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SECURITIES AND EXCHANGE COMMISSION  FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  Commission file number 0-13153 HABERSHAM BANCORP 
  Georgia
    
    58-1563165(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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:  Securities registered
pursuant to Section 12(g) of the Exchange Act: 
 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 o 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 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes
o   No x State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked prices of such common
equity; as of the last business day of the registrants most recently completed
second fiscal quarter. 1,679,136 Shares of Common Stock, $1.00 par value$35,261,856 as of
June 30, 2003 (based upon market value of $21.00/share as of that date).




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9a. CONTROLS AND PROCEDURESPART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem l1. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MattersItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXEX-13.0 FINANCIAL STATEMENTS AND NOTESEX-14.0 CODE OF ETHICSEX-21.0 SUBSIDIARIES OF HABERSHAM BANCORPEX-23.1 INDEPENDENT ACCOUNTANT'S CONSENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 906 CERTIFICATION OF THE CEO AND CFO    Table of Contents  Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of March 5 2004: Common Stock, $1.00 par value2,872,831 shares DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Companys Annual Report to Shareholders for the year ended
December 31, 2003 (the Annual Report) are incorporated by reference into Part
II. (2) Portions of the Companys Proxy Statement relating to the 2004 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 Habersham Bank became the wholly-owned
subsidiary of the Company. Habersham Bank has one subsidiary, Advantage
Insurers, Inc., a property, casualty and life insurance agency. Effective June
30, 1995, the Company acquired Security Bancorp, Inc. and its subsidiary bank,
Security State Bank. The Company consolidated the charters of Security State
Bank and Habersham Bank in 1999. Business of the Bank 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, White, Cherokee, Warren, and
Gwinnett Counties, 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. Business of BancMortgage Financial Corp. Prior to December 2002, the Company conducted mortgage banking operations
through BancMortgage Financial Corp. (BancMortgage). BancMortgage was
organized as a wholly-owned non-bank subsidiary of Habersham Bank in 1996. In
December 2002, the Company sold BancMortgage to the existing management of
BancMortgage.
See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Overview.




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Business of Advantage Insurers, Inc. Advantage Insurers, Inc. was organized as a wholly-owned non-bank
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. During the past few years,
legislation and regulatory changes, together with 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, White,
Cherokee, Warren, and Gwinnett Counties, Georgia. Habersham Bank competes
principally for all types of loans, deposits and other financial services with
other financial institutions located in its primary market area. To a lesser
extent, Habersham Bank competes 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, 2003, the Company had 146 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. SUPERVISION & REGULATION Both the Company and Habersham Bank are subject to extensive state and
federal banking regulations that impose restrictions on and provide for general
regulatory oversight of their operations. These laws generally are intended to
protect depositors and not shareholders. The following discussion describes
the material elements of the regulatory framework that applies to us. The Company Because the Company owns all of the capital stock of the Bank, it is a
bank holding company under the federal Bank Holding Company Act of 1956. As a
result, the Company is primarily subject to the supervision, examination, and
reporting requirements of the Bank Holding Company Act and the regulations of
the Federal Reserve. As a bank holding company located in Georgia, the Georgia
Department of Banking and Finance also regulates and monitors all significant
aspects of the Companys operations. Acquisitions of Banks.The Bank Holding Company Act requires every bank
holding company to obtain the Federal Reserves prior approval before:




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
    
    acquiring 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 banks voting shares;
    
    acquiring all or substantially all of the assets of any bank; or
    
    merging or consolidating with any other bank holding company. Additionally, the Bank Holding Company Act provides that the Federal
Reserve may not approve any of these transactions if it would result in or tend
to create a monopoly or, substantially lessen competition or otherwise function
as a restraint of trade, unless the anti-competitive effects of the proposed
transaction are 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 bank holding companies and banks concerned and the convenience
and needs of the community to be served. The Federal Reserves consideration
of financial resources generally focuses on capital adequacy, which is
discussed below. Under the Bank Holding Company Act, if adequately capitalized and
adequately managed, the Company or any other bank holding company located in
Georgia may purchase a bank located outside of Georgia. Conversely, an
adequately capitalized and adequately managed bank holding company located
outside of Georgia may purchase a bank located inside Georgia. In each case,
however, restrictions may be placed on the acquisition of a bank that has only
been in existence for a limited amount of time or will result in specified
concentrations of deposits. Currently, Georgia law prohibits acquisitions of
banks that have been incorporated for less than three years. Because the Bank
has been incorporated for more than three years, this limitation does not apply
to the Company or to the Bank. Change in Bank Control.Subject to various exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with related
regulations, require Federal Reserve approval prior to any person or company
acquiring control of a bank holding company. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of the bank holding company. Control is refutably
presumed to exist if a person or company acquires 10% or more, but less than
25%, of any class of voting securities and either:  
    
    the bank holding company has registered securities under
Section 12 of the Securities Act of 1934; or
    
    no other person owns a greater percentage of that class of
voting securities immediately after the transaction. Our common stock is registered under the Securities Exchange Act of 1934. The
regulations also provide a procedure for challenging the rebuttable presumption
of control. Permitted Activities. A bank holding company is generally permitted under
the Bank Holding Company Act to engage in or acquire direct or indirect control
of more than 5% of the voting shares of any company engaged in the following
activities:  
    
