Edgar Filing: CHARTER FINANCIAL CORP/GA

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

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

For the transition period from to

Commission file number 000-33071

Charter Financial Corporation

(Exact name of registrant as specified in its charter)

United States

58-2659667

(State or other jurisdiction of

incorporation or organization)

(IRS 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)

(Former name, former address and former fiscal year, if changed from last Report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 28, 2006
Common Stock, $0.01 par value per share		19,832,105 shares

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements of Charter Financial Corporation

	Condensed Consolidated Statements of Financial Condition (Unaudited) March 31, 2006 and September 30, 2005	Page 1

	Condensed Consolidated Statements of Income (Unaudited) – Three and Six months ended March 31, 2006 and 2005	Page 2

	Condensed Consolidated Statements of Cash Flows (Unaudited) – Six months ended March 31, 2006 and 2005	Page 3

	Notes to Unaudited Condensed Consolidated Financial Statements	Page 4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 26

Item 4.	Controls and Procedures	Page 26

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	Page 27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 27

Item 3.	Defaults Upon Senior Securities	Page 27

Item 4.	Submission of Matters to a Vote of Security Holders	Page 27

Item 5.	Other Information	Page 27

Item 6.	Exhibits	Page 27

	Signatures	Page 28

	Certifications

FORWARD LOOKING STATEMENTS

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

•

general and local economic conditions;

•

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

•

the ability of our customers to make loan payments;

•

our ability to continue to maintain overhead costs at reasonable levels;

•

our ability to acquire funds from or invest funds in wholesale or secondary markets;

•

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

•

changes in accounting principles, policies, or guidelines;

•

our success in managing the risks involved in our business;

•

inflation, interest rates, market and monetary fluctuations;

•

changes in legislation or regulation; and

•

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

Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may differ from actual outcomes. They can be affected by inaccurate assumptions we might make or known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

March 31, 2006 and September 30, 2005

(unaudited)


	March 31, 2006			September 30, 2005
Assets

Cash and amounts due from depository institutions	$	13,381,557		12,295,506
Interest-bearing deposits in other financial institutions		8,189,020		8,568,599

Cash and cash equivalents		21,570,577		20,864,105

Loans held for sale, market value of $1,182,592 and $1,248,495 at March 31, 2006 and September 30, 2005, respectively		1,176,028		1,233,679
Freddie Mac common stock available for sale		270,687,500		254,775,750
Mortgage-backed securities and collateralized mortgage obligations available for sale		331,094,269		358,461,047
Other investment securities available for sale		37,588,752		17,711,641
Federal Home Loan Bank stock		15,981,200		14,869,300
Loans receivable		390,575,000		363,898,792
Unamortized loan origination fees, net		(951,441	)	(930,936	)
Allowance for loan losses		(6,143,364	)	(6,160,314	)

Loans receivable, net		383,480,195		356,807,542

Real estate owned		709,232		1,120,418
Accrued interest and dividends receivable		3,617,209		3,222,854
Premises and equipment, net		15,463,053		13,969,137
Intangible assets, net of amortization		5,677,821		5,765,492
Cash surrender value of life insurance		12,020,644		—
Other assets		1,885,854		1,769,518

Total assets	$	1,100,952,334		1,050,570,483

Liabilities and Stockholders’ Equity

Liabilities:
Deposits	$	365,500,702		320,129,182
FHLB advances and other borrowings		366,935,000		382,336,000
Advance payments by borrowers for taxes and insurance		953,648		1,314,541
Deferred income taxes		98,553,069		93,270,870
Other liabilities		13,421,920		10,289,711

Total liabilities		845,364,339		807,340,304

Stockholders’ Equity:
Common stock, $0.01 par value; 19,832,105 and 19,830,705 shares issued at March 31, 2006 and September 30, 2005, respectively; 19,630,772 and 19,629,372 shares outstanding at March 31, 2006 and September 30, 2005, respectively		198,321		198,307
Additional paid-in capital		38,536,090		38,384,588
Treasury stock, at cost; 201,333 shares at March 31, 2006 and September 30, 2005		(6,261,270	)	(6,261,270	)
Unearned compensation - ESOP		(2,286,940	)	(2,286,940	)
Retained earnings		67,594,482		63,790,437
Accumulated other comprehensive income:
Net unrealized holding gains on securities available for sale, net of tax		157,807,312		149,405,057

Total stockholders’ equity		255,587,995		243,230,179

Total liabilities and stockholders’ equity	$	1,100,952,334		1,050,570,483

See accompanying notes to the unaudited consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Income

For the Three and Six Months Ended March 31, 2006 and 2005

(unaudited)


	Three Months Ended March 31, 2006			Three Months Ended March 31, 2005	Six Months Ended March 31, 2006	Six Months Ended March 31, 2005
Interest and dividend income:
Loans receivable	$	6,475,564		4,943,266	12,620,246	9,883,066
Mortgage-backed securities and collateralized mortgage obligations		4,096,506		4,248,711	8,188,936	8,329,570
Equity securities		2,316,667		1,749,171	4,604,029	3,271,067
Debt securities		262,269		102,047	435,026	219,219
Interest-bearing deposits in other financial institutions		122,182		15,320	212,048	34,956

Total interest and dividend income		13,273,188		11,058,515	26,060,285	21,737,878

Interest expense:
Deposits		2,782,111		1,396,020	5,066,165	2,696,049
Borrowings		3,823,862		3,905,116	7,847,151	7,644,832

Total interest expense		6,605,973		5,301,136	12,913,316	10,340,881

Net interest income		6,667,215		5,757,379	13,146,969	11,396,997

Provision for loan losses		—		—	—	—

Net interest income after provision for loan losses		6,667,215		5,757,379	13,146,969	11,396,997

Noninterest income:
Gain on sale of loans and servicing released loan fees		153,300		201,283	316,029	434,284
Service charges on deposit accounts		882,633		631,504	1,716,106	1,301,976
Gain on sale of Freddie Mac common stock		—		—	4,768,735	2,576,777
Net gain on sale of mortgage-backed securities, collateralized mortgage obligations, and other investments		—		15,728	—	38,069
Loan servicing fees		69,488		58,290	131,841	119,888
Net gain on operation of covered call program		309,484		674,090	322,738	308,262
Brokerage commissions		121,393		69,926	237,004	160,920
Other		157,662		44,429	162,025	47,178

Total noninterest income		1,693,960		1,695,250	7,654,478	4,987,354

Noninterest expense:

Salaries and employee benefits		2,673,014		2,585,552	5,530,108	5,375,546
Occupancy		905,922		654,302	1,783,553	1,346,404
Legal and professional		356,053		318,493	716,591	555,387
Marketing		270,259		261,317	450,620	432,359
Furniture and equipment		158,863		187,347	303,383	382,476
Postage, office supplies, and printing		119,516		127,910	254,357	245,602
Federal insurance premiums and other regulatory fees		60,151		58,359	118,485	114,459
Net (recoveries) cost of operations of real estate owned		(2,606	)	10,312	42,443	7,317
Deposit premium amortization expense		42,969		48,629	87,672	99,222
Other		288,483		277,910	625,032	572,326

Total noninterest expense		4,872,624		4,530,131	9,912,244	9,131,098

Income before income taxes		3,488,551		2,922,498	10,889,203	7,253,253

Income tax expense		936,413		459,559	3,003,296	1,866,197

Net income	$	2,552,138		2,462,939	7,885,907	5,387,056

Basic net income per share	$	0.13		0.13	0.40	0.28

Diluted net income per share	$	0.13		0.13	0.40	0.28

Weighted average number of common shares outstanding		19,401,055		19,529,401	19,400,864	19,517,703

Weighted average number of common and common equivalent shares outstanding		19,496,350		19,585,290	19,489,679	19,581,137

See accompanying notes to the unaudited consolidated financial statements.

CHARTER FINANCIAL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended March 31, 2006 and March 31, 2005

(unaudited)


	Six Months Ended March 31, 2006			Six Months Ended March 31, 2005
Cash flows from operating activities:
Net income	$	7,885,907		5,387,056
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		472,197		417,251
Provision for asset impairment		187,477		—
Allocation of ESOP common stock		208,300		199,980
(Accretion) amortization of premiums and discounts, net		(62,823	)	193,395
Gain on sale of loans and servicing released loan fees		(316,029	)	(434,284	)
Proceeds from sale of loans held for sale		15,740,922		6,195,984
Originations and purchases of loans held for sale		(15,367,242	)	(4,998,041	)
Gain on sale of Freddie Mac common stock		(4,768,735	)	(2,576,777	)
Net gain on sales of mortgage-backed securities, collateralized mortgage obligations, and other investments		—		(38,069	)
Provision for allowance in other real estate owned		61,818		—
Gain on sale of real estate owned		(7,969	)	(7,992	)
Stock option expense		110,552		—
Changes in assets and liabilities:
Increase in accrued interest and dividends receivable		(394,355	)	(308,235	)
Decrease (increase) in other assets		197,687		(89,777	)
Increase in other liabilities		2,923,910		1,943,829

