UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended September 30, 2012

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

For the transition period from to

Commission File Number: 001-34889

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.)

1233 O. G. Skinner Drive, West Point, Georgia		31833
(Address of principal executive offices)		(Zip Code)

(706) 645-1391

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		The Nasdaq Stock Market LLC

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of March 31, 2012 was approximately $56,099,771.

The number of shares outstanding of the registrant’s common stock as of December 7, 2012 was 18,277,540.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on February 20, 2013 are incorporated by reference into Part III of this Form 10-K.

INDEX


Part I

		Page
Item 1.	Business		2
Item 1A.	Risk Factors		20
Item 1B.	Unresolved Staff Comments		30
Item 2.	Properties		30
Item 3.	Legal Proceedings		31
Item 4.	Mine Safety Disclosures

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		32
Item 6.	Selected Financial Data		34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		79
Item 8.	Financial Statements and Supplementary Data		80
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		159
Item 9A.	Controls and Procedures		159
Item 9B.	Other Information		160

Part III

Item 10.	Directors, Executive Officers and Corporate Governance		161
Item 11.	Executive Compensation		161
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		161
Item 13.	Certain Relationships and Related Transactions, and Director Independence		162
Item 14.	Principal Accounting Fees and Services		162

Part IV

Item 15.	Exhibits and Financial Statement Schedules		163

SIGNATURES			167

Cautionary Note About Forward-Looking Statements

We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, as well as statements about the objectives and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our businesses, statements about our future status, and activities or reporting under U.S. banking and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

PART I

Item 1.

BUSINESS

General

Charter Financial Corporation, or “Charter Financial,” is a federally chartered corporation established in October 2001 to be the holding company for CharterBank. Charter Financial’s business activity is the ownership of the outstanding capital stock of CharterBank.

CharterBank is a federally chartered stock savings bank headquartered in West Point, Georgia. CharterBank was originally founded in 1954 as a federally chartered mutual savings and loan association. Our principal business consists of attracting retail deposits from the general public in the areas surrounding our administrative office in West Point, Georgia and our branch offices located in west-central Georgia, east-central Alabama and now the Florida Panhandle, and investing those deposits, together with funds generated from operations, in commercial real estate loans, one- to four-family residential mortgage loans, construction loans and investment securities and, to a lesser extent, commercial business loans, home equity loans and lines of credit and other consumer loans. In addition to our branch offices in West Central Georgia, East Central Alabama and the Florida Panhandle, we operate a cashless branch office in Norcross, Georgia. CharterBank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency. CharterBank’s executive offices are located at 1233 O.G. Skinner Dr., West Point, Georgia 31833. Its telephone number at that address is (706) 645-1391.

CharterBank has grown through strategic de novo branching and acquisitions primarily, along the I-85/I-185 corridor and adjacent areas anchored by Auburn, Alabama and Atlanta and Columbus, Georgia. In February 2003, we expanded our presence in the Auburn-Opelika, Alabama market through the acquisition of EBA Bancshares and its subsidiary, Eagle Bank of Alabama. In March 2005 and May 2007, new branches were opened in Lagrange, Georgia. In June 2009, we entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and assume all of the deposits of Neighborhood Community Bank, or “NCB”, a full-service commercial bank headquartered in Newnan, Georgia, and in March 2010, we entered into an agreement with the FDIC to acquire certain assets and assume all of the deposits of McIntosh Commercial Bank, or “MCB”, a full-service commercial bank headquartered in Carrollton, Georgia. In September 2011, we entered into an agreement with the FDIC to acquire certain assets and assume all of the deposits of The First National Bank of Florida, or “FNB”, a full-service commercial bank headquartered in Milton, Florida. The agreements with the FDIC in connection with the acquisitions of NCB, MCB and FNB also included loss-sharing agreements with respect to certain loans and assets. For additional information regarding the NCB, MCB and FNB acquisitions, see “—FDIC-Assisted Acquisitions” below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—FDIC-Assisted Acquisitions.”

First Charter, MHC is our federally chartered mutual holding company. First Charter, MHC’s principal business activity is the ownership of 11,457,924 shares of common stock of Charter Financial, or approximately 63% of Charter Financial’s outstanding shares as of December 7, 2012. As long as we remain in the mutual holding company form of organization, First Charter, MHC must own a majority of the outstanding shares of Charter Financial.

The Charter Foundation, Inc. (“Charter Foundation”), a nonprofit charitable foundation, was established in December 1994 by members of CharterBank. Charter Foundation provides funds to eligible nonprofit organizations to help them carry out unique, innovative projects in specific fields of interest. Charter Foundation’s goal is to fund projects that will enhance the quality of life in the communities served by CharterBank.

Charter Foundation at September 30, 2012 had approximately $7.0 million in assets and annually distributes 5% of its net asset value in grants to the local community. The grants and gifts provided by Charter Foundation are generally for charitable causes, and to enhance the quality of life and housing in CharterBank’s markets. CharterBank indirectly benefits from the favorable publicity and elevated public standing generated through Charter Foundation’s gifts.

Our Internet address is www.charterbank.net. Information on our website should not be considered a part of this Annual Report on Form 10-K.

Market Area

Prior to acquiring branch offices of NCB, MCB and FNB, we conducted operations primarily in western Georgia and eastern Alabama, through our main office in West Point, Georgia (Troup County), a branch in Valley, Alabama (Chambers County), three branches in LaGrange, Georgia (Troup County), a branch in Opelika, Alabama (Lee County), and two branch offices in Auburn, Alabama (Lee County), for a total of eight branch offices. We acquired four branches in Georgia, along the I-85 corridor, in the NCB acquisition in June 2009, and closed one branch. In March 2010, we acquired four branches of MCB and subsequently closed three of these branches, further expanding our presence in west-central Georgia with an office in Carrollton (Carroll County). In September 2011, we acquired eight branches of FNB and we subsequently closed five of these branches in Northwest Florida. We kept two branches located in Santa Rosa County and one branch in Escambia County. The acquisitions have complemented the corporate expansion we have achieved in recent years both through de novo branching and acquisitions. Management believes that the acquisitions are key components to building our retail franchise, as we now have 16 branches on the I-85 corridor and adjacent areas between Newnan, Georgia and Auburn, Alabama, and in the Florida Panhandle. The focus of our near-term acquisition strategy will be to acquire additional franchises primarily with FDIC assistance.

According to the 2010 U.S. Census, population in our Georgia market area has increased from 2000 to 2010, with growth rates of 26.7%, 42.7%, 16.8%, 35.2% and 14.4% for Carroll, Coweta, Fayette, Harris, and Troup Counties, respectively. As of 2010, the Georgia market area’s median household income of $55,342 was above both the national and state levels. Consistent with national trends, the Georgia market area unemployment in 2012 decreased from 2011 levels. As of October 2012, the unemployment rate for Carroll, Coweta, Fayette, Harris, and Troup Counties was 8.9%, 7.5%, 7.1%, 6.4% and 9.3%, respectively.

According to the 2010 U.S. Census, from 2000 to 2010, our Alabama market area population decreased in Chambers County by 6.5% while increasing in Lee County by 21.9% and our median household income of $34,964 was below both the national and Alabama state levels as of 2010. Our Alabama market area has seen its unemployment rate in 2012 decrease from 2011 levels, with the Chambers County and Lee County unemployment rate at 9.4% and 6.7%, respectively, as of October 2012.

In our Florida market area, population increased 28.6% and 1.1% for Santa Rosa County and Escambia County, respectively, from 2000 to 2010 according to the 2010 U.S. Census. Median household income in our

Florida market area for 2010 was $46,000, which was below the national level but above the Florida level. Our Florida market area has seen its unemployment rate in 2012 decrease from 2011 levels, with the Santa Rosa and Escambia County unemployment rate at 7.0% and 8.1%, respectively, as of October 2012.

The outlook for our market area is for modest growth supported by a $1.0 billion KIA Motors assembly plant, which opened in February 2010 in West Point, Georgia. As of November 2012, the 2.2 million square-foot automobile manufacturing plant and its nearby suppliers have created more than 10,000 jobs in the area. The outlook for modest growth is also supported by a military base realignment which has added significantly to employment at Fort Benning in Columbus, Georgia. Additionally, in the spring of 2012, Point University, formerly known as Atlanta Christian College, moved their main campus from East Point, Georgia to West Point, Georgia, and with it, its students and numerous facility and staff. However, the market area is significantly overbanked, especially Newnan and Coweta County. This has limited our ability to expand organically, thus making geographic expansion more dependent upon acquisitions and de novo branching into new markets. We will seek to take advantage of the profitable growth opportunities presented within our expanded market area, and capitalize on our expanded retail footprint resulting from acquisitions. The economy of the Florida Panhandle is primarily dependent upon tourism and hospitality, farming, forestry, paper mills, import/export shipping, shipbuilding, and commercial fishing. Over the next five years, our Florida markets are projected to experience moderate growth in terms of total population and number of households. The outlook for our Florida Panhandle market is affected by the heavy influences of military bases and tourism.

Competition

We face intense competition both in making loans and attracting deposits. West-central Georgia, east-central Alabama and the Florida Panhandle have a high concentration of financial institutions, many of which are branches of large money center, super-regional, and regional banks that have resulted from the consolidation of the banking industry in Florida, 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 historically has 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, from brokerage firms, insurance companies and non-traditional financial institutions, including non-depository financial services providers.

FDIC-Assisted Acquisitions

Neighborhood Community Bank. On June 26, 2009, CharterBank entered into a purchase and assumption agreement with the FDIC to acquire certain assets and assume certain liabilities of NCB, a full-service commercial bank headquartered in Newnan, Georgia. The NCB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of funds. The acquisition of NCB’s four full-service branches, one of which has been closed, has expanded our market presence in west-central Georgia within the I-85 corridor region in which we are seeking to expand. We assumed $195.3 million of NCB’s liabilities, including $181.3 million of deposits, with no deposit premium paid. We also acquired $202.8 million of NCB assets, including $159.9 million of loans, net of unearned income, and $17.7 million of real estate owned, at a discount to book value of $26.9 million. The acquisition agreement with the FDIC included loss-sharing agreements pursuant to which the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $82.0 million of losses on acquired loans and real estate owned, and assume 95% of losses and share 95% of loss recoveries on losses exceeding $82.0 million. Loans and other real estate owned that are covered under the loss-sharing agreements are referred to in this annual report on Form 10-K as “covered loans” and “covered other real estate,” respectively. Collectively, these are referred to as “covered assets.” Loans, other real estate and assets that are not covered by loss-sharing agreements are referred to as “non-covered” loans, other real estate and assets.

It is expected that we will have sufficient nonaccretable discounts and allowance for loan losses, after recording the current year provisions, to cover any losses on the NCB covered loans and covered other real estate. Given the foregoing and as a result of the loss-sharing agreements with the FDIC on these assets, we do not expect to incur significant losses. In addition, we expect to have accretable discounts (accretable yield) to provide for market yields on the NCB covered loans.

McIntosh Commercial Bank. On March 26, 2010, CharterBank entered into an acquisition agreement with the FDIC to acquire certain assets and assume certain liabilities of MCB, a full-service commercial bank headquartered in Carrollton, Georgia. The MCB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of our funds. The retention of one of MCB’s four full-service branches has expanded our market presence in west-central Georgia within the I-85 corridor region and adjacent areas in which we are seeking to expand. We assumed $306.2 million of MCB’s liabilities, including $295.3 million of deposits, with no deposit premium paid. We also acquired $322.6 million of MCB assets, including $207.6 million of loans, net of unearned income, and $55.3 million of real estate owned, at a discount to book value of $53.0 million. The purchase and assumption agreement with the FDIC included loss-sharing agreements pursuant to which the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $106.0 million of losses on acquired loans and real estate owned, and assume 95% of losses and share 95% of loss recoveries on losses exceeding $106.0 million.

We recorded in noninterest income approximately $9.3 million in a pre-tax bargain purchase gain in connection with the MCB transaction, which represents the excess of the estimated fair value of the assets acquired over the fair value of the liabilities assumed. In addition, it is expected that we will have sufficient nonaccretable discounts, after recording the current year provisions, to cover any losses on the MCB covered loans and covered other real estate. We have recorded a FDIC receivable for expected losses to be indemnified and nonaccretable covered loan credit discounts for such amounts. It is also expected that we will have accretable discounts to provide for market yields on the MCB covered loans.

The First National Bank of Florida. On September 9, 2011, CharterBank entered into an acquisition agreement with the FDIC to acquire certain assets and assume certain liabilities of FNB, a full-service commercial bank headquartered in Milton, Florida. The FNB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of our funds. The retention of three of FNB’s eight full-service branches has expanded our market presence in the Florida Panhandle and adjacent areas in which we are seeking to expand. We assumed $247.5 million of FNB’s liabilities, including $244.7 million of deposits, with no deposit premium paid. We also acquired $251.8 million of FNB assets, including $185.9 million of loans, net of unearned income, and $24.9 million of real estate owned, at a discount to book value of $28.0 million. The purchase and assumption agreement with the FDIC included loss-sharing agreements pursuant to which the FDIC will assume 80% of losses and share 80% of loss recoveries on acquired loans and real estate owned.

We recorded in noninterest income approximately $1.1 million in a pre-tax bargain purchase gain in connection with the FNB transaction, which represents the excess of the estimated fair value of the assets acquired over the fair value of the liabilities assumed. In addition, it is expected that we will have sufficient nonaccretable discounts and allowance for loan losses, after recording the current year provisions, to cover any losses on the FNB covered loans and covered other real estate. We have recorded a FDIC receivable for expected losses to be indemnified and nonaccretable covered loan credit discounts for such amounts. It is also expected that we will have accretable discounts to provide for market yields on the FNB covered loans.

For more information regarding CharterBank’s FDIC-assisted acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—FDIC-Assisted Acquisitions” and Note 3 to the Notes to our Consolidated Financial Statements.

Lending Activities

We offer a broad range of loan products with a variety of rates and terms. Our lending operations consist of the following major segments: commercial real estate lending; single-family residential mortgage lending for retention in our portfolio; construction lending; and residential mortgage lending for resale in the secondary mortgage market, generally on a servicing-released basis. To a lesser extent, we also originate consumer loans (including home equity loans and other forms of consumer installment credit), and commercial business loans. This strategy is consistent with our community bank orientation.

We have pursued loan diversification with the objective of lowering credit concentration risk, enhancing yields and earnings, and improving the interest sensitivity of our assets. Historically, we have focused our lending activities on residential and commercial mortgage loans as well as consumer loans, primarily to local customers. We also have initiated retail and commercial business lending in the markets formerly served by NCB, MCB and FNB branches.

Commercial Real Estate Loans. Commercial real estate lending is an integral part of our operating strategy and we intend to continue to take advantage of opportunities to originate commercial real estate loans, especially in our new markets of Carroll, Coweta and Fayette Counties in Georgia and Santa Rosa and Escambia Counties in Florida. Commercial real estate loans typically have higher yields, better interest rate risk characteristics and larger loan balances compared to residential mortgage loans. Commercial real estate lending also has provided us with another means of broadening our range of customer relationships. As of September 30, 2012, non-covered commercial real estate loans totaled $251.4 million, or 57.5% of our total non-covered loan portfolio. Additionally, at September 30, 2012, we had $160.2 million (contractual amount) of commercial real estate loans covered by FDIC loss-sharing agreements, or 76.6% of total covered loans.

Commercial real estate loans are generally made to Georgia, Alabama or Florida entities and are secured by properties in these states. Commercial real estate loans are generally made for up to 85% of the value of the underlying real estate. Our commercial real estate loans are typically secured by offices, hotels, strip shopping centers, warehouses/distribution facilities land or convenience stores located principally in Georgia, Alabama and Florida. Multi-family mortgage loans, which we categorize as a subset of our commercial real estate loans, are originated for both new and existing properties and are made on apartment buildings with a wide range of tenant income levels. Many of our multi-family mortgage loans are secured by properties located near college campuses.

Commercial real estate lending involves additional risks compared to one- to four-family residential lending. Repayment of commercial real estate loans often depends on the successful operations and income stream of the borrowers, and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. To compensate for the increased risk, our commercial real estate loans generally have higher interest rates and shorter maturities than our residential mortgage loans. We offer commercial real estate loans at fixed rates and adjustable rates tied to the prime interest rate. However, the interest rates on a portion of our commercial real estate loan portfolio are tied to yields on U.S. Treasury securities or LIBOR. We currently offer fixed-rate terms of 15 years; however, in prior years we originated fixed-rate loans with maturities of up to 20 years.