    Banking or managing or controlling banks; and




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
    
    Any activity that the Federal Reserve determines to be so
closely related to banking as to be a proper incident to the business
of banking. Activities that the Federal Reserve has found to be so closely related to
banking as to be a proper incident to the business of banking include:  
    
    Factoring accounts receivable;
    
    Making, acquiring, brokering or servicing loans and usual
related activities;
    
    Leasing personal or real property;
    
    Operating a non-bank depository institution, such as a savings
association;
    
    Trust company functions;
    
    Financial and investment advisory activities;
    
    Conducting discount securities brokerage activities;
    
    Underwriting and dealing in government obligations and money
market instruments;
    
    Providing specified management consulting and counseling activities;
    
    Performing selected data processing services and support services;
    
    Acting as agent or broker in selling credit life insurance and
other types of insurance in connection with credit transactions; and
    
    Performing selected insurance underwriting activities. Despite prior approval, the Federal Reserve may order a bank holding
company or its subsidiaries to terminate any of these activities or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that the bank holding companys continued ownership, activity
or control constitutes a serious risk to the financial safety, soundness, or
stability of it or any of its bank subsidiaries. In addition to the permissible bank holding company activities listed
above, a bank holding company may qualify and elect to become a financial
holding company, permitting the bank holding company to engage in activities
that are financial in nature or incidental or complementary to financial
activity. The Bank Holding Company Act expressly lists the following
activities as financial in nature:  
    
    lending, trust and other banking activities;
    
    insuring, guaranteeing, or indemnifying against loss or harm,
or providing and issuing annuities, and acting as principal, agent,
or broker for these purposes, in any state;
    
    providing financial, investment, or advisory services;
    
    issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly;




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
    
    underwriting, dealing in or making a market in securities;
    
    other activities that the Federal Reserve may determine to be
so closely related to banking or managing or controlling banks as to
be a proper incident to managing or controlling banks;
    
    foreign activities permitted outside of the United States if
the Federal Reserve has determined them to be usual in connection
with banking operations abroad;
    
    merchant banking through securities or insurance affiliates; and
    
    insurance company portfolio investments. To qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least
satisfactory. Additionally, the Company must file an election with the
Federal Reserve to become a financial holding company and must provide the
Federal Reserve with 30 days written notice prior to engaging in a permitted
financial activity. While the Company meets the qualification standards
applicable to financial holding companies, the Company has not elected to
become a financial holding company at this time. Support of Subsidiary Institutions.Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for the Bank and
to commit resources to support the Bank. This support may be required at times
when, without this Federal Reserve policy, the Company might not be inclined to
provide it. In addition, any capital loans made by the Company to the Bank
will be repaid only after its deposits and various other obligations are repaid
in full. In the unlikely event of the Companys bankruptcy, any commitment by
it to a federal bank regulatory agency to maintain the capital of the Bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment. The Bank The Bank is subject to extensive state and federal banking regulations
that impose restrictions on and provide for general regulatory oversight of our
operations. These laws are generally intended to protect depositors and not
shareholders. The following discussion describes the material elements of the
regulatory framework that applies to us. Because the Bank is a commercial bank chartered under the laws of the
State of Georgia, it is primarily subject to the supervision, examination and
reporting requirements of the FDIC and the Georgia Department of Banking and
Finance. The FDIC and Georgia Department of Banking and Finance regularly
examine the Banks operations and have the authority to approve or disapprove
mergers, the establishment of branches and similar corporate actions. Both
regulatory agencies have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law. Additionally,
the Banks deposits are insured by the FDIC to the maximum extent provided by
law. The Bank is also subject to numerous state and federal statutes and
regulations that affect its business, activities and operations. Branching.Under current Georgia law, the Bank may open branch offices
throughout Georgia with the prior approval of the Georgia Department of Banking
and Finance. In addition, with prior regulatory approval, the Bank may acquire
branches of existing banks located in Georgia. The Bank and any other national
or state-chartered bank generally may branch across state lines by merging with
banks in other states if allowed by the applicable states laws. Georgia law,
with limited exceptions, currently permits branching across state lines through
interstate mergers.




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Under the Federal Deposit Insurance Act, states may opt-in and allow
out-of-state banks to branch into their state by establishing a new start-up
branch in the state. Currently, Georgia has not opted-in to this provision.
Therefore, interstate merger is the only method through which a bank located
outside of Georgia may branch into Georgia. This provides a limited barrier of
entry into the Georgia banking market, which protects us from an important
segment of potential competition. However, because Georgia has elected not to
opt-in, our ability to establish a new start-up branch in another state may be
limited. Many states that have elected to opt-in have done so on a reciprocal
basis, meaning that an out-of-state bank may establish a new start-up branch
only if their home state has also elected to opt-in. Consequently, until
Georgia changes its election, the only way we will be able to branch into
states that have elected to opt-in on a reciprocal basis will be through
interstate merger. Prompt Corrective Action.The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, the federal banking regulators have established five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) in which all institutions are
placed. The federal banking agencies have also specified by regulation the
relevant capital levels for each of the other categories. At December 31,
2003, the Bank qualified for the well-capitalized category. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically
undercapitalized. An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to various limitations. The
controlling holding companys obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiarys assets at the
time it became undercapitalized or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval. The regulations
also establish procedures for downgrading an institution to a lower capital
category based on supervisory factors other than capital. 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: (1) well capitalized; (2) adequately capitalized; and (3)
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 based on a supervisory evaluation that the institutions primary
federal regulator provides to the FDIC and information