Net cash provided by operating activities		6,871,617		5,884,320

Cash flows from investing activities:
Proceeds from sale of equity securities and other investment securities available for sale		—		8,300,000
Proceeds from sale of mortgage-backed securities and collateralized mortgage obligations available for sale		—		6,428,323
Principal collections on mortgage-backed securities and collateralized mortgage obligations available for sale		43,301,017		69,691,120
Purchases of mortgage-backed securities and collateralized mortgage obligations available for sale		(18,211,184	)	(90,073,914	)
Purchases of equity securities and other investments		(25,590,640	)	—
Proceeds from sale of Freddie Mac common stock		4,910,794		2,614,425
Proceeds from maturities of other securities available for sale		5,683,941		—
Purchase of FHLB stock		(1,586,300	)	(5,932,800	)
Proceeds from redemption of FHLB stock		474,400		4,694,600
Net increase in loans receivable, exclusive of loan sales		(27,359,414	)	(11,564,953	)
Proceeds from sale of real estate owned		1,044,098		287,646
Purchases of premises and equipment, net of dispositions		(2,379,942	)	(2,691,856	)
Purchase of cash surrender value of life insurance		(12,020,644	)	—

Net cash (used in) investing activities		(31,733,874	)	(18,247,409	)

Cash flows from financing activities:
Issuance of common stock upon exercise of stock options		40,964		198,868
Dividends paid		(4,081,862	)	(8,786,840	)
Net increase in deposits		45,371,520		7,657,447
Proceeds from Federal Home Loan Bank advances		66,250,000		172,650,000
Principal payments on advances from Federal Home Loan Bank		(41,250,000	)	(150,780,000	)
Proceeds from other borrowings		479,155,000		822,763,000
Principal payments on other borrowings		(519,556,000	)	(829,708,000	)
Net decrease in advance payments by borrowers for taxes and insurance		(360,893	)	(562,821	)

Net cash provided by financing activities		25,568,729		13,431,654

Net increase in cash and cash equivalents		706,472		1,068,565

Cash and cash equivalents at beginning of period		20,864,105		12,371,229

Cash and cash equivalents at end of period	$	21,570,577		13,439,794

Supplemental disclosures of cash flow information:
Interest paid	$	12,613,436		9,019,814

Income taxes paid	$	3,048,450		1,225,600

Investing activities:

Transfer of premises and equipment to assets held for sale	$	334,089		—

Financing activities:
Real estate acquired through foreclosure of the loans receivable	$	686,761		531,617

Financed sales of other real estate	$	805,632		17,000

Issuance of ESOP common stock	$	—		611,402

See accompanying notes to the unaudited consolidated financial statements.

Charter Financial Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Basis of Presentation

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

The accompanying unaudited condensed consolidated financial statements include the accounts of Charter Financial and its wholly owned subsidiary, CharterBank as of March 31, 2006 and September 30, 2005, and for the three and six-month periods ended March 31, 2006 and 2005. Significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements for the three and six months ended March 31, 2006, and 2005 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in Charter Financial’s annual report on Form 10-K for the year ended September 30, 2005.

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

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

In the normal course of business, the Company is party (both as plaintiff and defendant) to certain matters of litigation. In the opinion of management and counsel, none of these matters should have a material adverse effect on the Company’s financial position or results of operations.

In March 2006, the FASB issued Statement of Accounting Standards No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. This Statement requires the recognition of servicing assets and liabilities at fair value and allows subsequent measurement by either an amortization method or fair value. Implementation is required for years beginning after September 15, 2006. The impact of implementation on the Company’s financial statements will not be material.

(2) Plan of Reorganization

On October 16, 2001, CharterBank converted from a federally chartered mutual savings and loan association into a two-tiered mutual holding company structure and became a wholly owned subsidiary of Charter Financial. Charter Financial sold 3,964,481 shares of its common stock to the public, representing 20% of the outstanding shares, at $10.00 per share and received net proceeds of $37.2 million. Charter Financial contributed 50% of the net proceeds from the initial public offering to CharterBank. An additional 15,857,924 shares, or 80% of the outstanding shares of Charter Financial, were issued to First Charter, MHC. An Employee Stock Ownership Plan (ESOP) was established and such ESOP acquired 317,158 shares of Charter Financial in the offering, using the proceeds of a loan from Charter Financial. The ESOP loan is recorded as unearned compensation reducing stockholders’ equity of Charter Financial. The net proceeds of the offering, adjusted for the ESOP, totaled approximately $34.0 million.

As part of its reorganization in structure, CharterBank organized First Charter, MHC as a federally chartered mutual holding company, which is registered as a savings and loan holding company with the Office of Thrift Supervision (“OTS”). First Charter, MHC’s principal assets are its investment in Charter Financial and 398,000 shares of Freddie Mac common stock. First Charter, MHC does not engage in any business activity other than its investment in a majority of the common stock of Charter Financial, management of Freddie Mac common stock, and the management of any cash dividends received from Freddie Mac common stock. Federal law and regulations require that as long as First Charter, MHC is in existence it must own at least a majority of Charter Financial’s common stock.

(3) Earnings per Share

Earnings per share are calculated according to the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings per Share.” ESOP shares are only considered outstanding for earnings per share calculations when the shares have been committed to be released. Presented below are the calculations for basic and diluted earnings per share for the three and six months ended March 31, 2006 and 2005:

Earnings per Share


	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005		Six Months Ended Mar 31 2006		Six Months Ended Mar 31 2005
Basic:
Net Income		2,552,138		2,462,939		7,885,907		5,387,056
Weighted average common shares outstanding		19,401,055		19,529,401		19,400,864		19,517,703
Basic earnings per share	$	0.13	$	0.13	$	0.40	$	0.28

Diluted:
Net Income		2,552,138		2,462,939		7,885,907		5,387,056
Weighted average number of common and common equivalent shares outstanding		19,496,350		19,580,290		19,489,679		19,581,137
Diluted earnings per share	$	0.13	$	0.13	$	0.40	$	0.28

(4) Comprehensive Income

The primary component of other comprehensive income for the Company is net unrealized gains and losses on Freddie Mac common stock and investment and mortgage-backed securities available for sale. The table below summarizes total comprehensive income for the three months and six months ended March 31, 2006 and 2005.


	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006		2005
Total comprehensive income	$	(9,866,001	)	$	(31,556,206	)	$	16,288,162	$	(5,978,304	)
Change in net unrealized holding gains on securities, net of income taxes		(12,418,139	)		(34,019,145	)		11,330,258		(12,947,501	)
Less reclassification adjustment for net gains realized in net income		—			—			2,928,003		1,582,141

Net income	$	2,552,138		$	2,462,939		$	7,885,907	$	5,387,056

(5) Stock-Based Compensation

Charter Financial’s 2001 Stock Option Plan (the “Plan”), as amended, allows for stock option awards for up to 707,943 shares of the Company’s common stock to eligible directors and employees. At March 31, 2006, Charter Financial had granted 291,250 options under the Plan, of which 9,700 have been exercised and 4,150 forfeited. Under the provisions of the Plan, the option price is determined by a committee of the board of directors at the time of grant and may not be less than 100% of the fair market value of the common stock on the date of grant of such option. When granted, these options vest over periods up to five years and have a ten year maturity. Charter Financial generally grants incentive stock options when the grant qualifies for special federal income tax treatment

and grants nonqualified options when the grant does not qualify. Effective October 1, 2005, Charter Financial implemented SFAS No. 123R using the modified prospective transition method. For the six months ended March 31, 2006 stock option expense of $110,552 was recorded in the income statement in income before taxes. The net income impact was approximately $94,000 and there was no net impact on cash flow from operations and cash flow from financing activities. Basic and diluted earnings per share remained $0.40 with or without this stock option expense.

There were no grants or expirations of stock options during the six month period ended March 31, 2006. There were 1,400 shares exercised and there were 900 unvested options forfeited during the six month period ended March 31, 2006. There were 279,700 options outstanding at September 30, 2005 and 277,400 outstanding at March 31, 2006. The table below shows the intrinsic value of options exercised and options outstanding.


	Intrinsic Value		Number of Shares
Options exercised three months ending March 31, 2006	$	12,304	1,400

Options exercised three months ending March 31, 2005		63,954	4,900

Options exercised six months ending March 31, 2006		12,304	1,400

Options exercised six months ending March 31, 2005		90,675	6,800

Options outstanding March 31, 2006		1,928,245	277,400

Options outstanding September 30, 2005		836,211	279,700

The fair value of each option grant is estimated on the date of grant using the Black Scholes valuation model. There were no grants in the six months ended March 31, 2006 or the years ended September 30, 2005 and 2003. The weighted average assumptions used and the estimated fair values for the year ended September 30, 2004 as follows:


Risk-free interest rate		4.34	%
Dividend yield		6.06	%
Expected life at date of grant		7 years
Volatility		22.00	%
Weighted average grant-date fair value	$	4.00

At March 31, 2006, the Company has compensation cost not yet recognized of $314,943 for stock options and $2,089,597 for restricted stock grants which will be recognized over a weighted average period of fifteen months for the stock options and twenty-five months for the restricted stock.

Prior to the implementation of SFAS No. 123R Charter Financial accounted for the Plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock option based employee compensation cost was reflected in net income, as all options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if Charter Financial had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the six months ended March 31, 2005.