Our underwriting criteria for commercial real estate loans include maximum loan-to-value ratios, debt coverage ratios, secondary sources of repayment, guarantor requirements, net worth requirements and quality of cash flow. As part of our loan approval and underwriting of commercial real estate loans, we undertake a cash flow analysis, and we generally require a debt-service coverage ratio of at least 1.15 times. We believe that this segment of the market offers an opportunity to expand our portfolio while realizing strong risk-adjusted returns because many lenders are no longer active in this market. Our capacity to expand this portfolio may be tempered by lack of demand from qualified borrowers, intense competition for good loans, and possible loan concentrations.

Residential Mortgage Loans. We originate first and second mortgage loans secured by one- to four-family residential properties within Georgia, Florida and Alabama. We currently originate mortgages at all of our offices, but utilize centralized processing at our corporate office. As of September 30, 2012, non-covered residential mortgage loans totaled $105.5 million, or 24.1% of total non-covered loans. As of September 30, 2012, covered residential mortgage loans totaled $15.0 million, or 7.2% of total covered loans.

We originate both fixed rate and adjustable rate one- to four-family residential mortgage loans. Fixed rate, 30 year, conforming loans are generally originated for resale into the secondary market on a servicing-released basis. We generally retain in our portfolio loans that are 15 year fixed rate or non-conforming due to property exceptions and loans that have adjustable rates. As of September 30, 2012, approximately 51.3% of our one- to four-family loan portfolio consisted of fixed-rate mortgage loans and 48.7% consisted of either adjustable rate mortgage loans (“ARMs”) or hybrid loans with fixed interest rates for the first one, three, five or seven years of the

loan, and adjustable rates thereafter. After the initial term, the interest rate on ARMs generally adjusts on an annual basis at a fixed spread over the monthly average yield on United States Treasury securities, the prime interest rate as listed in The Wall Street Journal, or LIBOR. The interest rate adjustments are generally subject to a maximum increase of 2% per adjustment period and 6% over the life of the loan.

Traditionally, we have sought to distinguish ourselves in the area of non-conforming residential mortgage lending. While the risks of non-conforming lending may be somewhat higher than originating conforming residential mortgage loans, we believe that the greater yield and shorter repricing terms of these loans compensate us for this additional risk. Additionally, management believes that the credit quality of our loan portfolio is largely unaffected by the non-conforming loans, since the majority of these loans are non-conforming due to factors unrelated to credit quality (i.e., high acreage, leased land, multiple structures or newly self-employed borrowers). The loans may also be non-conforming because of a deficiency in the credit record of a borrower, but which management believes does not impair the borrower’s ability to repay the loan. Thus, the non-conforming loans we originate are not subprime loans. CharterBank originates one- to four-family loans with loan-to-values of up to 80%. We will occasionally originate loans with loan-to-values in excess of 80% with private mortgage insurance. The substantial portion of our one- to four-family residential mortgage loans are secured by properties in Georgia, Alabama and Florida.

The amount of subprime loans held by CharterBank is not material. We consider “subprime” loans to be loans originated to borrowers having credit scores below 580 at the time of origination. We do not, and have not, originated “low documentation” or “no documentation” loans, “option ARM” loans, or other loans with special or unusual payment arrangements.

We modify residential mortgage loans when it is mutually beneficial to us and the borrower, and on terms that are appropriate to the circumstances. We have no non-covered loans in government modification programs. Covered loans have FDIC modification programs available, these programs are outlined in their respective purchase and assumption agreements.

Construction and Development Loans. Consistent with our community bank strategy, construction and development lending has been an integral part of our overall lending strategy. While current market conditions have suppressed demand for construction and land loans, there are opportunities to lend to quality borrowers in our market area. Management believes that the reduction in the number of construction lenders has reduced the supply of construction loans, and there is an opportunity to lend to borrowers with superior liquidity, capital and management skills. We intend to remain an active participant in the construction lending market, primarily through our cashless branch in Norcross, Georgia. We are making virtually no development loans and we are providing very limited financing for the purchase of building lots. Construction loans represent an important segment of the loan portfolio, totaling $45.4 million, or 10.4% of non-covered loans at September 30, 2012.

We make loans primarily for the construction of one- to four-family residences but also for multi-family and nonresidential real estate projects on a select basis. We offer two principal types of construction loans: builder loans, including both speculative (unsold) and pre-sold loans to pre-approved local builders; and construction/permanent loans to property owners that are converted to permanent loans at the end of the construction phase. The number of speculative loans that we will extend to a builder at one time depends upon the financial strength and credit history of the builder. Our construction loan program is expected to remain a modest portion of our loan volume. We generally limit the number of outstanding loans on unsold homes under construction within a specific area and/or to a specific borrower.

Commercial Loans and Consumer Loans. To a much lesser extent, we also originate non-mortgage loans, including commercial business and consumer loans. At September 30, 2012, non-covered commercial loans totaled $16.6 million, or 3.8% of total non-covered loans, and non-covered consumer and other loans totaled $18.1 million, or 4.1% of non-covered loans. Additionally, at September 30, 2012, we had $26.0 million (contractual amount) of commercial loans and $6.2 million (contractual amount) of consumer and other loans covered by FDIC loss sharing agreements.

The majority of our non-mortgage non-covered loans are consumer loans, including loans on deposits, second mortgage loans, home equity lines of credit, automobile loans and various other installment loans. We primarily offer consumer loans (excluding second mortgage loans and home equity lines of credit) as an

accommodation to customers. Consumer loans tend to have a higher credit risk than residential mortgage loans because they may be secured by rapidly depreciable assets, or may be unsecured. Our consumer lending generally follows accepted industry standards for non sub-prime lending, including credit scores and debt to income ratios.

We offer home equity lines of credit as a complement to our one- to four-family residential mortgage lending. 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 have adjustable-rates and are secured by a first or second mortgage on owner-occupied one- to four-family residences located primarily in Georgia, Alabama and Florida. 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 for one- to four-family residential mortgage loans, except for slightly more stringent credit-to-income and credit score requirements. Home equity loans are generally limited to 80% of the value of the underlying property unless the loan is covered by private mortgage insurance or a loss sharing agreement. At September 30, 2012, we had $14.0 million of home equity lines of credit and second mortgage loans not covered by the FDIC. Of the funded home equity loans not covered by the FDIC $1.6 million had current credit scores of 650 or under as of October 2012. We had $8.7 million of unfunded home equity line of credit commitments not covered by the FDIC at September 30, 2012.

Our commercial business loans are generally limited to terms of five years or less. We typically attempt to collateralize these loans with a lien on commercial real estate or, occasionally, with a lien on business assets and equipment. We also generally require the personal guarantee of the business owner. Interest rates on commercial business loans are generally higher than interest rates on residential or commercial real estate loans due to the risk inherent in this type of loan. Commercial business loans are generally considered to have more risk than residential mortgage loans or commercial real estate loans because the collateral may be in the form of intangible assets and/or readily depreciable inventory. Commercial business 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, commercial business lending generally requires substantially greater supervision efforts by our management compared to residential mortgage or commercial real estate lending.

Loan Origination and Approval Procedures and Authority. The following describes our current lending procedures for residential mortgage loans and home equity loans and lines of credit. 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 residential and mortgage loans, except for home equity loans or lines where a valuation 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 laws 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 loans are approved through CharterBank’s Management Loan Committee process. The Management Loan Committee consists of the Chief Executive Officer, the President, the Chief Financial Officer, the Senior Credit Administrator, and certain other senior lending and credit officers. Commercial loan relationships of $1.0 million or less may be approved outside the Committee process by two senior officers who have commercial loan authority. Commercial loan relationships greater than $1.0 million are approved by the Management Loan Committee.

Loan Originations, Participations, Purchases and Sales. Most of our loan originations are generated by our loan personnel operating at our corporate headquarters and banking office locations. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.

Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold almost all fixed-rate, 30-year conforming one- to four-family residential mortgage loans in the secondary market generally on a servicing-released basis while retaining commercial real estate loans and non-conforming or 15-year fixed rate one- to four-family residential mortgage loans for retention in our portfolio. We sold $40.1 million of loans in fiscal 2012.

Infrequently, we have purchased loan participations in commercial loans in which we are not the lead lender that are secured by real estate or other assets. With regard to all loan participations, we follow our customary loan underwriting and approval policies, and although we may be only approving and servicing a portion of the loan, we underwrite the loan request as if we had originated the loan to ensure cash flow and collateral are sufficient. At September 30, 2012, our loan participations totaled $2.7 million, or 0.61%, of our non-covered loan portfolio. As of September 30, 2012, all of our loan participations were performing in accordance with their terms.

During fiscal 2012 we did not purchase any loans.

Investments

The Board of Directors reviews and approves our investment policy. The Chief Executive Officer 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 that will result in the best possible yield while maintaining the safety of the principal invested and assisting in managing our interest rate risk. We also seek to use our strong capital position to maximize our net income by investing in higher yielding mortgage-related securities funded by borrowings. We also consider our investment portfolio as a source of liquidity.

The broad objectives of our investment portfolio management are to:

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minimize the risk of loss of principal or interest;

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generate favorable returns without incurring undue interest rate and credit risk;

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manage the interest rate sensitivity of our assets and liabilities;

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

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provide a stream of cash flow;

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diversify assets and address maturity or interest repricing imbalances; and

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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.

Sources of Funds

Deposits are the major source of balance sheet funding for lending and other investment purposes. Additional significant sources of funds include liquidity, repayment of loans, loan sales, maturing investments, and borrowings. We believe that our standing as a sound and secure financial institution and our emphasis on the

convenience of our customers will continue to contribute to our ability to attract and retain deposits. We offer extended hours at the majority of our offices and alternative banking delivery systems that allow customers to pay bills, transfer funds and monitor account balances at any time. We also offer competitive rates as well as a competitive selection of deposit products, including checking, NOW, money market, regular savings and term certificate accounts. In addition, we offer a Rewards checking product that offers a higher rate on deposit balances up to $15,000 if certain conditions are met. These conditions include receiving only electronic statements, having at least one monthly ACH transaction and ten or more point of sale transactions per month. For accounts that do not meet these conditions in any given month, the rate paid on the balances is reduced.

We also rely on advertising and long-standing relationships to maintain and develop depositor relationships, while competitive rates are also paid to attract and retain deposits. Furthermore, the NCB, MCB, and FNB acquisitions are expected to enhance customer convenience by broadening the markets currently served by CharterBank.

We continually evaluate opportunities to enhance deposit growth. Potential avenues of growth include de novo branching and branch or institution acquisitions. Additionally, to the extent additional funds are needed, we may employ available collateral to reduce borrowings, which are expected to consist primarily of Federal Home Loan Bank advances. Based on asset limitations we have $234.5 million available at the Federal Home Loan Bank of Atlanta at September 30, 2012. Based on available collateral we are limited to $140.7 million at September 30, 2012. However, we have reduced and intend to continue to reduce our reliance on wholesale funds. We have a source of emergency liquidity with the Federal Reserve, and at September 30, 2012 we had collateral pledged that provided access to approximately $48.1 million of discount window borrowings.

Employees

As of September 30, 2012, we had 286 full-time employees and 12 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

Subsidiary Activities

Charter Financial has no direct or indirect subsidiaries other than CharterBank.

SUPERVISION AND REGULATION

General

Charter Financial is a savings and loan holding company, and is required to file certain reports with, and is subject to examination by, and otherwise must comply with the rules and regulations of the Board of Governors of the Federal Reserve System (“FRB”). Charter Financial is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

The Bank is a federal savings association, examined and supervised by the Office of the Comptroller of the Currency (“OCC”) and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. The Bank also is a member of and owns stock in the FHLB of Atlanta, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the FRB, governing reserves to be maintained against deposits and other matters. The OCC will examine the Bank and prepare reports for the consideration of the Bank’s board of directors on any operating deficiencies. The

Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s mortgage documents.

Any change in these laws or regulations, whether by the FDIC, the OCC, the FRB or Congress, could have a material adverse impact on Charter Financial, the Bank and their operations.

Certain of the regulatory requirements that are applicable to the Bank and Charter Financial are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and Charter Financial and is qualified in its entirety by reference to the actual statutes and regulations.

Federal Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), enacted on July 21, 2010, is significantly changing the bank regulatory structure and affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act eliminated our former primary federal regulator, the Office of Thrift Supervision, and required the Bank to be regulated by the OCC (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the FRB to supervise and regulate all savings and loan holding companies, including mutual holding companies and their mid-tier holding companies, like First Charter, MHC (the “MHC”) and Charter Financial, in addition to bank holding companies which the FRB already regulated. Accordingly, the MHC will require the approval of the FRB before it may waive the receipt of any dividends from Charter Financial. The FRB currently requires a “grandfathered” mutual holding company, like the MHC, to obtain member (depositor) approval and comply with other procedural requirements prior to waiving dividends, which would make dividend waivers more difficult to secure. For additional discussion regarding the waiver of dividends by the MHC, see “Holding Company Regulation Waivers of Dividend by First Charter, MHC.” The Dodd-Frank Act also requires the FRB to set minimum capital levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements should apply to savings and loan holding companies, although it is uncertain at this time whether the FRB will impose such capital requirements sooner. Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect on July 21, 2010.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with substantial power to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as the Bank will continue to be examined by their applicable federal bank regulators. The legislation also weakened the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution instead of aggregate deposits. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the FRB to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded. The Dodd-Frank Act provided for originators of certain securitized loans to retain a percentage of the risk for transferred loans, directed the FRB to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination.

Many of the provisions of the Dodd-Frank Act have delayed effective dates and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations will increase our operating and compliance costs.

Federal Banking Regulation

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended and federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate, commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate. The Bank may also invest in certain types of debt securities and certain other assets. A bank also may establish subsidiaries that may engage in certain activities not otherwise permissible for a bank, including real estate investment and securities and insurance brokerage. The Dodd-Frank Act authorized depository institutions to commence paying interest on business checking accounts, effective July 21, 2011.

Capital Requirements. Federal regulations require savings associations to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings associations receiving the highest rating on the CAMELS rating system and meeting certain other requirements) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS financial institution rating system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. Federal regulations also require that in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities that are not permissible for a national bank.

The risk-based capital standard for savings associations requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% (or 200% for certain residual interests in transferred assets), assigned by the applicable regulatory agency, based on the risks believed inherent in the type of asset. Core capital is defined as common shareholders’ equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association. In assessing an institution’s capital adequacy, the OCC takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual associations where necessary.

On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules that would revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and certain provisions of the Dodd-Frank Act. The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and

certain commercial real estate facilities that finance the acquisition, development or construction of real property. The proposed rules also required unrealized gains and losses on certain securities holdings to be included for purposes of calculating regulatory capital requirements. The proposed rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The proposed rules indicated that the final rule would become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019. However, the agencies have recently indicated that, due to the volume of public comments received, the final rule would not be in effect on January 1, 2013.

At September 30, 2012, the Bank’s capital exceeded all applicable requirements.

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2012, the Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings association, the Bank must satisfy the qualified thrift lender, or “QTL”, test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. A savings association that fails the qualified thrift lender test must operate under specified restrictions. Under the Dodd-Frank Act, non-compliance with the QTL test may subject the Bank to agency enforcement action for a violation of law. At September 30, 2012, the Bank satisfied the QTL test.

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings association. A federal savings association must file an application with the OCC for approval of a capital distribution if:

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the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years that is still available for dividends;

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the savings association would not be at least adequately capitalized following the distribution;

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the distribution would violate any applicable statute, regulation, agreement or condition imposed by a regulator; or

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the savings association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company must still file a notice with the FRB at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The OCC and the FRB have established similar criteria for approving an application or a notice and may disapprove a notice or application if:

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the savings association would be undercapitalized following the distribution;

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the proposed capital distribution raises safety and soundness concerns; or

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

In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution, if the institution would be undercapitalized after the distribution.

Liquidity. A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation.

Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the Community Reinvestment Act and federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the OCC is required to assess the savings association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.

The Bank received a satisfactory Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by FRB regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. First Charter, MHC and Charter Financial are affiliates of the Bank. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Savings associations are required to maintain detailed records of all transactions with affiliates.

The Bank’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 Federal Reserve Act and Regulation O of the FRB. Among other things, these provisions require that extensions of credit to insiders:

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subject to certain exceptions for loan law programs made available to all employees, 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

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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 the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.

Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

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

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well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the OCC or the OTS under certain statutes and regulations, to meet and maintain a specific capital level for any capital measure);

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adequately capitalized (at least 4% leverage capital (3% for associations with a composite CAMELS rating of 1), 4% Tier 1 risk-based capital and 8% total risk-based capital);

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undercapitalized (less than 4% leverage capital (except as noted in the bullet point above), 4% Tier 1 risk-based capital or 8% total risk-based capital);

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significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and

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critically undercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that the capital restoration

plan will not appreciably increase the current risk profile of the savings association. Any holding company for a savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At September 30, 2012, the Bank met the criteria for being considered “well-capitalized.”

The recently proposed rules that would increase regulatory capital requirements would adjust the prompt corrective categories accordingly.

Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. Also, under the Dodd-Frank Act, noninterest-bearing checking accounts have unlimited deposit insurance through December 31, 2012.

The FDIC assesses deposit insurance premiums on all insured depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky to the deposit insurance fund paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2¹/₂ to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits.

The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, and the FDIC must achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are required to fund the increase. The Dodd-Frank Act also eliminated the 1.5% maximum fund ratio, and instead gives the discretion of the FDIC the discretion to determine the maximum fund ratio. The FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.

On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 were based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base was assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, the Bank prepaid $3.5 million in estimated assessment fees for the fourth quarter of 2009 through 2012.

All FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation (“FICO”) for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by

the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2012, the annualized Financing Corporation assessment was equal to 0.66 basis points of total assets less tangible capital. Assessments related to the FICO bond obligations were not subject to the December 30, 2009 prepayment.

For the fiscal year ended September 30, 2012, the Bank paid $59,000 related to the FICO bonds and was assessed $743,000 pertaining to deposit insurance assessments. Deposit insurance assessments were prepaid in December 2009, for calendar years 2010 through 2012, while FICO bond payments were prepaid, one quarter in advance.

Prohibitions Against Tying Arrangements. Federal savings associations are 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 Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the FHLB of Atlanta, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.

As of September 30, 2012, outstanding borrowings from the FHLB of Atlanta were $81.0 million and the Bank was in compliance with the stock investment requirement.

Other Regulations

Interest and other charges collected or contracted for by CharterBank are subject to state usury laws and federal laws concerning interest rates. In addition, CharterBank’s operations are subject to federal laws and regulations applicable to credit transactions, financial privacy, money laundering and electronic fund transfers.

Holding Company Regulation

General. The MHC and Charter Financial are non-diversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, the MHC and Charter Financial are registered with the FRB and subject to FRB regulations, examinations, supervision and reporting requirements. In addition, the FRB has enforcement authority over the MHC, Charter Financial and, in some instances, the Bank. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank. As federal corporations, the MHC and Charter Financial are generally not subject to state business organization laws.

Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and FRB regulations, a mutual holding company, such as First Charter, MHC and its mid-tier company, such as Charter Financial, may engage in the following activities:

(i) investing in the stock of a savings association;

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

(iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association;

(iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association has its home offices;

(v) furnishing or performing management services for a savings association subsidiary of such company;

(vi) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of such company;

(vii) holding or managing properties used or occupied by a savings association subsidiary of such company;

(viii) acting as trustee under deeds of trust;

(ix) 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, unless the FRB, 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;

(x) if the savings and loan holding company meets the criteria to qualify as a financial holding company, it may engage in any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and

(xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the FRB. 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 in (i) through (x) above, and has a period of two years to cease any nonconforming activities and divest any nonconforming investments.

The Home Owners’ Loan Act prohibits a savings and loan holding company, including Charter Financial, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the FRB. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRB must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The FRB is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(i)

the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(ii)

the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the FRB to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to depository institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital, as is currently permitted for bank holding companies. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank

Act) before the capital requirements should apply to savings and loan holding companies. However, the recent proposed rule that would establish such regulatory capital requirements for savings and loan holding companies failed to acknowledge either the grandfather for trust preferred securities or the five-year transition period for application of the capital requirements to savings and loan holding companies. It is, therefore, uncertain whether the FRB will implement the statutory grandfather and transitional period.

Dividends and Repurchases. The FRB has issued guidance regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the guidance provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The guidance provides for prior regulatory review of capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The guidance also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

Waivers of Dividends by First Charter, MHC. The Dodd-Frank Act requires federally-chartered mutual holding companies to give the FRB notice before waiving the receipt of dividends, and provides that in the case of “grandfathered” mutual holding companies, like First Charter, MHC, the FRB “may not object” to a dividend waiver if the board of directors of the mutual holding company waiving dividends determines that the waiver: (i) would not be detrimental to the safe and sound operation of the subsidiary savings bank; and (ii) is consistent with the board’s fiduciary duties to members of the mutual holding company. To qualify as a grandfathered mutual holding company, a mutual holding company must have been formed, issued stock and waived dividends prior to December 1, 2009. The Dodd-Frank Act further provides that the FRB may not consider waived dividends in determining an appropriate exchange ratio upon the conversion of a grandfathered mutual holding company to stock form. In September 2011, however, the FRB issued an interim final rule that also requires as a condition to waiving dividends, that each mutual holding company obtain the approval of a majority of the eligible votes of its members within 12 months prior to the declaration of the dividend being waived, which makes dividend waivers more difficult to obtain. Charter Financial ceased paying cash dividends to its stockholders following the cash dividend paid in May 2012.

Conversion of First Charter, MHC to Stock Form. Federal regulations permit First Charter, MHC to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). In a Conversion Transaction a new stock holding company would be formed as the successor to Charter Financial, First Charter, MHC’s corporate existence would end, and certain depositors of the Bank would receive the right to subscribe for additional shares of the new holding company. In a Conversion Transaction, each share of common stock held by stockholders other than First Charter, MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the new holding company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the new holding company as they owned in Charter Financial immediately prior to the Conversion Transaction. Under a provision of the Dodd-Frank Act applicable to First Charter, MHC, Minority Stockholders should not be diluted because of any dividends waived by First Charter, MHC (and waived dividends should not be considered in determining an appropriate exchange ratio), in the event First Charter, MHC converts to stock form. Any such Conversion Transaction would require various member and stockholder approvals, as well as regulatory approval.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Change in Control Regulations. Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the MHC or Charter Financial unless the FRB has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances, including where the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the FRB. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the FRB.

Federal Securities Laws

Charter Financial’s common stock is registered with the Securities and Exchange Commission. As a result, Charter Financial is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

ITEM 1A.

RISK FACTORS

If, over the next two to three years, we are unable to replace the revenue we expect to derive from the interest income and continued realization of accretable discounts on our acquired loans and the FDIC receivable with new loans and other interest earning assets, our financial condition and earnings may be adversely affected.

As a result of the three FDIC-assisted acquisitions that we have made and the asset discount bids associated with each acquisition, we anticipate that a significant portion of our income over the next two to three years will be derived from the interest income and continued realization of accretable discounts on the loans that we purchased in our FDIC-assisted acquisitions and from the FDIC receivable. For the year ended September 30, 2012, we recognized $18.4 million of interest income on covered loans. The accretable discount on the acquired loans will be recognized into interest income over the estimated life of the covered loan portfolio. Furthermore, the discount recorded on the FDIC receivable will be accreted into noninterest income using the level yield method over the estimated life of the receivable. During the period, if we are unable to replace our acquired loans and the related accretion with new performing loans at a similar yield and other interest earning assets due to such reasons as a decline in loan demand or competition from other financial institutions in our markets, our financial condition and earnings, including our interest rate spread, may be adversely affected.

Our business may continue to be adversely affected by downturns in our national and local economies.

Our operations are significantly affected by national and local economic conditions. Substantially all of our loans are to businesses and individuals in west-central Georgia, east-central Alabama and the Florida Panhandle. All of our branches and most of our deposit customers are also located in these areas. A continuing decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations. In particular, Georgia, Alabama and Florida have experienced home price declines, increased foreclosures and high unemployment rates.

A further deterioration or minimal improvement in economic conditions in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

•

demand for our loans, deposits and services may decline;

•

loan delinquencies, problem assets and foreclosures may increase;

•

weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;

•

collateral for our loans may decline further in value; and

•

the amount of our low-cost or non-interest bearing deposits may decrease.

We may incur additional losses due to downward revisions to our preliminary estimates of the value of assets acquired in our FDIC-assisted acquisitions, the expiration of the loss sharing agreements or due to higher than expected charge-offs with respect to the assets acquired, which may not be supported by our loss-sharing agreements with the FDIC.

We acquired approximately $202.8 million, $322.6 million and $251.8 million of assets in connection with the NCB, MCB and FNB acquisitions, respectively. We marked down these assets to fair value at the date of each acquisition based on preliminary estimates.

There is no assurance that the assets acquired in the NCB, MCB and FNB acquisitions will not suffer further deterioration in value after the date of acquisition, which would require additional charge-offs. We entered into loss sharing agreements with the FDIC that provide that 80% of losses related to the acquired loans and other real estate owned (“covered assets”), up to $82.0 million in losses with respect to the $177.6 million of NCB covered assets, up to $106.0 million in losses with respect to the $262.9 million of MCB covered assets, will be borne by the FDIC and thereafter the FDIC will bear 95% of losses on NCB and MCB covered assets. We also entered into a loss sharing agreement with the FDIC that provides that 80% of losses related to the covered assets of $210.9 million acquired in the FNB transaction will be borne by the FDIC. However, we are not protected from all losses resulting from charge-offs with respect to such covered assets. Internal costs incurred to collect and otherwise resolve covered assets are borne by us and not subject to loss sharing reimbursement. Further, the loss sharing agreements have limited terms ranging from five years for commercial loans to ten years for residential mortgage loans. Therefore, any charge-offs or related losses that we experience after the expiration of the loss sharing agreements will not be reimbursed by the FDIC, including the write down of the FDIC indemnification asset, and would reduce our net income. Finally, if we fail to comply with the terms of the loss sharing agreements, we could lose the right to receive payments on a covered asset from the FDIC under the agreements. See “—Our ability to continue to receive benefits of our loss share arrangements with the FDIC is conditioned upon our compliance with certain requirements under the agreements,” below.

Our non-covered commercial real estate, real estate construction, and commercial business loans increase our exposure to credit risks.

Over the last several years, we have increased our non-residential lending in order to improve the yield and reduce the average duration of our assets. At September 30, 2012, our portfolio of non-covered commercial real estate, real estate construction, and commercial business loans totaled $313.3 million, or 71.7% of total non-covered loans, compared to $222.0 million, or 50.8% of total loans (all of which were non-covered) at September 30, 2008. At September 30, 2012, the amount of non-covered non-performing non-residential loans was $772,000. At September 30, 2012, our largest non-covered non-residential real estate borrowing relationship was $13.4 million, consisting of a borrower whose collateral was a real estate construction loan. These loans may expose us to a greater risk of non-payment and loss than residential real estate loans because, in the case of commercial loans, repayment often depends on the successful operation and earnings of the borrowers and, in the case of consumer loans, the applicable collateral is subject to rapid depreciation. Additionally, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest due on the loan, which could cause us to increase our provision for loan losses and adversely affect our financial condition and operating results.

If the allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to the allowance. Additions to the allowance would decrease our net income. At September 30, 2012, our allowance for loan losses for non-covered loans was $8.2 million, or 1.87% of total non-covered loans and 237.69% of non-covered non-performing loans, compared to $9.4 million, or 2.19% of total non-covered loans and 80.13% of non-covered non-performing loans at September 30, 2011. At September 30, 2012, $3.4 million of nonperforming loans were not covered by loss sharing.

Our level of commercial real estate, real estate construction and commercial business loans is one of the more significant factors in evaluating the allowance for loan losses. These loans may require increased provisions for loan losses in the future, which would decrease our earnings.

Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs would decrease our earnings and adversely affect our financial condition.

We could record future losses on our securities portfolio.

For the years ended September 30, 2012 and 2011, we have recorded $273,000 and $2.3 million, respectively, in other-than-temporary impairment charges on non-government agency collateralized mortgage obligations. At September 30, 2012, our securities portfolio totaled $189.4 million, which included $14.3 million of non-government agency collateralized mortgage obligations with net unrealized losses of $3.4 million. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other-than-temporary, which would result in additional losses that could be material. These factors include, but are not limited to, a continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the underlying borrowers deteriorate. These securities have limited liquidity and additional impairment charges may be required in future periods. Deterioration in private label securities or changes in regulatory capital requirements may reduce our regulatory capital or increase classified assets.

If our problem assets increase, our earnings will decrease.

At September 30, 2012, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent, and foreclosed real estate assets) not covered by loss sharing agreements consisted of $3.5 million of loans and $2.1 million of foreclosed real estate. As of September 30, 2012, we also had covered foreclosed real estate of $21.0 million. In addition, our non-covered classified assets (consisting of substandard loans and securities, doubtful loans and loss assets) totaled $39.5 million at September 30, 2012. Our problem assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. From time to time, we also write down the value of properties in our real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our real estate owned. Further, the resolution of problem assets requires the active involvement of management, which could detract from the overall supervision of our operations. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

Our ability to continue to receive the benefits of our loss share arrangements with the FDIC is conditioned upon our compliance with certain requirements under the agreements.

Our ability to recover a portion of our losses and retain the loss share protection is subject to our compliance with certain requirements imposed on us in the loss share agreements with the FDIC. These requirements relate primarily to our administration of the assets covered by the agreements, as well as our obtaining the consent of the FDIC to engage in certain corporate transactions that may be deemed under the agreements to constitute a transfer of the loss share benefits. For example, any merger or consolidation of CharterBank with another financial institution would require the consent of the FDIC under the loss share agreements relating to the NCB, MCB and FNB transactions.

In instances where the FDIC’s consent is required under the loss share agreements, the FDIC may withhold its consent to such transactions or may condition its consent on terms that we do not find acceptable. If the FDIC does not grant its consent to a transaction we would like to pursue, or conditions its consent on terms that we do not find acceptable, this may cause us not to engage in a corporate transaction that might otherwise benefit our stockholders or we may elect to pursue such a transaction without obtaining the FDIC’s consent, which could result in termination of our loss share agreements with the FDIC.

We may fail to realize any benefits and may incur unanticipated losses related to the assets we acquired and liabilities we assumed from Neighborhood Community Bank, McIntosh Commercial Bank and The First National Bank of Florida.

The success of the NCB, MCB and FNB acquisitions will depend, in part, on our ability to successfully combine the businesses and assets we acquired with our business, and our ability to successfully manage the significant loan portfolios that were acquired. It may take longer to successfully liquidate the nonperforming assets that were acquired in the NCB, MCB and FNB transactions. As with any acquisition involving a financial institution, there may also be business and service changes and disruptions that result in the loss of customers or cause customers to close their accounts and move their business to competing financial institutions. It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business, or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees, or to achieve the anticipated benefits of the transactions. Successful integration may also be hampered by differences between our organization and the NCB, MCB and FNB organizations. The loss of key employees of NCB, MCB and/or FNB could adversely affect our ability to successfully conduct business in the markets in which NCB, MCB and FNB operated, which could adversely affect our financial results. Integration efforts will also divert attention and resources from our management. In addition, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our ability to successfully integrate these operations. If we experience difficulties with the integration process, the anticipated benefits of the transactions may not be realized fully, or at all, or may take longer to realize than expected. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

Additional FDIC-assisted acquisition opportunities may not become available and competition from other bidders may make it more difficult for us to successfully bid on failed bank transactions on terms we consider acceptable.

Our near-term business strategy includes the pursuit of potential acquisitions of failing banks that the FDIC plans to place in receivership. Many of the banks placed in receivership do not meet our strategic objectives. Failed bank transactions are attractive opportunities in part because of loss-sharing arrangements with the FDIC that limit the acquirer’s risk of loss on the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the nondeposit liabilities that we assume. In addition, assets purchased from the FDIC are marked to their fair value and in many cases there is little or no addition to goodwill arising from an FDIC-assisted transaction. The bidding process for failing banks is competitive, and the competition may make it more difficult for us to bid on terms we consider to be acceptable. Many of these competing bidders will have more capital and other resources than CharterBank.

The FDIC or the Office of the Comptroller of the Currency, our primary federal regulator, could condition our ability to acquire a failed depository institution on our compliance with additional requirements.