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that the FDIC determines
to be relevant to the institutions financial condition and the risk posed to
the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of
deposits, depending on the institutions capital group and supervisory
subgroup. In addition, the FDIC imposes assessments to help pay off the $780
million in annual interest payments on the $8 billion Financing Corporation
bonds issued in the late 1980s as part of the government rescue of the thrift
industry. This assessment rate is adjusted quarterly and is set at $1.54 per
$100 of deposits for the first quarter of 2004. The FDIC may terminate its insurance of deposits if it finds that the
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. Community Reinvestment Act.The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the
record of each financial institution in meeting the credit needs of its local
community, including low and moderate-income neighborhoods. These facts are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could impose
additional requirements and limitations on the Bank. Additionally, we must
publicly disclose the terms of various Community Reinvestment Act-related
agreements. Other Regulations.Interest and other charges collected or contracted for
by the Bank are subject to state usury laws and federal laws concerning
interest rates. For example, under the Soldiers and Sailors Civil Relief Act
of 1940, a lender is generally prohibited from charging an annual interest rate
in excess of 6% on any obligation for which the borrower is a person on active
duty with the United States military. The Banks loan operations are also subject to federal laws applicable to
credit transactions, such as the:  
    
    Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
    
    Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it
serves;
    
    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
    
    Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
    
    Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
    
    Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured
obligations of persons in military service; and
    
    rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.




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In addition to the federal and state laws noted above, the Georgia Fair
Lending Act (GAFLA) imposes restrictions and procedural requirements on most
mortgage loans made in Georgia, including home equity loans and lines of
credit. On August 5, 2003, the Office of the Comptroller of the Currency
issued a formal opinion stating that the entirety of GAFLA is preempted by
federal law for national banks and their operating subsidiaries. GAFLA
contains a provision that preempts GAFLA as to state banks in the event that
the Office of the Comptroller of the Currency preempts GAFLA as to national
banks. Therefore, the Bank and any of its operating subsidiaries that may be
engaged in mortgage lending will be exempt from the requirements of GAFLA. The Banks deposit operations are subject to:  
    
    the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records; and
    
    the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers
rights and liabilities arising from the use of automated teller
machines and other electronic banking services. Capital Adequacy The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve, in the case of the Company, and
the FDIC, in the case of the Bank. The Federal Reserve has established a
risk-based and a leverage measure of capital adequacy for bank holding
companies. The Bank is also 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. The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles 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, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk 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 of total capital to risk-weighted
assets is 8%. Total capital consists of two components, Tier 1 Capital and
Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of qualifying cumulative
perpetual preferred stock, less goodwill and other specified intangible assets.
Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital
generally consists of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves. The total amount of Tier 2 Capital is limited to
100% of Tier 1 Capital. At December 31, 2003, the Banks ratio of total capital
to risk-weighted assets was 17.26% and our ratio of Tier 1 Capital to
risk-weighted assets was 16.03%. In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserves risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at




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least 4%. At December 31, 2003, our leverage ratio was 12.34%.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 reliance on
intangible assets. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new
activities. Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting brokered deposits, and certain other restrictions on its business.
As described above, significant additional restrictions can be imposed on
FDIC-insured depository institutions that fail to meet applicable capital
requirements. Payment of Dividends The Company is a legal entity separate and distinct from the Bank. The
principal sources of the Banks cash flow, including cash flow to pay dividends
to its shareholders, are dividends that the Bank pays to its sole shareholder,
the Company. Statutory and regulatory limitations apply to the Banks payment
of dividends. If, in the opinion of the federal banking regulator, the Bank
were engaged in or about to engage in an unsafe or unsound practice, the
federal banking regulator could require, after notice and a hearing, that it
stop or refrain from engaging in the questioned 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, a depository institution may not pay any dividend if
payment would cause it to become undercapitalized or if it already is
undercapitalized. 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. See The
BankPrompt
Corrective Action. The Georgia Department of Banking and Finance also regulates the Banks
dividend payments and must approve dividend payments that would exceed 50% of
the Banks net income for the prior year. Our payment of dividends may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines. At December 31, 2003, the Bank could pay approximately $1,596,000 in
dividends without prior regulatory approval. Restrictions on Transactions with Affiliates The Company and the Bank are subject to the provisions of Sections 23A and
23B of the Federal Reserve Act and Regulation W issued thereunder. Section 23A
places limits on the amount of:  
    
    a banks loans or extensions of credit to affiliates;
    
    a banks investment in affiliates;
    
    assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
    
    loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
    
    a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate.




