UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 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 No. 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 Number)

1233 O.G. Skinner Drive, West Point, Georgia	31833
(Address of Principal Executive Offices)	Zip Code

(706) 645-1391

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if smaller reporting company)	Smaller reporting company	þ

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

The number of shares of the registrant’s common stock outstanding as of February 7, 2013 was 18,277,540.

CHARTER FINANCIAL CORPORATION

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Statements of Financial Condition at December 31, 2012 and September 30, 2012	3

	Unaudited Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2012 and 2011	4

	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2012 and 2011	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended December 31, 2012 and Year Ended September 30, 2012	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011	7

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	51

Part II. Other Information

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	52

	Signatures	53

Part I. Financial Information

Item 1. Financial Statements

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	December 31,			September 30,
	2012			2012
Assets
Cash and amounts due from depository institutions	$	12,101,276		$	13,221,291
Interest-bearing deposits in other financial institutions		118,146,324			95,606,929
Cash and cash equivalents		130,247,600			108,828,220

Loans held for sale, fair value of $5,034,155 and $2,741,672		4,923,431			2,691,508
Securities available for sale		179,246,182			189,379,333
Federal Home Loan Bank stock		5,273,200			5,318,200
Loans receivable:
Not covered under FDIC loss sharing agreements		435,810,568			436,966,775
Covered under FDIC loss sharing agreements, net		149,268,548			166,228,316
Unamortized loan origination fees, net (non-covered loans)		(1,058,414	)		(1,101,481	)
Allowance for loan losses (non-covered loans)		(8,382,355	)		(8,189,895	)
Loans receivable, net		575,638,347			593,903,715
Other real estate owned:
Not covered under FDIC loss sharing agreements		1,414,421			2,106,757
Covered under FDIC loss sharing agreements		21,029,944			21,903,204
Accrued interest and dividends receivable		2,880,248			3,241,320
Premises and equipment, net		23,404,360			23,610,642
Goodwill		4,325,282			4,325,282
Other intangible assets, net of amortization		1,152,644			1,280,309
Cash surrender value of life insurance		34,087,206			33,831,920
FDIC receivable for loss sharing agreements		42,821,370			35,135,533
Deferred income taxes		6,469,026			6,176,199
Other assets		1,161,106			487,954
Total assets	$	1,034,074,367		$	1,032,220,096

Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	806,117,639		$	800,261,546
FHLB advances and other borrowings		80,000,000			81,000,000
Advance payments by borrowers for taxes and insurance		116,056			651,520
Other liabilities		3,852,050			7,786,262
Total liabilities		890,085,745			889,699,328
Stockholders’ equity:
Common stock, $0.01 par value; 19,859,219 shares issued at December 31, 2012 and September 30, 2012, respectively; 18,220,260 shares outstanding at December 31, 2012 and 18,229,760 shares outstanding at September 30, 2012		198,592			198,592
Preferred stock, no par value; 10,000,000 shares authorized		-			-
Additional paid-in capital		73,529,645			73,483,605
Treasury stock, at cost; 1,638,959 shares at December 31, 2012 and 1,629,459 shares at September 30, 2012		(39,706,730	)		(39,362,686	)
Unearned compensation – ESOP		(3,571,121	)		(3,571,121	)
Retained earnings		113,903,285			111,568,998
Accumulated other comprehensive gain (loss) – net of unrealized holding gains (losses) on securities available for sale		(365,049	)		203,380
Total stockholders’ equity		143,988,622			142,520,768
Commitments and contingencies
Total liabilities and stockholders’ equity	$	1,034,074,367		$	1,032,220,096

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended December 31,
	2012			2011
Interest and dividend income:
Loans receivable	$	10,179,929		$	11,548,614
Mortgage-backed securities and collateralized mortgage obligations		730,255			800,234
Federal Home Loan Bank Stock		34,899			23,006
Other investment securities available for sale		55,141			59,599
Interest-bearing deposits in other financial institutions		51,686			68,019
Total interest and dividend income		11,051,910			12,499,472
Interest expense:
Deposits		1,217,460			2,142,180
Borrowings		837,469			1,190,592
Total interest expense		2,054,929			3,332,772
Net interest income		8,996,981			9,166,700
Provision for loan losses, not covered under FDIC loss sharing agreements		300,000			1,500,000
Provision for covered loan losses		94,750			600,000
Net interest income after provision for loan losses		8,602,231			7,066,700
Noninterest income:
Service charges on deposit accounts		1,949,171			1,723,957
Gain on securities available for sale		219,913			632,593
Total impairment losses on securities		-			(304,094	)
Portion of losses recognized in other comprehensive income		-			204,094
Net impairment losses recognized in earnings		-			(100,000	)
Bank owned life insurance		255,287			272,199
Gain on sale of loans and loan servicing release fees		349,973			185,390
Loan servicing fees		82,470			90,513
Brokerage commissions		140,694			126,061
FDIC receivable for loss sharing agreements accretion		147,674			570,129
Other		62,457			315,174
Total noninterest income		3,207,639			3,816,016
Noninterest expenses:
Salaries and employee benefits		4,675,942			4,688,047
Occupancy		1,759,710			2,035,807
Legal and professional		323,206			497,045
Marketing		268,017			470,123
Federal insurance premiums and other regulatory fees		245,125			343,560
Net (benefit) cost of operations of real estate owned		(192,326	)		739,991
Furniture and equipment		201,946			205,018
Postage, office supplies and printing		246,761			279,359
Core deposit intangible amortization expense		127,665			140,442
Other		665,298			864,560
Total noninterest expenses		8,321,344			10,263,952
Income before income taxes		3,488,526			618,764
Income tax expense		1,154,239			130,371
Net income	$	2,334,287		$	488,393

Basic net income per share	$	0.13		$	0.03
Diluted net income per share	$	0.13		$	0.03
Weighted average number of common shares outstanding		17,806,739			18,036,619
Weighted average number of common and potential common shares outstanding		17,846,627			18,070,041

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended
	December 31,
	2012			2011
Net income	$	2,334,287		$	488,393
Less reclassification adjustment for net gains realized in net income, net of taxes of $84,887 and $244,181, respectively		(135,026	)		(388,412	)
Net unrealized holding losses on investment and mortgage securities available for sale arising during the period, net of taxes of $(272,465) and $(377,614), respectively		(433,403	)		(600,662	)
Other-than-temporary impairment losses recognized in earnings, net of taxes of $(38,600)		-			61,400
Comprehensive income (loss)	$	1,765,858		$	(439,281	)

