after provision for loan losses		3,504,255	4,041,497			7,178,293	7,834,583
Noninterest income:
Loan servicing fees		89,414	116,183			170,229	217,294
Service charges on deposit accounts		169,746	168,342			348,438	354,675
Gain on sale of loans and servicing released loan fees		437,567	325,032			966,647	536,033
Gain on sale of mortgage-backed securities, collateralized mortgage obligations, and other investments		15,278	227,383			459,718	219,113
Equity in earnings (loss) of limited partnership		268,112	(71,615	)		173,455	(71,615	)
Other		58,925	27,970			151,858	39,489
Total noninterest income		1,039,042	793,295			2,270,345	1,294,989
Noninterest expenses:
Salaries and employee benefits		1,844,289	1,635,305			4,074,481	3,209,695
Occupancy		504,594	434,026			986,847	840,102
Furniture and equipment		121,061	96,616			232,570	195,158
Marketing		234,100	103,108			461,892	189,916
Legal and professional		285,928	156,783			593,099	340,201
Other		574,532	553,760			1,180,253	999,279
Total noninterest expenses		3,564,504	2,979,598			7,529,142	5,774,351
Income before income taxes		978,793	1,855,194			1,919,496	3,355,221
Income tax expense		179,823	476,893			388,491	837,806
Net income	$	798,970	1,378,301			1,531,005	2,517,415
Earnings per share—basic and diluted	$	0.04			$	0.08
Weighted average common shares outstanding		19,542,998				19,525,714

See accompanying notes to the unaudited consolidated financial statements.

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CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Three and Six Months ended March 31, 2002 and 2001

(unaudited)

	Six Months Ended March 31, 2002			Six Months Ended March 31, 2001
Cash flows from operating activities:
Net income	$	1,531,005		2,517,415
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses		175,000		300,000
Depreciation and amortization		231,459		246,543
Market value component of ESOP expense		257,128		—
Deferred income tax benefit		—		(4,917,278	)
Equity in (earnings) loss of limited partnerships		(173,455	)	71,615
Accretion of discounts, net		(955,278	)	(2,355,141	)
Gain on sale of loans		(966,647	)	(536,033	)
Gain on sales of mortgage-backed securities, collateralized mortgage obligations, and other investments		(459,718	)	(219,113	)
Proceeds from sale of loans		47,934,194		22,060,966
Originations and purchases of loans held for sale		(45,822,501	)	(21,102,407	)
Loss (gain) on sales of real estate owned		28,018		(11,759	)
Changes in assets and liabilities:
(Increase) decrease in accrued interest and dividends receivable		(604,636	)	495,249
Decrease (increase) in other assets		1,312,794		(200,560	)
(Decrease) increase in other liabilities		(4,074,595	)	15,724,110
Net cash (used in) provided by operating activities		(1,587,232	)	12,073,607
Cash flows from investing activities:
Purchases of equity securities and other investment securities available for sale		(26,692,462	)	(112,500	)
Purchases of mortgage-backed securities and collateralized
mortgage obligations available for sale		(194,671,581	)	(46,378,745	)
Proceeds from sale of mortgage-backed securities and
collateralized mortgage obligations available for sale		51,940,692		114,532,730
Proceeds from maturity and repayment of mortgage-backed
securities and collateralized mortgage obligations available for sale		85,234,330		13,956,020
Proceeds from sale of other investment securities available for sale		8,700,000		6,564,772
Net decrease in loans receivable, exclusive of loan sales		12,165,098		5,535,444
Proceeds from sale of real estate owned		345,758		506,386
Purchases of premises and equipment, net of dispositions		(931,211	)	(356,657	)
Net cash (used in) provided by investing activities		(63,909,376	)	94,247,450
Cash flows from financing activities:
Offering proceeds held in escrow		(19,978,915	)	—
Proceeds from stock offering		34,047,819		—
Cash payment received from ESOP Plan		378,131		—
Net increase (decrease) in deposits		3,591,612		(89,183,884	)
Net increase in borrowings		45,422,000		86,250
Net decrease in advance payments by borrowers for taxes and insurance		(645,276	)	(548,885	)
Net cash provided by (used in) financing activities		62,815,371		(89,646,519	)
Net (decrease) increase in cash and cash equivalents		(2,681,237	)	16,674,538
Cash and cash equivalents at beginning of period		16,128,724		8,192,442
Cash and cash equivalents at end of period	$	13,447,487		24,866,980
Supplemental disclosures of cash flow information:
Interest paid	$	11,176,780		18,641,557
Income taxes paid	$	4,082,260		—
Financing activities:
Real estate acquired through foreclosure of the loans receivable	$	993,919		632,413

See accompanying notes to the unaudited consolidated financial statements.

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Charter Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1)    Basis of Presentation

Charter Financial Corporation (“Charter Financial”) is a federal corporation organized on October 16, 2001 by CharterBank (“Bank”) in connection with the reorganization of the Bank from a federal mutual savings and loan association into a two-tiered mutual holding company structure, as described more fully in Note 2.

The accompanying unaudited consolidated financial statements include the accounts of Charter Financial and its wholly-owned subsidiaries, CharterBank and Charter Insurance Company as of March 31, 2002 and September 30, 2001, and for the three and six month periods ended March 31, 2002 and 2001. Significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements for the three and six months ended March 31, 2002 and 2001 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in Charter Financial’s annual report on Form 10-K for the year ended September 30, 2001.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented.

