<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                   FORM 10-K

            X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         ------         SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1998.

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

     For the transition period from       to
                                    -----    -------

                         Commission file number 0-13153

  
                               HABERSHAM BANCORP
             (Exact name of registrant as specified in its charter)

          Georgia                                             58-1563165
----------------------------                                 -----------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or                                        Identification Number)
organization)

282 Historic Highway 441 North, P. O. Box 1980, Cornelia, Georgia         30531
-------------------------------------------------------------------------------
        (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:   (706) 778-1000

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

Securities registered pursuant to Section 12(g) of the Exchange Act:
                  Common Stock, $1.00 par value
                  -----------------------------

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   X
                -----
<PAGE>   2

Indicate the aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant computed by reference to the price at
which the common stock was sold, or the average bid and asked prices of such
common stock; as of a specified date within 60 days prior to the date of
filing:

1,447,494 Shares of Common Stock, $1.00 par value--$20,626,790 as of March 5,
1999 (based upon market value of $14.25/share).

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1998:

Common Stock, $1.00 par value--2,448,267 shares

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 1998 (the "Annual Report") are incorporated by reference into Part
II.

(2) Portions of the Company's Proxy Statement relating to the 1999 Annual
Meeting of Shareholders (the "Proxy Statement") are incorporated by reference
into Part III.

                                    PART I
Item 1.  BUSINESS.

                            BUSINESS OF THE COMPANY

         Habersham Bancorp (the "Company"), a Georgia corporation, was organized
on March 9, 1984. Effective December 31, 1984, the Company acquired all of the
outstanding shares of common stock of Habersham Bank ("Habersham Bank"). As a
result of this transaction, the former shareholders of Habersham Bank became
shareholders of the Company, and the Bank became the wholly-owned subsidiary of
the Company. Effective June 30, 1995, the Company consummated its acquisition of
Security Bancorp, Inc. ("Security") by agreeing to exchange 612,516 shares of
its common stock and cash of $1,990,269 for the outstanding shares of Security's
common stock in a merger of Security with and into the Company. Currently, the
primary business of the Company is the same as that of Habersham Bank, Security
State Bank ("Security State Bank") and BancMortgage Financial Corp
("BancMortgage"), a subsidiary of Habersham Bank formed in 199?. The Company
also has one direct nonbank subsidiary, The Advantage Group, Inc., and two other
indirect nonbank subsidiaries, Appalachian Travel Service, Inc., and Advantage
Insurers, Inc. (each are subsidiaries of Habersham Bank).

                             BUSINESS OF THE BANKS

         Habersham Bank is a financial institution which was organized under
the laws of the State of Georgia in 1904. Habersham Bank operates a
full-service commercial banking business based in Habersham County, Georgia,
providing such customary banking services as checking and savings accounts,
various types of time deposits, safe deposit facilities and individual
retirement accounts. It also makes secured and unsecured loans and provides
other financial services to its customers. Habersham Bank has a full-time trust
officer on staff and offers a full spectrum of trust services, including trust
administration, asset management services, estate and will probate and
administration, and other services in the area of personal trusts.
<PAGE>   3

         Security State Bank is a financial institution which was organized
under the laws of the State of Georgia in 1988. Security State Bank operates a
full-service commercial banking business based in Cherokee and surrounding
counties in Georgia, providing such customary banking services as checking and
savings accounts, various types of time deposits, safe deposit facilities and
individual retirement accounts. It also makes secured and unsecured loans and
provides other financial services to its customers.

                     BUSINESS OF THE ADVANTAGE GROUP, INC.

         The Advantage Group, Inc. was organized as a wholly-owned nonbank
subsidiary of the Company in 1987. The Advantage Group, Inc. administers the
Company's Kids' Advantage banking program and provides marketing and banking
services to other institutions.

                    BUSINESS OF BANCMORTGAGE FINANCIAL CORP.

         BancMortgage Financial Corp. was organized as a wholly-owned nonbank
subsidiary of Habersham Bank in 1996. BancMortgage Financial Corp. is a full
service mortgage and construction lending company located in the northern
Atlanta metropolitan area. BancMortgage Financial Corp. also does business in
the mid-Atlantic states as The Prestwick Mortgage Group and as BancFinancial
Services Corporation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

                  BUSINESS OF APPALACHIAN TRAVEL SERVICE, INC.

         Appalachian Travel Service, Inc. was acquired as a wholly-owned
nonbank subsidiary of Habersham Bank in 1996. Appalachian Travel Service, Inc.
is a full service travel agency located in Cornelia, Georgia.

                      BUSINESS OF ADVANTAGE INSURERS, INC.

         Advantage Insurers, Inc. was organized as a wholly-owned nonbank
subsidiary of Habersham Bank in 1997. Advantage Insurers, Inc. is a full
service insurance agency located in Cornelia, Georgia.

                                  COMPETITION

         The banking industry is highly competitive. Recent legislation,
together with other regulatory changes by the primary regulators of the various
financial institutions and competition from unregulated entities, has resulted
in the elimination of many traditional distinctions between commercial banks,
thrift institutions and other providers of financial services. Consequently,
competition among financial institutions of all types is virtually unlimited
with respect to legal ability and authority to provide most financial services.

         Habersham Bank's primary market area consists of Habersham and White
Counties, Georgia. Habersham Bank competes principally for all types of loans,
deposits and other financial services with three other commercial banks located
in Habersham County, Georgia. As of December 31, 1998, Habersham Bank was the
largest of the commercial banks located in Habersham County based upon total
assets.

<PAGE>   4

         Security State Bank's primary market area consists of Cherokee County,
Georgia. Security State Bank competes principally for all types of loans,
deposits and other financial services with other commercial banks located in
Cherokee County, Georgia.

         Habersham Bank and Security State Bank (collectively, the "Banks"),
also compete with other financial institutions located in Habersham and
Cherokee counties and with commercial banks, savings and loan associations and
other financial institutions located outside of Habersham and Cherokee
counties. To a lesser extent, Habersham Bank and Security State Bank compete
for loans with insurance companies, regulated small loan companies, credit
unions and certain governmental agencies.

         The Company and its non-bank subsidiaries also compete with numerous
other companies and financial institutions engaged in similar lines of
business, such as other bank holding companies, mortgage companies, mortgage
servicers, leasing companies, insurance companies, companies providing data
processing services and companies providing bank consulting services.

                                  EMPLOYEES

         As of December 31, 1998, the Company had 298 full-time equivalent
employees. Neither the Company nor any of its subsidiaries is a party to any
collective bargaining agreement. In the opinion of management, the Company and
its subsidiaries enjoy satisfactory relations with their respective employees.
<PAGE>   5

                           SUPERVISION AND REGULATION

GENERAL

         The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). As such, the Company
and its non-bank subsidiaries are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve.

         The BHC Act requires every bank holding company to obtain the Federal
Reserve's prior approval before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the voting shares of the bank; (b) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (c) it may merge or consolidate with any other bank
holding company.

The BHC Act further provides that the Federal Reserve may not approve any
transaction that: (a) would result in a monopoly; (b) would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking anywhere in the United States; (c) could substantially
lessen competition or to tend to create a monopoly in any section of the
country; or (d) would otherwise be in restraint of trade. The Federal Reserve
could, however, approve a proposed transaction if its anticompetitive effects
were clearly outweighed by the public interest in meeting the convenience and
needs of the community to be served. The Federal Reserve is also required to
consider the financial and managerial resources and future prospects of the
participants in the transaction and the convenience and needs of the community
to be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.

         The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies. As a result, the
Company and any other bank holding company located in Georgia may now acquire a
bank located in any other state, and any bank holding company located outside
Georgia may lawfully acquire any Georgia-based bank, regardless of state law to
the contrary, in either case subject to certain restrictions. The Interstate
Banking Act also generally provides that national and state-chartered banks may
now branch interstate through acquisitions of banks in other states. By
adopting legislation prior to June 1, 1997, states could either "opt in" and
accelerate the date after which interstate branching is permissible or "opt
out" and prohibit interstate branching altogether.

         In response to the Interstate Banking Act, the Georgia General
Assembly adopted the Georgia Interstate Banking Act, which was effective on
July 1, 1995. The Georgia Interstate Banking Act provides that (i) interstate
acquisitions by institutions located in Georgia will be permitted in states
that also allow national interstate acquisitions and (ii) interstate
acquisitions of
<PAGE>   6

institutions located in Georgia will be permitted by institutions in states
that allow national interstate acquisitions.

         Additionally, on January 26, 1996, the Georgia General Assembly
adopted the Georgia Interstate Branching Act, which permits Georgia-based banks
and bank holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge an acquired bank into an interstate branch network. The
Georgia Interstate Branching Act also allows banks to establish de novo
branches on an unlimited basis.

         The BHC Act generally prohibits the Company from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries and from acquiring or retaining direct or indirect
control of any company engaged in any activities other than those activities
determined by the Federal Reserve to be incidental to banking or managing or
controlling banks. In determining whether a particular activity is permissible,
the Federal Reserve must consider whether the performance of the activity
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest, or unsound banking practices. For
example, factoring accounts receivable, acquiring or servicing loans, leasing
personal property, conducting discount securities brokerage activities,
performing certain data processing services, acting as agent or broker in
selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible bank holding company activities. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve may order a holding
company or its subsidiaries to terminate any activity or its ownership or
control of any subsidiary when it has reasonable cause to believe that
continuation of the activity, ownership or control constitutes a serious risk
to the financial safety, soundness, or stability of any bank subsidiary of that
bank holding company.

         Each of the Company's bank subsidiaries is a member of the Federal
Deposit Insurance Corporation (the "FDIC"), and as such, its deposits are
insured by the FDIC to the maximum extent provided by law. Each bank subsidiary
is also subject to numerous state and federal statutes and regulations that
affect its business, activities, and operations, and each is supervised and
examined by one or more state or federal bank regulatory agencies.

         The FDIC and the Georgia Department of Banking and Finance (the
"Georgia Department") regularly examine the operations of the subsidiary banks
and are given authority to approve or disapprove mergers, consolidations, the
establishment of branches, and similar corporate actions. The FDIC and the
Georgia Department also have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law.
<PAGE>   7

PAYMENT OF DIVIDENDS

         The Company is a legal entity separate and distinct from its banking
and other subsidiaries. The principal sources of cash flow of the Company,
including cash flow to pay dividends to its shareholders, are dividends by its
subsidiary banks. There are statutory and regulatory limitations on the payment
of dividends by the subsidiary banks to the Company as well as by the Company
to its shareholders.

         If a federal banking regulator believes that a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the institution's financial condition,
could include the payment of dividends), it could require, after notice and
hearing, that the institution cease and desist from that practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and
unsound banking practice. Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a depository institution may not pay any
dividend if payment would cause it to become undercapitalized or if it already
is undercapitalized. See "-- Prompt Corrective Action." Moreover, the federal
agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.

         Under dividend restrictions imposed under federal and state laws, the
subsidiary banks, without obtaining governmental approvals, could declare
aggregate dividends to the Company of up to $1,128,000 (representing 50% of the
previous year's net income) in 1999.

         The payment of dividends by the Company and its subsidiary banks may
also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines.

CAPITAL ADEQUACY

         The Company and its subsidiary banks are required to comply with the
capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of its banking subsidiaries.
There are two basic measures of capital adequacy for bank holding companies
that have been promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.

         The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.

         The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as
<PAGE>   8

standby letters of credit) is 8%. At least half of Total Capital must consist
of common stock, minority interests in the equity accounts of consolidated
subsidiaries, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less goodwill and certain other
intangible assets ("Tier 1 Capital"). The remainder may consist of subordinated
debt, other preferred stock, and a limited amount of loan loss reserves ("Tier
2 Capital"). At December 31, 1998, the Company's consolidated Total Risk-Based
Capital Ratio and its Tier 1 Risk-Based Capital Ratio (i.e., the ratio of Tier
1 Capital to risk-weighted assets) were 12.16% and 11.10% respectively.

         In addition, the Federal Reserve has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3% for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3%, plus an additional cushion of 100 to 200 basis
points. The Company's Leverage Ratio at December 31, 1998 was 7.46%. The
guidelines also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve has
indicated that it will consider a "tangible Tier 1 Capital Leverage Ratio"
(deducting all intangibles) and other indicia of capital strength in evaluating
proposals for expansion or new activities.

         The subsidiary banks are subject to risk-based and leverage capital
requirements adopted by the FDIC, which are substantially similar to those
adopted by the Federal Reserve for bank holding companies.

         Each of the subsidiary banks was in compliance with applicable minimum
capital requirements as of December 31, 1998. The Company has not been advised
by any federal banking agency of any specific minimum capital ratio requirement
applicable to it or its subsidiary depository institutions.

         Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"-- Prompt Corrective Action."

         The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve and the FDIC have, pursuant to
FDICIA, adopted regulations requiring regulators to consider interest rate risk
(when the interest rate sensitivity of an institution's assets does not match
the sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
<PAGE>   9

SUPPORT OF SUBSIDIARY INSTITUTIONS

         Under Federal Reserve policy, the Company is expected to act as a
source of financial strength for, and to commit resources to support, each of
its banking subsidiaries. This support may be required when, absent this
Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its banking
subsidiaries are subordinate in right of payment to deposits and to certain
other indebtedness of such banks. In the event of a bank holding company's
bankruptcy, the bankruptcy trustee will assume any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
a banking subsidiary and will be entitled to a priority of payment.

         Under the Federal Deposit Insurance Act, a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with
(a) the default of a commonly controlled FDIC-insured depository institution or
(b) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
Company's subsidiary banks are subject to these cross-guarantee provisions. As
a result, any loss suffered by the FDIC in respect of these subsidiaries would
likely result in assertion of the cross-guarantee provisions, the assessment of
such estimated losses against the depository institution's banking affiliates,
and a potential loss of the Company's investment in its other subsidiary banks.

PROMPT CORRECTIVE ACTION

         FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to
a narrow exception, FDICIA requires the banking regulator to appoint a receiver
or conservator for an institution that is critically undercapitalized. The
federal banking agencies have specified by regulation the relevant capital
level for each category.
<PAGE>   10

         The capital levels established for each of the categories are as
follows:

<TABLE>
<CAPTION>
==============================================================================================================-
                                                Total                     Tier 1 Risk-
Capital Category           Tier 1 Capital       Risk-Based Capital        Based Capital          Other
===============================================================================================================

<S>                        <C>                  <C>                       <C>                    <C>
Well Capitalized           5% or more           10% or more               6% or more             Not subject to
                                                                                                 a capital 
                                                                                                 directive
---------------------------------------------------------------------------------------------------------------
Adequately                 4% or more           8% or more                4% or more                    --
Capitalized
---------------------------------------------------------------------------------------------------------------
Undercapitalized           less than 4%         less than 8%              less than 4%                  --
---------------------------------------------------------------------------------------------------------------
Significantly              less than 3%         less than 6%              less than 3%                  --
Undercapitalized
---------------------------------------------------------------------------------------------------------------
Critically                 2% or less                    --                        --                   --
Undercapitalized           tangible equity
===============================================================================================================
</TABLE>

         For purposes of the regulation, the term "tangible equity" includes
core capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets with
certain exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.

         At December 31, 1998, each subsidiary bank had the requisite capital
levels to qualify as well capitalized.

FDIC INSURANCE ASSESSMENTS

         The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (a) well
capitalized; (b) adequately capitalized; and (c) undercapitalized. These three
categories are substantially similar to the prompt corrective action categories
described above, with the "undercapitalized" category including institutions
that are undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns
an institution to one of three supervisory subgroups within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. The FDIC then determines an institution's insurance assessment
rate based on the capital category and supervisory category to which it is
assigned. There are nine assessment risk classifications (i.e., combinations of
capital groups and supervisory subgroups) to which different assessment rates
are applied.
<PAGE>   11

         Since 1996, the deposit insurance premiums for 92% of all Bank
Insurance Fund ("BIF") members in the highest capital and supervisory
categories have been set at $2,000 per year, regardless of deposit size.
Effective as of January 1, 1997, assessments to help pay off the $780 million
in annual interest payments on the $8 billion FICO bonds issued in the late
1980s as part of the government rescue of the thrift industry were imposed on
BIF-insured deposits in annual amounts presently estimated at 1.29 basis
points. Beginning in January 2000, these rates will increase to an estimated
2.43 basis points.

         The FDIC may terminate its insurance of deposits upon a finding that
an institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.

PROPOSED LEGISLATION AND REGULATORY ACTION

         New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or what form any proposed regulation or statute will be adopted or the
extent to which our business may be affected by such regulations or statutes.
<PAGE>   12

Item 2.  PROPERTIES

         The Company's principal office is located at Habersham Bank's Central
Habersham office, 282 Historic Highway 441, Cornelia, Georgia. The telephone
number of that office is (706) 778-1000.

         Habersham Bank's North Habersham (main) office is located at 1151
Washington Street, Clarkesville, Georgia. The telephone number of that office
is (706) 778-1000. Habersham Bank also has three full-service branch offices
and one limited service office for receiving deposits. Its Central Habersham
office is located at 282 Historic Highway 441, Cornelia, Georgia, its South
Habersham office is located at 186 441 By-Pass, Baldwin, Georgia and its
Cleveland Office is located at 575 South Main Street, Cleveland, Georgia. The
Hospitality Center is located at 1450 Washington Street, Clarkesville, Georgia.
Each office has a 24-hour teller machine. Habersham Bank owns its office
properties without encumbrance.

         Security State Bank's office is located at 1925 Marietta Highway,
Canton, Georgia, and the telephone number of that office is (770) 479-2111.
Security State Bank has one full service branch office. Its Waleska Office is
located at 7265 Reinhardt College Parkway, Waleska, Georgia. Security State
Bank owns its office properties without encumbrance.

         The Advantage Group, Inc.'s principal office is located at Habersham
Bank's Central Habersham office, at 282 Historic Highway 441, Cornelia,
Georgia. The telephone number of that office is (706) 778-1000.

         BancMortgage Financial Corp.'s principal office is located at 990
Hammond Drive, Suite 1020, Atlanta, Georgia 30328, and the telephone number of
that office is (770) 804-7208. This office is leased.

         Appalachian Travel Service, Inc.'s principal office is located at 282
Historic Highway 441, Cornelia, Georgia, and the telephone number of that
office is (706) 778-5777.

         Advantage Insurers, Inc.'s principal office is located at 282 Historic
Highway 441, Cornelia, Georgia, and the telephone number of that office is
(706) 778-2277.

Item 3.  LEGAL PROCEEDINGS

         The Company is not a party to, nor is any of its property the subject
of, any material pending legal proceedings, other than ordinary routine
litigation incidental to its business, and no such proceedings are known to be
contemplated by governmental authorities.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.
<PAGE>   13

                                   PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The common stock of Habersham Bancorp is traded on the NASDAQ Stock
Market ("NASDAQ") under the symbol HABC. At December 31, 1998, Habersham
Bancorp had approximately 577 shareholders of record. The following table sets
forth the high and low sale prices of the Company's common stock on a quarterly
basis for the past two fiscal years

<TABLE>
<CAPTION>
             1998                   HIGH      LOW
             ----                   ----      ---
          
          <S>                       <C>       <C>
          Fourth quarter            17.00     14.00
          Third quarter             18.75     16.00
          Second quarter            20.25     18.13
          First quarter             20.50     18.50

<CAPTION>
             1997                   HIGH      LOW
             ----                   ----      ---
         
          <S>                       <C>       <C>
          Fourth quarter            22.00     18.50
          Third quarter             21.50     19.75
          Second quarter            21.50     19.75
          First quarter             21.00     17.00
</TABLE>

         Cash dividends were paid quarterly at a rate of $.04 per share of
common stock in 1998. Cash dividends were paid quarterly at a rate of $.035 per
share of common stock in 1997.
<PAGE>   14

Item 6.  SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                        FOR THE YEARS ENDED DECEMBER 31
                                                      1998           1997           1996           1995           1994

<S>                                              <C>            <C>            <C>            <C>            <C>   
SUMMARY OF OPERATIONS
Interest income                                  $   28,959     $   26,962     $   23,367     $   16,556     $   12,435
Interest expense                                     15,091         13,305         11,044          7,398          4,801
Other income                                         15,750          8,056          2,277          1,371          1,207
Other expense                                        26,214         18,412         11,762          7,830          6,620

Net Income                                            2,058          2,157          1,908          2,021          1,658

PER SHARE AMOUNTS
Net income-diluted                               $      .83     $      .86     $      .79     $      .99     $      .98
Dividends                                               .16            .14            .12            .10            .08
Weighted average number of
 common and common equivalent
 shares outstanding                               2,481,630      2,497,993      2,411,687      2,032,567      1,689,795

AT DECEMBER 31
Total assets                                     $  384,069     $  328,197     $  310,011     $  229,586     $  161,327
Earning assets                                      359,838        299,301        287,850        213,035        152,018
Loans                                               281,898        235,764        230,867        145,434        100,848
Deposits                                            280,453        261,665        224,361        195,085        141,615
Shareholders' equity                                 32,214         30,144         27,669         25,905         15,851

RATIOS
Return on average assets                                .57%           .69%           .70%          1.01%          1.02%
Return on average equity                               6.63%          7.48%          7.16%          9.39%         10.50%
Dividend payout ratio                                 16.87%         16.28%         15.19%          9.85%          8.02%
Average equity to average
 assets ratio                                          8.52%          9.16%          9.84%         10.74%          9.76%
</TABLE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

         The following discussion sets forth the major factors that affect the
Company's results of operations and financial condition. These comments should
be read in conjunction with the consolidated financial statements and related
notes.

         This discussion contains forward-looking statements involving risks
and uncertainties. Results may differ significantly from that discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, risks involving the potential adverse effect of changes
in interest rates and the current interest rate environment, loan losses and
the adequacy of the Company's loan loss allowance, changes in regulation and
legislation, and competition.

ORGANIZATION

         Habersham Bancorp (the "Company") owns all of the outstanding stock of
Habersham Bank ("Habersham Bank"), Security State Bank ("Security Bank"), and
The Advantage Group, Inc. Habersham Bank owns all of the outstanding stock of
BancMortgage Financial Corp ("BancMortgage"), Appalachian Travel Service, Inc.
("Appalachian") and Advantage Insurers, Inc. ("Advantage Insurers"). The
Advantage Group, Inc. is a non-bank subsidiary which engages in the business of
providing certain management consulting advice to depository institutions.
<PAGE>   15

Advantage Insurers, which began operations on March 31, 1997, offers a full
line of property, casualty and life insurance products. The Advantage Group,
Inc., Appalachian and Advantage Insurers do not comprise a significant portion
of the financial position, results of operations or cash flows of the Company.
Management's discussion and analysis, which follows, relates primarily to
Habersham Bank, Security Bank and BancMortgage.

         BancMortgage was organized in 1996 as a full service mortgage and
construction lending company located in the northern Atlanta metropolitan area.
During the third quarter of 1997, BancMortgage acquired for approximately
$60,000 the assets and certain liabilities of The Prestwick Mortgage Group, a
national investment banking and advisory firm specializing in the brokerage and
evaluation of mortgage-related assets. As a result of the acquisition,
BancMortgage does business as The Prestwick Mortgage Group and as BancFinancial
Services Corporation, a full-service wholesale mortgage lender specializing in
sub-prime mortgage loans, in the mid-Atlantic area.

RESULTS OF OPERATIONS

         The Company's net income was $2,057,901, $2,157,276 and $1,907,849 for
the years ended December 31, 1998, 1997 and 1996, respectively, with related
diluted earnings per common and common equivalent share of $ .83, $.86 and
$.79, respectively, representing a decrease of 3.49% from 1997 to 1998 and an
increase of 8.86% from 1997 to 1996. The decrease in net income for 1998 was
primarily due to a decrease in net yield on interest earning assets and
increases in other operating expenses. The increase in net income for 1997 was
primarily due to the increase in revenue from BancMortgage operations. Net
income represents a return on average equity of 6.63%, 7.48% and 7.16% for
1998, 1997 and 1996, respectively.

NET INTEREST INCOME

         Net interest income is the largest single source of income for the
Company. Management strives to attain a level of earning asset growth while
providing a net yield on earning assets which will cover overhead and other
costs and provide a reasonable return to our shareholders. Net interest income
for 1998 was approximately $13.9 million compared to $13.7 million in 1997 and
$12.3 million in 1996. Net interest income for 1998 increased approximately
$211,000 or 1.55% when compared to 1997 and increased approximately $1.3
million or 10.82% when compared to 1996.

         Interest income increased approximately $2.0 million or 7.40% in 1998
when compared to 1997 and increased approximately $3.6 million or 15.39% in
1997 when compared to 1996. The increase in interest income for 1998 resulted
primarily from increases in the loan portfolio of the Company, offset by a
reduced average yield on the loan portfolio. The increase in interest income
for 1997 resulted primarily from an increase of approximately $5.6 million in
the loan portfolio, offset by a reduced average yield on the loan portfolio.
The Company's loan portfolio increased approximately $11.5 million from
December 31, 1997 to December 31, 1998 due to approximately $70.2 million of
new loans offset by sales of approximately $58.7 million in residential
mortgages and construction loans. BancMortgage's loan portfolio increased by
approximately $35 million from December 31, 1997 to December 31, 1998,
resulting from originations of approximately $665 million and sales of
approximately $630 million. Average interest rates on loans were 9.37%, 10.03%
and 10.47% in 1998, 1997 and 1996, respectively. Yields on variable rate
residential mortgages decreased during 1998 in response to movements on various
indices.
<PAGE>   16

         Weighted average interest rates on investment securities were 5.52%,
5.82% and 5.78% in 1998, 1997 and 1996, respectively. Average interest rates on
federal funds sold were 5.33%, 5.80% and 5.66% in 1998, 1997 and 1996,
respectively.

         The increase in interest expense for 1998 of $1.8 million over 1997
resulted primarily from additional interest expense on increased average
balances of interest bearing deposits of approximately $33.4 million when
compared to 1997 average balances and on increased average Federal Home Loan
Bank advances of approximately $4.6 million when compared to 1997 average
advances. The weighted average interest rate paid on deposits in 1998 increased
to 5.24% compared to 5.18% in 1997. The average interest rate paid on Federal
Home Loan Bank advances decreased to 5.30% compared to 6.21% in 1997. The
increase in interest expense for 1997 of $2.3 million over 1996 resulted
primarily from additional interest expense on increased average balances of
interest bearing deposits of approximately $26 million when compared to 1996
average balances and on increased average Federal Home Loan Bank advances of
approximately $6.2 million when compared to 1996 average advances. The weighted
average interest rate paid on deposits in 1997 decreased to 5.18% when compared
to 5.62% in 1996. The average interest rate paid on Federal Home Loan Bank
advances increased to 6.21% compared to 5.09% in 1996.

         The net interest margin of the Company was 4.08% in 1998, 4.65% in
1997 and 4.89% in 1996. Net interest margin decreased primarily due to
increases in interest expense paid on certificates of deposits and a decrease
in yields on loans.

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID

         Average assets rose approximately $49.3 million or 15.67% in 1998 and
$43.9 million or 16.23% in 1997 over 1996. Average loan balances increased
approximately $31.2 million or 13.18% in 1998 over 1997 and approximately $47.7
million or 25.30% in 1997 over 1996. Average balances in investment securities
increased approximately $14.8 million or 33.48% in 1998 over 1997 and decreased
approximately $8.4 million or 15.93% in 1997 over 1996. The average balance of
federal funds sold in 1998 increased approximately $716,667 or 10.22% when
compared to 1997 and decreased approximately $1 million or 12.80% in 1997 when
compared to 1996.

         The average balance of deposits for 1998 increased by approximately
$36.3 million or 15.26% over 1997 and increased by approximately $27.6 million
or 13.10% over 1996.
<PAGE>   17

         The following table sets forth the consolidated average balance sheets
for the Company, average rates earned on interest earning assets, average rates
paid on deposits and borrowed funds, interest income and interest expense for
each category of interest earning assets and interest bearing liabilities, and
net interest margin. This information is presented for the years ended December
31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                        1998            1997          1998      1997        1998           1997
                                       AVERAGE         AVERAGE       YIELD/    YIELD/      INCOME         INCOME
                                       BALANCE         BALANCE       RATES     RATES      (EXPENSE)      (EXPENSE)

<S>                                 <C>              <C>             <C>       <C>      <C>             <C>
ASSETS

Interest bearing balances
 with other banks                   $     99,000     $    168,516     6.60%     6.66%   $     6,534     $    11,217
Federal funds sold                     9,393,451        7,015,000     5.33%     5.80%       500,504         406,956
Investment securities:(2)
 Taxable                              32,749,495       21,631,576     5.71%     6.24%     1,869,012       1,349,570
 Non-taxable                          22,633,929       19,842,315     5.25%     5.37%     1,188,040       1,064,947
                                    ------------     ------------
 Total investment securities          55,383,424       41,473,891

Trading Securities                     1,064,899
Other Investments                      2,894,675        2,985,316
Loans, net (taxable)(1)              267,857,590      236,673,265     9.37%    10.03%    25,088,953      23,743,448
Cash and due from banks               10,729,293        8,948,696
Premises & equipment                   8,429,133        7,827,736
Other assets                           8,346,333        9,776,640
                                    ------------     ------------                      ------------    ------------
TOTAL ASSETS                        $364,197,798     $314,869,060                        28,653,043      26,576,138
                                    ============     ============                      ============    ============

LIABILITIES

Money market & NOW                  $ 53,598,039     $ 44,119,467     3.20%     3.10%    (1,717,837)     (1,366,113)
Savings accounts                       8,254,196        7,790,505     2.71%     2.78%      (224,025)       (216,384)
Certificates of deposit              184,802,058      161,251,544     5.94%     5.86%   (10,970,060)     (9,454,476)
Short-term and other
 borrowings                           41,073,525       36,501,152     5.30%     6.21%    (2,178,631)     (2,268,193)
Demand deposit accounts               27,892,056       25,026,047
Other liabilities                     17,541,259       11,331,058                      
                                                                                       ------------    ------------
                                                                                        (15,090,553)    (13,305,166) 
                                                                                       ------------    ------------  
                                                                                       
Shareholders' equity                  31,036,665       28,849,287
                                    ------------     ------------

TOTAL LIABILITIES & EQUITY          $364,197,798     $314,869,060
                                    ============     ============

NET INTEREST MARGIN                                                   4.08%     4.65%   $13,562,490     $13,270,972
                                                                                        ===========     ===========
</TABLE>

<PAGE>   18

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE AND AVERAGE YIELDS
EARNED AND RATES PAID, CONTINUED

<TABLE>
<CAPTION>
                                            1996           1996         1996
                                          AVERAGE         YIELD/       INCOME
                                          BALANCE         RATES       (EXPENSE)

<S>                                    <C>                <C>        <C>
ASSETS
Interest bearing balances
 with other banks                      $    279,148        6.74%     $    18,824
Federal funds sold                        8,045,000        5.66%         455,733
Investment securities:(2)
 Taxable                                 29,121,828        5.99%       1,744,496
 Non-taxable                             20,821,319        5.49%       1,143,088
                                       ------------
 Total investment securities             49,943,147 

Other investments                         2,940,600
Loans, net (taxable)(1)                 188,885,803       10.47%      19,773,296
Cash and due from banks                   7,038,373
Premises & equipment                      5,414,446
Other assets                              8,346,113
                                       ------------                  -----------
TOTAL ASSETS                           $270,892,630                   23,135,437
                                       ============                  ===========
LIABILITIES

Money market & NOW                     $ 37,566,357        3.04%      (1,140,686)
Savings accounts                          7,639,507        2.71%        (206,935)
Certificates of deposit                 141,763,866        5.75%      (8,153,533)
Short-term and other
 borrowings                              30,316,397        5.09%      (1,542,481)
Demand deposit accounts                  23,626,106 
                                                                     -----------
Other liabilities                         3,335,003                  (11,043,635)
                                                                     -----------
Shareholders' equity                     26,645,394
                                       ------------

TOTAL LIABILITIES & EQUITY             $270,892,630
                                       ============

NET INTEREST MARGIN                                        4.89%     $12,091,802
                                                                     ===========
</TABLE>

(1)      Interest earnings on nonaccrual loans are included in the foregoing
         analysis to the extent that such interest earnings had been recorded
         during 1998, 1997 and 1996.
(2)      Average yields for available for sale securities are computed using
         the historical cost balances. Such yields do not give effect to
         changes in fair value that are reflected as a component of
         shareholders' equity.
<PAGE>   19

The following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in volume and rates for the periods
indicated:

<TABLE>
<CAPTION>
                                                1998 AS COMPARED TO 1997                       1997 AS COMPARED TO 1996
                                               INCREASE (DECREASE) DUE TO                     INCREASE (DECREASE) DUE TO
                                           NET           RATE(1)      VOLUME(1)           NET        RATE(1)      VOLUME(1)
                                      ------------------------------------------   ------------------------------------------

<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
INTEREST BEARING ASSETS
 Interest bearing balances
  with other banks                    $     (4,683)  $        (53)  $     (4,630)  $     (7,607)  $       (150)  $     (7,457)
 Investment securities:
  Taxable                                  519,442       (174,316)       693,758       (394,926)        53,740       (448,666)
  Non-taxable                              123,093        (26,817)       149,910        (78,141)       (24,394)       (53,747)
                                      ------------   ------------   ------------   ------------   ------------   ------------
   Total Investment securities             642,535       (201,133)       843,668       (473,067)        29,346       (502,413)

 Federal funds sold                         93,548        (44,402)       137,950        (48,777)         9,521        (58,298)
 Loans, net (taxable)                    1,345,505     (1,782,283)     3,127,788      3,970,152     (1,033,195)     5,003,347
                                      ------------   ------------   ------------   ------------   ------------   ------------

    TOTAL INTEREST INCOME                2,076,905     (2,027,871)     4,104,776      3,440,701       (994,478)     4,435,179
                                      ------------   ------------   ------------   ------------   ------------   ------------

INTEREST BEARING LIABILITIES
 Money market & NOW                        351,724         57,888        293,836        225,428         26,211        199,217
 Savings accounts                            7,641         (5,250)        12,891          9,449          5,357          4,092
 Certificates of deposit                 1,515,584        135,524      1,380,060      1,300,943        180,402      1,120,541
 Short-term and
  other borrowings                         (89,562)      (373,506)       283,944        725,711        410,908        314,803
                                      ------------   ------------   ------------   ------------   ------------   ------------

    TOTAL INTEREST EXPENSES              1,785,387       (185,344)     1,970,731      2,261,531        622,878      1,638,653
                                      ------------   ------------   ------------   ------------   ------------   ------------

NET INTEREST INCOME                   $    291,518   $ (1,842,527)  $  2,134,045   $  1,179,170   $ (1,617,356)  $  2,796,526
                                      ============   ============   ============   ============   ============   ============
</TABLE>

(1) The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the rate component.

OTHER INCOME AND OTHER EXPENSE

         Noninterest income in 1998 increased $7.7 million or 95.51% when
compared to 1997 and increased $5.8 million or 253.77% when compared to 1996.
These increases were due primarily to increases in loan fee income of
approximately $1 million and $869,000 for 1998 and 1997, respectively and
increases in gains on sale of loans of approximately $5.8 million and $3.8
million for 1998 and 1997, respectively. These increases are attributable to
the operations of BancMortgage beginning in 1996. In addition, sales income
from Appalachian Travel Services, a business acquired in 1996, increased
approximately $135,000 and $849,000 for 1998 and 1997, respectively.

         Other noninterest expense in 1998 increased by approximately $7.8
million or 42.38% as compared to 1997 and the 1997 amount increased
approximately $6.6 million or 56.53% as compared to 1996. The increase for 1998
was primarily due to increases of $6,001,018, $472,378 and $1,026,836 in
personnel, occupancy and other operating expenses, respectively. The increase
for 1998 was primarily due to increases in personnel, occupancy expenses and
other operating expenses resulting from a full year of operations in banking
and mortgage banking locations which began mid-year 1997. These expenses were
increased further by the opening of new locations in Hall and Fayette Counties
by BancMortgage. The increase for 1997 was primarily due to increases of
$4,188,043, $639,805 and $895,347 in personnel, occupancy and other operating
expenses, respectively. These increases are the result of staffing requirements
and operating expenses for the new Cleveland Office - Habersham Bank, the new
Waleska Office - Security Bank and new offices for BancMortgage in Cobb and
Fulton counties. BancMortgage also expanded into Virginia with the acquisition
of The Prestwick Group and BancFinancial Services Corporation.
<PAGE>   20

PROVISION FOR LOAN LOSSES

         The Company's provision for loan losses is intended to create an
adequate allowance for losses in the loan portfolio at the end of each
reporting period. The provision for loan losses was $692,500 in 1998 as
compared to $422,000 in 1997 and $360,000 in 1996. The Company's allowance for
loan losses was $2,709,570 at December 31, 1998, which was l.29% of year-end
loans and 115.54% of total nonperforming loans, as compared to $2,336,079 at
December 31, 1997, which was 1.18% of year-end loans and 108.1% of total
nonperforming loans.

         At December 31, 1998, loans over 90 days past due and nonaccrual loans
totaled $3,022,267 or 1.44% of gross outstanding loans as compared to
$2,533,157 or 1.28% of gross outstanding loans at December 31, 1997. The
increase for 1998 was primarily due to the addition of nonaccrual and past due
real estate mortgages of approximately $980,000 and $234,000, respectively,
from BancMortgage operations offset by decreases in 90 days past due loans,
other real estate, nonaccrual and restructured loans of approximately $503,000,
$367,000, $225,000 and $64,000, respectively. The increase for 1997 was
primarily due to the addition of two loans totaling approximately $1.1 million
having Small Business Administration guarantees between 80% and 85%.

         Management is not aware of any loans classified for regulatory
purposes as loss, doubtful, substandard or special mention that have not been
disclosed which 1) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or 2) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.

         Net charge-offs amounted to $319,009 in 1998 representing .12% of
average loans, as compared to $347,327 in 1997, representing .15% of average
loans, as compared to $434,382 in 1996, representing .23% of average loans.
<PAGE>   21

         The following table summarizes, for each of the years in the five year
period ended December 31, 1998, selected information related to the allowance
for loan losses:

<TABLE>
<CAPTION>
                                             1998           1997            1996            1995            1994

<S>                                     <C>            <C>             <C>             <C>             <C>
Balance of allowance for loan
 losses at beginning of period          $  2,336,079   $  2,261,406    $  2,335,788    $  1,744,335    $  1,601,902
                                        ------------   ------------    ------------    ------------    ------------
Balance of allowance of Security
 Bank at June 30, 1995                                                                      628,371

Loans charged-off:
 Commercial, financial &
  agricultural                              (221,048)      (224,976)       (183,218)        (22,252)        (37,146)
 Real estate                                 (77,764)      (142,871)       (256,126)        (47,110)        (17,011)
 Installment loans to individuals           (140,809)      (145,373)       (108,660)        (44,242)        (49,962)
 Other                                       (22,157)       (34,390)        (23,014)        (62,230)        (21,025)
                                        ------------   ------------    ------------    ------------    ------------
Total charged-off loans                     (461,778)      (547,610)       (571,018)       (175,834)       (125,144)
                                        ------------   ------------    ------------    ------------    ------------
Recoveries:
 Commercial, financial &
  agricultural                                59,284         22,454          32,857           5,566           1,893
 Real estate                                  16,850        108,247          65,150           1,610           4,772
 Installment loans to individuals             55,071         61,324          28,760          17,429          15,387
 Other                                        11,564          8,258           9,869          16,268          37,429
                                        ------------   ------------    ------------    ------------    ------------
Total recoveries                             142,769        200,283         136,636          40,873          59,481
                                        ------------   ------------    ------------    ------------    ------------
 Net charge-offs                            (319,009)      (347,327)       (434,382)       (134,961)        (65,663)

 Additions to allowance                      692,500        422,000         360,000          98,043         208,096
                                        ------------   ------------    ------------    ------------    ------------
 Balance of allowance for loan
  losses at end of period               $  2,709,570   $  2,336,079    $  2,261,406    $  2,335,788    $  1,744,335
                                        ============   ============    ============    ============    ============

 Average amount of loans                $267,857,590   $236,673,265    $188,885,803    $122,451,274    $ 97,723,297
                                        ============   ============    ============    ============    ============

 Ratio of net charge-offs during
  the period to average loans
  outstanding during the period                  .12%           .15%            .23%         .11%               .07%

 Ratio of allowance to year-end loans           1.29%          1.18%           1.09%        1.61%              1.73%
</TABLE>

         The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial, or real estate) and its
maturity. Cash flows adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions.

         The Company's provision for loan losses is based upon management's
continuing review and evaluation of the loan portfolio and is intended to
create an allowance adequate to absorb losses on loans outstanding as of the
end of each reporting period. For individually significant amounts,
management's review consists of evaluations of the borrowers' strength, value
of the related collateral and other factors. This evaluation is made by
classifying loans based on values assigned to each of the aforementioned
variables. These classifications are assigned by the loan reviewers and are
reviewed by the Board of Directors. Totals by loan classification, along with
related historical loss ratios, regulatory requirements and specific Collateral
evaluations, are used to determine the allowance required to provide for losses
on the classified loans. The review of groups of loans, which are individually
insignificant, is based upon delinquency status of the group, lending policies
and previous collection experience of each category. The effects of current
conditions on specific industries or classes of borrowers are also considered
in determining the general allowances for loan losses on this non-classified
portion of the loan portfolio. Management believes its allowance for loan
losses is adequate to absorb losses on loans outstanding at December 31, 1998.
<PAGE>   22

         The allocation of the allowance for loan losses by loan category at
December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                  1998                           1997
                                                            PERCENT OF LOANS               PERCENT OF LOANS
                                                            IN EACH CATEGORY               IN EACH CATEGORY
                                                 AMOUNT      TO TOTAL LOANS     AMOUNT      TO TOTAL LOANS

     <S>                                       <C>          <C>               <C>          <C>
     Commercial, financial & agricultural      $  440,776          6.6%       $  720,380        7.9%
     Real estate                                2,026,139         85.2%        1,133,044       84.0%
     Installment loans to individuals             186,155          8.2%          482,655        8.1%
     Loans held for sale                          56, 500          0.0%               --        0.0%
                                               ----------        -----        ----------      -----
          TOTAL                                $2,709,570        100.0%       $2,336,079      100.0%
                                               ==========        =====        ==========      =====
</TABLE>

         Prior to 1997, the Company used an alternative method to determine the
allowance for loan losses. The Company began the allocation of the allowance
for loan losses by loan categories in 1997.

LOANS

         Loans, exclusive of loans held for sale, increased approximately $11.5
million or 5.82%, in 1998 as compared to 1997 and decreased approximately $8.6
million or 4.17% in 1997 as compared to 1996. The increase in the Company's
loan portfolio in 1998 resulted primarily from approximately $70.2 million of
new loans offset by sales of approximately $58.7 million in construction loans
and residential mortgages. The Company's loan portfolio decreased $8.6 million
in 1997 due to the sale of approximately $37 million in residential mortgages
which had been originated by BancMortgage and purchased by Habersham Bank,
offset by new loans in 1997. Loans held for sale increased approximately $34.6
million or 92.38% in 1998 when compared to 1997 and increased approximately
$14.2 million or 60.99% in 1997 when compared to 1996 due to continued
increased mortgage banking activity.

         The composition of the Company's loan portfolio changed during 1998 as
a result of an increase in real estate secured mortgage loans of approximately
$8.7 million or 8.31% as compared to 1997; construction loans increased
approximately $4.4 million or 7.09%, in 1998 as compared to 1997, and
commercial loans decreased $2.0 million or 12.61%, in 1998 as compared to 1997.
The composition of the Company's loan portfolio changed during 1997 as a result
of a decrease in real estate secured mortgage loans of approximately $18.5
million or 15.09% as compared to 1996; construction loans increased
approximately $11.7 million or 23.28% in 1997 as compared to 1996, and
commercial loans decreased $2.4 million or 13.49% in 1997 as compared to 1996.

         The amount of loans outstanding at December 31 for each of the last
five years is set forth in the following table according to type of loan and is
net of unamortized loan origination fees and unamortized discounts. The Company
had no foreign loans at December 31 for each of the last five years.

<TABLE>
<CAPTION>
                                             1998           1997         1996             1995          1994

<S>                                      <C>            <C>            <C>            <C>            <C>
Commercial, financial and agricultural   $ 13,829,965   $ 15,824,792   $ 18,292,993   $ 17,945,695   $ 13,653,109
Real estate - construction                 66,359,030     61,965,365     50,263,496     16,512,884      5,564,753
Real estate - mortgage                    112,256,033    104,347,783    122,897,806     96,361,817     68,992,708
Installment loans to individuals           17,337,632     16,115,903     15,410,015     14,613,500     12,637,913
                                         ------------   ------------   ------------   ------------   ------------
    Total                                $209,782,660   $198,253,843   $206,864,310   $145,433,896   $100,848,843
                                         ============   ============   ============   ============   ============
</TABLE>

<PAGE>   23
         The following table sets forth the maturities and sensitivities to
changes in interest rates of loans at December 31, 1998.

<TABLE>
<CAPTION>
                                                                                DUE AFTER
                                                                 DUE IN         ONE THROUGH     DUE AFTER
                                                                 ONE YEAR       FIVE YEARS      FIVE YEARS            TOTAL
                                                                 ----------     -----------     -----------           -----
<S>                                                              <C>            <C>    <C>      <C>            <C>    
LOAN MATURITY
  Commercial, financial
   and agricultural .....................................        $ 8,218,014    $4,575,014      $ 1,036,937     $13,829,965
  Real estate - construction ............................         64,641,241     1,717,789               --      66,359,030
                                                                 -----------    ----------      -----------     -----------
       TOTAL ............................................        $72,859,255    $6,292,803      $ 1,036,937     $80,188,995
                                                                 ===========    ==========      ===========     ===========

LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
 Predetermined interest rates ...........................        $18,533,584    $4,662,814      $   246,080     $23,442,478
 Floating or adjustable
  interest rates ........................................         54,325,671     1,629,989          790,857      56,746,517
                                                                 -----------    ----------      -----------     -----------
    TOTAL ...............................................        $72,859,255    $6,292,803      $ 1,036,937     $80,188,995
                                                                 ===========    ==========      ===========     ===========
</TABLE>

NONPERFORMING ASSETS AND PAST DUE LOANS

         Nonperforming assets consist of nonaccrual loans, accruing loans 90
days past due, restructured loans and other real estate owned. Nonperforming
assets increased $57,127 or 1.07% from December 31, 1997 to December 31, 1998
and increased $619,247 or 13.08% from December 31, 1996 to December 31, 1997.
The increase for 1998 was primarily due to the addition of nonaccrual and past
due real estate mortgages of approximately $980,000 and $234,000, respectively,
from BancMortgage operations offset by decreases in 90 days past due loans,
other real estate, nonaccrual and restructured loans of approximately $503,000,
$367,000, $225,000 and $64,000, respectively. The increase for 1997 was
primarily due to the increase in other real estate owned.

         The following table sets forth the totals of nonperforming assets,
selected ratios and accruing loans past due 90 days or more at December 31 for
each of the last five years.

<TABLE>
<CAPTION>
     NONPERFORMING ASSETS:                      1998           1997          1996           1995          1994

     <S>                                    <C>            <C>           <C>            <C>           <C>
     Accruing loans 90 days past due        $1,013,009     $1,282,000    $  377,000     $  258,000    $  196,017
     Nonaccrual                              2,009,258      1,251,157       981,801      1,022,683       568,822
     Restructured loans                        849,963        913,753       973,559      1,227,411     1,318,790
     Other real estate owned                 1,539,900      1,908,094     2,403,397      1,217,860     1,165,954
                                            ----------     ----------    ----------     ----------    ----------
       Total nonperforming assets           $5,412,130     $5,355,004    $4,735,757     $3,725,954    $3,249,583
                                            ==========     ==========    ==========     ==========    ==========
     RATIOS:
     Nonperforming loans (excluding
      restructured loans) to total loans          1.44%          1.28%          .66%           .88%          .76%
     Nonperforming assets to total loans
      plus other real estate owned                2.56%          2.68%         2.26%          2.51%         3.19%
     Allowance to nonperforming assets           50.06%         43.62%        47.75%         62.69%        53.68%
</TABLE>

         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 in management's opinion, when reasonable doubt exists
as to the full collection of interest or principal. Interest income that would
have been recorded on these nonaccrual and restructured loans in accordance
with their original terms totaled $401,099, $289,782 and $213,484,
respectively, in 1998, 1997 and 1996, compared with interest income recognized
of $274,557, $252,930 and $180,780, respectively.

         At December 31, 1998, the Company had no significant loans which
management designated as potential problem loans which have not been disclosed
above as nonaccrual or past due loans.
<PAGE>   24

         Habersham Bank held a concentration in mortgages for agribusiness
purposes in the poultry industry which totaled approximately $10 million, or
approximately 4.67% of total net loans at December 31, 1998 and which totaled
approximately $12 million, or approximately 6.34% of total net loans at
December 31, 1997.

INVESTMENT SECURITIES

         The Company has classified its investment securities as available for
sale, held to maturity, or trading. The classification of certain investment
securities as available for sale is consistent with the Company's investment
philosophy of maintaining flexibility to manage the securities portfolio. At
December 31, 1998, approximately $46.3 million of investment securities were
classified as available for sale. Approximately $263,000 of net unrealized
gain, net of income taxes, was included in shareholders' equity related to the
available for sale investment securities.

         On September 30, 1998, the Company exercised its previously acquired
option to purchase a 26.5% interest in Empire Bank Corp. ("Empire"),
Homerville, Georgia at a total cost of $3,017,406. Subsequent to the Company
acquiring its option to purchase this interest in Empire, Empire entered into a
definitive agreement to be acquired by FLAG Financial Corp. ("FLAG"). Upon the
exchange of its common stock in Empire for the common stock of FLAG during
December, the Company recorded the investment in the common stock of FLAG as a
trading security and recorded an unrealized gain of $478,134 which is reflected
in earnings.

         The following table sets forth the carrying amounts of investment
securities at December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                                 1998             1997            1996
<S>                                          <C>              <C>             <C>
Investment securities available for sale:
    U.S. Treasury                            $   200,812      $   201,438     $   801,003
    U.S. Government agencies                  31,678,154       20,982,863      21,625,933
    States & political subdivisions           13,767,110       11,345,182       8,520,859
    Other investments                            693,936          694,940         680,881
                                             -----------      -----------     -----------
      Total                                  $46,340,012      $33,224,423     $31,628,676
                                             ===========      ===========     ===========

Investment securities held to maturity:
    U.S. Government agencies                 $ 3,911,279      $ 1,351,357     $ 2,187,521
    States & political subdivisions           11,600,284        9,954,423      12,122,431
    Other investments                             99,000           99,000         198,000
                                             -----------      -----------     -----------
      Total                                  $15,610,563      $11,404,780     $14,507,952
                                             ===========      ===========     ===========

Trading securities                           $ 3,495,540               --              --
                                             ===========                                  
</TABLE>
<PAGE>   25

         The following table sets forth the maturities of investment securities
at December 31, 1998 and the related weighted yields of such securities on a
tax equivalent basis (assuming a 34% tax rate).

<TABLE>
<CAPTION>
                                                              MATURING IN
                                                  ONE YEAR         1-5         5-10         AFTER 10
                                                  OR LESS         YEARS       YEARS          YEARS

<S>                                             <C>            <C>           <C>           <C>
Investment securities available for sale:
Carrying Value:
 U.S. Treasury                                  $  200,812
 U.S. Government agencies                        1,245,367     $11,779,850   $  684,946    $17,967,991
 States & political subdivisions                 1,170,817       5,218,286    2,586,366      4,791,641
 Other investments                                                                             693,936

Weighted average yields:
 U.S. Treasury                                        6.15%
 U.S. Government agencies                             6.42%           5.76%        5.94%          6.67%
 States & political subdivisions                      6.45%           4.96%        5.10%          5.05%

Investment securities held to maturity:
Carrying Value:
 U.S. Government agencies                       $  101,792     $ 1,224,232   $  517,984    $ 2,067,271
 States & political subdivisions                   883,113       4,047,508    3,159,112      3,510,551
 Other investments                                  99,000

Weighted average yields:
 U.S. Government agencies                             7.42%           6.12%        6.92%          7.24%
 States & political subdivisions                      4.37%           4.85%        4.96%          6.12%
 Other Investments                                    6.60%
</TABLE>

         No securities were held which represent a combined total for one
issuer which is in excess of 10% of the Company's shareholders' equity at
December 31, 1998.

DEPOSITS

         Average deposits increased approximately $36.3 million and $27.6
million during 1998 and 1997, respectively.

         The following table sets forth the average amount of deposits and
average rate paid on such deposits for each category which exceeds 10% of
average total deposits for the years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>                           
                                                1998                          1997                      1998
                                              AVG. AMT         AVG          AVG. AMT        AVT       AVG. AMT        AVG
                                             OUTSTANDING       RATE        OUTSTANDING      RATE     OUTSTANDING      RATE
<S>                                          <C>               <C>         <C>              <C>      <C>              <C>
Interest bearing demand deposits             $ 53,598,039      3.20%       $ 44,119,467     3.10%    $ 37,566,357     3.04%
Noninterest bearing demand deposits            27,892,056       n/a          25,026,047      n/a       23,626,106      n/a
Time certificates of deposits                 184,802,058      5.94%        161,251,544     5.86%     141,763,866     5.75%
</TABLE>

         At December 31, 1998, time certificates of deposit of $100,000 or more
totaled $58,885,476. The maturities of all time certificates of deposit over
$100,000 are as follows:

<TABLE>
     <S>                                     <C>
     3 months or less                        $19,046,198 
     Over 3 but less than 6 months            12,519,527 
     Over 6 but not more than 12 months       18,884,387 
     Over 1 year but not more than 5 years     8,435,364
                                             -----------
       TOTAL                                 $58,885,476
                                             ===========
</TABLE>

OTHER BORROWINGS

         Other borrowings increased approximately $28.6 million during 1998 as
compared with 1997 as a result of borrowings of approximately $28.4 million
from the Federal Home Loan Bank and a $2.7 million note payable to the
<PAGE>   26

National Bank of Commerce of Birmingham in connection with the purchase of
Empire common stock offset by repayments of approximately $2.5 million. Other
borrowings decreased approximately $20.4 million during 1997 as compared with
1996 as a result of repayments to the Federal Home Loan Bank.

CAPITAL RESOURCES

         The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimal 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 financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.

         Quantitative measures established by regulations to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
below in the table) 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, 1998, that
the Company meets all capital adequacy requirements to which it is subject.

         As of December 31, 1998, the most recent notifications from both the
Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Banks 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 Banks' categories.

         The Company's actual capital amounts and ratios as of December 31,
1998 follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 TO BE WELL
                                                                                 CAPITALIZED
                                                                                 UNDER PROMPT
                                                                                 CORRECTIVE
                                                               FOR CAPITAL        ACTION
                                                ACTUAL     ADEQUACY PURPOSES     PROVISIONS
                                            AMOUNT  RATIO    AMOUNT    RATIO   AMOUNT   RATIO

<S>                                        <C>      <C>    <C>         <C>     <C>      <C>
As of December 31, 1998 
Total Capital (to risk-weighted assets):
  The Company                              $30,292  12.16%   $20,576     8%        N/A    N/A
  Habersham Bank                            21,636  10.34%    16,738     8%    $20,923     10%
  Security Bank                              7,466  14.48%     4,124     8%      5,155     10%

Tier I Capital (to risk-weighted assets):
  The Company                              $28,561  11.10%   $10,288     4%        N/A    N/A
  Habersham Bank                            19,459   9.30%     8,369     4%    $12,554      6%
  Security Bank                              6,934  13.45%     2,062     4%      3,093      6%

Tier I Capital (to average assets):
  The Company                              $28,561   7.46%   $15,315     4%        N/A    N/A
  Habersham Bank                            19,459   6.09%    12,783     4%    $15,979      5%
  Security Bank                              6,934  10.97%     2,529     4%      3,161      5%
</TABLE>
<PAGE>   27

         While management believes that the current level of capital is
sufficient for the current and foreseeable needs of the Company, capital needs
are continually evaluated by management.

         Treasury stock activity in 1997 consisted of 36,985 shares sold upon
exercise of options at a per share price of $8.33 and 5,207 shares sold under a
dividend reinvestment plan. Treasury stock activity in 1996 consisted of 38,000
shares sold upon exercise of options at a per share price of $7.52.

         Cash dividends were paid at a rate of $.04 per share in March, June,
September and December of 1998. Cash dividends were paid at a rate of $.035 per
share in March, June, September and December 1997. Cash dividends were paid at
a rate of $.03 per share in March, June, September and December 1996.

         Management is not aware of any required regulatory changes, or any
recommendation by any regulatory authority which will have a material effect on
the Company's liquidity, capital or results of operations.

INTEREST RATE SENSITIVITY

         The objective of asset and liability management is to manage and
measure the level and volatility of earnings and capital by controlling
interest rate risk. To accomplish this objective, management makes use of
interest rate and income simulation models to perform current and dynamic
projections of interest income and equity, as well as more traditional asset
and liability management methods.

         The Company's historical performance in various economic climates is
considered by management in making long-term asset and liability decisions for
the Company.

         The relative interest rate sensitivity of the Company's assets and
liabilities indicates the extent to which the Company's net interest income may
be affected by interest rate movements. The Company's ability to reprice assets
and liabilities in the same dollar amounts and at the same time minimizes
interest rate risks. One method of measuring the impact of interest rate
changes on net interest income is to measure, in a number of time frames, the
interest sensitivity gap, by subtracting interest sensitive liabilities from
interest sensitive assets, as reflected in the following table. Such interest
sensitivity gap represents the risk, or opportunity, in repricing. If more
assets than liabilities are repriced at a given time in a rising rate
environment, net interest income improves; in a declining rate environment, net
interest income deteriorates. Conversely, if more liabilities than assets are
repriced while interest rates are rising, net interest income deteriorates; if
interest rates are falling, net interest income improves.
<PAGE>   28

INTEREST RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                                      DUE IN        DUE AFTER      DUE AFTER        DUE AFTER      DUE AFTER  
                                           YIELD/     THREE      THREE THROUGH   SIX THROUGH      ONE THROUGH       FIVE
INTEREST EARNING ASSETS:                   RATE       MONTHS       SIX MONTHS    TWELVE MONTHS      FIVE YEARS      YEARS

<S>                                        <C>      <C>          <C>             <C>              <C>            <C>     
 Federal funds sold                        5.32%    $ 8,300,000                                                               
 Investment securities                     5.70%        799,514   $    886,639   $   2,014,747    $ 21,269,876   $ 36,979,799 
 Loans                                     9.37%     96,570,894     27,526,605      33,219,078      46,726,284     77,855,109 
                                           -----    -----------   ------------   -------------    ------------   ------------ 
 Total earning assets                      8.64%    105,670,408     28,413,244      35,233,825      67,996,160    114,834,908 
                                           -----    -----------   ------------   -------------    ------------   ------------ 

INTEREST BEARING LIABILITIES:

Deposits:
  Money Market and NOW                     3.20%     55,419,227                                                               
  Savings                                  2.71%      8,634,374                                                               
  Certificates of
    Deposit                                5.94%     70,022,596     34,157,231       49,549,736     34,247,061         14,859 
  Short term
    borrowings                             5.30%     53,950,230                                      2,700,000                
                                           -----    -----------   ------------   -------------    ------------   ------------ 
Total interest bearing
  liabilities                              5.33%    188,026,427   $ 34,157,231       49,549,736     36,947,061         14,859 
                                           ------  ------------   ------------   --------------   ------------   ------------ 

INTEREST RATE MARGIN                       4.08%
                                           ====

Excess (deficiency) of interest earning
 assets over (to) interest  
 bearing liabilities                               $(82,356,019)  $( 5,743,987)  $ (14,315,911)   $ 31,049,099   $114,820,049 
                                                   ============   ============   =============    ============   ============
Cumulative Gap                                     $(82,356,019)  $(88,100,006)  $(102,415,917)   $(71,366,818)  $ 43,453,231

Ratio of cumulative gap to
 total cumulative earning assets                         (77.94)%       (65.71)%       (60.49%)         (30.07%)        12.34%
Ratio of interest earning assets to
 interest bearing liabilities                             56.20%        60.35%          62.31%           76.88%        114.08%

<CAPTION>
                                                TOTAL
                                         
INTEREST EARNING ASSETS:                 
<S>                                           <C>
 Federal funds sold                           $  8,300,000
 Investment securities                          61,950,575
 Loans                                         281,897,970
                                              ------------
 Total earning assets                          352,148,545
                                              ------------

INTEREST BEARING LIABILITIES:

Deposits:
  Money Market and NOW                          55,419,227
  Savings                                        8,634,374
  Certificates of
    Deposit                                    187,991,483
  Short term
    borrowings                                  56,650,230
                                              ------------
Total interest bearing
  liabilities                                 $308,695,314
                                              ------------

INTEREST RATE MARGIN                     

Excess (deficiency) of interest earning
 assets over (to) interest  
 bearing liabilities                          $ 43,453,231
                                              ============
Cumulative Gap                           

Ratio of cumulative gap to
 total cumulative earning assets         
Ratio of interest earning assets to
 interest bearing liabilities            
</TABLE>

         The Company's strategy is to maintain a ratio of interest sensitive
assets to interest sensitive liabilities in the range of 60% to 140% at the
less than one year time frame. At December 31, 1998, the Company was able to
meet such objective. The interest rate sensitivity analysis has a negative one
year gap of approximately $102.4 million (excess of interest bearing
liabilities to interest earning assets repricing within one year). However, the
Company's experience has shown that NOW, IMMA and Savings deposits of
approximately $53.1 million are less sensitive to short term rate movements.

MARKET RISK

         Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. The risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.

         Market risk arises primarily from interest rate risk inherent in the
Company's lending and deposit taking activities. The structure of the Company's
loan and deposit portfolios is such that a significant decline in the prime
rate may adversely impact net market values and interest income. Management
seeks to manage this risk through the use of its investment securities
portfolio. The composition and size of the investment portfolio is managed so
as to reduce the interest rate risk in the deposit and loan portfolios while at
the same time maximizing the yield generated from the portfolio.

         The table below presents in tabular form the contractual balances and
the estimated fair value of the Company's balance sheet financial instruments
and their expected maturity dates as of December 31, 1998. The expected
maturity categories take into consideration historical prepayments experience
as well as management's expectations based on the interest rate environment as
of December 31, 1998.
<PAGE>   29

MARKET RISK INFORMATION (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                    PRINCIPAL/NOTIONAL AMOUNT MATURING IN:                            FAIR
                                           1999       2000        2001       2002      2003   THEREAFTER   TOTAL      VALUE

<S>                                     <C>         <C>         <C>         <C>       <C>     <C>         <C>        <C>
RATE-SENSITIVE ASSETS:
Fixed interest rate loans               $ 50,258    $10,100     $11,775     $5,389    $5,816    $75,576   $158,914   $155,285
Average interest rate                       8.81%      9.23%       9.15%      8.62%     8.43%      7.12%      8.56%

Variable interest rate loans              65,559      3,214       4,820      1,336     1,171     46,884    122,984    117,435
Average interest rate                       8.54%      9.13%       9.17%      9.32%     9.28%     10.09%      9.25%

Fixed interest rate securities             1,491      2,490       2,320      2,682     2,920     45,860     57,763     58,301
Average interest rate                       5.30%      4.84%       5.60%      5.15%     5.05%      6.07%      5.33%

Variable interest rate securities             --        248          --         --        --      3,940      4,188      4,188
Average interest rate                         --       5.01%         --         --        --       6.15%      5.58%

RATE-SENSITIVE LIABILITIES:
Savings and interest bearing checking     64,054         --          --         --        --         --     64,054     64,054
Average interest rate                       2.74%        --          --         --        --         --       2.74%

Fixed interest rate time deposits        139,270     17,967       8,293      9,310     1,216        144    176,200    184,235
Average interest rate                       5.78%      5.89%       6.07%      6.04%     6.35%      6.10%      5.78%

Variable interest rate time deposits      11,720         71          --         --        --         --     11,791     12,086
Average interest rate                       5.04%      4.78%         --         --        --         --       4.91%

Variable interest rate borrowings         56,650         --          --         --        --         --     56,650     56,650
Average interest rate                       5.40%        --          --         --        --         --       5.40%
</TABLE>

The trading securities of $3,495,540 are subject to changes in market values.

INFLATION

         The Company's assets and liabilities are generally monetary in nature.
Therefore, interest rates have a greater impact on the Company's performance
than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or magnitude as the prices of goods and
services. See "Interest Rate Sensitivity" above.

LIQUIDITY

         The Company's liquidity program is designed and intended to provide
guidance in funding the credit and investment activities of the affiliate banks
while at the same time ensuring that the deposit obligations of the affiliate
banks are met on a timely basis. In order to permit active and timely
management of assets and liabilities, these accounts are monitored regularly in
regard to volume, mix and maturity. Habersham Bank's liquidity policy requires
a minimum ratio of 20% of cash and certain short-term investments to net
withdrawable deposit accounts and Security Bank's liquidity policy requires a
minimum of 25%. The following table lists the liquidity ratios for the Banks.

<TABLE>
<CAPTION>
                                      1998         1997
                                     -----        -----
     <S>                             <C>          <C>
     Habersham Bank                  23.97%       30.64%
     Security Bank                   30.24%       25.51%
</TABLE>

         One of the sources of funds for Habersham Bancorp is dividends from
the subsidiary banks. The approval of the Georgia Department of Banking and
Finance is required if dividends declared by the Banks to the Company in any
<PAGE>   30

year will exceed 50% of the net income of the Banks for the previous calendar
year. As of December 31, the Banks could declare dividends to the Company up to
approximately $1,128,000 without regulatory approval.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective for
financial statements for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company does not believe the provisions of SFAS No.
133 will have a significant impact on the financial statements, as the Company
does not have a material amount of derivative instruments.

YEAR 2000

         The Company recognizes that there is a business risk in computerized
systems as the next century approaches. The Company has defined Year 2000
readiness as computerized systems used by the Company having the ability to: 1)
correctly process dates before and after the year 2000, 2) recognize the year
2000 as a leap year, 3) accept and display dates unambiguously, and 4) process
logic dates that are used for "non-date function."

         The Company has developed an ongoing Action Plan designed to ensure
that its operational and financial systems will not be adversely affected by
failures due to processing errors arising from calculations using the year 2000
date or other operations that are date sensitive. The Action Plan consists of
five phases: Awareness, Assessment, Remediation, Validation and Implementation.
The Company has formed a Year 2000 committee assigned to this project and the
Boards of Directors and senior management of the Company have established year
2000 compliance as a strategic initiative. The Year 2000 Committee meets on a
monthly basis to monitor testing progress as well as all other aspects of the
Year 2000 issue.

         During 1998, the Year 2000 Committee successfully completed the
Awareness, Assessment and Remediation Phases of our Year 2000 Action Plan.
Validation is also substantially completed. All remaining testing will be
concluded by June 30, 1999. The Implementation Phase is also well under way.
The activities involved in each phase are described below.

Assessment Phase - In the Assessment Phase, the Company inventoried all
hardware, software and non-computerized systems. Each inventory item has been
prioritized as to its Year 2000 compliance.

Awareness Phase - A Customer Awareness Committee was formed to develop a plan
for communication tools to be utilized throughout 1999 in an effort to ensure
that our customers are aware of the impact that Year 2000 issues may have on
their individual businesses and also to assure our customers that we are making
every effort to ensure the stability and continued service to our customers
into the next millennium. Communications tools used by the Customer Awareness
Committee include informational brochures, newsletters, seminars, toll free
telephone numbers, and contact personnel identified for each subsidiary.

Remediation and Validation Phase - As a part of the remediation phase, a Year
2000 Contingency Committee developed a business resumption contingency plan as
well as a business remediation contingency plan. This Year 2000 Contingency
Plan has been completed and approved by the Boards of Directors. Validation of
the Plan should be complete by June 30, 1999. The Plan addresses worst case
scenarios such as total or partial failure of our mainframe operating system as
well as other software that plays an integral part in the day to day
<PAGE>   31

operations of our Company. The Plan details the resources and procedures
necessary to manually process transactions in the event the core systems do not
function on January 1, 2000. Alternative methods of providing service in the
event of other disasters, such as a power failure, are addressed in the plan
also. In addition, the Company has made every attempt to address external
risks, primarily credit and liquidity, associated with our major customers and
businesses. The way that these material customers approach and comply with the
Year 2000 will have a potential significant impact on the Company. In an effort
to identify and manage the risks posed by those customers, the Company has
identified material customers; evaluated their Year 2000 preparedness through
questionnaires and interviews; assessed their Year 2000 risk to the Company;
and implemented appropriate controls to manage and mitigate their Year 2000
risk to the Company. Currently, there are no significant customers which are
rated as "high" Year 2000 risk and which the Company believes present a
significant risk of loss. This Year 2000 Contingency Plan has been completed
and approved by the Boards of Directors. Validation of the Plan should be
complete by June 30, 1999.

Implementation Phase - Testing of our systems was substantially complete as of
December 31, 1998. All testing appears to have been successful. However, the
Company's information technology ("IT") systems are comprised of third party
application and operating systems used in accounting functions related to
lending and deposit activities. The IT systems also consist of hardware, both
including main frame computer equipment and personal computers. Since we are
not the manufacturer of the products and systems on which we rely, we have also
been working with our third party vendors to determine whether there are any
outstanding Year 2000 problems. All systems identified as mission critical have
been certified as Year 2000 compliant by vendors providing the software
applications or hardware. Non-IT systems, such as door security and vault time
locks which may be date sensitive, have been identified as well and have been
included in the testing program of the Company. These efforts are scheduled to
be completed well in advance of December 31, 1999.