	Three Months Ended March 31, 2005			Six Months Ended March 31, 2005
Net income, as reported	$	2,462,939		$	5,387,056
Add: Total stock-based compensation expense included in reported net income, net of tax		244,252			660,297
Deduct: Total stock-based employee compensation expense determined under fair value based method for all stock options, net of related tax effects		(304,039	)		(779,872	)

Pro forma net income	$	2,403,152		$	5,267,481

Earnings per share:
Basic – as reported	$	0.13		$	0.28
Basic – pro forma	$	0.12		$	0.27

Diluted – as reported	$	0.13		$	0.28
Diluted – pro forma	$	0.12		$	0.27

The adoption of FAS 123R did not change the expense relating to Charter Financial’s Recognition and Retention restricted stock program.

Recognition and retention grants and stock option grants vest at the earlier of the scheduled vesting or death, disability, or qualified retirement. At March 31, 2006, the Company has compensation cost not yet recognized of $314,943 for stock options and $2,089,597 for restricted stock grants which will be recognized over a weighted average period of fifteen months for the stock options and twenty-five months for the restricted stock. All grants made prior to the implementation of SFAS 123(R) are expensed to the scheduled vesting date. Grants subsequent to the implementation of SFAS 123(R) will be expensed to the earlier of scheduled vesting or substantive vesting which is when the recipient becomes qualified for retirement which is generally age 65 or age 55 with 10 years of service. One grant recipient is qualified for retirement as of March 31, 2006. Four restricted stock grant recipients and nine stock option grant recipients will be qualified for retirement before all of their grants reach scheduled vesting.

(6) Intangible Assets, Net

Intangible assets, net include cost in excess of net assets acquired and deposit premiums recorded in connection with the acquisition of EBA Bancshares, Inc. as follows:


	March 31, 2006		September 30, 2005
Goodwill	$	4,325,282	$	4,325,282
Deposit Premium, net of amortization of $623,402 and $535,731, respectively		1,352,539		1,440,210

	$	5,677,821	$	5,765,492

The deposit premium is being amortized using the double-declining balance method over thirteen years. Charter Financial recorded amortization expense related to the deposit premium of $42,969 and $87,671 for the three and six months ended March 31, 2006, respectively.

(7) Derivative Instruments – Covered Call Program

At March 31, 2006, Charter Financial had covered call options on Freddie Mac common stock outstanding on 325,000 shares. Deferred income, which is recorded in the liability section of the condensed consolidated statement of financial condition, is cash that we received when writing the call. If the call expires unexercised, deferred income is realized upon maturity of the call. If the call is exercised, deferred income is included as gain or loss on the sale of Freddie Mac common stock. Charter Financial has also recorded the unrealized loss and gain in the income statement, as the derivative instruments do not qualify as hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The mark to market loss or gain is recorded in noninterest income of

our condensed consolidated statements of income. During the six months ended March 31, 2006, holders of the covered call options exercised options to purchase 75,000 shares of Freddie Mac common stock. The income statement impact of the covered call premium and mark to market is as follows:


	Three Months Ended March				Six Months Ended March
	2006		2005		2006		2005
Net Gain on Fair Value in Income Statement	$	188,989	$	484,047	$	202,243	$	149,990
Realized Income		120,495		190,043		120,495		158,272

Income on Covered Calls	$	309,484	$	674,090	$	322,738	$	308,262

Item 2

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

Overview

The purpose of this summary is to provide an overview of the items management focuses on when evaluating the financial condition of Charter Financial Corporation (“Charter Financial”, the “Company”, “us”, or “we”) and our success in implementing our stockholder value strategy. Our stockholder value strategy has three major themes: (1) creating a larger, more profitable and more valuable retail banking franchise; (2) managing the substantial appreciation in our Freddie Mac common stock investment; and (3) efficiently utilizing our capital. Management believes the following points were the most important to that analysis this quarter.

•

A regular quarterly dividend of 45 cents per share was paid to our minority shareholders during the quarter ended March 31, 2006.

•

Solid earnings enhanced our ability to support a regular quarterly dividend.

•

Our net interest income has improved due to growth in loan balances and higher dividends on Freddie Mac stock.

•

Consistent with our emphasis on attracting and retaining core deposits, we increased both core deposits and the related deposit fees.

•

Gains from sales of one-to-four family mortgage loans peaked in fiscal 2003 with low interest rates. As mortgage rates have increased, gains on sale have declined due to sharply lower refinance volumes and, to a much lesser extent, the retention of 15 year fixed rate mortgage loans for our portfolio.

•

Our net interest income has increased as we have increased our loan balances and Freddie Mac increased its dividend on its stock. Our deposit costs, while increasing, have not yet increased at the same rate as overall interest rates. We have additional borrowings that will reprice in future quarters that will increase interest expense.

•

Non-performing loans were lower than in the previous quarter. Management believes that the allowance for loan losses is adequate. No provision is indicated, as losses and risk in the loan portfolio are essentially the same.

•

The writing of covered call options on Freddie Mac common stock resulted in income of $309,484 and $322,738 for the three and six months ended March 31, 2006, respectively. There were no call options exercised during the three months and call options on 75,000 shares exercised during the six months ended resulting in a pretax gain of $4.8 million on sale of stock.

•

Our book value per share was $13.02 at March 31, 2006, of which $8.28 is provided by the after tax equity in our Freddie Mac stock investment.

•

Freddie Mac common stock depreciated from $65.35 per share at December 31, 2005 to $61.00 at March 31, 2006. This was the reason for our other comprehensive loss of $12.4 million net of tax. Our book value per share decreased by $0.49 per share during the three months.

Management Strategy

We have a growth-oriented strategy focused on (1) expanding our retail banking operations and thus the franchise value of our retail bank, (2) managing our Freddie Mac common stock while reviewing strategies to increase or realize its value for our shareholders, and (3) effectively managing our capital.

Expanding Retail Banking Operations. Our retail banking strategy is to operate as a well-capitalized community bank dedicated to providing a superior customer experience through excellent and personalized service and quality products at competitive prices and convenience. We have sought to implement this strategy by concentrating on

expanding our branch network and delivery channels for our customers, and on our core product offerings, including residential and commercial mortgage loans and a variety of checking and savings products. We focus on core deposit products such as Totally Free checking that provide low cost funding and fee income.

Managing Our Freddie Mac Common Stock Investment. We manage our Freddie Mac common stock in several ways. Over the past ten years, our total annual return on Freddie Mac common stock has averaged approximately 13%. Dividends on our Freddie Mac common stock are an important component of our shareholder value. Seventy percent of the Freddie Mac dividends are excluded from Charter Financial’s taxable income through the corporate dividends received exclusion. The Freddie Mac dividend, when combined with the 70% corporate dividend exclusion and the 15% personal tax rate on dividends received by individuals, creates a tax efficient means for our stockholders to receive value from our Freddie Mac common stock investment. We sell covered call options on the Freddie Mac common stock as a means of enhancing our return on this investment. We continue to review our investment in Freddie Mac common stock in light of existing conditions and what is in the best interests of our stockholders.

Managing our Capital. The third major component of our strategy is capital management. During the second quarter, we declared and paid a $0.45 per share dividend. During the first quarter of fiscal 2006, we declared a $0.35 regular quarterly dividend and an additional special dividend of $0.35 per share that were paid during the second quarter. We increased our capital leverage in fiscal 2003 with the additional retail assets and deposits acquired in the acquisition of EBA Bancshares, Inc. and its wholly owned banking subsidiary, Eagle Bank of Alabama. While our current retail focus is increasing market share within our existing market, we regularly evaluate expanding our capital leverage by extending the market area through de novo branching or acquisitions. Wholesale leverage generally enhances income, but not franchise value, and thus is a low priority capital management tool for us.

Our capacity to pay dividends is enhanced when First Charter, MHC is willing and permitted by the Office of Thrift Supervision (the “OTS”) to waive receipt of its portion of the dividends. We continue to evaluate our dividend policy and the appropriateness of special dividends and/or share repurchases.

General

Charter Financial Corporation is a federally-chartered corporation organized in 2001, and is registered as a savings and loan holding company with the OTS. Charter Financial serves as the holding company for CharterBank. First Charter, MHC (the “MHC”), a federal mutual holding company, owns approximately 80% of the outstanding shares of Charter Financial’s common stock. Our common stock is quoted on the National Market System of the NASDAQ Stock Market under the symbol “CHFN”. Unless the context otherwise requires, all references herein to the Company, CharterBank or Charter Financial include Charter Financial and CharterBank on a consolidated basis.

Charter Financial’s principal business is its ownership of CharterBank. Charter Financial also owns 1,882,500 shares of Freddie Mac common stock. Additionally, CharterBank owns 2,555,000 shares of Freddie Mac common stock. Our Condensed Consolidated Statement of Financial Condition at March 31, 2006 reflects $270.7 million of Freddie Mac common stock, representing consolidated ownership of 4,437,500 shares of Freddie Mac common stock, of which $264.8 million is unrealized gain. Noninterest-bearing liabilities include $102.2 million in deferred taxes related to the unrealized gain on the Freddie Mac common stock. Accumulated other comprehensive income includes $162.6 million representing the net unrealized gain on the Freddie Mac common stock.

CharterBank is a service-oriented bank providing retail and small business customers with products and services designed to create long-term, profitable relationships. We offer numerous loan products, including residential mortgage loans, commercial real estate loans, commercial loans, home equity loans, second mortgages, and other products. We offer deposit products, including consumer and commercial checking accounts, savings accounts, money market accounts, and certificates of deposit.