The consolidated financial statements of Charter Financial and subsidiaries prior to October 16, 2001 reflect the assets and liabilities transferred to Charter Financial in the reorganization. Specifically, historical financial information is of the predecessor entity, CharterBank and subsidiary, adjusted to retroactively reflect the transfer of the 400,000 shares of Freddie Mac common stock and the $100,000 in cash to First Charter, MHC. Operating data prior to October 16, 2001 has also been retroactively adjusted for such effects.

Charter Financial believes that the disclosures are adequate to make the information presented not misleading; however, the results for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year.

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(2)    Plan of Reorganization

On October 16, 2001, CharterBank converted from a federally-chartered mutual savings and loan association into a two-tiered mutual holding company structure and became a wholly-owned subsidiary of Charter Financial. Charter Financial sold 3,964,481 shares of its common stock to the public, representing 20% of the outstanding shares, at $10.00 per share and received net proceeds of $37.2 million. Charter Financial contributed 50% of the net proceeds from the initial public offering to CharterBank. An additional 15,857,924 shares, or 80% of the outstanding shares of Charter Financial, were issued to First Charter, MHC. An Employee Stock Ownership Plan (ESOP) was established and such ESOP acquired 317,158 shares of Charter Financial in the offering, using the proceeds of a loan from Charter Financial. Such ESOP obligation is recorded as unearned compensation reducing stockholders’ equity of Charter Financial. The net proceeds of the offering, adjusted for the ESOP, amounted to approximately $34 million.

As part of its reorganization, CharterBank organized First Charter, MHC as a federally-chartered mutual holding company which is registered as a savings and loan holding company with the Office of Thrift Supervision (“OTS”). First Charter, MHC’s principal assets are the shares of common stock of Charter Financial it received in the reorganization, the $100,000 it received as its initial capitalization, and 400,000 shares of Freddie Mac common stock, which was transferred from CharterBank as part of the reorganization.

(3)    Earnings per Share

Earnings per share are calculated according to the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings per Share” (“Statement 128”). ESOP shares are only considered outstanding for earnings per share calculations when they are committed to be released. Presented below are the calculations for basic and diluted earnings per share for the three and six months ended March 31, 2002:

	Three Months Ended March 31, 2002		Six Months Ended March 31, 2002
Basic:
Net income	$	798,970	$	1,531,005
Weighted average common shares outstanding		19,542,998		19,525,714
Basic earnings per share	$	0.04	$	0.08
Diluted:
Net income	$	798,970	$	1,531,005
Weighted average number of common and common equivalent shares outstanding		19,542,998		19,525,714
Diluted earnings per share	$	0.04	$	0.08

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(4)    Comprehensive Income (Loss)

The primary component of other comprehensive income (loss) for the Company is net unrealized gains and losses on Freddie Mac common stock and investment and mortgage securities available for sale. The table below summarizes total comprehensive income (loss) for the three and six months ended March 31, 2002 and 2001.

	Three Months Ended March 31,					Six Months Ended March 31,
	2002			2001		2002		2001
Total comprehensive income (loss)	$	(6,484,791	)	(7,413,555	)	(5,232,377	)	41,909,654
Change in net unrealized holding gains (losses) on securities, net of income taxes		(7,283,761	)	(8,791,856	)	(6,763,382	)	39,392,239
Net income	$	798,970		1,378,301		1,531,005		2,517,415

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Item 2

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

General

General.    Charter Financial Corporation (“Charter Financial,” “us,” or “we”) is a federally-chartered corporation organized in 2001, as more fully described in Note 2 to the unaudited consolidated financial statements, and is registered as a savings and loan holding company with the Office of Thrift Supervision (“OTS”). Charter Financial serves as the holding company for CharterBank (“Bank”). First Charter, MHC owns 80% of the outstanding shares of Charter Financial’s common stock. Our common stock is quoted on the National Market System of the Nasdaq Stock Market under the symbol “CHFN.” Unless the context otherwise requires, all references herein to the Bank or Charter Financial include Charter Financial and the Bank on a consolidated basis.

Charter Financial’s principal business is its ownership of CharterBank. Charter Financial also owns 1,700,000 shares of Freddie Mac common stock and Charter Insurance Company, a Hawaiian corporation which generates fee income by reinsuring a portion of CharterBank’s loan originations which carry private mortgage insurance. Charter Insurance Company owns 400,000 shares of Freddie Mac common stock. Additionally, CharterBank owns 2,555,000 shares of Freddie Mac common stock. On a consolidated basis, Charter Financial Corporation owns 4,655,000 shares of Freddie Mac common stock.

CharterBank currently operates five full-service branch offices and two loan production offices in west-central Georgia and east-central Alabama. CharterBank is a service-oriented bank providing retail and small business customers with products and services designed to create a long-term, profitable relationship. We offer numerous loan products, including residential mortgage loans, commercial real estate loans, commercial loans, home equity loans, second mortgages, and other products. CharterBank also offers deposit products, including consumer and commercial checking accounts, savings accounts, money market accounts, and certificates of deposit.

Charter Financial’s results of operations depend primarily on net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans, commercial mortgage loans, consumer loans, mortgage related securities, and investment securities. Interest-bearing liabilities consist primarily of retail and wholesale deposits, repurchase agreements and borrowings from the Federal Home Loan Bank (FHLB) of Atlanta. Our balance sheet at March 31, 2002 also contains noninterest-bearing liabilities of approximately $130.7 million of which $108.1 million represents deferred taxes, principally relating to the unrealized gain on our Freddie Mac common stock. Our results of operations are also impacted by our provision for loan losses, noninterest income and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and

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other general and administrative expenses. Noninterest income principally includes gains on sale of loans, gains on sales of investment and mortgage securities and service fees and charges.

Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company.

These policies are described in Note 1 to the consolidated financial statements which were presented in the Company’s 2001 annual report on Form 10-K. Of these policies, management believes that the accounting for the allowance for loan losses is the most critical. Please see “Asset Quality” for a further discussion of the Company’s methodology in determining the allowance.

Losses on loans result from a broad range of causes, from borrower-specific problems to industry issues to the impact of the economic environment. The identification of the factors that lead to default or non-performance under a loan agreement and the estimation of loss in these situations is very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact in the estimate of losses. As described further below, management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.

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Comparison of Financial Condition at March 31, 2002 and September 30, 2001

Our total assets increased $49.5 million, or 5.5%, to $944.4 million at March 31, 2002 from $894.9 million at September 30, 2001. The increase was primarily due to growth in the investment securities and the mortgage-backed securities and collateralized mortgage obligations. A decrease in the market value of our Freddie Mac stock from $302.6 million at September 30, 2001 to $295.0 million at March 31, 2002 slightly offset the growth in investment securities and the mortgage-backed securities and collateralized mortgage obligations.

Total loans decreased $13.3 million, or 5.8%, to $216.6 million at March 31, 2002 compared to $229.9 million at September 30, 2001. The 1-4 family residential real estate portfolio decreased by $18.7 million, or 14.5%, from $129.2 million at September 30, 2001 to $110.5 million at March 31, 2002. Our present strategy is to sell conforming fixed rate loans in the secondary market. With the high level of refinancing that took place late in fiscal year 2001 and in the first half of fiscal 2002 we had a decline in the overall 1-4 family residential real estate loan portfolio. The consumer and other loan portfolio decreased $3.1 million or 13.1% from $23.5 million at September 30, 2001 to $20.4 million at March 31, 2002. The decrease in the consumer portfolio was primarily due to runoff of the loans acquired in the acquisition of Citizens National Bank in 1999. Nonresidential real estate loans increased by $5.1 million, commercial non-real estate loans increased $1.3 million and construction real estate loans increased $2.1 million.

Mortgage-backed securities and collateralized mortgage obligations increased from $326.6 million at September 30, 2001 to $382.4 million at March 31, 2002 for an increase of $55.8 million or 17.1%. The market value of Freddie Mac common stock and other equity securities decreased $7.6 million, or 2.5%, from $302.6 million to $295.0 million as the price per share of Freddie Mac common stock decreased from $65.00 at September 30, 2001 to $63.37 at March 31, 2002.

Total deposits increased from $200.4 million at September 30, 2001 to $203.9 million at March 31, 2002 mainly due to an increase of approximately $2.8 million in retail deposits. The increase is primarily due to the introduction of our new high performance checking accounts that were introduced in all of our retail locations during the quarter ended March 31, 2002.

Due to the magnitude of CharterBank’s funding needs, management will continue to rely on borrowings, especially FHLB advances and repurchase agreements. The terms of new advances will be determined at the time based on the Company’s interest risk profile. Repurchase agreements are generally less than 90 days to maturity with rates at or slightly above LIBOR. With overall asset growth, borrowings increased from $309.4 million at September 30, 2001 to $354.8 million at March 31, 2002 for an increase of $45.4 million or 14.7%.

Our total stockholders’ equity increased $29.5 million, or 12.4%, to $266.4 million at March 31, 2002. The increase in equity is primarily due to the Charter Financial initial stock offering which was completed in October 2001. Accumulated other comprehensive income is comprised of net unrealized holding gains on securities available for sale. Accumulated other comprehensive income at March 31, 2002 was $174.1 million, a $6.8 million decrease from the

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balance at September 30, 2001 of $180.9 million. The decrease in accumulated other comprehensive income is mainly attributable to the decrease in the market value of our Freddie Mac common stock investment.

Comparison of Operating Results for the

Three Months Ended March 31, 2002 and 2001

General

Net income was $798,970 for the three months ended March 31, 2002, which was $579,000 lower than the $1.4 million for the three months ended March 31, 2001. This decrease primarily stemmed from decreased net interest income associated with lower interest rates and mortgage loan run-off, as well as increased noninterest expenses due to contributions to the ESOP and marketing expenses relating to the opening of the new branch in Auburn, Alabama.

Interest Income

Interest income decreased by $3.6 million to $8.9 million for the three months ended March 31, 2002 from $12.5 million for the three months ended March 31, 2001. The major component of the decrease was a decrease in interest income on mortgage securities of $2.2 million resulting from declining interest rates in 2002. Interest income on loans also decreased by $1.4 million due to a combination of a decrease in average balances of loans and lower interest rates during the three months ended March 31, 2002.

Interest Expense

Interest expense decreased from $8.3 million for the three months ended March 31, 2001 to $5.3 million for the three months ended March 31, 2002, for a decrease of $3.0 million. Interest expense on deposits decreased by $1.0 million and interest expense on borrowings decreased by $2.0 million. The decrease in interest expense on borrowings is primarily due to lower interest rates while the decrease in interest expense on deposits is due to lower rates, as well as, lower levels of wholesale deposits.

