EXHIBIT
13.0




HABERSHAM
BANCORP
 AND
SUBSIDIARIES
 
 
 Consolidated
Financial Statements
 
 December
31, 2007, 2006 and 2005
 
 (with
Independent Accountants’ Report thereon)
 
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
 
 
 To the
Board of Directors and Stockholders
 Habersham
Bancorp and Subsidiaries
 
 
 We have
audited the accompanying consolidated balance sheets of Habersham Bancorp and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of earnings, comprehensive income, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Habersham Bancorp and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
 
 
 \s\Porter
Keadle Moore, LLP
 Atlanta,
Georgia
 February
29, 2008
  -1-
  Habersham
Bancorp and Subsidiaries
 Consolidated
Balance Sheets
 December
31, 2007 and 2006
 
 Assets2007
              
              
              2006Cash
      and due from banks
              
              $
              18,196,283
              
              
              
              26,119,137Federal
      funds sold
              
              
              4,188,944
              
              
              
              64,398,671Cash
      and cash equivalents
              
              
              22,385,227
              
              
              
              90,517,808Investment
      securities available for sale
              
              
              89,890,102
              
              
              
              84,982,415Investment
      securities held to maturity, estimated fair value of $2,751,684 and
      $3,367,941
              
              
              2,689,198
              
              
              
              3,289,322Other
      investments
              
              
              3,408,924
              
              
              
              3,365,224Loans
      held for sale
              
              
              1,865,850
              
              
              
              3,183,115Loans,
      net of allowance for loan loss of $2,136,848 and
$3,444,789
              
              
              348,250,843
              
              
              
              342,816,012Premises
      and equipment, net
              
              
              16,081,593
              
              
              
              12,923,720Accrued
      interest receivable
              
              
              2,752,173
              
              
              
              2,937,981Other
      real estate
              
              
              11,498,271
              
              
              
              537,975Goodwill
              
              
              3,549,780
              
              
              
              3,549,780Cash
      surrender value of life insurance
              
              
              9,538,611
              
              
              
              5,046,830Other
      assets
              
              
              2,308,775
              
              
              
              2,588,102Total
      assets
              
              $
              514,219,347
              
              
              
              555,738,284Liabilities and
      Stockholders’ EquityDeposits:Noninterest-bearing
      demand
              
              $
              29,740,791
              
              
              
              47,286,172Money
      market and NOW accounts
              
              
              96,236,923
              
              
              
              86,120,584Savings
              
              
              60,076,631
              
              
              
              62,200,262Time
      ($100,000 and over)
              
              
              116,043,575
              
              
              
              176,651,417Other
      time
              
              
              88,168,718
              
              
              
              78,370,325Total
      deposits
              
              
              390,266,638
              
              
              
              450,628,760Short-term
      borrowings
              
              
              766,608
              
              
              
              778,778Federal
      funds purchased and securities sold under repurchase
      agreements
              
              
              26,183,807
              
              
              
              5,873,955Federal
      Home Loan Bank advances
              
              
              38,000,000
              
              
              
              38,000,000Accrued
      interest payable
              
              
              3,303,394
              
              
              
              2,979,288Other
      liabilities
              
              
              1,516,725
              
              
              
              1,913,382Total
      liabilities
              
              
              460,037,172
              
              
              
              500,174,163CommitmentsStockholders’
      equity:Common
      stock, $1.00 par value; 10,000,000 shares authorized;2,818,593
      and 2,968,593 shares issued and outstanding
              
              
              2,818,593
              
              
              
              2,968,593Additional
      paid-in capital
              
              
              13,490,587
              
              
              
              15,530,587Retained
      earnings
              
              
              38,135,126
              
              
              
              37,777,500Accumulated
      other comprehensive income (loss)
              
              
              (262,131
              )
              
              
              (712,559
              )Total
      stockholders’ equity
              
              
              54,182,175
              
              
              
              55,564,121Total
      liabilities and stockholders’ equity
              
              $
              514,219,347
              
              
              
              555,738,284
  
 See
accompanying notes to consolidated financial statements.
  -2-
  Habersham
Bancorp and Subsidiaries
 Consolidated
Statements of Earnings
 For the
Years Ended December 31, 2007, 2006 and 2005
  2007
              
              
              2006
              
              
              2005Interest
      income:Loans
              
              $
              31,670,690
              
              
              
              29,927,711
              
              
              
              22,421,374Investments:Taxable
      securities
              
              
              3,086,017
              
              
              
              2,873,933
              
              
              
              2,371,946Tax
      exempt securities
              
              
              1,110,046
              
              
              
              982,884
              
              
              
              807,397Other
      investments
              
              
              236,914
              
              
              
              233,392
              
              
              
              158,061Federal
      funds sold
              
              
              271,871
              
              
              
              442,118
              
              
              
              177,491Total
      interest income
              
              
              36,375,538
              
              
              
              34,460,038
              
              
              
              25,936,269Interest
      expense:Time
      deposits, $100,000 and over
              
              
              5,792,183
              
              
              
              3,949,260
              
              
              
              2,091,969Other
      deposits
              
              
              8,345,735
              
              
              
              7,116,569
              
              
              
              4,291,317Federal
      funds purchased and securities sold under repurchase
      agreements
              
              
              611,682
              
              
              
              213,262
              
              
              
              235,025Short-term
      and other borrowings, primarily FHLB advances
              
              
              2,097,304
              
              
              
              1,938,568
              
              
              
              1,982,027Total
      interest expense
              
              
              16,846,904
              
              
              
              13,217,659
              
              
              
              8,600,338Net
      interest income
              
              
              19,528,634
              
              
              
              21,242,379
              
              
              
              17,335,931Provision
      for loan losses
              
              
              675,225
              
              
              
              -
              
              
              
              330,000Net
      interest income after provision for loan losses
              
              
              18,853,409
              
              
              
              21,242,379
              
              
              
              17,005,931Noninterest
      income:Mortgage
      origination income
              
              
              774,490
              
              
              
              785,147
              
              
              
              981,045Service
      charges on deposit accounts
              
              
              988,256
              
              
              
              902,238
              
              
              
              701,881Other
      service charges and commissions
              
              
              254,240
              
              
              
              265,653
              
              
              
              260,893Securities
      (losses) gains, net
              
              
              4,900
              
              
              
              (13,216
              )
              
              
              (5,654
              )Gain
      on sale of premises and equipment
              
              
              7,545
              
              
              
              83,555
              
              
              
              14,000Income
      from life insurance
              
              
              190,084
              
              
              
              172,116
              
              
              
              181,775Trust
      services fees
              
              
              410,069
              
              
              
              314,139
              
              
              
              238,124Other
      income
              
              
              1,148,957
              
              
              
              1,146,118
              
              
              
              1,075,769Total
      noninterest income
              
              
              3,778,541
              
              
              
              3,655,750
              
              
              
              3,447,833Noninterest
      expense:Salaries
      and employee benefits
              
              
              10,544,056
              
              
              
              9,779,789
              
              
              
              8,478,019Occupancy
      expenses
              
              
              2,401,145
              
              
              
              2,209,495
              
              
              
              1,930,771Computer
      services
              
              
              632,601
              
              
              
              553,849
              
              
              
              459,544Telephone
              
              
              453,464
              
              
              
              444,214
              
              
              
              408,838Other
              
              
              4,640,907
              
              
              
              4,206,208
              
              
              
              3,714,149Total
      noninterest expense
              
              
              18,672,173
              
              
              
              17,193,555
              
              
              
              14,991,321Earnings
      before income taxes
              
              
              3,959,777
              
              
              
              7,704,574
              
              
              
              5,462,443Income
      tax expense
              
              
              1,020,420
              
              
              
              2,411,665
              
              
              
              1,648,972Net
      earnings
              
              $
              2,939,357
              
              
              
              5,292,909
              
              
              
              3,813,471Earnings
      per common share – basic
              
              $
              1.00
              
              
              
              1.80
              
              
              
              1.31Earnings
      per common share – diluted
              
              $
              1.00
              
              
              
              1.77
              
              
              
              1.30Weighted
      average number of common shares outstanding
              
              
              2,942,292
              
              
              
              2,942,737
              
              
              
              2,903,788Weighted
      average number of common and common equivalent shares
      outstanding
              
              
              2,952,528
              
              
              
              2,983,048
              
              
              
              2,938,698
 
 
 See
accompanying notes to consolidated financial statements.
  -3-
 
 Habersham
Bancorp and Subsidiaries
 Consolidated
Statements of Comprehensive Income
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 2007
              
              
              2006
              
              
              2005Net
      earnings
              
              $
              2,939,357
              
              
              
              5,292,909
              
              
              
              3,813,471Other
      comprehensive income (loss):Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
              
              
              836,769
              
              
              
              283,072
              
              
              
              (1,445,125
              )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
              
              
              (149,402
              )
              
              
              36,269
              
              
              
              202,982Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
              
              
              (4,900
              )
              
              
              13,216
              
              
              
              5,654Total
      other comprehensive income (loss) before tax
              
              
              682,467
              
              
              
              332,557
              
              
              
              (1,236,489
              )Income
      taxes related to other comprehensive income:Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
              
              
              (284,502
              )
              
              
              (96,244
              )
              
              
              491,343Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
              
              
              50,797
              
              
              
              (12,332
              )
              
              
              (69,014
              )Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
              
              
              1,666
              
              
              
              (4,494
              )
              
              
              (1,923
              )Total
      income taxes related to other comprehensive income (loss)
              
              
              (232,039
              )
              
              
              (113,070
              )
              
              
              420,406Total
      other comprehensive income (loss), net of tax
              
              
              450,428
              
              
              
              219,487
              
              
              
              (816,083
              )Total
      comprehensive income
              
              $
              3,389,785
              
              
              
              5,512,396
              
              
              
              2,997,388
   See
accompanying notes to consolidated financial statements.
  -4-
  Habersham
Bancorp and Subsidiaries
 Consolidated
Statements of Changes in Stockholders’ Equity
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 
 Common
      Stock
              
              
              Additional
      Paid-in Capital
              
              
              Retained
      Earnings
              
              
              Accumulated
      Other Comprehensive Income
      (Loss)
              
              
              TotalBalance,
      December 31, 2004
              
              $
              2,900,192
              
              
              
              14,560,488
              
              
              