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The total amount of the above transactions is limited in amount, as to any
one affiliate, to 10% of a banks capital and surplus and, as to all affiliates
combined, to 20% of a banks capital and surplus. In addition to the
limitation on the amount of these transactions, each of the above transactions
must also meet specified collateral requirements. The Bank must also comply
with other provisions designed to avoid the taking of low-quality assets. The Company and the Bank are also subject to the provisions of Section 23B
of the Federal Reserve Act which, among other things, prohibit an institution
from engaging in the above transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to the
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies. The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with third parties, and (2) must not involve
more than the normal risk of repayment or present other unfavorable features. Privacy Financial institutions are required to disclose their policies for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing nonpublic personal financial
information with nonaffiliated third parties except under narrow circumstances,
such as the processing of transactions requested by the consumer or when the
financial institution is jointly sponsoring a product or service with a
nonaffiliated third party. Additionally, financial institutions generally may
not disclose consumer account numbers to any nonaffiliated third party for use
in telemarketing, direct mail marketing or other marketing to consumers. Consumer Credit Reporting On December 4, 2003, the President signed the Fair and Accurate Credit
Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act
(the FCRA). Most of the amendments to the FCRA (the FCRA Amendments) will become
effective in late 2004, depending on implementing regulations to be issued by
the Federal Trade Commission and the federal bank regulatory agencies. The FCRA Amendments include, among other things:  
    
    new requirements for financial institutions to develop policies and procedures to identify potential identity
theft and, upon the request of a consumer, place a fraud alert
in the consumers credit file stating that the consumer may be
the victim of identity theft or other fraud;
    
    for entities that furnish information to consumer reporting agencies (which would include the Bank), new
requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously
furnished information that is later determined to be inaccurate;
and
    
    a new requirement for mortgage lenders to disclose credit scores to consumers.




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##### Table of Contents



The FCRA Amendments also will prohibit a business that receives consumer
information from an affiliate from using that information for marketing
purposes unless the consumer is first provided a notice and an opportunity to
direct the business not to use the information for such marketing purposes (the
opt-out), subject to certain exceptions. While the FCRA Amendments will
limit the Companys ability to share information with its affiliates for
marketing purposes, the actual impact of these limitations will depend on the
extent to which our customers elect to prohibit the use of their personal
information for marketing purposes. We have no basis at this time to predict
the volume of consumer opt-outs. Prior to the effective date of the FCRA Amendments, the Company and its
subsidiaries will implement policies and procedures to comply with the new
rules. Anti-Terrorism Legislation The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the
President on October 26, 2001, imposed new requirements and limitations on specified
financial transactions and account relationships, intended to guard against money
laundering and terrorism. Most of these requirements and limitations took effect in
2002. Additional know your customer rules became effective in June 2003, requiring
the Bank to establish a customer identification program under Section 326 of the
USA PATRIOT Act. The Company and its subsidiaries implemented procedures and
policies to comply with those rules prior to the effective date of each of the rules. 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 financial institutions operating or doing business in the
United States. We cannot predict whether or in what form any proposed
regulation or statute will be adopted or the extent to which our business may
be affected by any new regulation or statute. Effect of Governmental Monetary Polices Our earnings are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies. The
Federal Reserve Banks monetary policies have had, and are likely to continue
to have, an important impact on the operating results of commercial banks
through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the
Federal Reserve affect the levels of bank loans, investments and deposits
through its control over the issuance of United States government securities,
its regulation of the discount rate applicable to member banks and its
influence over reserve requirements to which member banks are subject. We
cannot predict the nature or impact of future changes in monetary and fiscal
policies. 
 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)




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##### Table of Contents



778-1000. Habersham Bank also has six full-service branch offices.
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; its Cleveland Office is located at 575 South Main Street, Cleveland,
Georgia; its Canton Office is located at 1925 Marietta Highway, Canton,
Georgia; its Waleska Office is located at 7265 Reinhardt College Parkway,
Waleska, Georgia; its Warrenton Office is located at 217 East Main Street,
Warrenton, Georgia; and its Braselton Office is located at 6322 Grand Hickory
Drive, Braselton, Georgia. Each office has a 24-hour teller machine.
Habersham Bank owns its office properties without encumbrance, with the
exception of the Warrenton Office which is leased on a month to month basis. 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. 
 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, 2003, Habersham
Bancorp had approximately 541 shareholders of record. The following table sets
forth the high and low sale prices, and the cash dividends paid on the
Companys common stock on a quarterly basis for the past two fiscal years and
the first quarter of 2004 to date. 2004
    
    High
    
    Low
    
    DividendsFirst quarter(through March 15, 2004)
    
    $
    25.50
    
    
    $
    24.00
    
    
    $
    0.07
 2003
    
    High
    
    Low
    
    DividendsFourth quarter
    
    $
    25.50
    
    
    $
    22.55
    
    
    $
    1.00Third quarter
    
    
    23.00
    
    
    
    19.83
    
    
    
    0.06Second quarter
    
    
    21.12
    
    
    
    17.31
    
    
    