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common stock
	Number of shares		Amount		Additional paid-in capital		Treasury stock			Unearned compensation ESOP			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders' equity
Balance at September 30, 2011		19,859,219	$	198,592	$	73,083,363	$	(36,127,940	)	$	(3,729,390	)	$	107,962,533		$	(1,971,458	)	$	139,415,700
Net income		—		—		—		—			—			4,978,692			—			4,978,692
Change in unrealized loss on securities		—		—		—		—			—			—			2,174,838			2,174,838
Dividends paid, $0.10 per share		—		—		—		—			—			(1,372,227	)		—			(1,372,227	)
Allocation of ESOP common stock		—		—		—		—			158,269			—			—			158,269
Effect of restricted stock awards		—		—		306,366		353,267			—			—			—			659,633
Stock option expense						93,876														93,876
Repurchase of shares		—		—		—		(3,588,013	)		—			-			—			(3,588,013	)
Balance at September 30, 2012		19,859,219	$	198,592	$	73,483,605	$	(39,362,686	)	$	(3,571,121	)	$	111,568,998		$	203,380		$	142,520,768
Net income		—		—		—		—			—			2,334,287			—			2,334,287
Change in unrealized loss on securities		—		—		—		—			—			—			(568,429	)		(568,429	)
Effect of restricted stock awards		—		—		13,957		—			—			—			—			13,957
Stock option expense		—		—		32,083		—			—			—			—			32,083
Repurchase of shares and conversion expenses		—		—		—		(344,044	)		—			—			—			(344,044	)
Balance at December 31, 2012		19,859,219	$	198,592	$	73,529,645	$	(39,706,730	)	$	(3,571,121	)	$	113,903,285		$	(365,049	)	$	143,988,622

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	2,334,287		$	488,393
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses, not covered under FDIC loss sharing agreements		300,000			1,500,000
Provision for covered loan losses		94,750			600,000
Depreciation and amortization		411,150			419,996
Accretion and amortization of premiums and discounts, net		789,290			771,804
Accretion of fair value discounts related to covered loans		(2,282,333	)		(2,434,999	)
Accretion of fair value discounts related to FDIC receivable		(147,674	)		(570,129	)
Gain on sale of loans and loan servicing release fees		(349,973	)		(185,390	)
Proceeds from sale of loans		13,141,669			5,833,816
Originations and purchases of loans held for sale		(15,023,619	)		(6,212,346	)
Gain on sale of mortgage-backed securities, collateralized mortgage obligations and other investments		(219,913	)		(632,593	)
Other-than-temporary impairment-securities		-			100,000
Write down of real estate owned		236,434			507,724
Gain on sale of real estate owned		(140,244	)		(25,292	)
Restricted stock award expense		-			33,677
Stock option expense		32,083			23,717
Increase in cash surrender value on bank owned life insurance		(255,287	)		(272,199	)
Changes in assets and liabilities:
Decrease in accrued interest and dividends receivable		361,071			75,187
Increase in other assets		(673,150	)		(431,848	)
(Decrease) increase in other liabilities		(3,920,255	)		749,332
Net cash (used in) provided by operating activities		(5,311,714	)		338,850

Cash flows from investing activities:
Proceeds from sales of securities available for sale		13,952,478			27,413,474
Principal collections on securities available for sale		14,073,340			15,913,513
Purchase of securities available for sale		(26,389,800	)		(73,601,451	)
Proceeds from maturities or calls of securities available for sale		7,066,500			1,036,000
Proceeds from redemption of FHLB stock		45,000			1,335,400
Net decrease in loans receivable		16,050,825			885,095
Net decrease (increase) in FDIC receivable		(8,324,986	)		6,828,107
Proceeds from sale of real estate owned		6,358,354			4,404,233
Purchases of premises and equipment		(77,203	)		(162,540	)
Net cash (used in) provided by investing activities		22,754,508			(15,948,169	)

See accompanying notes to unaudited condensed consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended December 31,
	2012			2011
Cash flows from financing activities:
Purchase of treasury stock		(344,044	)		(2,197,243	)
Dividends paid		-			(900,861	)
Increase (decrease) in deposits		5,856,093			(51,589,968	)
Principal payments on Federal Home Loan Bank advances		(1,000,000	)		-
Net decrease in advance payments by borrowers for taxes and insurance		(535,463	)		(648,867	)
Net cash (used in) provided by financing activities		3,976,586			(55,336,939	)
Net increase (decrease) in cash and cash equivalents		21,419,380			(70,946,258	)
Cash and cash equivalents at beginning of period		108,828,220			149,761,646
Cash and cash equivalents at end of period	$	130,247,600		$	78,815,388
Supplemental disclosures of cash flow information:
Interest paid	$	2,091,569		$	3,547,078
Income taxes paid	$	2,650,110		$	205,000
Supplemental disclosure of noncash activities:
Real estate acquired through foreclosure of collateral on loans receivable	$	4,102,125		$	3,747,265
Write down of real estate owned reimbursed by the FDIC	$	307,402		$	1,150,000
Issuance of common stock under stock benefit plan	$	-		$	148,875
Unrealized loss on securities available for sale, net	$	(568,429	)	$	(927,674	)

CHARTER FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Nature of Operations

Charter Financial Corporation (“Charter Financial” or the “Company”), a federally chartered corporation, was organized on October 16, 2001 by CharterBank (the “Bank” ), to become the mid-tier holding company for the Bank in connection with the Bank’s reorganization from a federal mutual savings and loan association into the two-tiered mutual holding company structure. In connection with the reorganization, the Company sold 3,964,481 shares of its common stock to the public, representing 20% of the outstanding shares at $10.00 per share, and received net proceeds of $37.2 million. An additional 15,857,924 shares, or 80% of the Company’s outstanding shares, were issued to First Charter, MHC, the Bank’s federally chartered mutual holding company.