              30,661,077
              
              
              
              (115,963
              )
              
              
              48,005,794Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              3,813,471
              
              
              
              -
              
              
              
              3,813,471Change
      in other comprehensive income, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (816,083
              )
              
              
              (816,083
              )Cash
      dividends, $.32 per share
              
              
              -
              
              
              
              -
              
              
              
              (929,785
              )
              
              
              -
              
              
              
              (929,785
              )Tax
      benefit from options exercised
              
              
              -
              
              
              
              15,534
              
              
              
              -
              
              
              
              -
              
              
              
              15,534Issuance
      of common stock upon exercise of stock options
              
              
              21,048
              
              
              
              147,153
              
              
              
              -
              
              
              
              -
              
              
              
              168,201Balance,
      December 31, 2005
              
              
              2,921,240
              
              
              
              14,723,175
              
              
              
              33,544,763
              
              
              
              (932,046
              )
              
              
              50,257,132Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              5,292,909
              
              
              
              -
              
              
              
              5,292,909Change
      in other comprehensive income, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              219,487
              
              
              
              219,487Cash
      dividends, $.36 per share
              
              
              -
              
              
              
              -
              
              
              
              (1,060,172
              )
              
              
              -
              
              
              
              (1,060,172
              )Tax
      benefit from options exercised
              
              
              -
              
              
              
              84,280
              
              
              
              -
              
              
              
              -
              
              
              
              84,280Issuance
      of common stock upon exercise of stock options
              
              
              47,353
              
              
              
              723,132
              
              
              
              -
              
              
              
              -
              
              
              
              770,485Balance,
      December 31, 2006
              
              
              2,968,593
              
              
              
              15,530,587
              
              
              
              37,777,500
              
              
              
              (712,559
              )
              
              
              55,564,121Net
      earnings
              
              
              -
              
              
              
              -
              
              
              
              2,939,357
              
              
              
              -
              
              
              
              2,939,357Change
      in other comprehensive income, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              450,428
              
              
              
              450,428Common
      stock repurchase  - 150,000 shares
              
              
              (150,000
              )
              
              
              (2,040,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,190,000
              )Cash
      dividends, $.90 per share
              
              
              -
              
              
              
              -
              
              
              
              (2,581,731
              )
              
              
              -
              
              
              
              (2,581,731
              )Balance,
      December 31, 2007
              
              $
              2,818,593
              
              
              
              13,490,587
              
              
              
              38,135,126
              
              
              
              (262,131
              )
              
              
              54,182,175
 
 
 See
accompanying notes to consolidated financial statements.
  -5-
  Habersham
Bancorp and Subsidiaries
 Consolidated
Statements of Cash Flows
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 2007
              
              
              2006
              
              
              2005Cash
      flows from operating activities:Net
      earnings
              
              $
              2,939,357
              
              
              
              5,292,909
              
              
              
              3,813,471Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Provision
      for loan losses
              
              
              675,225
              
              
              
              -
              
              
              
              330,000Provision
      for losses on other real estate owned
              
              
              142,000
              
              
              
              16,500
              
              
              
              -Income
      from life insurance
              
              
              (190,084
              )
              
              
              (172,116
              )
              
              
              (118,775
              )Depreciation
      expense
              
              
              1,170,791
              
              
              
              1,052,771
              
              
              
              959,014Loss
      (gain) on sale of premises and equipment
              
              
              (7,545
              )
              
              
              (83,555
              )
              
              
              7,343Net
      amortization (accretion) of premium/discount in investment
      securities
              
              
              80,651
              
              
              
              133,912
              
              
              
              366,709Securities
      (gain) loss, net
              
              
              (4,900
              )
              
              
              13,216
              
              
              
              5,654Loss
      (gain) on sale of other real estate
              
              
              (82,556
              )
              
              
              (15,454
              )
              
              
              38,570Net
      gain on sale of loans
              
              
              (774,490
              )
              
              
              (785,147
              )
              
              
              (981,045
              )Proceeds
      from sales of loans
              
              
              35,732,752
              
              
              
              33,611,309
              
              
              
              40,366,137Increase
      in loans held for sale
              
              
              (33,640,997
              )
              
              
              (33,889,839
              )
              
              
              (40,442,830
              )Amortization
      of intangible assets
              
              
              62,064
              
              
              
              62,064
              
              
              
              25,860Deferred
      income tax (benefit) expense
              
              
              301,978
              
              
              
              189,186
              
              
              
              (5,123
              )Changes
      in assets and liabilities, net of effects of purchase acquisition in
      2005:(Increase)
      decrease in accrued interest receivable
              
              
              185,808
              
              
              
              (578,810
              )
              
              
              (664,333
              )(Increase)
      decrease in other assets
              
              
              (466,156
              )
              
              
              (199,369
              )
              
              
              (855,515
              )Increase
      (decrease) in accrued interest payable
              
              
              324,106
              
              
              
              1,016,581
              
              
              
              269,952(Decrease)
      increase in other liabilities
              
              
              (396,657
              )
              
              
              27,769
              
              
              
              263,202Net
      cash provided by operating activities
              
              
              6,051,347
              
              
              
              5,691,927
              
              
              
              3,378,291Cash
      flows from investing activities, net of effects of purchase acquisition in
      2005:Payment
      for purchase of LB&T, net of cash acquired $4,631,073
              
              
              -
              
              
              
              -
              
              
              
              800,889Investment
      securities available for sale:Proceeds
      from maturities
              
              
              6,555,706
              
              
              
              6,767,710
              
              
              
              10,347,256Proceeds
      from sales and calls
              
              
              4,136,400
              
              
              
              2,013,278
              
              
              
              5,188,280Purchases
              
              
              (14,843,351
              )
              
              
              (20,512,685
              )
              
              
              (16,872,305
              )Investment
      securities held to maturity:Proceeds
      from maturities
              
              
              599,800
              
              
              
              31,801
              
              
              
              144,396Proceeds
      from calls
              
              
              -
              
              
              
              80,000
              
              
              
              596,708Other
      investments:Proceeds
      from sales
              
              
              -
              
              
              
              553,500
              
              
              
              450,000Purchases
              
              
              (43,700
              )
              
              
              (543,300
              )
              
              
              (1,356,290
              )Net
      increase in loans
              
              
              (17,310,848
              )
              
              
              (27,098,118
              )
              
              
              (27,876,679
              )Purchases
      of premises and equipment
              
              
              (4,364,275
              )
              
              
              (3,592,734
              )
              
              
              (1,451,263
              )Proceeds
      from sales of premises and equipment
              
              
              43,156
              
              
              
              219,240
              
              
              
              15,622Net
      additions of other real estate
              
              
              (435,179
              )
              
              
              -
              
              
              
              (906
              )Purchase
      of  life insurance
              
              
              (4,501,753
              )
              
              
              -
              
              
              
              -Redemption
      of life insurance
              
              
              200,056
              
              
              
              -
              
              
              
              -Proceeds
      from sale of other real estate
              
              
              616,231
              
              
              
              3,309,672
              
              
              
              1,012,650Net
      cash used in investing activities
              
              $
              (29,347,757
              )
              
              
              (38,771,636
              )
              
              
              (29,001,642
              )
 
  -6-
  Habersham
Bancorp and Subsidiaries
 Consolidated
Statements of Cash Flows, continued
 For the
Years Ended December 31, 2007, 2006 and 2005
 
 2007
              
              
              2006
              
              
              2005Cash
      flows from financing activities, net of effects of purchase acquisition in
      2005:Net
      (decrease) increase in deposits
              
              $
              (60,362,122
              )
              
              
              77,866,814
              
              
              
              59,814,489Net
      (decrease) increase in short-term borrowings
              
              
              (12,170
              )
              
              
              3,336
              
              
              
              (10,594
              )Proceeds
      from  FHLB advances
              
              
              4,000,000
              
              
              
              8,000,000
              
              
              
              16,300,000Repayment
      of FHLB advances
              
              
              (4,000,000
              )
              
              
              (12,300,000
              )
              
              
              (10,000,000
              )Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
              
              
              20,309,852
              
              
              
              (2,549,368
              )
              
              
              3,588,692Payment
      of cash dividends
              
              
              (2,581,731
              )
              
              
              (1,060,172
              )
              
              
              (929,785
              )Common
      stock repurchase
              
              
              (2,190,000
              )
              
              
              -
              
              
              
              -Issuance
      of common stock upon exercise of stock options
              
              
              -
              
              
              
              770,485
              
              
              
              168,201Net
      cash (used) provided by financing activities
              
              
              (44,836,171
              )
              
              
              70,731,095
              
              
              
              68,931,003Change
      in cash and cash equivalents
              
              
              (68,132,581
              )
              
              
              37,651,386
              
              
              
              43,307,652Cash
      and cash equivalents at beginning of the year
              
              
              90,517,808
              
              
              
              52,866,422
              
              
              
              9,558,770Cash
      and cash equivalents at end of year
              
              $
              22,385,227
              
              
              
              90,517,808
              
              
              
              52,866,422Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
              
              $
              16,522,798
              
              
              
              12,201,078
              
              
              
              8,276,805Income
      taxes
              
              $
              1,261,000
              
              
              
              2,403,000
              
              
              
              1,430,000Supplemental
      disclosures of noncash investing activities:Other
      real estate acquired through loan foreclosures
              
              $
              11,200,792
              
              
              
              1,055,372
              
              
              
              3,026,470Loans
      granted to facilitate the sale of other real estate
              
              $
              -
              
              
              
              -
              
              
              
              500,260
 
 On July
25, 2005, the Company purchased all of the capital stock of Liberty Bank and
Trust (Toccoa, Georgia) for $3,830,184, including certain acquisition costs of
$194,184.
 