Cost - At December 31, 1998, costs incurred for Year 2000 related upgrades of
computer equipment and software totaled approximately $15,000 and are included
in other operating expenses. A Year 2000 budget of less than $100,000 has been
established for systems that must be upgraded or remediated during 1999.
Approximately 60% of the budgeted Year 2000 cost is anticipated to be
capitalized. This amount is not expected to have a material effect on the
Company's financial condition or results of operations for 1999.

Liquidity - In an attempt to ensure that the Banks have sufficient liquidity to
cover potential cash withdrawals prior to the Year 2000, the Year 2000
Contingency Plan requires monitoring of cash levels, communication with
depositors regarding Year 2000 readiness and the availability of FDIC deposit
insurance and ensuring that the Banks have available lines of credit to meet
immediate cash requirements.

   Based on information currently available, while management anticipates there
could be isolated and intermittent disruptions of various services, there is no
expectations of extensive system failures that would have a material adverse
effect on the financial condition or results of operations of the Company.
<PAGE>   32

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)     QUARTER ENDED

<TABLE>
<CAPTION>
                                   MARCH 30   JUNE 30   SEPT. 30  DEC. 31
                          (Dollars in thousands except per share amounts)
   <S>                             <C>        <C>       <C>       <C>
   1998:
      Interest income                $6,910    $7,226     $7,366   $7,457
      Net interest income             3,420     3,446      3,513    3,489
      Net income                        443       419        604      592
      Per share - basic                 .18       .17        .25      .24
      Per share - diluted               .18       .17        .24      .24

   1997:
     Interest income                 $6,487    $6,626     $6,880   $6,969
     Net interest income              3,243     3,520      3,499    3,395
     Net income                         617       523        468      549
     Per share - basic                  .26       .22        .20      .23
     Per share - diluted                .25       .21        .19      .21
</TABLE>

         Cash dividends were paid on a quarterly basis at a rate of $.04 per
share of common stock in 1998 and $.035 per share of common stock in 1997.

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         See "Market Risk" under Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and incorporated herein by
reference.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated balance sheets of the Company as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows and notes to the consolidated
financial statements for each of the years in the three years ended December 31,
1998, and the reports issued thereon by the Company's independent public
accountants are attached hereto as Exhibit 13 and are incorporated herein by
reference.

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         On February 25, 1997, the Company replaced its existing independent
public accounting firm, Deloitte & Touche LLP ("Deloitte"), with KPMG LLP.
Neither of Deloitte's reports on the Company's financial statements for the
years ended December 31, 1995 or 1996 contained an adverse opinion or a
disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles. The change of accountants was approved by the
Board of Directors. The Company had no disagreements with Deloitte during any
of the years ended December 31, 1995 or 1996 or during the interim period
through February 25, 1997 (date of dismissal) on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure that would have caused that firm to make reference to the subject
disagreement if it had not been resolved to Deloitte's satisfaction.

                           PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information concerning the Company's directors and executive officers
<PAGE>   33

appears in the Proxy Statement under the headings "Election of 
Directors-Nominees" and " -Compliance with Section 16(a) of the Exchange Act"
and "Executive Officers" and is incorporated by reference herein.

Item 11. EXECUTIVE COMPENSATION

         Information concerning the compensation of the Company's management
appears in the Proxy Statement under the headings "Executive Compensation" and
"Election of Directors - Compensation of Directors" and is incorporated by
reference herein.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning beneficial owners of more than 5% of the
Company's Stock and information concerning the stock owned by the Company's
management appears in the Proxy Statement under the heading "Ownership of
Stock" and is incorporated by reference herein.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information concerning certain relationships and related transactions
appears in the Proxy Statement under the heading "Certain Transactions" and is
incorporated by reference herein.

                                   PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      See Item 8 for a list of the financial statements as filed as a part 
         of this report.
(b)      No financial statement schedules are applicable as the required
         information is included in the financial statements in Item 8.
(c)      The registrant submits herewith as exhibits to this report on Form
         10-K the exhibits required by Item 601 of Regulation S-K, subject to
         Rule 12b-32 under the Securities Exchange Act of 1934.

<TABLE>
<CAPTION>
Exhibit No.                         Document
-----------                         --------

<S>               <C>
 3.1              Amended and restated Articles of Incorporation of Habersham
                  Bancorp, as amended. (1)

 3.2              By-laws of Habersham Bancorp, as amended as of November 20,
                  1989 (2) and as of March 16, 1991. (3)

10.1*             Habersham Bancorp Savings Investment Plan, as amended and
                  restated March 17, 1990, and the related Trust Agreements, as
                  amended March 17, 1990. (2)

10.2*             Habersham Bancorp Incentive Stock Option Plan, as amended
                  February 26, 1994. (4)

10.3*             Habersham Bancorp Outside Directors Stock Option Plan. (5)

10.4*             Habersham Bancorp 1996 Incentive Stock Option Plan. (6)

10.5*             Mortgage Banking Agreement Dated as of January 2, 1996 among
                  Habersham Bancorp, Habersham Bank, BancMortgage Financial
                  Corp. and Robert S. Cannon and Anthony L. Watts. (7)
</TABLE>

<PAGE>   34

<TABLE>
<S>      <C>
13.0     Financial statements and notes thereto contained in the
         Habersham Bancorp 1998 Annual Report.

16.0     Letter Regarding Change in Accountants. (8)

21.0     Subsidiaries of Habersham Bancorp.

23.1     Consent of KPMG LLP

23.2     Consent of Deloitte & Touche LLP

27.0     Financial Data Schedule (for SEC use only).

99.0     Independent Auditors Opinion dated January 17, 1997 on consolidated 
         financial statements for the year ended December 31, 1996.
</TABLE>

(1)      Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to
Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).

(2)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1989
(File No. 0-13153).

(3)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991
(File No. 0-13153).

(4)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993
(File No. 0-13153).

(5)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994
(File No. 0-13153).

(6)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995
(File No. 0-13153).

(7)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997
(File No. 0-13153).

(8)      Incorporated herein by reference to exhibit of same number in the
Registrant's current report on Form 8-K dated March 4, 1997.
(File No. 0-13153).

* Indicates the Registrant's plans, management contracts and compensatory
arrangements.

         (b)  Reports on Form 8-K:

         No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1998.
<PAGE>   35

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                  HABERSHAM BANCORP (Registrant)



By: /s/ David D. Stovall              Date: March 30, 1999 
    -------------------------               -----------------
    Director, President and
    Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature                          Title                        Date
        ---------                          -----                        ----

<S>                                 <C>                            <C>
/s/ Thomas A. Arrendale, Jr         Chairman of the Board          March 30, 1999
------------------------------      and Director

/s/ Thomas A. Arrendale, III        Vice Chairman of the Board     March 30, 1999
------------------------------      and Director

/s/ David D. Stovall                Director, President and        March 30, 1999
------------------------------      Chief Executive Officer *

/s/ James Holcomb                   Director                       March 30, 1999
------------------------------


/s/ James A. Stapleton, Jr          Director                       March 30, 1999
------------------------------


/s/ C. Kenneth White                Director                       March 30, 1999
------------------------------


/s/ Calvin R. Wilbanks              Director                       March 30, 1999
------------------------------
</TABLE>

* Principal financial officer, principal executive officer, controller and
principal accounting officer.
<PAGE>   36

                                EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit No.                          Document
-----------                          --------
   <S>            <C>
    3.1           Amended and restated Articles of Incorporation of Habersham
                  Bancorp, as amended. (1)

    3.2           By-laws of Habersham Bancorp, as amended as of November 20,
                  1989 (2) and as of March 16, 1991 March 16, 1991 (3)

   10.1*          Habersham Bancorp Savings Investment Plan, as amended and
                  restated March 17, 1990, and the related Trust Agreements, as
                  amended March 17, 1990 (2)

   10.2*          Habersham Bancorp Incentive Stock Option Plan, as amended 
                  February 26, 1994 (4)

   10.3*          Habersham Bancorp Outside Directors Stock Plan (5)

   10.4*          Habersham Bancorp 1996 Incentive Stock Option Plan (6)

   10.5*          Mortgage Banking Agreement dated as of January 2, 1996 among
                  Habersham Bancorp, Habersham Bank, BancMortgage Financial
                  Corp., and Robert S. Cannon and Anthony L. Watts. (7)

   13.0           Financial statements and notes thereto contained in the 
                  Habersham Bancorp 1998 Annual Report

   16.0           Letter Regarding Change in Accountants (8)

   21.0           Subsidiaries of Habersham Bancorp

   23.1           Consent of KPMG LLP

   23.2           Consent of Deloitte & Touche LLP

   27.0           Financial Data Schedule (for SEC use only)

   99.0           Independent Auditor Opinion dated January 17, 1997 on 
                  consolidated financial statements for the year ended 
                  December 31, 1996.
</TABLE>

(1)      Incorporated herein by reference to exhibit 3(a) in Amendment No. 1 to
the Registrant's Registration Statement on Form S-4 (Regis. No. 33-57915).

(2)      Incorporated herein by reference to exhibit of same number in the
Registrant Annual Report on Form 10-K for the year December 31, 1989. (File No.
0-13153).

(3)      Incorporated herein by reference to exhibit of same number in the
Registrant Annual Report on Form 10-K for the year ended December 31,
1991.(File No. 0-13153).

(4)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1993.
(File No. 0-13153).

(5)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1994.
(File No. 0-13153).
<PAGE>   37

(6)      Incorporated herein by reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1995.
(File No. 0-13153).

(7)      Incorporated herein be reference to exhibit of same number in the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997.
(File No. 0-13153).

(8)      Incorporated herein by reference to exhibit of same number in the
Registrant's current report on Form 8-K dated March 4, 1997. 
(File No. 0-13153).

* Indicates the Registrant's plans, management contracts and compensatory
arrangements.