In January 2007, Charter Financial repurchased 508,842 shares of its common stock at $52.00 per share through a self-tender offer. Following the stock repurchase, Charter Financial delisted its common stock from the NASDAQ Global Market and deregistered its common stock with the Securities and Exchange Commission. Between January 2007 and September 2009 Charter Financial repurchased 1,186,858 additional shares of its common stock. In September 2010, through an incremental offering, the Company issued 4,400,000 shares with net proceeds of $26.6 million, and First Charter, MHC canceled 4,400,000 shares of Company stock that it held. On September 27, 2011, Charter Financial announced a 5% stock repurchase plan with repurchased shares being held in treasury and available for general corporate purposes. For the three months ended December 31, 2012, 9,500 shares have been repurchased at a cost of $88,838.

As of December 31, 2012, First Charter, MHC owned 11,457,924 shares of the Company’s common stock, representing approximately 62.7% of the Company’s 18,277,540 outstanding shares of common stock at that date. The remaining 6,819,616 shares of common stock, or approximately 37.3% of the outstanding shares of common stock, were held by the public.

The Company's decision to pay dividends and the amount of such dividends is affected by the election of First Charter, MHC 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 its public stockholders than if First Charter, MHC had accepted such dividends. The Federal Reserve Board (FRB) now requires federally chartered mutual holding companies to conduct a vote of its members and then give the FRB notice before waiving the receipt of dividends. In the past, the FRB generally has not allowed dividend waivers by mutual holding companies, and there can be no assurance that the FRB will approve dividend waivers by First Charter, MHC in the future, or what conditions the FRB may place on any dividend waivers.

Note 2: Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Charter Financial Corporation and subsidiary include the accounts of the Company and the Bank as of December 31, 2012 and September 30, 2012 (derived from audited financial statements), and for the three-month period ended December 31, 2012 and 2011. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented. The results of operations for the three-month period ended December 31, 2012 are not necessarily indicative of the results that may be expected for the entire year or any other interim period.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the estimates used for fair value acquisition accounting and the Federal Deposit Insurance Corporation receivable for loss sharing agreements, estimate of expected cash flows on purchased impaired and other acquired loans, and the assessment for other-than-temporary impairment of investment securities, mortgage-backed securities, and collateralized mortgage obligations. Certain reclassifications of 2011 balances have been made to conform to classifications used in 2012. These reclassifications did not change net income.

Note 3: Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued an update to the accounting standards relating to testing goodwill for impairment. This guidance allows companies to waive comparing the fair value of a reporting unit to its carrying amount in assessing the recoverability of goodwill if, based on qualitative factors, it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this update as of October 1, 2012, did not have a material impact on the Company's financial statements.

In October 2012, the FASB issued an update to the accounting standards to provide guidance on the subsequent accounting treatment for an indemnification asset recognized at the acquisition date as a result of a government-assisted acquisition of a financial institution. The amendments in this update require entities that recognize an indemnification asset (in accordance with Subtopic 805-20) as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification) to subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). The amendments in this guidance are effective for the Company for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The adoption of this update has no impact on the consolidated financial statements because the Company's accounting procedures for the indemnification asset is in compliance with this amendment.

In February 2013, the FASB issued an update to the accounting standards to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this update require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective prospectively for reporting periods beginning after December 15, 2012.

Note 4: Securities Available for Sale

Securities available for sale are summarized as follows:

	December 31, 2012
	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value

Other Investment Securities:
Tax-free municipals	$	12,122,631	$	23,682	$	(1,458	)	$	12,144,855
U.S. government sponsored entities		10,123,015		81,163		-			10,204,178
Mortgage-backed securities:
FNMA certificates		88,075,657		1,163,277		-			89,238,934
GNMA certificates		4,257,863		335,957		-			4,593,820
FHLMC certificates		41,715,064		736,557		(7,410	)		42,444,211
Collateralized mortgage obligations:
FNMA		5,993,604		193,206		-			6,186,810
GNMA		323,861		2,978		-			326,839
FHLMC		493,861		53,573		-			547,434
Private-label mortgage securities: [2]
Investment grade		2,271,612		25,238		(222,462	)		2,074,388
Split rating [1]		1,435,267		50,661		-			1,485,928
Non investment grade		12,986,851		-		(2,988,066	)		9,998,785
Total	$	179,799,286	$	2,666,292	$	(3,219,396	)	$	179,246,182

[1] Bonds with split ratings represent securities with separate investment and non investment grades.

[2] Credit ratings are current as of December 31, 2012.

	September 30, 2012
	Amortized Cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Other investment securities:
Tax-free municipals	$	11,555,068	$	25,004	$	(1,571	)	$	11,578,501
U.S. government sponsored entities		16,519,624		107,431		—			16,627,055
Mortgage-backed securities:
FNMA certificates		84,836,714		1,748,088		—			86,584,802
GNMA certificates		4,568,181		377,231		—			4,945,412
FHLMC certificates		45,178,602		1,065,844		—			46,244,446
Collateralized mortgage obligations:
FNMA		7,712,770		314,386		—			8,027,156
GNMA		499,503		3,960		(152	)		503,311
FHLMC		533,379		46,710		—			580,089
Private-label mortgage securities:
Investment grade		2,480,412		32,214		(155,882	)		2,356,744
Split Rating [1]		6,922,884		—		(676,581	)		6,246,303
Non investment grade		8,264,044		—		(2,578,530	)		5,685,514
Total	$	189,071,181	$	3,720,867	$	(3,412,716	)	$	189,379,333

[1] Bonds with split ratings represent securities with separate investment and non investment grades.

The amortized cost and estimated fair value of investment securities available for sale as of December 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of the municipal bonds in the table below are pre-funded and are expected to be prepaid before contractual maturity.

	Amortized cost		Estimated fair value
Less than 1 year	$	5,123,015	$	5,142,638
1-5 years		8,252,737		8,317,669
Greater than 5 years		8,869,894		8,888,727
Mortgage-backed securities		157,553,640		156,897,148

	$	179,799,286	$	179,246,182

Proceeds from called or matured securities available for sale during the three months ended December 31, 2012 and 2011 were $7,066,500 and $1,036,000, respectively. Proceeds from sales for the three months ended December 31, 2012 and 2011 were $13,952,478 and $27,413,474, respectively. Gross realized gains on the sale of these securities were $219,913 and $634,791 for the three months ended December 31, 2012 and 2011, respectively. Gross realized losses on the sale of these securities were $0 and $2,198 for the three months ended December 31, 2012 and 2011, respectively.