 In
conjunction with the acquisition, assets were acquired and liabilities were
assumed as follows:
 Fair
      value of assets acquired
              
              $
              23,891,175Liabilities
              
              
              20,060,991$
              3,830,184
  
 See
accompanying notes to consolidated financial statements.
  -7-
  Habersham
Bancorp and Subsidiaries
 Notes to
Consolidated Financial Statements
  (1)
                Organization
      and Basis of Presentation
 The
consolidated financial statements of Habersham Bancorp and subsidiaries
(the “Company”) include the financial statements of Habersham Bancorp and
its wholly owned subsidiaries: Habersham Bank (the “Bank”) and The
Advantage Group, Inc. The Bank owns 100% of Advantage Insurers, Inc. All
intercompany accounts and transactions have been eliminated in
consolidation.
  The
Company’s continuing primary business is the operation of banks in rural and
suburban communities in Habersham, White, Cherokee, Warren, Gwinnett, Stephens,
Forsyth and Hall counties in Georgia. The Company’s primary source of revenue is
providing loans to businesses and individuals in its market area.
  Use
of Estimates
 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
  Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of other real estate, management obtains
independent appraisals for significant properties. A substantial portion of the
Company’s loans is secured by real estate in Habersham, White, and Cherokee
Counties and the metropolitan Atlanta area. Accordingly, the ultimate
collectibility of a substantial portion of the Company’s loan portfolio is
susceptible to changes in real estate market conditions in these
areas.
  Interest
Rate Risk
 The
Company’s assets and liabilities are generally monetary in nature and interest
rates have an impact on the Company’s performance. The Company manages the
effect of interest rates on its performance by striving to match maturities and
interest sensitivity between loans, investment securities, deposits and other
borrowings. However, a significant change in interest rates could have an effect
on the Company’s results of operations.
  Reclassifications
 Certain
2006 and 2005 amounts have been reclassified to conform with the 2007
presentation.
These         reclassifications had
no effect on the operations, financial condition or cash flows of the
company.
  (2)
              Summary
      of Significant Accounting Policies
 The
accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States of America and general
practices within the banking industry. The following is a summary of the more
significant accounting policies:
  Cash
and Cash Equivalents
 Cash and
cash equivalents include cash on hand, amounts due from banks, and Federal funds
sold. Federal funds are generally sold for one-day periods.
  Investment
Securities
 The
Company classifies its investment securities in two categories: available for
sale or held to maturity.
  Investment
securities classified as available for sale are carried at fair value. The
related unrealized gain or loss, net of deferred income taxes, is included as a
separate component of stockholders’ equity. Gains and losses from dispositions
are based on the net proceeds and the adjusted carrying amounts of the
securities sold, using the specific identification method.
  Investment
securities classified as held to maturity are stated at cost, adjusted for
amortization of premiums, and accretion of discounts. The Company has the intent
and ability to hold these investment securities to maturity.
  Purchase
premiums and discounts on investment securities are amortized and accreted to
interest income using the level yield method on the outstanding principal
balances, taking into consideration prepayment assumptions.
  -8-
  A decline
in the fair value of any security below cost that is deemed other than temporary
is charged to earnings, resulting in the establishment of a new cost basis for
the security.
  Other
Investments
 At
December 31, 2007 and 2006, other investments are primarily comprised of
stock of the Federal Home Loan Bank of Atlanta.
  Investment
in stock of a Federal Home Loan Bank is required of every federally insured
institution that utilizes its services. Federal Home Loan Bank stock is
considered restricted stock, as defined in Statement of Financial Accounting
Standards (SFAS) No. 115; accordingly, the provisions of
SFAS No. 115 are not applicable to this investment. The Federal Home
Loan Bank stock is reported in the consolidated financial statements at cost.
Dividend income is recognized when earned.
  Loans
Held for Sale
 Mortgage
loans held for sale are carried at the lower of cost or market determined on an
aggregate basis. Market values are determined on the basis of relevant delivery
prices in the secondary mortgage market. At December 31, 2007 and 2006,
there were no valuation allowances relating to mortgage loans held for
sale.
  Loans
 Loans are
stated at the amount of unpaid principal, reduced by unearned income and the
allowance for loan losses.
  Interest
on loans is generally recorded over the terms of the loans using the simple
interest method on the unpaid principal balance. Accrual of interest is
discontinued when either principal or interest becomes 90 days past due,
unless the loan is both well secured and in the process of collection, or when
in management’s opinion, reasonable doubt exists as to the full collection of
interest or principal. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of principal is
probable.
  Loan
origination fees and certain direct origination costs are deferred and
capitalized, respectively, and recognized over the life of the loan as an
adjustment of the yield on the related loan based on the interest
method.
  Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan’s effective interest rate, or at the loan’s observable
market price, or the fair value of the collateral if the loan is collateral
dependent. Loans that are determined to be impaired require a valuation
allowance equivalent to the amount of the impairment. The valuation allowance is
established through the provision for loan losses.
  A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the note agreement. Cash receipts on impaired loans,
which are accruing interest, are applied to principal and interest under the
contractual terms of the loan agreement. Cash receipts on impaired loans for
which the accrual of interest has been discontinued are applied to reduce the
principal amount of such loans until the required principal payments have been
brought current and, if the future collection of principal is probable, are
recognized as interest income thereafter.
  Allowance
for Loan Losses
 The
allowance for loan losses is maintained at a level estimated to be adequate to
provide for probable losses in the loan portfolio. Management follows a
consistent procedural discipline and accounts for loan loss contingencies in
accordance with SFAS No. 5, Accounting for Contingencies
and SFAS No. 114, Accounting
by Creditors for Impairment of a Loan.   The following is
a description of how each portion of the allowance for loan losses is
determined.
  For the
purposes of determining the required allowance for loan losses and resulting
periodic provisions, the Company segregates the loan portfolio into broad
segments, such as: commercial real estate; residential real estate;
construction; commercial business; and consumer loans. The Company provides for
a general allowance for losses inherent in the portfolio by the above
categories. The general allowance for losses on problem loans in these
categories is based on a review and evaluation of these loans, taking into
consideration financial condition and strengths of the borrower, related
collateral, cash flows available for debt repayment, and known and expected
economic trends and conditions. General loss percentages for the problem loans
are determined based upon loss percentages by loan classification as well as
historical loss experience. Specific allowances are provided in the event that
the specific collateral analysis on each problem loan indicates that the
probable loss upon liquidation of collateral would be in excess of the general
percentage allocation. For the remainder of the portfolio, general allowances
for losses are calculated based on estimates of inherent losses which are likely
to exist as of the evaluation date even though they might not have been
identified by the more objective processes used for the portion of the allowance
described above.
  -9-
  Loss
percentages used for the general allocation portion of the portfolio are
generally based on historical loss factors adjusted where necessary for
qualitative factors. This portion of the allowance is particularly subjective
and requires judgments based on qualitative factors which do not lend themselves
to exact mathematical calculations, such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume, terms, and
portfolio mix; changes in lending policies and procedures; evaluations of the
risk identification process; changes in the outlook for local and regional
economic conditions; concentrations of credit; and peer group
comparisons.
  Loans
deemed uncollectible are charged to the allowance. Provisions for loan losses
and recoveries on loans previously charged off are added to the
allowance.
  Management
believes 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, the
financial condition of borrowers and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination.  The Company’s most recent regulatory examination
concluded in February 2008.  It was determined that no additions to
the allowance for loan losses at December 31, 2007 would be
required.
  Other
Real Estate
 Other
real estate includes real estate acquired through foreclosure. Other real estate
is carried at the lower of its recorded amount at the date of foreclosure or
estimated fair value less costs to sell based on independent appraisals. Any
excess of carrying value of the related loan over the fair value of the real
estate at date of foreclosure is charged against the allowance for loan losses.
Any expense incurred in connection with holding such real estate or resulting
from any writedowns subsequent to foreclosure is included in other noninterest
expense.
  Premises
and Equipment
 Premises
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using primarily the straight-line method over the estimated useful
lives of the assets. Useful lives for depreciation are three years for
computer software and automobiles; primarily 40 years for buildings;
ten years for furniture, fixtures, and equipment; and the lease term or the
life of the property, whichever is shorter, for leasehold
improvements.
  Goodwill
and Other Intangible Assets
 Goodwill
represents the excess of the purchase price for bank acquisitions over the fair
value of the net assets acquired.  Goodwill is tested annually for
impairment unless events or circumstances arise that would indicate the need for
more frequent testing.  The impairment tests are performed at the
reporting level which in the Bank’s case is effectively the entire entity. There
were no goodwill impairment losses in the financial statements.
  Derivative
Instruments and Hedging Activities
 The fair
value of derivatives is recognized in the financial statements as assets or
liabilities.  The accounting for the changes in the fair value of a
derivative depends on the intended use of the derivative instrument at
inception.  The change in fair value of instruments used as fair value
hedges is accounted for in the income of the period simultaneous with accounting
for the fair value change of the item being hedged.  The change in
fair value of the effective portion of cash flow hedges is accounted for in
comprehensive income rather than income.  The change in fair value of
derivative instruments that do not qualify as a hedge is accounted for in the
income of the period of the change.
  Income
Taxes
 Income
taxes are accounted for under the asset and liability method. Provisions for
income taxes are based upon amounts reported in the statements of earnings
(after exclusion of nontaxable income such as interest on state and municipal
securities) and include deferred taxes on temporary differences between
financial statement and tax bases of assets and liabilities measured using
enacted tax rates expected to apply to taxable income in the year in which the
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
   -10-
  Earnings
Per Share
 Basic
earnings per share is computed by dividing net earnings by the
weighted average of common shares  outstanding. Diluted earnings
per share is computed by dividing net earnings by the weighted average of common
shares outstanding plus common share equivalents resulting from dilutive stock
options, determined using the treasury stock method.  Options on
201,625, 50,500 and 54,500 shares were not included in the diluted earnings per
share computation for 2007, 2006 and 2005, respectively, as they were
antidilutive.
  Comprehensive
Income
 Other
comprehensive income for the Company consists of items recorded directly in
equity under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and the net of tax effect of changes in
the fair value of cash flow hedges.
  Stock-Based
Compensation
 On
January 1, 2006, the Company adopted Statement of Financial Accounting Standard
No. 123(R), Share-based 
payments (“SFAS No. 123(R)”).  SFAS No. 123(R) requires all
share-based payments, including stock options, to be recognized in the financial
statements based on their fair value at the grant date.   As the
Company had no vesting of previously awarded share-based compensation that
occurred during 2007 and 2006 and there were no stock option grants during 2007
and 2006, the implementation of SFAS No. 123(R) had no effect on the operations,
financial condition or cash flow of the Company for the years ended December 31,
2007 and 2006.
  Prior to
2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, compensation cost was measured as the excess, if any, of the
quoted market price of the Company’s stock at the date of grant over the amount
an employee must pay to acquire the stock.
  Had
compensation cost for the Company’s stock option plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method included in SFAS No. 123, the Company’s net earnings and
earnings per share for the year ended December 31, 2005  would have
been reduced to the proforma amounts indicated below:
  Net
      earnings
              
              $
              3,813,471Deduct:Total
      stock-based compensation expense determined under fair value based method,
      net of related tax effect
              
              
              (1,271,404
              )Proforma
      net earnings
              
              $
              2,542,067Net
      earnings per common share – basic:As
      reported
              
              $
              1.31Proforma
              
              $
              .88Net
      earnings per common share – diluted:As
      reported
              
              $
              1.30Proforma
              
              $
              .87
 
 The
estimated fair value of options granted during 2005 was $13.05, per share. The
fair value of options granted under the Company’s fixed stock option plans
during 2005, was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used:
expected dividend yield of 3.20% in 2005; expected volatility of 85% in 2005;
weighted average risk-free interest rate of 4.25% in 2005; and,  an
expected weighted average life of five years in 2005.
 