CharterBank’s results of operations depend primarily on net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans, commercial real estate loans, consumer loans, mortgage related securities and equity securities such as our Freddie Mac common stock. Interest-bearing liabilities consist primarily of retail and wholesale deposits, repurchase agreements and borrowings from the Federal Home Loan Bank (FHLB) of Atlanta.

Our results of operations also depend on our provision for loan losses, noninterest income and noninterest expense. Noninterest expense includes salaries and employee benefits, occupancy expenses and other general and administrative expenses. Noninterest income includes gains on sale of loans, gains (losses) on sales of investment and mortgage-backed securities, covered call income, deposit fees and other service fees and charges.

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

Capital and Capital Management

CharterBank has traditionally been a well-capitalized savings association. The following table sets forth the tier one capital levels, risk-based capital levels, and ratios for the past several quarters.


For the Quarters Ended	Tier 1 Capital		Risk-Weighted Capital Ratio		Regulatory Core Capital Ratio		Total Risk - Based Capital		Total Risk -Based Capital Ratio
	(Dollars in Millions)
March 31, 2006	$	73.4	12.47	%	8.79	%	$	146.8	24.94	%
December 31, 2005		71.4	12.73		8.84			142.9	25.46
September 30, 2005		78.8	14.69		9.86			148.1	27.62
June 30, 2005		77.3	14.24		9.86			154.5	28.48
March 31, 2005		75.7	14.28		9.64			151.4	28.56
December 31, 2004		73.8	13.93		9.38			147.5	27.87
September 30, 2004		72.3	14.19		9.46			144.6	28.37
June 30, 2004		70.8	13.73		9.08			141.5	27.46

At March 31, 2006 and September 30, 2005, we significantly exceeded each of the applicable regulatory capital requirements. Tier 1 capital as a percent of total regulatory assets is consistently above the “well-capitalized” requirement of 5.0%. Total risk-based capital ratios exceed the applicable “well-capitalized” requirement for risk-based capital of 10.0%. CharterBank exceeded the “well-capitalized” level of its various regulatory capital requirements by amounts ranging from $31.7 million to $87.9 million at March 31, 2006. We made a capital distribution from CharterBank to Charter Financial of $9.0 million during the first quarter of fiscal 2006, which resulted in the $7.4 million reduction in Tier 1 capital shown in the table above at December 31, 2005.

As shown in the table below, we have a history of increasing dividends as well as paying special dividends.


Date Paid	Amount		Type
June 2002	$	0.10	Quarterly
September 2002	$	0.10	Quarterly
December 2002	$	0.10	Quarterly
March 2003	$	0.10	Quarterly
June 2003	$	0.20	Quarterly
September 2003	$	0.20	Quarterly
January 2004	$	0.20	Quarterly
March 2004	$	0.20	Special
March 2004	$	0.20	Quarterly
June 2004	$	0.25	Quarterly
September 2004	$	0.25	Quarterly
January 2005	$	0.25	Quarterly
February 2005	$	2.00	Special
March 2005	$	0.25	Quarterly
June 2005	$	0.35	Quarterly
September 2005	$	0.35	Quarterly
January 2006	$	0.35	Quarterly
February 2006	$	0.35	Special
March 2006	$	0.45	Quarterly

The Board of Directors will determine future dividends as well as other capital management strategies such as additional leverage, stock repurchases and special dividends. The Board of Directors will consider, among other factors, capital levels, results of operations, tax considerations, regulatory and regulatory business plan considerations, industry standards and economic conditions in determining such future dividends.

The MHC has waived its right to receive dividends from Charter Financial since its formation and intends to continue to do so, subject to the approval of the OTS. The following table reconciles the total voting shares with the number of shares receiving dividends. The largest adjustment is for the waiver of dividends by the MHC. The table shows that the number of shares that typically receive dividends is a fraction, approximately one-fifth, of the total voting shares.


Total Voting Shares outstanding at March 31, 2006	19,831,305
Less: Unallocated shares in ESOP	(212,194	)
Treasury Stock-MRP	(201,333	)
Shares held by MHC	(15,857,924	)

Total Shares receiving dividends at March 31, 2006	3,559,854

As indicated in the table above, we accrued dividends on the 3,559,854 shares held by our minority stockholders. The regular quarterly dividend of $0.45 per share declared in March totaled $1,601,934 or approximately 63% of our net income of $2,552,138 for the quarter.

Our capacity to pay dividends is limited by several factors including cash availability at Charter Financial, tax considerations, regulatory requirements and the MHC’s willingness and ability to waive its dividends on the approximately 80% of our stock that it owns. Historically, the MHC has waived its portion of the dividends we pay and intends to waive future dividends. The MHC is required to obtain approval of the OTS prior to waiving a dividend. The OTS considers a variety of factors in approving dividend waivers including its assessment of the rights of the MHC’s stakeholders.

Charter Financial’s primary sources of cash are distributions from CharterBank, dividends on the Freddie Mac stock it owns, covered call premiums and proceeds from sales of Freddie Mac common stock. CharterBank is generally permitted by the OTS to distribute its current year’s and prior two years’ undistributed earnings if CharterBank is well capitalized after the distribution. Distributions in excess of this level require additional approval from the OTS.

Our total stockholders’ equity is made up of realized equity and unrealized equity. Realized equity includes common stock, additional paid-in capital, treasury stock, unearned compensation, and retained earnings, while unrealized capital is comprised of accumulated other comprehensive income.

Accumulated other comprehensive income (“unrealized equity”) is comprised of net unrealized holding gains on securities available for sale. Unrealized equity at March 31, 2006 was $157.8 million, an $8.4 million increase from September 30, 2005 of $149.4 million as the price per share of our investment in Freddie Mac common stock increased from $56.46 to $61.00. The following table shows realized and unrealized equity and the Freddie Mac common stock price for the past eight quarters. A comparison of the unrealized equity and Freddie Mac common stock price demonstrates the relationship between the price of Freddie Mac common stock and our unrealized equity.


	Total Capital		Realized Equity		Unrealized Equity		Percentage of Unrealized Capital to Total Capital		Freddie Mac Common Stock Price
	(Dollars in Thousands)
March 31, 2006	$	255,588	$	97,781	$	157,807	61.74	%	$	61.00
December 31, 2005		266,960		96,735		170,225	63.76			65.35
September 30, 2005		243,230		93,825		149,405	61.43			56.46
June 30, 2005		268,768		91,530		177,238	65.94			65.23
March 31, 2005		258,546		89,552		168,994	65.36			63.20
December 31, 2004		290,226		87,213		203,013	69.95			73.70
September 30, 2004		272,500		92,141		180,359	66.19			65.24
June 30, 2004		261,012		89,881		171,131	65.56			63.30

As indicated in the following tables, other comprehensive loss was $12.4 million for the three months ended March 31, 2006, compared to other comprehensive loss of $34.0 million for the three months ended March 31, 2005. For the period ended March 31, 2006, the loss was the result of the decrease in the price of Freddie Mac stock and an unrealized loss on mortgage securities due to higher interest rates. The price of Freddie Mac common stock decreased by $4.35 and $10.50 per share for the quarters ended March 31, 2006 and March 31, 2005, respectively.


	For the Quarters Ended
	March 31, 2006			December 31, 2005		September 30, 2005		June 30, 2005	March 31, 2005
Freddie Mac:
Number of shares		4,437,500		4,437,500		4,512,500		4,537,500	4,567,500
Market Price	$	61.00		65.35		56.46		65.23	63.20
Market Value	$	270,687,500		289,990,625		254,775,750		295,981,125	288,666,000
Unrealized Gain Net of Tax	$	162,567,957		174,420,076		152,710,919		177,979,304	173,449,519

Other Comprehensive Income (Loss)
Related to Mortgage Securities and other Investments	$	(566,020	)	(888,764	)	(2,564,834	)	3,714,778	(4,572,473	)
Freddie Mac Common Stock	$	(11,852,119	)	21,709,158		(25,268,385	)	4,529,785	(29,446,672	)

Change in net unrealized holding gains on securities, net of income taxes	$	(12,418,139	)	20,820,394		(27,833,219	)	8,244,563	(34,019,145	)

We believe that our ownership of Freddie Mac common stock continues to present attractive appreciation and dividend growth potential. Since the sale of Freddie Mac common stock would result in the realization of a substantial current tax liability for us, we have no current plans to liquidate a significant portion of our Freddie Mac common stock investment. We continually evaluate our investment in Freddie Mac common stock, taking into account the appreciation and dividend potential of the Freddie Mac common stock, the income tax impact of a strategy, alternative investments or uses of sales proceeds and the portion of our capital that the after-tax unrealized gain represents.

We write covered calls on up to 400,000 shares of our Freddie Mac stock. When we write a call option, we receive a fee or premium. If the call option expires unexercised, we retain this premium and record it as income. If the call option is exercised, the premium is added to the sale proceeds and increases the gain on the sale of Freddie Mac stock. Once a covered call is written, we have little control over whether it will be exercised. If a call option is in the money as its maturity approaches, we can either allow it to be exercised or purchase the call to prevent its exercise. The decision to allow the exercise or to repurchase the option is based on several factors including the strike price at which the option would be exercised, alternative investments for the proceeds of the sale, tax considerations, the proportion of our equity that is realized compared to unrealized and the cost to repurchase the option. If a high volume of call options are exercised within a particular quarter, we would experience higher than normal noninterest income. Because we have little control over whether a call will be exercised, our noninterest income and net income could fluctuate significantly from quarter to quarter.