Securities available for sale with an aggregate carrying amount of $114,602,149 and $127,617,291 at December 31, 2012 and September 30, 2012, respectively, were pledged to secure FHLB advances.

Securities available for sale that had been in a continuous unrealized loss position for less than 12 months at December 31, 2012 are as follows:

	December 31, 2012
	Amortized cost		Gross unrealized losses			Estimated fair value
Mortgage-backed securities:
FHLMC certificates		8,290,299		(7,410	)		8,282,889

	$	8,290,299	$	(7,410	)	$	8,282,889

There were no securities available for sale in a continuous unrealized loss position for less than 12 months at September 30, 2012.

Securities available for sale that had been in a continuous unrealized loss position for greater than 12 months at December 31, 2012 and September 30, 2012 are as follows:

	December 31, 2012
			Gross
	Amortized		unrealized			Estimated
	cost		losses			fair value
Other investment securities:
Tax-free municipals		260,264		(1,458	)		258,806
Collateralized mortgage obligations:
Private-label mortgage securities		14,256,142		(3,210,528	)		11,045,614

	$	14,516,406	$	(3,211,986	)	$	11,304,420

	September 30, 2012
			Gross
	Amortized		unrealized			Estimated
	cost		losses			fair value
Other investment securities:
Tax-free municipals		262,550		(1,571	)		260,979
Collateralized mortgage obligations:
GNMA		133,587		(152	)		133,435
Private-label mortgage securities		16,485,944		(3,410,993	)		13,074,951

	$	16,882,081	$	(3,412,716	)	$	13,469,365

At December 31, 2012 the Company had approximately $3.2 million of gross unrealized losses on non-GSE collateralized mortgage obligations with aggregate amortized cost of approximately $14.3 million. During the quarter ended December 31, 2012 the Company did not record any other than temporary impairment charges. Other than previously stated, the Company is projecting that it will receive essentially all contractual cash flows so there is no break in yield or additional other than temporary impairment.

Regularly, the Company performs an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired other-than-temporarily. The assessment considers many factors including the severity and duration of the impairment, the Company’s intent and ability to hold the security for a period of time sufficient for recovery in value, recent events specific to the industry, and current characteristics of each security such as delinquency and foreclosure levels, credit enhancements, and projected losses and loss coverage ratios. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future include but are not limited to, deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity. All of these securities were evaluated for other-than-temporary impairment based on an analysis of the factors and characteristics of each security as previously enumerated. The Company considers these unrealized losses to be temporary impairment losses primarily because of continued sufficient levels of credit enhancements and credit coverage levels of less senior tranches to tranches held by the Company.

The following table summarizes the changes in the amount of credit losses on the Company’s investment securities recognized in earnings for the three months ended December 31, 2012 and 2011:

	Three Months Ended December 31
	2012		2011

Beginning balance of credit losses previously recognized in earnings	$	380,446	$	4,822,916
Amount related to credit losses for securities for which an other-than-temporary impairment was not previously recognized in earnings		-		-
Amount related to credit losses for securities for which an other-than-temporary impairment was recognized in earnings		-		100,000
Ending balance of cumulative credit losses recognized in earnings	$	380,446	$	4,922,916

The following table shows issuer-specific information, including current par value, book value, fair value, credit rating and unrealized gain (loss) for the Company's portfolio of non-agency collateralized mortgage obligations as of December 31, 2012:

Cusip	Description	Credit Rating [1]			Cumulative Net Impairment Losses Recognized in Earnings		Current Par Value		Book Value		Market Value		Unrealized Gain (Loss)
		Moody	S&P	Fitch					(Dollars in thousands)
Investment Grade
36228FQF6	GSR 2003-4F 1A2	n/a	AA+	AA	$	-	$	296	$	296	$	301	$	5
55265KL80	MASTR 2003-8 4A1	n/a	A+	AAA		-		711		706		726		20
86359BVF5	SARM 2004-6 3A3	n/a	A+	n/a		-		1,269		1,269		1,047		(222	)
	Total				$	-	$	2,277	$	2,271	$	2,074	$	(197	)

Split Rating
17307GDL9	CMLTI 2004-HYB1 A31	B1	n/a	BBB	$	-	$	1,435	$	1,435	$	1,486	$	51
	Total				$	-	$	1,435	$	1,435	$	1,486	$	51

Non Investment Grade
576433QD1	MARM 2004-7 5A1	Ba3	BB	n/a		-		5,136		5,136		4,503		(633	)
576433UQ7	MARM 2004-13 B1	NR	CCC	n/a	$	380	$	5,561	$	5,181	$	3,052	$	(2,129	)
576433VN3	MARM 2004-15 4A1	B3	n/a	B		-		2,670		2,670		2,444		(226	)
	Total				$	380	$	13,367	$	12,987	$	9,999	$	(2,988	)

	Grand Total				$	380	$	17,079	$	16,693	$	13,559	$	(3,134	)

[1] Credit ratings are current as of December 31, 2012.

The Bank’s investment in the MARM 2004-13 B1 security represents the largest unrealized loss position in the investment portfolio at $2.1 million. Based on assessments of expected cash flows no additional other than temporary impairment exists on this security at December 31, 2012. This bond has previously taken a total of $380,000 in OTTI. The favorable cash flow profile is attributable to a number of pertinent factors, including the relatively low levels of delinquency and the stable levels of default, foreclosure, and severities upon foreclosure. The security has a housing price index adjusted weighted average loan-to-value ratio of 53% on the underlying mortgages, average credit scores of 737 and its 2004 origination indicates its seasoning. Furthermore, 90% of the underlying mortgages have been timely payers for the past 24 months. We believe the unrealized loss position is attributed to liquidity risk.

Note 5: Loans Receivable

Loans receivable are summarized as follows:

	December 31, 2012		September 30, 2012
Loans not covered by loss sharing agreements:
1-4 family residential real estate mortgage	$	103,707,236	$	105,514,544
Commercial real estate		249,612,987		251,379,010
Commercial		17,820,303		16,596,833
Real estate construction		46,772,520		45,369,190
Consumer and other		17,897,522		18,107,198
Loans receivable, net of undisbursed proceeds of loans in process		435,810,568		436,966,775
Less:
Unamortized loan origination fees, net		1,058,414		1,101,481
Allowance for loan losses		8,382,355		8,189,895

Total loans not covered, net	$	426,369,799	$	427,675,399

The carrying amount of covered loans at December 31, 2012 and September 30, 2012, consisted of impaired loans at acquisition date and all other acquired loans and are presented in the following tables.