Net Interest Income

Net interest income decreased by $662,000 from $4.2 million for the three months ended March 31, 2001 to $3.5 million for the three months ended March 31, 2002. The decrease of $3.6 million in interest income was primarily offset by the decrease of $3.0 million in interest expense reflecting asset yields declining faster than the cost of interest-bearing liabilities.

The following tables depict the significant effect of the Freddie Mac common stock on our traditional bank ratios, such as net interest income, net interest rate spread, and net interest margin. The tables show these measures with and without the effects of the Freddie Mac common stock. Freddie Mac common stock had a dividend return on cost basis of 64.84% at March 31, 2002. However, the dividend yield on the market value of the Freddie Mac common stock is only 1.35%. The appreciation in the market value of the Freddie Mac common stock has created our strong accumulated comprehensive income.

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Our net interest margin weakened slightly for the three months ended March 31, 2002, as compared to the three months ended March 31, 2001. During the second quarter of fiscal 2001, we locked in $102.0 million in fixed rate FHLB borrowings with maturities of ten years and an average rate of 5.71%, of which $72.0 million can be called by the FHLB after seven years. Our cost of borrowings decreased by 190 basis points from the three months ended March 31, 2001 compared to the three months ended March 31, 2002. This decrease was moderated by the additional fixed rate borrowings. We also reduced our fixed rate mortgage securities by $71.5 million from $143.9 million at March 31, 2001 to $72.4 million at March 31, 2002, which combined with impact of declining interest rates on floating rate mortgage securities resulted in a decrease in the yield on mortgage securities of 339 basis points. The combined effect of the additional fixed rate borrowings and shifts from fixed rate mortgage securities to floating rate changed our interest risk profile from liability sensitive to slightly asset sensitive.

The yield on loans receivable decreased 92 basis points from 8.86% for the three months ended March 31, 2001 to 7.94% for the three months ended March 31, 2002. This decrease reflects the impact of lower interest rates and the shift in the mix of the loan portfolio as 1-4 family mortgage loans decreased and commercial real estate loans increased from 2001.

The cost of deposits decreased 191 basis points from 5.54% for the three months ended March 31, 2001 compared to 3.63% for the three months ended March 31, 2002. The decrease in the cost of deposits during a time period of falling interest rates was moderated by our deposit pricing strategy implemented during 2001 that pays higher rates to customers maintaining larger balances.

The combination of these rate changes reduced the overall net interest margin by 31 basis points from 1.83% for the three months ended March 31, 2001 compared to 1.52% for the three months ended March 31, 2002. The table below shows the actual balance of interest-earning assets and interest-bearing liabilities as of March 31, 2002.

	For the Quarter Ended March 31,
	2002						2001						Balance as of March 31, 2002
	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	4,060	$	17	1.67	%	$	14,002	$	186	5.31	%	703
FHLB common stock and other equity		13,929		222	6.38	%		12,700		228	7.18	%	14,115
Mortgage-backed securities and collateralized mortgage obligations available for sale		375,830		3,155	3.36	%		319,973		5,398	6.75	%	382,354
Other investments securities available for sale		15,732		171	4.35	%		14,098		236	6.70	%	15,203
Loans receivable		215,329		4,272	7.94	%		250,708		5,556	8.86	%	211,257
Total interest-earning assets excluding Freddie Mac Common Stock		624,880		7,837	5.02	%		611,481		11,604	7.59	%	623,632
Freddie Mac Common Stock and other equity securities available for sale		302,656		1,024	1.35	%		304,118		931	1.22	%	295,041
Total interest-earning assets including Freddie Mac Common Stock		927,536		8,861	3.82	%		915,599		12,535	5.48	%	918,673
Total noninterest-earning assets		19,047						19,749					25,761
Total assets	$	946,583	$	8,861	3.74	%	$	935,348	$	12,535	5.36	%	944,434
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts	$	17,342	$	42	0.97	%	$	16,629	$	71	1.71	%	19,116
Savings accounts		8,567		19	0.89	%		8,033		39	1.94	%	8,955
Money market deposit accounts		17,001		68	1.60	%		12,658		139	4.39	%	17,312
Certificate of deposit accounts		148,517		1,606	4.33	%		159,741		2,481	6.21	%	147,187
Total interest-bearing deposits		191,427		1,735	3.63	%		197,061		2,730	5.54	%	192,570
Borrowed funds		347,056		3,597	4.15	%		371,408		5,614	6.05	%	354,846
Total interest-bearing liabilities		538,483		5,332	3.96	%		568,469		8,344	5.87	%	547,416
Noninterest-bearing deposits		10,527		—	—			7,464		—	—		11,377
Other noninterest-bearing liabilities		123,025		—	—			125,995		—	—		119,274
Total noninterest bearing liabilities		133,552		—	—			133,459		—	—		130,651
Total liabilities		672,035		5,332	3.17	%		701,928		8,344	4.75	%	678,067
Total equity		274,548						233,420					266,367
Total liabilities and equity	$	946,583	$	5,332			$	935,348	$	8,344			944,434
Net interest income including Freddie Mac common stock			$	3,529					$	4,191
Net interest rate spread, including Freddie Mac common stock (1)					-0.14	%					-0.39	%
Net interest margin including Freddie Mac common stock (2)					1.52	%					1.83	%
Ratio of interest-earning assets toaverage interest-bearing liabilities, including Freddie Mac common stock					172.25	%					161.06	%
Net interest income, excluding Freddie Mac common stock dividends				2,505						3,260
Net interest rate spread, excluding Freddie Mac common stock (3)					1.06	%					1.72	%
Net interest margin, excluding Freddie Mac common stock (4)					1.60	%					2.13	%
Ratio of interest-earning assets to average interest-bearing liabilities, excluding Freddie Mac common stock					116.04	%					107.57	%

(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3) Net interest rate spread excluding Freddie Mac common stock represents the difference between the weighted average yield on total interest-earning assets excluding Freddie Mac common stock and the weighted average cost of interest-bearing liabilities.