A gain on a sale of Freddie Mac stock resulting from a covered call exercise is included in net income. While normally net income results in an increase in equity, the unrealized gain is already included in equity as accumulated other comprehensive income. The gain on sale of Freddie Mac stock does not result in an increase in total equity but rather moves the equity from accumulated other comprehensive income to retained earnings.

We did not sell any Freddie Mac stock during the three months ended March 31, 2006 or 2005. During the six months ended March 31, 2005, we sold 37,500 shares of Freddie Mac common stock through exercises of call options for a pre-tax gain of $2.6 million. During the six months ending March 31, 2006, we sold 75,000 shares of Freddie Mac common stock through exercises of call options which resulted in a pre-tax gain on sale of stock of $4.8 million which was 43.8% of income before income taxes.

Critical Accounting Policies

In reviewing and understanding financial information for Charter Financial, you are encouraged to read and understand the significant accounting policies, which are used in preparing Charter Financial’s consolidated financial statements. These policies are described in Note 1 to the consolidated financial statements which were presented in Charter Financial’s 2005 annual report on Form 10-K. Of these policies, management believes that the accounting for the allowance for loan losses is one of the most critical. Please see “Asset Quality” for a further discussion of Charter Financial’s methodology in determining the allowance.

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

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is not probable. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that become uncollectible, based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, historical loss rates, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect a borrower’s ability to repay.

Management believes that the allowance for loan losses is adequate.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review CharterBank’s allowance for loan losses. Such agencies may require CharterBank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. If we are required to make additions to our allowance for loan losses by the regulatory agencies, the additions would reduce our net income and our capital.

Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale comprise a significant portion of Charter Financial’s balance sheet, and income on these assets is important to our operating results. Investments, mortgage-backed securities, and collateralized mortgage obligations available for sale are reported at fair value, as determined by independent price quotations. Purchase premiums and discounts on investment securities are amortized and accreted to interest income using a method which approximates a level yield over the period to maturity of the related securities. Purchase premiums and discounts on mortgage-backed securities and collateralized mortgage obligations are amortized and accreted to interest income using the interest method over the remaining lives of the securities, taking into consideration assumed prepayment patterns.

Income taxes are a material expense for Charter Financial. Charter Financial receives a dividends received deduction on dividend income from our investment in Freddie Mac common stock. This is the lesser of 70% of dividends received or 70% of taxable income before the dividends received deduction. The difference can be significant and is carefully monitored. Since Charter Financial does not file a consolidated tax return, this determination is made at the individual company level. The actual deduction will be determined at September 30, 2006 based on the level of dividends and the level of taxable income.

Charter Financial has an appropriate level of tax reserves. These reserves are subject to significant judgment. Management believes these tax reserves are adequate, and representative of probable exposure.

Comparison of Financial Condition at March 31, 2006 and September 30, 2005

At March 31, 2006 our total assets were $1.1 billion, up $50.4 million from September 30, 2005.

The following table shows the actual balance of loans outstanding at March 31, 2006 as well as the average balances of loans outstanding for the past five quarters beginning with March 31, 2005. The risk and return characteristics of loans vary significantly by the type of loan.


For the Quarters Ended	1-4 Family Residential		Construction		Commercial Real Estate		Consumer		Commercial Non- Real Estate		Total Loans		Percent Change per Quarter
	(Dollars in Thousands)
Actual Balance:
March 31, 2006	$	147,951	$	41,146	$	165,434	$	18,727	$	17,317	$	390,575	NA

Average Balance:
March 31, 2006		147,093		37,020		164,804		19,088		16,719		384,724	3.4	%
December 31, 2005		148,408		32,362		156,331		18,932		16,041		372,074	5.3
September 30, 2005		143,375		32,541		136,632		18,839		21,985		353,372	3.6
June 30, 2005		140,349		31,012		122,664		18,908		28,225		341,158	3.5
March 31, 2005		138,158		26,373		118,162		18,973		28,109		329,775	1.7

The nonresidential real estate loan growth reflects our strategy to increase this portion of the portfolio. Future growth of our nonresidential real estate portfolio depends primarily on interest rates, growth in the economy and competitiveness in the market to obtain new loans. As of March 31, 2006, CharterBank had approximately 73% of its assets in qualifying assets. At March 31, 2006 the loan portfolio is broadly composed of residential real estate loans of 37.9%, construction loans of 10.5%, commercial purpose loans of 4.4%, nonresidential real estate loans of 42.4% and consumer loans of 4.8%. A total of 90.8% of CharterBank’s loan portfolio is secured by real estate.

In recent years, CharterBank has made an effort to build its loans secured by commercial real estate properties and these loans now make up 42.4% of the loan portfolio. In a significant number of the loans secured by commercial properties, the owner occupies the properties and the ongoing operations of the business provide the cash to service the debt. CharterBank’s largest funded loan is a $6.5 million loan on a hotel. The largest industry concentration of commercial purpose loans is the hospitality industry where we have an aggregate of $25.8 million, or 6.6% of our loan portfolio, to various hotel and motel operations. Construction and development loans, which comprise 10.5% of the loan portfolio, are carefully monitored since the repayment is generally dependent upon the liquidation of the real estate and is impacted by national and local economic conditions. Future changes to the mix in our loan portfolio will be impacted by the qualified thrift lender requirements of the OTS which require that CharterBank maintain at least 65% of its portfolio assets in qualifying residential housing related assets.

While about half of CharterBank’s originations of 1-4 family residential real estate loans are sold into the secondary market, the other half are retained due to attractive risk and return characteristics. Such loans primarily make up the residential real estate mortgage portfolio. The remainder of the residential portfolio is composed of residential real estate mortgages “held for sale.” These loans are in the process of being sold into the secondary market and, since the credit, the rate and the purchase price have been approved by the buyer, CharterBank takes no credit or interest rate risk with respect to these loans. CharterBank has a risk of non performance from the buyer of these loans.

Mortgage-backed securities and collateralized mortgage obligations decreased from $358.5 million at September 30, 2005 to $331.1 million at March 31, 2006. This decrease was a result from purchasing fewer securities than the principle payments received. The market value of our Freddie Mac common stock increased $15.9 million, or 6.2%, from $254.8 million to $270.7 million. This increase resulted from an increase in the price per share of Freddie Mac common stock from $56.46 at September 30, 2005 to $61.00 at March 31, 2006.

Total deposits increased from $320.1 million at September 30, 2005 to $365.5 million at March 31, 2006. Of this increase $16.9 was in wholesale certificates of deposit. CharterBank has focused on attracting and retaining core deposits in order to fund loans and reduce dependence on higher cost deposits. Accordingly, as shown in the following table, over the last two years, core deposits (checking, money market and savings accounts) have increased from $126.6 million to $143.4 million. Fees on core deposit accounts increased from $632,000 in the March 2005 quarter to $883,000 in the March 2006 quarter.


	Deposit Fees		Transaction Accounts		Savings		Money Market Accounts		Total Core Deposits		Certificates of Deposit
	(Dollars in Thousands)
March 31, 2006	$	883	$	77,598	$	14,193	$	51,595	$	143,386	$	222,115
December 31, 2005		833		66,195		13,550		49,115		128,860		226,118
September 30, 2005		745		68,110		14,739		48,512		131,361		188,768
June 30, 2005		679		67,224		14,926		44,497		126,647		165,125
March 31, 2005		632		65,245		15,698		45,623		126,566		160,666
December 31, 2004		670		61,164		14,674		46,662		122,500		147,741
September 30, 2004		689		64,304		14,980		50,066		129,350		150,225
June 30, 2004		625		61,783		14,430		54,038		130,251		162,753
March 31, 2004		673		61,672		14,816		53,514		130,002		160,999

Management will continue to use brokered deposits, credit union certificates of deposit, FHLB advances and repurchase agreements to fund the securities and loan portfolios. The maturity dates of new FHLB advances will be determined at the time the advance is taken and will be based on interest rates, Charter Financial’s interest rate risk profile and other factors. Repurchase agreements are generally less than 45 days to maturity and carry rates at or slightly above one month LIBOR. Borrowings decreased $15.4 million or 4.2% from $382.3 million at September 30, 2005 to $366.9 million at March 31, 2006 as mortgage securities also decreased $27.4 million. A portion of the periodic cash flow form the mortgage securities was used to reduce borrowings and a portion was used to purchase $12.0 million of bank owned life insurance.

Charter Financial recorded $4.3 million of goodwill and $2.0 million of core deposit intangible as a result of the Eagle Bank acquisition in fiscal 2003. We are amortizing the core deposit intangible over 13 years using an accelerated method of amortization.

Our total stockholders’ equity is made up of realized equity and unrealized equity. Realized equity includes common stock, additional paid-in capital, treasury stock, unearned compensation, and retained earnings, while unrealized equity is comprised of accumulated other comprehensive income.

Total capital increased to $255.6 million at March 31, 2006 from $243.2 million at September 30, 2005. Unrealized equity increased to $157.8 at March 31, 2006 from $149.4 million at September 30, 2005 primarily as a result of the increase in the per share price of Freddie Mac stock from $56.46 at September 30, 2005 to $61.00 at March 31, 2006. Realized capital increased to $97.8 million at March 31, 2006 from $93.8 million at September 30, 2005.