	December 31, 2012
	Impaired Loans at Acquisition		All Other Acquired Loans		Total Covered Loans
Loans covered by loss sharing agreements
1-4 family residential real estate	$	4,691,507	$	8,977,666	$	13,669,173
Commercial real estate		65,219,748		78,715,378		143,935,126
Commercial		10,969,916		10,264,766		21,234,682
Real estate construction		1,304,345		130,000		1,434,345
Consumer and other		628,066		4,824,710		5,452,776
Loans receivable, gross		82,813,582		102,912,520		185,726,102
Less:
Non-accretable difference		11,931,593		4,501,132		16,432,725
Allowance for covered loan losses		1,210,566		7,748,436		8,959,002
Accretable discount		8,225,435		2,542,181		10,767,616
Discount on acquired performing loans		-		269,409		269,409
Unamortized loan origination fees, net		-		28,802		28,802
Total loans covered, net	$	61,445,988	$	87,822,560	$	149,268,548

	September 30, 2012
	Impaired Loans at Acquisition		All Other Acquired Loans		Total Covered Loans
Loans covered by loss sharing agreements:
1-4 family residential real estate mortgage	$	5,619,110	$	9,421,190	$	15,040,300
Commercial real estate		71,806,980		88,353,272		160,160,252
Commercial		12,081,845		13,885,559		25,967,404
Real estate construction		1,321,752		559,675		1,881,427
Consumer and other		708,832		5,458,309		6,167,141
Loans receivable, gross		91,538,519		117,678,005		209,216,524
Less:
Non-accretable difference		14,285,220		5,096,952		19,382,172
Allowance for covered loan losses		1,793,943		8,546,872		10,340,815
Accretable discount		9,869,297		3,055,050		12,924,347
Discount on acquired performing loans		—		308,728		308,728
Unamortized loan origination fees, net		—		32,146		32,146

Total loans covered, net	$	65,590,059	$	100,638,257	$	166,228,316

The following table documents changes in the accretable discount on acquired loans during the three months ended December 31, 2012 and the year ended September 30, 2012:

	Impaired Loans At Acquisition			All Other Acquired Loans			Total Covered Loans
Balance, September 30, 2011	$	16,893,100		$	4,705,432		$	21,598,532
Loan accretion		(7,023,803	)		(1,650,382	)		(8,674,185	)
Balance, September 30, 2012		9,869,297			3,055,050			12,924,347
Loan accretion		(1,730,145	)		(512,869	)		(2,243,014	)
Transfer from non-accretable difference		86,283			—			86,283

Balance, December 31, 2012	$	8,225,435		$	2,542,181		$	10,767,616

The following is a summary of transactions during the three months ended December 31, 2012 and 2011 in the allowance for loan losses on loans covered by loss sharing:

	Three Months Ended December 31,
	2012			2011
Balance, beginning of period	$	10,340,815		$	6,892,425
Loans charged-off (gross)		(2,717,463	)		(4,020,868	)
Recoveries on loans previously charged-off		10,650			-
Provision for loan losses charged to FDIC receivable		1,230,250			2,400,000
Provision for loan losses charged to operations		94,750			600,000
Balance, end of period	$	8,959,002		$	5,871,557

The following table documents changes in the carrying value of the FDIC receivable for loss sharing agreements relating to covered loans and other real estate owned during the three months ended December 31, 2012 and the year ended September 30, 2012:

	Three Months Ended December 31, 2012			Year Ended September 30, 2012
Balance, beginning of period	$	35,135,533		$	96,777,791
Payments made to (received from) FDIC		7,836,747			(80,528,485	)
Accretion of fair value adjustment		147,674			1,461,779
Recovery of previous loss reimbursements		(3,082,024	)		(3,252,736	)
Provision for estimated losses on covered assets recognized in noninterest expense		1,425,814			15,976,659
External expenses qualifying under loss sharing agreements		1,357,626			4,700,525
Balance, end of period	$	42,821,370		$	35,135,533

Loan Origination and Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial real estate loans are generally made by the Company to Georgia, Alabama or Florida panhandle entities and are secured by properties in these states. 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. The Company’s 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 the loan approval and underwriting of commercial real estate loans, management undertakes a cash flow analysis, and requires a debt-service coverage ratio of at least 1.15 times. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2012, approximately 31.0% of the outstanding principal balance of the Company’s commercial real estate loans was secured by owner-occupied properties.

The Company makes construction and land development 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. While current market conditions have suppressed demand for construction and land loans, there are opportunities to lend to quality borrowers in the Company’s market area for construction loans. The Company offers 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 management will extend to a builder at one time depends upon the financial strength and credit history of the builder. The Company’s construction loan program is expected to remain a modest portion of the loan volume and management generally limits the number of outstanding loans on unsold homes under construction within a specific area.

The Company also originates first and second mortgage loans secured by one- to four-family residential properties within Georgia, Alabama and the Florida Panhandle. Management currently originates mortgages at all branch locations, but utilizes a centralized processing location to reduce the underwriting risk. The Company originates 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 and loans that are non-conforming due to property exceptions and that have adjustable rates are generally retained in the Company’s portfolio. The non-conforming loans originated are not considered to be subprime loans and the amount of subprime and low documentation loans held by the Company is not material.

The majority of the Company’s non-mortgage loans consist of consumer loans, including loans on deposits, second mortgage loans, home equity lines of credit, auto loans and various other installment loans. The Company primarily offers 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. The Company’s consumer lending generally follows accepted industry standards for non sub-prime lending, including credit scores and debt to income ratios. The Company also offers home equity lines of credit as a complement to one- to four-family residential mortgage lending. 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 December 31, 2012, the Company had $14.6 million of home equity lines of credit and second mortgage loans not covered by FDIC loss sharing agreements (“loss sharing”).

The Company’s commercial business loans are generally limited to terms of five years or less. Management typically collateralizes these loans with a lien on commercial real estate or, very rarely, with a lien on business assets and equipment. Management also generally requires 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 Management compared to residential mortgage or commercial real estate lending.

The Company maintains an internal loan review function that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. The Company further engages an independent, external loan reviewer on an annual basis.