(4) Net interest margin excluding freddie Mac common stock represents net interest income excluding freddie Mac common stock dividends as a percentage of average interest-earning assets excluding Freddie Mac common stock.

Provision for Loan Losses

The provision for loan losses decreased by $125,000 from $150,000 for the three months ended March 31, 2001 to $25,000 for the three months ended March 31, 2002. The Bank had net charge-offs of $314,000 for the quarter ending March 31, 2001 compared to $113,000 for the quarter ending March 31, 2002. The majority of the net charge-offs in the past have been loans acquired in the Citizens acquisition but that portfolio has reduced to a small percentage of the overall total portfolio. The reduced provision is also attributable to the reduction in loans receivable.

Noninterest Income

Noninterest income increased $246,000 from $793,000 for the three months ended March 31, 2001 compared to $1.0 million for the three months ended March 31, 2002. For the three

11

months ended March 31, 2002 the Bank had earnings in its equity interest of a loan servicing limited partnership of $268,000 compared to a loss of $71,000 for the three months ended March 31, 2001 due to more stability in interest rates which contributed to such earnings of the limited partnership which invests in mortgage servicing rights. During the three months ended March 31, 2002, gain on sale of loans increased to $438,000 compared to $325,000 for the three months ended March 31, 2001. This increase was caused by a higher volume of loans originated and sold as well as a higher profit margin on these sales, which was a result of the declining interest rate environment during late fiscal 2001 and in the first quarter of fiscal 2002. Gain on sale of securities decreased to $15,000 compared to $227,000 for the three months ended March 31, 2001 as CharterBank continued to decrease its investment in fixed-rate mortgage securities.

Noninterest Expense

Noninterest expense increased to $3.6 million for the three months ended March 31, 2002 from $3.0 million for the three months ended March 31, 2001 for an increase of $585,000. Noninterest expense for the three months ended March 31, 2002 reflected an increase in salary and employee benefits of $209,000. One reason for the salary and benefits increase is $285,000 in expense relating to the ESOP formed in October 2001 in conjunction with the reorganization. The ESOP Trust borrowed from Charter Financial to purchase its stock at the initial public offering price of $10 per share. This loan is recorded on the Company’s books as a reduction of capital and is disclosed as unearned compensation in stockholders’ equity. When the Company makes a cash contribution to the ESOP the cash is returned to the Company in principal and interest on the loan. When the Company receives a principal payment it reduces the unearned compensation and thus increases capital. ESOP expense is recorded at the average fair market value of the common shares that are released to the ESOP trust for allocation to employees. Charter Financial expects that its future quarterly ESOP expense will be somewhat less than the current quarter. Fluctuations in the market value of Charter Financial common shares and cash dividends, if any, may cause such expense to vary. The opening of our Auburn, Alabama branch also contributed to the increase in salaries and benefits. The introduction of high performance checking products into our markets contributed to increased marketing expense by $131,000.

Income Taxes

Income taxes decreased to $180,000 for the three months ended March 31, 2002 from $477,000 for the three months ended March 31, 2001 for a decrease of $297,000. The effective tax rate decreased from 25.71% for the three months ended March 31, 2001 to 18.37% for the three months ended March 31, 2002. The lower level of income before taxes increased the impact of the corporate dividends received deduction, which applies to dividends on Freddie Mac common stock, thus reducing the effective tax rate.

Other Comprehensive Loss

Other comprehensive loss was $7.3 million for the three months ended March 31, 2002, compared to loss of $8.8 million for the three months ended March 31, 2001. These losses are primarily the result of the decrease in the price of Freddie Mac common stock during the periods. During the three months ended March 31, 2002, the price of Freddie Mac common stock

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decreased from $65.40 per share at December 31, 2001 to $63.37 per share at March 31, 2002 or $2.03 per share. During the three months ended March 31, 2001, the price of Freddie Mac common stock decreased from $68.875 per share to $64.83 per share or $4.045 per share.

	Shares	Market Price Per Share		Total Market Value		Unrealized Gain, Net of Tax
December 31, 2001	4,655,000	$	65.400	$	304,437,000	$	183,045,967
March 31, 2002	4,655,000		63.370		294,987,350		177,243,882
Change in Freddie Mac stock		$	2.030				(5,802,085	)
Other comprehensive loss related to mortgage securities and other investments							(1,481,676	)
Total other comprehensive loss						$	(7,283,761	)

	Shares	Market Price Per Share		Total Market Value		Unrealized Gain, Net of Tax
December 31, 2000	4,655,000	$	68.875	$	320,613,125	$	192,978,108
March 31, 2001	4,655,000		64.830		301,783,650		181,416,810
Change in Freddie Mac stock		$	4.045				(11,561,298	)
Other comprehensive income related to mortgage securities and other investments							2,769,442
Total other comprehensive loss						$	(8,791,856	)

Other comprehensive loss related to mortgage securities and other investments was $1.5 million for the three months ended March 31, 2002 compared to income of $2.8 million for the three months ended March 31, 2001. While interest rates moved in the same direction and approximately the same magnitude as in the comparable period in 2001, we had income in the March 2001 quarter due to a much larger portfolio of fixed rate mortgage securities.