 
 Recent
Accounting Pronouncements
 Accounting for Uncertainty
in Income Taxes
  In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (“FIN
48”).  This interpretation clarifies that management is expected to
evaluate an income tax position taken or expected to be taken for likelihood of
realization before recording any amounts for such position in the financial
statements.  FIN 48 also requires expanded disclosure with respect to
income tax positions taken that are not certain to be realized.  This
interpretation is effective for fiscal years beginning after December 15, 2006,
and requires management to evaluate every open tax position that exists in every
jurisdiction on the date of initial adoption.  The implementation of
FIN 48 had no material effect on the Company’s consolidated financial
statements.
  -11-
  Fair Value
Measurements
  In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  SFAS No. 157 does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  However, the application of this Statement may change how fair
value is determined.  The Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.  The financial statement impact is
not expected to be material to the Company’s financial position, results of
operations or disclosures.
  Other
accounting standards that have been issued or proposed by the FASB and other
standard setting entities that    do not require adoption
until a future date are not expected to have a material impact on the Company’s
consolidated financial statements upon adoption.
  (3)
              Business
      Combination
 On July
25, 2005, the Company consummated an agreement to acquire all of the outstanding
shares of Liberty         Bank
& Trust (“Liberty”) for $3.6 million in cash plus certain acquisition costs
totaling $194,000.  Additionally, the purchase price could include
approximately $789,000 of contingent cash consideration that will be released
from escrow only upon the lapse of the expiration period and resolution of the
contingencies.  The cash proceeds to consummate the purchase were
obtained from cash dividends paid to the Company by its bank subsidiary,
Habersham Bank.  Liberty was a commercial bank based in Toccoa,
(Stephens County), Georgia and had total assets of $23.2 million, including
total loans of $15 million and total investments of $3.3
million.  Additionally, Liberty had $20 million in
deposits.  The Company accounted for the transaction using the
purchase method and accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their fair values at the date of the
acquisition. The excess of the purchase price over the fair value of the net
assets acquired (goodwill) was approximately $1.1 million, none of which were
deductible for income tax purposes. Operations of Liberty are included in the
consolidated statements of earnings since its acquisition.
 
 (4)
              Reserve
      Requirements
 At
December 31, 2007 and 2006, the Federal Reserve Bank required that the Bank
maintain average reserve balances of $926,000 and $1,737,000,
respectively.
  (5)
              Investment
      Securities Available for Sale
 Amortized
cost, estimated fair values, and gross unrealized gains and losses of investment
securities available for sale are as follows:
 
 December 31,
      2007
              
              Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Estimated
      Fair ValueU.S.
      government-sponsored enterprises
              
              $
              33,384,277
              
              
              
              225,251
              
              
              
              42,142
              
              
              
              33,567,386Mortgage-backed
      securities
              
              
              30,362,134
              
              
              
              88,900
              
              
              
              523,674
              
              
              
              29,927,360State
      and political subdivisions
              
              
              26,298,632
              
              
              
              215,492
              
              
              
              300,766
              
              
              
              26,213,358Equity
      securities
              
              
              209,110
              
              
              
              -
              
              
              
              27,112
              
              
              
              181,998Total
              
              $
              90,254,153
              
              
              
              529,643
              
              
              
              893,694
              
              
              
              89,890,102December 31,
      2006
              
              Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Estimated
      Fair ValueU.S.
      government-sponsored enterprises
              
              $
              31,049,720
              
              
              
              9,505
              
              
              
              385,376
              
              
              
              30,673,849Mortgage-backed
      securities
              
              
              32,115,158
              
              
              
              27,293
              
              
              
              951,369
              
              
              
              31,191,082State
      and political subdivisions
              
              
              22,804,347
              
              
              
              226,646
              
              
              
              93,547
              
              
              
              22,937,446Equity
      securities
              
              
              209,109
              
              
              
              -
              
              
              
              29,071
              
              
              
              180,038Total
              
              $
              86,178,334
              
              
              
              263,444
              
              
              
              1,459,363
              
              
              
              84,982,415
 
 Proceeds
from sales and calls of available for sale securities during 2007, 2006 and 2005
were $4,136,400, $2,013,278 and $5,188,280, respectively.
  -12-
 
 Gross
gains of $4,900, $9,881 and $35,802 were recognized on those sales for 2007,
2006 and 2005, respectively.  Gross losses of $23,097 and $50,737 were
recognized on those sales for 2006 and 2005, respectively.
 
 The
following investments available for sale have an unrealized loss at December 31,
2007 and 2006 for which an other than temporary impairment has not been
recognized:
 
 2007
              
              
              2006Estimated
      Fair Value
              
              
              Unrealized
      Losses
              
              
              Estimated
      Fair Value
              
              
              Unrealized
      LossesUnrealized
      loss for less than 12 months:U.S.
      government-sponsored enterprises
              
              $
              2,287,869
              
              
              
              4,399
              
              
              
              6,901,880
              
              
              
              42,746Mortgage-backed
      securities
              
              
              527,339
              
              
              
              13,067
              
              
              
              2,755,736
              
              
              
              37,684State
      and political subdivisions
              
              
              7,646,042
              
              
              
              197,502
              
              
              
              4,330,457
              
              
              
              44,412$
              10,461,250
              
              
              
              214,968
              
              
              
              13,988,073
              
              
              
              124,842Unrealized
      loss for greater than 12 months:U.S.
      government-sponsored enterprises
              
              $
              5,796,199
              
              
              
              37,743
              
              
              
              20,572,302
              
              
              
              342,629Mortgage-backed
      securities
              
              
              21,917,295
              
              
              
              510,607
              
              
              
              26,367,202
              
              
              
              913,685State
      and political subdivisions
              
              
              4,414,426
              
              
              
              103,264
              
              
              
              3,259,021
              
              
              
              49,136Equity
      securities
              
              
              181,998
              
              
              
              27,112
              
              
              
              180,038
              
              
              
              29,07132,309,918
              
              
              
              678,726
              
              
              
              50,378,563
              
              
              
              1,334,521$
              42,771,168
              
              
              
              893,694
              
              
              
              64,366,636
              
              
              
              1,459,363
 
 
 At
December 31, 2007, there were 5 U.S. government-sponsored enterprises, 10
mortgage-backed securities, and 23 state and political subdivision securities
with an unrealized loss for less than 12 months and 12 U.S. government-sponsored
enterprises, 64 mortgage-backed securities, and 16 state and political
subdivision securities and one equity investment with an unrealized loss for
more than 12 months. The total fair value of the securities with an unrealized
loss at December 31, 2007 represented 97.95% of their amortized cost; therefore,
the impairment is not considered severe. While the duration is dependent on the
market, the existing unrealized loss could be shortened by the issuing agency
calling the securities.
 
 The
amortized cost and estimated fair values of investment securities available for
sale, exclusive of equity investments, at December 31, 2007, by contractual
maturity, are shown below.  Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Callable securities
and mortgage-backed securities are included in the year of their contractual
maturity date.
 
 Amortized
      Cost
              
              
              Estimated
      Fair ValueDue
      in one year or less
              
              $
              1,662,773
              
              
              
              1,663,112Due
      after one year through five years
              
              
              9,182,333
              
              
              
              9,225,821Due
      after five years through ten years
              
              
              22,970,764
              
              
              
              23,047,330Due
      after ten years
              
              
              56,229,173
              
              
              
              55,771,841Total
              
              $
              90,045,043
              
              
              
              89,708,104
 
 Investment
securities available for sale with carrying values of approximately $78,008,000
and $65,505,000 were pledged as collateral at December 31, 2007 and 2006,
respectively, for Federal Home Loan Bank advances, public deposits, and other
deposits, as required by law.
  -13-
 
 (6)
                Investment
      Securities Held to Maturity
 Amortized
cost, estimated fair values, and gross unrealized gains and losses of investment
securities held to maturity are as follows:
  December 31,
      2007
              
              Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Estimated
      Fair ValueMortgage-backed
      securities
              
              $
              43,179
              
              
              
              868
              
              
              
              2
              
              
              
              44,045State
      and political subdivisions
              
              
              2,646,019
              
              
              
              61,620
              
              
              
              -
              
              
              
              2,707,639Total
              
              $
              2,689,198
              
              
              
              62,488
              
              
              
              2
              
              
              
              2,751,684December 31,
      2006
              
              Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Estimated
      Fair ValueMortgage-backed
      securities
              
              $
              68,124
              
              
              
              1,822
              
              
              
              -
              
              
              
              69,946State
      and political subdivisions
              
              
              3,221,198
              
              
              
              80,639
              
              
              
              3,842
              
              
              
              3,297,995Total
              
              $
              3,289,322
              
              
              
              82,461
              
              
              
              3,842
              
              
              
              3,367,941
 
 There
were no proceeds from calls in 2007.  Proceeds from calls of
investment securities held to maturity during  2006 and 2005
were  $80,000 and $596,708, respectively. Gross gains of $9,281 were
recognized on those calls for 2005.   There were no gains or
losses on maturities or calls in 2007 or 2006.
 
 The
amortized cost and estimated fair values of securities held to maturity at
December 31, 2007, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Callable securities and mortgage-backed securities are included in
the year of their contractual maturity date.
 
 Amortized
      Cost
              
              
              Estimated
      Fair ValueDue
      in one year or less
              
              $
              547,803
              
              
              
              552,745Due
      after one year through five years
              
              
              708,819
              
              
              
              725,157Due
      after five years through ten years
              
              
              1,380,177
              
              
              
              1,416,002Due
      after ten years
              
              
              52,399
              
              
              
              57,780Total
              
              $
              2,689,198
              
              
              
              2,751,684
 
 Investment
securities held to maturity with carrying values of approximately $2,564,000 and
$1,680,000 were pledged as collateral at December 31, 2007 and 2006,
respectively, for public deposits and other deposits, as required by
law.
  -14-
  (7)
              Loans
 Loans at
December 31, 2007 and 2006 are summarized as follows:
 
 2007
              
              
              2006Real
      estate:Construction
              
              $
              175,904,135
              
              
              
              152,752,981Other
              
              
              138,401,227
              
              
              
              161,190,348Commercial,
      financial and agricultural
              
              
              20,496,647
              
              
              
              15,901,820Consumer
      installment
              
              
              15,630,413
              
              
              
              16,503,399350,432,422
              
              
              
              346,348,548Less:Unamortized
      loan origination fees, net
              
              
              28,060
              
              
              
              71,254Unearned
      credit life premiums
              
              
              16,671
              
              
              
              16,493Allowance
      for loan losses
              
              
              2,136,848
              
              
              
              3,444,789Total
              
              $
              348,250,843
              
              
              
              342,816,012
 
 Changes
in the allowance for loan losses are as follows:
 
 2007
              
              
              2006
              
              
              2005Balance,
      January 1
              
              $
              3,444,789
              
              
              
              3,944,525
              
              
              
              3,634,643Provision
      for loan losses
              
              
              675,225
              
              
              
              -
              
              
              
              330,000Loans
      charged off
              
              
              (2,116,001
              )
              
              
              (702,626
              )
              
              
              (444,351
              )Recoveries
              
              
              132,835
              
              
              
              202,890
              
              
              
              209,154Allowance
      from purchase acquisition
              
              
              -
              
              
              
              -
              
              
              
              215,079Balance,
      December 31
              
              $
              2,136,848
              
              
              
              3,444,789
              
              
              
              3,944,525
 
 The
Company considers a loan to be impaired when it is probable that it will be
unable to collect all amounts due according to the original terms of the loan
agreement. The Company measures impairment of a loan on a loan-by-loan basis for
commercial real estate, commercial business, and agricultural loans. Residential
mortgages, installment, and other consumer loans are considered smaller balance,
homogenous loans which are not evaluated individually for impairment. Amounts of
impaired loans that are not probable of collection are charged off immediately.
Impaired loans and related amounts included in the allowance for loan losses at
December 31, 2007 and 2006 are as follows:
 
 2007
              
              
              2006Balance
              
              
              Allowance
      Amount
              
              
              Balance
              
              
              Allowance
      AmountImpaired
      loans with a related allowance
              
              $
              18,326,924
              
              
              
              102,444
              
              
              
              344,930
              
              
              
              52,000Impaired
      loans without a related allowance
              
              
              -
              
              
              
              -
              
              
              
              157,303
              
              
              
              -
 
 The
average amount of impaired loans during 2007, 2006 and 2005 was $6,152,253,
$530,258 and $1,014,810, respectively. The interest income recognized on such
loans was $592,664 in 2007, $10,058 in 2006 and $37,569 in 2005, which
approximated the amount of interest received on the cash basis.
 
 Habersham
Bank held concentrations of loans to customers, which totaled of 100% or more of
Tier 1 capital by purpose code at December 31, 2007 and 2006, as
follows:
 
 2007
              
              
              2006Land
      and subdivision development
              
              $
              100,880,811
              
              
              
              56,943,812Real
      estate lessors (amortized non-owner occupied)
              
              
              73,456,063
              
              
              
              51,464,636$
              174,336,874
              
              
              
              108,408,448
 
 The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of its lending activities to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments and evaluates each
customer’s creditworthiness on a case-by-case basis. At December 31, 2007
and 2006, the Company had outstanding loan commitments approximating $73,283,000
and $103,796,000, respectively, and standby letters of credit approximating
$5,499,000 and $5,881,000, respectively. The amount of collateral obtained, if
deemed necessary, for these financial instruments by the Company, upon extension
of credit, is based on management’s credit evaluation of the customer.
Collateral held, if any, varies but may include inventory, equipment, real
estate, or other property. The accounting loss the Company would incur if any
party to the financial instrument failed completely to perform according to the
terms of the contract and the collateral proved to be of no value is equal to
the face amount of the financial instrument.
  -15-
 
 (8) Premises
and Equipment
 Premises
and equipment are summarized as follows:
 
 2007
              
              
              2006Land
              
              $
              5,121,361
              
              
              
              2,545,691Buildings
              
              
              12,612,790
              
              
              
              10,464,309Leasehold
      improvements
              
              
              148,637
              
              
              
              150,310Construction
      in progress
              
              
              663,046
              
              
              
              1,420,585Furniture
      and equipment
              
              
              7,455,704
              
              
              
              7,397,361Total
              
              
              26,001,538
              
              
              
              21,978,256Less
      accumulated depreciation
              
              
              9,919,945
              
              
              
              9,054,536Premises
      and equipment, net
              
              $
              16,081,593
              
              
              
              12,923,720
 
 The
Company has entered into operating lease agreements for
property.  Approximate minimum rentals under such leases are as
follows:
 2008
              
              $
              598,8762009
              
              
              577,9452010
              
              
              549,5132011
              
              
              327,7752012
              
              
              164,820$
              2,218,929
 
 Rental
expense was $530,297 in 2007, $460,625 in 2006 and $362,138 in
2005.
 
 (9)
              Other
      Real Estate
 A summary
of real estate acquired through foreclosure or deeds in lieu of foreclosure
follows:
 
 2007
              
              
              2006Number
      of Properties
              
              
              Carrying Amount
              
              
              Number
      of Properties
              
              
              Carrying AmountProperties
      acquired from borrowers,
      net        of amounts charged
      against the allowance for loan losses at foreclosure:Commercial
      properties
              
              
              2
              
              
              $
              639,500
              
              
              
              1
              
              
              $
              399,500Residential
      properties
              
              
              1
              
              
              
              33,844
              
              
              
              -
              
              
              
              -Vacant
      lots
              
              
              39
              
              
              
              4,500,483
              
              
              
              5
              
              
              
              138,475Residential
      construction properties
              
              
              22
              
              
              
              6,324,444
              
              
              
              -
              
              
              
              -64
              
              
              $
              11,498,271
              
              
              
              6
              
              
              $
              537,975
  -16-
  The
following is a summary of the changes in other real estate for the years ended
December 31, 2007 and 2006:
 
 2007
              
              
              2006Number
      of Properties
              
              
              Carrying Amount
              
              
              Number
      of Properties
              
              
              Carrying AmountBalance
      at the beginning of the year
              
              
              6
              
              
              $
              537,975
              
              
              
              8
              
              
              $
              2,773,662Additions
      – primarily foreclosed properties
              
              
              64
              
              
              
              11,635,971
              
              
              
              12
              
              
              
              1,055,372Deletions
      – primarily property sales
              
              
              (
      6
              )
              
              
              (533,675
              )
              
              
              (14
              )
              
              
              (3,274,559
              )Write-downs
              
              
              -
              
              
              
              (142,000
              )
              
              
              -
              
              
              
              (16,500
              )Balance
      at the end of the year
              
              
              64
              
              
              $
              11,498,271
              
              
              
              6
              
              
              $
              537,975
 
 Carrying
values for foreclosed properties are based on independent appraisals at the date
of foreclosure adjusted for estimated disposal costs and quick sale concessions,
which is management’s best estimate of fair value.  While management
uses available information to record foreclosed properties at fair value, future
write-downs may be necessary based on changes in economic conditions and other
factors.
 
 (10)
                Deposits
      and Borrowings
 At
December 31, 2007, the scheduled maturities of time deposits are as
follows:
 
 2008
              
              $
              150,147,9112009
              
              
              18,833,8712010
              
              
              24,153,7252011
              
              
              9,129,1792012
      and thereafter
              
              
              1,947,607Total
              
              $
              204,212,293
 
 Short-term
borrowings of $766,608 and $778,778 at December 31, 2007 and 2006, respectively,
consist of a U.S. Treasury, tax and loan deposit note.
 
 (11)
              Federal
      Funds Purchased and Securities Sold Under Repurchase
      Agreements
 Certain
information related to the Company’s securities sold under repurchase agreements
is summarized as follows:
 2007
              
              
              2006Balance
      at year-end
              
              $
              26,183,807
              
              
              
              5,873,955Maximum
      outstanding during the year
              
              
              34,867,414
              
              
              
              13,083,955Average
      outstanding during the year
              
              
              14,213,048
              
              
              
              6,395,038Weighted
      average interest rate during the year
              
              
              4.30
              %
              
              
              2.45
              %Weighted
      average interest rate at end of year
              
              
              3.87
              %
              
              
              4.04
              %
 
 All
securities sold under repurchase agreements are held by independent
trustees.Securities sold under
repurchase agreements at December 31, 2007 and 2006 are collateralized by
investment securities with aggregate carrying values of approximately
$13,724,000 and $9,314,000, respectively.  At December 31, 2007
and 2006, the Company had additional repurchase agreement line of credit
commitments available with a regional bank totaling $550,000 and $5,860,000,
respectively. No amounts were outstanding under that commitment at December 31,
2007 and 2006. The Company also had additional repurchase agreement line of
credit commitments available with another regional bank totaling $2,100,000 and
$133,500 at December 31, 2007 and 2006, respectively. No amounts were
outstanding under that commitment at December 31, 2007 and 2006.
  -17-
  The
Company did not have any federal funds purchased at December 31, 2007 and
2006.  At December 31, 2007 and 2006, the Company had unused lines for
overnight borrowings through Federal Funds purchased of
$30,000,000.
 
 (12)
                FHLB
      Advances
 At
December 31, 2007, the Company had available line of credit commitments
with the Federal Home Loan Bank (FHLB) totaling $38,220,740 of which $38,000,000
was advanced and $220,740 was available.
 
 Advances
outstanding at December 31, 2007 consisted of:
 
 Advance date
              
              Amount
              
              
              Interest Rate
              
              
              Maturity Date
              
              Rate
              
              Call FeatureMarch
      30, 2000
              
              $
              10,000,000
              
              
              
              6.02
              %
              
              March
      30, 2010
              
              Fixed
              
              Callable
      each yearJanuary
      12, 2001
              
              
              10,000,000
              
              
              
              4.93
              %
              
              January
      12, 2011
              
              Fixed
              
              Callable
      each yearMay
      21, 2004
              
              
              3,000,000
              
              
              
              5.21
              %
              
              May
      21, 2009
              
              Floating
              
              No
      call provisionAugust
      26, 2004
              
              
              3,000,000
              
              
              
              5.26
              %
              
              August
      26, 2009
              
              Floating
              
              No
      call provisionMay
      17, 2005
              
              
              4,000,000
              
              
              
              4.18
              %
              
              May
      19, 2008
              
              Fixed
              
              No
      call provisionMay
      22, 2006
              
              
              3,000,000
              
              
              
              5.46
              %
              
              May
      22, 2008
              
              Fixed
              
              No
      call provisionSeptember
      13, 2006
              
              
              5,000,000
              
              
              
              5.06
              %
              
              September
      14, 2009
              
              Floating
              
              No
      call provision$
              38,000,000
 
 At
December 31, 2007, the Company has pledged against FHLB advances, certain
investment securities, all stock of the FHLB, cash totaling $500,000 and certain
qualifying first mortgage loans with an outstanding balance of
$25,704,000.
 
 Advances
outstanding at December 31, 2006 consisted of:
 
 Advance date
              
              Amount
              
              
              Interest Rate
              
              Maturity Date
              
              Rate
              
              Call FeatureMarch
      30, 2000
              
              $
              10,000,000
              
              
              
              6.02
              %
              March
      30, 2010
              
              Fixed
              
              Callable
      each yearJanuary
      12, 2001
              
              
              10,000,000
              
              
              
              4.93
              %
              January
      12, 2011
              
              Fixed
              
              Callable
      each yearMay
      21, 2004
              
              
              3,000,000
              
              
              
              5.61
              %
              May
      21, 2009
              
              Floating
              
              No
      call provisionAugust
      26, 2004
              
              
              3,000,000
              
              
              
              5.60
              %
              August
      26, 2009
              
              Floating
              
              No
      call provisionMay
      17, 2005
              
              
              4,000,000
              
              
              
              4.18
              %
              May
      19, 2008
              
              Fixed
              
              No
      call provisionMay
      22, 2006
              
              
              3,000,000
              
              
              
              5.46
              %
              May
      22, 2008
              
              Fixed
              
              No
      call provisionSeptember
      13, 2006
              
              
              5,000,000
              
              
              
              5.36
              %
              September
      14, 2009
              
              Floating
              
              No
      call provision$
              38,000,000
 
 At
December 31, 2006, the Company has pledged against FHLB advances, certain
investment securities, all stock of the FHLB, cash totaling $12,332,000 and
certain qualifying first mortgage loans with an outstanding balance of
$27,671,000.
 
 (13)
                Derivative
      Instruments and Hedging
Activities
 The
Company maintains an overall interest rate risk-management strategy that
incorporates the limited use of derivative instruments to minimize fluctuations
in earnings that are caused by interest rate volatility.  The goal is
to manage interest rate sensitivity by modifying the repricing or maturity
characteristics of certain balance sheet assets and liabilities so the net
interest margin is not, on a material basis, adversely affected by movements in
interest rates.  As a result of interest rate fluctuations, hedged
assets and liabilities will appreciate or depreciate in fair
value.  The effect of this unrealized appreciation or depreciation
will generally be offset by earnings or loss on the derivative instruments that
are linked to the hedged assets and liabilities.  The Company views
this strategy as a prudent management of interest rate sensitivity, such that
earnings are not exposed to undue risk presented by changes in interest
rates.
  Derivative
instruments that are used as part of the Company’s interest rate risk-management
strategy include interest rate swap contracts.  Interest rate swaps
generally involve the exchange of fixed and variable-rate interest payments
between two parties, based on a common notional principal amount and maturity
date.
  -18-
  By using
derivative instruments, the Company is exposed to credit and market
risk.  If the counterparty fails to perform, credit risk is equal to
the extent of the fair value gain in a derivative.  When the fair
value of a derivative contract is positive, this generally indicates that the
counterparty owes the Company, and, therefore, creates a repayment risk for the
Company.  When the fair value of a derivative contract is negative,
the Company owes the counterparty and, therefore, it has no repayment
risk.  The Company minimizes the credit risk in derivative instruments
by entering into transactions with high-quality counterparties that are reviewed
periodically.
  The
Company’s derivative activities are monitored by its asset/liability management
function as part of that group’s oversight of asset/liability and treasury
functions.  This group is responsible for implementing various hedging
strategies that are developed through its analysis of data from financial
simulation models and other internal and industry sources.  The
resulting hedging strategies are then incorporated into the overall
interest-rate risk management.
  During
2004, Habersham Bank entered into two interest rate swap agreements with a
regional bank to partially offset the interest rate risk associated with
variable rate Federal Home Loan Bank (“FHLB”) borrowings.  Each FHLB
loan amount is $3 million with quarterly adjustable rates set at 23 basis points
above the three-month LIBOR.  The three-month LIBOR rate at December
31, 2007 was 4.70%. The first swap contract was entered into during the second
quarter of 2004 and is for a 4.5% fixed rate on a $3 million notional
amount.  The swap matures on May 21, 2009.  The second swap
contract was entered into during the third quarter of 2004 and is for a 4.05%
fixed rate on a $3 million notional amount. The swap matures on August 26,
2009.
  The swaps
are being accounted for as cash flow hedges at December 31, 2007 and
2006.  The fair values are included in other comprehensive income, net
of taxes.  Habersham Bank recorded a liability of approximately
$33,000 at December 31, 2007 and an asset of approximately $116,000 at December
31, 2006 to reflect the fair value of the swaps.
  The
hedges were designed to be highly effective as all terms of the swaps are
matched to the FHLB advances.    The Company utilizes the
long-haul methodology to measure the effectiveness of the
hedges.  Because of the matching terms of the advances and the
interest rate swaps, with the exception of the prepayment ability, the hedges
would continue to be highly effective as long as the FHLB advances continued to
be outstanding.  On a quarterly basis, the company ensures the debt
remains outstanding and that the credit risk of the swap counterparty has not
diminished.  If the debt is outstanding and there has been no change
in the credit risk of the swap counterparty, the hedge is deemed to remain
effective.  Any changes in the fair value of the swaps are recorded on
the balance sheet and accounted for in accumulated other comprehensive income,
net of tax.  If the debt were no longer outstanding, or there was a
credit risk problem (default) with the swap counterparty, the hedge would no
longer be deemed effective and the fair value of the swaps would be reclassified
from accumulated other comprehensive income to current earnings.  No
hedge ineffectiveness from these cash flow hedges was recognized in the
consolidated statement of earnings for the years ending December 31, 2007, 2006
and 2005.
  (14)
              Income
      Taxes
 Income
tax expense (benefit)  for the years ended December 31, 2007,
2006 and 2005 are as follows:
 
 2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              718,442
              
              
              
              1,943,753
              
              
              
              1,493,741State
              
              
              -
              
              
              
              278,726
              
              
              
              160,354Total
      current
              
              
              718,442
              
              
              
              2,222,479
              
              
              
              1,654,095Deferred:Federal
              
              
              270,476
              
              
              
              160,719
              
              
              
              (4,589
              )State
              
              
              31,502
              
              
              
              28,467
              
              
              
              (534
              )Total
      deferred
              
              
              301,978
              
              
              
              189,186
              
              
              
              (5,123
              )Total
              
              $
              1,020,420
              
              
              
              2,411,665
              
              
              
              1,648,972
  -19-
  The
provision for income taxes is less than that computed by applying the Federal
statutory rate of 34% to earnings before income taxes as indicated by the
following:
 
 2007
              
              
              2006
              
              
              2005Income
      tax on earnings before income taxes at statutory rate
              
              $
              1,346,324
              
              
              
              2,619,555
              
              
              
              1,857,231Differences
      resulting from:Tax-exempt
      income
              
              
              (394,833
              )
              
              
              (338,217
              )
              
              
              (278,379
              )Earnings
      on cash surrender value of life insurance
              
              
              (62,281
              )
              
              
              (58,519
              )
              
              
              (61,804
              )State
      income tax, net of Federal tax effect
              
              
              20,791
              
              
              
              202,747
              
              
              
              105,481Other
              
              
              110,419
              
              
              
              (13,901
              )
              
              
              26,443$
              1,020,420
              
              
              
              2,411,665
              
              
              
              1,648,972
 
 At
December 31, 2007 and 2006, the significant components of the Company’s net
deferred tax assets and liabilities are as follows:
 
 2007
              
              
              2006Deferred
      tax assets:Allowance
      for loan losses
              
              $
              811,147
              
              
              
              1,307,642Other
      real estate
              
              
              193,872
              
              
              
              81,434Deferred
      compensation
              
              
              386,674
              
              
              
              409,593Furniture,
      fixtures and equipment due to difference in depreciation
      methods
              
              
              157,921
              
              
              
              23,106Unearned
      credit life premiums
              
              
              6,329
              
              
              
              6,261Unrealized
      loss on investment securities available for sale
              
              
              123,777
              
              
              
              406,612Unrealized
      loss on derivatives
              
              
              11,260
              
              
              
              -Loan
      discount
              
              
              29,824
              
              
              
              53,939Other
              
              
              17,616
              
              
              
              1961,738,420
              
              
              
              2,288,783Deferred
      tax liabilities:Unrealized
      gain on derivatives
              
              
              -
              
              
              
              (39,536
              )Core
      deposit intangible
              
              
              (178,660
              )
              
              
              (202,219
              )Deferred
      loan fees
              
              
              (10,651
              )
              
              
              (27,048
              )Unearned
      safe deposit box income
              
              
              -
              
              
              
              (9,824
              )Prepaid
      expenses
              
              
              (199,383
              )
              
              
              (126,413
              )(388,694
              )
              
              
              (405,040
              )Net
      deferred tax asset
              
              $
              1,349,726
              
              
              
              1,883,743
 
 The net
deferred tax asset is included in other assets in the consolidated balance
sheets.
 