Nonaccrual and Past Due Loans. Nonaccrual loans not covered by loss sharing, segregated by class of loans were as follows:

	December 31, 2012		September 30, 2012
1-4 family residential real estate	$	2,103,104	$	2,038,340
Commercial real estate		780,987		771,711
Commercial		184,851		191,499
Real estate construction		—		—
Consumer and other		41,856		42,363
Total	$	3,110,798	$	3,043,913

An age analysis of past due loans not covered by loss sharing, segregated by class of loans at December 31, 2012 and September 30, 2012 were as follows:

December 31, 2012

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans > 90 Days Accruing
1-4 family residential real estate	$	2,257,882	$	218,323	$	2,476,205	$	101,231,031	$	103,707,236	$	80,786
Commercial real estate		1,111,549		-		1,111,549		248,501,438		249,612,987		-
Commercial		175,418		-		175,418		17,644,885		17,820,303		-
Real estate construction		-		-		-		46,772,520		46,772,520		-
Consumer and other		172,986		13,564		186,550		17,710,972		17,897,522		-
	$	3,717,835	$	231,887	$	3,949,722	$	431,860,846	$	435,810,568	$	80,786

September 30, 2012

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans > 90 Days Accruing
1-4 family residential real estate	$	1,460,017	$	621,257	$	2,081,274	$	103,433,270	$	105,514,544	$	401,726
Commercial real estate		1,459,472		-		1,459,472		249,919,538		251,379,010		-
Commercial		145,001		-		145,001		16,451,832		16,596,833		-
Real estate construction		-		-		-		45,369,190		45,369,190		-
Consumer and other		125,054		-		125,054		17,982,144		18,107,198		-
	$	3,189,544	$	621,257	$	3,810,801	$	433,155,974	$	436,966,775	$	401,726

An age analysis of past due loans covered by loss sharing, segregated by class of loans at December 31, 2012 and September 30, 2012 were as follows:

December 31, 2012

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans [1]		Loans > 90 Days and Accruing [2]
1-4 family residential real estate	$	685,776	$	861,847	$	1,547,623	$	10,600,542	$	12,148,165	$	861,847
Commercial real estate		3,534,577		17,935,968		21,470,545		106,358,618		127,829,163		17,935,968
Commercial		391,024		2,291,399		2,682,423		12,076,792		14,759,215		2,291,399
Real estate construction		-		-		-		1,430,861		1,430,861		-
Consumer and other		43,684		160,577		204,261		3,962,710		4,166,971		160,577
	$	4,655,061	$	21,249,791	$	25,904,852	$	134,429,523	$	160,334,375	$	21,249,791

[1]

Covered loan balances are net of non-accretable differences and allowance for covered loan losses and have not been reduced by $11,037,025 of accretable discounts and discounts on acquired performing loans.

[2]

Covered loans contractually past due greater than ninety days are reported as accruing loans because of accretable discounts established at the time of acquisition.

September 30, 2012

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans [1]		Loans > 90 Days Accruing [2]
1-4 family residential real estate	$	734,789	$	834,569	$	1,569,358	$	11,460,232	$	13,029,590	$	834,570
Commercial real estate		6,546,132		20,588,187		27,134,319		115,540,726		142,675,045		20,588,187
Commercial		917,019		2,984,197		3,901,216		13,723,435		17,624,651		2,984,197
Real estate construction		-		-		-		1,343,072		1,343,072		-
Consumer and other		55,441		391,755		447,196		4,373,983		4,821,179		391,754
	$	8,253,381	$	24,798,708	$	33,052,089	$	146,441,448	$	179,493,537	$	24,798,708

[1]

Covered loan balances are net of non-accretable differences and allowance for covered loan losses and have not been reduced by $13,233,075 of accretable discounts and discounts on acquired performing loans.

[2]

Covered loans contractually past due greater than ninety days are reported as accruing loans because of accretable discounts established at the time of acquisition.

Impaired Loans. The Company evaluates “impaired” loans, which includes nonperforming loans and accruing troubled debt restructured loans, having risk characteristics that are unique to an individual borrower on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance is calculated based on the credit grade utilizing historical loss experience and other qualitative factors.

Impaired loans not covered by loss sharing, segregated by class of loans were as follows:

December 31, 2012

							Three Months Ended December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized
With no related allowance recorded:
1-4 family residential real estate	$	2,244,408	$	2,599,030	$	-	$	2,603,030	$	3,219
Commercial real estate		8,159,971		9,257,345		-		9,442,893		102,471
Commercial		184,851		200,831		-		203,097		-
Real estate construction		5,825		34,744		-		34,779		101
Subtotal:		10,595,056		12,091,950		-		12,283,799		105,791
With an allowance recorded:
1-4 family residential real estate	$	-	$	-	$	-	$	-	$	-
Commercial real estate		3,850,467		3,850,466		23,092		4,176,352		10,623
Commercial		2,522,943		2,522,943		14,923		2,608,525		5,172
Real estate construction		-		-		-		-		-
Subtotal:		6,373,409		6,373,409		38,015		6,784,877		15,795
Totals:
1-4 family residential real estate	$	2,244,408	$	2,599,030	$	-	$	2,603,030	$	3,219
Commercial real estate		12,010,438		13,107,811		23,092		13,619,245		113,094
Commercial		2,707,794		2,723,774		14,923		2,811,622		5,172
Real estate construction		5,825		34,744		-		34,779		101
Grand Total:	$	16,968,465	$	18,465,359	$	38,015	$	19,068,676	$	121,586

The recorded investment in accruing troubled debt restructured loans at December 31, 2012 totaled $13,818,737 and is included in the impaired loan table above.

September 30, 2012

							Year Ended September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized
With no related allowance recorded:
1-4 family residential real estate	$	2,500,824	$	2,982,895	$	-	$	2,867,188	$	31,122
Commercial real estate		12,469,240		14,063,513		-		13,689,972		568,615
Commercial		2,847,862		2,860,935		-		2,908,659		95,676
Real estate construction		5,925		34,844		-		32,735		296
Grand Total:	$	17,823,851	$	19,942,187	$	-	$	19,498,554	$	695,709

There were no recorded allowances for impaired loans not covered by loss sharing at September 30, 2012. The recorded investment in accruing troubled debt restructured loans at September 30, 2012 totaled $14,420,575 and is included in the impaired loan table above.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio for both loans covered and not covered by loss sharing agreements, management tracks certain credit quality indicators including the level of classified loans, net charge-offs, non-performing loans (see details above) and the general economic conditions in its market areas.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. The risk grade for each individual loan is determined by the loan officer and other approving officers at the time of loan origination and is changed from time to time to reflect an ongoing assessment of loan risk. Risk grades are reviewed on specific loans monthly for all delinquent loans as a part of monthly meetings held by the Loan Committee, quarterly for all nonaccrual and special reserve loans, and annually as part of the Company's internal loan review process. In addition, individual loan risk grades are reviewed in connection with all renewals, extensions and modifications. Risk grades for covered loans are determined by officers within the Special Assets Division based on an ongoing assessment of loan risk. Such risk grades are updated in a manner consistent with non-covered loans, except the grading of such loans are assessed quarterly, as applicable, relating to revised estimates of expected cash flows.

The following table presents the risk grades of the loan portfolio not covered by loss sharing, segregated by class of loans:

December 31, 2012

	1-4 family residential real estate		Commercial real estate		Commercial		Real estate construction		Consumer and other		Total
Pass (1-4)	$	95,446,522	$	218,417,749	$	14,606,118	$	46,137,628	$	17,110,480	$	391,718,497
Special Mention (5)		3,257,546		6,182,683		87,734		34,424		554,267		10,116,654
Substandard (6)		5,003,168		25,012,555		3,126,451		600,468		232,775		33,975,417
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total not covered loans	$	103,707,236	$	249,612,987	$	17,820,303	$	46,772,520	$	17,897,522	$	435,810,568

September 30, 2012

	1-4 family residential real estate		Commercial real estate		Commercial		Real estate construction		Consumer and other		Total
Pass (1-4)	$	97,045,428	$	217,582,908	$	13,252,993	$	44,075,754	$	17,357,541	$	389,314,624
Special Mention (5)		3,525,488		11,396,970		93,033		286,505		559,982		15,861,978
Substandard (6)		4,943,628		22,399,132		3,250,807		1,006,931		189,675		31,790,173
Doubtful (7)		-		-		-		-		-		-
Loss (8)		-		-		-		-		-		-
Total not covered loans	$	105,514,544	$	251,379,010	$	16,596,833	$	45,369,190	$	18,107,198	$	436,966,775

The following table presents the risk grades, ignoring grade enhancement provided by the FDIC loss sharing, of the loan portfolio covered by loss sharing agreements, segregated by class of loans at December 31, 2012 and September 30, 2012. Numerical risk ratings 5-8 constitute classified assets for regulatory reporting; however regulatory authorities consider the FDIC loss sharing percentage of either 80% or 95%, as applicable, as a reduction of the regulatory classified balance for covered loans. With respect to classified assets covered by loss sharing agreements, numerical risk ratings 5-8, for regulatory reporting purposes are done under FDIC guidance reporting the bank’s non-reimbursable amount of the book balance of the loans as classified. The remaining reimbursable portion is classified as pass, numerical risk ratings 1-4.

December 31, 2012

	1-4 family residential real estate		Commercial real estate		Commercial		Real estate construction		Consumer and Other		Total
Numerical risk rating (1-4)	$	6,638,498	$	53,369,622	$	5,526,168	$	126,516	$	3,611,096	$	69,271,900
Numerical risk rating (5)		1,987,139		22,401,745		3,716,210		1,304,345		219,579		29,629,018
Numerical risk rating (6)		3,322,792		49,007,557		4,861,955		-		333,639		57,525,943
Numerical risk rating (7)		199,736		3,050,239		654,882		-		2,657		3,907,514
Numerical risk rating (8)		-		-		-		-		-		-
Total covered loans [1]	$	12,148,165	$	127,829,163	$	14,759,215	$	1,430,861	$	4,166,971	$	160,334,375

[1]	Covered loan balances are net of non-accretable differences and allowances for covered loan losses and have not been reduced by $11,037,025 of accretable discounts and discounts on acquired performing loans.

September 30, 2012

	1-4 family residential real estate		Commercial real estate		Commercial		Real estate construction		Consumer and other		Total
Numerical risk rating (1-4)	$	7,153,464	$	56,448,239	$	6,912,992	$	-	$	4,011,268	$	74,525,963
Numerical risk rating (5)		2,223,780		27,564,628		4,040,798		1,343,072		224,720		35,396,998
Numerical risk rating (6)		3,217,548		54,282,789		5,127,288		-		581,495		63,209,120
Numerical risk rating (7)		434,798		4,379,389		1,543,573		-		3,696		6,361,456
Numerical risk rating (8)		-		-		-		-		-		-
Total covered loans [1]	$	13,029,590	$	142,675,045	$	17,624,651	$	1,343,072	$	4,821,179	$	179,493,537

[1]	Covered loan balances are net of non-accretable differences and allowances for covered loan losses and have not been reduced by $13,233,075 of accretable discounts and discounts on acquired performing loans.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense and 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. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely and subsequent recoveries are added to the allowance.

Management’s allowance for loan losses methodology is a loan classification-based system. Management bases the required reserve on a percentage of the loan balance for each type of loan and classification level. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are reserved at different percentages based on the loan loss history of the last two years. Reserve percentages are also adjusted based upon our estimate of the effect that the current economic environment will have on each type of loan.

Management segments its 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 CharterBank’s loan and collection policy. An organizationally independent department reviews risk grade assignments on an ongoing basis. Management reviews current information and events regarding a borrowers’ financial condition and strengths, cash flows available for debt repayment, the related collateral supporting the loan and the effects of known and expected economic conditions. When the evaluation reflects a greater than normal risk associated with the individual loan, management classifies the loan accordingly. If the loan is determined to be impaired, management allocates a portion of the allowance for loan losses for that loan based on the fair value of the collateral, 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. Charter Financial has developed specific quantitative allowance factors to apply to each loan which considers loan charge-off experience over the most recent two years by loan type. In addition, loss estimates are applied 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 volume of past due loans, changes in the value of collateral of collateral-dependent loans, and other economic uncertainties. An unallocated component of the allowance is also established for losses that specifically exist in the remainder of the portfolio, but have yet to be identified.