    0.06First quarter
    
    
    19.68
    
    
    
    17.08
    
    
    
    0.06
 2002
    
    High
    
    Low
    
    DividendsFourth quarter
    
    $
    18.50
    
    
    $
    16.26
    
    
    $
    0.06Third quarter
    
    
    20.76
    
    
    
    17.64
    
    
    
    0.06Second quarter
    
    
    22.99
    
    
    
    17.65
    
    
    
    0.06First quarter
    
    
    17.44
    
    
    
    15.75
    
    
    
    0.06
 The approval of the Georgia Department of Banking and Finance is required
if dividends declared by the Bank to the Company in any year will exceed 50% of
the net income of the Bank for the previous calendar year. As of December 31,
2003 the Bank could declare dividends to the Company up to approximately
$1,596,000 without regulatory approval. See Item 1  Business  Supervision
and Regulation  Payment of Dividends for additional information regarding
regulatory restrictions on our ability to pay dividends.




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA For the years ended December 312003
    
    2002
    
    2001
    
    2000
    
    1999SUMMARY OF OPERATIONSInterest income
    
    $
    22,285
    
    
    $
    26,794
    
    
    $
    34,262
    
    
    $
    37,285
    
    
    $
    28,060Interest expense
    
    
    8,122
    
    
    
    12,041
    
    
    
    20,403
    
    
    
    22,781
    
    
    
    14,872Provision for loan losses
    
    
    950
    
    
    
    1,307
    
    
    
    1,463
    
    
    
    955
    
    
    
    500Other income
    
    
    3,872
    
    
    
    3,963
    
    
    
    3,109
    
    
    
    2,555
    
    
    
    2,445Other expense
    
    
    14,041
    
    
    
    12,787
    
    
    
    12,290
    
    
    
    11,872
    
    
    
    12,532Income from continuing operations
    
    
    2,318
    
    
    
    3,493
    
    
    
    2,396
    
    
    
    2,903
    
    
    
    2,710Income (loss) from discontinued
operations
    
    
    
    
    
    
    2,337
    
    
    
    3,109
    
    
    
    124
    
    
    
    (956
    )Cumulative effect of
change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    
    
    
    
    Net income
    
    
    2,318
    
    
    
    5,830
    
    
    
    5,343
    
    
    
    3,027
    
    
    
    1,754PER SHARE AMOUNTSIncome from continuing
operations  diluted
    
    $
    .80
    
    
    $
    1.24
    
    
    $
    .88
    
    
    $
    1.08
    
    
    $
    1.04Income (loss) from discontinued
operations  diluted
    
    
    
    
    
    
    .83
    
    
    
    1.14
    
    
    
    .04
    
    
    
    (.37
    )Cumulative effect of change in
accounting principle  diluted
    
    
    
    
    
    
    
    
    
    
    (.06
    )
    
    
    
    
    
    
    Net income per common sharediluted
    
    $
    .80
    
    
    $
    2.07
    
    
    $
    1.96
    
    
    $
    1.12
    
    
    $
    .67Dividends
    
    
    1.18
    
    
    
    .24
    
    
    
    .24
    
    
    
    .24
    
    
    
    .20Weighted average number of
common and common equivalent
shares outstanding
    
    
    2,895,113
    
    
    
    2,815,972
    
    
    
    2,729,291
    
    
    
    2,699,949
    
    
    
    2,609,360AT DECEMBER 31Total assets
    
    $
    374,714
    
    
    $
    429,411
    
    
    $
    546,503
    
    
    $
    543,108
    
    
    $
    461,976Earning assets
    
    
    342,794
    
    
    
    395,047
    
    
    
    503,562
    
    
    
    504,640
    
    
    
    424,663Loans
    
    
    261,818
    
    
    
    303,813
    
    
    
    440,527
    
    
    
    441,850
    
    
    
    365,499Deposits
    
    
    279,600
    
    
    
    336,526
    
    
    
    336,360
    
    
    
    341,032
    
    
    
    317,420Long-term debt
    
    
    30,000
    
    
    
    30,000
    
    
    
    35,775
    
    
    
    21,950
    
    
    
    1,950Shareholders equity
    
    
    49,679
    
    
    
    50,743
    
    
    
    43,982
    
    
    
    38,751
    
    
    
    35,429RATIOSReturn on average assets
    
    
    .59
    %
    
    
    1.41
    %
    
    
    1.22
    %
    
    
    .68
    %
    
    
    .49
    %Return on average equity
    
    
    4.49
    %
    
    
    12.24
    %
    
    
    12.80
    %
    
    
    8.21
    %
    
    
    5.10
    %Dividend payout ratio
    
    
    147.50
    %
    
    
    11.59
    %
    
    
    12.26
    %
    
    
    21.41
    %
    
    
    29.75
    %Average equity to average
assets ratio
    
    
    13.24
    %
    
    
    11.52
    %
    
    
    9.55
    %
    
    
    8.32
    %
    
    
    9.64
    %
 Balance sheet amounts have not been adjusted to reflect discontinued
operations.