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Comparison of Operating Results for the Six Months Ended March 31, 2002 and 2001

General

Net income was $1.5 million for the six months ended March 31, 2002, which was $1.0 million lower than the $2.5 million for the six months ended March 31, 2001. This decrease primarily stemmed from increased noninterest expenses associated with ESOP expense and the opening of the new branch in Auburn, Alabama.

Interest Income

Interest income decreased by $7.6 million to $18.4 million for the six months ended March 31, 2002 from $26.0 million for the six months ended March 31, 2001. The major component of the decrease was a decrease in interest income on mortgage securities resulting from the declining interest rate environment in fiscal 2002. Interest income on loans also decreased by $2.4 million due to a combination of a decrease in average balances of loans and lower interest rates during the six months ended March 31, 2002.

Interest Expense

Interest expense decreased from $17.9 million for the six months ended March 31, 2001 to $11.0 million for the six months ended March 31, 2002, for a decrease of $6.9 million. Interest expense on deposits decreased by $2.5 million and interest expense on borrowings decreased by $4.4 million. The decrease in interest expense on borrowings is primarily due to lower interest rates while the decrease in interest expense on deposits is due to lower rates, as well as, lower levels of wholesale deposits.

Net Interest Income

Net interest income decreased by $781,000 from $8.1 million for the six months ended March 31, 2001 to $7.4 million for the six months ended March 31, 2002. The decrease of $7.6 million in interest income was primarily offset by the decrease of $6.9 million in interest expense reflecting asset yields declining faster than the cost of interest-bearing liabilities.

Provision for Loan Losses

The provision for loan losses decreased by $125,000 from $300,000 for the six months ended March 31, 2001 to $175,000 for the six months ended March 31, 2002. The reduction in the provision was based on the contraction of the loan portfolio in fiscal 2002.

Noninterest Income

Noninterest income increased $1.0 million from $1.3 million for the six months ended March 31, 2001 compared to $2.3 million for the six months ended March 31, 2002. During the six months ended March 31, 2002, gain on sale of loans increased to $967,000 compared to $536,000 for the six months ended March 31, 2001. This increase was caused by a higher volume

14

of loans originated and sold as well as a higher profit margin on these sales which was a result of the declining interest rate environment during 2002. Gain on sale of securities increased to $460,000 compared to a gain of $219,000 for the six months ended March 31, 2001 as CharterBank continued to decrease its investment in fixed-rate mortgage securities. Earnings in equity of loan servicing partnership increased to $173,000 for the six months ended March 31, 2002 from a loss of $72,000 for the six months ended March 31, 2001 due to more stability in interest rates which contributed to such earnings of the limited partnership which invests in mortgage servicing rights.

Noninterest Expense

Noninterest expense increased to $7.5 million for the six months ended March 31, 2002 from $5.8 million for the six months ended March 31, 2001 for an increase of $1.7 million. Noninterest expense for the six months ended March 31, 2002 reflected an increase in salary and employee benefits of $865,000. The major reason for the salary and benefits increase is $967,000 in ESOP expense, and the opening of our Auburn, Alabama branch. ESOP expense is not expected to continue at this level as the Company made a special contribution in the quarter ended December 31, 2001. Fluctuations in the market value of Charter Financial common shares and cash dividends, if any, may cause such expense to vary. The opening of our new Auburn, Alabama branch and the introduction of high performance checking products into our market contributed to an increase in marketing of $272,000. Other expense includes approximately $200,000 to implement a document imaging system.

Income Taxes

Income taxes decreased to $388,000 for the six months ended March 31, 2002 from $838,000 for the six months ended March 31, 2001 for a decrease of $450,000. The effective tax rate decreased slightly from 24.97% for the six months ended March 31, 2001 to 20.24% for the six months ended March 31, 2002. The corporate dividends received deduction, which applies to dividends on Freddie Mac common stock, is the primary reason that the effective rate is less than the statutory rate.

Other Comprehensive Income

Other comprehensive loss was $6.8 million for the six months ended March 31, 2002, compared to other comprehensive income of $39.4 million for the six months ended March 31, 2001. This decrease is primarily the result of the lower price of Freddie Mac common stock during the six months ended March 31, 2002. During the six months ended March 31, 2002, the price of Freddie Mac common stock decreased from $65.00 per share at September 30, 2001 to $63.37 per share at March 31, 2002 or $1.63 per share. During the six months ended March 31, 2001, the price of Freddie Mac common stock increased from $54.0625 per share to $64.830 per share or $10.7675 per share.

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	Shares	Market Price Per Share		Total Market Value		Unrealized Gain, Net of Tax
September 30, 2001	4,655,000	$	65.000	$	302,575,000	$	181,902,699
March 31, 2002	4,655,000		63.370		294,987,350		177,243,882
Change in Freddie Mac stock		$	1.630				(4,658,817	)
Other comprehensive loss related to mortgage securities and other investments							(2,104,564	)
Total other comprehensive loss						$	(6,763,382	)
	Shares	Market Price Per Share		Total Market Value		Unrealized Gain, Net of Tax
September 30, 2000	4,655,000	$	54.0625	$	251,660,938	$	150,641,465
March 31, 2001	4,655,000		64.830		301,783,650		181,416,810
Change in Freddie Mac stock		$	10.7675				30,775,345
Other comprehensive income related to mortgage securities and other investments							8,616,894
Total other comprehensive income						$	39,392,239

Other comprehensive loss related to mortgage securities and other investments was $2.1 million for the six months ended March 31, 2002 compared to income of $8.6 million for the six months ended March 31, 2001. While interest rates moved in the same direction and approximately the same magnitude as in the comparable period in 2001, we had income in the March 2001 quarter due to a much larger portfolio of fixed rate mortgage securities.