 (15)
              Stockholders’
      Equity
 The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company’s and the Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s and the Bank’s capital amounts
and the Bank’s classifications under the regulatory framework for prompt
corrective action are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2007 and 2006, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
  -20-
  As of
December 31, 2007, the most recent notifications from both the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank’s capital
categories.
 
 The
Company’s and the Bank’s actual capital amounts and ratios as of
December 31, 2007 and 2006 are as follows (dollars in
thousands):
 Actual
              
              
              For
      Capital Adequacy
    Purposes
              
              
              To
      Be Well Capitalized Under Prompt Corrective Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2007:Total
      Capital (to Risk-Weighted Assets):Company
              
              $
              52,542
              
              
              
              12.90
              %
              
              
              32,589
              
              
              
              8
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              49,322
              
              
              
              12.13
              %
              
              
              32,521
              
              
              
              8
              %
              
              
              40,651
              
              
              
              10
              %Tier
      I Capital (to Risk-Weighted Assets):Company
              
              $
              50,405
              
              
              
              12.37
              %
              
              
              16,295
              
              
              
              4
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              47,185
              
              
              
              11.61
              %
              
              
              16,260
              
              
              
              4
              %
              
              
              24,391
              
              
              
              6
              %Tier
      I Capital (to Average Assets):Company
              
              $
              50,405
              
              
              
              9.99
              %
              
              
              20,192
              
              
              
              4
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              47,185
              
              
              
              9.38
              %
              
              
              20,131
              
              
              
              4
              %
              
              
              25,164
              
              
              
              5
              %As
      of December 31, 2006:Total
      Capital (to Risk-Weighted Assets):Company
              
              $
              55,610
              
              
              
              14.03
              %
              
              
              31,720
              
              
              
              8
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              51,915
              
              
              
              13.19
              %
              
              
              31,477
              
              
              
              8
              %
              
              
              39,346
              
              
              
              10
              %Tier
      I Capital (to Risk-Weighted Assets):Company
              
              $
              52,165
              
              
              
              13.16
              %
              
              
              15,860
              
              
              
              4
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              48,470
              
              
              
              12.32
              %
              
              
              15,738
              
              
              
              4
              %
              
              
              23,608
              
              
              
              6
              %Tier
      I Capital (to Average Assets):Company
              
              $
              52,165
              
              
              
              10.83
              %
              
              
              19,260
              
              
              
              4
              %
              
              
              N/A
              
              
              
              N/ABank
              
              $
              48,470
              
              
              
              10.14
              %
              
              
              19,115
              
              
              
              4
              %
              
              
              23,893
              
              
              
              5
              %
 
 The
Department of Banking and Finance requires prior approval for a bank to pay
dividends in excess of 50% of the preceding year’s earnings. Based on this
limitation, the amount of cash dividends available from the Bank for payment in
2008 is approximately $1,975,000, subject to maintenance of the minimum capital
requirements.  As a result of this restriction, at December 31, 2007,
approximately $48,994,000 of the parent company’s investment in the Bank is
restricted as to dividend payments from the Bank to the parent
company.
 
 (16)
                Employee
      Benefit and Stock Option
Plans
 The
Company has a contributory profit sharing plan under Internal Revenue Code
Section 401(k) – (the 401(k) Plan). The 401(k) Plan covers
substantially all employees. Employees may contribute up to 15% of their annual
salaries not to exceed the amount allowed by the IRS. At its discretion, the
Company may make matching contributions in an amount not to exceed 100% of each
participant’s first 3% of compensation contributed. The Company’s contributions
to the plan totaled $220,162 in 2007, $196,760 in 2006 and $149,489 in
2005.
 
 During
1998, the Bank’s board of directors approved the Director’s Retirement Plan (the
Plan), a noncontributory retirement plan. Amounts earned on the life insurance
policies purchased by the Bank over the rate, as defined in the Plan, to be
retained for the benefit of the Bank are to be deferred and paid to the
directors upon retirement. As of December 31, 2007 and 2006, the cash
surrender values of the life insurance policies totaled $5,029,954
and  $5,046,830, respectively, and are included in cash surrender
values of life insurance in the balance sheet.
 
 During
2006, the Bank’s board of directors approved a Senior Executive Retirement Plan
(“SERP”) for five of the Bank’s key employees to be funded by the purchase of
bank-owned life insurance.  The SERP, a noncontributory retirement
plan, provides amounts earned on the life insurance policies purchased by the
Bank over the rate, as defined in the Plan, to be retained for the benefit of
the Bank are to be deferred and paid to the employees upon
retirement.  During 2007, the Bank purchased the life insurance
policies under this SERP which becomes effective January 1, 2008.  As
of December 31, 2007, the cash surrender values of the life insurance
policies totaled $4,508,657, and is included in cash surrender values of life
insurance in the balance sheet.
  -21-
 
 The
Company has an Incentive Stock Option Plan that provides that officers and
certain employees of the Company may be granted options to purchase shares of
common stock of the Company at an amount equal to the fair market value of the
stock at the date of grant. The options, which may be exercised immediately,
expire five years from the date of grant.
 
 The
Company’s Outside Directors Stock Option Plan provides that outside directors of
Habersham Bancorp and its subsidiaries may be granted options to purchase shares
of common stock of the Company at an amount equal to the fair market value of
the stock at the date of grant. The options are fully vested on the date of
grant, exercisable six months from the date of grant, and expire
ten years from the date of grant. Shares reserved for future grants under
this plan are approximately 203,675 at December 31, 2007 and 2006.
 
 The
following table summarizes information about stock options outstanding at
December 31, 2007:
 
 Number Outstanding and Exercisable at December 31,
      2007
              
              
              Weighted
      Average Remaining Contractual Life in
      Years
              
              
              Weighted
      Average Exercise Price50,500
              
              
              
              1.00
              
              
              $
              24.4971,250
              
              
              
              3.40
              
              
              
              20.60109,000
              
              
              
              4.37
              
              
              
              22.95230,750
              
              
              
              3.34
              
              
              
              22.56
 
 A summary
of the status of the Company’s stock option plans and changes during 2007, 2006
and 2005 is presented below:
 2007
              
              
              2006
              
              
              2005Shares
              
              
              Weighted Avg.ExercisePrice
              
              
              Shares
              
              
              Weighted Avg.ExercisePrice
              
              
              Shares
              
              
              Weighted Avg.ExercisePriceOutstanding
      at beginning of the year
              
              
              298,250
              
              
              $
              21.49
              
              
              
              367,750
              
              
              $
              20.98
              
              
              
              314,500
              
              
              $
              19.41Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              117,750
              
              
              
              22.95Exercised
              
              
              -
              
              
              
              -
              
              
              
              (63,000
              )
              
              
              18.27
              
              
              
              (26,500
              )
              
              
              11.10Terminated
      and expired
              
              
              (67,500
              )
              
              
              17.82
              
              
              
              (6,500
              )
              
              
              23.54
              
              
              
              (38,000
              )
              
              
              21.02Outstanding
      and exercisable at end of year
              
              
              230,750
              
              
              
              22.56
              
              
              
              298,250
              
              
              
              21.49
              
              
              
              367,750
              
              
              
              20.98
 
 There
were no options exercised during 2007.  There was no intrinsic value
of exercisable options at December 31, 2007 based on a market price of
$15.61.  The total intrinsic value of options exercised in 2006 and
2005 was $361,157 and $311,228, respectively.
  -22-
 
 (17)
              Other
      Expenses
 Items
comprising other expenses for the years ended December 31, 2007, 2006 and
2005 are as follows:
 2007
              
              
              2006
              
              
              2005Legal
      and other outside services
              
              $
              1,198,210
              
              
              
              1,089,565
              
              
              
              977,933Advertising
      and public relations
              
              
              721,683
              
              
              
              678,622
              
              
              
              598,857Office
      supplies
              
              
              535,841
              
              
              
              514,175
              
              
              
              438,765Leased
      equipment expense
              
              
              422,836
              
              
              
              375,769
              
              
              
              328,968Other
              
              
              1,762,337
              
              
              
              1,548,077
              
              
              
              1,369,626Total
              
              $
              4,640,907
              
              
              
              4,206,208
              
              
              
              3,714,149
  Outside
services include charges for FDIC insurance, legal and professional services,
insurance, director fees, and State of Georgia Department of Banking
fees.
 
 (18)
              Fair
      Value of Financial Instruments
 The
following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
 
 2007
              
              
              2006Carrying
      Amount
              
              
              Fair
      Value
              
              
              Carrying
      Amount
              
              
              Fair
      ValueAssets:Cash
      and cash equivalents
              
              $
              22,385,227
              
              
              
              22,385,227
              
              
              
              90,517,808
              
              
              
              90,517,808Investment
      securities available for sale
              
              
              89,890,102
              
              
              
              89,890,102
              
              
              
              84,982,415
              
              
              
              84,982,415Investment
      securities held to maturity
              
              
              2,689,198
              
              
              
              2,751,684
              
              
              
              3,289,322
              
              
              
              3,367,941Other
      investments
              
              
              3,408,924
              
              
              
              3,408,924
              
              
              
              3,365,224
              
              
              
              3,365,224Loans
      held for sale
              
              
              1,865,850
              
              
              
              1,879,102
              
              
              
              3,183,115
              
              
              
              3,196,032Loans,
      net
              
              
              348,250,843
              
              
              
              349,180,116
              
              
              
              342,816,012
              
              
              
              340,071,367Cash
      surrender value of  life insurance
              
              
              9,538,611
              
              
              
              9,538,611
              
              
              
              5,046,830
              
              
              
              5,046,830Interest
      rate swaps
              
              
              -
              
              
              
              -
              
              
              
              116,285
              
              
              
              116,285Liabilities:Deposits
              
              $
              390,266,638
              
              
              
              392,776,117
              
              
              
              450,628,760
              
              
              
              452,735,267Short-term
      borrowings
              
              
              766,608
              
              
              
              766,608
              
              
              
              778,778
              
              
              
              778,778Federal
      funds purchased and securities sold under repurchase
      agreements
              
              
              26,183,807
              
              
              
              26,183,807
              
              
              
              5,873,955
              
              
              
              5,873,955FHLB
      advances
              
              
              38,000,000
              
              
              
              38,794,791
              
              
              
              38,000,000
              
              
              
              38,410,681Interest
      rate swaps
              
              
              33,117
              
              
              
              33,117
              
              
              
              -
              
              
              
              -
 
 The
carrying amounts of cash and cash equivalents, interest-bearing demand and
savings accounts, short-term borrowings, and federal funds purchased and
securities sold under repurchase agreements are a reasonable estimate of their
fair value due to the short-term nature or short term to maturity of these
financial instruments. The fair value of investment securities available for
sale and investment securities held to maturity is based on quoted market prices
and dealer quotes. Fair values of mortgage loans held for sale are determined
based on relevant delivery prices in the secondary mortgage market. The fair
value of other loans, time deposits, and FHLB advances is estimated by
discounting the future cash flows using interest rates currently charged/paid by
the Bank for such financial instruments with similar credit risks and
maturities.
 
