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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

          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.

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

          As of  April 30, 2003, 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.

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PART I – FINANCIAL INFORMATION

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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:

          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. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

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CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 31, 2003 and September 30, 2002

(unaudited)

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, 2003 and 2002
(unaudited)

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 Six Months Ended March 31, 2003 and 2002
(unaudited)

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, 2003 and September 30, 2002, and for the three and six months ended March 31, 2003 and 2002. Significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements for the three and six months ended March 31, 2003 and 2002 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, 2002.

          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. 

          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.

(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

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Financial in the offering, using the proceeds of a loan from Charter Financial.  The ESOP loan is recorded as unearned compensation reducing stockholders’ equity of Charter Financial.  The net proceeds of the offering, adjusted for the ESOP, totaled approximately $34.0 million.

          As part of its reorganization in structure, 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 its investment in Charter Financial and 400,000 shares of Freddie Mac common stock.  First Charter, MHC does not engage in any business activity other than its investment in a majority of the common stock of Charter Financial, management of Freddie Mac common stock, and the management of any cash dividends received from Freddie Mac common stock.  Federal law and regulations require that as long as First Charter, MHC is in existence it must own at least a majority of Charter Financial’s common stock.

(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.” ESOP shares are only considered outstanding for earnings per share calculations when the shares have been 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, 2003:

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(4)  Comprehensive Loss

          The primary component of other comprehensive loss for the Company is net unrealized gains and losses on Freddie Mac common stock and investment and mortgage backed securities available for sale.  The table below summarizes total comprehensive loss for the three and six months ended March 31, 2003 and 2002.

(5)  Stock-Based Compensation

          During 2003, the Company amended the 2001 Stock Option Plan (the Plan) to allow for stock option awards for up to 707,943 shares of the Company’s common stock to eligible directors and employees.  At March 31, 2003, the Company had granted 152,000 options under the Plan.  Under the provisions of the Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair market value of the common stock on the date of grant of such option.  When granted, these options vest over a five-year period.  The Company accounts for the Plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under the Plan had 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 Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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          No stock options were granted during the three and six months ended March 31, 2002.

(6)  Business Combinations

          Effective February 21, 2003, Charter Financial acquired all of the issued and outstanding shares of EBA Bancshares, Inc. (EBA), Opelika, Alabama, and its wholly-owned banking subsidiary, Eagle Bank of Alabama, for a purchase price of approximately $8,600,000 in cash.  The acquisition has been accounted for using the purchase method of accounting and, hence, the results of operations of EBA have been included in the consolidated financial statements beginning on the aforementioned effective date.  The assets and liabilities of EBA, including preliminary determined purchase accounting adjustments, as of the date of the acquisition, were as follows:

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          The following summarizes the unaudited pro forma consolidated results of operations assuming EBA was acquired in a purchase accounting transaction on October 1, 2001.

(7)  Goodwill and Other Intangible Assets

          In conjunction with the acquisition of EBA, Charter Financial acquired the following goodwill and other intangibles assets:

          Goodwill and other intangible assets include cost in excess of net assets acquired and deposit premiums recorded in connection with the acquisition of EBA.  The deposit premium is being amortized using the double-declining balance method over thirteen years. Charter Financial recorded amortization expense related to the deposit premium of $19,088 for the three and six months ended March 31, 2003.

          At March 31, 2003, other intangible assets is summarized as follows:

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

General

           Charter Financial Corporation (“Charter Financial,” “Company”, “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 Company, 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 owns 4,655,000 shares of Freddie Mac common stock.

          CharterBank completed the cash acquisition of EBA Bancshares, Inc. and its wholly-owned subsidiary, Eagle Bank of Alabama, in February 2003. The acquisition added three branches in the Auburn-Opelika area of Alabama with $55.3 million in loans and $60.7 million in retail deposits.  After the acquisition, CharterBank operates a main office, seven full-service branch offices, and three 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 long-term, profitable relationships.  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 earnings on investments and 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 real estate loans, consumer loans, mortgage related securities, and equity securities such as our Freddie Mac common stock investment.  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, 2003 contains $247.2 million of Freddie Mac stock, of which $240.9 million is unrealized gain.  Noninterest-bearing liabilities include $93.0 million in deferred taxes related to the unrealized gain in Freddie Mac stock, and accumulated other

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comprehensive income includes $147.9 million representing the net unrealized gain in Freddie Mac stock.  Our results of operations also depend on our provision for loan losses, noninterest income and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses.  Noninterest income includes gains on sale of loans, gains (losses) on sales of investment and mortgage backed securities, and service fees and charges.

          Our results of operations may also be affected significantly by economic and competitive conditions in our market area and elsewhere, including those conditions that influence market interest rates, government policies and the actions of regulatory authorities.  Future changes in applicable laws, regulations or government policies may materially impact us.  Furthermore, because our lending activity is concentrated in loans secured by real estate located in Georgia and Alabama, downturns in the regional economy encompassing these states could have a negative impact on our earnings.