Asset Quality

As indicated in the table below, nonperforming loans increased from $2.3 million at September 30, 2001 to $2.9 million at March 31, 2002. Nonperforming loans as a percent of total loans increased from 1.01% at September 30, 2001 to 1.34% at March 31, 2002. The allowance for loan losses as a ratio of non-performing loans was 2.28x at September 30, 2001 and was 1.80x at March 31, 2002. Net charge-offs for the six month period ended March 31, 2001 was $1.3 million compared to $252,000 for the six month period ended March 31, 2002. The net charge-offs along with the shrinkage in our loan portfolio is reflected in these ratios.

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Underperforming loans are balloon loans that are 90 or more days past contractual maturity on which we are still receiving monthly payments and accruing interest. Non-performing loans are nonaccrual loans. The following table shows underperforming and non-performing assets.

	March 31, 2002			September 30, 2001
	(In Thousands)
Underperforming loans	$	489		$	218
Total non-performing loans		2,900			2,312
Foreclosed real estate, net		1,054			434
Total non-performing assets	$	3,954		$	2,746
Non-performing loans as a percent of total loans		1.34	%		1.01	%
Non-performing assets as a percent of total assets		0.42	%		0.31	%
Allowance for loan losses as a percent of total loans		2.41	%		2.30	%
Allowance for loan losses as a ratio of non-performing loans		1.80x			2.28x

The allowance for loan losses represents a reserve for probable loan losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with particular emphasis on impaired, non-accruing, past due and other loans that Management believes require special attention. The determination of the allowance for loan losses is considered a critical accounting policy.

When reviewing the allowance for loan losses, it is important to understand to whom the Company lends. The largest components of the loan portfolio are 1-4 family residential loans and commercial real estate loans. The risk of this type of lending is a downturn in economic environment resulting in reduced capacity to repay and/or depreciated property values. The Company has mitigated the risk to these types of borrowers through prudent loan to value ratios and regular monitoring of economic conditions.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of potential risk in the loan portfolio. The amount of the provision for loan losses is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loss experience, delinquency trends, the amount of losses charged to the allowance in a given period, and an assessment of economic conditions. A provision for losses in the amount of $175,000 and $300,000 was charged to expense for the six months ending March 31, 2002 and March 31, 2001, respectively. At March 31, 2002 and September 30, 2001 the allowance for loan losses to total loans was 2.41% and 2.30%, respectively. Management considers the current allowance for loan losses adequate based on its analysis of the potential risk in the portfolio.

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Our allowance for loan loss methodology is a loan classification based system. We base the required reserve on a percentage of the loan balance for each type of loan and classification level. CharterBank establishes specific reserves in addition to general reserves when inherent losses are identifiable at the loan level. In addition to these allocated reserves CharterBank had unallocated reserves of $385,000 and $789,000 at March 31, 2002 and September 30, 2001, respectively.

Commitments

The Company had commitments to fund loans at March 31, 2002 of approximately $19.8 million of which the largest component was unused consumer credit lines of approximately $6.9 million, with other significant components being unused commercial credit lines of approximately $3.2 million and unfunded construction loans of approximately $5.7 million. The Company originated $56.9 million in Conforming 1-4 family loans during the six month period ended March 31, 2002. Conforming 1-4 family loans are generally sold on a best efforts basis so the Company has no binding commitments on these loans.

The Bank is party to lines of credit with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. Lines of credit are unfunded commitments to extend credit. These instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amounts recognized in the financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unfunded commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank follows the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Unfunded commitments to extend credit where contract amounts represent potential credit risk totaled $19.8 million at March 31, 2002. These commitments are primarily at variable interest rates.

The Company’s commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment securities available for sale or external funding sources through acceptance of deposits from customers or borrowings from other financial institutions.

The following table is a summary of the Company’s commitments to extend credit, commitments under contractual leases as well as the Company’s contractual obligations, consisting of deposits, FHLB advances and borrowed funds by contractual maturity date for the next five years.

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Commitments and Contractual Obligations	Due in 1 Year		Due in 2 Years	Due in 3 Years	Due in 4 Years	Due in 5 Years
Loan commitments to originate mortgage loans	$	3,907,000	—	—	—	—
Available home equity and unadvanced lines of credit		10,163,852	—	—	—	—
Letters of credit		80,000	—	—	—	—
Lease agreements		76,300	60,300	60,300	60,300	60,300
Deposits		117,594,128	15,458,702	7,868,745	2,563,428	3,701,838
Securities sold under agreements to repurchase		87,546,000	—	—	—	—
FHLB advances		55,550,000	56,000,000	28,750,000	—	—
Other borrowings		—	—	—	—	—
Total commitments and contractual obligations	$	274,917,280	71,519,002	36,679,045	2,623,728	3,762,138

Although management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.