Comparison of Operating Results for the Three and Six Months Ended March 31, 2006 and 2005

General

Net income was $2.6 million and $7.9 million for the three months and six months ended March 31, 2006, which was $89,000 higher than the three months ended March 31, 2005 and $2.5 million higher than the six months ended March 31, 2005. The most significant factor in the net income increase for the six month period was significantly higher net interest and noninterest income which included a $4.8 million gain on the sale of Freddie Mac common stock related to our covered call program in the six months ending March 31, 2006 as compared to a $2.6 million gain during the six months ended March 31, 2005.

Net Interest Income

Net interest income increased $910,000 from $5.8 million for the three months and increased $1.7 million from $11.4 million for the six months ended March 31, 2005 to $6.7 million for the three months and $13.1 million for the six months ended March 31, 2006. The key factors in this increase were an increase in Freddie Mac stock dividends and growth in loan balances. An increase in dividends received on Freddie Mac common stock from $0.35 to $0.47 per share per quarter added $532,500 to net interest income for the most recent quarter compared to the three months ended March 31, 2005. For the same periods, our net interest spread increased from 0.98% to 1.09% for the three months ended and increased from 0.97% to 1.15% for the six months ended and our net interest margin increased from 2.16% to 2.49% for the three months ended and increased from 2.14% to 2.49% for the six months ended.

The following table shows the average balances of the key components of earning assets and interest bearing liabilities for the past five quarters. From March 2005 to March 2006 we have increased our average loan balance $54.9 million while we decreased the average balance in mortgage and investment securities by $45.3 million. During the same period we decreased our average borrowings balance by $61.8 million and increased our interest costing deposits by $81.1 million.


	Average Assets
For Quarters Ended	Interest Earning Assets		Freddie Mac		Loans		Mortgage and Investment Securities
For Quarters Ended	(Dollars in Thousands)
March 31, 2006	$	1,072,418	$	296,359	$	384,724	$	364,955
December 31, 2005		1,036,088		271,443		372,074		368,417
September 30, 2005		1,032,968		284,344		353,372		374,774
June 30, 2005		1,045,123		288,894		341,158		395,225
March 31, 2005		1,064,473		305,734		329,775		410,291

	Average Liabilities
	Total Interest Bearing Liabilities		Borrowings		Non Interest Earning Deposits		Interest Costing Deposits
	(Dollars in Thousands)
March 31, 2006	$	685,140	$	355,809	$	26,989	$	329,331
December 31, 2005		676,056		372,103		28,645		303,953
September 30, 2005		656,374		382,522		26,280		273,852
June 30, 2005		668,301		409,196		26,647		259,105
March 31, 2005		665,892		417,616		24,098		248,276

The table below shows the costs of liabilities and yield on assets and the components of both. Our spread between the yield on securities and the cost of borrowings has varied from 34 basis points to 60 basis points, with the most recent quarter being 50 basis points. We have not had fixed rate borrowings mature or reprice in recent quarters. We have $25 million in borrowings that will mature in the next quarter. We currently pay a rate of 2.97% on these borrowings and expect the rate to increase at least 200 basis points. Our loan yield and deposit cost spread has narrowed 39 basis points since the March 2005 quarter as deposits have repriced upwards faster than our loans have repriced.


	Three Months Ended
	March 2006		December 2005		September 2005		June 2005		March 2005		December 2004		September 2004		June 2004		March 2004
	(Dollars in Thousands)
Cost of Liabilities	3.86	%	3.73	%	3.55	%	3.36	%	3.18	%	3.05	%	2.76	%	2.58	%	2.49	%
Cost of Deposits	3.38		3.01		2.68		2.38		2.25		2.05		1.80		1.72		1.81
Cost of CD’s	3.92		3.59		3.26		2.97		2.80		2.67		2.34		2.26		2.38
Cost of NOW Accts	1.26		0.76		0.81		0.78		0.72		0.57		0.54		0.49		0.45
Cost of Savings	0.26		0.25		0.25		0.23		0.23		0.24		0.25		0.25		0.24
Cost of MMDA	3.83		3.21		2.97		2.52		2.43		1.93		1.57		1.43		1.34
Cost of Borrowings	4.30		4.32		4.18		3.98		3.74		3.67		3.41		3.19		2.94

Yield on Assets	4.95		4.94		4.46		4.37		4.16		4.02		3.91		3.83		3.72
Yield on Freddie Mac	2.82		3.13		2.22		2.21		2.09		1.79		1.85		2.05		1.97
Yield on Assets excluding Freddie Mac	5.77		5.58		5.32		5.20		4.99		4.92		4.73		4.48		4.39
Yield on Loans	6.73		6.61		6.32		6.20		5.99		6.10		5.80		5.75		5.79

Yield on Mortgage Securities	4.80		4.66		4.52		4.42		4.29		4.12		4.01		3.62		3.40

Loan/Deposit Spread	3.35		3.60		3.64		3.82		3.74		4.05		4.00		4.03		3.98
Mortgage Securities/Borrowings Spread	0.50		0.34		0.34		0.44		0.55		0.45		0.60		0.43		0.46

Rate/Volume Analysis. The following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense during the March 2006 quarter and the March 2005 quarter. Information is provided in each category with respect to:

•

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

•

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

•

the net change.


	Quarter Ended March 31, 2006 Compared to Quarter Ended March 31, 2005 Increase/(Decrease)
	Due to								Net
	Volume			Rate		Combined			Net
	(In thousands)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	174		$	65	$	189		$	428
FHLB common stock and other equity securities		(18	)		348		(10	)		320
Mortgage-backed securities and collateralized mortgage obligations available for sale		(2,360	)		2,034		(282	)		(608	)
Other investment securities available for sale		285			209		146			640
Loans receivable		3,294			2,433		405			6,132

Total interest-earning assets		1,375			5,089		448			6,912

Freddie Mac common stock (1)		(44	)		536		(5	)		487

Total interest-earning assets and Freddie Mac common stock		1331			5,625		443			7,399

Interest-bearing liabilities:
NOW accounts		50			210		36			296
Savings accounts		(3	)		3		(0	)		(0	)
Money market deposit accounts		79			615		46			740
Certificates of Deposit		2,025			1,675		808			4,508

Total interest-bearing deposits		2,151			2,503		890			5,544
Borrowed funds		(2,312	)		2,333		(345	)		(324	)

Total interest-bearing liabilities		(161	)		4,836		545			5,220

Change in net interest income including Freddie Mac common stock	$	1,492		$	789	$	(102	)	$	2,179

(1)	The rate/volume table shows the changes resulting from both rate and volume in the combined column in lieu of allocating this amount to the rate and volume columns.

Interest income on loans increased $6.1 million with $3.3 million of the increase due to increased loan balances and $2.4 million to increased rates on loans. Interest income on mortgage securities decreased $608,000 with $2.0 million increase due to higher yields and a decrease of $2.4 million due to lower balances. Interest expense on borrowings decreased $324,000 with a $2.3 million decrease due to lower balances and a $2.3 million increase due to higher rates with a $345,000 decrease due to the combination of balance and rates. Interest expense on certificates of deposit increased due to both higher rates and increased balances. The change in net interest income shows $1.5 million due to higher balances and $789,000 due to higher rates. The portion due to higher rates is generally due to asset yields going up faster than liability costs. Liability costs so far have lagged the increases in overall interest rates.

The following table shows our net interest income, net interest spread and net interest margin and the impact the dividends on each of these from our Freddie Mac stock and its dividends. Net interest rate spread is the difference between yield on assets and cost of liabilities. Net interest margin is net interest income as a percent of average earning assets. Our net interest income was up $187,000 in the March quarter compared to the December 2005 quarter as our shift to loans and their higher interest income more than offset the impact of overall higher interest rates on our interest expense.


	Three Months Ended
	March 31, 2006			December 30, 2005			September 30, 2005			June 30, 2005			March 31, 2005			December 30, 2004
	(Dollars in Thousands)
Net Interest Income	$	6,667		$	6,480		$	5,699		$	5,811		$	5,757		$	5,640
Net Interest Income excluding Freddie Mac dividends	$	4,581		$	4,359		$	4,120		$	4,212		$	4,158		$	4,262
Attributable to Freddie Mac dividends	$	2,086		$	2,121		$	1,579		$	1,599		$	1,599		$	1,378

Net Interest Spread		1.09	%		1.21	%		0.91	%		1.01	%		0.98	%		0.97	%
Net Interest Spread excluding Freddie Mac dividends		1.91	%		1.85	%		1.77	%		1.84	%		1.81	%		1.87	%
Attributable to Freddie Mac dividends		(0.82	)%		(0.64	)%		(0.86	)%		(0.83	)%		(0.83	)%		(0.90	)%

Net Interest Margin		2.49	%		2.50	%		2.21	%		2.22	%		2.16	%		2.12	%
Net Interest Margin excluding Freddie Mac dividends		2.36	%		2.28	%		2.20	%		2.23	%		2.19	%		2.26	%
Attributable to Freddie Mac dividends		0.13	%		0.22	%		0.01	%		(0.01	)%		(0.03	)%		(0.14	)%

Yield on Assets		4.95	%		4.94	%		4.46	%		4.37	%		4.16	%		4.02	%
Cost of Liabilities		3.86	%		3.73	%		3.55	%		3.36	%		3.18	%		3.05	%

Provision for Loan Losses

No provision for loan losses was taken for the three months or six months ended March 31, 2006 and 2005. CharterBank had net recoveries of $1,749 for the three months ended March 31, 2006 compared to net charge-offs of $27,239 for the three months ended March 31, 2005 and $16,950 in net charge offs for the six months ended March 31, 2006 compared to $240,146 in net charge offs for the six months ended March 31, 2005. The 2005 charge offs included $222,456 of a loan acquired in the acquisition of Citizens Bank in 1999 for which reserves had been brought forward in purchase accounting.