We may seek to acquire one or more additional failed depository institutions from the FDIC. As the agency responsible for resolving failed depository institutions, the FDIC has the discretion to determine whether a

party is qualified to bid on a failed institution. On August 26, 2009, the FDIC adopted a Statement of Policy on Qualifications for Failed Bank Acquisitions that sets forth a number of significant restrictions and requirements as a condition to the participation by certain “private investors” and institutions in the acquisition of failed depository institutions from the FDIC. Among the requirements would be that CharterBank maintain higher capital ratios for a three-year period following the acquisition of a failed depository institution from the FDIC, which would impair our ability to grow in the future without obtaining additional capital. Based on our interpretation of the Statement of Policy, we do not believe the provisions of the Statement of Policy would apply to us. However, if the FDIC were to adopt similar provisions that would apply to us, and we were unwilling to comply with such conditions, then we would not be permitted to acquire failed institutions from the FDIC. Additionally, we must obtain permission from the Office of the Comptroller of the Currency to bid on failed depository institutions and such permission may be withheld under certain circumstances.

Acquisitions, including any additional FDIC-assisted acquisitions, could disrupt our business and adversely affect our operating results.

On June 26, 2009 we entered into an agreement with the FDIC to acquire assets from Neighborhood Community Bank with a fair value of approximately $196.7 million and assume liabilities from such bank with a fair value of approximately $196.7 million. We also acquired four branches of NCB in the transaction, one of which has been closed. On March 26, 2010, we entered into an agreement with the FDIC to acquire assets of McIntosh Commercial Bank with a fair value of approximately $316.2 million and assume liabilities from such bank with a fair value of approximately $310.6 million. We also acquired four branches of MCB in the transaction, three of which have been closed. On September 9, 2011, we entered into an agreement with the FDIC to acquire assets of First National Bank of Florida with a fair value of approximately $249.0 million and assume liabilities from such bank with a fair value of approximately $248.3 million. We also acquired eight branches of FNB in the transaction, five of which have been closed. We expect to continue to grow by acquiring other financial institutions, related businesses or branches of other financial institutions that we believe provide a strategic fit with our business, which may or may not include loss sharing transactions. To the extent that we grow through acquisitions, we may not be able to adequately or profitably manage this growth. In addition, such acquisitions may involve the issuance of securities, which may have a dilutive effect on earnings per share. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:

•

Potential exposure to unknown or contingent liabilities we acquire;

•

Exposure to potential asset quality problems of the acquired financial institutions, businesses or branches;

•

Difficulty and expense of integrating the operations and personnel of financial institutions, businesses or branches we acquire;

•

Potential diversion of our management’s time and attention;

•

The possible loss of key employees and customers of financial institutions, businesses or branches we acquire;

•

Difficulty in safely investing any cash generated by the acquisition;

•

Inability to utilize potential tax benefits from such transactions;

•

Difficulty in estimating the fair value of the financial institutions, businesses or branches to be acquired which affects the profits we generate from the acquisitions; and

•

Potential changes in banking or tax laws or regulations that may affect the financial institutions or businesses to be acquired.

Our management team’s strategies for the enhancement of stockholder value may not succeed.

Our management team is taking actions to enhance stockholder value, including consolidating branches, reviewing personnel, developing new products, and continuing to review FDIC-assisted acquisition opportunities. In addition, we intend to focus on opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet.” These actions may not enhance stockholder value.

As a community bank, our recruitment efforts may not be sufficient enough to implement our business strategy and execute successful operations.

As we continue to grow, we may find our recruiting efforts more challenging. If we do not succeed in attracting, hiring, and integrating experienced or qualified personnel, we may not be able to successfully implement our business strategy. Additionally, we may be unable to grow efficiently and effectively.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Historically low interest rates may adversely affect our net interest income and profitability.

During the past three years it has been the policy of the Board of Governors of the Federal Reserve System to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Historically, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets. As a result, rates paid on our interest-bearing liabilities have decreased more quickly than the rates we pay on the loans we have originated and the securities we have purchased. Consequently, our interest rate spreads have increased in the short term. However, our ability to reduce our interest expense is now highly limited compared to the ability for average yields on our interest-earning assets to continue to decrease. The Federal Reserve Board has indicated its intention to maintain low interest rates in the near future. Accordingly, our interest rate spreads and our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which would adversely affect our profitability.

Changes in interest rates could adversely affect our results of operations and financial condition.

Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, a sustained increase in interest rates generally would tend to reduce our interest income.

Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive on a new investment.

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2012, the fair value of our portfolio of investment securities, mortgage-backed securities and collateralized mortgage obligations totaled $189.4 million. Net unrealized gains on these securities totaled $308,000 at September 30, 2012.

Additionally, a majority of our single-family mortgage loan portfolio is comprised of adjustable-rate loans. Any rise in market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, which would increase the possibility of default.

Strong competition and changing banking environment may limit growth and profitability.

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do even while playing a rapidly increasing role in the financial services industry, which could ultimately limit our growth, profitability and stockholder value. Our profitability depends upon our ability to successfully compete in our market areas and adapt to the ever changing banking environment.

Financial reform legislation has, among other things, eliminated the Office of Thrift Supervision, tightened capital standards and created a new Consumer Financial Protection Bureau, and will result in new laws and regulations that are expected to increase our costs of operations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among other things, as a result of the Dodd-Frank Act:

•

the Office of the Comptroller of the Currency became the primary federal regulator for federal savings associations such as CharterBank (replacing the Office of Thrift Supervision), and the Federal Reserve Board now supervises and regulates all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including Charter Financial and First Charter, MHC;

•

effective July 21, 2011, the federal prohibition on paying interest on demand deposits has been eliminated, thus allowing businesses to have interest bearing checking accounts. This change has increased our interest expense;

•

the Federal Reserve Board is required to set minimum capital levels for depository institution holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies. However, recently proposed rules would not provide such a transition period for savings and loan holding companies. See “Supervision and Regulation—Capital Requirements;

•

the federal banking regulators are required to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives;

•

a new Consumer Financial Protection Bureau has been established, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like CharterBank, will be examined by their applicable bank regulators; and

•

federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws.

In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations to which we were not previously subject, will also divert management’s time from managing our operations. Higher capital levels would require us to maintain higher levels of assets that earn less interest and dividend income and returns on stockholders’ equity would suffer.

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules are uncertain.

On June 7, 2012, the Federal Reserve Board approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to us. The Office of the Comptroller of the Currency subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III was initially intended to be implemented beginning January 1, 2013, however on November 9, 2012, the U.S. federal banking agencies announced that they do not expect that any of the proposed rules would become effective on January 1, 2013.

Various provisions of the Dodd-Frank Act increase the capital requirements of financial institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to CharterBank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to CharterBank.

In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations.

The application of more stringent capital requirements for CharterBank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers, could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares.

The Federal Reserve Board may issue final rules that would adversely affect First Charter, MHC’s ability to waive dividends, which would adversely affect our ability to pay dividends and the value of our common stock.

The value of Charter Financial’s common stock is significantly affected by our ability to pay dividends to our public shareholders, which is affected by our earnings and cash resources at the holding company level and by the ability of CharterBank to make capital distributions to Charter Financial. Moreover, our ability to pay dividends and the amount of any such dividend is affected by the ability of First Charter, MHC, our mutual holding company, to waive the receipt of dividends declared by Charter Financial. First Charter, MHC has historically waived its right to receive most dividends on its shares of Charter Financial common stock, which means that Charter Financial has had more cash resources to pay dividends to our public stockholders than if First Charter, MHC had accepted such dividends.

The Dodd-Frank Act requires federally-chartered mutual holding companies to give the FRB notice before waiving the receipt of dividends, and provides that in the case of “grandfathered” mutual holding companies, like First Charter, MHC, the FRB “may not object” to a dividend waiver if the board of directors of the mutual holding company waiving dividends determines that the waiver: (i) would not be detrimental to the safe and sound operation of the subsidiary savings bank; and (ii) is consistent with the board’s fiduciary duties to members of the mutual holding company. To qualify as a grandfathered mutual holding company, a mutual holding company must have been formed, issued stock and waived dividends prior to December 1, 2009. The Dodd-Frank Act further provides that the FRB may not consider waived dividends in determining an appropriate exchange ratio upon the conversion of a grandfathered mutual holding company to stock form. In September 2011, however, the FRB issued an interim final rule that also requires as a condition to waiving dividends, that each mutual holding company obtain the approval of a majority of the eligible votes of its members within 12 months prior to the declaration of the dividend being waived. While the final rule has not been issued we believe that a depositor vote will be required annually to waive be dividends. This limits the capacity of Charter Financial to pay dividends.

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

The Dodd-Frank Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by increasing ongoing compliance costs and restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

In response to the financial crisis of 2008 and early 2009, Congress has taken actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit accounts. In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay on their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.

Moreover, bank regulatory agencies have responded aggressively to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the Office of the Comptroller of the Currency and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations are likely to increase our costs of regulatory compliance and costs of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. For example, recent regulatory changes to our overdraft protection programs could decrease the amount of fees we receive for these services. For the years ended September 30, 2012 and 2011, overdraft protection fees totaled $3.8 million and $3.4 million, respectively. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor. Regulations limit interchange fees for banks with assets of more than $10.0 billion. It is unclear whether in the future these limits will apply to smaller banks such as CharterBank.

We hold certain intangible assets that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.

Pursuant to applicable accounting requirements, we are required to periodically test our goodwill and core deposit intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similarly situated insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our shares of common stock, our liquidity or our regulatory capital levels.

Any requested or required changes in how we determine the impact of loss share accounting on our financial statements could have a material or adverse effect on our reported results.

Our financial results are significantly based on loss share accounting, which is subject to assumptions and judgments made by us. Loss share accounting is a complex accounting methodology. Many of the decisions management makes regarding the application of this accounting methodology may be revised at the request of various regulatory agencies to whom we report. As such, any financial information generated through the use of loss share accounting is subject to change. Any significant change in such information could have a material adverse effect on our results of operations and our previously reported results.

Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of: fraud by employees or persons outside our company; the execution of unauthorized transactions by employees: errors relating to transaction processing and technology; breaches of the internal control systems and compliance requirements; and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.

We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. Any such losses could have a material adverse effect on our financial condition and results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in violations of consumer privacy laws including the Gramm-Leach-Bliley Act, cause significant liability to us and give reason for existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage and potential liability, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

Hurricanes or other adverse weather events would negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Our market area is located in the southeastern region of the United States and is susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and man-made disasters. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us, damage our banking facilities and offices and negatively impact our growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where they operate. We cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect our operations or the economies in our current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing our loans and an increase in delinquencies, foreclosures or loan losses. Our business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We currently conduct business through our administrative office in West Point, Georgia, our branch offices in west-central Georgia, East-central Alabama, the Florida Panhandle and our cashless branch office in Norcross, Georgia. Our Georgia branch offices are located in Carrollton, LaGrange (three offices), Newnan (two offices), Peachtree City and West Point, and our Alabama branches are located in Auburn (two offices), Opelika and Valley. Our Florida Branch offices are in Milton, Pace, and Pensacola. The net book value of the land, buildings, furniture, fixtures and equipment owned by us was $23.6 million at September 30, 2012.

ITEM 3.

LEGAL PROCEEDINGS

As of the date of filing of this Annual Report on Form 10-K, we were not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which, in the aggregate, involve amounts that we believe are immaterial to our consolidated financial condition, results of operations and cash flows.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and Dividend Information.

On September 29, 2010, our common stock began trading on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “CHFN.” Prior to that date, our common stock was quoted on the OTC Bulletin Board. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on NASDAQ since September 29, 2010, and the high and low bid information for our common stock as quoted on the OTC Bulletin Board prior to September 29, 2010. Quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not reflect actual transactions. The table below also sets forth the cash dividends paid per share for the periods indicated.


	Price Per Share				Cash Dividend Declared
	High		Low		Cash Dividend Declared
Fiscal 2012
Fourth quarter	$	10.00	$	8.79	$	0.00
Third quarter		9.90		8.62		0.05
Second quarter		9.99		8.96		0.00
First quarter		10.36		9.00		0.05

Fiscal 2011
Fourth quarter	$	9.70	$	9.12	$	0.05
Third quarter		10.00		9.73		0.05
Second quarter		11.05		10.65		0.05
First quarter		8.99		8.90		0.05

Holders.

As of December 5, 2012, there were approximately 454 holders of record of our common stock.

Dividends.

Charter Financial started paying a quarterly cash dividend in September 2002. Beginning with the dividend paid for the quarter ended March 31, 2010, we reduced our quarterly dividend from $0.25 per share to $0.05 per share. The reduction of the dividend reflects our decision to pursue opportunities for deployment of capital in FDIC-assisted transactions such as the Neighborhood Community Bank, McIntosh Commercial Bank and The First National Bank of Florida transactions. The dividend rate and the continued payment of dividends will primarily depend on our earnings, alternative uses for capital, such as FDIC-assisted transactions, capital requirements, acquisition opportunities, our financial condition and results of operations, statutory and regulatory limitations affecting dividends and the policies of the Board of Governors of the Federal Reserve System (“FRB”) regarding dividend waivers by federal mutual holding companies, like First Charter, MHC, that waived dividends prior to December 1, 2009, and, to a lesser extent, tax considerations and general economic conditions. Charter Financial discontinued the quarterly dividend after the dividend paid in May 2012.

Under the rules of the Office of Comptroller of the Currency and the FRB, CharterBank is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. For information concerning additional federal laws and regulations regarding the ability of CharterBank to make capital distributions, including the payment of dividends to Charter Financial, see “Taxation—Federal Taxation” and “Supervision and Regulation—Federal Banking Regulation.”

Unlike CharterBank, Charter Financial is not restricted by Office of the Comptroller of the Currency regulations on the payment of dividends to its shareholders. However, the FRB has issued a policy statement regarding the payment of dividends by bank holding companies that it has also made applicable to savings and loan holding companies as well. In general, the FRB’s policies provide that dividends should be paid only out of current

earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. FRB guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Charter Federal to pay dividends or otherwise engage in capital distributions. In addition, the source of dividends that may be paid by Charter Federal depends on the net proceeds retained by it and earnings thereon, and dividends from CharterBank.

When Charter Financial pays dividends on its common stock to public shareholders, it is also required to pay dividends to First Charter, MHC, unless First Charter, MHC elects to waive the receipt of dividends. When it was supervised by the Office of Thrift Supervision, First Charter, MHC generally waived its right to dividends on the shares of Charter Financial that it owns, which means that Charter Financial had more cash resources to pay dividends to its public shareholders than if First Charter, MHC accepted such dividends. The Dodd-Frank Act provides that a mutual holding company is required to give the FRB notice before waiving the receipt of dividends, and sets forth the standards for granting a waiver, including a requirement that waived dividends be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form. The Dodd-Frank Act, however, further provides that the FRB may not consider waived dividends in determining an appropriate exchange ratio in a conversion to stock form by any federal mutual holding company, such as First Charter, MHC, that waived dividends prior to December 1, 2009. The FRB has issued an interim final rule providing that, pursuant to the Dodd-Frank Act grandfathering provision, it “may not” object to dividend waivers under similar requirements applied by the Office of Thrift Supervision, the previous regulator of federal mutual holding companies, but adding the requirement that a majority of the mutual holding company’s members eligible to vote have approved a waiver of dividends by the company within 12 months prior to the declaration of the dividend being waived. The FRB has typically not allowed dividend waivers by mutual bank holding companies and, therefore, the ability of First Charter, MHC to waive dividends in the future, should any dividends be declared by the Charter Financial, is uncertain. See “The Federal Reserve Board may issue final rules that would adversely affect First Charter, MHC’s ability to pay dividends, which would adversely affect the value of our common stock,” under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

In addition, pursuant to applicable regulations, during the three-year period following our stock offering in September, 2010, we will not take any action to declare an extraordinary dividend to shareholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

Securities Authorized for Issuance under Equity Compensation Plans.

See Part III, Item 12(d) Equity Compensation Plan Information, in this Annual Report on Form 10-K, for the table providing information as of September 30, 2012 about Company common stock that may be issued upon the exercise of options under the Charter Financial Corporation 2001 Stock Option Plan.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Not applicable.

ITEM 6.

SELECTED FINANCIAL DATA

The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes contained in Item 8 of this Annual Report on Form 10-K. The information at September 30, 2012 and 2011 and for the years ended September 30, 2012, 2011 and 2010 is derived in part from the audited consolidated financial statements that appear in this annual report. The information presented below does not include the financial condition, results of operations or other data of First Charter, MHC.