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##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ORGANIZATION Habersham Bancorp (the Company) owns all of the outstanding stock of
Habersham Bank (Habersham Bank) and The Advantage Group, Inc. Habersham Bank
owns all of the outstanding stock of Advantage Insurers, Inc. (Advantage
Insurers) and prior to December 2002, owned all of the outstanding stock of
BancMortgage Financial Corp (BancMortgage). The Advantage Group, Inc., a
non-bank subsidiary providing marketing and advertising services, ceased
operation September 30, 2001. Advantage Insurers, which began operations on
March 31, 1997, offers a full line of property, casualty, and life insurance
products. The Advantage Group, Inc. and Advantage Insurers do not comprise a
significant portion of the financial position, results of operations, or cash
flows of the Company. During the year ended December 31, 2002, the Company sold BancMortgage to
the existing management of BancMortgage resulting in a loss of $110,064. The
Companys consolidated financial statements have been reclassified to reflect
the operations of BancMortgage as discontinued. Managements discussion and
analysis, which follows, relates primarily to Habersham Bank. EXECUTIVE SUMMARY The Companys continuing primary business is the operation of banks in
rural and suburban communities in Habersham, White, Cherokee, Warren, and
Gwinnett counties in Georgia. Its primary source of income is interest income
from loans and investment securities. During 2003 interest rates remained at
historically low levels and management expects interest rates to remain at
these levels throughout most of the coming year. Management will continue to
focus on maintaining a profitable net interest margin in 2004. 2003 was a year of transition for Habersham Bancorp. One of the expected
results of the sale of BancMortgage on December 5, 2003, was a decrease in
total assets of Habersham Bank as approximately $57.8 million of residential
home construction and acquisition and development loans which originated from
BancMortgage matured or paid-off. The loss of these assets was offset by the
redemption at maturity of over $21.4 million in nationally brokered
certificates of deposit which are not considered core deposits of the Bank.
Cash available has been reinvested in longer term investment securities
available for sale. Net income was also impacted by the sale of BancMortgage. Interest income
and interest expense trended downward over 2003, as the loans originated from
BancMortgage matured and paid-out and as the nationally brokered certificates
of deposits were redeemed. Additional expense was incurred for the staffing of
Habersham Mortgage, a new division of Habersham Bank, and a new branch office
in Braselton. Management has developed a strategy for asset growth and expansion of its
financial services through branching into selective growth markets in North
Georgia. Habersham Bank began this expansion program of its traditional
banking business with the completion of a branch office in Braselton, Georgia.
Braselton is the home of Chateau Elan, a winery and golf community, and an area
of rapid growth of residential properties. Additionally, Habersham Bank
purchased an existing branch location from a regional bank in the Hickory Flat
area of eastern Cherokee County. The Hickory Flat location is scheduled to
open for operation in March 2004 and is to replace the Waleska Office which is
scheduled to close during the first quarter of 2004. Cherokee County is
considered one of the fastest growing communities in Georgia.




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##### Table of Contents



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 unexpected 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. CRITICAL ACCOUNTING ESTIMATES In reviewing and understanding financial information for the Company, you
are encouraged to read and understand the significant accounting policies which
are used in preparing the consolidated financial statements of the Company.
These policies are described in Note 2 to the consolidated financial statements
which are presented elsewhere in this annual report. Of these policies,
management believes that the accounting for the allowance for loan losses is
the most critical. This is because of the subjective nature of the estimates
used in establishing the allowance and the effect these estimates have on the
Companys earnings. Because the allowance is replenished by means of a
provision for loan losses that is charged as an expense against net income, the
estimation of the allowance affects the Companys earnings directly. Losses on
loans result from a broad range of causes, from borrower-specific problems to
industry issues to the impact of the economic environment. The identification
of the factors that lead to default or non-performance under a loan agreement
and the estimation of loss in these situations is very subjective. In
addition, a dramatic change in the performance of one or a small number of
borrowers can have a significant impact in the estimate of losses. As
described further below, under Allowance for Loan Losses, management has
implemented a process that has been applied consistently to systematically
consider the many variables that impact the estimation of the allowance for
loan losses. Certain economic factors could have a material impact on the loan loss
allowance determination and its adequacy. The depth and duration of any
economic recession would have an impact on the credit risk associated with the
loan portfolio. Another factor that can impact the determination is a
consideration for concentrations in collateral which secure the loan portfolio.
The Companys loan portfolio is secured primarily by commercial and
residential real estate with such loans comprising approximately 88.3% of the
total loan portfolio. While there is a risk that the value of the real estate
securing the loans in the portfolio could decrease during an economic
recession, the majority of the real estate securing the loan portfolio is 1  4
family residential properties which are generally not as affected by downturns
in the economy. The Company also has concentrations in mortgages for
agribusiness purposes in the poultry industry and in commercial loans for the
travel accommodation industry. See Nonperforming Assets and Past Due Loans. The Company will from time to time make unsecured loans. The risk to the
Company is greater for unsecured loans as the ultimate repayment of the loan is
only dependent on the borrowers ability to pay. The balance of unsecured loans
at December 31, 2003 was $8.2 million which does not pose a significant risk to
the Company. The Company is not aware of any large loan relationships that if defaulted
would have a significant impact on the allowance for loan losses. Refer to the section entitled Allowance for Loan Losses for an
additional discussion of the key assumptions and methods used in determining
the allowance for loan losses, as well as inherent risks in estimating the
allowance.