 The fair
value of Federal Home Loan Bank stock and the cash surrender value of bank-owned
life insurance approximates carrying value. Other insignificant investments have
been reflected above with fair values equaling carrying values.
  -23-
  For
derivative instruments, fair value is estimated as the amount that the Company
would receive or pay to terminate the contracts at the reporting date, taking
into account the current unrealized gains or losses on open
contracts.
 
 As
required by SFAS No. 107, demand deposits are shown at their carrying
value. No value has been ascribed to core deposits, which generally bear a low
rate of interest or no interest and do not fluctuate in response to changes in
interest rates.
 
 The
carrying values and fair values of commitments to extend credit and standby
letters of credit are not significant.
 
 The fair
value estimates presented herein are based on pertinent information available to
management as of December 31, 2007 and 2006. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
 
 (19)
              Related
      Party Transactions
 In the
ordinary course of business, the Company extends loans to its directors,
executive officers, and principal stockholders and their affiliates at terms and
rates comparable to those prevailing at the time for comparable transactions
with other customers. In the opinion of management, these loans do not involve
more than the normal credit risk nor present other unfavorable features. An
analysis of the activity during 2007 of loans to executive officers, directors,
and principal stockholders is as follows:
 
 Balance,
      January 1
              
              $
              8,057,403Amounts
      advanced
              
              
              8,986,025Repayments
              
              
              (5,547,667
              )Balance,
      December 31
              
              $
              11,495,761
 
 Deposits
from related parties totaled approximately $22,252,000 and $88,834,000 at
December 31, 2007 and 2006, respectively.   There were no deposit
relationships with a balance greater than 5% of total deposits as of December
31, 2007.   At December 31, 2006, the Bank had one significant
deposit relationship (balance greater than 5% of total deposits) with a total
deposit balance of $80,043,000.
  -24-
 
 (20)
                Condensed
      Financial Statements of Habersham Bancorp (Parent
  Only)
 The
parent company only condensed financial statements are presented
below:
  CONDENSED
BALANCE SHEETS
  AssetsDecember 312007
              
              
              2006Cash
              
              $
              242,296
              
              
              
              746,161Investment
      in subsidiaries
              
              
              50,969,192
              
              
              
              51,868,864Other
      investments
              
              
              599,990
              
              
              
              599,990Equipment,
      net
              
              
              76,080
              
              
              
              107,637Other
      assets
              
              
              2,420,597
              
              
              
              2,315,373Total
      assets
              
              $
              54,308,155
              
              
              
              55,638,025
 
 Liabilities
      and Stockholders’ EquityAccounts
      payable
              
              $
              125,980
              
              
              
              73,904Stockholders’
      equity:Common
      stock
              
              
              2,818,593
              
              
              
              2,968,593Additional
      paid-in capital
              
              
              13,490,587
              
              
              
              15,530,587Retained
      earnings
              
              
              38,135,126
              
              
              
              37,777,500Accumulated
      other comprehensive income (loss)
              
              
              (262,131
              )
              
              
              (712,559
              )Total
      stockholders’ equity
              
              
              54,182,175
              
              
              
              55,564,121Total
      liabilities and stockholders’ equity
              
              $
              54,308,155
              
              
              
              55,638,025
   CONDENSED
STATEMENTS OF EARNINGS
  For the
Years Ended December 31, 2007, 2006 and 2005
  2007
              
              
              2006
              
              
              2005Income:Dividends
      from bank
              
              $
              5,300,000
              
              
              
              1,500,000
              
              
              
              7,500,000Management
      fees from subsidiaries
              
              
              672,000
              
              
              
              668,666
              
              
              
              668,666Other
      income
              
              
              5,306
              
              
              
              10,000
              
              
              
              29,695Total
      income
              
              
              5,977,306
              
              
              
              2,178,666
              
              
              
              8,198,361Expenses:General
      and administrative
              
              
              2,296,202
              
              
              
              2,070,585
              
              
              
              1,766,390Earnings
      before income taxes and equity in undistributed earnings of
      subsidiaries
              
              
              3,681,104
              
              
              
              108,081
              
              
              
              6,431,971Income
      tax benefit
              
              
              608,353
              
              
              
              524,445
              
              
              
              402,314Earnings
      before equity in undistributed earnings of subsidiaries
              
              
              4,289,457
              
              
              
              632,526
              
              
              
              6,834,285(Distributions
      in excess of earnings) equity in undistributed earnings of
      subsidiaries
              
              
              (1,350,100
              )
              
              
              4,660,383
              
              
              
              (3,020,814
              )Net
      earnings
              
              $
              2,939,357
              
              
              
              5,292,909
              
              
              
              3,813,471
  -25-
  CONDENSED
STATEMENTS OF CASH FLOWS
  For the
Years Ended December 31, 2007, 2006 and 2005
  2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      earnings
              
              $
              2,939,357
              
              
              
              5,292,909
              
              
              
              3,813,471Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Depreciation
              
              
              47,708
              
              
              
              47,289
              
              
              
              31,977Gain
      on sale of equipment
              
              
              (5,306
              )
              
              
              (10,000
              )
              
              
              -(Increase)
      decrease in other assets
              
              
              (105,224
              )
              
              
              (97,665
              )
              
              
              (142,525
              )(Decrease)
      increase in other liabilities
              
              
              52,076
              
              
              
              59,433
              
              
              
              (65,683
              )Distributions
      in excess of earnings (equity in undistributed earnings) of
      subsidiaries
              
              
              1,350,100
              
              
              
              (4,660,383
              )
              
              
              3,020,814Net
      cash provided by operating activities
              
              
              4,278,711
              
              
              
              631,583
              
              
              
              6,658,054CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of Liberty Bank & Trust, net of cash acquired of
      $4,631,073
              
              
              -
              
              
              
              -
              
              
              
              (563,111
              )Contributions
      to bank subsidiary
              
              
              -
              
              
              
              -
              
              
              
              (4,631,073
              )Purchase
      of other investment
              
              
              -
              
              
              
              -
              
              
              
              (599,990
              )Purchase
      of equipment
              
              
              (45,705
              )
              
              
              (45,703
              )
              
              
              (93,353
              )Proceeds
      from sale of equipment
              
              
              34,860
              
              
              
              10,000
              
              
              
              -Net
      cash used in investing activities
              
              
              (10,845
              )
              
              
              (35,703
              )
              
              
              (5,887,527
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of cash dividends
              
              
              (2,581,731
              )
              
              
              (1,060,172
              )
              
              
              (929,785
              )Common
      stock repurchase
              
              
              (2,190,000
              )
              
              
              -
              
              
              
              -Proceeds
      from issuance of common stock upon exercise of stock
    options
              
              
              -
              
              
              
              770,485
              
              
              
              168,201Net
      cash used in financing activities
              
              
              (4,771,731
              )
              
              
              (289,687
              )
              
              
              (761,584
              )(Decrease)
      increase in cash
              
              
              (503,865
              )
              
              
              306,193
              
              
              
              8,943Cash
      at beginning of year
              
              
              746,161
              
              
              
              439,968
              
              
              
              431,025Cash
      at end of year
              
              $
              242,296
              
              
              
              746,161
              
              
              
              439,968
  -26-
 
 (21)
                Quarterly
      Financial Data (Unaudited)
 The
supplemental quarterly financial data for the years ended December 31, 2007 and
2006 is summarized as follows:
 Quarter
      EndedMarch
      31 2007
              
              
              June
      30 2007
              
              
              September
      30 2007
              
              
              December
      31 2007Interest
      income
              
              $
              9,037,996
              
              
              
              9,351,395
              
              
              
              9,295,267
              
              
              
              8,690,880Interest
      expense
              
              
              3,980,126
              
              
              
              4,118,754
              
              
              
              4,396,180
              
              
              
              4,351,844Net
      interest income
              
              
              5,057,870
              
              
              
              5,232,641
              
              
              
              4,899,087
              
              
              
              4,339,036Provision
      for loan losses
              
              
              -
              
              
              
              -
              
              
              
              80,000
              
              
              
              595,225Net
      earnings
              
              
              984,455
              
              
              
              1,034,329
              
              
              
              854,776
              
              
              
              65,797Net
      earnings per share – basic
              
              
              .33
              
              
              
              .35
              
              
              
              .29
              
              
              
              .02Net
      earnings per share – diluted
              
              
              .33
              
              
              
              .35
              
              
              
              .29
              
              
              
              .02March
      31 2006
              
              
              June
      30 2006
              
              
              September
      30 2006
              
              
              December
      31 2006Interest
      income
              
              $
              7,963,941
              
              
              
              8,258,056
              
              
              
              9,122,968
              
              
              
              9,115,073Interest
      expense
              
              
              2,884,292
              
              
              
              3,051,091
              
              
              
              3,471,205
              
              
              
              3,811,071Net
      interest income
              
              
              5,079,649
              
              
              
              5,206,965
              
              
              
              5,651,764
              
              
              
              5,304,001Provision
      for loan losses
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      earnings
              
              
              1,271,224
              
              
              
              1,325,275
              
              
              
              1,532,890
              
              
              
              1,163,520Net
      earnings per share – basic
              
              
              .43
              
              
              
              .45
              
              
              
              .52
              
              
              
              .39Net
      earnings per share – diluted
              
              
              .43
              
              
              
              .44
              
              
              
              .51
              
              
              
              .39


-27-