Noninterest Income

Noninterest income was $1.7 million for the three months ended March 31, 2006 and $7.7 million for the six months ended March 31, 2006 and was $1.7 million for the three months ended March 31, 2005 and $5.0 million for the six months ended March 31, 2005. The table below shows the components of noninterest income for the last ten quarters. There was a $4.8 million gain on sale of securities during the six months ended March 31, 2006 compared to $2.6 million for the six months ended March 31, 2005. The gain on sale of securities was a gain on the sale of Freddie Mac common stock resulting from the exercise of calls written as a part of Charter Financial’s covered call program. Our deposit fees have increased as our checking products have increased in balance and to a lesser extent increased fees. Courtesy pay and insufficient funds fees were 58% of the $883,000 for the three months ended March 31, 2006. The March 2006 gain on sale of loans of $153,000 is the lowest level recorded in the last ten quarters as one-to-four family mortgage rates have increased and the levels of refinancing and originations of conforming loans have dropped.


	Loan Servicing Fees		Deposit Fees		Gain on the Sale of Loans		Gain on Sale of Investments, Net		Equity in Gain (Loss) of Limited Partnership			Gain (Loss) on Covered Call Program			Brokerage Commissions		Other Income
	(Dollars in Thousands)
For the Quarters Ended
March 31, 2006	$	69	$	883	$	153	$	—	$	—		$	309		$	121	$	158
December 31, 2005		62		833		163		4,769		—			13			116		4
September 30, 2005		63		745		254		1,603		—			76			127		3
June 30, 2005		64		679		196		1,906		—			141			104		18
March 31, 2005		58		632		201		16		—			674			70		44
December 31, 2004		62		670		233		2,599		—			(366	)		91		3
September 30, 2004		62		689		255		988		(200	)		11			75		106
June 30, 2004		57		625		345		38		—			(2	)		61		6
March 31, 2004		58		672		309		627		—			81			59		38
December 31, 2003		32		563		242		576		—			59			69		6

As discussed above, net gain on sale of investments, a component of our noninterest income, may fluctuate significantly from quarter to quarter depending on the volume of covered calls exercised during such quarter.

Noninterest Expense

Noninterest expense increased $342,493 to $4.9 million for the three months ended March 31, 2006 from $4.5 million for the three months ended March 31, 2005. The table following shows the components of noninterest expense for the past five quarters.


	For the Three Months Ended											For the Six Months Ended
	March 31, 2006			December 31, 2005		September 30, 2005		June 30, 2005		March 31, 2005		March 31, 2006		March 31, 2005
	(Dollars in Thousands)
Compensation & employee benefits	$	2,673		$	2,857	$	2,506	$	2,212	$	2,586	$	5,530	$	5,376
Occupancy		906			877		684		770		654		1,784		1,346
Legal & professional		356			361		473		471		318		717		555
Marketing		270			180		164		194		261		451		432
Furniture & equipment		159			145		190		176		187		303		383
Postage, office supplies, and printing		120			135		128		141		128		254		246
Federal insurance premiums and other regulatory fees		60			58		58		58		58		118		115
Net cost (gain) of operations of real estate owned		(3	)		45		16		10		10		42		7
Deposit premium amortization expense		43			45		45		45		49		88		99
Other		288			337		339		458		279		625		572

Total	$	4,872		$	5,040	$	4,603	$	4,535	$	4,530	$	9,912	$	9,131

Compensation and employee benefits increased $87,000 over the three months ended March 31, 2006 compared to the three months ended March 31, 2005. The increase was due to incentive accruals based on 100% achievement of targets. Compensation and employee benefits expense was $154,000 higher in the six months ended March 31, 2006 than the six months ended March 31, 2005. Occupancy expense increased in the six months ended March 31, 2006 compared to the same period in 2005 due partly to impairment on a building for $187,000.

Income Taxes

Income tax expense increased to $936,000 for the three months ended March 31, 2006 from $460,000 for the three months ended March 31, 2005, for an increase of $476,000. The increase was primarily due to higher levels of taxable income and a higher effective tax rate.

Asset Quality

The following table shows that nonperforming loans declined from $4.1 million at September 30, 2005 to $3.7 million at March 31, 2006. Nonperforming loans as a percent of total loans decreased from 1.12% at September 30, 2005 to 0.95% at March 31, 2006. Approximately 96.0% of our nonaccrual loans had real estate as collateral at March 31, 2006. Nonperforming loans are not accruing interest. The following table also shows under-performing loans and nonperforming assets.


	March 31, 2006			September 30, 2005
	(Dollars in Thousands)
Underperforming loans	$	189		$	133
Total nonperforming loans		3,702			4,075
Foreclosed real estate, net		709			1,120

Total nonperforming assets	$	4,411		$	5,195

Nonperforming loans to total loans		0.95	%		1.12	%
Nonperforming assets to total assets		0.40	%		0.49	%

Under-performing loans are loans 90 days or more delinquent or 90 days past maturity date that are still accruing interest. Under-performing loans increased from $133,000 at September 30, 2005 to $189,000 at March 31, 2006.

Our allowance for loan loss methodology is a loan classification based system. We base the required allowance on a percentage of the loan balance for each type of loan and classification level. Allowance balances on doubtful, substandard and special mention loans are provided for at 50.0%, 15.0% and 5.0% respectively. Loans may be classified manually and are automatically classified if they are not previously classified when they reach certain levels of delinquency. Unclassified loans are provided for at different percentages based on our perception of the inherent losses in the type of loan. Allowances on the conforming one-to-four family loans in the portfolio are at lower percentages than other loans. Percentages are based on each individual lending program and its loss history and underwriting characteristics, including loan to value, credit score, debt coverage, collateral, and capacity to service debt.

Charter Financial segments its allowance for loan losses into the following four major categories: 1) identified losses for impaired loans; 2) general reserves for Classified/Watch loans; 3) general reserves for loans with satisfactory ratings; and 4) an amount based on national and local economic and market factors. Risk ratings are initially assigned in accordance with CharterBank’s loan and collection policy. On an ongoing basis, an organizationally independent department reviews grade assignments and considers current information regarding a borrowers’ financial condition and debt service capacity, collateral condition 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, generally based on the fair value of the collateral as the measure for the amount of the impairment. Impaired and Classified/Watch loans are aggressively monitored. The allowance for loans rated satisfactory are further subdivided into various types of loans. Charter Financial has developed specific quantitative allowance factors, which it applies to each loan type to develop reserve components. These allowance factors are based upon economic, market and industry conditions that are specific to Charter Financial’s local markets and consider, but are not limited to, national and local economic conditions, bankruptcy trends, unemployment trends, loan concentrations, dependency upon government installations and facilities, and competitive factors in the local market. They are subjective in nature and require considerable judgment on the part of CharterBank’s management. However, it is CharterBank’s opinion that these items do represent uncertainties in CharterBank’s business environment that must be factored into CharterBank’s analysis of the allowance for loan losses.

Additions to the allowance for loan losses are made periodically to maintain the allowance at an appropriate level based on management’s analysis of loss inherent in the loan portfolio. The amount of the provision for loan losses is determined by an evaluation of the level of loans outstanding, loss risk as determined based on a loan classification system, the level of nonperforming loans, historical loss experience, delinquency trends, the amount of losses charged to the allowance in a given period, and an assessment of economic conditions. There were no provisions for loan losses taken for the six months ended March 31, 2006, and March 31, 2005. Management considers the current allowance for loan losses to be adequate based on its analysis of the losses in the portfolio.

During the six months ended March 31, 2006, the allowance for loan losses decreased by $16,950 to $6.1 million. When reviewing the allowance for loan losses, it is important to understand Charter Financial’s lending strategy. The largest components of our loan portfolio are one-to-four family residential loans and commercial real estate loans. Economic downturns resulting in reduced capacity to repay and/or depreciated property values are the chief risks to this lending strategy. Charter Financial has mitigated the risk associated with these types of borrowers through prudent loan to value ratios and regular monitoring of economic conditions.

We have no loans that are not currently disclosed as non-accrual, past due, underperforming or restructured, where there is known information about possible credit problems of borrowers that causes management to have serious doubts about their ability to comply with present loan repayment terms.

Commitments

Charter Financial had commitments to fund loans at March 31, 2006 of approximately $52.4 million. Commitments to fund loans include unused consumer credit lines of approximately $11.3 million, unused commercial credit lines of approximately $15.3 million, unfunded construction loans of approximately $22.0 million, approved but not yet funded mortgage loans, primarily for portfolio, of approximately $1.3 million and nonresidential loans of approximately $2.5 million. Conforming one-to-four family thirty year fixed rate loans are generally sold on a best efforts basis at the time the rate is committed to the customer so Charter Financial has no interest rate risk on these loans.