Liquidity and Capital Resources

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. Our primary sources of liquidity are deposits, borrowings, scheduled amortization and prepayments of loan principal and mortgage related securities, maturities and calls of investment securities and funds provided by our operations. We can borrow funds from the FHLB based on eligible collateral of loans and securities up to a limit of 30% of consolidated assets. At March 31, 2002, our maximum borrowing capacity from the FHLB was approximately $291 million. At March 31, 2002 we had outstanding borrowings of $267.3 million with unused borrowing capacity of $23.6 million. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral. We can obtain funds in the brokered deposit markets as well as funds using our Freddie Mac common stock as collateral and have established a line of credit that

19

provides for borrowing up to half of the market value of the stock. We consider this source of funds a last resort due to the potential adverse tax consequences on the dividends received deduction which exempts 70% of our Freddie Mac dividends from taxable income. CharterBank has increasingly relied on wholesale fundings including advances from the FHLB, repurchase agreements and brokered deposits to fund securities and loan growth in the past two fiscal years. This reflects a growth in our loan portfolio that has outpaced growth in retail deposits. CharterBank monitors its liquidity position frequently and anticipates that we will have sufficient funds to meet our current funding commitments.

At March 31, 2002, repurchase agreements totaled $87.5 million, a $10.2 million decrease from the amount outstanding at September 30, 2001 of $97.7 million. Wholesale deposits were $37.2 million at March 31, 2002 compared to $36.4 million at September 30, 2001.

Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

Our primary investing activities are the origination of 1-4 family real estate, commercial real estate, commercial and consumer loans, and the purchase of mortgage and investment securities. During the six months ended March 31, 2002, we originated approximately $90.5 million in total loans. Residential mortgage loans accounted for 63.1% of the originations and commercial real estate accounted for 18.2% of the originations. This reflects management’s strategy of increasing the portfolio balance of commercial real estate loans, especially considering that most of the residential mortgage loans were sold in the secondary market. Purchases of investment securities totaled $9.3 million for the six months ended March 31, 2002. At March 31, 2002 and September 30, 2001, CharterBank had loan commitments to borrowers of approximately $3.9 million and $1.0 million, respectively, and available home equity and unadvanced lines of credit of approximately $10.2 million and $10.3 million, respectively.

Deposit flows are affected by the level of our interest rates and, by the interest rates and products offered by competitors, as well as other factors. Total deposits were $203.9 million at March 31, 2002 as compared to $200.4 million at September 30, 2001. Time deposit accounts scheduled to mature within one year were $117.6 million and $119.4 million at March 31, 2002 and September 30, 2001, respectively.

CharterBank has traditionally been a well-capitalized savings bank, due to, among other factors, the unrealized gains on Freddie Mac common stock. At March 31, 2002, we exceeded each of the applicable regulatory capital requirements. CharterBank’s tier 1 capital was $72.6 million at March 31, 2002. Tier 1 capital represented 17.18% of risk-weighted assets. Tier 1 capital represented 11.04% of total regulatory assets at March 31, 2002, which exceeds the well-capitalized requirements of 5.0%. At March 31, 2002, we had a risk-based total capital of $144.8 million and a risk-based capital ratio of 34.27%, which significantly exceeds the applicable well-capitalized requirements of 10%.

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On October 16, 2001 the Company completed its reorganization into a two tier mutual holding company with a sale of 20% of the Company’s stock. The net proceeds of this offering increased capital by approximately $34.7 million of which $18.6 million was contributed to CharterBank.

In November 2001, we opened our new Auburn, Alabama branch. We had previously capitalized $1.6 million in expenses for its construction and $500,000 for the land. We are actively evaluating additional branch locations. Establishing other branches and ATMs will involve additional capital expenditures, which have not yet been determined. Other larger expenditures may include the purchase of land or buildings for future branch sites within our target market area. Except for the above, we do not anticipate any other material capital expenditures during fiscal year 2002. We do not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than the commitments and unused lines of credit noted above.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.

The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 on October 1, 2001. As the Company does not have any recorded goodwill or intangible assets, the adoption of SFAS Nos. 141 and 142 did not have an impact on the consolidated financial statements.            

In June 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on October 1, 2002.

In August, 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying

21

amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company will adopt the provisions SFAS No. 144 on October 1, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the consolidated financial statements.

Impact of Inflation and Changing Prices

The unaudited consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

As of March 31, 2002, there were no substantial changes from the interest rate sensitivity analysis or changes in the composition of the Company’s market-sensitive assets and liabilities or their related market values from that reported as of September 30, 2001. The foregoing disclosures related to the market risk of Charter Financial should be read in conjunction with Charter Financial’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended September 30, 2001 included in Charter Financial’s 2001 annual report on Form 10-K.

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Part II

OTHER INFORMATION

Item 1.    Legal Proceedings

None.

Item 2.    Changes in Securities and Use of Proceeds

None.

Item 3.    Defaults upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 5.    Other Information

None.

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits.—Not applicable

(b)  Reports on Form 8-K

Charter Financial filed a Form 8-K with the SEC on February 21, 2002, reporting in Item 5 - Other Events - reporting that it had made an offer to acquire FLAG Financial Corporation on February 13, 2002.

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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.

	CHARTER FINANCIAL CORPORATION (Registrant)
Date:    May 14, 2002	By:	/s/     Robert L. Johnson
		Robert L. Johnson President and Chief Executive Officer

Date:    May 14, 2002	By:	/s/    Curtis R. Kollar
		Curtis R. Kollar Vice President, Chief Financial Officer and Treasurer (principal financial officer)

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