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 2002 annual report on Form 10-K.  Of these policies, management believes that the accounting for the allowance for loan losses is one of the most critical.  Please see “Asset Quality” for a further discussion of the Company’s methodology in determining the allowance.

          The accounting and financial reporting policies of Charter Financial Corporation conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Of these policies, management has identified the allowance for loan losses as a critical accounting policy that requires difficult subjective judgment and is important to the presentation of the financial condition and results of operations of the Company. 

          The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s  ability to repay.

          The Company segments its allowance for loan losses into the following four major categories: 1) identified losses for impaired loans; 2) general reserves for Classified/Watch loans; 3) general reserves for loans with satisfactory ratings; and 4) an unallocated amount.  Risk ratings

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are initially assigned in accordance with the Bank’s loan and collection policy. An organizationally independent department reviews grade assignments on an ongoing basis.  Management reviews current information and events regarding a borrowers’ financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions.  When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly.  If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based on the fair value of the collateral as the measure for the amount of the impairment.  Impaired and Classified/Watch loans are aggressively monitored.  The reserves for loans rated satisfactory are further subdivided into various types of loans as defined by loan type.  The Company has developed specific qualitative reserve factors to apply to each individual component of the reserve.  These qualitative reserve factors are based upon economic, market and industry conditions that are specific to the Company’s local markets.  These qualitative reserve factors consider, but are not limited to, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, dependency upon government installations and facilities, and competitive factors in the local market.  These allocations for the qualitative reserve factors are included in the various individual components of the allowance for loan losses.  The qualitative reserve factors are subjective in nature and require considerable judgment on the part of the Bank’s management.  However, it is the Bank’s opinion that these items do represent uncertainties in the Bank’s business environment that must be factored into the Bank’s analysis of the allowance for loan losses.  The unallocated component of the allowance is established for losses that specifically exist in the remainder of the portfolio, but have yet to be identified.   

          Management believes that the allowance for loan losses is adequate. While the Company has 83.79% of its loan portfolio secured by real estate loans, this percentage is not significantly higher than in previous years.  Commercial real estate comprises 37.19% of the loan portfolio and a significant portion is owner occupied properties where the operations of the commercial entity provide the necessary cash flow to service the debt.  For this portion of real estate loans, repayment is not dependent upon liquidation of the real estate.  Construction and development loans comprise 6.32% of the real estate loan portfolio.  The Company carefully monitors the loans in this category since the repayment of these loans is generally dependent upon the liquidation of the real estate and is impacted by national and local economic conditions.  The residential category represents those loans the Company chooses to maintain in its portfolio rather than selling into the secondary market for marketing and competitive reasons.  The residential loans held for sale category comprises loans that are in the process of being sold into the secondary market.  The credit has been approved by the investor and the interest rate and purchase price locked so the Company takes no credit or interest rate risk with respect to these loans.  The Company has no large loan concentrations to individual borrowers or industries. Only 7.85% of the Company’s portfolio consists of consumer loans, while 8.36% consists of commercial non real estate loans.  While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

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          Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale are reported at fair value, as determined by independent quotations.  Purchase premiums and discounts on investment securities are amortized and accreted to interest income using a method which approximates a level yield over the period to maturity of the related securities.  Purchase premiums and discounts on mortgage-backed securities and collateralized mortgage obligations are amortized and accreted to interest income using the interest method over the remaining lives of the securities, taking into consideration assumed prepayment patterns.

          The Company receives a dividends received deduction for tax purposes on dividend income from our investment in Freddie Mac stock.  This deduction is the lesser of 70% of dividends received or  70% of taxable income before the dividends received deduction.  Since the Company does not file a consolidated tax return, this determination is made at the individual company level.  At March 31, 2003, the tax provision was based on a deduction of 70% of taxable income.  The actual deduction will be determined at September 30, 2003 based on the level of dividends and the level of taxable income.

Comparison of Financial Condition at March 31, 2003 and September 30, 2002

          Our total assets decreased $8.5 million, or 0.9%, to $974.1 million at March 31, 2003 from $982.6 million at September 30, 2002. 

          Total loans increased $53.0 million, or 24.8%, to $267.0 million at March 31, 2003 compared to $214.0 million at September 30, 2002. Loans of $55.3 million were acquired in the Eagle acquisition.  The one-to-four family residential real estate portfolio increased from $100.5 million at September 30, 2002 to $107.4 million at March 31, 2003.  The acquisition of Eagle increased one-to-four family loans by $15.2 million which was partially offset by the prepayments bringing it to a net increase of $6.9 million or 6.9%.  The consumer and other loans increased $2.1 million, or 10.5%, from $20.0 million at September 30, 2002 to $22.1 million at March 31, 2003.  The increase in the consumer loans was primarily due to the Eagle acquisition which increased consumer loans by $4.5 million, with part of the increase offset by reductions in second mortgage loans due to refinancings. Commercial real estate and other commercial loans increased by $37.3 million during the period ended March 31, 2003, and real estate construction loans increased by $6.6 million during the period with Eagle’s acquisition increasing commercial real estate loans by $32.0 million and construction loans by $3.6 million, respectively.

          Mortgage-backed securities and collateralized mortgage obligations decreased from $455.9 million at September 30, 2002 to $403.1 million at March 31, 2003 for a decrease of $52.8 million or 11.6%. The market value of Freddie Mac common stock decreased $13.0 million, or 5.0%, from $260.2 million to $247.2 million as the price per share of Freddie Mac common stock decreased from $55.90 at September 30, 2002 to $53.10 at March 31, 2003. 

          Total deposits increased from $210.7 million at September 30, 2002 to $277.5 million at March 31, 2003.  Deposits of $60.7 million were acquired in the Eagle Bank acquisition.

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          Management will continue to rely on borrowings, especially FHLB advances and repurchase agreements, to fund purchases in the securities portfolios, and, to a lesser extent, the loan portfolio. The terms of new advances will be determined at the time based on interest rates, the Company’s interest risk profile and other factors.  Repurchase agreements are generally less than 90 days to maturity with rates at or slightly above LIBOR.  Borrowings decreased from $411.0 million at September 30, 2002 to $351.5 million at March 31, 2003, for a decrease of $59.5 million or 14.5%. Proceeds from the sale of mortgage securities were used to reduce borrowings.

          The Company’s acquisition of Eagle Bank resulted in $4.3 million of goodwill and $2.0 million of core deposit intangible.  The core deposit intangible will be amortized over approximately 13 years using an accelerated method of amortization.

          Our total stockholders’ equity is comprised of realized equity and unrealized equity.  Realized equity includes common stock, additional paid-in capital, treasury stock, unearned compensation, and retained earnings, while unrealized equity is accumulated other comprehensive income.  Stockholders’ equity decreased $12.4 million, or 5.0%, to $236.8 million at March 31, 2003 from September 30, 2002. Realized equity decreased by $6.0 million, from $93.2 million at September 30, 2002 to $87.2 million at March 31, 2003, with the major reason being the increase in treasury stock of $6.1 million.  Treasury stock was acquired for the Company’s restricted stock benefit plan.  Accumulated other comprehensive income is comprised of net unrealized holding gains on securities available for sale.  Accumulated other comprehensive income at March 31, 2003 was $149.6 million, a $6.4 million decrease from the balance at September 30, 2002 of $156.0 million.  The decrease in accumulated other comprehensive income is mainly attributable to the decrease in the market value of our investment in Freddie Mac common stock.

Comparison of Operating Results for the Three Months Ended
March 31, 2003 and 2002

General

          Net income was $164,000 for the three months ended March 31, 2003, which was $635,000 lower than the net income of $799,000 for the three months ended March 31, 2002. This decrease primarily stemmed from higher general and administrative costs and the impact of lower interest rates on the loan portfolio and the securities portfolio.

Interest Income

          Interest income fell by $477,000 to $8.4 million for the three months ended March 31, 2003 from $8.9 million for the three months ended March 31, 2002. One component of the decrease was a decline in the overall yield on investment securities due to the amortization of the premium on the Company’s mortgage-backed securities.  Interest income on loans also dropped by $244,000 due to lower interest rates during the three months ended March 31, 2003.

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Interest Expense

          Interest expense fell by $620,000 from $5.3 million for the three months ended March 31, 2002 to $4.7 million for the three months ended March 31, 2003.  Interest expense on deposits and borrowings decreased $324,000 and $296,000, respectively, in 2003 compared to 2002. The reduction in interest expense on borrowings is due to lower interest rates and lower average balances while the reduction in interest expense on deposits is due to lower interest rates and higher balances in the lower cost transaction accounts.

Net Interest Income

          As a result of the above factors, net interest income increased by $143,000 from $3.5 million for the three months ended March 31, 2002 to $3.7 million for the three months ended March 31, 2003.

          The following table depicts 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 table shows these measures with and without the effects of the Freddie Mac common stock.  We believe this comparison provides our shareholders with useful information so that they may compare CharterBank with its peer group using traditional bank ratios, excluding the effect of the Freddie Mac stock.  Freddie Mac common stock had a dividend return on cost basis of 73.7% at March 31, 2003.  However, the dividend yield on the market value of the Freddie Mac common stock is only 1.84%.  The appreciation in the market value of the Freddie Mac common stock has created our strong accumulated comprehensive income that is a component of stockholders’ equity.

          In the table following, we derived the yields and costs by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown.  We derived average balances from actual daily balances over the periods indicated.  Interest income includes the recognition of certain fees over the lives of the underlying loans.  The table also shows the actual balances of interest-earning assets and interest-bearing liabilities as of March 31, 2003.

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