	At September 30,
	2012		2011		2010		2009		2008
	(In thousands)
Selected Financial Condition Data:
Total assets	$	1,032,220	$	1,171,710	$	1,186,082	$	936,880	$	801,501
Non-covered loans receivable, net (1)		472,676		419,979		451,231		462,786		428,472
Covered loans receivable, net (2)		166,228		235,050		148,139		89,764		—
Investment and mortgage securities available for sale (3)		189,379		158,737		133,183		206,061		277,139
Core deposits (4)		456,292		447,176		313,170		216,902		169,499
Retail deposits (5)		779,397		883,389		739,691		463,566		356,237
Total deposits		800,262		911,094		823,134		597,634		420,175
Total borrowings		81,000		110,000		212,000		227,000		267,000
Total equity	$	142,521	$	139,416	$	136,876	$	99,345	$	102,302
Tangible total equity		136,915		133,263		130,532		93,077		96,988


	Years Ended September 30,
	2012		2011		2010		2009		2008
	(In thousands)
Selected Operating Data:
Interest and dividend income	$	48,101	$	45,786	$	49,959	$	40,340	$	46,377
Interest expense		10,589		15,228		22,758		22,599		26,771

Net interest income		37,512		30,558		27,201		17,741		19,606
Provision for loan losses		3,300		1,700		5,800		4,550		3,250
Provision for loan losses on covered loans		1,202		1,200		420		—		—

Net interest income after provision for loan losses		33,010		27,658		20,981		13,191		16,356
Total noninterest income		12,915		9,283		17,510		12,011		18,950
Total noninterest expenses		40,307		33,942		30,469		22,581		20,284

Income before provision for income taxes		5,618		2,999		8,022		2,621		15,022
Income tax expense		639		694		2,087		306		4,491

Net income	$	4,979	$	2,305	$	5,935	$	2,315	$	10,531

Per Share Data:
Basic earnings per share	$	0.28	$	0.13	$	0.32	$	0.13	$	0.55
Fully diluted earnings per share	$	0.28	$	0.13	$	0.32	$	0.12	$	0.55
Dividends declared per share	$	0.10	$	0.20	$	0.40	$	1.00	$	1.75

(1)	Excludes “covered loans” acquired from the FDIC subject to loss-sharing agreements. See Note 5 to the Notes to our Consolidated Financial Statements. Loans shown are net of deferred loan (fees) costs and allowance for loan losses and exclude loans held for sale.

(2)	Consists of loans acquired from the FDIC subject to loss sharing agreements. See Note 5 to the Notes to our Consolidated Financial Statements.

(3)	Includes all CharterBank investment and mortgage securities available for sale.

(4)	Core deposits consist of transaction accounts, money market accounts and savings accounts.

(5)	Retail deposits include core deposits and certificates of deposit other than brokered and wholesale certificates of deposit.


	At or For the Years Ended September 30,
	2012			2011			2010			2009			2008
Selected Financial Ratios and Other Data:

Performance Ratios:
Return on average assets (ratio of net income to average total assets)		0.46	%		0.22	%		0.56	%		0.27	%		1.16	%
Return on average equity (ratio of net income to average equity)		3.58	%		1.67	%		5.62	%		2.25	%		6.23	%
Interest rate spread (1)		4.12	%		3.53	%		3.30	%		2.08	%		1.47	%
Net interest margin (2)		4.17	%		3.59	%		3.19	%		2.35	%		2.32	%
Efficiency ratio (3)		79.93	%		85.32	%		79.16	%		75.90	%		52.61	%
Non-interest expense to average total assets		3.75	%		3.34	%		2.89	%		2.68	%		2.23	%
Average interest-earning assets as a ratio of average interest-bearing liabilities		1.05	x		1.04	x		0.89	x		1.09	x		1.27	x
Average equity to average total assets		12.95	%		13.43	%		10.03	%		12.12	%		18.56	%
Dividend payout ratio (5)		27.50	%		83.82	%		27.29	%		153.79	%		66.97	%

Asset Quality Ratios (4) (6):

Non-covered Assets (4):
Non-performing assets to total assets (6)		0.66	%		1.99	%		2.33	%		2.16	%		1.68	%
Non-performing loans to total loans		0.79	%		2.72	%		2.55	%		2.82	%		2.47	%
Allowance for loan losses as a ratio of non-performing loans		2.38	x		0.80	x		0.84	x		0.71	x		0.77	x
Allowance for loan losses to total loans		1.87	%		2.19	%		2.12	%		1.98	%		1.89	%
Net charge-offs as a percentage of average non-covered loans outstanding		0.86	%		0.48	%		0.90	%		0.71	%		0.24	%

Bank Regulatory Capital Ratios:
Total capital (to risk-weighted assets)		19.22	%		24.36	%		21.53	%		15.71	%		18.15	%
Tier I capital (to risk-weighted assets)		17.97	%		23.10	%		20.28	%		14.65	%		16.90	%
Tier I capital (to average assets)		12.16	%		10.68	%		10.21	%		9.30	%		10.51	%

Consolidated Capital Ratios:
Total equity to total assets		13.81	%		11.90	%		11.42	%		10.49	%		12.76	%
Tangible total equity to total assets		13.26	%		11.38	%		10.98	%		9.99	%		12.18	%

Other Data:
Number of full service offices		16			18			16			14			10
Full time equivalent employees		292			294			260			209			178

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

(2)	The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(3)	The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

(4)

Covered assets consist of assets of Neighborhood Community Bank, McIntosh Commercial Bank, and The First National Bank of Florida acquired from the FDIC subject to loss sharing agreements. Non-covered assets consist of assets other than covered assets. See Note 3 to the Notes to our Consolidated Financial Statements.

(5)	The dividend payout ratio represents total dividends declared and not waved per share divided by total net income. The following table sets forth the aggregate cash dividends paid per period and the amount of dividends paid to public stockholders and to First Charter, MHC:


	For the Year Ended September 30,
	2012		2011		2010		2009		2008
Dividends paid to public stockholders	$	649,331	$	1,340,899	$	1,040,926	$	2,651,554	$	5,656,953
Dividends paid to First Charter, MHC		722,896		600,000		600,000		750,000		1,500,000

Total dividends paid	$	1,372,227	$	1,940,899	$	1,640,926	$	3,401,554	$	7,156,953

First Charter, MHC waived dividends of $423,000, $1.7 million, $5.7 million, $28.7 million and $26.3 million during the years ended September 30, 2012, 2011, 2010, 2009 and 2008, respectively.

(6)	We also have $21.9 million of covered other real estate owned, representing 2.1% of consolidated assets. Loss sharing agreements cover any losses upon disposition of such assets at either 95% or 80%.

ITEM 7.

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

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities, collateralized mortgage obligations and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and Federal Home Loan Bank advances.

As a result of our loan underwriting policies, management believes that we have not suffered the same level of loan losses during the current economic downturn as many financial institutions in our market area. Consequently, we have recently been able to take advantage of attractive low-risk opportunities to enhance our banking franchise through the purchase of distressed banking franchises from the FDIC.

Our net income increased $2.7 million and totaled $5.0 million for the year ended September 30, 2012, from $2.3 million for the year ended September 30, 2011. The increase in net income for fiscal 2012 resulted primarily from increases in net interest income, noninterest income and a reduction in income tax expense, partially offset by an increase in our provision for non-covered loan losses and an increase in noninterest expense. Net interest income increased $7.0 million to $37.5 million for the year ended September 30, 2012 due to the covered loans acquired in the FNB acquisition in September 2011 and a reduction in the cost of funds as a result of the low interest rate environment and a reduction in FHLB borrowings. Noninterest income increased $3.6 million to $13.0 million for the year ended September 30, 2012 due primarily to a $2.0 million reduction in other-than-temporary impairment charges and an increase of $1.2 million in fees on checking accounts. Our provision for non-covered loan losses was $3.3 million for the year ended September 30, 2012 as compared to $1.7 million for the year ended September 30, 2011 as a result of an increase in net charge-offs due in part to $1.2 million in charge-offs of specific allowances of impaired loans as required by Office of the Comptroller of the Currency policy. Noninterest expense increased $6.4 million to $40.3 million for the year ended September 30, 2012 due primarily to the cost of operating, integrating and managing the assets acquired from the FDIC as receiver of FNB in September 2011.

Our business is affected by prevailing general and local economic conditions, particularly market interest rates, and by government policies concerning, among other things, monetary and fiscal affairs and housing. In addition, we are subject to extensive regulations applicable to financial institutions, lending and other operations, privacy, and consumer disclosure.

Business Strategy

Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based customer service. This 58-year history in the community, combined with management’s extensive experience and adherence to conservative underwriting standards through numerous business cycles, has enabled us to maintain a strong capital position with favorable credit quality metrics despite the economic downturn.

We believe that the current economic and financial services environment presents a significant opportunity for us to grow our retail banking operations, in particular through FDIC-assisted acquisitions of troubled financial institutions, such as our acquisitions of NCB, MCB, and FNB in June 2009, March 2010, and September 2011, respectively. Through these transactions, we acquired sixteen full-service branch offices, of which seven were retained. We also acquired deposits of $721.0 million in the three transactions. In each of the FDIC-assisted acquisitions, we participated in a competitive bid process in which we offered an asset discount bid on net assets acquired and no deposit premium. We also entered into loss sharing agreements with the FDIC which cover a majority of the assets acquired (referred to as “covered assets”) and provide for substantial protection on losses associated with the covered assets. See “FDIC-Assisted Acquisitions” below. We anticipate that the prevailing weakness in the banking sector and the slow economic recovery in our market area will provide additional opportunities for us to participate in FDIC-assisted transactions and believe that purchasing distressed banking assets from the FDIC provides us with a low-risk opportunity to enhance our banking franchise.

Based on the persistent challenges presented by the economic and regulatory climate along with increased compliance costs and an accelerated need for economies of scale, we expect there to be a significant amount of unassisted consolidation in our banking markets which we intend to explore as opportunities arise. We believe that our strong financial condition and capital position are desirable traits for smaller community banking institutions seeking a merger partner. As a result, while we will continue to analyze opportunities for FDIC-assisted transactions, these transactions will not be available for an indefinite period of time and therefore we will also look to fill out the franchise through conservatively structured unassisted transactions. Our knowledge of the marketplace and our experienced management team, together with our experience in managing problem assets acquired from the FDIC in the NCB, MCB, and FNB transactions position us to take advantage of future opportunities to acquire troubled and other financial institutions in our market area.

From January 1, 2009 through September 30, 2012, 432 banking institutions failed in the United States, including 59 failures that have occurred in the state of Georgia. We believe that purchasing distressed banking assets from the FDIC provides us with a low-risk opportunity to enhance our banking franchise, and we intend to evaluate such opportunities as they arise. We believe that there are numerous banks within or adjacent to our target market areas that are subject to various enforcement actions and that have increasing levels of non-performing assets and declining capital levels. Our knowledge of the marketplace and our experienced management team, together with our experience in managing problem assets acquired from the FDIC in the NCB, MCB, and FNB transactions and our capital level, position us to take advantage of future opportunities to acquire troubled financial institutions in our market area.

Key aspects of our business strategy include the following:

•

Leverage capital through disciplined acquisitions. The economy and banking industry in our market area of west-central Georgia, east-central Alabama and the Florida Panhandle continue to face significant challenges as many banks have experienced capital constraints and liquidity challenges as a result of incurring significant losses due to credit quality issues. We believe that these challenges create strategic growth opportunities for us, and our discipline and selectivity in identifying target franchises, along with our successful history of working with the FDIC, such as in the NCB, MCB and FNB transactions, and the additional capital raised through this offering will provide us an advantage in pursuing and consummating future acquisitions. We intend to leverage our capital base and acquisition experience to selectively pursue FDIC-assisted acquisitions and conservatively structured unassisted transactions of select franchises that present attractive risk-adjusted returns. In addition, future acquisitions will enable us to further utilize our substantial infrastructure devoted to the workout of special assets and administration of loss share agreements.

•

Expand our retail banking franchise. Our focus is on growing our retail banking presence throughout the markets in west-central Georgia, east-central Alabama, and the Florida Panhandle, including our expanded retail footprint resulting from the NCB, MCB and FNB acquisitions, while reducing reliance on wholesale funding sources. Since September 30, 2010 we have reduced FHLB borrowings by $131.0 million and certificates of deposit by $166.0 million in our efforts to fund our balance sheet with core deposits (comprised of transaction, savings and money market accounts). Over this same time period we have increased core deposits from $313.2 million to $456.3 million while lowering our cost of funds from 2.43% for the year ended September 30, 2010 to 1.14% for the year ended September 30, 2012. These deposits provide a low cost source of funds for our lending operations, as well as a potential source of fee income.

We intend to build a diversified balance sheet, positioning us as a full-service community bank that offers both retail and commercial loan and deposit products to all markets within the I-85 corridor and the adjacent and other markets resulting from our acquisitions of NCB, MCB, and FNB. Moreover, we expect that the high level of customer service and expanded product offerings we provide, as well as our capital strength and financial position in an otherwise distressed banking market, will also facilitate organic growth and an opportunity to increase market share.

•

Quality customer service and convenience. In order to proactively address the needs of our clients, we continue to make and build out investments in infrastructure and technology to

improve transactional efficiencies and minimize the amount of time required for customers to complete regular banking activities, such as making a deposit at a branch drive-thru. In addition, the customer experience is enhanced for in-branch transactions as unique amenities such as child-friendly play areas, coffee cafes and change counters combine banking activities with everyday realities. To further emphasize convenience for our customers, we offer extended hours at the majority of our offices and alternative banking delivery systems, such as internet banking, that allow customers to pay bills, transfer funds and monitor account balances at any time. Additionally, we strive to create tailored products and services that are designed to meet the changing needs of our customers, such as our Rewards checking program discussed under the heading “Business of Charter Financial Corporation and CharterBank—Sources of Funds.”

•

Maintain strong asset quality. We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers. While the challenging operating environment which began a few years ago contributed to an increase in problem assets, management’s primary objective has been to expeditiously reduce the level of nonperforming and classified assets through diligent monitoring and aggressive resolution efforts, including problem covered assets of NCB, MCB and FNB. The results of this effort are evidenced by our asset quality at September 30, 2012, with $5.6 million of non-performing assets not covered by loss sharing which represented 0.66% of total non-covered assets, and has declined $10.2 million from $15.8 million reported at September 30, 2011. Our ratio of allowance for loan losses to non-covered non-performing loans was 237.69% at September 30, 2012.

We have established dedicated problem asset resolution teams with experienced leadership to resolve nonperforming assets and classified assets acquired in the NCB, MCB and FNB transactions. While the majority of these nonperforming assets do not pose a significant credit risk because they are substantially covered under loss sharing agreements with the FDIC, reducing the amount of contractually non-performing assets acquired in the NCB, MCB and FNB acquisitions will reduce the cost of carrying these assets. Covered loans are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, covered loans that are contractually past due are still considered to be accruing and performing loans. See “—Asset Quality.”

•

Focus on relationship-driven banking. We are focused on meeting the financial needs of our customer base through offering a full complement of loan, deposit and online banking solutions (i.e. internet banking and mobile banking). Over the years we have introduced new products and services in order to more fully serve and deepen the relationship with customers which has enabled us to grow our core deposit base, which generally represents a customer’s primary banking relationship. Our quality customer relationships and core competencies provide opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet” and we intend to actively develop such opportunities.

•

Scalable operating platform. We have committed significant resources to establish a scalable platform to accommodate future growth. The investments made thus far in systems and personnel will enable us to achieve improved operational efficiencies, with minimal additional investments, as we continue to integrate the assets and liabilities from recent acquisitions. In particular, our investment in operations required to integrate and manage the assets and liabilities acquired in FDIC-assisted transactions are largely fixed, allowing us to leverage existing systems and personnel to drive a higher return on similar investments in the future. Our acquisitions of NCB in June 2009, MCB in March 2010, and FNB in September 2011 highlight our ability to capitalize on opportunities that offer attractive risk-adjusted returns and provide a template for future acquisitions. We have closed 11 branch locations, nine of which were acquired in FDIC acquisitions, since 2009 as part of efforts to improve operational efficiency and will continue to focus our attention on other initiatives to increase franchise value.