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

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

The following table is a summary of Charter Financial’s commitments to extend credit, leases and funding sources consisting of deposits, FHLB advances and borrowed funds.


	Commitments and Contractual Obligations
	Due in 1 Year		Due in 2 Years	Due in 3 Years	Due in 4 Years	Due in 5 Years
Loan commitments to originate 1-4 family mortgage loans	$	1,266,850	—	—	—	—
Loan commitments to fund construction loans in process		22,049,894	—	—	—	—
Loan commitments to originate nonresidential mortgage loans		2,493,600	—	—	—	—
Available home equity and unadvanced lines of credit		26,643,147	—	—	—	—
Letters of credit		1,480,140	—	—	—	—
Lease agreements		85,624	75,024	14,952	—	—
Deposits		243,516,467	94,812,113	11,205,567	9,063,230	5,513,434
Securities sold under agreements to repurchase		54,935,000	—	—	—	—
FHLB advances		50,000,000	100,000,000	—	10,000,000	127,000,000

Total commitments and contractual obligations	$	402,470,722	194,887,137	11,220,519	19,063,230	132,513,434

Management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise. Management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote. In the prior quarter, there were repurchase agreements of $62.3 million outstanding.

Derivative Instruments

We had no material commitments to originate loans held for sale at March 31, 2006. In prior periods, these commitments were accounted for at fair value.

The commitments to sell loans are best effort, forward sale agreements, and not mandatory forward sale commitments. The best effort agreements are not derivative instruments, and therefore, are not accounted for as derivatives. The interest rate caps and floors in our adjustable rate loans are clearly and closely related to the interest rate in the loan, and therefore, the floors and caps are not accounted for separately from the loan as a derivative instrument. The commitment to purchase investment securities is a firm forward commitment, which is accounted for as a derivative instrument and recorded at fair value.

Liquidity

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. The OTS requires that CharterBank maintain a sufficient amount of liquid assets to maintain its safe and sound operation. CharterBank monitors its liquidity position frequently and anticipates that we will have sufficient funds to meet our current funding commitments.

Our primary sources of liquidity are:

•

Deposits

•

Borrowings

•

Scheduled amortization and prepayments of loan principal and mortgage related securities

•

Maturities and calls of investment securities

•

Funds provided by operations

Deposit flows are affected by the level of interest rates, by the interest rates and products offered by competitors, and by other factors. Total deposits increased by $45.4 million to $365.5 million at March 31, 2006, from $320.1 million at September 30, 2005. Wholesale deposits were $86.7 million at March 31, 2006 compared to $69.8 million at September 30, 2005. Wholesale deposits included $45.0 million in brokered deposits at March 31, 2006 and September 30, 2005, respectively. Time deposit accounts scheduled to mature within one year were $100.1 million and $136.2 million at March 31, 2006 and September 30, 2005, respectively. While CharterBank has experienced inconsistent certificates of deposit growth, we anticipate that a significant portion of these certificates of deposit will remain on deposit. CharterBank continues to target growth of transaction-based deposit accounts to lower its overall cost of funds, increase deposit fees and provide cross-selling opportunities.

We can borrow funds from the FHLB based on eligible collateral of loans and securities up to a limit of 40% of CharterBank’s assets. At March 31, 2006, our maximum borrowing capacity from the FHLB was approximately $393.9 million compared to $375.6 million at September 30, 2005. At March 31, 2006, we had outstanding FHLB borrowings of $312.0 million compared to $287.0 million at September 30, 2005, with unused borrowing capacity of $81.9 million and $88.6 million, respectively. Availability of eligible loans and securities to pledge as collateral limits our borrowing capacity at the FHLB. In addition, we may enter into reverse repurchase agreements with approved broker-dealers. Reverse repurchase agreements are agreements that allow us to borrow money using our securities as collateral. Funds available through reverse repurchase agreements are limited by the availability of securities to pledge as collateral. At March 31, 2006, reverse repurchase agreements totaled $54.9 million, a $40.4 million decrease from the amount outstanding at September 30, 2005 of $95.3 million. This funding was replaced with a combination of wholesale and retail deposits. We can also obtain funds in the wholesale deposit markets. Funding for loan growth may come from retail deposit growth, wholesale deposit growth, FHLB borrowings and reverse repurchase agreements.

Our Freddie Mac common stock can also be used as collateral for loans and we have established a line of credit that allows borrowing up to half of the market value of the stock. We consider this source of funds a last resort due to the adverse tax consequences on the dividends received deduction that exempts 70% of our Freddie Mac dividends from taxable income.

Loan repayment and maturing investment securities are a relatively predictable source of funds. However, interest rates, local and general economic conditions and competition in the market place strongly affect deposit flows, calls of investment securities and prepayments of loans and mortgage-backed securities. These factors reduce the predictability of the timing of these sources of funds. Principal repayments on mortgage related securities totaled $43.3 million for the six months ended March 31, 2006. Ongoing levels of cash flow will depend on the level of mortgage rates and possible mortgage refinancing.

The interest rate environment, specifically low one-to-four family mortgage rates, impacts refinancing activity and, accordingly, cash flow from prepayments of mortgage securities. The level of this cash flow depends on the ongoing level of refinancing, and, thus, it is difficult to determine at this time.

Our primary investing activities are:

•

The origination of commercial real estate, one-to-four family real estate, commercial and consumer loans

•

The purchase of mortgage and investment securities

•

Capital expenditures

During the three months ended March 31, 2006, we originated approximately $36.7 million in total loans. Residential mortgage loans accounted for 31.42% of the originations, construction loans for 23.83%, commercial and commercial real estate for 38.99%, and consumer loans for 5.76%. Of the $11.5 million in residential mortgage loans originated, $6.6 million were sold to investors. During the six months ended March 31, 2006, we originated approximately $84.1 million in total loans. Residential mortgage loans accounted for 33.52% of the originations, construction loans for 20.03%, commercial and commercial real estate for 42.19%, and consumer loans for 4.26%. At March 31, 2006 and September 30, 2005, CharterBank had loan commitments to borrowers of approximately $25.8 million and $37.0 million, respectively, and available home equity and unadvanced lines of credit of approximately $26.6 million and $23.3 million, respectively. Of the $28.2 million in residential mortgage loans originated, $15.7 million were sold to investors.

Purchases of mortgage-backed securities, collateralized mortgage obligations, and other investment securities totaled $43.8 million for the six months ended March 31, 2006, and $90.1 million for the six months ended March 31, 2005. CharterBank has relied on wholesale fundings including advances from the FHLB, repurchase agreements and brokered deposits to purchase securities and fund loans.

Capital expenditures of $2.4 million during the six months ended March 31, 2006 included approximately $2.1 million for branch expansions. We anticipate capital expenditures for acquisition of branch sites, construction, expansion and renovation of retail facilities and except for these expenditures and any changes in our intentions to repurchase shares as outlined in “Capital and Capital Management,” we do not anticipate any other material capital expenditures during fiscal year 2006. We do not have any balloon or other payments due on any long-term obligations or any off-balance sheet items, other than the commitments and unused lines of credit noted above.

Off-Balance Sheet Arrangements

Charter Financial does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on Charter Financial’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Recent Accounting Pronouncements

liabilities and allows subsequent measurement by either an amortization method or fair value. Implementation is required for years beginning after September 15, 2006. The impact of implementation on the Company’s financial statements will not be material.

Item 3

Quantitative and Qualitative Disclosures about

Market Risk

As of March 31, 2006, there were no substantial changes from the interest rate sensitivity analysis or changes in the market value of portfolio equity for various changes in interest rate analysis calculated as of September 30, 2005. Please see the net interest income discussion in Item two of this document for additional discussion of the impact of changes in interest rates on our net interest income. The foregoing disclosures related to the market risk of Charter Financial should be read in conjunction with Charter Financial’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended September 30, 2005, included in Charter Financial’s 2005 Annual Report on Form 10-K.

Item 4

Controls and Procedures

Management, including the Company’s President and Chief Executive Officer and Chief Financial Officer, Treasurer and Vice President, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer, Treasurer and Vice President concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely discussions regarding disclosure.

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

Part II

OTHER INFORMATION

Item 1. Legal Proceedings

None.

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

None.

Item 3. Defaults upon Senior Securities

None.

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

Charter Financial held its annual meeting of shareholders on February 22, 2006. The proposal submitted to the shareholders at the Meeting was approved. The proposal submitted to shareholders and the tabulation of votes for the proposal is as follows:

Election of two candidates to the board of directors.

The number of votes cast with respect to this matter was as follows:


Nominee	For	Against	Abstentions
Jane W. Darden	19,078,042	0	108,613
Thomas M. Lane	19,071,604	0	115,051

There were no broker non-votes applicable to this matter.

Item 5. Other Information

None.

Item 6. Exhibits


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

32.1		Section 1350 Certifications

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Charter Financial Corporation

Date: May 9, 2006	By:	/s/ Robert L. Johnson
		Robert L. Johnson
		President and Chief Executive Officer

Date: May 9, 2006	By:	/s/ Curtis R. Kollar
		Curtis R. Kollar
		Chief Financial Officer, Vice President and Treasurer

EXHIBIT INDEX


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

32.1		Section 1350 Certifications

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents