CHARTER FINANCIAL CORP/GA - 10-K Annual Report

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2003

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

Commission File No.: 000-33071

Charter Financial Corporation

(Exact Name of Registrant as Specified in Its Charter)

United States

58-2659667

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

600 Third Avenue, West Point, Georgia 31833

(Address of Principal Executive Offices, including zip code)

(706) 645-1391

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act). Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 15, 2003 was $119,150,177, based on the per share closing price as of December 15, 2003 on the Nasdaq National Market for the registrant’s common stock, which was $35.50. There were 19,569,676 shares of the registrant’s common stock, $.01 par value per share outstanding at December 15, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the proxy statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

CHARTER FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED

SEPTEMBER 30, 2003

TABLE OF CONTENTS

		PAGE
ITEM	PART I

1	BUSINESS	4
2	PROPERTIES	49
3	LEGAL PROCEEDINGS	50

	PART II

4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	51
5	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	51
6	SELECTED FINANCIAL DATA	53
7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	55
7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	93
8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	93
9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	93
9A	CONTROLS AND PROCEDURES	94

	PART III

10	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	94
11	EXECUTIVE COMPENSATION	94
12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	94
13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	95

	PART IV

14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	95
15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K	95

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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;

•

the ability of our customers to make loan payments;

•

the performance of Freddie Mac common stock price and the level of dividends received;

•

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 Annual Report on Form 10-K 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.

PART I

ITEM 1.

BUSINESS

General. Charter Financial Corporation (“Charter Financial,” “us,” or “we”) is a federally-chartered corporation organized in 2001 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.

Our focus is to build stockholder value by effectively deploying our capital. Our plan is to invest in and build our retail banking franchise, manage our Freddie Mac common stock investment wisely and make use of the full range of capital management strategies that are available to us. Our plan is to grow our retail franchise, focusing on core deposits, by enhancing convenience and customer service. This means expanding access through additional branches, either de novo or through acquisitions, and electronic delivery channels, and extending service hours. In this regard, we acquired EBA Bancshares, Inc. and its wholly-owned subsidiary, Eagle Bank of Alabama, in order to expand our presence in the Auburn-Opelika, Alabama market in February, 2003. In addition, we have a seventeen-year history with our investment in Freddie Mac common stock and, while we continually evaluate this investment and explore our options, we expect our investment to continue to provide a competitive return for our stockholders. We will also evaluate, as appropriate, capital management strategies such as leverage, stock buyback programs and the payment of cash dividends.

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. The ESOP loan is disclosed as unearned compensation reducing stockholders’ equity of Charter Financial. The net proceeds, adjusted for the ESOP, totaled approximately $34 million.

As part of our 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 OTS. First Charter, MHC’s principal assets are its investment in Charter Financial and 400,000 shares of Freddie Mac common stock, the fair value of which was $20.9 million as of September 30, 2003. 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. During the year ended September 30, 2003, First Charter, MHC waived its right to receive cash dividends from Charter Financial. Upon continued regulatory approval, First Charter, MHC expects to waive its right to receive any future cash dividends from Charter Financial for the foreseeable future.

All historical financial information contained herein has been adjusted to retroactively reflect the transfer of 400,000 shares of Freddie Mac common stock and $100,000 in cash to First Charter, MHC which occurred in October 2001 upon the aforementioned reorganization. Operating data has also been retroactively adjusted for such effects.

At September 30, 2003, Charter Financial had total assets of $1.0 billion, of which $299.9 million was comprised of loans receivable and $394.4 million was comprised of mortgage-backed securities and collateralized mortgage obligations. At such date, total deposits were $279.4 million, borrowings were $388.4 million and total stockholders’ equity was $230.4 million. Charter Financial owns 4,640,000 shares of Freddie Mac common stock of which 1,685,000 shares are owned directly by Charter Financial and the rest are owned by Charter Financial’s subsidiaries with CharterBank owning 2,555,000 shares and Charter Insurance owning 400,000 shares. Charter Financial’s 4,640,000 shares of Freddie Mac common stock had a market value of $242.9 million at September 30, 2003.

CharterBank was originally founded in 1954 and currently operates a main office, seven full-service branch offices and four loan production offices in Georgia and Alabama. CharterBank is a community-oriented financial institution serving primarily consumer households and small businesses. CharterBank is the only locally-owned and operated financial institution in Troup County, Georgia and the Valley area, consisting of Lanett and Valley, Alabama and West Point, Georgia. CharterBank is subject to extensive regulation, supervision, and examination by the OTS, its primary regulator, and the Federal Deposit Insurance Corporation (the “FDIC”), which insures its deposits. CharterBank’s savings deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund of the FDIC.

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. Prior to the reorganization, CharterBank founded The Charter Foundation, a non-profit foundation, which makes charitable contributions in its market area.

Internet Addresss. Our Internet address is www.charterbank.net. We make available free of charge, through our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Market Area. We conduct our operations in west-central Georgia and east-central Alabama through our main office in West Point, Georgia, two branch offices in Valley, Alabama, a branch office in LaGrange, Georgia, two branch offices in Opelika, Alabama, and two branch offices in Auburn, Alabama. The main office and two Valley, Alabama offices serve the “Valley” region of our market area, which consists of West Point, Georgia, and Lanett and Valley, Alabama. The LaGrange office serves an adjacent community on Interstate 85. Four branches serve the Auburn-Opelika or Lee County, Alabama area. We also operate loan production offices in Newnan and St. Mary’s, Georgia and Phenix City and Monroeville, Alabama. The Valley area is a small market area and we are expanding our market area to nearby counties along the Interstate I-85 corridor, which are larger and have more growth potential.

On September 10, 2002, the Company signed a definitive agreement with EBA Bancshares, Inc. (EBA) providing for, among other things, the merger of EBA’s subsidiary bank, Eagle Bank of Alabama, into the Company’s banking subsidiary, CharterBank. Terms of the agreement provided for EBA shareholders to receive $17.00 in cash for each share of common stock of EBA for a total purchase price of approximately $8.6 million. As part of the Eagle acquisition, we acquired approximately $55.3 million in gross loans and $60.7 million in deposits. This acquisition was completed in the first calendar quarter of 2003. The acquisition was accounted for using the purchase method of accounting and, therefore, the results of operations of Eagle Bank of Alabama have been included in our operations since the effective date of the acquisition

On August 18, 1999, we acquired all of the issued and outstanding shares of Citizens Bancgroup, Inc. and its wholly-owned subsidiary Citizens National Bank, a national bank headquartered in Valley, Alabama for a purchase price of approximately $2.25 million in cash (the “Citizens acquisition”). As part of the Citizens acquisition, we acquired approximately $24.7 million in loans, and $42.0 million in deposits. The acquisition was accounted for using the purchase method of accounting and, therefore, the results of operations of Citizens National have been included in our operations since the effective date of the acquisition.

The economy of our market area has historically been supported by the textile industry. During the 1980’s and 1990’s employment growth in local telecommunications companies offset declining textile industry jobs in our area. With the telecommunications slump and continuing downward textile industry employment trends, unemployment rates have been increasing. Also, the median household income in our area is below national and statewide levels. Part of our retail strategy is to grow in areas that are more vibrant and economically diverse. To this end, we have generally located our loan production offices in more urban and higher income areas. In addition, our expansion into the Auburn-Opelika, Alabama market reflects our diversification and growth oriented strategy.

Competition. We face intense competition both in making loans and attracting deposits. West-central Georgia and east-central Alabama have a high concentration of financial institutions, many of which are branches of large money center, super-regional, and regional banks which have resulted from the consolidation of the banking industry in Alabama and Georgia. Many of these competitors have greater resources than we do and may offer services that we do not provide.

Our competition for loans comes from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, credit card banks, insurance companies, and brokerage and investment banking firms. Our most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations, credit unions, and mutual funds. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds and from brokerage firms and insurance companies.

LENDING ACTIVITIES

Loan Portfolio Composition. Our loan portfolio consists of one-to-four family residential first mortgage loans, commercial real estate loans, real estate construction loans, consumer loans and commercial loans. At September 30, 2003, we had total loans receivable of $299.9 million. Residential mortgage loans comprised $133.3 million, or 44.5% of total loans at September 30, 2003. Loans secured by mortgages on commercial real estate totaled $111.2 million at September 30, 2003 representing a $43.2 million, or 63.47%, increase from the balance of commercial real estate loans at September 30, 2002.

At September 30, 2003, approximately $62.0 million of total commercial real estate loans are secured by real estate in the local bank market and approximately $49.2 million of total commercial real estate loans are secured by commercial real estate in other parts of Georgia and Alabama. Of the $49.2 million not in the local bank market, approximately $25.3 million of total commercial real estate loans are secured by real estate in the Atlanta metropolitan area. We expect continued growth in our commercial real estate portfolio in the future.

The remaining portion of our loan portfolio at September 30, 2003 consisted of consumer loans totaling $19.7 million, real estate construction loans of $14.1 million, and other commercial loans of $21.6 million. Our consumer loan portfolio contains approximately $2.4 million in auto loans.

Our loans are subject to federal and state law and regulations. The interest rates we charge on loans are affected principally by the demand for loans, the supply of money available for lending purposes and the interest rates offered by our competitors. These factors are, in turn, affected by general and local economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies, and governmental budgetary matters.

The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.

	At September 30,
	2003					2002					2001					2000					1999
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
	(Dollars in thousands)
One-to-four family residential real estate(1)	$	133,305		44.5	%	$	100,471		46.9	%	$	129,223		56.2	%	$	152,822		58.9	%	$	132,036		61.6	%
Commercial real estate		111,189		37.1			68,016		31.8			61,225		26.6			60,838		23.4			46,545		21.7
Consumer and other(2)		19,673		6.5			19,970		9.3			23,537		10.2			29,915		11.5			24,353		11.4
Commercial		21,634		7.2			16,587		7.8			6,819		3.0			8,987		3.5			3,245		1.5
Real estate construction(3)		14,076		4.7			8,962		4.2			9,143		4.0			7,138		2.7			8,038		3.8

Total loans		299,877		100.0	%		214,006		100.0	%		229,947		100.0	%		259,700		100.0	%		214,217		100.0	%

Less:
Net deferred loan costs (fees)		(544	)				(173	)				(66	)				113					(51	)
Allowance for loan losses		(6,780	)				(5,179	)				(5,290	)				(6,346	)				(5,710	)

Loans receivable, net	$	292,553				$	208,654				$	224,591				$	253,467				$	208,456

(1)	Excludes loans held for sale.

(2)	Includes home equity loans and lines of credit, and second mortgage loans.

(3)	Net of undisbursed proceeds on loans-in-process.

Loan Maturity and Repricing. The following table shows the repricing dates or contractual maturity dates as of September 30, 2003. The table does not reflect prepayments but does reflect scheduled principal amortization. Demand loans, loans having no stated maturity, and overdrafts are shown as due in one year or less.

	At September 30, 2003
	1-4 Family Residential Real Estate Loans		Commercial Real Estate		Consumer and Other		Commercial		Real Estate Construction(1)		Totals
	(In thousands)
Amounts due or repricing:
Within one year	$	45,570	$	45,671	$	8,112	$	14,069	$	13,904	$	127,326

After one year:
One to three years		21,273		20,583		4,383		3,902		132		50,273
Three to five years		18,757		18,664		2,404		1,728		22		41,575
Five to ten years		30,508		17,710		3,283		929		7		52,437
Over ten years		17,197		8,561		1,491		1,006		11		28,266

Total due after one year		87,735		65,518		11,561		7,565		172		172,551

Total amount due:	$	133,305	$	111,189	$	19,673	$	21,634	$	14,076	$	299,877

(1)	Presented net of undisbursed proceeds on loans-in-process.

The following table presents, as of September 30, 2003, the dollar amount of all loans contractually due or scheduled to reprice after September 30, 2004 and whether such loans have fixed interest rates or adjustable interest rates.

	Due After September 30, 2004
	Fixed		Adjustable		Total
	(In thousands)
One-to-four family residential real estate	$	37,738	$	49,997	$	87,735
Commercial real estate		19,812		45,706		65,518
Consumer and other		6,448		5,113		11,561
Commercial		4,960		2,605		7,565
Construction		41		131		172

Total loans	$	68,999	$	103,552	$	172,551

The following table presents our loan originations, purchases, sales and principal payments for the periods indicated.

	For the Years Ended September 30,
	2003		2002			2001
	(In thousands)
Loans(1):
Balance outstanding at beginning of period	$	214,006	$	229,947		$	259,700
Loans acquired from Eagle Bank		55,276		—			—

Originations:
One-to-four family residential real estate		196,474		112,457			121,952
Commercial real estate and commercial		75,920		52,678			25,225
Consumer and other loans		20,220		3,614			5,130
Real estate construction		36,652		17,468			12,283

Total originations		329,266		186,217			164,590

Less:
Principal repayments, unadvanced funds and other, net		175,943		118,926			128,242
Sale of residential mortgage loans, principal balance		121,263		80,753			63,786
Loan charge-offs and transfers to foreclosed real estate		1,465		2,479			2,315

Total deductions		298,671		202,158			194,343
Net loan activity		85,871		(15,941	)		(29,753	)

Ending balance	$	299,877	$	214,006		$	229,947

(1)	Excludes loans held for sale.

Residential Mortgage Loans and Originations. We emphasize the origination of first and second mortgages secured by one- to four-family properties within Georgia and Alabama. At September 30, 2003 and September 30, 2002, loans on one-to-four family properties accounted for 44.5% and 46.9% of our total loan portfolio, respectively.

Our mortgage origination strategy is to offer a broad array of products to meet customer needs. These products include nonconforming loans which are held in our portfolio, thirty-year fixed rate loans sold to investors with servicing released for fee income, and fixed rate loans sold to the secondary market where we retain the servicing rights. Management’s current strategy has been to sell loans with servicing released instead of keeping the servicing, as we believe that this improves our overall profitability. Our loan portfolio contains some loans that are nonconforming due to loan to value or credit exceptions.

Our originations of all types of residential first mortgages amounted to $196.5 million for the fiscal year ended September 30, 2003, $112.5 million for the year ended September 30, 2002,

and $122.0 million for the year ended September 30, 2001. Due to the low interest rate environment, a significant portion of loans originated in 2003 and 2002 were refinances, including refinances of our existing portfolio loans and loans in our servicing portfolio. The average size of our residential mortgage loans originated in the year ended September 30, 2003 was $100,000, and $110,000 for the year ended September 30, 2002.

We originate new mortgage loans through dedicated mortgage originators. Our mortgage originators develop referrals from current bank customers, real estate brokers, attorneys, past customers and other key referral sources.

We offer a variety of mortgage products to allow customers to select the best product for their needs. A description of the products and underwriting guidelines are highlighted below.

Adjustable Rate Mortgage Loans. We offer a variety of adjustable rate mortgage products that initially adjust after one, three, five, or seven years. After the initial term, adjustable rate mortgage loans generally adjust on an annual basis at a fixed spread over the monthly average yield on United States Treasury securities, the Wall Street Journal Prime or Libor. The interest rate adjustments are generally subject to a maximum increase of 2% per adjustment period and the aggregate adjustment is generally subject to a maximum increase of 6% over the life of the loan. At September 30, 2003, 63.30% of the residential mortgage loans in our portfolio were adjustable rate mortgage loans, most of which were hybrid loans with the rate fixed for the first five or seven years.

Generally, we offer adjustable rate mortgage loans in amounts up to $1.0 million depending on the loan-to-value ratio and the type of property. The loan-to-value ratio is the loan amount divided by the lower of (a) the appraised value of the property or (b) the purchase price of the property. The loan-to-value ratio is commonly used by financial institutions as one measure of potential exposure to risk. Loans on owner occupied one-to-four family residences are generally subject to a maximum loan to value ratio of 80% or require mortgage insurance if they exceed this ratio.

Fixed Rate Mortgage Loans Retained in Portfolio. Late in fiscal 2003 we stopped selling our 15-year conforming mortgage originations and started holding them in portfolio. These loans had better yields than securities with similar interest risk attributes that were available for purchase. As of September 30, 2003, we have $24.8 million of 15-year conforming mortgages in our portfolio. We are not currently retaining any other fixed rate mortgages. However, we still have mortgages in portfolio obtained in acquisitions and from periods before we began regularly selling fixed rate loans in the secondary market.

Fixed Rate Mortgages Sold Servicing Released. We offer a variety of thirty-year fixed-rate products that we sell to investors on a servicing released basis. These loans are underwritten to the investors’ standards and are generally sold to the investor after the loan closes. The rate on these loans is committed with the investor on a best efforts basis when the borrower locks in their interest rate. Gains on sales of residential loans amounted to $2.8 million of our noninterest income for the year ended September 30, 2003.

Fixed Rate Mortgages Sold with Servicing Retained. We are an approved seller/servicer for Freddie Mac. Our fixed rate loans are underwritten to comply with Freddie Mac standards for sale to the secondary market. At September 30, 2003, CharterBank serviced loans for Freddie Mac with an aggregate balance of $47.1 million and serviced loans for other investors with an aggregate balance of $3.9 million.

Home Equity Credit Lines and Second Mortgages. We offer home equity lines of credit as a complement to our one-to-four family lending activities. We believe that offering home equity credit lines helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. Home equity credit lines provide adjustable-rate loans secured by a first or second mortgage on owner-occupied one- to four-family residences located primarily in Georgia and Alabama. Home equity credit lines enable customers to borrow at rates tied to the prime rate as reported in The Wall Street Journal. The underwriting standards applicable to home equity credit lines are similar to those applicable to one- to four-family first mortgage loans with the exception of loan to value ratios which may go to 100% and slightly more stringent credit to income and credit score requirements. At September 30, 2003, we had $11.8 million of home equity and second mortgage loans. We also had $7.2 million of unfunded home equity commitments at September 30, 2003.

Commercial Real Estate Loans. CharterBank embarked on a strategy of increasing its commercial real estate loan portfolio during fiscal 1998. We originate commercial real estate loans secured by properties located in our primary market area. In underwriting commercial real estate loans, we consider not only the property’s historic cash flow, but also its current and projected occupancy, location, and physical condition. We generally lend up to a maximum loan-to-value ratio of 80% on commercial properties and require a minimum debt coverage ratio of 1.15 to 1 after tax. At September 30, 2003, we had $111.2 million of loans in our commercial real estate portfolio. The average size of a loan in our portfolio at September 30, 2003 was $301,000, which is larger than the average loan size in prior years due to several multi-million dollar commercial loans that were closed during fiscal 2003. Our largest funded loan exposure is a commercial real estate loan with a balance of $6.3 million at September 30, 2003. This loan is secured by a medical office building located in the metro Atlanta, Georgia area.

Commercial real estate lending involves additional risks compared with one-to-four family residential lending. Payments on loans secured by commercial real estate properties often depend on the successful management of the properties, on the amount of rent from the properties, or on the level of expenses needed to maintain the properties. Repayment of such loans may therefore be adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. In order to mitigate this risk, we monitor our loan concentration and our loan policies generally limit the amount of loans to a single borrower or group of borrowers. We also utilize the services of an outside consultant to conduct credit quality reviews of the commercial loan portfolio. Because of increased risks associated with commercial real estate loans, our commercial real estate loans generally have higher rates and shorter maturities than our residential mortgage loans. We usually offer commercial real estate loans at fixed rates and adjustable rates tied to the prime rate. However, a significant portion of the commercial real estate portfolio is still tied to yields on U.S. Treasury securities. We currently offer fixed rate terms of 3-7 years on these loans. However, in prior years we have had some loans with maturities of up to 20 years.

Commercial Loans. Commercial loans generally are limited to terms of five years or less. Whenever possible, we collateralize these loans with a lien on commercial real estate, or alternatively, with a lien on business assets and equipment. We also generally require the personal guarantee of the business owner. Interest rates on commercial loans generally have higher yields than residential or commercial real estate loans due to the risk inherent in this type of loan.

Commercial loans are generally considered to involve a higher degree of risk than residential or commercial real estate loans because the collateral may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans may also involve relatively large loan balances to single borrowers or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation and income stream of the borrower. Such risks can be significantly affected by economic conditions. In addition, business lending generally requires substantially greater supervision efforts by our management compared to residential or commercial real estate lending. Commercial loans, however, comprise a small portion of our loan portfolio, at approximately 7.2% of total loans receivable and approximately 2.2% of total assets at September 30, 2003.

Consumer Loans. We offer a variety of consumer loans to retail customers in the communities we serve. Examples of our consumer loans include:

•

home equity loans-open and closed end;

•

secured deposit and other loans;

•

unsecured credit lines and installment loans.

At September 30, 2003, our consumer loan portfolio totaled $19.7 million, or 6.5% of total loans. Consumer loans are generally originated at higher interest rates than residential and commercial mortgage loans and tend to have a higher credit risk than residential loans because they may be secured by a home with a loan-to-value of 100%, secured by rapidly depreciable assets, or be unsecured. Despite these risks, our level of consumer loan delinquencies, excluding auto loans, has generally been low. We cannot assure you, however, that our delinquency rate on consumer loans will continue to remain low in the future, or that we will not incur future losses on these activities.

At September 30, 2003, the auto loan portfolio totaled $2.4 million, or 0.8% of total loans. Charge-offs on the auto loan portfolio amounted to approximately $82,000 for the year ended September 30, 2003 compared to charge-offs of approximately $166,000 for the year ended September 30, 2002.

We make loans for up to 100% of the amount of a borrower’s certificates of deposit balance. These savings secured loans totaled $1.5 million at September 30, 2003.

Loan Approval Procedures and Authority. Our lending policies provide that various loan personnel and management committees may review and approve secured loan relationships up to $1.5 million and unsecured loan relationships up to $500,000. All loan relationships above these amounts require approval of either the Board’s Executive Loan Committee or the full Board of Directors.

The following generally describes our current lending procedures for residential mortgages and home equity lines and loans. Upon receipt of a completed loan application from a prospective borrower, we order a credit report and verify other information. If necessary, we obtain additional financial or credit related information. We require an appraisal for all mortgage loans, except for home equity loans or lines where an alternative evaluation may be used to determine the loan to value ratio. Appraisals are performed by licensed or certified third-party appraisal firms and are reviewed by our lending department. We require title insurance or a title opinion on all mortgage loans.

We require borrowers to obtain hazard insurance and we may require borrowers to obtain flood insurance prior to closing. For properties with a private sewage disposal system, we also require evidence of compliance with applicable law on residential mortgage loans. Further, we generally require borrowers to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which we make disbursements for items such as real estate taxes, hazard insurance, flood insurance, and private mortgage insurance premiums, if required.

Commercial real estate loans are approved through CharterBank’s Management Loan Committee process. The Management Loan Committee consists of the President, the Executive Vice President, the Chief Financial Officer, the Senior Credit Administrator, and certain other senior lending and credit officers. The Management Loan Committee has authority to approve individual loan relationships and modifications up to $1,500,000. Commercial non-real estate loan relationships of $1,000,000 or less may be approved outside the Committee process by three officers who have commercial real estate loan authority.

Asset Quality

One of our key operating objectives has been and continues to be the achievement of a high level of asset quality. We maintain a large proportion of loans secured by residential one-to- four family properties and commercial properties; we set sound credit standards for new loan originations; and we follow careful loan administration procedures. The following table sets forth the non-performing loans by loan category at the dates indicated. As indicated by the table following, nonperforming loans increased during the year ended September 30, 2003.

	At September 30,
	2003		2002		Increase (Decrease)
1-4 family residential real estate mortgage	$	2,080,802	$	2,069,211	$	11,591
Commercial real estate		2,474,106		738,783		1,735,323
Commercial		429,810		165,868		263,942
Consumer and other		139,199		39,007		100,192

Total	$	5,123,917	$	3,012,869	$	2,111,048

Delinquent Loans and Foreclosed Assets. Our policies require that management continuously monitor the status of the loan portfolio and report to the Loan Committee of the Board of Directors on a monthly basis. These reports include information on delinquent loans and foreclosed real estate, and our actions and plans to cure the delinquent status of the loans and to dispose of the foreclosed property. The Loan Committee approves action plans on all loans that are 90 days delinquent. The Loan Committee consists of two outside directors and at least one Board member who is a member of management. One of the outside directors acts as Chairman of the Loan Committee, while other Board members rotate monthly in the second outside director position.

The following table presents information regarding total nonaccrual loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated. At September 30, 2003, 2002, and 2001, we had $5.1 million, $3.0 million, and $2.3 million, respectively, of nonperforming loans. If all nonaccrual loans had been performing in accordance with their original terms and had been outstanding from the earlier of the beginning of the period or origination, we would have recorded additional interest income on these loans of approximately $136,000 for the year ended September 30, 2003.

	At September 30,
	2003			2002			2001			2000			1999
Underperforming loans - accruing loans delinquent 90 days or more	$	633		$	133		$	218		$	159		$	—

Total non-performing loans		5,124			3,013			2,312			2,831			1,989
Foreclosed real estate, net		684			670			434			630			222

Total non-performing assets	$	5,808		$	3,683		$	2,746		$	3,461		$	2,211

Non-performing loans to total loans		1.71	%		1.41	%		1.01	%		1.09	%		0.93	%

Non-performing assets to total assets		0.58	%		0.38	%		0.31	%		0.37	%		0.24	%

Nonperforming assets at September 30, 2003, 2002, and 2001 were $5.8 million, $3.7 million, and $2.7 million, respectively. Primarily, the nonaccrual loans are residential and commercial real estate loans that are nonaccrual due to economic conditions.

We generally stop accruing income when interest or principal payments are 90 days in arrears. We may stop accruing income on such loans earlier than 90 days when we consider the timely collectibility of interest or principal to be doubtful. We may continue to accrue interest income beyond 90 days if the loan is well secured and we determine that the ultimate collection of all principal and interest is not in doubt. When we designate nonaccrual loans, we reverse all outstanding interest that we had previously credited. If we receive a payment on a nonaccrual loan, we may recognize a portion of that payment as interest income, if we determine that the ultimate collectibility of principal is no longer in doubt. However, such loans may remain on nonaccrual status.

Impaired loans are individually assessed to determine whether the carrying value exceeds the fair value of the collateral or the present value of the expected cash flows to be received. Smaller balance homogeneous loans, such as residential mortgage loans and consumer loans, are collectively evaluated for impairment. At September 30, 2003, 2002, and 2001, impaired loans totaled $2.2 million, $2.1 million, and $696,000, respectively. At September 30, 2003, 2002, and 2001, we had $2.7 million, $2.0 million, and $2.6 million, respectively, of portfolio loans classified as troubled debt restructurings. The average recorded investment in impaired loans for the years ended September 30, 2003, 2002, and 2001 was approximately $2,167,000, $1,405,000, and $948,000, respectively. Interest income recognized on impaired loans for the years ended September 30, 2003, 2002, and 2001 was not significant.

Foreclosed real estate consists of property we have acquired through foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties are initially recorded at the lower of the recorded investment in the loan or fair value. Thereafter, we carry foreclosed real estate at fair value less estimated selling costs. At September 30, 2003, 2002, and 2001, respectively, we had $684,000, $670,000 and $434,000 in foreclosed real estate.

Allowance for Loan Losses. The following table presents the activity in our allowance for loan losses and other ratios at or for the dates indicated.

	At or for Years Ended September 30,
	2003			2002			2001			2000			1999
	(Dollars in thousands)
Balance at beginning of year	$	5,179		$	5,290		$	6,346		$	5,710		$	2,054
Allowance for loan losses of acquired company(1)		2,177			—			—			—			3,752
Charge-offs:
1-4 residential real estate		(209	)		(321	)		(132	)		(104	)		(49	)
Commercial real estate		—			—			—			(91	)		—
Commercial		(497	)		(175	)		(554	)		(26	)		(133	)
Consumer and other		(338	)		(320	)		(1,387	)		(713	)		(238	)
Real estate construction		—			—			(23	)		(204	)		—

Total charge-offs		(1,044	)		(816	)		(2,096	)		(1,138	)		(420	)

Recoveries:
1-4 residential real estate		140			94			119			32			1
Commercial real estate		—			—			21			18			—
Commercial		25			—			—			20			—
Consumer and other		278			361			400			294			83
Real estate construction		—			—			—			—			—

Total recoveries		443			455			540			364			84

Net (charge-offs) recoveries		(601	)		(361	)		(1,556	)		(774	)		(336	)
Provision for loan losses		25			250			500			1,410			240

Balance at end of year	$	6,780		$	5,179		$	5,290		$	6,346		$	5,710

Total loans receivable	$	299,877		$	214,006		$	229,947		$	259,700		$	214,217

Average loans outstanding	$	256,792		$	215,632		$	243,243		$	242,868		$	178,496

Allowance for loan losses as a percent of total loans receivable (2)		2.26	%		2.33	%		2.30	%		2.44	%		2.67	%

Net loans (charged off) recovered as a percent of average outstanding		(0.23	)%		(0.16	)%		(0.64	)%		(0.32	)%		(0.19	)%

(1)	Established as a result of Citizens acquisition in 1999 and the Eagle Bank acquisition in 2003.

(2)	Does not include loans held for sale or deferred fees.

Our evaluation of the loan portfolio includes the review of all loans on which the collection of principal might be at risk. We consider the following factors as part of this evaluation:

•

our historical loan loss experience;

•

estimated losses in the loan portfolio;

•

increases in categories with higher loss potential, such as commercial real estate loans;

•

credit scores and credit history;

•

the estimated value of the underlying collateral; and

•

current economic and market trends.

There may be other factors that may warrant our consideration in maintaining the allowance at a level sufficient to cover probable losses. Although we believe that we have established and maintained the allowance for loan losses at adequate levels, it may be necessary to increase the allowance if economic, real estate and other conditions differ substantially from the current operating environment.

In addition, the Office of Thrift Supervision (the “OTS”) as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS may require us to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on their judgments of information available to them at the time of their examination, thereby adversely affecting our results of operations.

For the year ended September 30, 2003, we expensed a $25,000 provision for loan losses based on our evaluation of the items discussed above. The recorded provision of $25,000 was less than net charge-offs because the majority of the 2003 net charge-offs represent losses associated with the Eagle portfolio and already considered in their acquired allowance for loan losses. Management believes to the best of its knowledge, the allowance for loan losses is sufficient to cover all known losses and inherent losses in the current loan portfolio at September 30, 2003. To determine the adequacy of the allowance, we look at historical trends in the growth and composition of our loan portfolio, among other factors. The most significant risk trends over the last five years are the growth of our commercial real estate loan portfolio, the growth of the nonconforming residential loan portfolio, and the nonperforming loans acquired in the Citizens and Eagle acquisitions. We believe that, despite using prudent underwriting standards, commercial real estate loans contain higher loss potential than one- to four-family residential mortgages.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-for the years ended September 30, 2003, 2002, and 2001 — Provision for Loan Losses.”

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans indicated.

	At September 30,
	2003						2002						2001
	Amount		Loan Balances by Category		Percent of loans in Each Category to Total Loans		Amount		Loan Balances by Category		Percent of loans in Each Category to Total Loans		Amount		Loan Balances by Category		Percent of loans in Each Category to Total Loans
	(Dollars in thousands)
Loan Category
One-to-four family residential real estate	$	1,185	$	133,305	44.5	%	$	1,017	$	100,471	46.9	%	$	1,841	$	129,223	56.2	%
Commercial real estate		2,920		111,189	37.1			2,394		68,016	31.8			1,656		61,225	26.6
Consumer loans and other(1)		592		19,673	6.5			620		19,970	9.3			382		23,537	10.2
Commercial		1,147		21,634	7.2			506		16,587	7.8			359		6,819	3.0
Real estate construction		258		14,076	4.7			377		8,962	4.2			263		9,143	4.0
Unallocated		678		—	—			265		—	—			789		—	—

Total allowance for loan losses	$	6,780	$	299,877	100.0	%	$	5,179	$	214,006	100.0	%	$	5,290	$	229,947	100.0	%

	At September 30,
	2000						1999
	Amount		Loan Balances by Category		Percent of loans in Each Category to Total Loans		Amount		Loan Balances by Category		Percent of loans in Each Category to Total Loans
	(Dollars in thousands)
Loan Category
One-to-four family residential real estate	$	1,228	$	152,822	58.9	%	$	1,529	$	132,036	61.6	%
Commercial real estate		1,487		60,838	23.4			1,448		46,545	21.7
Consumer loans and other(1)		2,345		29,915	11.5			2,154		24,353	11.4
Commercial		623		8,987	3.5			376		3,245	1.5
Real estate construction		236		7,138	2.7			119		8,038	3.8
Unallocated		427		—	—			84		—	—

Total allowance for loan losses	$	6,346	$	259,700	100.0	%	$	5,710	$	214,217	100.0	%

(1)	Includes home equity lines of credit, excludes loans held for sale.

Investment Activities

The Board of Directors reviews and approves our investment policy on an annual basis. The President and Chief Financial Officer, as authorized by the Board, implement this policy based on the established guidelines within the written investment policy, and other established guidelines, including those set periodically by the Asset Liability Management Committee.

The primary goal of our investment policy is to invest funds in assets with varying maturities which will result in the best possible yield while maintaining the safety of the principal invested and assisting in managing interest rate risk. We also seek to use our strong capital position to maximize our net income through investment in higher yielding mortgage related securities funded by borrowings. The investment portfolio is also viewed as a source of liquidity. The broad objectives of our investment portfolio management are to:

•

Minimize the risk of loss of principal or interest;

•

Generate a favorable return without incurring undue interest rate and credit risk;

•

Manage the interest rate sensitivity of our assets and liabilities;

•

Meet daily, cyclical and long term liquidity requirements while complying with our established policies and regulatory liquidity requirements;

•

Diversify assets in stable economic regions and address specific gap imbalances; and

•

Provide collateral for pledging requirements.

In determining our investment strategies, we consider our interest rate sensitivity, yield, credit risk factors, maturity and amortization schedules, asset prepayment risks, collateral value and other characteristics of the securities to be held.

Our investment policies and procedures also encompass evaluating and monitoring our Freddie Mac common stock investment.

Liquidity

We calculate liquidity by taking the total of:

•

our cash;

•

cash we have in other banks;

•

unpledged U.S. Government or Government Agency Securities; and

•

unpledged mortgage-backed securities guaranteed by the U.S. Government or Agencies or rated AAA.

We utilize borrowing lines of credit supported by available collateral, including Freddie Mac common stock, which provides a high level of liquidity. We consider our Freddie Mac common stock a collateral source of last resort due to the adverse income tax consequences of losing the dividends received deduction. We borrow funds from the Federal Home Loan Bank based on eligible collateral of loans and securities up to a limit of 30% of assets. Our maximum borrowing capacity from the Federal Home Loan Bank is approximately $306.5 million, of which $267.1 million of borrowings were outstanding at September 30, 2003. We utilize Federal Home Loan Bank advances, reverse repurchase agreements and other borrowings to fund the purchase of higher yielding investment securities in order to increase our net income and return on equity.

Investment Portfolio

General. Federally chartered thrifts have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed securities, certain certificates of deposit of insured financial institutions, repurchase agreements, overnight and short term loans to other banks, corporate debt instruments, and Fannie Mae and Freddie Mac equity securities. Our investments primarily fall into two major categories:

•

equity investments; and

•

collateralized mortgage obligations and mortgage-backed securities.

Securities can be classified as trading, held to maturity, or available for sale at the date of purchase. All of our securities are currently classified as “available for sale.” The weighted average annualized yield of our non-equity portfolio was 3.24% as of September 30, 2003. We believe the credit quality of the portfolio is high, with 98% of the portfolio, excluding equity investments, invested in U.S. Government, U.S. Government Agency, or U.S. Government Agency-guaranteed mortgage-backed securities or mortgage related securities with a rating of AA or better as of September 30, 2003. All securities rated below AA have been sold or have matured subsequent to September 30, 2003. For information see “Management Discussion and Analysis—Carrying Values, Yields and Maturities.”

Investment Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated.

	At September 30,
	2003				2002				2001				2000				1999
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
	(Dollars in thousands)
Investment Securities:
U.S. Government agencies	$	12,981	$	12,892	$	—	$	—	$	—	$	—	$	14,449	$	12,880	$	31,388	$	29,950
Other debt securities		8,633		8,737		12,175		12,059		—		—		1,000		1,002		1,951		1,980

Total investment securities		21,614		21,629		12,175		12,059		—		—		15,449		13,882		33,339		31,930

Mortgage-backed and mortgage-related securities:
Ginnie Mae		14,532		14,919		24,189		24,714		20,081		20,230		85,700		82,172		81,651		77,919
Fannie Mae		89,365		90,408		31,103		31,590		16,518		16,620		52,832		50,783		64,839		62,536
Freddie Mac		13,378		13,267		6,744		6,732		—		—		25,043		24,355		24,357		23,785

Total mortgage-backed and mortgage- related securities		117,275		118,594		62,036		63,036		36,599		36,850		163,575		157,310		170,847		164,240

Collateralized mortgage obligations:
Fannie Mae		136,101		133,520		126,788		126,353		74,091		73,619		78,831		77,777		61,621		60,528
Freddie Mac		86,818		86,068		239,570		239,179		140,128		139,677		70,513		69,369		60,493		59,464
Non-agency		56,441		56,250		25,181		25,238		72,417		71,430		67,198		59,946		74,288		68,950
Ginnie Mae		—		—		2,139		2,134		5,081		5,037		3,518		3,306		3,504		3,316

Total collateralized mortgage obligations		279,360		275,838		393,678		392,904		291,717		289,763		220,060		210,398		199,906		192,258

Total mortgage-backed securities and collateralized mortgage obligations		396,635		394,432		455,714		455,940		328,316		326,613		383,635		367,708		370,753		356,498

Total investment and mortgage securities	$	418,249	$	416,061	$	467,889	$	467,999	$	328,316	$	326,613	$	399,084	$	381,590	$	404,092	$	388,428

Freddie Mac common stock and other equity securities	$	6,285	$	242,904	$	6,317	$	260,215	$	6,365	$	302,623	$	6,316	$	251,661	$	6,409	$	242,336

Total investment and mortgage securities and Freddie Mac common stock	$	424,534	$	658,965	$	474,206	$	728,214	$	334,681	$	629,236	$	405,400	$	633,251	$	410,501	$	630.764

The following table sets forth the composition of the mortgage securities portfolio at the dates indicated and whether such investments have fixed or adjustable interest rates.

	At September 30, 2003							At September 30, 2002
	Amortized Costs		Market Value		Unrealized Gain/(Loss)			Amortized Costs		Market Value		Unrealized Gain/(Loss)
	(Dollars in thousands)
Fixed rate corporate debt	$	1,631	$	1,737	$	106		$	1,140	$	1,198	$	58
Fixed rate agency notes/bonds		12,981		12,892		(89	)		—		—		—
Total fixed rate mortgage-backed and mortgage-related securities		77,611		79,222		1,611			39,939		40,980		1,041
Total fixed rate collateralized mortgage obligations		106,303		103,124		(3,179	)		113,950		114,842		892

Total fixed rate investment and mortgage securities		198,526		196,975		(1,551	)		155,029		157,020		1,991
Variable rate corporate		7,002		7,000		(2	)		11,035		10,861		(175	)
Variable rate mortgage-backed and mortgage-related securities		39,663		39,371		(292	)		22,097		22,056		(40	)
Variable rate collateralized mortgage obligations		173,058		172,715		(343	)		279,728		278,062		(1,666	)

Total variable rate investment and mortgage securities		219,723		219,086		(637	)		312,860		310,979		(1,881	)
Freddie Mac common stock and other equity securities		6,285		242,904		236,619			6,317		260,215		253,898

Total investment and mortgage securities and Freddie Mac common stock	$	424,534	$	658,965	$	234,431		$	474,206	$	728,214	$	254,008

Investment Portfolio Maturities. The composition and maturities of the investment securities portfolio (debt securities) and the mortgage-backed securities portfolio at September 30, 2003 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or redemptions that may occur.

	One Year or Less				More than One Year through Five Years				More than Five Years through Ten Years				More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost			Weighted Average Yield		Amortized Cost		Market Value		Weighted Average Yield
	(Dollars in thousands)
Investment securities available for sale:
U. S. Government agencies	$	—	—		$	8,885	2.98	%	$	4,096	3.15	%	$	—		—		$	12,981	$	12,892	3.07	%
Corporate debt		7,506	3.26	%		—	—			—	—			1,127	*	5.45	%		8,633		8,737	4.37	%

Total investment securities		7,506	3.26	%		8,885	2.98	%		4,096	3.15	%		1,127	*	5.45	%	$	21,614		21,629	3.24	%
Mortgage-backed securities available for sale:
Ginnie Mae		—	—			23	6.33	%		—	—			14,509		5.61	%		14,532		14,919	5.61	%
Fannie Mae		—	—			—	—			7,456	4.70	%		81,909		5.05	%		89,365		90,408	5.02	%
Freddie Mac		—	—			—	—			—	—			13,378		2.06	%		13,378		13,266	2.06	%

Total mortgage-backed securities		—	—			23	6.33	%		7,456	4.70	%		109,796		4.76	%		117,275		118,593	4.76	%
Collateralized mortgage obligations:
Fannie Mae		—	—			—	—			—	—			136,101		2.77	%		136,101		133,520	2.77	%
Freddie Mac		—	—			—	—			—	—			86,818		2.50	%		86,818		86,068	2.50	%
Non-agency		—	—			—	—			—	—			56,441		2.32	%		56,441		56,251	2.32	%

Total collateralized mortgage obligations		—	—			—	—			—	—			279,360		2.60	%		279,360		275,839	2.59	%

Total	$	7,506	3.26	%	$	8,908	2.99	%	$	11,552	4.15	%	$	390,283		3.21	%	$	418,249	$	416,061	3.24	%

*	Has a put option in approximately two years.

Equity Securities. As of September 30, 2003, equity securities were primarily comprised of 4,640,000 shares of Freddie Mac common stock which had a per share market value of $52.35 per share, a total market value of $242.9 million and a cost basis of approximately $1.35 per share. The large unrealized pre-tax gain of approximately $236.6 million is the result of a series of well-timed investments in Freddie Mac common stock in the middle to late 1980’s. As a result of strong fundamental growth at Freddie Mac and a favorable stock market environment, our Freddie Mac common stock investment has appreciated significantly, constituting approximately 24.3% of our total assets. The unrealized gain in Freddie Mac common stock has substantially strengthened our capital and earnings. The after-tax unrealized gain in Freddie Mac common stock constitutes 63.1% of our equity capital, making it the largest segment of our equity position. Dividends on Freddie Mac common stock have also significantly increased our dividend and interest income.

Charter Financial’s Freddie Mac common stock is held by different companies within the Charter group as follows:

CharterBank		2,555,000 shares
Charter Financial		1,685,000 shares
Charter Insurance		400,000 shares

Total		4,640,000 shares

In addition, the owner of 80% of Charter Financial’s common stock, First Charter, MHC, owns 400,000 shares of Freddie Mac common stock.

We believe that our ownership of Freddie Mac common stock continues to present attractive appreciation and dividend growth potential. Since the sale of Freddie Mac common stock would result in the realization of a substantial current tax liability for us, we have no current plans to liquidate our Freddie Mac common stock investment. In 2003, we implemented a pilot program of writing covered calls of Freddie Mac common stock with 250,000 shares of stock. If a call option is in the money as the maturity of the call approaches, we evaluate the economics of allowing the call to be exercised or buying the call to prevent its exercise. During September, 2003, we sold 15,000 shares of Freddie Mac common stock and subsequent to September 30, 2003, we have sold 9,500 shares of Freddie Mac common stock. We continually evaluate our investment in Freddie Mac common stock considering the appreciation and dividend potential of the Freddie Mac common stock, the income tax impact of a strategy, alternative investments or uses of sales proceeds and the portion of our capital that the after-tax unrealized gain represents.

Mortgage Related Securities. Our mortgage-backed security portfolio is composed of collateralized mortgage obligations and mortgage-backed securities. Collateralized mortgage obligations and mortgage-backed securities consist of various types of securities issued by the major secondary market issuers including Ginnie Mae, Fannie Mae and Freddie Mac, as well as a variety of private issuers. The portfolio includes securities with a wide variety of structures including variable rate and fixed rate securities, including many hybrid securities with balloon terms.

Mortgage-backed securities generally yield less than the loans that underlie these securities because of the cost of payment guarantees or credit enhancements that reduce credit risk. However, mortgage-backed securities are more liquid than individual mortgage loans and may be used as collateral for our borrowings. In general, mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae or private issuers that rate AA or better are weighted at not more than 20% for risk-based capital purposes, compared to 50% risk weighting assigned to most nonsecuritized residential mortgage loans.

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, they remain subject to the risk of a fluctuating interest rate environment. Along with other factors, such as the geographic distribution of the underlying mortgage loans, changes in interest rates may alter the prepayment rate of those mortgage loans and affect both prepayment rates and the value of mortgage-backed securities. Prepayments impact the rate of amortization of premiums and accretion of discounts and thus impact the yield on our securities. The table below shows the premiums, discounts and projected weighted average lives for our mortgage-backed securities and collateralized mortgage obligations.

	At September 30, 2003
	Par		Premium		Discount		Amortized Cost		Average Life in Yrs.	Average Interest Yield

MBS - fixed rate	$	77,885,357	$	277,852	$	552,003	$	77,611,206	7.26	5.41	%

MBS - variable rate		38,894,189		768,732		—		39,662,921	3.01	2.88

CMO - fixed rate		106,309,574		273,691		280,133		106,303,132	7.31	3.28

CMO - variable rate		173,101,784		211,196		255,346		173,057,634	10.12	2.18

Total	$	396,190,904	$	1,531,471	$	1,087,482	$	396,634,893

While mortgage related securities have average lives as stated in the accompanying tables, average lives may be significantly shorter based on interest rates and underlying loan prepayments. Based on interest rates and market prepayment assumptions as of September 30, 2003, the estimated average life of our fixed rate mortgage-backed security portfolio was 7.26 years and of our fixed rate collateralized mortgage obligation portfolio was 7.31 years. If prepayment rates are higher than estimated, then our earnings will be negatively affected by the increased amortization of premiums. A portion of the fixed rate mortgage-backed securities are backed by multifamily loans that have prepayment penalties or yield maintenance agreements and thus are not as likely to prepay due to changes in interest rates.

As discussed above, we have sought to utilize our strong equity position to enhance our earnings and return on equity by using Federal Home Loan Bank advances, reverse repurchase agreements and other borrowings to fund the purchase of higher yielding investment securities. Historically our mortgage-backed securities portfolio has been effective in leveraging our strong

capital and increasing net earnings levels. We will continue to purchase collateralized mortgage obligations and mortgage-backed securities and other securities in the future with the same general objectives.

Mortgage-Backed Securities and Mortgage-Related Securities. The following table discloses the amortized cost and fair value of our mortgage-backed and mortgage-related securities, all of which are classified as available for sale as of the dates indicated. Since 1994, all mortgage-backed and mortgage-related securities have been classified as available for sale.

	At September 30,
	2003						2002						2001
	Amortized Cost		Percent of Total		Fair Value		Amortized Cost		Percent of Total		Fair Value		Amortized Cost		Percent of Total		Fair Value
	(Dollars in thousands)
Mortgage-backed securities available for sale:
Ginnie Mae	$	14,532	3.66	%	$	14,919	$	24,189	5.31	%	$	24,714	$	20,081	6.12	%	$	20,230
Fannie Mae		89,365	22.53			90,408		31,103	6.83			31,590		16,518	5.03			16,620
Freddie Mac		13,378	3.37			13,267		6,744	1.48			6,732		—	—			—

Collateralized mortgage obligations available for sale:
Fannie Mae		136,101	34.32			133,520		126,788	27.82			126,353		74,091	22.57			73,619
Freddie Mac		86,818	21.89			86,068		239,570	52.57			239,179		140,128	42.68			139,677
Other		56,441	14.23			56,250		25,181	5.52			25,238		72,417	22.06			71,430
Ginnie Mae		—	—			—		2,139	.47			2,134		5,081	1.54			5,037

Total	$	396,635	100.00	%	$	394,432	$	455,714	100.00	%	$	455,940	$	328,316	100.00	%	$	326,613


	At September 30,
	2000						1999
	Amortized Cost		Percent of Total		Fair Value		Amortized Cost		Percent of Total		Fair Value
	(Dollars in thousands)
Mortgage-backed securities available for sale:
Ginnie Mae	$	85,700	22.33	%	$	82,171	$	81,651	22.01	%	$	77,919
Fannie Mae		52,832	13.77			50,783		64,839	17.49			62,536
Freddie Mac		25,043	6.53			24,355		24,357	6.57			23,785
Collateralized mortgage obligations available for sale:
Fannie Mae		78,831	20.55			77,778		61,621	16.62			60,528
Freddie Mac		70,513	18.38			69,369		60,493	16.32			59,464
Other		67,198	17.52			59,946		74,288	20.04			68,950
Ginnie Mae.		3,518	0.92			3,306		3,504	0.95			3,316

Total	$	383,635	100.00	%	$	367,708	$	370,753	100.00	%	$	356,498

Federal Home Loan Bank Stock. Every federally insured financial institution that borrows funds from a Federal Home Loan Bank as a source of liquidity is required to invest in the stock of that Federal Home Loan Bank. The institution’s investment in Federal Home Loan Bank stock, along with other assets of the institution, is then pledged as collateral for the advances. As of September 30, 2003, we owned approximately $13.6 million of stock in the Federal Home Loan Bank of Atlanta.

Sources of Funds

Deposits (both retail and wholesale), borrowings, securities sold under agreements to repurchase, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investments securities and funds provided by operations are our primary sources of funds for use in lending, investing and for other general purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Deposits. At September 30, 2003, our total deposits amounted to $279.4 million, of which $229.6 million were retail deposits, $42.2 million were funds on deposit from credit unions, and $7.6 million were brokered deposits. At September 30, 2002, our retail deposits totaled $173.0 million, or 82.1% of total deposits, and our wholesale deposits totaled $37.7 million, or 17.9% of total deposits. Wholesale deposits consist of funds on deposit from credit unions and brokered deposits.

Retail Deposits. We offer a variety of deposit products to meet the needs of retail and business customers. We currently offer non-interest bearing demand accounts, interest bearing demand accounts (NOWs), savings passbook and statement accounts, money market accounts and certificates of deposits. Deposit products are developed to meet the needs of our targeted markets and products are changed as necessary to meet customer needs and marketing objectives.

Our deposit flows are influenced by a number of factors including:

•

general and local economic conditions;

•

the perceived strength of the stock and stock mutual fund market;

•

prevailing interest rates; and

•

competition.

Our retail deposits are primarily obtained from areas surrounding our offices. To attract and retain deposits, our primary strategy is to provide a superior customer experience and convenience. We determine our deposit rates by evaluating our competition’s pricing, the cost of Federal Home Loan Bank borrowings, rates on U.S. Treasury securities, the LIBOR swap curve and other related funds.

As of September 30, 2003, core deposits or demand deposits, NOW deposits, savings, and money market accounts represented 43.3% of total retail deposits and 35.6% of total deposits.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Analysis of Net Interest Income” for information relating to the average balances and costs of our deposit accounts for the years ended September 30, 2003, 2002, and 2001. We expect that our retail core deposit base will continue to expand to reflect the planned expansion of our retail branch network and that our transaction accounts will increase as a result of our increased marketing efforts related to such accounts within our targeted market area.

Wholesale Deposits. Our wholesale deposits consist of brokered deposits and/or funds on deposit from credit unions. CharterBank obtains credit union deposits by placing rates on a rate service. CharterBank pays to advertise its rates with the third party. Credit unions with an interest in depositing funds with CharterBank contact CharterBank directly. This past year, CharterBank solicited brokered certificates of deposit with terms of two years or less to increase liquidity. CharterBank obtained brokered deposits through major securities brokers. A deposit broker is broadly defined as any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions. The fees paid in connection with the brokered deposits are amortized over the life of the deposit and are included in interest expense. Legal title to these brokered deposits is held in street name. These certificates of deposit are actively traded based on prevailing interest rates; ownership changes hands on a daily basis and they are held by a broker in “street name.” At September 30, 2003, we had $7.6 million in brokered deposits. We had no brokered deposits as of September 30, 2002 and 2001.

At September 30, 2003, our credit union certificates of deposit and brokered deposits totaled $49.7 million, or 17.8% of total deposits. At September 30, 2002, our credit union certificates of deposit totaled $37.7 million, or 17.9% of total deposits.

Deposit Distribution Weighted Average. The following table sets forth the distribution of our deposit accounts, by account type, at the dates indicated.

	At September 30,
	2003						2002						2001
	Amount		Percent		Weighted Average Rates		Amount		Percent		Weighted Average Rates		Amount		Percent		Weighted Average Rates
	(Dollars in thousands)
Retail:
Non-certificated accounts:
Noninterest bearing-demand deposits (1)	$	22,418	8.02	%	—	%	$	7,853	3.73	%	—	%	$	9,497	4.74	%	—	%
NOW deposits		30,630	10.96		0.53			26,384	12.52		1.10			15,465	7.72		1.25
Savings deposits		15,419	5.53		0.30			9,132	4.33		0.75			10,313	5.15		1.50
Money market deposits		31,079	11.12		1.14			26,110	12.39		1.72			18,817	9.39		2.26

Total non-certificated accounts		99,546	35.63		0.57			69,479	32.97		1.08			54,092	27.00		1.45

Certificates of deposit:
One year or less		90,783	32.49		2.40			75,665	35.91		3.15			86,071	42.96		5.06
Over 1 year through 3 years		23,886	8.56		4.72			18,272	8.67		4.73			17,788	8.88		5.61
Over 3 years		15,434	5.52		4.38			9,662	4.58		5.03			6,031	3.01		6.29

Total retail certificates of deposit		130,103	46.57		2.68			103,599	49.16		3.61			109,890	54.85		5.09

Total retail deposits		229,649	82.20		1.83			173,078	82.13		2.62			163,982	81.85		4.14

Wholesale:
Certificates of deposit
One year or less		38,731	13.86		2.11			33,700	15.99		3.28			33,298	16.62		5.71
Over 1 year through 3 years		11,006	3.94		2.78			3,968	1.88		3.83			3,075	1.53		5.60

Total wholesale:		49,737	17.80		2.26			37,668	17.87		3.34			36,373	18.15		5.70

Total certificates of deposit		179,840	64.37		2.56			141,267	67.03		3.53			146,263	73.00		5.24

Total deposit accounts	$	279,386	100.00	%	1.96	%	$	210,746	100.00	%	2.61	%	$	200,355	100.00	%	4.21	%

(1)	Excludes mortgagors’ escrow payments.

Deposit Flow. The following table summarizes the deposit activity of the Bank for the periods indicated. The increase in 2003 is mainly attributable to the approximately $60.7 million in deposits acquired in the Eagle acquisition.

	For the Years Ended September 30,
	2003			2002			2001
	(Dollars in thousands)
Balance at beginning of period	$	210,746		$	200,355		$	274,371
Net increase (decrease) before interest credited, wholesale		12,073			1,296			(93,516	)
Net increase (decrease) before interest credited, retail		52,335			4,696			11,547
Interest credited		4,232			4,399			7,953

Balance at end of period	$	279,386		$	210,746		$	200,355

Total increase (decrease) in deposit accounts	$	68,640		$	10,391		$	(74,016	)

Percentage increase (decrease)		32.57	%		5.19	%		(26.98	)%

The balances of our wholesale deposits are more volatile than retail deposits. As wholesale deposits mature, these deposits are less likely to remain with CharterBank, as compared to the relatively stable balances of our core retail deposit base. While we expect our retail deposit base to increase in the next several years, the maturities of our wholesale deposits may outpace the growth of our retail deposit base. Accordingly, we plan to either utilize borrowed funds or retain our wholesale certificates of deposit to fund loans.

C.D. Maturities. At September 30, 2003, we had $64.1 million in certificates of deposits with balances of $100,000 and greater maturing as follows:

Maturity Period	Amount		Weighted Average Rate
	(Dollars in thousands)
Retail:
Three months or less	$	12,459	2.73	%
Over three months through six months		12,387	2.64
Over six months through 12 months		9,682	2.62
Over 12 months		15,181	5.02

Total		49,709	3.39

Wholesale:
Three months or less		1,600	2.41
Over three months through six months		6,866	1.39
Over six months through 12 months		4,150	2.22
Over 12 months		1,800	2.74

Total		14,416	2.26

Total	$	64,125	3.13	%

C.D. Balances by Rates. The following table sets forth, by interest rate ranges, information concerning our certificates of deposit at the dates indicated.

	At September 30, 2003
	Period to Maturity
	Less than One Year		One to Two Years		Two to Three Years		More than Three Years		Total		Percent of Total
	(Dollars in thousands)
Retail:
2.00% and below	$	55,596	$	2,020	$	500	$	391	$	58,507	44.97	%
2.01% to 3.00%		16,449		2,573		2,188		1,572		22,782	17.51
3.01% to 4.00%		6,470		2,267		259		2,602		11,598	8.92
4.01% to 5.00%		3,504		1,071		1,042		4,507		10,124	7.78
5.01% to 6.00%		2,988		600		932		6,346		10,866	8.35
6.01% and above		7,018		7,486		1,722		—		16,226	12.47

Total	$	92,025	$	16,017	$	6,643	$	15,418	$	130,103	100.00	%

Wholesale:
2.00% and below	$	22,573	$	1,782	$	—	$	—	$	24,355	48.97	%
2.01% to 3.00		12,580		6,747		—		—		19,327	38.86
3.01% to 4.00%		2,487		495		99		—		3,081	6.19
4.01% to 5.00%		99		1,289		—		—		1,388	2.79
5.01% to 6.00%		595		—		—		—		595	1.20
6.01% to 7.00%		694		297		—		—		991	1.99

Total	$	39,028	$	10,610	$	99	$	—	$	49,737	100.00	%

Borrowings. In addition to deposits, borrowings from the Federal Home Loan Bank and securities sold under agreements to repurchase provide an additional source of funds to finance our lending and investing activities. At September 30, 2003, our total borrowings were $388.4 million, as compared to $411.0 million at September 30, 2002. Our utilization of borrowings has generally contributed to our profitability and we will continue to employ borrowings as a source of funds. At the same time, we will consider whether to undertake future borrowings as a source of funds only after a review of numerous relevant factors including:

•

the potential interest spread and risks involved;

•

analysis of the current and anticipated interest rate environment;

•

the current and expected levels of our deposit base;

•

various other risk factors associated with using borrowings as a source of funds; and

•

the return and risk characteristics of the asset to be acquired or retained.

Federal Home Loan Bank Advances. At September 30, 2003, our outstanding FHLB advances totaled $267.1 million, as compared to $274.0 million at September 30, 2002. At September 30, 2003, CharterBank had pledged, under a specific collateral lien with the Federal Home Loan Bank of Atlanta:

•

all stock of the Federal Home Loan Bank of Atlanta held by CharterBank;

•

certain qualifying first mortgage loans with unpaid principal balances totaling $104.0 million; and

•

certain mortgage-backed securities, collateralized mortgage obligations, and investment securities with an aggregate fair value of $205.7 million.

At September 30, 2003, CharterBank has available lines of credit commitments with the FHLB totaling $306.5 million, of which $267.1 million was advanced and $39.4 million was available.

Securities Sold Under Agreements to Repurchase. We had approximately $121.3 million of securities sold under agreements to repurchase outstanding at September 30, 2003, as compared to $137.0 million at September 30, 2002. At September 30, 2003 our securities sold under agreements to repurchase are secured by certain mortgage-backed securities, collateralized mortgage obligations, and investment securities with an aggregate fair market value, including accrued interest of $150.7 million, as compared to $155.8 million at September 30, 2002. All securities sold under the agreements to repurchase are under our control. The repurchase agreements at September 30, 2003 and 2002 have maturities of less than 45 days and provide for the purchase of identical securities and specify delivery of the underlying securities to an approved custodian.

The following table sets forth information concerning balances and interest rates on the Bank’s Federal Home Loan Bank advances and securities sold under agreement to repurchase at the dates and for the years indicated.

	At and for the Year Ended September 30,
	2003			2002			2001
	(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding	$	264,293		$	260,253		$	239,497
Maximum amount outstanding at any month-end during the year		292,250			287,300			254,000
Balance outstanding at end of the year		267,100			274,000			211,750
Weighted average interest rate during the year		4.34	%		4.86	%		5.97	%
Weighted average interest rate at end of year		3.99	%		4.53	%		5.61	%

Securities sold under agreements to repurchase:
Average balance outstanding	$	108,498		$	107,076		$	117,600
Maximum amount outstanding at any month-end during the year		133,608			158,727			157,963
Balance outstanding at end of the year		121,341			136,963			97,674
Weighted average interest rate during the year		1.58	%		2.21	%		5.62	%
Weighted average interest rate at end of year		1.26	%		2.06	%		3.25	%

The following table sets forth additional information on the maturities, interest rates, and balances of FHLB advances at the dates and for the years indicated.

	2003						2002
Due	Amount		Interest rates		Weighted average rate		Amount		Interest rates		Weighted average rate
Less than one year	$	140,100,000	1.30-5.34	%	2.40	%	$	93,250,000	1.87-6.49	%	2.77	%
One to two years		—	—		—			53,750,000	4.53-5.34		4.73
Two to three years		—	—		—			—	—		—
Thereafter		127,000,000	5.40-6.22		5.75			127,000,000	5.40-6.22		5.75

	$	267,100,000			3.99	%	$	274,000,000			4.53	%

Current and Planned Sources of Funds. As discussed above, we expect to continue to rely on a combination of both retail and wholesale deposits to fund our operations. We seek to grow the retail component of our funding structure, while reducing our dependence on wholesale funds as a source of funds. We believe that at the present time the Auburn-Opelika market, where we currently have four branches, offers a larger, higher growth market, than our other market areas. We are hopeful that our planned branch expansion within our targeted market area and ATMs will enhance our ability to attract retail deposits.

While we will reduce our reliance on wholesale fundings in the long term, the maturities of our wholesale fundings will most likely outpace the growth of our retail deposit base over the next several years. Thus, wholesale fundings, possibly including brokered deposits, credit union deposits and borrowings, will continue to remain a significant source of funds for CharterBank in the near term. In addition to deposits and borrowings, our other significant sources of funds include liquidity, loan repayments, maturing investments and retained earnings.

Investment in Limited Partnerships

In 1997, CharterBank purchased interests in two limited partnerships, for $7.0 million, which were formed to acquire mortgage servicing rights. CharterBank was allocated approximately 12% and 21% of the respective earnings or losses of these two partnerships. During 1998, CharterBank wrote off its entire limited partnership investment of $2.0 million in the partnership for which it had a previous 12% interest. During 2003, CharterBank wrote off the remainder of its limited partnership investment of $5.0 million in the partnership for which it had a previous 21% interest. For the year ended September 30, 2003, CharterBank recognized $106,746 equity in the net losses of the limited partnership, and $564,164 and $1,200,488 for the years ended September 30, 2002 and 2001, respectively. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of our limited partnership interest.

Personnel

As of September 30, 2003, CharterBank had 188 full-time equivalent employees. The employees are not represented by a collective bargaining unit, and we consider our relationship with our employees to be excellent.

FEDERAL AND STATE TAXATION

Federal

General. For federal income tax purposes, we report income on the basis of a taxable year ending September 30, using the accrual method of accounting, and we are generally subject to federal income taxation in the same manner as other corporations. Since reorganization, CharterBank and Charter Financial constitute an affiliated group of corporations and, therefore, are eligible to report their income on a consolidated basis. However, Charter Financial and CharterBank file separate federal and state income tax returns. CharterBank and Charter Financial are not currently under audit by the IRS and has not been audited for the past five years. The last federal audit of CharterBank’s federal tax return was related to the fiscal year ended September 30, 1991.

Distributions. To the extent that CharterBank makes “non-dividend distributions” to Charter Financial, such distributions will be considered to result in distributions from unrecaptured tax bad debt reserve as of December 31, 1987 (“base year reserve”), to the extent thereof and then from supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in income. Non-dividend distributions include distributions in excess of current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. Dividends paid out of current or accumulated earnings and profits will not be included in income.

The amount of additional income created from a non-dividend distribution is equal to the lesser of the base year reserve and supplemental reserve for losses on loans or an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, in some situations, approximately one and one-half times the non-dividend distribution would be includible in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate.

Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”), imposes a tax on alternative minimum taxable income at a rate of 20%. Only 90% of alternative minimum taxable income can be offset by alternative minimum tax net operating loss carryovers of which we currently have none. Alternative minimum taxable income is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. We have been subject to a tax on alternative minimum taxable income during the past five years.

Elimination of Dividends. Charter Financial may exclude from its income 100% of dividends received from CharterBank as a member of the same affiliated group of corporations.

State

CharterBank currently files and will continue to file Georgia and Alabama income tax returns. Generally, the income of financial institutions in Georgia and Alabama, which is calculated based on federal taxable income, subject to certain adjustments, is subject to both Alabama and Georgia tax. We are not currently under audit with respect to our Georgia or Alabama income tax returns and our state tax returns have not been audited for the past five years.

Charter Financial will be required to file a Georgia income tax return and will generally be subject to a state income tax rate that is the same tax rate as the tax rate for financial institutions in Georgia.

REGULATION OF CHARTERBANK AND CHARTER FINANCIAL

General

Charter Financial and First Charter, MHC are regulated as savings and loan holding companies by the OTS. CharterBank, as a federal stock savings bank, is subject to regulation, examination and supervision by the OTS. CharterBank must file reports with the OTS concerning its activities and financial condition. Charter Financial and First Charter, MHC are also required to file reports with, and otherwise comply with the rules and regulations of the OTS. Charter Financial is also required to file reports with, and otherwise comply with, the rules and regulations of the SEC under the federal securities laws.

Gramm-Leach-Bliley Act

On November 12, 1999, President Clinton signed into law landmark financial services legislation, titled the Gramm-Leach-Bliley Act (“GLB Act”). The GLB Act repeals depression-era laws restricting affiliations among banks, securities firms, insurance companies and other financial services providers. The impact of the GLB Act on Charter Financial, First Charter, MHC, and CharterBank where relevant, is discussed throughout the regulation section below.

Any change in such laws and regulations, whether by the OTS, the FDIC, or through legislation, could have a material adverse impact on Charter Financial and CharterBank and their operations and stockholders.

Federal Banking Regulation

Activity Powers. CharterBank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OTS. Under these laws and regulations, CharterBank may invest in mortgage loans secured by residential and commercial real estate; commercial and consumer loans; certain types of debt securities; and certain other assets. CharterBank may also establish service corporations that may engage in activities not otherwise permissible for CharterBank, including certain real estate equity investments and securities and insurance brokerage. CharterBank’s authority to invest in certain types of loans or other investments is limited by federal law.

Loans-to-One-Borrower Limitations. CharterBank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, CharterBank’s total loans or extensions of credit to a single borrower cannot exceed 15% of CharterBank’s unimpaired capital and surplus which does not include accumulated other comprehensive income. CharterBank may lend additional amounts up to 10% of its unimpaired capital and surplus, if the loans or extensions of credit are fully-secured by readily-marketable collateral. CharterBank currently complies with applicable loans-to-one-borrower limitations.

QTL Test. Under federal law, CharterBank must comply with the qualified thrift lender, or “QTL” test. Under the QTL test, CharterBank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” means, in general, CharterBank’s total assets less the sum of:

•

specified liquid assets up to 20% of total assets;

•

goodwill and other intangible assets; and

•

the value of property used to conduct CharterBank’s business.

CharterBank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. CharterBank met the QTL test at September 30, 2003, and in each of the prior 12 months, and, therefore, qualifies as a thrift lender. For purposes of calculating compliance with the QTL test, we use the cost basis of our investment in our Freddie Mac common stock, rather than the current market value of the stock.

If CharterBank fails the QTL test it must either operate under certain restrictions on its activities or convert to a bank charter.

Capital Requirements. OTS regulations require CharterBank to meet three minimum capital standards:

(1)

a tangible capital ratio requirement of 1.5% of total assets, as adjusted under the OTS regulations;

(2)

a leverage ratio requirement of 3% of core capital to such adjusted total assets, if a savings association has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Ratings System; and

(3)

a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-weighted assets.

The minimum leverage capital ratio for any other depository institution that does not have a composite rating of 1 will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining compliance with the risk-based capital requirement, CharterBank must compute its risk-weighted assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks that the OTS believes are inherent in the type of asset.

Tangible capital is defined, generally, as common stockholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative and other perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses, as defined. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in tier 2 capital. The allowance for loan and lease losses, as defined, is includable in tier 2 capital to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital.

At September 30, 2003, CharterBank met each of its capital requirements. See footnote 20 in the accompanying consolidated financial statements.

All the Federal banking agencies, including OTS, must revise their risk-based capital requirements to ensure that such requirements account for interest rate risk, concentration of credit risk and the risks of non-traditional activities, and that they reflect the actual performance of and expected loss on multi-family loans.

On May 10, 2002, the OTS adopted an amendment to its capital regulations which eliminated the interest rate risk component of the risk-based capital requirement.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, CharterBank has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for CharterBank nor does it limit its discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of CharterBank, to assess CharterBank’s record of meeting the credit needs of its community and to take the record into account in its evaluation of certain applications by CharterBank. The CRA also requires all institutions to make public disclosure of their CRA ratings. CharterBank received a “Satisfactory” CRA rating in its most recent examination.

CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the system focuses on three tests:

•

a lending test, to evaluate the institution’s record of making loans in its assessment areas;

•

an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

•

a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.

Transactions with Related Parties. CharterBank’s authority to engage in transactions with its “affiliates” is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). In general, these transactions must be on terms which are as favorable to CharterBank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of CharterBank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from CharterBank. In addition, the OTS regulations prohibit a savings association from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.

Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A and 23B of the FRA and replaced these interpretations with Regulation W. In addition, Regulation W expands the definition of what constitutes an affiliate subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B.

Under Regulation W, all transactions entered into on or before December 12, 2002, which either became subject to Sections 23A and 23B solely because of Regulation W, and all transactions covered by Sections 23A and 23B, the treatment of which changed solely because of Regulation W, became subject to Regulation W on July 1, 2003. All other covered affiliate transactions became subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W. We do not expect that the changes made by Regulation W will have a material adverse effect on our business.

CharterBank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of CharterBank’s capital. The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions of credit in excess of certain limits must be approved by CharterBank’s Board of Directors.

Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the FRA.

Enforcement. The OTS has primary enforcement responsibility over savings associations, including CharterBank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

Standards For Safety And Soundness. Under federal law, the OTS has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing corrective

actions and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Limitation on Capital Distributions. The OTS imposes various restrictions or requirements on CharterBank’s ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution. CharterBank must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to CharterBank’s net income for that year plus CharterBank’s retained net income for the previous two years.

The OTS may disapprove of a notice or application if:

•

CharterBank would be undercapitalized following the distribution;

•

the proposed capital distribution raises safety and soundness concerns; or

•

the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

Liquidity. CharterBank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Prompt Corrective Action Regulations. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of the following four categories based on the association’s capital:

•

well-capitalized;

•

adequately capitalized;

•

undercapitalized; and

•

critically undercapitalized.

At September 30, 2003, CharterBank met the criteria for being considered “well-capitalized.”

When appropriate, the OTS can require corrective action by a savings association holding company under the “prompt corrective action” provisions of federal law.

Insurance of Deposit Accounts. CharterBank is a member of the Savings Association Insurance Fund, and CharterBank pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund, which primarily insures the deposits of banks and state chartered savings banks.

Under federal law, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution’s financial information as of its most recent quarterly financial report filed with the applicable bank regulatory agency prior to commencement of the assessment period. An institution’s assessment rate depends on the capital category and supervisory sub-category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%.

In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payment on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017.

Federal Home Loan Bank System. CharterBank is a member of the Federal Home Loan Bank (the “FHLB”) of Atlanta, which is one of the regional FHLBs making up the FHLB System. Pursuant to regulations promulgated by the Federal Housing Finance Board, as required by Gramm-Leach, the FHLB of Atlanta has adopted a capital plan, which is expected to be implemented no earlier than December 2003, that will change the foregoing minimum stock ownership requirements for Atlanta stock. Under the new capital plan, each member of the FHLB of Atlanta will have to maintain a minimum investment in FHLB of Atlanta stock in an amount estimated to be the sum of (i) an amount (up to a maximum of $25 million) equal to approximately 0.25% of the member’s total assets and (ii) 4.5% of the member’s outstanding advances, plus 4.5% of the outstanding assets purchased from the member and held by the FHLB under master commitments, plus 8% of any Affordable Multi-Family Participation Program loans purchase from the member. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance.

FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, CharterBank’s net interest income would be affected.

Prohibitions Against Tying Arrangements. Federal savings banks are subject to the prohibitions of 12 U.S.C. § 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Reserve System

Under regulations of the Federal Reserve Board (the “FRB”), CharterBank is required to maintain noninterest-earning reserves against its transaction accounts. FRB regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $42.1 million or less, subject to adjustment by FRB, and an initial reserve of $6.0 million plus 3%, subject to adjustment by FRB of 10%, against that portion of total transaction accounts in excess of $42.1 million. The first $6.0 million of otherwise reservable balances, subject to adjustments by FRB, are exempted from the reserve requirements. CharterBank is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest-bearing account at a Federal Reserve bank or a pass-through account as defined by FRB, the effect of this reserve requirement is to reduce CharterBank’s interest-earning assets, to the extent the requirement exceeds vault cash.

Holding Company Regulation

Charter Financial and First Charter, MHC are savings and loan holding companies regulated by the OTS. As such, Charter Financial and First Charter, MHC are registered with and are subject to OTS examination and supervision, as well as certain reporting requirements. In addition, the OTS has enforcement authority over Charter Financial and First Charter, MHC and any of their non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve System.

Restrictions Applicable to Charter Financial. Because Charter Financial was organized after May 4, 1999, under the GLB Act, it is prohibited from engaging in non-financial activities. Unitary savings and loan associations acquired before this date are “grandfathered” under the GLB Act and generally have no restrictions on their business activities. Charter Financial’s activities, however, will be restricted to:

•

furnishing or performing management services for a savings institution subsidiary of such holding company;

•

conducting an insurance agency or escrow business;

•

holding, managing, or liquidating assets owned or acquired from a savings institution subsidiary of such company;

•

holding or managing properties used or occupied by a savings institution subsidiary of such company;

•

acting as trustee under a deed of trust;

•

any other activity (a) that the FRB, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956 (“BHC”), unless the Director of the OTS, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (b) in which multiple savings and loan holding companies were authorized by regulation to directly engage on March 5, 1987;

•

purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the Director of the OTS; and

•

any activity permissible for financial holding companies under section 4(k) of the BHC.

Permissible activities which are deemed to be financial in nature or incidental thereto under section 4(k) of the Banking Holding Company Act include:

•

lending, exchanging, transferring, investing for others or safeguarding money or securities;

•

insurance activities or providing and issuing annuities, and acting as principal, agent or broker;

•

financial, investment or economic advisory services;

•

issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;

•

underwriting, dealing in, or making a market in securities;

•

activities previously determined by the FRB to be closely related to banking;

•

activities that bank holding companies are permitted to engage in outside of the U.S.;

•

merchant banking activities; and

•

portfolio investments made by an insurance company.

In addition, Charter Financial cannot be acquired or acquire a company unless the acquirer is engaged solely in financial activities.

Restrictions Applicable to Activities of Mutual Holding Companies. Under federal law, a mutual holding company may engage only in the following activities:

•

investing in the stock of a savings institution;

•

acquiring a mutual association through the merger of such association into a savings institution subsidiary of such holding company or an interim savings institution subsidiary of such holding company;

•

merging with or acquiring another holding company, one of whose subsidiaries is a savings institution;

•

investing in a corporation the capital stock of which is available for purchase by a savings institution under federal law or under the law of any state where the subsidiary savings institution or association is located; and

•

the permissible activities described above for non-grandfathered savings and loan holding companies.

If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed above, and it has a period of two years to cease any non conforming activities and divest any non-conforming investments.

Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including Charter Financial and First Charter, MHC, directly or indirectly, from acquiring:

•

control (as defined under HOLA) of another savings institution (or a holding company parent) without prior OTS approval;

•

through merger, consolidation, or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior OTS approval; or

•

control of any depository institution not insured by the FDIC (except through a merger with and into the holding company’s savings institution subsidiary that is approved by the OTS).

A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its subsidiary institution is located, except:

•

in the case of certain emergency acquisitions approved by the FDIC;

•

if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or

•

if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association.

If the savings institution subsidiary of a federal mutual holding company fails to meet the QTL test set forth in Section 10(m) of the HOLA and regulations of the OTS, the holding company must register with the FRB as a bank holding company under the BHC Act within one year of the savings institution’s failure to so qualify.

The Sarbanes-Oxley Act

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoing that occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act’s principal legislation includes:

•

the creation of an independent accounting oversight board;

•

auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;

•

additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;

•

the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

•

an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors.

•

requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;

•

requirement that companies disclose whether at least one member of the committee is a “financial expert” (as such term will be defined by the Securities and Exchange Commission) and if not, why not;

•

expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;

•

a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;

•

disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;

•

mandatory disclosure by analysts of potential conflicts of interest; and

•

a range of enhanced penalties for fraud and other violations.

Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.

USA Patriot Act

In response to the events of September 11^th, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, and increased amendments to the Bank Secrecy Act. Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

•

Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program.

•

Pursuant to Section 326, on May 9, 2003 the Secretary of the Department of Treasury, in conjunction with other bank regulators, issued Joint Final Rules that provide for minimum standards with respect to customer identification and verification. These rules became effective on October 1, 2003.

•

Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.

•

Effective December 26, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.

•

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

Federal Securities Law

Our common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act.

ITEM 2.

PROPERTIES

We currently conduct our business through eight full-service banking offices and four loan production offices. As of September 30, 2003, the properties and leasehold improvements owned by us had an aggregate net book value of $9.4 million.

Location	Ownership	Year Opened	Year of Lease or License Expiration(1)	Deposits as of September 30, 2003
				(In thousands)
Administrative/Main Office:
600 Third Avenue West Point, Georgia	Owned	1965	—	$	104,222

Branch Offices:
300 Church Street LaGrange, Georgia	Owned	1976	—		33,893

3500 20^th Avenue(2) Valley, Alabama	Leased	1963	7/31/08		53,342

91 River Road(2) Valley, Alabama	Owned	1989	—		12,056

1605 East University Drive Auburn, Alabama	Owned	2001	—	19,001

2320 Moore’s Mill Road (3) Auburn, Alabama	Owned	2002	—	6,033

114 South 7^th Street (3) Opelika, Alabama	Owned	1995	—	14,549

3702 Pepperell Parkway (3) Opelika, Alabama	Owned	1988	—	36,290

Loan Production Offices:

2959 Highway 154, Bld. C, Suite D Newnan, Georgia	Leased	1993	3/1/05

1212 7^th Avenue, Suite B and C Phenix City, Alabama	Leased	2001	2/15/04

27 North Mt. Pleasant Avenue Monroeville, Alabama	Leased	2000	Month-to Month

217 Osborne Street St. Mary’s, Georgia	Leased	2003	4/30/04

Brokerage Office:

307 Church Street, Suite A LaGrange, Georgia	Leased	2002	12/31/03

(1)	Lease expiration dates assume all options to extend lease terms are exercised.

(2)	Includes time period operated by Citizens National Bank prior to the Citizens acquisition.

(3)	Includes time period operated by Eagle Bank prior to the Eagle Bancshares acquisition,

ITEM 3. LEGAL PROCEEDINGS

We are not involved in and none of our property is the subject of any pending legal proceeding other than ordinary routine legal proceedings incidental to our business. We believe that these routine legal proceedings, in the aggregate, are immaterial to our consolidated financial condition and results of operations.

PART II

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Nasdaq National Market System for the Nasdaq Stock Market under the symbol “CHFN.” First Charter, MHC owns 15,857,924 shares, or 80% of our outstanding common stock. At September 30, 2003, there were 19,569,676 shares of common stock issued and outstanding, and there were approximately 275 holders of record. The price range for our common stock for the period from October 1, 2002 to September 30, 2003, based on daily closing prices, and the amounts of dividends we paid during that period, are set forth in the following table.

Period	High		Low		Dividend

October 16, 2001- December 31, 2001	$	18.30	$	14.25

January 1, 2002- March 31, 2002	$	25.10	$	17.95

April 1, 2002- June 30, 2002	$	31.65	$	24.18	$0.10 per share

July 1, 2002- September 30, 2002	$	30.06	$	23.96	$0.10 per share

October 1, 2002- December 31, 2002	$	31.23	$	26.20	$0.10 per share

January 1, 2003- March 31, 2003	$	31.42	$	29.59	$0.10 per share

April 1, 2003- June 30, 2003	$	32.12	$	26.08	$0.20 per share

July 1, 2003- September 30, 2003	$	31.65	$	28.76	$0.20 per share

The stock price information set forth above has been provided by Bloomberg. High, low, and closing prices and daily trading volumes are reported in most major newspapers.

During the years ended September 30, 2002 and September 30, 2003, we have paid quarterly dividends in the amounts set forth in the table above. The payment of future dividends

will be subject to determination by our board of directors, which will take into account, among other factors, our financial condition, results of operations, tax considerations, industry standards, economic conditions and regulatory restrictions that affect the payment of dividends by CharterBank to Charter Financial. We cannot guarantee that we will not reduce or eliminate dividends in the future.

When Charter Financial pays dividends to its stockholders, it is required to pay dividends to First Charter, MHC, unless First Charter, MHC elects to waive dividends. To date, First Charter, MHC has waived dividends paid by Charter Financial. Any decision to waive dividends will be subject to regulatory approval.

Charter Financial is not subject to Office of Thrift Supervision regulatory restrictions on the payment of dividends. Our ability to pay dividends in the future depends on cash at Charter Financial and income at Charter Financial, including premiums on covered calls and exercises of covered calls on Freddie Mac common stock. It also depends on the amount of funds available from CharterBank, which CharterBank must provide the Office of Thrift Supervision with 30 days notice of its intention to make a capital distribution to Charter Financial. Office of Thrift Supervision regulations may also limit, in certain circumstances, CharterBank’s ability to make capital distributions. CharterBank made a dividend distribution to Charter Financial in September, 2003 of $2.5 million, which was approved by the Office of Thrift Supervision.

ITEM 6.

SELECTED FINANCIAL DATA

The summary information presented below at September 30 and for each of the years presented is derived in part from the consolidated financial statements of Charter Financial. The following information is only a summary, and you should read it in conjunction with our consolidated financial statements and notes beginning on page F-1.

	At September 30,
	2003		2002		2001		2000		1999
	(In thousands)
Selected Financial Data: (1)
Total assets	$	1,000,495	$	982,563	$	894,920	$	920,962	$	883,686
Loans receivable, net(2)		292,553		208,654		224,591		253,467		208,456
Investment and mortgage securities available for sale(3)		416,061		467,999		326,614		381,590		388,704
Freddie Mac common stock & other equity securities		242,904		260,215		302,623		251,661		242,336
Retail deposits		229,649		173,078		163,982		144,482		153,731
Total deposits		279,386		210,746		200,355		274,371		282,965
Deferred income taxes		88,196		96,040		112,379		92,120		88,869
Total borrowings		388,441		410,963		309,424		352,219		312,867
Total retained earnings		59,190		58,225		56,058		51,029		50,157
Accumulated other comprehensive income(4)		143,941		155,961		180,858		139,900		135,241
Total equity		230,359		249,166		236,916		190,929		185,398
Allowance for loan losses		6,780		5,179		5,290		6,346		5,710
Non-performing assets		5,808		3,683		2,746		3,461		2,211

	For the Years Ended September 30,
	2003		2002		2001		2000		1999
	(In thousands)
Selected Operating Data: (1)
Interest and dividend income	$	34,335	$	37,740	$	48,071	$	53,949	$	36,741
Interest expense		18,805		21,845		31,645		36,647		23,341

Net interest income		15,530		15,895		16,426		17,302		13,400
Provision for loan losses		25		250		500		1,410		240

Net interest and dividend income after provision for loan losses		15,505		15,645		15,926		15,892		13,160

Total noninterest income		5,733		1,939		1,652		1,949		38,749
Total noninterest expenses		18,064		14,200		11,416		15,943		10,749

Income before provision for income taxes		3,174		3,384		6,162		1,898		41,160

Income tax expense		83		484		1,406		1,260		14,333

Net income	$	3,091	$	2,900	$	4,756	$	638	$	26,827

Basic earnings per share	$	0.16	$	0.15		—		—		—
Fully diluted earnings per share	$	0.16	$	0.15		—		—		—
Dividends declared per share	$	0.60	$	0.20		—		—		—

(1)	Reflects assets and liabilities transferred in reorganization on October 16, 2001 and income and expenses related thereto.

(2)	Loans are shown net of deferred loan (fees) costs and allowance for loan losses and exclude loans held for sale.

(3)	Includes all CharterBank investment and mortgage securities available for sale excluding Freddie Mac common stock.

(4)	Consists of unrealized holding gains and losses on Freddie Mac common stock, investments, mortgage-backed securities and collateralized mortgage obligations classified as available for sale, net of income taxes.

	At or for the Years Ended September 30,
	2003		2002		2001		2000		1999
Selected Financial Ratios and Other Data(5):

Performance:
Return on realized assets(6)	0.43	%	0.43	%	0.76	%	0.09	%	5.41	%
Return on average assets	0.32		0.29		0.52		0.07		3.46
Comprehensive return on average assets(7)	(0.91	)	(2.17	)	4.98		0.59		0.32
Return on realized equity(6)	3.53		3.11		8.61		1.18		68.01
Return on average equity	1.26		1.06		2.08		0.38		12.70
Comprehensive return on average equity(8)	(3.64	)	(7.06	)	19.98		3.13		1.19
Average equity to average assets	25.07		30.68		24.92		18.90		27.25
Equity to total assets at end of period	23.02		25.36		26.47		20.73		20.98
Average interest rate spread(9)	0.49		0.10		(0.34	)	0.37		(0.42	)
Net interest margin(9)(10)	1.62		1.67		1.83		1.99		1.75
Average interest-earning assets to average interest-bearing liabilities	1.57	x	1.69	x	1.61	x	1.38	x	1.71	x
Total noninterest expense to average assets	1.85	%	1.40	%	1.24	%	1.78	%	1.39	%
Efficiency ratio(11)	88.73		76.14		63.15		82.27		54.33

Regulatory Capital Ratios:
Tangible capital	8.78		10.16		9.44		7.49		7.02
Core capital	8.78		10.16		9.44		7.49		7.02
Risk-based capital	27.23		32.67		29.94		26.45		36.66

Asset Quality Ratios:
Non-performing loans as a percent of total loans	1.71		1.41		1.01		1.09		0.93
Non-performing assets as a percent of total assets	0.58		0.38		0.31		0.38		0.25
Allowance for loan losses as a percent of total loans	2.26		2.42		2.30		2.44		2.67
Allowance for loan losses as a ratio of non-performing loans	1.32	x	1.30	x	2.28	x	2.24	x	2.87	x

Number of:
Full-time equivalent employees	188		147		130		126		129

(5)	Asset quality ratios and regulatory capital ratios are end of period ratios.

(6)	Realized assets and equity exclude unrealized gains on available for sale securities. Please see the Ratio Analysis section in the Management’s Discussion and Analysis for further discussion.

(7)

Comprehensive return on average assets represents comprehensive income divided by average assets. We believe that this information is relevant because, in contrast to other financial institutions, a vast majority of Charter Financial’s comprehensive income is in the form of other comprehensive income instead of net income due to Charter Financial’s significant investment in Freddie Mac common stock. Please see the Ratio Analysis section in the Management’s Discussion and Analysis for further discussion.

(8)

Comprehensive return on average equity represents comprehensive income divided by average equity. We believe that this information is relevant because, in contrast to other financial institutions, a vast majority of Charter Financial’s comprehensive income is in the form of other comprehensive income instead of net income due to Charter Financial’s significant investment in Freddie Mac common stock. Please see the Ratio Analysis section in the Management’s Discussion and Analysis for further discussion.

(9)	The net interest spread and net interest margin are significantly impacted by the large balances of Freddie Mac common stock and the low dividend yield on that stock. Please see the net interest margin discussion in MD&A for a discussion of this impact.

(10)	Net interest margin represents net interest income including dividend income from Freddie Mac common stock as a percentage of average interest-earning assets including Freddie Mac common stock.

(11)	The efficiency ratio represents the ratio of operating expenses (excluding certain elements of charitable contributions which relate to appreciation of donated stock) divided by the sum of net interest income and noninterest income less gain on sales of investments.

ITEM 7.

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

General

Charter Financial Corporation is the mid-tier holding company and the sole shareholder of CharterBank. In October 2001, Charter Financial was formed in connection with the conversion of the Bank from mutual to stock form (“Conversion”). At that time, the Company issued 80% or 15,857,924 shares of its common stock to First Charter, MHC (“MHC”). The Conversion, the offering of stock to depositors, and the issuance of Company stock to the MHC are referred to collectively as the “Reorganization”. As a result of this reorganization, the Bank converted to a federally chartered savings bank and became a wholly-owned subsidiary of the Company, which is majority owned by the MHC, a federally chartered mutual holding company. Charter Financial’s common stock is traded on the NASDAQ National Market under the symbol “CHFN”. All references to Charter Financial prior to October 16, 2001, except where otherwise indicated, are to CharterBank.

Our principal business is attracting deposits from the general public and investing those funds primarily in real estate loans. We also own 4.6 million shares of Freddie Mac common stock with an after tax unrealized gain of $145.3 million. While our primary businesses are the collecting of deposits from the general public and investing those funds in real estate loans, we also make consumer, construction and commercial loans and invest in mortgage-related and investment securities.

The Company’s results of operations are primarily dependent on our net interest income, which is the difference between the interest and dividend income we earn on loans, mortgage related securities and investments, and the interest expense we pay on deposits and borrowings. Our net interest income is affected by economic, competitive and regulatory factors that influence interest rates, loan demand and deposit flows. In addition, we, like other savings institution holding companies, are subject to interest rate risk to the degree that our interest- earning assets mature, prepay or reprice at different times, or on a different basis, than our interest-bearing liabilities.

Our results of operations are also affected by, among other things, gains or losses on loans held for sale, fee income received, gains or losses on the sale of Freddie Mac common stock or other mortgage or investment securities, the establishment of provisions for losses on loans, the level of operating expenses and income taxes. Our operating expenses principally consist of employee compensation and benefits, occupancy expenses, federal deposit insurance premiums, marketing expenses and other general and administrative expenses.

The Company is significantly affected by prevailing economic conditions including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are affected by a number of factors including interest rates paid on competing personal investments, the level of personal income and the personal rate of savings within our market area. Lending activities are influenced by the demand for housing as well as competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, borrowings and funds provided from operations.

Effective February 2003, Charter Financial acquired all of the outstanding shares of EBA Bancshares, Inc., Opelika, Alabama, and its wholly-owned banking subsidiary, Eagle Bank of Alabama, for a purchase price of approximately $8.6 million cash. The acquisition added three branches in the growing Auburn-Opelika area of Alabama, home of Auburn University, with $55.3 million in loans and $60.7 million in retail deposits.

The table below shows quarterly operating results for the past eight quarters.

	2003									2002
	1^st qtr.		2^nd qtr.		3^rd qtr.		4^th qtr.			1^st qtr.		2^nd qtr.		3^rd qtr.			4^th qtr.
Interest and dividend income	$	8,583		8,384		8,545		8,824		$	9,540		8,847		9,381			9,971
Interest expense		5,021		4,712		4,594		4,479			5,716		5,318		5,352			5,459

Net interest and dividend income		3,562		3,672		3,951		4,345			3,824		3,529		4,029			4,512
Provision for loan losses		—		—		—		25			150		25		75			—
Net interest and dividend income after provision for loan losses		3,562		3,672		3,951		4,320			3,674		3,504		3,954			4,512

Noninterest income (loss)		1,140		1,088		1,426		2,078			1,232		1,039		(707	)		376
Noninterest expense		4,139		4,560		4,752		4,612			3,965		3,564		3,168			3,503

Income before provision for income taxes		563		200		624		1,786	*		941		979		79			1,385

Income tax expense (benefit)		64		36		80		(98	)**		209		180		(114	)		209

Net income	$	499	$	164	$	544	$	1,884		$	732	$	799	$	193		$	1,176

*	Reflects the sale of 15,000 shares of Freddie Mac common stock related to the covered call program resulting in a gain of approximately $773,000.

**	Reflects the interaction of the Freddie Mac common stock sale with the exclusion of the Freddie Mac common stock dividends from income taxes resulting in an income tax benefit for the quarter.

Critical Accounting Policies

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

These policies are described in Note 1 to the consolidated financial statements. Also please see “Asset Quality” on page 18 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 one of the most critical accounting policies 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) specific reserves; 2) general reserves for Classified/Watch loans; 3) general reserves for loans with satisfactory ratings; and 4) an unallocated amount. Risk ratings are initially assigned in accordance with CharterBank’s loan and collection policy. An organizationally independent department reviews risk 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 quantitative 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.

While management uses available information to recognize losses on loans, future additions or reductions to the allowance may be necessary based on changes in economic conditions or changes in accounting guidance on reserves. 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.

Management believes that the allowance for loan losses is adequate. The Company has 86.3% of its loan portfolio secured by real estate loans, with one-to-four family real estate comprising 44.5% of the total loan portfolio. Commercial real estate comprises 37.1% 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. Construction and development loans comprise 4.7% 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. 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’s largest individual funded loan exposure is a commercial real estate loan with a balance of $6.3 million at September 30, 2003. Our largest industry exposure is the hotel industry with approximately $22.0 million in loans which include $6.6 million committed but not yet advanced. Only 6.5% of the Company’s portfolio consists of consumer loans, while 7.2% consists of commercial non real estate loans.

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 that 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 common 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 September 30, 2003, the tax provision was based on a deduction of 70% of dividends received.

Management Strategy

In recent years, we have adopted a growth-oriented strategy focused on (1) expanding our retail banking operations, (2) managing our Freddie Mac common stock investment while periodically reviewing strategies to increase or realize its value for our shareholders, and (3) effectively managing our capital.

Expanding Retail Banking Operations. Our retail banking strategy is to operate as a well-capitalized community bank dedicated to providing quality products, excellent service, and a superior customer experience at competitive prices. We have sought to implement this strategy by concentrating on our core product offerings, including residential and commercial mortgage loans and a variety of checking and saving products, while at the same time broadening our product lines and services, expanding delivery systems for our customers, and filling in our branch network.

Our current market includes the I85 corridor from LaGrange, Georgia to Auburn, Alabama, including the economic communities of LaGrange, Georgia, Auburn-Opelika, Alabama

and the Valley area which includes West Point, Georgia and Lanett and Valley, Alabama. The Valley area is our historical home base. Based on data from the FDIC, as of June 30, 2003 we have 45% of the bank deposits in the Valley market, approximately 6% deposit market share in the Auburn-Opelika market and 7% deposit market share in the LaGrange market. None of our major competitors have branches in all three of these markets. We have 14% of the combined deposit market share which is the second largest market share of any bank in these markets. Our competitors in the top six of deposit market share each compete in only one of the three markets. There are a significant number of customers and potential customers that live in one of these markets and work in another. Auburn-Opelika, and to a lesser extent LaGrange, have stronger economies and more growth potential than the Valley market. We plan to upgrade at least one branch in Auburn-Opelika and open one new branch in LaGrange during the next year. We are focusing on increasing our market share in these markets before expanding geographically.

Historically we have focused on the consumer with one-to-four family mortgage loans and certificates of deposit. We are continuing our consumer focus with one-to-four family mortgages, consumer loans to credit-worthy borrowers, and a full menu of core deposit products. Our core deposits have increased to 43.3% of our total retail deposits. We are expanding our customer base to include credit worthy small businesses and commercial real estate loans.

We seek to:

•

Improve customer service and convenience as a means to compete for an increased share of our customers’ financial service business;

•

Expand our retail banking franchise and our market share by increasing the number of households and the share of wallet of current households served within our market area;

•

Continue to expand our market coverage by taking advantage of opportunities to build or acquire branches or acquire delivery systems within our target market;

•

Improve customer use of our existing alternative delivery channels, such as ATMs, Internet banking and telephone banking: and

•

Expand our offerings to businesses by focusing our commercial loan and deposit products and services as a means to increase the yield on our loan portfolio, to attract lower cost deposit accounts and increase non-interest income through related fees.

We train our employees in providing outstanding quality service to customers as well as in the technical aspects of their jobs.

A significant component of expanding our retail franchise is improving the communities we serve. The Charter Foundation plays a major role in implementing change in our markets. The Charter Foundation was created in 1994 and endowed by CharterBank’s members with an initial gift of $1 million of Freddie Mac common stock. Subsequent gifts from CharterBank plus proceeds from the Foundation’s investments have put the Foundation’s corpus at approximately $7 million. The annual grant budget, which is 5% of average assets, now totals approximately $400,000. This is $400,000 with which Charter Foundation can make gifts to improve the quality of life in areas served by CharterBank. In the last two years, Charter Foundation has incorporated a member-voting component into the grant program. In June and July of each year,

CharterBank’s customers in each market have an opportunity to vote for three $5,000 grants to be given in their community. This program began as an effort to more closely tie the Foundation and the Bank in the minds of customers and the general public. Since its inception in 1994, The Charter Foundation has awarded more than $2 million in grants in the communities served by CharterBank.

Another community development activity geared to expanding the retail franchise is the Honors Savings Club program. This program, currently available to students in all public high schools in Troup County, Georgia, and Chambers County, Alabama, pays students for making all A’s in a given semester. There is also a $500 bonus opportunity for the class Valedictorian, and a $500 bonus opportunity for any student who makes all A’s for all 4 years. To receive the award, each student must open an account at CharterBank, with one of the goals of the program being to cement a banking relationship with these students while they are young. Other goals are to reward academic excellence and to try to combat peer pressure that says it is not “cool” to be smart. Since its inception in 1996, more than $300,000 has been earned by students making all A’s. This program, while bearing the CharterBank name, is funded from First Charter, MHC so as not to adversely impact earnings at Charter Financial.

Managing Our Freddie Mac Common Stock Investment. We manage our Freddie Mac common stock in several ways. Over the past ten years our total annual return on Freddie Mac common stock has averaged 16.91%. Dividends on our Freddie Mac common stock are an important component of our shareholder value. Freddie Mac dividends exceed $0.20 per Charter Financial share, or over $1.00 per Charter Financial minority share. Seventy percent of the Freddie Mac dividends are excluded from Charter Financial’s taxable income through the corporate dividends received exclusion. The Freddie Mac dividend, when combined with the 70% corporate dividend exclusion and the recently enacted 15% personal tax rate reduction on dividends received by individuals, creates a tax efficient means for our stockholders to receive value from our Freddie Mac common stock investment. Also, the dividend waiver, where only the minority shareholders receive dividends, adds significant value to the minority shareholders. In 2003 we implemented a pilot program of selling covered calls on the Freddie Mac common stock as a means of enhancing the returns on this investment. We continue to review this investment in Freddie Mac common stock in light of existing conditions and what is in the best interests of our shareholders.

Managing our Capital. The third major component of our strategy is capital management. We increased our capital leverage with the additional retail assets and deposits acquired in the Eagle acquisition. While our current retail focus is increasing market share within our existing market, we regularly evaluate expanding our capital leverage by extending the market area through de novo branching or acquisitions. We maintained our wholesale leverage of mortgage securities and borrowings. Wholesale leverage generally enhances income, but not franchise value, and thus is a low priority capital management tool. During the third fiscal quarter of 2003 we increased our quarterly dividend from 10 cents to 20 cents per share. Our capacity to pay dividends is enhanced by First Charter, MHC’s willingness to waive receipt of its portion of the dividends. We continue to evaluate our dividend policy and the appropriateness of special dividends or share repurchases.

Management of Interest Rate Risk

As a financial institution, we face risk from interest rate volatility. Fluctuations in interest rates impact both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates also affect the market value of all interest-earning assets.

The primary goal of our interest rate risk management strategy is to maximize net interest income while maintaining an acceptable profile. We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, portfolio equity and net interest income remain within an acceptable range.

Our lending activities have emphasized one-to-four family and commercial mortgage loans. Our sources of funds include retail deposits, FHLB advances, repurchase agreements and wholesale deposits. Retail deposits consist primarily of certificates of deposit, which have shorter terms to maturity than the loan portfolio, and transaction accounts. We employ several strategies to manage the interest rate risk inherent in the asset/liability mix, including but not limited to:

•

Selling the 30 year mortgages we originate to the secondary market, generally on a servicing released basis;

•

Maintaining the diversity of our existing loan portfolio through the origination of commercial real estate and consumer loans which typically have variable rates and shorter terms than residential mortgages;

•

Emphasizing investments with adjustable interest rates;

•

Maintaining fixed rate borrowings from the FHLB; and

•

Increasing retail transaction deposits which typically have long durations.

The actual amount of time before loans are repaid can be significantly impacted by changes in market interest rates. Prepayment rates also vary due to a number of other factors, including the regional economy in the area where the loans were originated, seasonal factors, demographic variables, the assumability of the loans, related refinancing opportunities and competition. We monitor interest rate sensitivity so that we can attempt to adjust our asset and liability mix in a timely manner and thereby minimize the negative effects of changing rates.

Historically, we believed our high level of capital allowed us to support a high level of interest rate risk which enhanced our long term income at the cost of increased volatility in the income stream. During fiscal 2001, we reduced our interest risk profile by selling fixed rate mortgage securities and replacing variable rate borrowings with fixed rate borrowings. These actions moved the Company from being significantly liability sensitive, or having net income and net portfolio benefit from lower interest rates, to being modestly asset sensitive. During 2003, record levels of mortgage securities and loans were prepaid by borrowers in response to a decline in interest rates. Prepayments of fixed rate loans and securities eliminated the positive spread between these assets and the fixed rate borrowings. The combination of the fixed rate, long-term borrowings from 2001 which, in the current environment, are high rate borrowings compared to current rates, and the extension risk on recently acquired assets have increased our exposure to higher interest rates, as well as negatively affected our net interest income.

Net Interest Income Simulation. We use a simulation model to monitor interest rate risk. An analysis is performed on changes in net interest income assuming changes in interest rates, both up and down 100, 200 and 300 basis points from current rates over the one year time period following the current financial statement. However, with certain interest rates currently below 2.00%, decreases of 200 and 300 basis points in our simulation model do not provide meaningful information.

The table following sets forth, as of September 30, 2003, the estimated changes in net portfolio value that would result from changes in interest rates as indicated over the applicable twelve-month period.

Net Portfolio Value
Change In Rates	% Change		Post Shock Capital Ratio
+300 bp	(26.43	)%	23.05%
+200 bp	(19.22	)%	24.50%
+100 bp	(12.00	)%	25.74%
0 bp	0.00	%	27.85%
-100 bp	(0.13	)%	27.40%

The net portfolio value is the capital, the excess of assets over liabilities, after all assets and liabilities are marked to market. The net portfolio value decreases as interest rates increase because fixed rate loans and securities decline in value with the increase in rates. The net portfolio value also decreases as interest rates decrease because fixed rate loans and mortgage securities have a borrower option to prepay so the assets do not gain significantly in value as rates decline. Freddie Mac common stock is held at a constant value through the interest rate shocks. At September 30, 2003, fixed rate investment and mortgage securities comprised $198.5 million or 47.5% of our total portfolio of investment and mortgage securities of $418.2 million. The disparate result on net portfolio value of interest rate increases versus interest rate decreases is sometimes referred to as negative convexity and is the result of embedded options in mortgage securities, loans and borrowings. The post shock capital ratio is the post shock net portfolio value as a percent of total assets.

The effects of interest rates on net portfolio value and net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in the market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable rate mortgages, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset.

After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase. The following gap table summarizes the anticipated maturities or repricing of CharterBank’s interest-earning assets and interest-bearing liabilities as of September 30, 2003, based on the information and assumptions set forth in the notes that follow.

At September 30, 2003 (Dollars In thousands)	Within Three Months			Three to Twelve Months			More Than One Year to Three Years			More Than Three Years to Five Years			Over Five Years			Total
Interest-earning assets:
Loans (1) (2)	$	82,454		$	79,324		$	71,899		$	32,480		$	33,720		$	299,877
Mortgage related securities(2)		149,354			50,019			109,356			33,186			52,517			394,432
Investment securities(3)		7,017			504			—			8,885			5,223			21,629
Other securities		—			—			—			—			3,551			3,551

Interest-bearing deposits		1,249			—			—			—			—			1,249
Other interest-earning assets		801			—			—			—			13,610			14,411

Total interest-earning assets	$	240,875		$	129,847		$	181,255		$	74,551		$	108,621		$	735,149

Interest-bearing liabilities:

Certificates of deposit	$	40,339		$	90,523		$	39,800		$	14,738		$	—		$	185,400
Money market accounts (4)		4,237			20,731			9,419			—			—			34,387
NOW accounts (4)		47,864			—			4,430			1,476			1,477			55,247
Savings accounts (4)		—			—			9,252			3,084			3,083			15,419
Borrowed funds (5)		235,875			25,566			—			—			127,000			388,441

Total interest-bearing liabilities	$	328,315		$	136,820		$	62,901		$	19,298		$	131,560		$	678,894

Period gap	$	(87,440	)	$	(6,973	)	$	118,354		$	55,253		$	(22,939	)	$	56,255

Cumulative gap	$	(87,440	)	$	(94,413	)	$	23,941		$	79,194		$	56,255

Cumulative gap as a percentage of total assets		(11.9	)%		(12.8	)%		3.3	%		10.8	%		7.7	%

(1)

Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust, rather than in the period in which the loans are due, or in the period in which repayments are expected to occur prior to their next rate adjustment, and fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization. Both fixed and adjustable rate loans are adjusted to take into account estimated prepayments in assessing their interest rate sensitivity.

(2)	Reflects estimated prepayments in the current interest rate environment.

(3)	Based on contractual maturities and if applicable, call dates.

(4)

Although our money market accounts, NOW accounts and savings accounts are subject to immediate withdrawal, management considers a substantial amount of such accounts to be core deposits having significantly longer effective maturities. The decay rates used on these accounts are based on management’s estimates and should not be regarded as indicative of the actual withdrawals that may be experienced by us.

(5)	Conversion features are not assumed to be exercised.

The preceding table indicates that we have more liabilities repricing than assets in the next year, after which we have more assets that reprice than liabilities. This indicates that our net interest income should benefit from lower rates in the short term and higher rates in the longer term. The gap table should be used in conjunction with the portfolio equity analysis and net interest income simulation. Each method of analysis provides a different analysis of interest risk and at times each has strengths and weaknesses. The gap table uses loan repricings based on current interest rates and thus probably indicates earlier repricings than would actually occur if interest rates were higher.

Average Balance Sheet and Analysis of Net Interest Income. 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 approximately 76.8% at September 30, 2003. However, the dividend yield on the market value of the Freddie Mac common stock was 1.80%. The appreciation over time in the market value of the Freddie Mac common stock has created our strong accumulated other comprehensive income.

Overall, ratios have weakened for the year ended September 30, 2003, compared to the year ended September 30, 2002, due to the effects of falling interest rates on our wholesale investment strategy. During 2000 and 2001, we borrowed $127 million in long-term fixed rate FHLB advances which limited the decrease in the average cost of borrowings to 55 basis points from 2002 to 2003. However, the lower interest rate environment also increased loan prepayments and lowered the yield on mortgage-related investments by 93 basis points in 2003. The yield on loans receivable also decreased 134 basis points. The yield on Freddie Mac common stock increased from 1.32% to 1.80% based on increased dividends and a lower market value. The cost of deposits decreased 110 basis points from 3.49% in 2002 to 2.39% in 2003. The decrease in the cost of deposits is due to overall lower interest rates, a higher proportion of lower cost transaction accounts and a balance-tiered certificate of deposit pricing strategy implemented during 2002. The combination of these rate changes reduced the overall net interest margin by five basis points from 1.67% for the year ended September 30, 2002 to 1.62% for the year ended September 30, 2003. The increase in the yield on Freddie Mac common stock offset most of the impact of the yield on mortgage securities dropping far more than the cost of borrowings. The yield on mortgage securities dropped with lower interest rates and record levels of prepayments while our fixed rate borrowings that funded the mortgage securities remained in place.

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.

	At September 30, 2003
	Actual Balance		Yield/ Cost
Assets:
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	1,994	1.23	%
FHLB common stock		13,610	3.25	%
Mortgage-backed securities and collateralized mortgage obligations available for sale		394,432	3.63	%
Other investment securities available for sale		21,629	3.24	%
Loans receivable		299,877	6.07	%

Total interest-earning assets excluding Freddie Mac common stock		731,542	4.61	%
Freddie Mac common stock		242,904	1.99	%

Total interest-earning assets including Freddie Mac common stock		974,446	3.95	%
Total noninterest-earning assets		26,049	—

Total assets	$	1,000,495	3.85	%

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts	$	30,630	0.53	%
Savings accounts		15,419	0.30	%
Money market deposit accounts		31,079	1.14	%
Certificates of deposit accounts		179,840	2.86	%

Total interest-bearing deposits		256,968	2.22	%
Borrowed funds		388,441	3.14	%

Total interest-bearing liabilities		645,409	2.77	%
Noninterest-bearing deposits		22,418	—
Other noninterest-bearing liabilities		102,309	—

Total noninterest-bearing liabilities		124,727	—
Total liabilities		770,136	2.32	%
Total stockholders’ equity		230,359

Total liabilities and stockholders’ equity	$	1,000,495

	For the Years Ended September 30,
	2003							2002							2001
	Average Balance			Interest		Average Yield/ Cost		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	$	7,315		$	98	1.34	%	$	4,013		$	79	1.97	%	$	7,213		$	344	4.77	%
FHLB common stock and other equity securities		13,424			563	4.19			13,623			769	5.64			12,486			899	7.20
Mortgage-backed securities and collateralized mortgage obligations available for sale		405,937			11,883	2.93			400,525			15,473	3.86			328,648			21,150	6.44
Other investment securities available for sale		13,096			442	3.38			13,467			513	3.81			9,866			652	6.61
Loans receivable		256,792			16,694	6.50			215,632			16,903	7.84			243,243			21,442	8.82

Total interest-earning assets excluding Freddie Mac common stock		696,564			29,680	4.26			647,260			33,737	5.21			601,456			44,487	7.40
Freddie Mac common stock		259,242			4,655	1.80			302,149			4,003	1.32			297,834			3,584	1.20

Total interest-earning assets including Freddie Mac common stock		955,806			34,335	3.59			949,409			37,740	3.98			899,290			48,071	5.35
Total non-interest-earning assets		22,586			—	—			64,384			—	—			18,690			—	—

Total assets	$	978,392		$	34,335			$	1,013,793		$	37,740			$	917,980		$	48,071

Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts		27,010			194	0.72			18,006			176	0.98			14,512			249	1.72
Savings accounts		12,684			63	0.50			8,848			80	0.90			8,261			161	1.95
Money market deposit accounts		30,967			417	1.35			22,049			349	1.58			14,254			565	3.96
Certificates of deposit accounts		163,880			4,933	3.01			146,779			6,221	4.24			162,222			9,762	6.02

Total interest-bearing deposits		234,541			5,607	2.39			195,682			6,826	3.49			199,249			10,737	5.39
Borrowed funds		372,791			13,199	3.54			367,329			15,019	4.09			357,098			20,908	5.85

Total interest-bearing liabilities		607,332			18,806	3.10			563,011			21,845	3.88			556,347			31,645	5.69
Noninterest-bearing deposits		16,526			—	—			10,407			—	—			8,516			—	—
Other noninterest-bearing liabilities		109,259			—	—			129,005			—	—			124,365			—	—

Total noninterest-bearing liabilities		125,785			—	—			139,412			—	—			132,881			—	—

Total liabilities		733,117			18,806	2.57			702,423			21,845	3.11			689,228			31,645	4.59
Total stockholders’ equity		245,275			—				311,370			—				228,752			—

Total liabilities and stockholders’ equity	$	978,392		$	18,806			$	1,013,793		$	21,845			$	917,980		$	31,645

Net interest income, including Freddie Mac common stock				$	15,529						$	15,895						$	16,426

Net interest rate spread, including Freddie Mac common stock(1)						0.49	%						0.10	%						(0.34	%)
Net interest margin, including Freddie Mac common stock(2)						1.62	%						1.67	%						1.83	%
Ratio of interest-earning assets to average interest-bearing liabilities, including Freddie Mac common stock		157.38	%						168.63	%						161.64	%
Net interest income excluding Freddie Mac common stock dividends				$	10,874						$	11,892						$	12,842

Net interest rate spread excluding Freddie Mac common stock(3)						1.16	%						1.33	%						1.71	%
Net interest rate margin excluding Freddie Mac common stock (4)						1.56	%						1.84	%						2.14	%
Ratio of interest-earning assets to average interest-bearing liabilities, excluding Freddie Mac common stock		114.69	%						114.96	%						108.11	%

(footnotes on following page)

(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.

Rate/Volume Analysis. The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to:

(1)

interest income changes attributable to changes in volume (changes in volume multiplied by prior rate);

(2)

interest income changes attributable to changes in rate (changes in rate multiplied by prior volume); and,

(3)

the net change.

	Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Increase/(Decrease)												Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 Increase/(Decrease)
	Due to												Due to
	Volume			Rate			Combined			Net			Volume			Rate			Combined			Net
	(In thousands)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	65		$	(25	)	$	(21	)	$	19		$	(153	)	$	(204	)	$	92		$	(265	)
FHLB common stock and other equity securities		(9	)		(199	)		2			(206	)		79			(191	)		(17	)		(129	)
Mortgage-backed securities and collateralized mortgage obligations available for sale		209			(3,748	)		(51	)		(3,590	)		4,627			(8,454	)		(1,850	)		(5,677	)
Other investment securities available for sale		(14	)		(58	)		2			(71	)		238			(276	)		(101	)		(139	)
Loans receivable		3,226			(2,886	)		(550	)		(209	)		(2,434	)		(2,375	)		270			(4,539	)

Total interest-earning assets		3,477			(6,916	)		(618	)		(4,057	)		2,357			(11,500	)		(1,606	)		(10,749	)
Freddie Mac common stock		(569	)		1,423			(202	)		652			—			419			—			419

Total interest-earning assets and Freddie Mac common stock	$	254		$	(3,635	)	$	(24	)	$	(3,405	)	$	2,357		$	(11,081	)	$	(1,606	)	$	(10,330	)

Interest-bearing liabilities:
NOW accounts	$	88		$	(47	)	$	(23	)	$	18		$	60		$	(107	)	$	(26	)	$	(73	)
Savings accounts		35			(36	)		(16	)		(17	)		11			(86	)		(6	)		(81	)
Money market deposit accounts		141			(52	)		(21	)		68			309			(340	)		(185	)		(26	)
Certificates of deposit		725			(1,803	)		(210	)		(1,288	)		(929	)		(2,886	)		274			(3,541	)

Total interest-bearing deposits		989			(1,938	)		(270	)		(1,219	)		(549	)		(3,419	)		57			(3,911	)
Borrowed funds		223			(2,013	)		(30	)		(1,820	)		599			(6,307	)		(181	)		(5,889	)

Total interest-bearing liabilities	$	1,212		$	(3,951	)	$	(300	)	$	(3,039	)	$	50		$	(9,726	)	$	(124	)	$	(9,800	)

Change in net interest income including Freddie Mac common stock	$	2,265		$	(2,965	)	$	(318	)	$	(1,018	)	$	2,307		$	(1,355	)	$	(1,482	)	$	(530	)

Comparison of Financial Condition at September 30, 2003 and 2002

Our total assets increased $17.9 million, or 1.83%, to $1.0 billion at September 30, 2003 from September 30, 2002. The increase was primarily due to increases in loans receivable. Total loans increased $85.9 million, or 40.1%, to $299.9 million at September 30, 2003. The one-to-four family residential real estate portfolio increased by $32.8 million, or 32.6%, to $133.3 million at September 30, 2003. The one-to-four family loans acquired in the acquisition of Eagle Bank accounted for $15.2 million of this increase. The consumer and other loan portfolio decreased $200,000 or 1.0% from September 30, 2002 to $19.7 million at September 30, 2003. The decrease in the consumer portfolio was primarily the result of reductions in second mortgage loans due to refinancings, which more than offset $4.5 million of consumer loans acquired in the Eagle Bank acquisition. Commercial real estate and other commercial loans increased by $48.2 million during fiscal 2003, and real estate construction loans increased by $5.1 million during the year with our acquisition of Eagle Bank accounting for $32.0 million of the increase in commercial real estate loans and $3.6 million of the increase in construction loans.

Our mortgage-backed securities and collateralized mortgage obligations decreased from $455.9 million at September 30, 2002 to $394.4 million at September 30, 2003, a decrease of $61.5 million or 13.49%. The market value of Freddie Mac common stock decreased $17.3 million, or 6.65%, from $260.2 million at September 30, 2002 to $242.9 million at September 30, 2003.

Total deposits increased from $210.7 million at September 30, 2002 to $279.4 million at September 30, 2003. This increase is predominantly the result of the fact we acquired deposits of $62.1 million in the Eagle Bank acquisition.

For the foreseeable future, we intend to continue to rely on borrowings, especially Federal Home Loan Bank advances and repurchase agreements, to fund the securities portfolios and loans to the extent that loan growth exceeds deposit growth. The terms of new advances will be determined at the time of the advance 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 5.48% from $411.0 million at September 30, 2002 to $388.4 million at September 30, 2003.

The Company’s acquisition of Eagle Bank resulted in our recording $4.3 million of goodwill and $2.0 million of core deposit intangible. The core deposit intangible is 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 comprised of accumulated other comprehensive income. Stockholders’ equity decreased $18.8 million, or 7.55%, to $230.4 million at September 30, 2003.

Realized equity decreased by $6.8 million to $86.4 million at September 30, 2003 from $93.2 million at September 30, 2002, primarily due to the increase in treasury stock of $7.8 million. Treasury stock was acquired to fund 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 decreased by $12.0 million or 7.71%, to $143.9 million at September 30, 2003. As indicated in the tables below, other comprehensive loss for the year was $12.0 million compared to a loss of $24.9 million for the year ended September 30, 2002. The loss was primarily the result of the decrease in the price of Freddie Mac common stock, which fell by $3.55 per share, resulting in an after-tax decrease in our Freddie Mac common stock investment of $10.6 million. Other comprehensive income (loss) relating to mortgage securities and other investments decreased by $2.5 million to a loss of $1.4 million from income of $1.1 million for the year ended September 30, 2002.

	Year Ended September 30, 2003
	Shares	Market Price Per Share			Total Market Value		Unrealized Gain, Net of Tax
September 30, 2002	4,655,000	$	55.90		$	260,214,500	$	155,893,352
September 30, 2003	4,640,000		52.35			242,904,000		145,283,854

Change in Freddie Mac stock			(3.55	)				(10,609,498	)
Other comprehensive loss related to mortgage securities and other investments								(1,410,665	)

Total other comprehensive loss							$	(12,020,163	)


	Year Ended September 30, 2002
	Shares	Market Price Per Share			Total Market Value		Unrealized Gain, Net of Tax
September 30, 2001	4,655,000	$	65.00		$	302,575,000	$	181,902,699
September 30, 2002	4,655,000		55.90			260,214,500		155,893,352

Change in Freddie Mac stock			(9.10	)				(26,009,347	)
Other comprehensive income related to mortgage securities and other investments								1,112,500

Total other comprehensive loss							$	(24,896,847	)

Comparison of Operating Results for Years Ended September 30, 2003 and 2002

General

Net income of $3.1 million for the year ended September 30, 2003 represents a $200,000 increase from net income of $2.9 million for the year ended September 30, 2002. The $3.8

million increase in noninterest income was essentially offset by the $3.8 million increase in noninterest expense. Our income tax expense was down $400,000, which more than offset the decrease in our net interest income after the loan loss provision. Net interest income during the year ended September 30, 2003 decreased slightly due to lower interest rates which was partially offset by a $225,000 decrease in the provision for loan losses.

Ratio Analysis

We believe our return on equity can be measured in three ways. The first is the traditional return on total equity, or GAAP measure, which is net income divided by average total equity. The second is return on realized equity which is net income divided by realized equity (excluding unrealized gains on available for sale securities). The third is comprehensive return on equity which is comprehensive income divided by average total equity. We use all of these measures in evaluating our performance and setting goals.

	Year Ended September 30,
	2003		2002
Return on total equity	1.26	%	1.06	%

Return on realized equity	3.53		3.11
Comprehensive return on equity	(3.64	)	(7.06	)

Each of these measures has its strengths and weaknesses and is useful to investors by providing different perspectives. The return on total equity is the traditional measure. However, in our case the total equity measure shows a low result because it includes the unrealized gains on Freddie Mac stock and other available for sale securities in equity (the denominator) but does not reflect unrealized gains and losses on Freddie Mac common stock and other available for sale securities in net income (the numerator). The return on realized equity excludes unrealized gains on Freddie Mac common stock and other available for sale securities from both net income and equity and thus does not reflect a significant portion of the economic value in the Company, while it does include gains on Freddie Mac stock and other available for sale securities that are realized through the sale of stock. The comprehensive return on equity reflects the overall increase or decrease in value as reflected by the stock price of Freddie Mac common stock and other available for sale securities and management believes this is an accurate long-term measure that exhibits high levels of volatility in short time periods.

The return on assets measures as shown below similarly reflect the effects of including or not including the significant unrealized gains and losses on the Freddie Mac common stock and other available for sale securities.

	Year Ended September 30,
	2003		2002
Return on average total assets	0.32	%	0.29	%

Return on realized assets	0.43		0.43
Comprehensive return on assets	(0.91	)	(2.17	)

Interest Income

Total interest and dividend income, including Freddie Mac common stock, was $34.3 million for the year, a 9.02% decrease over interest and dividend income, including Freddie Mac common stock, of $37.7 million for the year ended September 30, 2002. Dividend income on Freddie Mac common stock increased by $652,000 to $4.7 million from $4.0 million due to the increase in quarterly dividends of Freddie Mac common stock from $0.22 per share to $0.26 per share. Total interest and dividend income, excluding Freddie Mac common stock, was $29.7 million for the year, an 11.87% decrease over interest and dividend income, excluding Freddie Mac common stock of $33.7 million for the year ended September 30, 2002. Interest on loans decreased $209,000, or 1.24%, to $16.7 million. The average balance of loans receivable increased $41.2 million to $256.8 million for the year ended September 30, 2003. Interest on investment debt securities available for sale decreased $71,000 to $442,000 for the year from $513,000 for the prior year.

Interest on mortgage-backed securities and collateralized mortgage obligations decreased by $3.6 million to $11.9 million for the year from $15.5 million a year earlier. The decrease was due to lower yields as the yields on both variable and fixed rate securities dropped with interest rates. The lower interest income due to lower interest rates was partially offset by increased volumes. The lower interest rates reduced yields by increasing amortization of premiums due to shorter projected average lives. Lower interest rates also meant that cash flow from investments was reinvested at lower rates. The yield on interest-earning assets excluding Freddie Mac common stock decreased 95 basis points. Total interest-earning assets excluding Freddie Mac common stock averaged $696.6 million for the year, up from $647.2 million in the comparable 2002 period, a 7.62% increase. The average yield on loans decreased 134 basis points to 6.50%, while the yield on mortgage-related securities decreased from 3.86% for 2002 to 2.93% in 2003, reflecting the declining interest rate environment during this time period.

Interest Expense

Total interest expense for the year was $18.8 million, a $3.0 million, or 13.91%, decrease from 2002. The decrease is attributable to a 78 basis point decrease in the average cost of interest-bearing liabilities which was partially offset by a $44.3 million increase in the average balance of interest-bearing liabilities from $563.0 million for the year ended September 30, 2002 to $607.3 million for the year ended September 30, 2003. The decrease in average cost was primarily due to the 55 basis point decrease in the cost of borrowed funds as compared to the year ended September 30, 2002 and a 110 basis point drop in the cost of deposits.

Interest expense on deposits decreased $1.2 million, or 17.65%, to $5.6 million for the year ended September 30, 2003 compared with $6.8 million for the prior year. The average balance of certificates of deposit increased $17.1 million to $163.9 million in 2003 from $146.8 million the prior year primarily as a result of the certificates of deposit we acquired in our acquisition of Eagle Bank, which was offset by decreases due to less aggressive retail CD rates being offered by CharterBank. Due to the declining interest rate environment during this period, an increased proportion of lower cost transaction deposit accounts, and a strategy of less aggressive rates paid for certificates of deposit, the average cost of interest-bearing deposits

decreased 110 basis points during 2003. Interest expense on certificate of deposit balances decreased $1.3 million during the year ended September 30, 2003 compared with the year ended September 30, 2002, as the average balance of these accounts increased $17.1 million and the cost decreased 123 basis points.

Interest expense on borrowed funds decreased $1.8 million as a result of the 55 basis point decrease in the average cost of borrowed funds which was partially offset by the $5.5 million increase in the average balance of borrowed funds. The decrease in the average cost was attributed to the declining interest rate environment.

Net Interest Income

Net interest income including Freddie Mac common stock dividends for the year ended September 30, 2003 decreased $366,000, or 2.30%, to $15.5 million. The net interest rate spread including Freddie Mac common stock increased 39 basis points to 0.49% for the year ended September 30, 2003 from 0.10% for the prior year. Traditional bank measures such as net interest rate spread and net interest rate margin will improve as the market value of the Freddie Mac common stock and/or mortgage securities and borrowings become a smaller portion of our earning assets. The average balance of the Freddie Mac common stock was $259.2 million for the year ended September 30, 2003 as compared to $302.1 million for the year ended September 30, 2002. The net interest margin, which is net interest income including dividends on Freddie Mac common stock divided by average total interest-earning assets, decreased five basis points to 1.62% for the year ended September 30, 2003.

Net interest income excluding the effects of Freddie Mac common stock decreased $1.0 million, or 8.40%, to $10.9 million for the year ended September 30, 2003, compared with $11.9 million for the year ended September 30, 2002. The net interest rate spread excluding effects of Freddie Mac common stock, the difference between the average yield on average total interest-earning assets and the average cost of average total interest-bearing liabilities, dropped by 17 basis points as the yield on interest-earning assets excluding Freddie Mac common stock decreased at a higher rate than the average cost of interest-bearing liabilities. The net interest margin, which is net interest income divided by average total interest-earning assets excluding Freddie Mac common stock, decreased 28 basis points.

Our net interest margin and net interest spread are low when compared to industry standards primarily due to two factors. First, under our wholesale investment strategy, our assets include a high proportion of securities with rates lower than those that would typically be earned on loans. Our liabilities include a high proportion of borrowings and wholesale deposits with higher costs than those typically paid on retail deposits. Each of these factors lowers our net interest margin and net interest spread. Our wholesale investment strategy has historically resulted in increases in net interest income and efficient use of our capital. Second, the dividend rate as compared to the market value of our Freddie Mac common stock is low. However, when compared to our cost basis in the investment, the dividend rate exceeds 74%.

Provision for Loan Losses and Asset Quality

For the year ended September 30, 2003, we recorded a $25,000 provision for loan losses, compared to $250,000 for the year ended September 30, 2002. Gross charge-offs totaled $1.0 million for the year ended September 30, 2003 as compared to the prior year total of $816,000. Of the gross charge-offs in 2003, $539,000 were loans that were acquired in the Eagle Bank acquisition. The lower provision in 2003 reflects that, while net charge-offs for the year ended September 30, 2003 were $602,000 compared to net charge-offs of $361,000 for the prior year, the acquisition of Eagle Bank added $2.2 million to the Company’s loan loss reserves. During the year ended September 30, 2003, CharterBank experienced an increase in nonperforming loans with the weakened economic conditions; however, the majority of nonperforming loans are residential real estate loans where the risk of loss is lower than on loans that are not secured by real estate. CharterBank’s reserve methodology requires reserves based on a percentage of the outstanding balance for each type of loan. The percentage is based on CharterBank’s estimate of losses inherent within that type of loan.

The allowance for loan losses as of September 30, 2003 was 2.26% of total loans compared with 2.42% of total loans at September 30, 2002. The allowance at September 30, 2003 was 1.32x of nonaccrual loans compared to 1.72x at September 30, 2002. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and its underlying collateral, the mix of loans within the portfolio, delinquency trends, economic conditions, current and prospective trends in real estate values, and other relevant factors.

The table below shows under-performing (loans 90 days or more delinquent that are still accruing interest) and non-performing assets:

	September 30, 2003			September 30, 2002
	(In thousands)
Underperforming loans	$	633		$	133

Total non-performing loans		5,124			3,013
Foreclosed real estate, net		684			670

Total non-performing assets		5,808			3,683

Non-performing loans to total loans		1.71	%		1.41	%
Non-performing assets to total assets		0.58	%		0.38	%

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.

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 one-to-four family residential loans and commercial real estate loans. The inherent risk with this type of lending is that a downturn in the economic environment may result in reduced capacity of borrowers to repay and/or depreciated property values. We believe we have 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, loss risk determined based on a loan grading system, 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. Management considers the current allowance for loan losses to be adequate, based on its analysis of the potential risk in the portfolio.

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. Doubtful, substandard and special mention loans are reserved at 50.0%, 15% and 5.0% respectively. These percentages for doubtful and substandard were reduced during 2003 from 60% and 17.5% based on historical losses on the Company’s real estate loans. These changes reduced required reserves by approximately $357,000. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our perception of the inherent losses in the type of loan. The conforming one-to-four family loans in the portfolio are reserved at lower percentages. Reserve percentages are based on each individual lending program and its loss history and underwriting characteristics including loan to value, credit score, debt coverage, collateral, and capacity to service debt.

Noninterest Income

Noninterest income increased 200% to $5.7 million for the year ended September 30, 2003 compared with $1.9 million in the prior year. We had $880,000 in net gains on the sale of mortgage and other investment securities, including a $773,000 gain on the sale of Freddie Mac common stock during the year ended September 30, 2003 compared with a loss of $816,000 in the prior year. Other factors included an increase of $915,000 in the gain on loans sold, an increase of $537,000 in fees on deposits and a $457,000 decrease in the equity loss in a mortgage servicing limited partnership. The increase in the gain on loans sold reflects the record levels of one-to-four family loan originations. Future levels of gain on sale of loans are dependent on interest rates. The increase in deposit fees reflects our growth in core deposits and the Company’s focus on deposit fees. The table following shows the quarterly levels of deposit fees, core deposits and gain on sale of loans.

(In thousands)	Core Deposits (at Quarter End)		Deposit Fees (for the Quarter)	Gain on Sale of Loans (for the Quarter)
September 30, 2003	$	99,546	409	657
June 30, 2003		98,605	383	886
March 30, 2003		95,557	277	643
December 31, 2002		68,090	328	589

September 30, 2002		69,480	269	539
June 30, 2002		68,303	241	354
March 30, 2002		56,762	170	438
December 31, 2001		50,365	179	529

September 30, 2001		54,256	156	536
June 30, 2001		47,711	171	509
March 30, 2001		46,690	168	325
December 31, 2000		42,681	186	211

As mentioned earlier, the limited partnership invested in mortgage loan servicing, and, as a result, income fluctuates based on the underlying market value of related mortgage servicing rights. This market value is impacted by loan prepayment activity and the future expectation of such activity. As rates fall, the level of prepayment and expectation for future prepayments increase which results in lower market values for the underlying servicing rights. Loan prepayments and a decline in interest rates adversely affected our equity in earnings of limited partnerships. During 2003, CharterBank wrote off its remaining equity investment of $106,746 in its limited partnership. The loss on the partnership was partially offset by $2.8 million in gains on the sale of loans and servicing released loan fees in 2003. The lower interest rate environment and related refinancing during 2003 contributed significantly to the increase in our gain on the sale of loans and servicing released loan fees from the prior year.

Gain on sale of securities, including Freddie Mac common stock, was $880,000 for the year ended September 30, 2003 compared to a loss of $816,000 for the same period in 2002, a difference of $1.7 million in income for the year ended September 30, 2003. The $880,000 income was comprised of net gains of approximately $107,000 on mortgage securities and other investment securities, and a net gain of $773,000 on the sale of Freddie Mac common stock. The loss in 2002 was due to a $1.5 million loss on the sale of a bond issued by Intermedia which was subsequently acquired by WorldCom, and net gains of approximately $700,000 on mortgage securities and other investment securities.

Noninterest Expense

Total noninterest expense increased $3.9 million, or 27.21%, to $18.1 million for the year compared with $14.2 million for the prior year. The primary cause of the increase was due to increases in salaries and benefits, of which the largest increase was in stock-based benefits that have accelerated amortization due to the vesting schedules.

Salaries and employee benefits expense increased $3.2 million from $7.4 million in 2002 to $10.6 million in 2003. The major factor in the increase of compensation expense was restricted stock grant expense and a smaller factor in the increase in compensation expense was the staffing expense for the three Eagle Bank branches that were acquired in fiscal 2003.

Occupancy and equipment expenses increased $317,000, or 16.44%, for the year ended September 30, 2003 as compared to the same period in 2002 primarily due to service bureau expenses and increased building maintenance. Marketing expenses and legal and professional expenses were consistent with the prior year.

Income Taxes

Income taxes decreased from $484,000 for the year ended September 30, 2002 to $83,000 for the year ended September 30, 2003. The effective tax rate was 2.60% in 2003 and 14.31% in 2002. In both years, the dividends received deduction relating to 70% of the Freddie Mac cash dividends received has reduced federal income tax. Because dividends on Freddie Mac stock were high compared to other components of taxable income, the dividend exclusion lowered the effective tax rate more than it would have if other components of taxable income had been higher. There can be no assurance that future periods will result in similar effective tax rates.

Comparison of Financial Condition at September 30, 2002 and 2001

Our total assets increased $87.7 million, or 9.80%, to $982.6 million at September 30, 2002 from $894.9 million at September 30, 2001. The increase was primarily due to the increase in mortgage-related securities. Total loans decreased $7.5 million, or 3.37%, to $222.4 million at September 30, 2002 compared to $229.9 million at September 30, 2001. The one-to-four family residential real estate portfolio decreased by $20.3 million, or 18.64% from $129.2 million at September 30, 2001 to $108.9 million at September 30, 2002. With the present strategy of selling fixed rate loans to the secondary market and the refinances that took place late in fiscal year 2002 and 2001, we did not keep the refinanced long term fixed rate loans in portfolio, causing the decline in the overall one-to-four family residential real estate loans. The consumer and other loan portfolio decreased $3.6 million or 18.09% from $23.5 million at September 30, 2001 to $19.9 million at September 30, 2002. The decrease in the consumer portfolio was primarily due to runoff of the loans acquired in the Citizens acquisition and reductions in second mortgages and home equity loans due to refinancings. Commercial real estate and other commercial loans increased by $6.8 million and $9.8 million, respectively, during the year ended September 30, 2002.

Mortgage-backed securities and collateralized mortgage obligations increased from $326.6 million at September 30, 2001 to $455.9 million at September 30, 2002 for an increase of $129.3 million or 39.59% as we utilized additional capital through wholesale leverage. The market value of Freddie Mac common stock decreased $42.4 million, or 14.02%, from $302.6 million to $260.2 million.

Total deposits increased from $200.4 million at September 30, 2001 to $210.7 million at September 30, 2002 due to an increase of $15.4 in non-time deposits. In order to meet our

funding needs, management will continue to rely on borrowings, especially Federal Home Loan Bank advances. With overall asset growth increasing, borrowings increased from $309.4 million at September 30, 2001 to $411.0 million at September 30, 2002, a 32.81% increase.

Our total stockholders’ equity, which is comprised of common stock, additional paid-in capital, treasury stock, unearned compensation, retained earnings and accumulated other comprehensive income, increased $12.3 million, or 5.15%, to $249.2 million at September 30, 2002. The initial public stock offering in October, 2001, added net proceeds of $34.0 million to stockholders’ equity, adjusted for the effect of the ESOP. Accumulated other comprehensive income at Charter Financial is comprised of net unrealized holding gains on securities available for sale. Accumulated other comprehensive income at September 30, 2002 was $156.0 million, a $24.9 million decrease from the 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.

As indicated in the tables following, other comprehensive income (loss) for the year ended September 30, 2002 was a loss of $24.9 million compared to income of $41.0 million for the year ended September 30, 2001. The per share price of Freddie Mac common stock decreased from $65.00 at September 30, 2001 to $55.90 at September 30, 2002, resulting in an after tax decrease in our Freddie Mac common stock investment of $26.0 million. Other comprehensive income relating to mortgage securities and other investments decreased by $8.6 million to $1.1 million from $9.7 million for the year ended September 30, 2001. The decrease in income was due to the high level of appreciation in fixed rate mortgage related securities in the year ended September 30, 2001 as interest rates declined steadily throughout fiscal 2001. The more stable interest rates in fiscal 2002 led to lower levels of fair value fluctuation in investment and mortgage securities.

	Year Ended September 30, 2002
	Shares	Market Price Per Share			Total Market Value		Unrealized Gain, Net of Tax
September 30, 2001	4,655,000	$	65.00		$	302,575,000	$	181,902,699
September 30, 2002	4,655,000		55.90			260,214,500		155,893,352

Change in Freddie Mac stock			(9.10	)				(26,009,347	)
Other comprehensive income related to mortgage securities and other investments								1,112,500

Total other comprehensive loss							$	(24,896,847	)


	Year Ended September 30, 2001
	Shares	Market Price Per Share			Total Market Value		Unrealized Gain, Net of Tax
September 30, 2000	4,655,000		54.0625			251,660,938		150,641,464
September 30, 2001	4,655,000		65.0000			302,575,000		181,902,699

Change in Freddie Mac stock			10.9375					31,261,235
Other comprehensive income related to mortgage securities and other investments								9,696,208

Total other comprehensive income							$	40,957,443

Comparison of Operating Results for Years Ended September 30, 2002 and 2001

General

Net income of $2.9 million for the year ended September 30, 2002 represents a $1.9 million decrease from net income of $4.8 million for the year ended September 30, 2001. This decrease was due primarily to the recording of a $1.5 million loss on the sale of a WorldCom bond, and increased noninterest expenses associated with our branching strategy, new stock compensation programs, and commercial lending growth.

Net interest income during the year ended September 30, 2002 decreased slightly due to lower interest rates which was partially offset by a $250,000 decrease in provision for loan losses. Noninterest expenses for the year ended September 30, 2002 increased as compared to the year ended September 30, 2001 due to the ESOP and other stock benefits, cost of operating the new Auburn branch, and the additional talent hired to help grow the commercial real estate and commercial loan portfolios.

Ratio Analysis

We believe our return on equity can be measured in three ways. The first is the traditional return on total equity which is net income divided by average total equity. The second is return on realized equity which is net income divided by realized equity which excludes unrealized gains on available for sale securities. The third is comprehensive return on equity which is comprehensive income divided by average total equity.

	Year Ended September 30,
	2002		2001
Return on total equity	1.06	%	2.08	%

Return on realized equity	3.11		8.61
Comprehensive return on equity	(7.06	)	19.98

Each of these measures has its strengths and weaknesses. The return on total equity is the traditional measure. However, in the Company’s case the total equity measure shows a low result because it does not reflect unrealized gains and losses on Freddie Mac common stock in net income. The return on realized equity excludes unrealized gains on Freddie Mac common stock from both net income and equity. The comprehensive return on equity reflects the overall increase or decrease in value as reflected by the stock price of Freddie Mac common stock, which management believes is an accurate long-term measure but exhibits high levels of volatility in short time periods.

The return on assets measures as shown below similarly reflect the effects of including or not including the significant unrealized gains and losses on the Freddie Mac common stock.

	Year Ended September 30,
	2002		2001
Return on average total assets	0.29	%	0.52	%

Return on realized assets	0.43		0.76
Comprehensive return on assets	(2.17	)	4.98

Interest Income

Total interest and dividend income excluding Freddie Mac common stock was $33.7 million for the year ended September 30, 2002, a 24.27% decrease over interest and dividend income excluding Freddie Mac common stock of $44.5 million for the year ended September 30, 2001. Interest on loans decreased $4.5 million, or 21.03%, to $16.9 million from $21.4 million for the year ended September 30, 2001. The average balance of loans receivable decreased $27.6 million from $243.2 million for the year ended September 30, 2001 to $215.6 million for the year ended September 30, 2002. Interest on investment debt securities available for sale decreased $139,000 to $513,000 for the year ended September 30, 2002 from $652,000 for the year ended September 30, 2001. Dividend income on Freddie Mac common stock increased by $400,000 to $4.0 million for the year ended September 30, 2002 from $3.6 million for the year ended September 30, 2001 due to the increase in quarterly dividends of Freddie Mac common stock from $0.20 per share to $0.22 per share. Interest on mortgage-backed securities and collateralized mortgage obligations decreased by $5.6 million to $15.5 million for the year ended September 30, 2002 from $21.1 million for the year ended September 30, 2001. The decrease was due to lower yields as the yields on variable rate securities dropped with interest rates and prepayments accelerated in the lower interest rate environment and reinvestments were at lower rates. The yield on interest-earning assets excluding Freddie Mac common stock decreased 219 basis points. Total interest-earning assets excluding Freddie Mac common stock averaged $647.2 million for the year ended September 30, 2002, up from $601.5 million from the comparable 2001 period, a 7.61% increase. The average yield on loans, net, decreased 98 basis points to 7.84%, while the yield on mortgage-related securities decreased from 6.44% for the year ended September 30, 2001 to 3.86% for the year ended September 30, 2002 reflecting the declining interest rate environment during this time period.

Interest Expense

Total interest expense for the year ended September 30, 2002 was $21.8 million, a $9.8 million, or 30.98%, decrease from the year ended September 30, 2001. The decrease is attributable to a 181 basis point decrease in the average cost of interest-bearing liabilities which was partially offset by a $6.7 million increase in the average balance of interest-bearing liabilities from $556.3 million for the year ended September 30, 2001 to $563.0 million for the year ended September 30, 2002. The decrease in average cost was primarily due to the 176 basis point decrease in the cost of borrowed funds as compared to the year ended September 30, 2001 and to

a lesser extent a 190 basis point drop in the cost of deposits. The decrease reflects the lower interest rate environment that prevailed during 2002 compared to 2001 and the rate-sensitive nature of our liabilities.

Interest expense on deposits decreased $3.9 million, or 36.43%, to $6.8 million for the year ended September 30, 2002 compared with $10.7 million for the year ended September 30, 2001. The average balance of certificates of deposit decreased $15.4 million to $146.8 million for the year ended September 30, 2002 from $162.2 million for the year ended September 30, 2001 due to less aggressive retail CD rates being offered. Due to the declining interest rate environment during this period, an increased proportion of lower cost transaction deposit accounts, and a strategy that is less aggressive in the rates paid for certificates of deposit, the average cost of interest-bearing deposits decreased 190 basis points during the year ended September 30, 2002. Interest expense on money market balances decreased $216,000 from the year ended September 30, 2001 to the year ended September 30, 2002, as the average balance of these accounts increased $7.8 million and the cost decreased 238 basis points.

Interest expense on borrowed funds decreased $5.9 million as a result of the $10.2 million increase in the average balance of borrowed funds and the 176 basis point decrease in the average cost of borrowed funds. The decrease in the average cost was attributed to the declining interest rate environment.

Net Interest Income

Net interest income excluding the effects of Freddie Mac common stock decreased $950,000, or 7.04%, to $11.9 million for the year ended September 30, 2002 compared with $12.8 million for the year ended September 30, 2001. The net interest rate spread excluding effects of Freddie Mac common stock, which is the difference between the average yield on average total interest-earning assets and the average cost of average total interest-bearing liabilities, dropped by 38 basis points as the yield on interest-earning assets excluding Freddie Mac common stock decreased at a higher rate than the average cost of interest-bearing liabilities. The net interest margin, which is net interest income divided by average total interest-earning assets, decreased 30 basis points. Our net interest margin and net interest spread are low when compared to industry standards primarily due to two factors. First, the dividend rate as compared to the market value of our Freddie Mac common stock is low. However, when compared to our cost basis in the investment, the dividend rate exceeds 63%. Second, under our wholesale investment strategy, our assets include a high proportion of securities with rates lower than those that would typically be earned on loans and our liabilities include a high proportion of borrowings and wholesale deposits with higher costs than those typically paid on retail deposits. This lowers our net interest margin and net interest spread. However, our wholesale investment strategy has historically increased net interest income and increased our capital efficiency. Net interest income including Freddie Mac common stock dividends for the year ended September 30, 2002 decreased $500,000, or 3.05%, to $15.9 million compared with $16.4 million for the year ended September 30, 2001.

The net interest rate spread including Freddie Mac common stock increased 44 basis points to 0.10% for the year ended September 30, 2002 from negative 0.34% for the prior year.

Traditional bank measures such as net interest rate spread and net interest rate margin will improve as the market value of the Freddie Mac common stock becomes a smaller portion of our earning assets. The average balance of the Freddie Mac common stock was $302.1 million for the year ended September 30, 2002 as compared to $297.8 million for the year ended September 30, 2001. The net interest margin, which is net interest income including dividends on Freddie Mac common stock divided by average total interest-earning assets, decreased 16 basis points to 1.67% for the year ended September 30, 2002.

Provision for Loan Losses and Asset Quality

For the year ended September 30, 2002, we recorded a $250,000 provision for loan losses, compared to $500,000 for the year ended September 30, 2001. Gross charge-offs totaled $816,000 for the year ended September 30, 2002 as compared to the prior year total of $2.1 million. The lower provision in 2002 reflects:

(1)

lower levels of charge-offs - Net charge-offs for the year ended September 30, 2002 were $361,000 compared to net charge-offs of $1.6 million for the year ended September 30, 2001. During the year ended September 30, 2002, CharterBank experienced an increase in nonperforming loans with the weakened economic conditions; however, the majority of nonperforming loans are residential real estate loans where the risk of loss is lower. During fiscal 2001, CharterBank had heavier net charge-offs in its consumer portfolio ($987,000) with modest net recoveries ($41,000) on such loans in fiscal 2002.

(2)

a decline in the overall loan portfolio of $7.5 million - CharterBank’s reserve methodology requires reserves based on a percentage of the outstanding balance for each type of loan. The percentage is based on CharterBank’s estimate of losses inherent within that type of loan.

The allowance for loan losses as of September 30, 2002 was 2.33% of total loans compared with 2.30% at September 30, 2001. The allowance remained stable at approximately 2.3% of loans as potential losses on the loans acquired in the Citizens National acquisition decreased and weakened economic conditions resulted in increases in the level of nonaccrual real estate loans, specifically one-to-four family and thus increased reserves on these loans. Future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and its underlying collateral, the mix of loans within the portfolio, delinquency trends, economic conditions, current and prospective trends in real estate values, and other relevant factors.

The table below shows under-performing (loans 90 days or more delinquent that are still accruing interest) and non-performing assets:

	September 30, 2002			September 30, 2001
	(In thousands)
Underperforming loans	$	133		$	218

Total non-performing loans		3,013			2,312
Foreclosed real estate, net		670			434

Total non-performing assets		3,683			2,746

Non-performing loans to total loans		1.41	%		1.01	%
Non-performing assets to total assets		0.38	%		0.31	%

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 one-to-four 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, loss risk determined based on a loan grading system, 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. Management considers the current allowance for loan losses adequate based on its analysis of the potential risk in the portfolio.

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. Doubtful, substandard and special mention loans are reserved at 60.0%, 17.5% and 5.0% respectively. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on our perception of the inherent losses in the type of loan. The conforming one-to-four family loans in the portfolio are reserved at lower percentages. Reserve percentages are based on each individual lending program and its loss history and underwriting characteristics including loan to value, credit score, debt coverage, collateral, and capacity to service debt.

Noninterest Income

Noninterest income increased to $1.9 million for the year ended September 30, 2002 compared with $1.7 million in the prior year, an 11.8% increase. The primary cause of the increase was an increase of $280,000 in the gain on loans sold, an increase of $177,000 in fees on deposits and a $636,000 decrease in the equity loss in a mortgage servicing limited partnership. These increases were mostly offset with a $1.5 million loss on the sale of a bond issued by Intermedia which was subsequently acquired by WorldCom. CharterBank had approximately $700,000 in net gains on the sale of mortgage and other investment securities during the year ended September 30, 2002 in the falling rate market.

The limited partnership invested in mortgage loan servicing. Accordingly, income substantially fluctuates based on the underlying market value of related mortgage servicing rights. This market value is impacted by loan prepayment activity and the future expectation of such activity. As rates fall, the level of prepayment and expectation for future prepayments increase which results in lower market values for the underlying servicing rights. Loan prepayments and a decline in interest rates adversely affected our equity in earnings of limited partnerships. The loss on the partnership was partially offset by $1.9 million in gains on the sale of loans and servicing released loan fees in 2002. The lower interest rate environment and related refinancing associated with such periods during 2002 was a major catalyst in our significant increase in gain on the sale of loans and servicing released loan fees from the prior year.

Loss on sale of mortgage-backed securities and investments was $816,000 for the year ended September 30, 2002 as compared to a loss of $1,000 for the same period in 2001, a difference of $815,000 in income for the year ended September 30, 2002. The $816,000 loss was comprised of the above mentioned $1.5 million loss on the WorldCom bond and net gains of approximately $700,000 on mortgage securities and other investment securities.

Noninterest Expense

Total noninterest expense increased $2.8 million, or 24.56%, to $14.2 million for the year ended September 30, 2002 compared with $11.4 million for the prior year. The primary cause of the increase was due to increases in salaries and benefits, occupancy, marketing, and legal and professional.

Salaries and employee benefits expense increased $1.2 million from $6.2 million for the year ended September 30, 2001 compared to $7.4 million for the same time period in 2002. The major factor in the increase of compensation expense was the addition of new personnel employed in the commercial real estate lending of CharterBank, the Auburn branch which opened in fiscal 2002, and compensation expense resulting from the ESOP and other stock based benefits that were adopted in fiscal 2002.

Occupancy and equipment expenses increased $348,000, or 22.04%, for the year ended September 30, 2002 as compared to the same period in 2001 primarily due to our new full-service branch in Auburn that opened in November 2001.

Marketing expenses increased $357,000, or 79.62%, for the year ended September 30, 2002, as compared to the same period in 2001 primarily due to our retail banking initiatives, including market expansion and promotions to target transaction account deposit growth.

Legal and professional expense increased to $1.2 million for the year ended September 30, 2002 from $640,000 for the year ended September 30, 2001. The high level of professional fees and expenses in fiscal 2002 was attributable to expenses related to the retail market expansion and the public company expenses.

Income Taxes

Income taxes decreased from $1.4 million for the year ended September 30, 2001 to $484,000 for the year ended September 30, 2002. The effective tax rate was 14.31% in 2002 and 22.82% in 2001. In both fiscal 2002 and fiscal 2001, the dividends received deduction relating to 70% of the Freddie Mac cash dividends received has reduced federal income tax. There can be no assurance that future periods will result in similar benefits.

Commitments

The Company had commitments to fund loans at September 30, 2003 of approximately $39.2 million which is composed of unused consumer credit lines of approximately $8.7 million, unused commercial credit lines of approximately $6.1 million, unfunded construction loans of approximately $12.5 million, mortgage loans of approximately $1.5 million, and nonresidential and commercial loans of approximately $10.5 million. Thirty-year conforming one-to-four 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.

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.

	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	$	1,506,375	$	—	$	—	$	—	$	—
Loan commitments to fund construction loans in process		12,454,021		—		—		—		—
Loan commitments to originate nonresidential mortgage loans		9,983,250		—		—		—		—
Loan commitments to originate commercial loans		500,000		—		—		—		—
Available home equity and unadvanced lines of credit		14,774,052		—		—		—		—
Letters of credit		206,850		—		—		—		—
Lease agreements		90,628		52,350		42,000		42,000		35,000
Deposits		229,060,027		28,272,370		6,619,013		9,814,677		5,619,621
Securities sold under agreements to repurchase		121,341,220		—		—		—		—
FHLB advances		140,100,000		—		—		—		—
Commitments to purchase investment securities		4,996,094		—		—		—		—

Total commitments and contractual obligations	$	535,012,517	$	28,324,720	$	6,661,013	$	9,856,677	$	5,654,621

After September 30, 2003, the Company made a commitment to acquire a minority interest in a de novo bank for $2.0 million. The branches will be in high volume grocery stores in major metropolitan areas. This bank will serve low income depositors and borrowers. The primary products will be transaction accounts that provide access through debit cards and small consumer loans.

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

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. The OTS requires that CharterBank maintain a sufficient amount of liquid assets to maintain its safe and sound operation. 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 assets. At September 30, 2003 and 2002, our maximum borrowing capacity from the FHLB was approximately $306.5 million

and $301.5 million, respectively. At September 30, 2003 and 2002, we had outstanding borrowings of $267.1 million and $274.0 million, respectively, with unused borrowing capacity of $39.4 million and $27.5 million, respectively. 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. We can also obtain funds using our Freddie Mac common stock as collateral and have established a line of credit that 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 that exempts 70% of our Freddie Mac dividends from taxable income. CharterBank has relied on wholesale fundings including advances from the FHLB, repurchase agreements and brokered deposits to purchase securities in the past two fiscal years. CharterBank monitors its liquidity position frequently and anticipates that we will have sufficient funds to meet our current funding commitments.

At September 30, 2003, repurchase agreements totaled $121.3 million, a $15.7 million decrease from the amount outstanding at September 30, 2002 of $137.0 million. Wholesale deposits were $49.7 million at September 30, 2003 as compared to $37.7 million at September 30, 2002.

Loan repayment 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. Principal repayments on mortgage related securities totaled $709.3 million for the twelve months ended September 30, 2003. Ongoing levels of cash flow will depend on the level of mortgage rates and possible mortgage refinancing.

Our primary investing activities are the origination of commercial real estate, one- to four-family real estate, commercial and consumer loans, and the purchase of mortgage and investment securities.

During the year ended September 30, 2003, we originated approximately $329.3 million in total loans. Residential mortgage loans accounted for 60% of the originations, construction loans for 11% of the originations, commercial and commercial real estate loans for 23% of the originations, and consumer loans for 6% of the originations during the year ended September 30, 2003. Of the $196.5 million in residential loans originated, $121.3 million were sold to investors. During the year ended September 30, 2002, we originated loans of approximately $186.2 million, and during the comparable period of 2001, we originated loans of approximately $164.6 million. Residential mortgage loans accounted for 60.4% of total loan originations for fiscal 2002 as compared to 74.1% of total loans originated for fiscal 2001. Commercial real estate loans accounted for 28.3% of total originations for fiscal 2002 as compared to 15.3% of total originations for fiscal 2001.

Purchases of mortgage and investment securities totaled $672.2 million for the year ended September 30, 2003, $449.2 million for the year ended September 30, 2002, and $183.8 million for the year ended September 30, 2001. At September 30, 2003 and 2002, CharterBank had loan

commitments to borrowers of approximately $39.2 million and $21.0 million, respectively, and available home equity and unadvanced lines of credit of approximately $14.8 million and $11.3 million, respectively.

The low interest rate environment, specifically low one-to-four family mortgage rates, has dramatically increased refinancing activity and accordingly cash flow on mortgage securities. The level of this increased cash flow in the future depends on the ongoing level of refinancing and, thus, is difficult to determine at this time although most projections indicate higher interest rates and significantly lower levels of refinancing, which would reduce this cash flow in 2004. We have reinvested a significant portion of this cash flow in securities. During the third quarter of 2003, the Company began retaining conforming 15-year one-to-four family loans, with approximately $24.8 million being retained as of September 30, 2003.

Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors, and by other factors. Total deposits were $279.4 million at September 30, 2003, as compared to $210.7 million at September 30, 2002. Total deposits increased by $68.7 million during the year ended September 30, 2003. Deposits increased as a result of the Eagle Bank acquisition and, to a lesser extent, core deposit growth. Time deposit accounts scheduled to mature within one year were $129.5 million and $110.7 million at September 30, 2003 and 2002, respectively. While CharterBank has experienced certificates of deposit run-off, we anticipate that a significant portion of these certificates of deposit will remain on deposit. CharterBank continues to target growth of transaction-based deposit accounts to lower its overall cost of funds, provide deposit fees and provide cross-sell opportunities.

Capital expenses during fiscal 2003 included $1.9 million for purchasing land for future branch sites, and $8.6 million for our acquisition of EBA Bancshares and its subsidiary Eagle Bank. We anticipate that acquisition of branch sites, construction, expansion and renovation of retail facilities and possibly relocating support functions to one location during fiscal 2004 will be between $3.0 million and $7.0 million. Except for the above, we do not anticipate any other material capital expenditures during fiscal year 2004. 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.

Capital and Capital Management

CharterBank has traditionally been a well-capitalized savings bank, due, among other factors, to our unrealized gains on Freddie Mac common stock. At September 30, 2003 and 2002, we exceeded each of the applicable regulatory capital requirements. Our tier 1 capital was $66.4 million and $73.6 million at September 30, 2003 and 2002, respectively. Tier 1 capital represented 13.80% and 16.34% of risk-weighted assets at September 30, 2003 and 2002, respectively. Tier 1 capital represented 8.78% and 10.16% of total regulatory assets at September 30, 2003 and 2002, respectively, which exceeds the well-capitalized requirements of 5.0%. At September 30, 2003 and 2002, respectively, we had a risk-based total capital of $131.0 million and $147.3 million and a risk-based capital ratio of 27.23% and 32.67%, which significantly exceeds the applicable well-capitalized requirements of 10%. CharterBank exceeded its various regulatory capital requirements by amounts ranging from $28.5 million to $92.5 million at September 30, 2003.

The Recognition and Retention Plan (restricted stock grants), which was adopted and approved by shareholders in fiscal 2002 and amended in fiscal 2003, has 283,177 restricted common shares authorized of which 133,240 shares were granted in July 2002. During fiscal 2003, the Company acquired an additional 282,177 common shares for the Recognition and Retention Plan Trust, which completes the acquisition of shares for this plan, and as of September 30, 2003 gives us 283,177 shares of treasury stock at a cost of $7.8 million. The stock option plan, which was adopted in fiscal 2002 and amended in fiscal 2003, has 707,943 shares authorized of which 152,000 have been granted as of September 30, 2003.

We paid a dividend of $.10 per share in December 2002 and March 2003, and $0.20 per share in June and September, 2003. We have declared a dividend of $.20 per share payable in January 2004. First Charter, MHC has waived its portion of these dividends. The Board of Directors will determine future dividends as well as other capital management strategies such as additional leverage, stock repurchases and special dividends. The Board of Directors will consider, among other factors, capital levels, results of operations, tax considerations, regulatory and regulatory business plan considerations, industry standards and economic conditions in determining such future dividends.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to all entities. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain lease obligations. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial condition or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the Company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. SFAS No. 145 requires that in certain circumstances previous items classified as extraordinary that do not meet the criteria in Opinion 30 must be reclassified. The statement is effective for fiscal years beginning after May 15, 2002. Management does not expect the adoption of SFAS No. 145 to have a material effect on the Company’s financial condition or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. Management does not anticipate that SFAS No. 146 will have a material impact on the Company’s financial condition or results of operations.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. SFAS No. 147’s transition provisions require affected institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142 goodwill as of the date the Company initially applied SFAS No. 142 in its entirety, if such goodwill resulted from a business combination.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial condition or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities and Interpretation of ARB No. 51 (FIN 46). FIN 46 establishes the criteria for consolidating variable interest entities. FIN 46 is effective for fiscal years or interim periods beginning after June 15, 2003, to variable entities that were acquired before February 1, 2003. Management does not anticipate that FIN 46 will have a material impact on the Company’s financial condition or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial

accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a significant effect on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect that SFAS No. 150 will have a significant effect on its consolidated financial statements.

Impact of Inflation and Changing Prices

The consolidated financial statements and accompanying notes of the Company 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 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, pages 61 to 65, for a discussion of Quantitative and Qualitative Disclosures About Market Risk. The interest rate sensitivity analysis or the market value of portfolio equity for various changes in interest rate analysis calculated as of September 30, 2003 indicates a loss of market value of portfolio equity for a significant increase or decrease in interest rates.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F-48 following the signature page of this Annual Report.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, Treasurer and Vice President, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer, Treasurer and Vice President concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following information included in the Company’s Proxy Statement for the 2004 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference: “Election of Directors,” “Nominees and Continuing Directors,” “Executive Officers who are not Directors,” “Code of Ethics,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11.

EXECUTIVE COMPENSATION

The following information included in the Proxy Statement is incorporated herein by reference: “Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Performance Graph,” “Change of Control Agreements,” “Director Compensation,” “Executive Compensation,” “Employment Agreements,” and “Benefit Plans.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following information included in the Proxy Statement is incorporated herein by reference: “Security Ownership of Certain Beneficial Owners and Management-Principal Shareholders of Charter Financial Corporation,” and “Security Ownership of Management.”

The following table sets forth the aggregate information of our equity compensation plans in effect as of September 30, 2003.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	152,000	$	29.26	705,880

Equity compensation plans not approved by security holders	—		—	—

Total	152,000	$	29.26	705,880	(1)

(1)	Reflects 555,943 shares reserved for future grant under the Charter Financial Corporation 2001 Stock Option Plan. This also reflects 149,937 shares reserved for future awards under the RRP, which are held by the RRP Trust and treated as treasury stock for financial statement purposes.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following information included in the Proxy Statement is incorporated herein by reference: “Information about the Board of Directors and Management – Transactions with Certain Related Persons.”

PART IV

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following information included in the Proxy Statement is incorporated herein by reference: “Principal Accountant Fees and Services.”

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Listed below are all financial statements and exhibits filed as part of this report:

a.	Financial Statements, Schedules, and Exhibits

(1)

The consolidated balance sheets of Charter Financial Corporation and its subsidiaries as of September 30, 2003 and 2002 and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2003, together with the related notes and independent auditors’ report of KPMG LLP.

(2)

Schedules omitted as they are not applicable.

(3)

See Exhibit Index.

b.	Exhibits and Reports on Form 8-K

Exhibit		Description
2.1		CharterBank Amended Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance*
2.2		Business Combination Agreement, dated September 10, 2002 by and among Charter Financial Corporation, CharterBank and EBA Bancshares, Inc.****
3.1		Federal Stock Charter of Charter Financial Corporation*
3.2		Bylaws of Charter Financial Corporation*
4.1		Federal Stock Charter of Charter Financial Corporation (See Exhibit 3.1)*
4.2		Bylaws of Charter Financial Corporation (See Exhibit 3.2)*
4.3		Form of Stock Certificate of Charter Financial Corporation*
10.1		Form of Employee Stock Ownership Plan of Charter Financial Corporation*
10.2		Form of Benefit Restoration Plan of Charter Financial Corporation*
10.3		Form of Employment Agreement by and among Robert L. Johnson and Charter Financial Corporation*
10.4		Form of One Year Change in Control Agreement by and among certain officers, Charter Financial Corporation and CharterBank *
10.5		Form of Two Year Change in Control Agreement by and among certain officers, Charter Financial Corporation and CharterBank *
10.6		CharterBank 401(k) Plan and Adoption Agreement **
10.7		Charter Financial Corporation 2001 Stock Option Plan***
10.8		Charter Financial Corporation 2001 Recognition and Retention Plan***
14.0		Code of Ethics
21.1		Subsidiaries of the Registrant
23.1		Consent of KPMG LLP
31.1		Rule 13a-14(a)/15d-14(a) Certifications.
32.1		Section 1350 Certifications.

*	Incorporated herein by reference to the Registration Statement No. 333-57684, on Form S-1 of Charter Financial filed with the SEC on March 27, 2001, as amended.

**	Incorporated herein by reference to the Registration Statement No. 333-67402, on Form S-8, filed with the SEC on August 13, 2001, as amended.

***	Incorporated herein by reference to the definitive proxy statement on Schedule 14A as filed with the SEC on March 26, 2002.

****	Incorporated herein by reference to the current report on Form 8-K dated September 11, 2002.

Reports on Form 8-K

The Company furnished a Form 8-K with the Securities and Exchange Commission dated July 1, 2003, pursuant to Item 9 to report and furnish a slide presentation given by Charter Financial Corporation.

The Company furnished a Form 8-K with the Securities and Exchange Commission dated July 28, 2003, pursuant to Item 12 to report the issuance of and furnish its press release describing third quarter earnings.

The Company furnished a Form 8-K with the Securities and Exchange Commission dated November 4, 2003, pursuant to Item 12 to report the issuance of and furnish its press release describing annual and fourth quarter earnings.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on December 17, 2003.

CHARTER FINANCIAL CORPORATION

By:		/s/ Robert L. Johnson
		Robert L. Johnson
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, and any rules and regulations promulgated thereunder, this Annual Report on Form 10-K, has been signed by the following persons in the capacities and on the dates indicated.

Name	Title	Date
/s/ John W. Johnson, Jr.	Chairman of the Board	December 17, 2003
John W. Johnson, Jr.

/s/ Robert L. Johnson	President, Chief Executive Officer and Director (principal executive officer)	December 17, 2003
Robert L. Johnson

/s/ David Z. Cauble, III	Director	December 17, 2003
David Z. Cauble, III

/s/ Jane W. Darden	Director	December 17, 2003
Jane W. Darden

/s/ William B. Hudson	Director	December 17, 2003
William B. Hudson

/s/ Thomas M. Lane	Director	December 17, 2003
Thomas M. Lane

/s/ David L.Strobel	Director	December 17, 2003
David L. Strobel

/s/ Curtis R. Kollar	Chief Financial Officer, Vice President and Treasurer (principal accounting officer)	December 17, 2003
Curtis R. Kollar

Exhibit Index

Exhibit	Description	Method of Filing

2.1	CharterBank Amended Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock Issuance	*

2.2	Business Combination Agreement, dated September 10, 2002 by and among Charter Financial Corporation, CharterBank and EBA Bancshares, Inc.	****

3.1	Federal Stock Charter of Charter Financial Corporation	*

3.2	Bylaws of Charter Financial Corporation	*

4.1	Federal Stock Charter of Charter Financial Corporation	*

4.2	Bylaws of Charter Financial Corporation	*

4.3	Form of Stock Certificate of Charter Financial Corporation	*

10.1	Form of Employee Stock Ownership Plan of Charter Financial Corporation	*

10.2	Form of Benefit Restoration Plan of Charter Financial Corporation	*

10.3	Form of Employment Agreement by and among Robert L. Johnson and Charter Financial Corporation	*

10.4	Form of One Year Change in Control Agreement by and among certain officers, Charter Financial Corporation and CharterBank	*

10.5	Form of Two Year Change in Control Agreement by and among certain officers, Charter Financial Corporation and CharterBank	*

10.6	CharterBank 401(k) Plan and Adoption Agreement	**

10.7	Charter Financial Corporation 2001 Stock Option Plan	***

10.8	Charter Financial Corporation 2001 Recognition and Retention Plan	***

14.0		Code of Ethics

21.1		Subsidiaries of the Registrant

23.1		Consent of KPMG LLP

31.1		Rule 13a-14(a)/15d-14(a) Certifications

32.1		Section 1350 Certifications

*	Incorporated herein by reference to the Registration Statement No. 333-57684, on Form S-1 of Charter Financial filed with the SEC on March 27, 2001, as amended.

**	Incorporated herein by reference to the Registration Statement No. 333-67402, on From S-8, filed with the SEC on August 13, 2001, as amended.

***	Incorporated herein by reference to the definitive proxy statement on Schedule 14A as filed with the SEC on March 26, 2002.

****	Incorporated herein by reference to the current report on Forms 8-K dated September 11, 2002.

100

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Consolidated Financial Statements

September 30, 2003 and 2002

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Board of Directors

Charter Financial Corporation:

We have audited the accompanying consolidated balance sheets of Charter Financial Corporation and subsidiaries (the Company) as of September 30, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended September 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charter Financial Corporation and subsidiaries as of September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America.

LOGO

Atlanta, Georgia

November 14, 2003

F-1

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2003 and 2002

	2003			2002
Assets

Cash and amounts due from depository institutions (note 20)	$	9,926,321		7,990,832
Interest-bearing deposits in other financial institutions		1,994,168		2,127,305

Cash and cash equivalents		11,920,489		10,118,137

Loans held for sale, market value of $2,058,892 and $8,582,332 at September 30, 2003 and 2002, respectively		2,026,261		8,437,409
Freddie Mac common stock (note 5)		242,904,000		260,214,500
Mortgage-backed securities and collateralized mortgage obligations available for sale (notes 6 and 15)		394,432,288		455,940,470
Other investment securities available for sale (note 5)		21,628,603		12,058,565
Federal Home Loan Bank stock (notes 5 and 15)		13,610,000		14,365,000

Loans receivable		299,877,198		214,006,327
Unamortized loan origination fees, net		(544,202	)	(173,319	)
Allowance for loan losses		(6,779,576	)	(5,179,048	)

Loans receivable, net (notes 8 and 15)		292,553,420		208,653,960

Real estate owned (note 9)		683,577		669,618
Accrued interest and dividends receivable (note 10)		3,200,112		3,264,921
Premises and equipment, net (note 11)		9,382,894		6,243,345
Intangible assets, net of amortization (note 4)		6,168,074		—
Other assets (notes 12 and 13)		1,985,645		2,597,509

Total assets	$	1,000,495,363		982,563,434

Liabilities and Stockholders’ Equity

Liabilities:
Deposits (note 14)	$	279,385,708		210,746,322
Borrowings (note 15)		388,441,220		410,963,000
Advance payments by borrowers for taxes and insurance		1,191,597		1,356,720
Deferred income taxes (note 16)		88,196,330		96,040,343
Other liabilities		12,921,426		14,291,483

Total liabilities		770,136,281		733,397,868

Stockholders’ equity (notes 20 and 23):
Common stock, $0.01 par value; 19,822,405 shares issued in 2003 and 2002; 19,569,676 and 19,821,405 shares outstanding in 2003 and 2002, respectively		198,224		198,224
Additional paid-in capital		37,491,011		37,476,396
Treasury stock, at cost; 252,729 and 1,000 shares in 2003 and 2002, respectively		(7,836,234	)	(29,930	)
Unearned compensation – ESOP		(2,624,940	)	(2,664,539	)
Retained earnings		59,190,493		58,224,724
Accumulated other comprehensive income:
Net unrealized holding gains on securities available for sale		143,940,528		155,960,691

Total stockholders’ equity		230,359,082		249,165,566

Commitments and contingencies (notes 8, 18, and 21)

Total liabilities and stockholders’ equity	$	1,000,495,363		982,563,434

See accompanying notes to consolidated financial statements.

F-2

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended September 30, 2003, 2002, and 2001

	2003			2002		2001
Interest and dividend income:
Loans receivable	$	16,693,886		16,902,524		21,441,540
Mortgage-backed securities and collateralized mortgage obligations		11,883,281		15,473,241		21,150,446
Equity securities		5,218,004		4,771,563		4,483,643
Debt securities		441,848		513,168		651,936
Interest-bearing deposits in other financial institutions		98,411		79,211		343,910

Total interest and dividend income		34,335,430		37,739,707		48,071,475

Interest expense:
Deposits (note 14)		5,607,246		6,825,501		10,737,520
Borrowings (note 15)		13,198,597		15,019,296		20,908,272

Total interest expense		18,805,843		21,844,797		31,645,792

Net interest income		15,529,587		15,894,910		16,425,683

Provision for loan losses (note 8)		25,000		250,000		500,000

Net interest income after provision for loan losses		15,504,587		15,644,910		15,925,683

Noninterest income:
Gain on sale of loans and servicing released loan fees		2,775,256		1,859,961		1,580,257
Service charges on deposit accounts		1,396,106		858,618		681,464
Gain on sale of Freddie Mac common stock		773,368		—		—
Gain on sale of mortgage-backed securities, collateralized mortgage obligations, and other investments (notes 5 and 6)		107,038		(816,223	)	(1,023	)
Loan servicing fees		154,975		306,072		411,040
Equity in loss of limited partnership (note 13)		(106,746	)	(564,164	)	(1,200,488	)
Brokerage commissions		332,391		74,422		—
Other		300,702		221,141		181,344

Total noninterest income		5,733,090		1,939,827		1,652,594

Noninterest expenses:
Salaries and employee benefits (note 17)		10,574,311		7,412,111		6,244,988
Occupancy		2,243,370		1,926,594		1,578,354
Legal and professional		1,261,387		1,243,078		639,882
Marketing		855,826		805,423		448,408
Furniture and equipment		630,860		474,811		398,788
Postage, office supplies, and printing		571,189		535,901		417,965
Federal insurance premiums and other regulatory fees		210,651		213,096		222,249
Net cost of operations of real estate owned		151,036		135,014		144,245
Deposit premium amortization expense (note 4)		133,149		—		—
Other		1,432,061		1,454,131		1,321,323

Total noninterest expenses		18,063,840		14,200,159		11,416,202

Income before income taxes		3,173,837		3,384,578		6,162,075

Income tax expense (note 16)		82,543		484,443		1,405,973

Net income	$	3,091,294		2,900,135		4,756,102

Basic and diluted net income per share	$	0.16		0.15		—

Weighted average number of common shares outstanding		19,456,886		19,534,018		—

Weighted average number of common and common equivalent shares outstanding		19,460,824		19,534,018		—

See accompanying notes to consolidated financial statements.

F-3

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

Years ended September 30, 2003, 2002, and 2001

	Comprehensive income			Common stock			Additional paid-in capital		Treasury stock		Unearned compensation – ESOP		Retained earnings		Accumulated other comprehensive income		Total stockholders’ equity
	Comprehensive income			Number of shares	Amount		Additional paid-in capital		Treasury stock		Unearned compensation – ESOP		Retained earnings		Accumulated other comprehensive income		Total stockholders’ equity
Balance at September 30, 2000				—	$	—	—		—		—		51,029,038		139,900,095		190,929,133
Comprehensive income:
Net income	$	4,756,102		—		—	—		—		—		4,756,102		—		4,756,102
Other comprehensive income – unrealized gain on securities net of income taxes of $25,748,480 (note 24)		40,957,443		—		—	—		—		—		—		40,957,443		40,957,443

Total comprehensive income	$	45,713,545

Capital contribution				—		—	—		—		—		273,147		—		273,147

Balance at September 30, 2001				—		—	—		—		—		56,058,287		180,857,538		236,915,825
Issuance of common stock				19,822,405		198,224	37,021,175		—		(3,171,580	)	—		—		34,047,819
Comprehensive loss:
Net income	$	2,900,135		—		—	—		—		—		2,900,135		—		2,900,135
Other comprehensive loss – unrealized loss on securities net of income taxes of $15,651,763 (note 24)		(24,896,847	)	—		—	—		—		—		—		(24,896,847	)	(24,896,847	)

Total comprehensive loss	$	(21,996,712	)

Dividends paid, $0.20 per share (note 24)				—		—	—		—		—		(733,698	)	—		(733,698	)
Allocation of ESOP common stock				—		—	455,221		—		507,041		—		—		962,262
Purchase of common stock for treasury				—		—	—		(29,930	)	—		—		—		(29,930	)
Balance at September 30, 2002				19,822,405		198,224	37,476,396		(29,930	)	(2,664,539	)	58,224,724		155,960,691		249,165,566

Issuance of common stock																	—
Comprehensive loss:
Net income	$	3,091,294		—		—	—		—		—		3,091,294		—		3,091,294
Other comprehensive loss – unrealized loss on securities net of income taxes of $7,556,650 (note 24)		(12,020,163	)	—		—	—		—		—		—		(12,020,163	)	(12,020,163	)

Total comprehensive loss	$	(8,928,869	)

Dividends paid, $0.60 per share (note 24)				—		—	—		—		—		(2,125,525	)	—		(2,125,525	)
Allocation of ESOP common stock				—		—	84,092		—		39,599		—		—		123,691
Issuance of common stock				—		—	(69,477	)	909,842		—		—		—		840,365
Purchase of common stock for treasury				—		—	—		(8,716,146	)	—		—		—		(8,716,146	)

Balance at September 30, 2003				19,822,405	$	198,224	37,491,011		(7,836,234	)	(2,624,940	)	59,190,493		143,940,528		230,359,082

See accompanying notes to consolidated financial statements.

F-4

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended September 30, 2003, 2002, and 2001

	2003			2002		2001
Cash flows from operating activities:
Net income	$	3,091,294		2,900,135		4,756,102
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		25,000		250,000		500,000
Depreciation and amortization		1,010,138		706,179		736,700
Allocation of ESOP common stock		123,691		962,262		—
Deferred income tax expense (benefit)		251,059		(686,521	)	(5,489,638	)
Gain on sale of premises and equipment		(667	)	—		—
Equity in loss of limited partnerships		106,746		564,164		1,200,488
Amortization (accretion) of premiums and discounts, net		3,152,840		729,532		(2,972,099	)
Gain on sale of loans		(2,775,256	)	(1,859,961	)	(1,580,257	)
Proceeds from sale of loans		111,715,049		80,753,296		65,366,632
Originations and purchases of loans held for sale		(102,528,645	)	(77,593,422	)	(64,253,762	)
Gain on sale of Freddie Mac common stock		(773,368	)	—		—
(Gain) loss on sales of mortgage-backed securities, collateralized mortgage obligations, and other investments		(107,038	)	816,223		1,023
Provision for loss on other real estate owned		56,486		13,000		—
Loss on sales of real estate owned		81,078		72,576		122,266
Changes in assets and liabilities:
Decrease (increase) in accrued interest and dividends receivable		329,009		(89,102	)	1,301,025
Decrease (increase) in other assets		88,224		251,239		(1,136,640	)
(Decrease) increase in other liabilities		(686,525	)	216,177		4,748,316

Net cash provided by operating activities		13,159,115		8,005,777		3,300,156

Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations available for sale		8,253,369		136,845,298		189,420,664
Principal collections on mortgage-backed securities and collateralized mortgage obligations available for sale		709,327,602		147,147,443		52,471,823
Purchases of mortgage-backed securities and collateralized mortgage obligations available for sale		(659,225,249	)	(412,888,459	)	(183,717,769	)
Purchases of other investment securities available for sale		(12,997,462	)	(36,337,911	)	(48,174	)
Proceeds from sale of other investment securities available for sale		—		22,162,639		15,564,771
Proceeds from sale of Freddie Mac common stock		804,555		—		—
Proceeds from maturities of other securities available for sale		4,300,000		2,000,000		—
Purchase of FHLB stock		(17,732,500	)	(2,777,500	)	—
Proceeds from redemption of FHLB stock		18,937,500		—		1,000,000
Net cash paid for EBA Bancshares, Inc.		(3,791,005	)	—		—
Net (increase) decrease in loans receivable, exclusive of loan sales		(30,438,092	)	5,586,826		27,618,347
Proceeds from sale of real estate owned		508,001		1,341,575		831,149
Purchases of premises and equipment, net of dispositions		(2,357,329	)	(1,894,341	)	(1,742,079	)

Net cash provided by (used in) investing activities		15,589,390		(138,814,430	)	101,398,732

(Continued)

F-5

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended September 30, 2003, 2002, and 2001

	2003			2002		2001
Cash flows from financing activities:
Issuance of common stock in stock offering	$	—		34,047,819		—
Purchase of common stock for treasury		(8,716,146	)	(29,930	)	—
Offering proceeds in escrow		—		(19,978,915	)	19,978,915
Dividends paid		(2,125,525	)	(733,698	)	—
Net increase (decrease) in deposits		6,582,421		10,391,355		(74,015,676	)
Proceeds from Federal Home Loan Bank advances		814,050,000		220,450,000		434,935,014
Principal payments on advances from Federal Home Loan Bank		(820,950,000	)	(158,200,000	)	(457,935,014	)
Proceeds from other borrowings		1,334,401,330		1,428,577,887		1,471,021,087
Principal payments on other borrowings		(1,350,023,110	)	(1,389,288,887	)	(1,490,815,587	)
Net decrease in advance payments by borrowers for taxes and insurance		(165,123	)	(437,565	)	(204,492	)
Capital contribution		—		—		273,147

Net cash (used in) provided by financing activities		(26,946,153	)	124,798,066		(96,762,606	)

Net increase (decrease) in cash and cash equivalents		1,802,352		(6,010,587	)	7,936,282

Cash and cash equivalents at beginning of year		10,118,137		16,128,724		8,192,442

Cash and cash equivalents at end of year	$	11,920,489		10,118,137		16,128,724

Supplemental disclosures of cash flow information:
Interest paid	$	18,932,056		22,154,352		32,688,743
Income taxes paid		1,349,568		5,134,322		2,947,150

Investing activities:
Transfer of assets held for sale to premises and equipment		415,870		—		—
Financing activities:
Real estate acquired through foreclosure of the loans receivable		419,524		1,662,627		757,564
Issuance of common stock under stock benefit plans		840,365		—		—

See accompanying notes to consolidated financial statements.

F-6

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(1)

Summary of Significant Accounting Policies

The consolidated financial statements of Charter Financial Corporation and subsidiaries (the Company) include the financial statements of Charter Financial Corporation and the following wholly owned subsidiaries: CharterBank (the Bank) and Charter Insurance Company. All intercompany accounts and transactions have been eliminated in consolidation.

Charter Financial Corporation was formed through the reorganization of CharterBank in October 2001. The consolidated financial statements of Charter Financial Corporation and subsidiaries reflect the assets and liabilities transferred in such reorganization and the related earnings thereon. Refer to note 2 for further discussion of this reorganization.

CharterBank was organized as a federally chartered mutual savings and loan association in 1954. CharterBank is primarily regulated by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC), and undergoes periodic examinations by those regulatory authorities.

The Company primarily provides mortgage loans and a full range of deposit products to individual customers through its main office in West Point, Georgia and seven full-service branch offices located in LaGrange, Georgia, Auburn, Alabama, and Valley, Alabama. In addition, the Company operates four loan production offices located in various Georgia and Alabama locations. The Company primarily competes with other financial institutions in its market area within west central Georgia and east central Alabama. The Company considers its primary lending market to be the states of Georgia and Alabama.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to prevailing practices within the financial institutions industry. The following is a summary of the significant accounting policies that the Company follows in presenting its consolidated financial statements.

(a)

Basis of Presentation

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and mortgage loan prepayment assumptions used to determine the amount of revenue recognition on mortgage-backed securities and collateralized mortgage obligations. In connection with the determination of the allowance for loan losses and the value of real estate owned, management obtains independent appraisals for significant properties. In connection with the determination of revenue recognition on mortgage-backed securities and collateralized mortgage obligations, management obtains independent estimates of mortgage loan prepayment assumptions, which are based partly on historical prepayments and current interest rates.

A substantial portion of the Company’s loans is secured by real estate located in its market area. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in the real estate market conditions of this market area.

F-7	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(b)

Cash Equivalents

Cash equivalents, as presented in the consolidated financial statements, include amounts due from other depository institutions and interest-bearing deposits in other financial institutions. Generally, interest-bearing deposits in other financial institutions are for one-day periods.

(c)

Investments, Mortgage-Backed Securities, and Collateralized Mortgage Obligations

Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale are reported at fair value, as determined by independent quotations. Investment in stock of a Federal Home Loan Bank is required of every federally insured financial institution who utilizes its services. Generally, the Federal Home Loan Bank will repurchase excess stock at cost; accordingly, the investment in Federal Home Loan Bank stock is carried at cost which approximates its fair value.

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.

Gains and losses on sales of investments, mortgage-backed securities, and collateralized mortgage obligations are recognized on the trade date, based on the net proceeds received and the adjusted carrying amount of the specific security sold.

A decline in the market value of any available for sale security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for that security. At September 30, 2003, the Company did not have any securities with other than temporary impairment.

(d)

Loans and Interest Income

Loans are reported at the principal amounts outstanding, net of unearned income, deferred loan fees/origination costs, and the allowance for loan losses. Loans held for sale are carried at the lower of aggregate cost or market, with market determined on the basis of open commitments for committed loans. For uncommitted loans, market is determined on the basis of current delivery prices in the secondary mortgage market.

Interest income is recognized using the simple interest method on the balance of the principal amount outstanding. Unearned income, primarily arising from deferred loan fees, net of certain origination costs, and deferred gains on the sale of the guaranteed portion of Small Business Administration (SBA) loans, is amortized over the lives of the underlying loans using the interest method over the estimated life of the loans.

The accrual of interest income is discontinued on loans which become contractually past due by 90 days or when reasonable doubt exists as to the full timely collection of interest or principal. Interest previously accrued but not collected is reversed against current period interest income when such loans are placed on nonaccrual status. Interest on nonaccrual loans which is ultimately collected is credited to income in the period received.

F-8	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. Large pools of smaller balance homogeneous loans, such as consumer and installment loans are collectively evaluated for impairment by the Company. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Cash receipts on impaired loans which are accruing interest are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are recorded as income when received unless full recovery of principal is in doubt.

Gains or losses on the sale of mortgage loans are recognized at settlement dates and are computed as the difference between the sales proceeds received and the net book value of the mortgage loans sold. At the time of sale, a servicing asset is recorded if expected servicing revenues exceed an amount approximating adequate servicing compensation. The servicing asset, included in other assets, is amortized using the interest method over the estimated life of the serviced loans considering assumed prepayment patterns.

(e)

Allowance for Loan Losses

The allowance for loan losses is adjusted through provisions for loan losses charged or credited to operations. Loans are charged off against the allowance for loan losses when management believes that the collection of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is determined through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, delinquency trends, adequacy of collateral, loan concentrations, specific problem loans, and economic conditions that may affect the borrowers’ ability to pay.

To the best of management’s ability, all known and inherent losses that are both probable and reasonable to estimate have been recorded. 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 Company’s allowance for loan losses. Such agencies may require the Company to adjust the allowance based on their judgment about information available to them at the time of their examination.

(f)

Real Estate Owned

Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent

F-9	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the allowance for loan losses. Subsequent write-downs are charged to a separate allowance for losses pertaining to real estate owned, established through provisions for estimated losses on real estate owned charged to operations. Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to restore the allowance to an adequate level. Gains recognized on the disposition of the properties are recorded in other income.

Costs of improvements to real estate are capitalized, while costs associated with holding the real estate are charged to operations.

(g)

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation which is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets range from 20 to 50 years for buildings and improvements and three to 15 years for furniture, fixtures, and equipment.

(h)

Mortgage Banking Activities

Statement of Financial Accounting Standards (SFAS) No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.

Mortgage loan servicing rights are included in other assets. Mortgage servicing rights are stated at cost, less accumulated amortization and impairment valuation allowance. The Company recognizes, as separate assets, rights to service mortgage loans for others, either purchased or through Company originations. Mortgage servicing rights which are acquired through either the purchase or origination of mortgage loans are recognized as separate assets when the Company sells or securitizes those loans with servicing rights retained. For originated and purchased mortgage loans, the amount of the mortgage servicing rights to be recognized is determined based upon an allocation of the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Fair value is determined by discounted cash flow analyses using appropriate assumptions for servicing fee income, servicing fee costs, prepayment rates, and discount rates. For mortgage servicing rights acquired separate from the mortgage loans, the Company capitalizes the amount paid.

The cost of the mortgage servicing rights is amortized in proportion to and over the period of net servicing income which is estimated to be generated by the underlying mortgage servicing rights.

F-10	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

In accordance with SFAS No. 140, the Company periodically assesses its capitalized mortgage servicing rights for impairment based upon the fair value of those rights. To measure the fair value of its mortgage servicing rights, the Company uses discounted cash flow analyses taking into consideration appropriate assumptions for servicing fee income, servicing fee costs, prepayment rates, and discount rates. The Company stratifies its capitalized mortgage servicing rights for the purpose of evaluating impairment, taking into consideration relevant risk characteristics, including loan type, note rate, and note term. If the recorded amount of the mortgage servicing rights exceeds the fair value, the amount of the impairment is recognized through a valuation allowance, with a corresponding charge to operations. Additionally, the Company will prospectively accelerate future amortization if a reduction in expected future net servicing income is estimated.

Fees for servicing loans for investors are based on the outstanding principal balance of the loans serviced and are recognized as income when earned.

(i)

Insurance

At September 30, 2003, the Company was covered under a $5,000,000 banker’s blanket bond policy and a $2,000,000 errors and omissions policy. The Company is also covered with a $10,000,000 umbrella policy.

(j)

Investment in Limited Partnerships

The carrying value of the Company’s share (based on its underlying ownership interest) of limited partnerships is based on the Company’s original investment adjusted for its pro rata share of the partnerships’ net income or losses.

(k)

Income Taxes

The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(l)

Comprehensive Income

Comprehensive income for the Company consists of net income for the period and unrealized holding gains and losses on investments, mortgage-backed securities, and collateralized mortgage obligations classified as available for sale, net of income taxes.

(m)

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets, which eliminates amortization of goodwill and intangible assets that have indefinite useful lives and requires annual tests of impairments of those assets. SFAS No. 142

F-11	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

also provides specific guidance about how to determine and measure goodwill and intangible asset impairments, and requires additional disclosures of information about goodwill and other intangible assets. The provisions of SFAS No. 142 were required to be applied starting with fiscal years beginning after December 15, 2001 and applied to all goodwill and other intangible assets recognized in financial statements at the date of adoption.

Goodwill and other intangible assets include costs in excess of net assets acquired and deposit premiums recorded in connection with the acquisition of EBA Bancshares, Inc. The deposit premium is being amortized using the double-declining balance method over 13 years.

In accordance with the provisions of SFAS No. 142, the Company will test its goodwill for impairment annually. If indicators of impairment were present in amortizable intangible assets and undiscounted future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified.

(n)

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 also amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in the interim financial information. The Company adopted the provisions of SFAS No. 148 effective October 1, 2002.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

F-12	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method included in SFAS No. 123, the Company’s net income and income per share for 2003 and 2002 would have been reduced to the pro forma amounts indicated below:

	2003		2002
Net income	$	3,091,294	2,900,135
Deduct:
Total stock-based compensation expense determined under fair value based method, net of related tax effect		148,596	7,735

Pro forma net income	$	2,942,698	2,892,400

Net income per common share – basic:
As reported		0.16	0.15
Pro forma		0.15	0.15
Net income per common share – diluted:
As reported		0.16	0.15
Pro forma		0.15	0.15

No stock options were granted during the years ended September 30, 2003 and 2001.

(o)

Income Per Share

Basic net income per share is computed on the weighted average number of shares outstanding in accordance with SFAS No. 128, Earnings Per Share. Diluted net income per share is computed by dividing net income by weighted average shares outstanding plus common share equivalents resulting from dilutive stock options, determined using the treasury stock method.

(p)

Accounting Pronouncements

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. SFAS No. 147’s transition provisions require affected institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142 goodwill as of the date the affected institutions initially applied SFAS No. 142 in its entirety, if such goodwill resulted from a business combination. The Company had no goodwill at the time of adoption of SFAS No. 142.

F-13	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure about the guarantor’s obligations under certain guarantees that it has issued. The adoption of FIN 45 did not have a material impact on the Company’s financial condition or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities and Interpretation of ARB No. 51 (FIN 46). FIN 46 establishes the criteria for consolidating variable interest entities. The adoption of FIN 46 did not have a material impact on the Company’s financial condition or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not have a significant effect on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect that SFAS No. 150 will have a significant effect on its consolidated financial statements.

(2)

Reorganization

On October 16, 2001, CharterBank completed a reorganization into a two-level holding company structure with a sale of 20% of the stock of the mid-tier holding company – Charter Financial Corporation. CharterBank converted its charter into a mutual holding company charter and changed its name to First Charter, MHC which then contributed all its assets except $100,000 cash and 400,000 shares of Freddie Mac common stock to a newly formed mid-tier holding company, Charter Financial Corporation, in exchange for 80% of the stock in Charter Financial Corporation. Charter Financial Corporation sold 20% of its stock in a minority stock offering for net proceeds of $37,219,399, including proceeds for 317,158 shares purchased by Charter Financial Corporation for its Employee Stock Ownership Plan (ESOP). Charter Financial Corporation then contributed 2,555,000 shares of Freddie Mac common stock, 50% of the net proceeds of the offering and the banking assets and liabilities to its newly formed, wholly owned thrift subsidiary, CharterBank. Charter Financial Corporation also contributed 400,000 shares of Freddie Mac common stock to its wholly owned insurance subsidiary, Charter Insurance

F-14	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Company. Charter Financial Corporation retained the stock of Charter Insurance Company, 1,700,000 shares of Freddie Mac common stock, and 50% of the net proceeds of the stock offering. Management believes that CharterBank has continued its classification as “well capitalized” under the regulatory framework for prompt corrective action, following this reorganization.

The consolidated financial statements of Charter Financial Corporation and subsidiaries for the year ended September 30, 2001 reflect the assets and liabilities transferred to the Company in the reorganization. Specifically, historical financial information is that 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 has also been retroactively adjusted for such effects; furthermore, for the year ended September 30, 2001, the Company has reflected the retention of the net capital resulting from the dividend income on such 400,000 shares of Freddie Mac common stock, net of income taxes, as contributed capital in its equity.

(3)

Business Combinations

Effective February 21, 2003, the Company 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 purchase accounting adjustments, as of the date of the acquisition, were as follows:

Loans, net	$	53,846,691
Other earning assets		8,050,055
Other assets		2,659,402
Goodwill and other intangibles		6,301,223

		70,857,371

Deposits		62,056,965
Other liabilities		156,833

Purchase price, including acquisition costs	$	8,643,573

F-15	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

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

	Year ended September 30
	2003			2002
Interest income	$	35,706,000		42,483,000
Interest expense		19,783,000		24,621,000

Net interest income before provision for loan losses		15,923,000		17,862,000
Provision for loan losses		1,483,000		554,000

Net interest income after provision for loan losses		14,440,000		17,308,000
Noninterest income		5,886,000		2,272,000
Noninterest expense		19,770,000		16,347,000

Income before income taxes		556,000		3,233,000
Income tax expense		(145,000	)	422,000

Net income	$	701,000		2,811,000

Basic and diluted net income per share	$	0.04		0.14

(4)

Goodwill and Other Intangible Assets

In conjunction with the acquisition of EBA, the Company acquired the following goodwill and other intangible assets:

Goodwill	$	4,325,282
Deposit premium		1,975,941

	$	6,301,223

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 13 years. The Company recorded amortization expense related to the deposit premium of $133,149 for the year ended September 30, 2003.

At September 30, 2003, other intangible assets is summarized as follows:

Deposit premium	$	1,975,941
Less accumulated amortization		133,149

	$	1,842,792

F-16	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Amortization expense for the next five years is as follows:

2004	$	213,955
2005		188,627
2006		166,675
2007		147,684
2008		136,864

	$	853,805

(5)

Investment Securities

Investment securities available for sale are summarized as follows:

	September 30, 2003
	Amortized cost		Gross unrealized gains	Gross unrealized losses	Estimated fair value


Freddie Mac common stock	$	6,285,345	236,618,655	—	242,904,000

Other:
U.S. Government agencies	$	12,981,472	57,457	146,794	12,892,135
Corporate debt		8,632,364	106,057	1,953	8,736,468

	$	21,613,836	163,514	148,747	21,628,603

	September 30, 2002
	Amortized cost		Gross unrealized gains	Gross unrealized losses	Estimated fair value


Freddie Mac common stock	$	6,316,533	253,897,967	—	260,214,500

Corporate debt	$	12,175,282	57,998	174,715	12,058,565

F-17	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The amortized cost and estimated fair value of investment debt securities available for sale as of September 30, 2003, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized cost		Estimated fair value
One year or less	$	7,505,595	7,507,712
After one year through five years		8,885,078	8,942,535
After five years through ten years		4,096,394	3,949,600
After ten years		1,126,769	1,228,756

	$	21,613,836	21,628,603

The Company’s investment in Federal Home Loan Bank stock was $13,610,000 and $14,365,000 at September 30, 2003 and 2002, respectively. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, the investment in Federal Home Loan Bank stock is carried at cost because it is considered a restricted stock investment. The investment in Federal Home Loan Bank stock was not considered impaired at September 30, 2003 and 2002.

Proceeds from sales of investment securities and Freddie Mac common stock during 2003, 2002, and 2001 were $804,555, $22,162,639, and $15,564,771, respectively. Gross gains of $773,368 and $129,068 were realized on those sales for 2003 and 2002, respectively, and gross realized losses on sales of investment securities for 2002 and 2001 were $1,565,121 and $42,229, respectively.

Investment securities with an aggregate carrying amount of $19,891,948 and $6,998,404 at September 30, 2003 and 2002, respectively, were pledged to collateralize Federal Home Loan Bank advances and securities sold under agreements to repurchase.

F-18	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(6)

Mortgage-Backed Securities and Collateralized Mortgage Obligations

Mortgage-backed securities and collateralized mortgage obligations available for sale are summarized as follows:

	September 30, 2003
	Amortized cost		Gross unrealized gains	Gross unrealized losses	Estimated fair value
Mortgage-backed securities:
FNMA certificates	$	89,364,541	1,223,688	180,269	90,407,960
GNMA certificates		14,531,391	387,325	—	14,918,716
FHLMC certificates		13,378,196	2,125	113,799	13,266,522
Collateralized mortgage obligations:
FNMA		136,101,123	142,161	2,723,134	133,520,150
FHLMC		86,818,483	121,579	872,118	86,067,944
Other		56,441,159	159,496	349,659	56,250,996

	$	396,634,893	2,036,374	4,238,979	394,432,288


	September 30, 2002
	Amortized cost		Gross unrealized gains	Gross unrealized losses	Estimated fair value
Mortgage-backed securities:
FNMA certificates	$	31,102,710	516,716	29,492	31,589,934
GNMA certificates		24,189,302	524,533	—	24,713,835
FHLMC certificates		6,743,633	96	11,452	6,732,277
Collateralized mortgage obligations:
FNMA		126,787,882	266,761	701,584	126,353,059
GNMA		2,139,366	—	5,712	2,133,654
FHLMC		239,569,568	616,885	1,007,445	239,179,008
Other		25,181,629	172,150	115,076	25,238,703

	$	455,714,090	2,097,141	1,870,761	455,940,470

Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations during 2003, 2002, and 2001 were $8,253,369, $136,845,298, and $189,420,664, respectively. Gross gains of $107,038, $785,965, and $704,315 and gross losses of $0, $166,135, and $663,109 were realized on those sales for 2003, 2002, and 2001, respectively.

F-19	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Mortgage-backed securities and collateralized mortgage obligations with an aggregate carrying amount of $335,955,405 and $350,844,438 at September 30, 2003 and 2002, respectively, were pledged to secure Federal Home Loan Bank advances and to collateralize securities sold under agreements to repurchase.

The following table shows additional information related to the collateralized mortgage obligations held by the Company:

	September 30, 2003
	Fair value		Weighted average life	Yield		Net unrealized gain (loss)
Fixed rate	$	103,123,995	1.71 years	3.28	%	$	(3,179,137	)
Variable rate		172,715,095	6.52 years	2.18			(342,538	)

Total	$	275,839,090	5.43 years	2.59	%	$	(3,521,675	)

	September 30, 2002
	Fair value		Weighted average life	Yield		Net unrealized gain (loss)
Fixed rate	$	114,842,635	1.55 years	6.06	%	$	892,527
Variable rate		278,061,789	0.84 years	2.85			(1,666,548	)

Total	$	392,904,424	1.05 years	3.79	%	$	(774,021	)

The weighted average lives and yields in the above table are based on the average life utilizing the previous three months of prepayment speeds from September 30, 2003 and 2002, respectively. Different prepayment assumptions may result in different average lives and thus different yields.

(7)

Derivative Instruments

During 2003, the Company initiated a covered call program on its Freddie Mac common stock. The Company sold a total of 326,500 options during 2003 of which 165,000 options expired or were bought back by the Company, and of which 15,000 were exercised by the holder. At no time during 2003 did the Company have more than 250,000 options outstanding.

The options are derivative instruments as defined by SFAS No. 133 and as such are recorded at fair value. The Company does not account for the options as hedges and as a result the change in fair value is recorded in the income statement. At September 30, 2003, 146,500 options were outstanding with a fair value of $87,935.

F-20	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(8)

Loans Receivable

Loans receivable are summarized as follows:

	September 30
	2003			2002
1-4 family residential real estate mortgage	$	133,305,460		100,471,989
Commercial real estate		111,188,786		68,015,594
Commercial		21,633,914		16,586,857
Real estate construction		26,530,498		17,497,332
Consumer and other		19,672,561		19,969,916
Undisbursed proceeds of loans in process		(12,454,021	)	(8,535,361	)

Loans receivable, net of undisbursed proceeds of loans in process		299,877,198		214,006,327
Less:
Unamortized loan origination fees, net		544,202		173,319
Allowance for loan losses		6,779,576		5,179,048

	$	292,553,420		208,653,960

In addition to the above, the Company was servicing loans primarily for others with aggregate principal balances of $50,477,309, $95,879,380, and $132,506,482 at September 30, 2003, 2002, and 2001, respectively.

Loans to certain executive officers, directors, and their associates totaled $418,666 and $662,003 at September 30, 2003 and 2002, respectively. Management believes that such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal credit risk nor present other unfavorable features. The following is a summary of activity during 2003 with respect to such aggregate loans to these individuals and their associates and affiliated companies:

Balance at September 30, 2002	$	662,003

New loans		244,288
Repayments		(487,625	)

Balance at September 30, 2003	$	418,666

F-21	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

At September 30, 2003 and 2002, the Company had $5,123,917 and $3,012,869, respectively, of nonaccrual loans. The following is a summary of interest income relating to nonaccrual loans for the years ended September 30, 2003, 2002, and 2001.

	2003			2002		2001
Interest income at contractual rate	$	468,007		262,125		246,086
Interest income actually recorded		(331,571	)	(213,210	)	(141,609	)

Reduction of interest income	$	136,436		48,915		104,477

The following is a summary of transactions in the allowance for loan losses:

	2003			2002		2001
Balance at beginning of year	$	5,179,048		5,289,778		6,346,001
Allowance acquired in business combination		2,177,369		—		—
Loans charged off		(1,044,152	)	(816,074	)	(2,096,532	)
Recoveries on loans previously charged off		442,311		455,344		540,309
Provision for loan losses charged to operations		25,000		250,000		500,000

Balance at end of year	$	6,779,576		5,179,048		5,289,778

At September 30, 2003 and 2002, pursuant to the definition within SFAS No. 114, the Company had impaired loans of approximately $2,220,000 and $2,113,000. There were no specific allowances attributable to impaired loans at September 30, 2003 and 2002.

The average recorded investment in impaired loans for the years ended September 30, 2003, 2002, and 2001 was approximately $2,167,000, $1,405,000, and $948,000, respectively. Interest income recognized on impaired loans for the years ended September 30, 2003, 2002, and 2001, was not significant.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss, in the event of nonperformance by the customer for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded loans.

F-22	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

A summary of the Company’s financial instruments with off-balance sheet risk at September 30, 2003 and 2002 is as follows:

	2003		2002
Financial instruments whose contract amounts represent credit risk – commitments:
Mortgage loans	$	11,989,625	1,099,686
Open-end consumer loans		8,686,462	7,065,485
Open-end commercial loans		6,087,590	4,186,697
Construction loans		12,454,021	8,535,361

Total commitments	$	39,217,698	20,887,229

The Company was also committed to sell loans of approximately $88,500 and $1,051,000 at September 30, 2003 and 2002, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but consists primarily of residential real estate.

The following summarizes the Company’s commitments to fund fixed rate loans at September 30, 2003 and 2002:

	Amount		Range of rates
September 30, 2003	$	10,630,150	5.25-7.00	%
September 30, 2002		1,099,686	6.00-8.50	%

In the origination of mortgage loans, the Company enters into adjustable interest rate contracts with caps and floors written with the intent of managing its interest rate exposure. Interest rate caps and floors enable customers and the Company to transfer, modify, or reduce their interest rate risk. At September 30, 2003 and 2002, adjustable rate mortgage loans with interest rate caps and floors amounted to $55,819,000 and $64,453,000, respectively.

F-23	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(9)

Real Estate Owned

At September 30, 2003 and 2002, real estate owned is summarized as follows:

		2003			2002
Real estate acquired through foreclosure		$	683,577		669,618

(10)

Accrued Interest and Dividends Receivable

At September 30, 2003 and 2002, accrued interest and dividends receivable are summarized as follows:

	2003		2002
Loans	$	1,405,339	1,133,001
Mortgage-backed securities and collateralized mortgage obligations		1,405,408	1,794,868
Investment securities		280,125	149,119
Other		109,240	187,933

	$	3,200,112	3,264,921

(11)

Premises and Equipment

Premises and equipment at September 30, 2003 and 2002 is summarized as follows:

	2003		2002
Land	$	3,601,947	1,873,710
Buildings and improvements		6,890,774	5,193,843
Furniture, fixtures, and equipment		3,910,989	3,622,172
Construction in progress		335,400	14,400

		14,739,110	10,704,125
Less accumulated depreciation		5,356,216	4,460,780

	$	9,382,894	6,243,345

F-24	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(12)

Mortgage Servicing Rights

Activity in mortgage servicing rights (which are included in other assets) for the years ended September 30, 2003, 2002, and 2001 consists of the following:

	2003			2002		2001
Balance at beginning of year	$	591,900		815,984		1,097,284
Capitalized during the year		—		5,795		4,554
Amortization expense		(328,678	)	(229,879	)	(285,854	)

Balance at end of year	$	263,222		591,900		815,984

There was no valuation allowance at September 30, 2003 and 2002.

(13)

Investment in Limited Partnership

During 1997, the Company purchased an interest in a limited partnership, which was formed to acquire mortgage servicing rights, for $5,000,000. The Company is allocated approximately 21% of the respective earnings or losses of this partnership. As discussed in note 1, the Company uses the equity method of accounting for its investment in this limited partnership. Accordingly, the Company recognized equity in the net loss of the limited partnership of $106,746 during 2003, $564,164 during 2002, and $1,200,488 during 2001. An independent valuation of the mortgage servicing rights of the limited partnership is performed quarterly. At September 30, 2003, the Company’s carrying value in this investment is zero.

F-25	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Financial information (unaudited), including the balance sheets as of September 30, 2003 and 2002 and the income statements for the years ended September 30, 2003, 2002, and 2001 for the partnership, is as follows:

	2003		2002
Cash	$	466,646	97,392
Accounts receivable		1,278,471	426,800
Mortgage servicing rights, net		604,385	6,475,004
Other assets, primarily current		720,498	38,737

	$	3,070,000	7,037,933

Long-term debt	$	3,070,000	4,930,000
Other liabilities		—	1,590,251
Partners’ capital:
CharterBank		—	106,746
Other partners		—	410,936

	$	3,070,000	7,037,933

	Years ended September 30
	2003			2002		2001
Revenues	$	597,566		2,097,144		3,486,090
Expenses		1,115,122		4,832,485		9,306,638

Net loss	$	(517,556	)	(2,735,341	)	(5,820,548	)

CharterBank’s equity in net loss	$	(106,746	)	(564,164	)	(1,200,488	)

F-26	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(14)

Deposits

At September 30, 2003 and 2002, deposits are summarized as follows:

	2003					2002
	Amount		Range of interest rates	Weighted Average interest rate		Amount		Range of interest rates	Weighted average interest rate
Demand, NOW, and money market accounts	$	84,126,615	0.00-1.64%	0.58	%	$	60,347,303	0.00-2.31%	1.08	%
Savings deposits		15,419,473	0.00-4.50	0.30			9,132,228	0.75	0.75
Time deposits by original term:
Time deposits over $100,000		46,220,957	0.96-8.00	3.04			26,558,187	1.66-8.25	4.15
Other time deposits:
12 months or less		96,191,722	0.84-7.50	2.32			92,362,319	1.41-8.00	3.13
13-36 months		27,809,364	1.05-8.00	3.80			16,010,689	1.65-7.11	4.35
37 months or more		9,617,577	1.20-5.54	4.29			6,335,596	2.96-6.40	4.81

Total deposits		279,385,708		1.95	%		210,746,322		2.61	%

Accrued interest payable		502,606					492,611

	$	279,888,314				$	211,238,933

During 2003 and 2002, the Company actively pursued out of market time deposits from various credit unions and/or brokers as a source of funds. The balance of the credit union deposits was $42,180,547 and $37,668,253 and of the broker deposits was $7,556,601 and $0 at September 30, 2003 and 2002, respectively.

At September 30, 2003, scheduled maturities of time deposits are as follows:

Year ending September 30
2004	$	129,513,939
2005		28,272,370
2006		6,619,013
2007		9,814,677
2008		5,619,621

	$	179,839,620

F-27	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Interest expense on deposits for the years ended September 30, 2003, 2002, and 2001 is summarized as follows:

	2003		2002	2001
Demand, NOW, and money market accounts	$	611,164	524,784	814,627
Savings deposits		63,176	79,700	160,912
Time deposits		4,932,906	6,221,017	9,761,981

	$	5,607,246	6,825,501	10,737,520

Deposits of certain officers, directors, and their associates totaled $621,331 and $791,745 at September 30, 2003 and 2002, respectively. Management believes that such deposits have substantially the same terms as those for comparable transactions with other persons.

(15)

Borrowings

At September 30, 2003 and 2002, borrowings are summarized as follows:

	2003		2002
Federal Home Loan Bank advances	$	267,100,000	274,000,000
Securities sold under agreements to repurchase		121,341,220	136,963,000

	$	388,441,220	410,963,000

Federal Home Loan Bank advances at September 30, 2003 and 2002 are summarized by year of maturity in the table below:

	2003					2002
Due	Amount		Interest rates	Weighted average rate		Amount		Interest rates	Weighted average rate
Less than one year	$	140,100,000	1.30-5.34%	2.40	%	$	93,250,000	1.87-6.49%	2.77	%
One to two years		—	—	—			53,750,000	4.53-5.34	4.73
Two to three years		—	—	—			—	—	—
Thereafter		127,000,000	5.40-6.22	5.75			127,000,000	5.40-6.22	5.75

	$	267,100,000		3.99	%	$	274,000,000		4.53	%

At September 30, 2003, the Company has pledged, under a specific collateral lien with the Federal Home Loan Bank (FHLB), all stock of the FHLB, certain qualifying first mortgage loans with unpaid principal balances totaling $104,022,625 and certain mortgage-backed securities, collateralized mortgage obligations, and investment securities with an aggregate fair value of $205,659,852.

The Company has $111,350,000 in adjustable rate advances and $155,750,000 in fixed rate advances from the FHLB at September 30, 2003. As of September 30, 2003, the Company’s fixed rate FHLB advances include $125,750,000 of advances that are callable by the FHLB under certain circumstances. As of September 30, 2003, the Company’s adjustable rate advances include $25,000,000 of advances which have periodic floors.

F-28	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

At September 30, 2003, the Company had available line of credit commitments with the FHLB totaling $306,458,110 of which $267,100,000 was advanced and $39,358,110 was available at September 30, 2003.

The securities sold under agreements to repurchase at September 30, 2003 are secured by certain mortgage-backed securities, collateralized mortgage obligations, and investment securities with an aggregate fair value of $150,187,501. All securities sold under the agreements to repurchase are under the Company’s control. The repurchase agreements at September 30, 2003 and 2002 have maturities of less than 45 days, and provide for the purchase of identical securities and specify delivery of the underlying securities to an approved custodian. The aggregate carrying amount of such securities sold under the agreements to repurchase exceeded the amount of repurchase liabilities by approximately $28,846,281 at September 30, 2003.

The following summarizes pertinent data related to securities sold under the agreements to repurchase for the years ended September 30, 2003, 2002, and 2001:

	2003			2002		2001
Weighted average borrowing rate at year-end		1.26	%	2.06	%	3.25	%
Weighted average borrowing rate during the year		1.58		2.21		5.62
Average daily balance during year	$	108,497,899		107,076,110		117,600,366
Maximum month-end balance during the year		133,608,000		158,727,000		157,962,635

Interest expense on borrowings for the years ended September 30, 2003, 2002, and 2001 is summarized as follows:

	2003		2002	2001
Securities sold under agreements to repurchase	$	1,718,641	2,369,757	6,603,468
Federal Home Loan Bank advances		11,479,956	12,649,539	14,304,804

	$	13,198,597	15,019,296	20,908,272

F-29	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(16)

Income Taxes

Income tax expense (benefit) attributable to income from continuing operations for the years ended September 30, 2003, 2002, and 2001 consists of:

	2003			2002		2001
Federal:
Current	$	6,175		940,638		6,061,491
Deferred		64,747		(613,127	)	(4,847,991	)

Total Federal tax expense		70,922		327,511		1,213,500

State:
Current		(174,691	)	230,326		834,120
Deferred		186,312		(73,394	)	(641,647	)

Total state tax expense		11,621		156,932		192,473

	$	82,543		484,443		1,405,973

The difference between the actual total provision for Federal and state income taxes and Federal income taxes computed at the statutory rate of 34% for the years ended September 30, 2003 and 2002 and 35% for the year ended September 30, 2001 is summarized as follows:

	2003			2002		2001
Computed “expected” tax expense	$	1,079,105		1,150,757		2,156,726
Increase (decrease) in tax expense resulting from:
Dividends received deduction		(1,012,874	)	(799,570	)	(879,263	)
State income taxes, net of Federal tax effect		7,670		103,575		125,107
Tax-exempt income of subsidiary		(109,103	)	(108,783	)	—
Change in the deferred tax asset valuation allowance		(69,190	)	69,190		(85,278	)
Market value appreciation of ESOP shares		117,091		154,776		—
Other, net		69,844		(85,502	)	88,681

	$	82,543		484,443		1,405,973

The effective tax rate for the years ended September 30, 2003, 2002, and 2001 was 2.60%, 14.31%, and 22.82%, respectively.

F-30	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of September 30, 2003 and 2002 are presented below:

	2003		2002
Deferred tax assets:
Allowance for loan losses	$	1,605,909	968,886
Interest on nonaccrual loans		101,785	—
Deferred compensation		684,968	294,590
Depreciation		—	155,369
Investment in limited partnership		393,208	877,670
Real estate acquired through foreclosure		170,235	162,197
Net operating loss carryforward		306,755	—
Alternative minimum tax credit carryforward		501,819	—
Other		96,553	293,921

Total gross deferred tax assets		3,861,232	2,752,633

Less valuation allowance		—	69,190

Net deferred tax assets		3,861,232	2,683,443

Deferred tax liabilities:
Deferred loan costs, net		434,891	361,116
Depreciation		128,458	—
Mortgage servicing rights		99,050	226,376
Investment securities market adjustment for tax reporting		816,881	35,968
Net unrealized holding gains on securities available for sale		90,490,299	98,046,949
Federal Home Loan Bank stock dividends		11,198	42,419
Other		76,785	10,958

Total gross deferred tax liabilities		92,057,562	98,723,786

Net deferred tax liabilities	$	88,196,330	96,040,343

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and projections for future taxable income over the periods which the temporary differences resulting in the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences at September 30, 2003.

F-31	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(17)

Employee Benefits

The Company has a 401(k) Profit Sharing Plan and Trust (Plan) which covers substantially all of its employees. Prior to January 1, 2002, the Company matched up to 50% of employee contributions to the Plan, up to 8% of employee compensation, and made additional discretionary contributions. Effective January 1, 2002, the Company terminated its match of employee contributions to the Plan. The Company made contributions to the Plan of $45,859 and $228,531 in 2002 and 2001, respectively.

During 1996, the Company implemented a short-term incentive plan which covers substantially all employees. The Company also implemented a long-term incentive plan which covers key employees. For the years ended September 30, 2003, 2002, and 2001, the Company expensed $1,024,324, $361,066, and $1,023,783, respectively, related to the incentive plans.

During 2002, the Company adopted the 2001 Stock Option Plan (the 2001 Plan) which allows for stock option awards for up to 396,448 shares of the Company’s common stock to eligible directors and key employees of the Company. During 2003, the Company amended the 2001 Plan to allow for stock option awards for up to 707,943 shares. Under the provisions of the 2001 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 or upon death, disability, or qualified retirement. All options must be exercised within a ten-year period. The Company may grant either incentive stock options which qualify for special Federal income tax treatment or nonqualified stock options which do not receive such tax treatment.

The following table summarizes activity in the 2001 Plan by shares under option and weighted average exercise price per share:

	Shares	Exercise price/share
Options outstanding – September 30, 2001	—	$	—
Granted in 2002	152,000		29.26

Options outstanding – September 30, 2002	152,000		29.26
Granted in 2003	—		—

Options outstanding – September 30, 2003	152,000	$	29.26

Options exercisable at end of year – September 30, 2002	—	$	—
Options exercisable at end of year – September 30, 2003	35,200		29.26

F-32	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The following table summarizes information about the 2001 Plan at September 30, 2003:

Number outstanding at

September 30, 2003

Weighted average
remaining
contractual life

in years

Exercise price
per share

Weighted average
exercise price

per share

152,000

29.26

The fair value of each option grant is estimated on the date of grant using a minimum value option price assessment with weighted average assumptions used and estimated fair values for the year ended September 30, 2002 as follows:

Risk-free interest rate		3.76	%
Dividend yield		3.00	%
Expected life at date of grant		7 years
Volatility		29.00	%
Weighted average grant-date fair value	$	7.52

No options were granted during the year ended September 30, 2003.

During 2002, the Company implemented a benefit restoration plan (Benefit Plan) which covers the chief executive officer of the Company and any employees of the Company who are designated as eligible to participate in the Benefit Plan by resolution of the board of directors of the Company. The Benefit Plan restores the benefits in tax-qualified plans that are limited by the Internal Revenue Code. Also, in the case of a participant who retires before the repayment in full of a loan to the Employee Stock Ownership Plan, the restorative payments include a payment in lieu of the shares that would have been allocated if employment had continued through the full term of the loan. The participant in the Benefit Plan is entitled to contributions to the Benefit Plan upon termination of service, attainment of age 55, retirement or death. The Company expensed $62,949 and $137,894 related to the Benefit Plan during the years ended September 30, 2003 and 2002, respectively.

During 2002, the Company implemented the 2001 Recognition and Retention Plan (Retention Plan). In connection with the Retention Plan, a committee of the board of directors has been authorized to grant up to 158,579 restricted stock awards to certain employees and directors of the Company. During 2003, the Company amended the Retention Plan to allow for restricted stock awards for up to 283,177 awards. The Company has established a grantor trust to purchase these common shares of the Company on the open market or in private transactions. The grantor trust will not purchase previously authorized but unissued common shares from the Company and is not authorized to purchase more than 283,177 shares of common stock of the Company.

In July 2002, the Company granted as restricted stock awards 133,240 shares of the 158,579 shares reserved for the plan to eligible employees and directors of the Company, as defined by the Retention Plan. Such common shares had a fair value of $27.60 per share at date of grant which aggregated $3,678,445 in fair value. Vesting in the shares of the Retention Plan is 20% per year for each year of service with full

F-33	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

vesting after five years of service or upon death, disability, or qualified retirement. The Company expensed $1,637,177 and $433,283 related to the Retention Plan during the years ended September 30, 2003 and 2002, respectively, and will continue to record compensation over the five-year vesting period. As of September 30, 2003 and 2002, the grantor trust has purchased 283,177 shares and 1,000 shares, respectively, of the Company’s common stock which are disclosed as treasury shares in the consolidated balance sheet until such shares are vested in the Retention Plan.

During 2002, the Company implemented the Employee Stock Ownership Plan (ESOP) which covers substantially all of its employees. During the stock offering of the Company, the ESOP trust borrowed $3,171,580 from the Company to purchase 317,158 shares for allocation under the ESOP. The loan to the ESOP is reflected as unearned compensation in stockholders’ equity. As the Company receives principal payments on the loan, shares are released for allocation to participants in the ESOP and unearned compensation is reduced. Shares of the Company are freed for allocation to participants in the ESOP based on the principal and interest allocation method. Vesting in the shares of the ESOP occurs after five years of service. Participants in the ESOP may receive a distribution equal to the value of their account upon retirement, death, disability, termination of employment, or termination of the ESOP. The Company records compensation expense associated with the ESOP based on the average market price of the total shares committed to be released during the year as well as the dividends declared on the unallocated shares. The Company expensed $675,701 and $1,021,461 related to the ESOP during the years ended September 30, 2003 and 2002, respectively. The Company committed to be allocated 17,000 shares and 33,704 shares to participants in the plan during the years ended September 30, 2003 and 2002, respectively. At September 30, 2003, there were 10,913 shares in suspense in the ESOP, representing shares which were not allocated to participants resulting from additional principal payments made by the Company over the principal amount determined under the principal and interest allocation method.

(18)

Commitments and Contingent Liabilities

In the normal course of business, the Company is party (both as plaintiff and defendant) to certain matters of litigation. In the opinion of management and counsel, none of these matters should have a material adverse effect on the Company’s financial position or results of operations.

(19)

Fair Value of Financial Instruments

SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments.

(a)

Cash and Cash Equivalents

The carrying amount approximates fair value because of the short maturity of these instruments.

(b)

Investments and Mortgage-Backed Securities and Collateralized Mortgage Obligations Available for Sale

The fair value of investments and mortgage-backed securities and collateralized mortgage obligations available for sale is estimated based on bid quotations received from securities dealers. The Federal Home Loan Bank stock is considered a restricted stock and is carried at cost which approximates its fair value.

F-34	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The following table presents the fair value at September 30, 2003 and 2002:

	2003		2002
Freddie Mac common stock	$	242,904,000	260,214,500
U.S. Government agencies		12,892,135	—
Corporate debt		8,736,468	12,058,565
Mortgage-backed securities and collateralized mortgage obligations		394,432,288	455,940,470
Federal Home Loan Bank stock		13,610,000	14,365,000

	$	672,574,891	742,578,535

(c)

Loans Receivable

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

F-35	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The following table presents information for loans at September 30, 2003 and 2002:

	2003					2002
	Carrying amount			Estimated fair value		Carrying amount		Estimated fair value
1-4 family residential real estate	$	133,305,460		134,808,908		100,471,989		103,580,992
Commercial real estate		111,188,786		113,267,706		68,015,594		70,576,930
Commercial		21,633,914		21,700,390		16,586,857		16,364,679
Real estate construction		14,076,477		14,101,548		8,961,971		8,931,323
Consumer and other		19,672,561		19,823,050		19,969,916		20,160,624
Unamortized loan origination fees, net		(544,202	)	(544,202	)	(173,319	)	(173,319	)
Allowance for loan losses		(6,779,576	)	(6,779,576	)	(5,179,048	)	(5,179,048	)

	$	292,553,420		296,377,824		208,653,960		214,262,181

Loans held for sale	$	2,026,261		2,058,892		8,437,409		8,582,332

(d)

Mortgage Servicing Rights

The fair value of mortgage servicing rights approximates its carrying value due to the Company’s evaluation of the underlying loan portfolio and subsequent adjustment for loan prepayments and other market conditions.

(e)

Deposits

Under SFAS No. 107, the fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of September 30, 2003 and 2002. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The following table presents information for deposits at September 30, 2003 and 2002:

	2003			2002
	Carrying amount		Estimated fair value	Carrying amount	Estimated fair value
Demand, NOW, and money market accounts	$	84,126,615	84,126,615	60,347,303	60,347,303
Savings deposits		15,419,473	15,419,473	9,132,228	9,132,228
Time deposits		179,839,620	182,985,178	141,266,791	143,588,754

	$	279,385,708	282,531,266	210,746,322	213,068,285

F-36	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(f)

Borrowings

The fair value of the Company’s borrowings is estimated based on the discounted value of contractual cash flows. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities. The following presents information for borrowings at September 30, 2003 and 2002:

	2003			2002
	Carrying amount		Estimated fair value	Carrying amount	Estimated fair value
Federal Home Loan Bank advances	$	267,100,000	284,688,977	274,000,000	289,792,951
Securities sold under agreements to repurchase		121,341,220	121,341,220	136,963,000	136,963,000

	$	388,441,220	406,030,197	410,963,000	426,755,951

(g)

Accrued Interest and Dividends Receivable and Payable

The carrying amount of accrued interest and dividends receivable on loans and investments and payable on borrowings and deposits approximate their fair values.

(h)

Commitments

The fair value of commitments to extend credit to fund home equity, real estate construction, and real estate mortgage loans is immaterial because the underlying interest rates on such commitments approximate market rates.

(i)

Derivatives

The fair value of the outstanding covered call options is determined by the Company based on the current market price of the option.

(j)

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

F-37	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

(20)

Regulatory Matters

The Company is required to maintain non-interest-bearing cash reserve balances. The aggregate average cash reserve balances maintained at September 30, 2003 and 2002 to satisfy the regulatory requirement were $1,942,400 and $826,950, respectively.

Under Office of Thrift Supervision regulations, the Company is required to measure its interest rate risk and maintain the interest rate risk within limits the Company establishes. Based on its asset/liability structure at September 30, 2003, the Company’s earnings may be negatively impacted if interest rates increase.

Under provisions of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, the Company is required to meet certain core, tangible, and risk-based capital ratios. The regulations require institutions to have a minimum regulatory tangible capital ratio equal to 1.5% of total assets, a minimum 3% core capital ratio, and 8% risk-based capital ratio.

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the Federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations.

The prompt corrective action regulations define specific capital categories based on an institution’s capital ratios. The capital categories, in declining order, are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Institutions categorized as “undercapitalized” or worse are subject to certain restrictions, including the requirement to file a capital plan with its primary Federal regulator, prohibitions on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by its primary Federal regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the entire institution. Once an institution becomes “critically undercapitalized,” it must generally be placed in receivership or conservatorship within 90 days.

F-38	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

To be considered “adequately capitalized,” an institution must generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a total risk-based capital ratio of at least 8%. An institution is deemed to be “critically undercapitalized” if it has a tangible equity ratio of 2% or less.

As of September 30, 2003, the most recent notification from the OTS categorized CharterBank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, CharterBank must maintain minimum total risk-based, Tier 1 risk-based and core/leverage ratios as set forth in the following table. Management is not aware of the existence of any conditions or events occurring subsequent to September 30, 2003 which would affect CharterBank’s well-capitalized classification.

F-39	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

The table of compliance with minimum capital requirements for CharterBank is presented below at September 30, 2003 and 2002 (in thousands):

	2003
	Tangible capital			Core/ leverage capital			Tier I risk-based capital		Total risk-based capital
Total equity	$	151,127			151,127		151,127		151,127
General valuation allowances		—			—		—		6,016
Allowable unrealized gains		—			—		—		58,592
Goodwill and other intangible assets		(6,168	)		(6,168	)	(6,168	)	(6,168	)
Accumulated other comprehensive income		(78,602	)		(78,602	)	(78,602	)	(78,602	)

Regulatory capital	$	66,357			66,357		66,357		130,965

Total assets	$	889,640			889,640		889,640		889,640
Regulatory total assets		755,456			755,456
Risk-weighted assets							480,902		480,902
Capital ratio		8.78	%		8.78	%	13.80	%	27.23	%
Regulatory capital category:
Adequately capitalized or minimum FIRREA requirement equal to or greater than		1.50	%		3.00	%	N/A		8.00	%
Capital exceeding requirement	$	55,025			43,693		N/A		92,493
Adequately capitalized or minimum FDICIA requirement equal to or greater than					4.00	%	4.00	%	8.00	%
Capital exceeding requirement				$	36,139		47,121		92,493
Well capitalized, equal to or greater than					5.00	%	6.00	%	10.00	%
Capital exceeding requirement				$	28,584		37,503		82,875

F-40	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

	2002
	Tangible capital			Core/ leverage capital			Tier I risk-based capital		Total risk-based capital
Total equity	$	159,222			159,222		159,222		159,222
General valuation allowances		—			—		—		5,055
Allowable unrealized gains		—			—		—		68,586
Accumulated other comprehensive income		(85,581	)		(85,581	)	(85,581	)	(85,581	)

Regulatory capital	$	73,641			73,641		73,641		147,282

Total assets	$	864,359			864,359		864,359		864,359
Regulatory total assets		724,980			724,980
Risk-weighted assets							450,764		450,764
Capital ratio		10.16	%		10.16	%	16.34	%	32.67	%
Regulatory capital category:
Adequately capitalized or minimum FIRREA requirement equal to or greater than		1.50	%		3.00	%	N/A		8.00	%
Capital exceeding requirement	$	62,766			51,892		N/A		111,221
Adequately capitalized or minimum FDICIA requirement equal to or greater than					4.00	%	4.00	%	8.00	%
Capital exceeding requirement				$	44,642		55,610		111,221
Well capitalized, equal to or greater than					5.00	%	6.00	%	10.00	%
Capital exceeding requirement				$	37,392		46,595		102,206

(21)

Related Parties

During the years ended September 30, 2003, 2002, and 2001, the Company paid approximately $111,000, $140,000, and $93,000, respectively, in legal fees in the normal course of business to a law firm in which a partner is related to two board members.

The Company currently leases a branch facility and parking lot. The leases are from a partnership in which a Company executive and other related parties are partners. The facility lease expires July 31, 2008. The parking lot lease is presently being paid month-to-month. During the years ended September 2003, 2002, and 2001, lease expense relating to these leases was $50,297, $50,297, and $53,029, respectively.

F-41	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Future minimum lease payments for all leases of the Company are as follows:

2004	$	90,628
2005		52,350
2006		42,000
2007		42,000
2008		35,000

	$	261,978

(22)

Condensed Financial Statements of Charter Financial Corporation (Parent Only)

The following represents Parent Company only condensed financial information of Charter Financial Corporation:

Condensed Balance Sheets

	September 30
	2003			2002
Assets
Cash	$	9,984,913		16,034,006
Interest-bearing deposits in other banks		586,608		374,014
Freddie Mac common stock		88,209,750		95,030,000
Investment in subsidiaries		165,194,160		173,840,948
Other assets		975,445		359,283

	$	264,950,876		285,638,251

Liabilities and Stockholders’ Equity
Liabilities:
Accrued expenses	$	1,763,001		789,479
Deferred income taxes		32,828,793		35,683,206

Total liabilities		34,591,794		36,472,685

Stockholders’ equity:
Common stock, $0.01 par value; 19,822,405 shares issued in 2003 and 2002; 19,569,676 and 19,821,405 shares outstanding in 2003 and 2002, respectively		198,224		198,224
Additional paid-in capital		37,491,011		37,476,396
Treasury stock, at cost; 252,729 and 1,000 shares in 2003 and 2002, respectively		(7,836,234	)	(29,930	)
Unearned compensation – ESOP		(2,624,940	)	(2,664,539	)
Retained earnings		59,190,493		58,224,724
Accumulated other comprehensive income		143,940,528		155,960,691

Total stockholders’ equity		230,359,082		249,165,566

	$	264,950,876		285,638,251

F-42	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Condensed Statements of Income

	Year ended September 30, 2003			Period ended September 30, 2002
Income:
Interest income	$	308,107		298,874
Dividend income		1,700,000		1,462,616
Dividend received from Bank		2,500,000		—
Gain on sale of Freddie Mac common stock		773,368		—
Other income		51,975		463

Total operating income		5,333,450		1,761,953

Expenses:
Salaries and employee benefits		643,789		333,584
Occupancy		16,929		14,925
Legal and professional		294,190		320,798
Marketing		166,631		51,641
Other		71,534		46,347

Total operating expenses		1,193,073		767,295

Income before income taxes		4,140,377		994,658
Income tax expense		169,882		112,555

Income before (distributions in excess of net income) equity in undistributed net income		3,970,495		882,103
(Distributions in excess of net income) equity in undistributed net income of subsidiaries		(879,201	)	2,018,032

Net income	$	3,091,294		2,900,135

F-43	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Condensed Statements of Cash Flows

	Year ended September 30, 2003			Period ended September 30, 2002
Cash flows from operating activities:
Net income	$	3,091,294		2,900,135
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of Freddie Mac common stock		(773,368	)	—
Deferred tax benefit		(233,834	)	(85,812	)
Distributions in excess of earnings (equity in undistributed net income) of subsidiaries		879,201		(2,018,032	)
Allocation of ESOP common stock		39,599		507,041
Increase in other assets		(616,162	)	(359,283	)
Increase in other liabilities		1,813,887		789,479

Net cash provided by operating activities		4,200,617		1,733,528

Cash flows used in investing activities:
Proceeds from the sale of Freddie Mac common stock		804,555		—
Proceeds of stock offering invested in subsidiary		—		(18,609,699	)

Net cash provided by (used in) investing activities		804,555		(18,609,699	)

Cash flows from financing activities:
Issuance of common stock in stock offering		—		34,047,819
Purchase of common stock for treasury		(8,716,146	)	(29,930	)
Dividends paid		(2,125,525	)	(733,698	)

Net cash (used in) provided by financing activities		(10,841,671	)	33,284,191

Net (decrease) increase in cash		(5,836,499	)	16,408,020
Cash and cash equivalents at beginning of period		16,408,020		—

Cash and cash equivalents at end of period	$	10,571,521		16,408,020

Supplemental disclosures of cash flow information:
Income taxes paid	$	322,150		147,500
Capital contribution from parent in the form of net assets		—		236,915,825
Financing activities:
Issuance of common stock under stock benefit plans		840,365		—

The OTS imposes various restrictions or requirements on CharterBank’s ability to make capital distributions, including cash dividends. A savings bank that is the subsidiary of a savings and loan holding company must file an application or a notice with the OTS at least 30 days before making a capital distribution. CharterBank must file an application for prior approval if the total amount of its capital

F-44	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to CharterBank’s net income for that year plus CharterBank’s retained net income for the previous two years. The OTS may disapprove a notice or application if: (a) CharterBank would be undercapitalized following the distribution; (b) the proposed capital distribution raises safety and soundness concerns; or (c) the capital distribution would violate a prohibition contained in any statute, regulation, or agreement. Based on the aforementioned limitation on capital distributions, substantially all of Charter Financial Corporation’s investment in CharterBank was restricted from transfer by CharterBank to Charter Financial Corporation in the form of dividends.

F-45	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(23)

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income and other comprehensive income (loss) which includes the effect of unrealized holding gains (losses) on investment and mortgage securities available for sale in stockholders’ equity. The following table sets forth the amounts of other comprehensive income (loss) included in stockholders’ equity along with the related tax effect for the years ended September 30, 2003, 2002, and 2001.

	Pretax amount			Tax effect		After tax amount
2003:
Net unrealized holding losses on investment and mortgage securities available for sale arising during the year	$	(18,696,407	)	7,216,813		(11,479,594	)
Less reclassification adjustment for net gains realized in net income		880,406		(339,837	)	540,569

Other comprehensive loss	$	(19,576,813	)	7,556,650		(12,020,163	)

2002:
Net unrealized holding losses on investment and mortgage securities available for sale arising during the year	$	(41,364,833	)	15,966,825		(25,398,008	)
Less reclassification adjustment for net losses realized in net income		(816,223	)	315,062		(501,161	)

Other comprehensive loss	$	(40,548,610	)	15,651,763		(24,896,847	)

2001:
Net unrealized holding gains on investment and mortgage securities available for sale arising during the year	$	66,704,900		(25,748,085	)	40,956,815
Less reclassification adjustment for net losses realized in net income		(1,023	)	395		(628	)

Other comprehensive income	$	66,705,923		(25,748,480	)	40,957,443

F-46	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

(24)

Condensed Financial Statements of First Charter, MHC

The following represents only condensed financial information of First Charter, MHC:

Condensed Balance Sheets

	September 30
	2003		2002
Assets:
Cash and cash equivalents	$	325,947	232,294
Freddie Mac common stock		20,940,000	22,360,000
Investment in Charter Financial Corporation		184,287,266	199,332,453
Other assets		2,667	2,667

Total assets	$	205,555,880	221,927,414

Liabilities:
Deferred income taxes	$	7,862,971	8,411,101
Other liabilities		57,255	58,285

Total liabilities		7,920,226	8,469,386

Equity:
Contributed capital		10,570,790	16,772,462
Retained earnings		59,405,006	58,537,697
Accumulated other comprehensive income		127,659,858	138,147,869

Total equity		197,635,654	213,458,028

Total liabilities and equity	$	205,555,880	221,927,414

F-47	(Continued)

CHARTER FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2003 and 2002

Condensed Statements of Income

	Year ended September 30, 2003		Period ended September 30, 2002
Income:
Dividend income	$	400,107	344,145
Equity in earnings of subsidiaries		2,473,035	2,320,108

Total operating income		2,873,142	2,664,253

Expenses:
Salaries and employee benefits		162,553	146,070
Occupancy		3,000	2,875
Legal and professional		26,278	12,500
Marketing		42,000	36,000
Federal insurance premiums and other regulatory fees		1,500	7,750
Charitable contributions		33,000	28,000
Other		25,000	24,489

Total operating expenses		293,331	257,684

Income before income taxes		2,579,811	2,406,569
Income tax expense		12,083	9,784

Net income	$	2,567,728	2,396,785

First Charter, MHC owns 15,857,924 shares of Charter Financial Corporation common stock and has waived its right to receive dividends on such shares.

F-48	(Continued)