FDIC-Assisted Acquisitions

Neighborhood Community Bank. On June 26, 2009, we entered into an agreement with the FDIC, as receiver, to acquire certain assets and assume certain liabilities of Neighborhood Community Bank, a full service commercial bank headquartered in Newnan, Georgia. The NCB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of funds. The acquisition of NCB’s four full-service branches, one of which has been closed, has expanded our market presence in west central Georgia within the I-85 corridor region in which we are seeking to expand.

We assumed $195.3 million of liabilities, including $181.0 million of deposits with no deposit premium paid. The liabilities assumed by us also included $13.0 million of Federal Home Loan Bank advances and $981,000 of other liabilities. We acquired approximately $202.8 million of NCB’s assets, including $159.9 million in loans, net of unearned income, and $17.7 million of real estate owned at a discount of $26.9 million of fair value and other adjustments. The assets acquired also included $43.9 million of cash and cash equivalents, securities, Federal Home Loan Bank stock and other assets, including $19.4 million in cash that was received from the FDIC.

Under agreements with the FDIC, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $82.0 million of losses on the acquired loans and other real estate owned, and assume 95% of losses and share 95% of loss recoveries on losses exceeding $82.0 million. The loss sharing agreements cover losses on single-family residential mortgage loans for ten years and all other losses for five years and are subject to certain servicing procedures as specified in the agreements with the FDIC. In addition to the $26.9 million of fair value discounts, we initially recorded an indemnification asset from the FDIC in the amount of $50.0 million as part of the loss sharing agreements. Subsequent to initial recognition, an additional $20.6 million was recorded to increase the indemnification asset because of increased estimates of expected credit losses on covered assets. We have received $59.7 million in cash from the FDIC in loss sharing through September 30, 2012 relating to NCB agreements.

We determined current fair value accounting estimates of the acquired assets and liabilities in accordance with accounting requirements for acquisition transactions. We expect that we now have sufficient nonaccretable discounts (discounts representing amounts that are not expected to be collected from the customer, liquidation of collateral, or under the FDIC loss sharing agreements) to cover losses on the covered loans and other real estate. We have further recorded a FDIC receivable for losses expected to be indemnified by the FDIC. Furthermore, we expect to have accretable discounts (discounts representing the excess of a loan’s cash flows expected to be collected over the initial investment in the loan) to provide for market yields on the covered loans. No goodwill or bargain purchase gain was recorded in the transaction.

Assets covered by loss sharing, at fair value or net of acquisition discounts decreased from $132.0 million at acquisition to $36.9 million at September 30, 2012. Loss estimates were increased by $7.8 million on covered loans and $3.5 million on covered other real estate owned in fiscal 2012 compared to $6.0 million and $0, respectively, in fiscal 2011. This resulted in expensing provisions for losses of $889,000 for covered loans and $210,000 for covered other real estate owned for fiscal 2012 compared to $1.2 and $0, respectively, in fiscal 2011. Cumulatively, we have received $59.7 million in cash reimbursements from the FDIC and have a remaining FDIC indemnification receivable of $11.0 million at September 30, 2012.

The former NCB franchise is currently operating under the CharterBank name. Since the acquisition, retail customer deposits have increased slightly through September 30, 2012, which significantly exceeded the pre-acquisition planning targets.

McIntosh Commercial Bank. On March 26, 2010, we entered into a purchase and assumption agreement with the FDIC, as receiver, to acquire certain assets and assume certain liabilities of McIntosh Commercial Bank, a full-service commercial bank headquartered in Carrollton, Georgia. The MCB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of our funds. The retention of one of MCB’s four full-service branches has expanded our market presence in west central Georgia within the I-85 corridor region and adjacent areas in which we are seeking to expand.

We assumed $306.2 million of liabilities, including $295.3 million of deposits with no deposit premium paid. The liabilities assumed by us also included $9.5 million of FHLB advances and other borrowings and $1.4 million of other liabilities. We acquired approximately $322.6 million of MCB’s assets, including $207.6 million in loans, net of unearned income, and $55.3 million of real estate owned at a discount of $53.0 million. The assets acquired also included $68.9 million of cash and cash equivalents and $27.4 million of securities and other assets.

Under agreements with the FDIC, the FDIC will assume 80% of losses and share 80% of loss recoveries on the first $106.0 million of losses on the acquired loans and other real estate owned, and assume 95% of losses and share 95% of loss recoveries on losses exceeding $106.0 million. The loss sharing agreements cover losses on single-family residential mortgage loans for ten years and all other losses for five years. We initially recorded an indemnification asset from the FDIC in the amount of $108.3 million as part of the loss sharing agreements which reflected the present value of the expected net cash reimbursement related to the loss sharing agreements.

We determined current fair value accounting estimates of the acquired assets and liabilities in accordance with new accounting requirements for business combinations under which the assets acquired and liabilities assumed are recorded at their respective acquisition date fair values. It is expected that we will have sufficient nonaccretable discounts (discounts representing amounts that are not expected to be collected from the customer or liquidation of collateral) to cover any losses on the covered loans. We have further recorded a FDIC receivable for losses expected to be indemnified by the FDIC and also loan nonaccretable discounts for such credit losses. Furthermore, we expect to have accretable discounts (discounts representing the excess of a loan’s cash flows expected to be collected over the initial investment in the loan) to provide for market yields on the covered loans. In addition, we recorded noninterest income of approximately $9.3 million in a pre-tax bargain purchase gain as a result of the MCB transaction which represents the excess of the estimated fair value of the assets acquired over the fair value of the liabilities assumed.

The following table shows adjustments to the fair value of the assets and liabilities acquired and the resulting gain from the MCB acquisition as of March 26, 2010.


	As Recorded by MCB			Fair Value Adjustments				As Recorded by CharterBank
Assets:
Cash and due from banks	$	32,285,757		$	36,629,236		(1)	$	68,914,993
FHLB and other bank stock		1,321,710			(200,410	)	(2)		1,121,300
Investment securities		24,744,318			(75,028	)	(3)		24,669,290
Loans, net of unearned income		207,644,252			(110,645,341	)	(4)		96,998,911
Other real estate owned		55,267,968			(40,136,424	)	(5)		15,131,544
FDIC receivable for loss sharing agreements		—			108,252,007		(6)		108,252,007
Core deposit intangible		—			258,811		(7)		258,811
Other assets		1,313,923			(427,702	)	(8)		886,221

Total assets acquired	$	322,577,928		$	(6,344,851	)		$	316,233,077

Liabilities:
Deposits:
Noninterest-bearing	$	5,443,673		$	—			$	5,443,673
Interest-bearing		289,862,953			683,100		(9)		290,546,053

Total Deposits		295,306,626			683,100				295,989,726
FHLB advances and other borrowings		9,491,486			—				9,491,486
Deferred tax liability		—			3,737,126		(10)		3,737,126
Other liabilities		1,409,048			—				1,409,048

Total liabilities assumed		306,207,160			4,420,226			$	310,627,386

Excess of assets acquired over liabilities assumed	$	16,370,768	(11)

Aggregate fair value adjustments				$	(10,765,077	)

Net assets of MCB acquired								$	5,605,691

(1)	Adjustment reflects the initial funds received from the FDIC on the acquisition date.

(2)	Adjustment reflects the estimated fair value of other bank stock.

(3)	Adjustment reflects fair value adjustments based on our evaluation of the acquired investment securities portfolio.

(4)	Adjustment reflects fair value adjustments based on our evaluation of the acquired loan portfolio. The fair value adjustment includes adjustments for estimated credit losses, liquidity and servicing costs.

(5)	Adjustment reflects the estimated other real estate owned losses based on our evaluation of the acquired other real estate owned portfolio.

(6)	Adjustment reflects the estimated fair value of payments we will receive from the FDIC under the loss sharing agreements.

(7)	Adjustment reflects the estimated fair value of acquired core deposit intangible.

(8)	Adjustment reflects the estimated fair value adjustment of other assets.

(9)	Adjustment reflects fair value adjustments based on our evaluation of the acquired time deposit portfolio.

(10)	Adjustment reflects differences between the financial statement and tax bases of assets acquired and liabilities assumed.

(11)	Represents the excess of assets acquired over liabilities assumed; since the asset discount bid of $53.0 million exceeded this amount, the difference resulted in a cash settlement from the FDIC on the acquisition date.

Accounting standards prohibit carrying over an allowance for loan losses for loans purchased in the MCB acquisition as uncertainty regarding collectability of future contractual payments are incorporated into the fair value measurement. On the March 26, 2010 acquisition date, the estimate of the contractually required principal payments receivable for all impaired loans acquired from MCB was $136.9 million, and the estimated fair value of such loans was $50.4 million. The impaired MCB loans were generally valued based on the liquidation value of the underlying collateral because most of the loans are collateral dependent. We established credit risk related discounts (nonaccretable) of $73.8 million on the acquisition date relating to these impaired loans, reflected in the recorded net fair value of the impaired loans. Our estimate on the acquisition date of the contractually required principal payments receivable for all other loans acquired in the MCB acquisition was $70.8 million, and the estimated fair value of the loans was $46.6 million. We established credit risk related nonaccretable discounts of $18.9 million on these non-impaired loans. In our estimate of cash flows for the MCB loans, we also recorded accretable discounts of $5.3 million relating to the loans that will be recognized on a level yield basis over the life of the loans because accretable yield represents cash flows expected to be collected. As of the acquisition date, we also recorded a net FDIC receivable of $108.3 million, which reflected the present value of the expected net cash reimbursement under the loss sharing agreements for covered loans and other real estate. Such receivable has been discounted by $1.7 million for the expected timing of receipt of these cash flows.

Assets covered by loss sharing, at fair value or net of nonaccretable discount decreased from $112.1 million at acquisition to $41.9 million at September 30, 2012. Loss estimates were increased by $3.5 million on covered other real estate owned in fiscal 2012 and resulted in expensing provisions for losses on such assets of $175,000 for fiscal 2012. There were no such loss estimate increases or provisions on covered loans in fiscal 2012 or covered assets in fiscal 2011.

The First National Bank of Florida. On September 9, 2011, we entered into a purchase and assumption agreement with the FDIC, as receiver, to acquire certain assets and assume certain liabilities of The First National Bank of Florida a full-service commercial bank headquartered in Milton, Florida. The FNB acquisition extended our retail branch footprint as part of our efforts to increase our retail deposits and reduce our reliance on brokered deposits and borrowings as a significant source of our funds. The retention of three of FNB’s eight full-service branches has expanded our market presence in the northwestern Florida Panhandle region and adjacent areas in which we are seeking to expand.

We assumed $247.5 million of liabilities, including $244.7 million of deposits. We acquired approximately $251.8 million of FNB’s assets, including $185.9 million in loans, net of unearned income, and $24.9 million of other real estate owned. The assets acquired also included $49.3 million of cash and cash equivalents and $13.0 million of securities.

Under agreements with the FDIC, as part of the Purchase and Assumption Agreement, CharterBank and the FDIC entered into two loss sharing agreements—one for single family loans, and one for all other loans and other real estate owned. Under the loss sharing agreements, the FDIC will cover 80% of covered loan and other real estate owned losses, with the exception of $900,259 (contractual balance) in consumer loans. The term for loss sharing on residential real estate loans and other real estate owned is ten years, while the term for loss sharing on non-residential real estate loans and other real estate owned is five years in respect to losses and eight years for loss recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction, accrued interest on loans for up to 90 days from the date of the transaction, the book value of other real estate owned from the date of the transaction and certain direct costs. New loans made after the date of the transaction are not covered by the loss sharing agreements.

We determined current fair value accounting estimates of the acquired assets and liabilities in accordance with accounting requirements for business combinations under which the assets acquired and liabilities assumed are recorded at their respective acquisition date fair values. It is expected that we will have sufficient nonaccretable discounts (discounts representing amounts that are not expected to be collected from the customer or liquidation of collateral) to cover losses on the covered loans. We have further recorded a FDIC receivable for losses expected to be indemnified by the FDIC. Furthermore, we expect to have accretable discounts (discounts representing the excess of a loan’s cash flows expected to be collected over the initial investment in the loan) to provide for market yields on the covered loans. In addition, we recorded noninterest income of approximately $1.1 million in a pre-tax bargain purchase gain as a result of the FNB transaction which represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

The following table shows adjustments to the fair value of the assets and liabilities acquired and the resulting gain from the FNB acquisition as of September 9, 2011.


	As Recorded by FNB			Fair Value Adjustments					As Recorded by CharterBank
Assets:
Cash and due from banks	$	25,689,080		$	23,637,211		(1	)	$	49,326,291
FHLB and FRB stock		993,612			—					993,612
Investment securities available for sale		13,002,568			(97,407	)	(2	)		12,905,161
Loans, net of unearned income		185,927,300			(61,459,964	)	(3	)		124,467,336
Other real estate owned		24,943,178			(17,387,076	)	(4	)		7,556,102
FDIC receivable for loss sharing agreements		—			51,555,999		(5	)		51,555,999
Core deposit intangible		—			1,134,697		(6	)		1,134,697
Other assets		1,291,037			(251,246	)	(7	)		1,039,791

Total assets acquired	$	251,846,775		$	(2,867,786	)			$	248,978,989

Liabilities:
Deposits		244,715,032			—					244,715,032
Deferred tax liability		—			420,919		(9	)		420,919
Other liabilities		2,768,954			400,000		(10	)		3,168,954

Total liabilities assumed		247,483,986			820,919				$	248,304,905

Excess of assets acquired over liabilities assumed	$	4,362,789	(8)

Aggregate fair value adjustments				$	(3,688,705	)

Net assets of FNB acquired									$	674,084

(1)	Adjustment reflects the initial wire received from the FDIC adjusted for overpayment by the FDIC on the acquisition date.

(2)	Adjustment reflects fair value adjustments based on our evaluation of the acquired investment securities portfolio.

(3)	Adjustment reflects fair value adjustments based on our evaluation of the acquired loan portfolio. The fair value adjustment includes adjustments for estimated credit losses, liquidity and servicing costs.

(4)	Adjustment reflects the estimated other real estate owned losses based on our evaluation of the acquired other real estate owned portfolio.

(5)	Adjustment reflects the estimated fair value of payments we will receive from the FDIC under loss sharing agreements. The receivable was recorded at present value of the estimated cash flows using an average discount rate of approximately two percent.

(6)	Adjustment reflects fair value adjustments to record the estimated core deposit intangible.

(7)	Adjustment reflects fair value adjustments to record certain other assets acquired in this transaction.

(8)	Amount represents the excess of assets acquired over liabilities assumed and since the asset discount bid by CharterBank of $28 million exceeded this amount, the difference resulted in a cash settlement with the FDIC on the acquisition date.

(9)	Adjustment reflects differences between the financial statement and tax bases of assets acquired and liabilities assumed.

(10)	Adjustment reflects fair value adjustments to record certain other liabilities in this transaction.

Accounting standards prohibit carrying over an allowance for loan losses for loans purchased in the FNB acquisition as uncertainty regarding collectability of future contractual payments are incorporated into the fair value measurement. On the September 9, 2011 acquisition date, the estimate of the contractually required principal payments receivable for all impaired loans acquired from FNB was $121.6 million, and the estimated fair value of such loans was $57.8 million. The impaired FNB loans were generally valued based on the liquidation value of the underlying collateral because most of the loans are collateral dependent. Our estimate on the acquisition date of the contractually required principal payments receivable for all other loans acquired in the FNB acquisition and covered by the FDIC was $64.3 million, and the estimated fair value of the loans was $63.6 million. We did not initially establish any credit risk related discounts on these non-impaired loans. In our estimate of cash flows for the FNB loans, we recorded accretable discounts of $11.8 million relating to the loans that will be recognized on a level yield basis over the life of the loans because accretable yield represents cash flows expected to be collected. As of the acquisition date, we also recorded a net FDIC receivable of $51.6 million, representing FDIC indemnification under the loss sharing agreements for covered loans and other real estate. Such receivable was initially discounted by $2.0 million for the expected timing of receipt of these cash flows.

Assets covered by loss sharing, at fair value or net of acquisition discounts decreased from $132.0 million at acquisition to $109.3 million at September 30, 2012. Loss estimates were increased by $1.6 million on covered loans and $1.5 million on covered other real estate owned in fiscal 2012. This resulted in expensing provisions for losses of $313,000 for covered loans and $300,000 for covered other real estate owned for fiscal 2012. There were no such loss estimate increases or provisions in fiscal 2011. Cumulatively, we have received $45.1 million in cash reimbursements from the FDIC and have a remaining FDIC indemnification receivable of $12.7 million at September 30, 2012.

FDIC-Assisted Transactions and Loss Sharing Agreements

The following table presents the expected losses on acquired assets covered under loss share agreements as of September 30, 2012 (dollars in thousands):


		FDIC Stated Threshold or Intrinsic Loss Estimate												FDIC Receivable (4)
Entity	Date of Transaction	FDIC Stated Threshold or Intrinsic Loss Estimate		Original Estimated Covered Losses		Losses Incurred through September 30, 2012 (1)		Remaining Estimated Losses for Loans		Other real estate owned Mark at September 30, 2012 (2)		Projected Total Losses		Reimbursements from FDIC Received as of September 30, 2012		Balance at September 30, 2012 (3)
NCB	6/26/2009	$	82,000	$	65,072	$	77,321	$	10,078	$	2,517	$	89,916	$	59,712	$	10,957
MCB	3/26/2010		106,000		132,874		130,226		10,708		2,136		143,070		108,073		12,675
FNB	9/9/2011		59,483		70,008		47,317		21,885		1,767		70,969		45,124		12,670

		$	247,483	$	267,954	$	254,864	$	42,671	$	6,420	$	303,955	$	212,909	$	36,302

(1)	Claimed or Claimable loans and other real estate owned losses including expenses, net of revenues.

(2)	Represents the estimated losses on other real estate owned at year end. These losses have been recognized to record other real estate owned at net realizable value. These losses are claimable from the FDIC upon sale or receipt of a valid appraisal.

(3)	Balance is gross of a fair value discount of $1.2 million.

(4)	FDIC Receivable amounts are presented at their respective loss share agreement portions of 80% or 95%, whereas the other amounts related to losses are presented on a gross basis.

Under the FNB loss share agreements, all losses (whether or not they exceed the intrinsic loss estimate) are reimbursable by the FDIC at 80% of the losses and reimbursable expenses paid. During the year ended September 30, 2012, the losses and reimbursable expenses claimed under the MCB loss share agreements exceeded the FDIC established threshold and became reimbursable at 95% rather than the 80% rate. As of September 30, 2012, the losses and reimbursable expenses under the NCB loss share agreements were still reimbursable at a rate of 80%; however, projected total losses indicate the FDIC established threshold will be exceeded, ultimately resulting in the maximum reimbursable rate of 95%.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. They require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following are the accounting policies that we believe are critical. For a discussion of recent accounting pronouncements, see Note 1 of the Notes to our Financial Statements.

Allowance for Loan Losses. 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 collectability 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 collectability 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.

We segment our allowance for loan losses into the following four major categories: (1) specific reserves; (2) general allowances for Classified/Watch loans; (3) general allowances for loans with satisfactory ratings; and (4) an unallocated amount. Risk ratings are initially assigned in accordance with our loan and collection policy. A department independent from our loan origination staff 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, if the loan is considered collateral-dependent, as the measure for the amount of the impairment. Impaired and Classified/Watch loans are aggressively monitored. The allowances for loans by credit grade are further subdivided by loan type. We have developed specific quantitative allowance factors to apply to each loan grade which considers loan charge-off

experience over the most recent two years by loan type. In addition, we apply loss estimates for certain qualitative allowance factors that are subjective in nature and require considerable judgment on the part of management. Such qualitative factors include economic and business conditions, the column of past due loans, changes in the value of collateral in collateral-dependent loans, and other economic uncertainties. An unallocated component of the allowance is also 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 our allowance for loan losses. Such agencies may require us 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. At September 30, 2012, we had 92.1% of our total non-covered loan portfolio secured by real estate, with one- to four-family residential mortgage loans comprising 24.1% of the total non-covered loan portfolio, commercial real estate loans comprising 57.5% of the total non-covered loan portfolio, and construction loans comprising 10.4% of the total non-covered loan portfolio. We carefully monitor our commercial real estate loans since the repayment of these loans is generally dependent upon earnings from the collateral real estate or the liquidation of the real estate and is affected by national and local economic conditions. For many owner-occupied commercial real estate loans, debt service may be dependent upon cash flow from business operations. The residential category represents those loans we choose to maintain in our 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 fixed so we take no credit or interest rate risk with respect to these loans.

Relating to the FDIC-assisted acquisitions of the loans of NCB and FNB, we have established an allowance for loan losses for loans covered by loss-sharing agreements and such allowance for loan losses was $10.3 million at September 30, 2012. Management believes this allowance for covered loans is adequate. An impairment of the covered loans of MCB has not occurred to date based on updated estimates of expected cash flows.

Through the FDIC-assisted acquisitions of the loans of NCB, MCB, and FNB, we established non-accretable discounts for the acquired impaired loans and we also established non-accretable discounts for all other loans of MCB. These non-accretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, we continue to assess the experience of actual cash flows on a quarterly basis compared to our estimates. When we determine that non-accretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, an allowance for covered loans is recorded with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on additional future cash expected to be received from the FDIC due to loss sharing indemnification. During the years ended September 30, 2012 and 2011, we increased the allowance for covered loans by $9.4 million and $6.0 million by recording provisions of $1.2 million for September 30, 2012 and 2011, and $8.2 million and $4.8 million recorded as an increase to the FDIC receivable for the same respective time periods.

Other-Than-Temporary Impairment of Investment Securities. 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. In connection with the assessment for other-than-temporary impairment of investment securities, mortgage-backed securities, and collateralized mortgage obligations, management obtains fair value estimates by independent quotations, assesses current credit ratings and related trends, reviews relevant delinquency and default information, assesses expected cash flows and coverage ratios, reviews average credit score data of underlying mortgages, and assesses other current data. The severity and duration of an impairment and the likelihood of potential recovery of an impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value.

See “Risk Factors—We could record future losses on our securities portfolio.”

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 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 which are charged to expense. Based upon management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded in noninterest expense in the consolidated statements of income.

Goodwill and Other Intangible Assets. Intangible assets include costs in excess of net assets acquired and deposit premiums recorded in connection with the acquisitions. In accordance with accounting requirements, we test our goodwill for impairment annually or more frequently as circumstances and events may warrant. No impairment charges have been recognized through September 30, 2012.

Deferred Income Taxes. Management estimates income tax expense using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the amount of assets and liabilities reported in the consolidated financial statements and their respective tax bases. In estimating the liabilities and corresponding expense related to income taxes, management assesses the relative merits and risks of various tax positions considering statutory, judicial and regulatory guidance. Because of the complexity of tax laws and regulations, interpretation is difficult and subject to differing judgments. 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. 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. Management’s determination of the realization of the net deferred tax asset is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. Management has determined that no valuation allowances were necessary relating to the realization of its deferred tax assets.

Changes in the estimate of income tax liabilities occur periodically due to changes in actual or estimated future tax rates and projections of taxable income, interpretations of tax laws, the complexities of multi-state income tax reporting, the status of examinations being conducted by various taxing authorities and the impact of newly enacted legislation or guidance as well as income tax accounting pronouncements.

Receivable from FDIC Under Loss Sharing Agreements. Under loss sharing agreements with the FDIC, we recorded a receivable from the FDIC equal to 80 percent or 95 percent, as applicable, of the estimated losses in the covered loans and other real estate acquired in an FDIC-assisted transaction. The receivable was recorded at the present value of the estimated cash flows at the date of the acquisition and will be reviewed and updated prospectively as loss estimates related to covered loans and other real estate acquired through foreclosure change. Most third party expenses on other acquired real estate and covered impaired loans are covered under the loss sharing agreements and the cash flows from the reimbursable portion are included in the estimate of the FDIC receivable when incurred.

Estimation of Fair Value. The estimation of fair value is significant to certain of our assets, including investment securities available for sale, other real estate owned, assets and liabilities subject to acquisition accounting and the value of loan collateral for impaired loans. These are all recorded at either fair value or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, generally accepted accounting principles require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values may be influenced by a number of factors, including market interest rates, prepayment speeds, liquidity considerations, discount rates and the shape of yield curves. For additional information relating to the fair value of our financial instruments, see Note 15 to the consolidated financial statements.

Comparison of Financial Condition at September 30, 2012 and 2011

Assets. Total assets decreased by $139.5 million, or 11.9%, to $1.03 billion at September 30, 2012. Assets decreased primarily due to a decrease in loans receivable, net of $61.1 million and a decrease in cash and cash equivalents of $41.0 million which was used to fund the decrease in acquired certificates of deposit, offset in part by an increase in securities available for sale of $30.6 million. Cash and loans were greater at September 30, 2011 due to the FNB acquisition in September 2011.

Cash and cash equivalents. Cash and cash equivalents decreased to $108.8 million at September 30, 2012, down from $149.8 million at September 30, 2011. This decrease was planned with the repayment of $30.0 million of FHLB advances in the second quarter of fiscal 2012 and the reduction of certificate of deposit balances by $119.9 million.

Loans. At September 30, 2012, total loans were $593.9 million, or 57.5% of total assets. During the year ended September 30, 2012, our loan portfolio decreased by $61.1 million, or 9.3%. The decrease was due to the paydowns of acquired loan portfolios. Of the $593.9 million in net loans as of September 30, 2012, $166.2 million were covered by FDIC loss sharing agreements.


	Non-covered (1)		Covered		Total
	(Dollars in Thousands)
Loan Balances:
September 30, 2012	$	427,676	$	166,228	$	593,904
June 30, 2012		430,292		186,585		616,837
March 31, 2012		435,424		203,626		639,050
December 31, 2011		432,108		218,623		650,731
September 30, 2011		419,979		235,050		655,028
June 30, 2011		434,309		120,140		554,449
March 31, 2011		435,276		124,583		559,859
December 31, 2010		447,621		136,400		584,021
September 30, 2010		451,231		148,139		599,370

(1)	Non-covered loans are shown net of deferred loan fees and allowance for loan losses.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated.


	At September 30,
	2012						2011						2010						2009						2008
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
One- to four-family residential real estate (1)	$	105,515			16.83	%	$	98,845			14.23	%	$	106,041			16.9	%	$	126,097			20.9	%	$	138,205			31.6	%
Commercial real estate		251,379			40.11			252,037			36.29			267,726			42.6			270,062			44.8			222,056			50.8
Real estate construction (2)		45,369			7.24			41,726			6.01			45,930			7.3			43,965			7.3			39,563			9.0
Commercial		16,597			2.65			17,613			2.54			19,604			3.1			10,466			1.7			15,543			3.6
Consumer and other loans (3)		18,107			2.89			20,138			2.90			22,486			3.6			22,715			3.7			22,154			5.0
Covered loans (4)		189,834			30.28			264,202			38.04			182,335			26.5			122,060			21.6			—			—

Total loans		626,801			100.0	%		691,556			100.0	%		644,122			100.0	%		595,365			100.0	%		437,521			100.0	%

Other items:
Net deferred loan (fees)		(1,133	)					(1,050	)					(758	)					(857	)					(804	)
Allowance for loan losses-non-covered loans		(8,190	)					(9,370	)					(9,797	)					(9,332	)					(8,244	)
Allowance for loan losses-covered loans (5)		(10,341	)					(6,892	)					(15,554	)					(23,832	)					—
Accretable discount (5)		(13,233	)					(22,221	)					(18,643	)					(8,794	)					—

Loans receivable, net	$	593,904					$	655,028					$	599,370					$	552,550					$	428,473

(1)	Excludes loans held for sale of $2,692, $291, $2,061, $1,123 and $1,292 at September 30, 2012, 2011, 2010, 2009 and 2008, respectively.

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

(3)	Includes home equity loans, lines of credit and second mortgages.

(4)	Consists of loans and commitments acquired in the NCB, MCB, and FNB acquisitions that are covered by loss sharing agreements with the FDIC. Such amounts are presented net of non-accretable discounts of $19,382, $69,145, $52,861 and $7,137 at September 30, 2012, 2011, 2010 and 2009, respectively.

(5)	See Note 5 to the Notes to our Consolidated Financial Statements.

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2012. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.


	One- to four-family residential real estate (1)					Commercial real estate (2)					Real estate Construction (3)
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending September 30,
2013	$	12,409		5.86	%	$	141,561		5.86	%	$	39,036		5.01	%
2014		3,088		5.92			61,427		5.39			4,904		5.02
2015		2,073		5.81			43,587		5.07			788		5.00
2016 to 2017		1,885		5.85			20,747		4.99			1,186		4.19
2018 to 2022		10,813		5.28			24,094		4.80			45		5.50
2023 to 2027		27,684		4.03			44,615		5.33			753		4.50
2028 and beyond		60,592		5.22			58,023		5.27			—		—

Total	$	118,544		5.06	%	$	394,054		5.44	%	$	46,712		4.98	%


	Commercial (4)					Consumer and other loans (5)					Total (6)
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in thousands)
Due During the Years Ending September 30,
2013	$	13,691		5.54	%	$	2,585		5.43	%	$	209,282		5.67	%
2014		9,075		5.63			1,955		5.14			80,450		5.41
2015		4,008		4.52			2,170		5.22			52,624		5.06
2016 to 2017		3,415		3.39			6,095		5.20			33,328		4.88
2018 to 2022		1,763		5.44			8,043		4.34			44,758		4.86
2023 to 2027		2,136		4.52			1,980		4.00			77,169		4.80
2028 and beyond		133		4.25			101		6.79			118,849		5.24

Total	$	34,221		5.16	%	$	22,929		4.83	%	$	616,460		5.29	%

(1)	Includes $13,029 of covered loans.

(2)	Includes $142,675 of covered loans.

(3)	Includes $1,343 of covered loans. Presented net of undisbursed proceeds on loans-in-progress.

(4)	Includes $17,625 of covered loans.

(5)	Includes $4,821 of covered loans.

(6)	Excludes accretable discounts, allowance for loan losses on noncovered loans, and net deferred loan fees on both covered and noncovered loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2012 that are contractually due after September 30, 2013.


	Due After September 30, 2013
	Fixed		Adjustable		Total
	(In thousands)
One- to four-family residential real estate	$	46,690	$	59,444	$	106,134
Commercial real estate		70,356		182,137		252,493
Real estate construction		896		6,780		7,676
Commercial		12,981		7,550		20,531
Consumer and other loans		3,854		16,490		20,344

Total loans	$	134,777	$	272,401	$	407,178

Investment and Mortgage Securities Portfolio. At September 30, 2012, our investment and mortgage securities portfolio totaled $189.4 million, compared to $158.7 million at September 30, 2011. The increase was due to $135.3 million in purchases offset by $41.6 million in sales, $6.8 million in securities that were called, and $57.2 million in principal paydowns. During 2012, we also had approximately $273,000 in other-than-temporary impairment charges on non-government agency collateralized mortgage obligations. During 2011, we had approximately $2.3 million in other-than-temporary impairment charges on non-government agency collateralized mortgage obligations.

We review our investment portfolio on a quarterly basis for indications of impairment. In addition to management’s intent and ability to hold the investments to maturity or recovery of carrying value, the review for impairment includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer. Our review of mortgage securities includes loan geography, loan to value ratios, credit scores, types of loans, loan vintage, credit ratings, loss coverage from tranches less senior than our investment tranche and cash flow analysis. Our investments are evaluated using our best estimate of future cash flows. If, based on our estimate of cash flows, we determine that an adverse change has occurred, other-than-temporary impairment would be recognized for the credit loss. At September 30, 2012, we held no securities in our investment portfolio with other-than-temporary impairment, except for one non-agency collateralized mortgage obligation, which is discussed further below. At September 30, 2012, this non-agency security had a cost basis of $5.6 million and an unrecognized loss of $2.3 million, reflected through other comprehensive income.

The following table sets forth the composition of our investment and mortgage securities portfolio at the dates indicated. At September 30, 2012, all investment and mortgage securities were classified as available for sale.


	At September 30,
	2012				2011				2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Investment securities:
U.S. Government sponsored entities	$	16,520	$	16,627	$	17,414	$	17,510	$	—	$	—
Municipals		11,555		11,579		10,618		10,626		100		103

Total investment securities		28,075		28,206		28,032		28,136		100		103

Mortgage-backed and mortgage-related securities:
Fannie Mae		84,837		86,585		62,751		63,608		35,164		35,962
Ginnie Mae		4,568		4,945		5,842		6,088		25,437		26,098
Freddie Mac		45,178		46,244		20,634		21,291		7,135		7,614

Total mortgage-backed and mortgage related securities		134,583		137,774		89,227		90,987		67,736		69,674

Collateralized mortgage obligations:
Fannie Mae		7,713		8,027		16,682		17,133		9,605		9,872
Ginnie Mae		500		503		3,648		3,676		6,131		6,108
Freddie Mac		533		580		871		944		20,516		20,785
Other (1)		17,667		14,289		23,263		17,860		34,395		26,641

Total collateralized mortgage obligations		26,413		23,399		44,464		39,613		70,647		63,406

Total mortgage-backed securities and collateralized mortgage obligations		160,996		161,173		133,691		130,600		138,383		133,080

Total	$	189,071	$	189,379	$	161,723	$	158,736	$	138,483	$	133,183

(1)	Includes private label mortgage securities. See Note 4 of Notes to Consolidated Financial Statements.

We analyze our non-agency collateralized mortgage securities for other-than-temporary impairment at least quarterly. We use a multi-step approach using Bloomberg analytics considering market price, ratings, ratings changes, and underlying mortgage performance including delinquencies, foreclosures, deal structure, underlying collateral losses, prepayments, loan-to-value ratios, credit scores, and loan structure and underwriting, among other factors. We apply the Bloomberg default model, and if the bond shows no losses we consider it not other than temporarily impaired. If a bond shows losses or a break in yield with the Bloomberg default model, we create a probable vector of loss severities and defaults and if it shows a loss we consider it other than temporarily impaired.

Through September 30, 2012, we had cumulatively recorded $2.3 million of other-than-temporary impairment charges with respect to CWALT 2005-63 2A2, $2.4 million of other-than-temporary impairment charges with respect to SARM 2005-15 2A2, and $380,000 of other-than-temporary impairment charges with respect to MARM 2004-13 B1. No other mortgage securities in our investment portfolio were other than temporarily impaired at September 30, 2012. At September 30, 2012, CharterBank no longer owned the SARM 2005-15 2A2 as a consequence of a sales transaction. Additionally, the CWALT 2005-63 2A2 maintained a $0 book value following a previous charge-off of its remaining book value. As of September 30, 2012, the only other than temporarily impaired security held in the investment portfolio was the MARM 2004-13 B1.

Cash flow analysis indicates that the yields on all of the private label securities noted above are maintained. The unrealized losses may relate to general market liquidity and, in the securities with the larger unrealized losses, weakness in the underlying collateral, market concerns over foreclosure levels, and geographic concentration. We consider these unrealized losses to be temporary impairment losses primarily because cash flow analysis indicates that there are continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches. As of September 30, 2012, the private label securities were classified as available for sale and $5.1 million had been cumulatively recognized as impairment through net income. Of this total other-than-temporary impairment charge of $4.7 million was on securities that are no longer owned by us. Based on the analysis performed by management as of September 30, 2012, we deemed it probable that all contractual principal and interest payments other than the single security identified above as being other than temporarily impaired, will be collected and therefore there is no other-than-temporary impairment. See Note 4 in our Financial Statements for further information.

Securities Portfolio Maturities and Yields. The composition and maturities of the securities portfolio at September 30, 2012 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect scheduled amortization or the impact of prepayments or redemptions that may occur.


	Less than One Year					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		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Investment securities:
U.S. Governmental sponsored entities	$	1,364		0.74	%	$	15,156		1.28	%	$	—		—	%	$	—		—	%	$	16,520	$	16,627		1.24	%
Municipals		256		1.31			2,822		0.34			1,905		0.54			6,572		0.71			11,555		11,579		0.60

Total investment securities		1,620		0.83			17,978		1.13			1,905		0.54			6,572		0.71			28,075		28,206		0.98
Mortgage-backed securities:
Fannie Mae		—		—			—		—			26,013		1.61			58,824		1.84			84,837		86,585		1.77
Ginnie Mae		—		—			637		5.93			2,261		3.08			1,670		6.56			4,568		4,945		4.75
Freddie Mac		—		—			—		—			10,152		1.69			35,026		2.23			45,178		46,244		2.11

Total mortgage-backed and mortgage-related securities		—		—			637		5.93			38,426		1.71			95,520		2.06			134,583		137,774		1.98

Collateralized mortgage obligations:
Fannie Mae		—		—			—		—			—		—			7,713		2.83			7,713		8,027		2.83
Ginnie Mae		—		—			—		—			—		—			500		3.05			500		503		3.05
Freddie Mac		—		—			—		—			80		4.25			453		5.58			533		580		5.38
Other		—		—			—		—			1,181		4.85			16,486		3.29			17,667		14,289		4.16

Total collateralized mortgage obligations		—		—			—		—			1,261		4.81			25,152		3.18			26,413		23,399		3.77

Total	$	1,620		0.83	%	$	18,615		1.30	%	$	41,592		1.75	%	$	127,244		2.22	%	$	189,071	$	189,379		2.01	%

Bank Owned Life Insurance. We invest in bank owned life insurance to provide us with a funding source for our benefit plan obligations. Bank owned life insurance also generally provides us non-interest income that is non-taxable. The total cash surrender values of such policies at September 30, 2012 and 2011 were $33.8 million and $32.8 million, respectively.

Deposits. Total deposits decreased $110.8 million, or 12.2%, to $800.3 million at September 30, 2012 from $911.1 million at September 30, 2011. The decrease was caused primarily by a $113.1 million decline in retail certificates of deposit in acquired institutions. We reduced the rates paid on these certificates to better match our costing liabilities with loans. At September 30, 2012, $779.4 million of deposits were retail deposits and $20.9 million were brokered and other wholesale deposits. Funds on deposit from internet services and brokered deposits are considered as wholesale deposits.


			Deposit Balances
	Deposit Fees		Transaction Accounts		Savings		Money Market		Total Core Deposits		Retail Certificates of Deposit		Wholesale Certificates of Deposit		Total Deposits
			(Dollars in Thousands)
September 30, 2012	$	1,947	$	275,998	$	51,192	$	129,103	$	456,293	$	323,105	$	20,864	$	800,262
June 30, 2012		1,713		281,358		52,703		133,807		467,868		332,707		20,958		821,533
March 31, 2012		1,618		285,858		55,980		128,996		470,834		353,723		20,951		845,508
December 31, 2011		1,724		266,515		54,055		130,122		450,692		385,926		22,887		859,505
September 30, 2011		1,601		268,515		56,857		121,804		447,176		436,213		27,705		911,094
June 30, 2011		1,448		211,513		19,438		88,409		319,360		344,474		31,984		695,818
March 31, 2011		1,360		214,810		19,329		87,005		321,144		372,160		41,987		735,291
December 31, 2010		1,433		202,632		16,850		91,974		311,456		395,744		55,212		762,412
September 30, 2010		1,564		206,373		17,409		89,388		313,170		426,521		83,443		823,134

The following table sets forth the distribution of total deposit accounts, by account type, for the periods indicated.


	For the Years Ended September 30,
	2012								2011								2010
	Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit type:
Savings accounts	$	53,897		6.5	%		0.19	%	$	20,877		2.8	%		0.18	%	$	17,641		2.4	%		0.39	%
Certificates of deposit		384,700		46.3			1.42			425,168		57.1			1.80			453,142		62.7			2.08
Money market		125,860		15.2			0.37			89,692		12.0			0.47			88,445		12.2			0.74
Demand and NOW		266,149		32.0			0.21			209,437		28.1			0.61			164,073		22.7			1.26

Total deposits	$	830,606		100.0	%		0.79	%	$	745,174		100.0	%		1.26	%	$	723,301		100.0	%		1.69	%

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.


	At September 30,
	2012		2011		2010
	(In thousands)
Interest Rate:
Less than 2.00%	$	262,781	$	248,450	$	220,960
2.00% to 2.99%		45,598		162,643		210,736
3.00% to 3.99%		34,000		44,890		57,834
4.00% to 4.99%		1,466		4,602		10,569
5.00% to 5.99%		124		3,332		9,772
6.00% to 6.99%		—		—		93

Total	$	343,969	$	463,917	$	509,964

The following table sets forth, by interest rate ranges, information concerning our certificates of deposit.


	At September 30, 2012
	Period to Maturity
	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
	(Dollars in thousands)
Interest Rate Range:
0.49% and below	$	68,987	$	5,506	$	530	$	4	$	75,027		21.81	%
0.50% to 0.99%		101,634		36,454		1,879		1,015		140,982		40.99
1.00% to 1.99%		20,300		3,735		2,137		20,600		46,772		13.60
2.00% to 2.99%		20,728		5,854		15,037		3,979		45,598		13.26
3.00% to 3.99%		2,443		2,858		28,699		—		34,000		9.88
4.00% to 5.99%		1,081		509		—		—		1,590		0.46

Total	$	215,173	$	54,916	$	48,282	$	25,598	$	343,969		100.00	%

As of September 30, 2012, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $250,000 was approximately $50.0 million. As of September 30, 2012, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $177.9 million. The following table sets forth the maturity of those certificates greater than or equal to $100,000 as of September 30, 2012.


	At September 30, 2012
	Retail (1)		Wholesale (2)
	(In thousands)
Three months or less	$	19,500	$	200
Over three months through six months		32,726		6,666
Over six months through one year		35,436		7,127
Over one year to three years		57,854		5,185
Over three years		13,225		—

Total	$	158,741	$	19,178

(1)	Retail certificates of deposit consist of deposits held directly by customers. The weighted average interest rate for all retail certificates of deposit at September 30, 2012, was 1.14%.

(2)	Wholesale certificates of deposit include brokered deposits and deposits from other financial institutions. The weighted average interest rate for all wholesale certificates of deposit at September 30, 2012, was 2.21%.

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Atlanta. From time to time, our borrowings also have included securities sold under agreements to repurchase. At September 30, 2012, borrowings totaled $81.0 million, a decrease of $29.0 million from September 30, 2011. The decrease was due to the payoff of maturing, high rate Federal Home Loan Bank advances in March 2012.

At September 30, 2012, we had available Federal Home Loan Bank advances of up to $315.5 million under existing lines of credit. Based upon available investment and loan collateral except cash, additional advances of $140.7 million were available at September 30, 2012. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the years indicated.


	At or For the Years Ended September 30,
	2012			2011			2010
	(Dollars in thousands)
Balance at end of year	$	81,000		$	110,000		$	212,000
Average balance during year	$	94,205		$	130,170		$	214,996
Maximum outstanding at any month end	$	110,000		$	152,000		$	217,000
Weighted average interest rate at end of year		4.05	%		4.24	%		4.91	%
Average interest rate during year		4.24	%		4.48	%		4.90	%

We had a minimal amount of repurchase agreements acquired in our FDIC-assisted acquisitions which were repaid shortly after each acquisition.

At September 30, 2012, approximately $48.1 million of credit was available to us at the Federal Reserve Bank based on loan collateral pledged. The credit at the Federal Reserve Bank was not used other than periodic tests to ensure the line was functional.

Stockholders’ Equity. At September 30, 2012, total stockholders’ equity totaled $142.5 million (or $8.00 per share), a $3.1 million increase from September 30, 2011. The increase was primarily due to net income of $5.0 million for the year ended September 30, 2012 and a $2.2 million increase in accumulated other comprehensive income resulting from a decrease in unrealized losses on securities available for sale, partially offset by $1.4 million in dividends paid to stockholders and $3.6 million in shares repurchased and held in treasury.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	At September 30, 2012			For the Years Ended September 30,
	At September 30, 2012			2012								2011								2010
	Yield/ Rate			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-earning deposits in other financial institutions		0.25	%		68,025			161		0.24	%		105,413			236		0.22	%		87,470			135			0.15	%
FHLB common stock and other equity securities		2.43			8,074			115		1.42			12,602			92		0.73			14,427			50			0.35
Mortgage-backed securities and collateralized mortgage obligations available for sale (3)		2.06			154,674			3,368		2.18			126,917			3,943		3.11			177,484			6,983			3.93
Other investment securities available for sale (3)		0.98			27,343			262		0.96			21,565			154		0.71			4,028			195			4.84
Loans receivable (1)(2)(3)		6.32			641,284			44,195		6.89			584,998			41,362		7.07			602,551			42,595			7.07

Total interest-earning assets		4.74			899,400			48,101		5.35			851,495			45,787		5.38			885,960			49,958			5.64
Total noninterest-earning assets					174,736								174,693								167,887

Total assets				$	1,074,136							$	1,026,188							$	1,053,847

Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts		0.11		$	144,386		$	232		0.16		$	88,656		$	255		0.29		$	73,434		$	535			0.73
Reward accounts		0.51			56,883			335		0.59			67,788			1,017		1.50			43,876			1,529			3.48
Savings accounts		0.05			53,897			104		0.19			20,877			37		0.18			17,641			69			0.39
Money market accounts		0.29			125,860			469		0.37			89,692			419		0.47			88,445			657			0.74
Certificate of deposit accounts		1.20			384,700			5,454		1.42			425,168			7,667		1.80			453,142			9,437			2.08

Total interest-bearing deposits		0.69			765,726			6,594		0.86			692,181			9,395		1.36			676,538			12,227			1.81
Borrowed funds		4.05			94,213			3,995		4.24			130,236			5,832		4.48			215,072			10,530			4.90

Total interest-bearing liabilities		1.02			859,939			10,589		1.23			822,417			15,227		1.85			891,610			22,757			2.55
Non-interest-bearing deposits					64,880								52,993								46,763
Other noninterest-bearing liabilities					10,248								12,994								9,825

Total noninterest-bearing liabilities					75,128								65,987								56,588
Total liabilities					935,067								888,404								948,198
Total stockholders’ equity					139,069								137,784								105,649

Total liabilities and stockholders’ equity				$	1,074,136							$	1,026,188							$	1,053,847

Net interest income							$	37,512							$	30,560							$	27,201

Net interest-earning assets (5)							$	39,461							$	29,078							$	(5,650	)

Net interest rate spread (4)										4.12	%							3.53	%								3.09	%
Net interest margin (6)										4.17	%							3.59	%								3.07	%
Ratio of average interest-earning assets to average interest-bearing liabilities					104.59	%							103.54	%							99.37	%

(1)	Includes net loan fees deferred and accreted pursuant to applicable accounting requirements.

(2)

Interest income on loans is interest income as recorded in the income statement and, therefore, does not include interest income on non-accrual loans. The estimated average yield on non-covered loans was 6.04%, 6.22% and 5.76% for the years ended September 30, 2012, 2011 and 2010, respectively; whereas, the estimated average yield on covered loans was 8.57%, 9.53% and 10.96% for the years ended September 30, 2012, 2011 and 2010, respectively.

(3)	Tax exempt or tax-advantaged securities and loans are shown at their contractual yields and are not shown at a tax equivalent yield.

(4)	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.

(5)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

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

Rate/Volume Analysis

The following tables present the effects of changing rates and volumes on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The combined column represents the net change in volume between the two periods multiplied by the net change in rate between the two periods. The net column represents the sum of the prior columns.


	Year Ended September 30, 2012 Compared to the Year Ended September 30, 2011 Increase/Decrease
	(In Thousands) Due to
	Volume			Rate			Combined			Net
Interest Income:
Interest-earning deposits in other financial institutions	$	(84	)	$	13		$	(3	)	$	(74	)
FHLB common stock and other equity securities		(33	)		87			(31	)		23
Mortgage-backed securities and collateralized mortgage obligations available for sale		862			(1,179	)		(258	)		(575	)
Other investment securities available for sale		42			53			13			108
Loans receivable		3,980			(1,046	)		(101	)		2,833

Total interest-earning assets		4,767			(2,072	)		(380	)		2,315

Interest Expense:
NOW accounts		364			(832	)		(237	)		(705	)
Savings accounts		59			3			6			68
Money market deposit accounts		169			(85	)		(33	)		51
Certificate of deposit accounts		(730	)		(1,639	)		154			(2,215	)

Total interest-bearing deposits		(138	)		(2,553	)		(110	)		(2,801	)
Borrowed funds		(1,613	)		(309	)		85			(1,837	)

Total interest-bearing liabilities		(1,751	)		(2,862	)		(25	)		(4,638	)

Net change in net interest income	$	6,518		$	790		$	(355	)	$	6,953


	Year Ended September 30, 2011 Compared to the Year Ended September 30, 2010 Increase/Decrease
	(In Thousands) Due to
	Volume		Rate		Combined		Net
Interest Income:
Interest-earning deposits in other financial institutions	$	28	$	61	$	12	$	101
FHLB common stock and other equity securities

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

CHARTER FINANCIAL CORP/GA 10-K