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##### Table of Contents



RESULTS OF OPERATIONS Habersham Bancorps net income was $2,317,962, $5,830,451, and $5,342,791,
for the years ended December 31, 2003, 2002, and 2001, respectively, with
related diluted earnings per common and common equivalent share of $.80, $2.07,
and $1.96, respectively, representing a decrease of 61.35% from 2003 to 2002
and an increase of 5.61% from 2001 to 2002. Net income represents a return on average equity of 4.49%, 12.24%, and
12.80% for 2003, 2002, and 2001, respectively. 2003
    
    2002
    
    2001Income from continuing operations
    
    $
    2,317,962
    
    
    $
    3,493,010
    
    
    $
    2,395,891Diluted earnings per common and
common equivalent share
    
    $
    .80
    
    
    $
    1.24
    
    
    $
    .88
 The decrease in income from continuing operations for the year ended
December 31, 2003, when compared to the year ended December 31, 2002, was
primarily due to additional salary and other expenses associated with the
establishment of a new mortgage lending division, (Habersham Mortgage), during
the first quarter of 2003 and the building and staffing of a new branch located
in Braselton, Georgia during the fourth quarter of 2003. Also, contributing to
the decrease in income from continuing operations was a decrease in gains on
the sale of investment securities and other investments. These decreases were
offset somewhat by an increase in the net interest margin for the year ended
December 31, 2003 to 3.95% when compared to 3.91% for the year ended December
31, 2002. The increase in income from continuing operations for the year ended
December 31, 2002, when compared to the year ended December 31, 2001, was
primarily the result of improvement in the Companys net interest margin which
increased from 3.38% for the year ended December 31, 2001 to 3.91% for the year
ended December 31, 2002. In addition, the Company recognized gains on sale of
investment securities available for sale of $851,000 for the year ended
December 31, 2002 compared to $191,000 for the year ended December 31, 2001.
The Company also sold its investment in CB Financial Corp. common stock during
2002 resulting in a gain of $277,182. 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 that will cover overhead and other costs and provide a
reasonable return to our shareholders. 2003
    
    2002
    
    2001Net interest income
    
    $
    14,163,229
    
    
    $
    14,752,860
    
    
    $
    13,859,111
 Net interest income for 2003 decreased approximately $590,000 when
compared to 2002 and increased approximately $894,000 when compared to 2001. Fluctuations occurring in interest rates and balances in the loan,
securities, and deposit portfolios directly impact net interest income. Other
borrowings are also impacted by rate movements and balances. Net interest
income is impacted by interest income from loans, investment securities, and
federal funds sold offset by interest paid on deposits and borrowings.




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##### Table of Contents



During 2003, interest income decreased approximately $4.0 million when
compared to 2002 as a result of average loan balances in 2003 decreasing
approximately $24.8 million when compared to 2002 in addition to the average
loan rates in 2003 decreasing approximately .79% when compared to 2002. The
decrease in the loan portfolio is primarily the result of payoffs of real
estate construction loans. Interest income on investment securities decreased
approximately $499,000 when compared to 2002 primarily due to decreases in the
interest yield of approximately 1.17%. Interest income on investment securities was also impacted by the
declining interest rate environment. The weighted average yield on investment
securities was 4.05%, 5.22%, and 5.29%, for the years ended December 31, 2003,
2002, and 2001, respectively. Average yields on federal funds sold were 1.50%,
1.39%, and 3.22%, for the years ended December 31, 2003, 2002, and 2001,
respectively. Interest expense for 2003 decreased approximately $3.9 million when
compared to 2002 as a result of average deposit balances in 2003 decreasing
approximately $43.4 million when compared to 2002 in addition to the average
deposit rate in 2003 decreasing approximately .84% when compared to 2002. The
decrease in the deposit portfolio is primarily the result of the redemption of
national market certificates of deposit during the year. Interest income decreased approximately $7.5 million or 21.8% in 2002 when
compared to 2001 primarily due to decreases in interest rates which
significantly impacted the earnings on the Companys loan portfolio. The
average yield on the Companys loan portfolio decreased significantly from
9.15% in 2001 to 7.62% in 2002. Additionally during 2002, the Companys loan
portfolio decreased approximately $17.7 million due to the sale of construction
loans of approximately $31.7 million and decreases in the commercial and
consumer portfolios of approximately $11 million offset by new residential and
construction loans of approximately $25.0 million. The decrease in interest expense of approximately $8.4 million or 41.0% in
2002 when compared to 2001 was primarily due to a continued declining interest
rate environment and decreases in average balances of time deposits and
borrowings. The average portfolio of time deposits decreased approximately
$23.8 million and average borrowings decreased approximately $16.2 million
during 2002. The weighted average interest rate paid on deposits in 2002
decreased significantly from 5.32% for the year ended December 31, 2001 to
3.29% for the year ended December 31, 2002 as time deposits repriced at lower
rates. The average interest rate paid for borrowings decreased 59 basis points
from 5.29% in 2001 to 4.70% in 2002. The net interest margin of the Company was 3.95% in 2003, 3.91% in 2002,
and 3.38% in 2001. The net interest margin of the Company was maintained
during 2003 due to close management of yields earned on loans and investment
securities and on rates paid for deposits and borrowings. CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS
EARNED AND RATES PAID Average loan balances declined approximately $24.8 million or 8.08% in
2003 from 2002 primarily as a result of the maturity and payoffs of real estate
construction and mortgage loans of approximately $40.6 million offset by new
commercial loans of approximately $15.8 million. Average balances of investment securities increased approximately $10.6
million or 18.72% in 2003 over 2002 as a result of investing the excess cash
from loan maturities and payoffs in investment securities. Available for sale
mortgage backed and treasury securities purchases totaled approximately $51.5
million offset by proceeds from maturities, sales, and calls of approximately
$32.2 million during 2003. Held to maturity investment securities and other
stock investments decreased due to the calls and maturities of approximately
$1.3 million and $.8 million,