An unallocated allowance is generally maintained in a range of 4% to 12% of the total allowance in recognition of the imprecision of the estimates and other factors. In times of greater economic downturn and uncertainty, the higher end of this range is provided.

Through the FDIC-assisted acquisitions of the loans of Neighborhood Community Bank (“NCB”), McIntosh Commercial Bank (“MCB”) and First National Bank of Florida (“FNB”), management established non-accretable discounts for the acquired impaired loans and also for all other loans of MCB. These non-accretable discounts were based on estimates of future cash flows. Subsequent to the acquisition dates, management continues to assess the experience of actual cash flows compared to estimates. When management determines that non-accretable discounts are insufficient to cover expected losses in the applicable covered loan portfolios, the allowance for covered loans is increased with a corresponding provision for covered loan losses as a charge to earnings and an increase in the applicable FDIC receivable based on loss sharing indemnification. During the quarters ended December 31, 2012 and 2011, the Company increased its allowance for loan losses on loans covered by loss sharing relating to NCB acquired loans by $1.0 million and $3.0 million, respectively, and recorded $52,000 and $600,000, respectively, as a charge to earnings with $993,000 and $2.4 million, respectively, recorded as an increase to the FDIC receivable. Additionally, during the quarter ended December 31, 2012, the Company increased its allowance for loan losses on loans covered by loss sharing relating to FNB acquired loans by $30,000 and recorded $30,000 as a charge to earnings with no effect to the FDIC receivable. There were no such provisions in the quarter ended December 31, 2011. During the quarter ended December 31, 2012, the Company increased its allowance for loan losses on loans covered by loss sharing relating to MCB acquired loans by $250,000 and recorded $13,000 as a charge to earnings with $237,000 recorded as an increase to the FDIC receivable. There were no such provisions in the quarter ended December 31, 2011.The non-accretable discount that was established for a certain loan pool was determined at December 31, 2012 to not be required based on improvements in cash flows; therefore $86,000 was recorded to accretion income with $431,000 being deducted from the FDIC receivable.

The Company maintained its allowance for loan losses for the quarter ended December 31, 2012 in response to continued weak economic conditions, net charge-offs, financial indicators for borrowers in the real estate sectors, continuing low collateral values of commercial and residential real estate, and nonaccrual and impaired loans. The following table details the allowance for loan losses on loans not covered by loss sharing by portfolio segment as of the quarters ended December 31, 2012 and 2011. Allocation of a portion of the allowance to one category of loans does not preclude availability to absorb losses in other categories.

The following tables are a summary of transactions in the allowance for loan losses on loans not covered by loss sharing by portfolio segment:

	Three months ended December 31, 2012
	1-4 Family real estate			Commercial real estate			Commercial			Real Estate construction		Consumer and other			Unallocated			Total
Allowance for loan losses:
Balance at beginning of period	$	879,854		$	5,480,132		$	711,594		$	287,129	$	79,627		$	751,559		$	8,189,895
Charge-offs		(46,270	)		(124,365	)		-			-		(7,479	)		-			(178,114	)
Recoveries		7,606			57,856			4,334			-		778			-			70,574
Provision		137,418			276,825			(355,493	)		192,101		73,478			(24,329	)		300,000
Balance at end of period	$	978,608		$	5,690,448		$	360,435		$	479,230	$	146,404		$	727,230		$	8,382,355

Ending balance: individually evaluated for impairment	$	-		$	23,092		$	14,923		$	-	$	-					$	38,015

Loans:
Ending balance	$	103,707,236		$	249,612,987		$	17,820,303		$	46,772,520	$	17,897,522					$	435,810,568

Ending balance: individually evaluated for impairment	$	2,244,408		$	12,010,438		$	2,707,794		$	5,825	$	-					$	16,968,465

	Three months ended December 31, 2011
	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Unallocated			Total
Allowance for loan losses:
Balance at beginning of period	$	633,364		$	5,972,310		$	821,830		$	1,065,512		$	48,276		$	828,545		$	9,369,837
Charge-offs		(161,558	)		(1,786,594	)		(81,574	)		-			(61,591	)		-			(2,091,317	)
Recoveries		3,914			359			34,681			-			2,402			-			41,356
Provision		104,035			2,173,200			(201,891	)		(476,103	)		74,312			(173,553	)		1,500,000
Balance at end of period	$	579,755		$	6,359,275		$	573,046		$	589,409		$	63,399		$	654,992		$	8,819,876
Ending balance: individually evaluated for impairment	$	-		$	617,544		$	66,818		$	-		$	-					$	684,362

Loans:
Ending balance	$	101,560,814		$	254,960,299		$	23,996,617		$	41,423,371		$	19,992,582					$	441,933,683
Ending balance: individually evaluated for impairment	$	5,340,489		$	7,149,582		$	3,092,629		$	-		$	-					$	15,582,700

The following tables detail the non-accretable discount and allowance for loan losses on loans covered by loss sharing by portfolio segment:

	Three Months Ended December 31, 2012
	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction			Consumer and Other			Total
Non-accretable differences [1]:
Balance at beginning of period	$	2,010,709		$	17,485,206		$	8,342,754		$	538,355		$	1,345,963		$	29,722,987
Charge-offs		(541,943	)		(1,913,367	)		(2,775,183	)		(536,407	)		(105,498	)		(5,872,398	)
Recoveries		2,652			207,303			4,629			1,000			554			216,138
Provision for loan losses charged to FDIC receivable		33,250			299,250			855,000			-			42,750			1,230,250
Provision for loan losses charged to operations		16,342			27,689			48,148			536			2,035			94,750
Balance at end of period	$	1,521,010		$	16,106,081		$	6,475,348		$	3,484		$	1,285,804		$	25,391,727


Covered loans:
Ending contractual balance	$	13,669,173		$	143,935,126		$	21,234,682		$	1,434,345		$	5,452,776		$	185,726,102

[1]	Amounts include the allowance for covered loan losses.

	Three months ended December 31, 2011
	1-4 Family Real Estate			Commercial Real Estate			Commercial			Real Estate Construction		Consumer and Other		Total
Non-accretable differences [1]:
Balance at beginning of period	$	3,430,280		$	64,169,400		$	7,706,431		$	2,970,506	$	764,924	$	79,041,541
Charge-offs		(296,058	)		(7,552,366	)		(715,250	)

CHARTER FINANCIAL CORP/GA 10-Q