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##### Table of Contents



respectively. Average federal funds sold
increased approximately $444,000 or 13.91% in 2003 over 2002. The average balance of deposits, excluding noninterest-bearing deposits,
for 2003 decreased by approximately $43.4 million or 14.52% from 2002 and
decreased approximately $21.8 million or 6.80% from 2001. The decrease in
average deposits for 2003 is primarily due to the redemption at maturity of
national market certificates of deposit of approximately $48.5 million offset
by increases in money market and savings accounts of approximately $3.7 million
and $1.4 million, respectively. The following table sets forth the consolidated average balance sheets for
the Company, average rates earned on interest-earning assets, average rates
paid on interest-bearing liabilities, 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, 2003, 2002, and 2001. CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS
EARNED AND RATES PAID, CONTINUED 2003
    
    2002Average
    
    Income/
    
    Average
    
    Average
    
    Income/
    
    AverageBalance
    
    (Expense)
    
    Yield/Cost
    
    Balance
    
    (Expense)
    
    Yield/CostInterest-earning assets:Loans, net (1)
    
    $
    282,142,667
    
    
    $
    19,271,998
    
    
    
    6.83
    %
    
    $
    306,940,750
    
    
    $
    23,380,051
    
    
    
    7.62
    %Investment securities (2):Taxable
    
    
    49,730,498
    
    
    
    1,900,731
    
    
    
    3.82
    %
    
    
    37,013,214
    
    
    
    2,025,239
    
    
    
    5.47
    %Tax exempt
    
    
    17,394,027
    
    
    
    820,122
    
    
    
    4.71
    %
    
    
    19,528,459
    
    
    
    928,576
    
    
    
    4.75
    %Federal funds sold
    
    
    3,639,083
    
    
    
    54,593
    
    
    
    1.50
    %
    
    
    3,194,367
    
    
    
    44,350
    
    
    
    1.39
    %Loans held for sale
    
    
    2,523,729
    
    
    
    97,558
    
    
    
    3.87
    %
    
    
    
    
    
    
    Total interest-earning assets
    
    
    355,430,004
    
    
    
    22,145,002
    
    
    
    6.23
    %
    
    
    366,676,790
    
    
    
    26,378,216
    
    
    
    7.19
    %Noninterest-earning assets
    
    
    34,856,621
    
    
    
    
    
    
    
    
    
    
    
    71,306,128Total assets
    
    $
    390,286,625
    
    
    
    
    
    
    
    
    
    
    $
    437,982,918Interest-bearing liabilities:Money market and NOW
    
    $
    57,534,840
    
    
    
    (355,015
    )
    
    
    0.62
    %
    
    $
    53,770,339
    
    
    
    (495,558
    )
    
    
    0.92
    %Savings accounts
    
    
    9,298,757
    
    
    
    (41,537
    )
    
    
    0.45
    %
    
    
    7,947,215
    
    
    
    (63,280
    )
    
    
    0.80
    %Certificates of deposit
    
    
    188,858,305
    
    
    
    (5,856,071
    )
    
    
    3.10
    %
    
    
    237,423,845
    
    
    
    (9,271,035
    )
    
    
    3.90
    %Total deposits
    
    
    255,691,902
    
    
    
    (6,252,623
    )
    
    
    2.45
    %
    
    
    299,141,399
    
    
    
    (9,829,873
    )
    
    
    3.29
    %Short-term and other borrowings
    
    
    39,724,975
    
    
    
    (1,869,044
    )
    
    
    4.70
    %
    
    
    47,023,799
    
    
    
    (2,211,214
    )
    
    
    4.70
    %Total interest-bearing liabilities
    
    
    295,416,877
    
    
    
    (8,121,667
    )
    
    
    2.75
    %
    
    
    346,165,198
    
    
    
    (12,041,087
    )
    
    
    4.12
    %Noninterest-bearing liabilities
    
    
    43,205,622
    
    
    
    
    
    
    
    
    
    
    
    44,169,231Total liabilities
    
    
    338,622,499
    
    
    
    
    
    
    
    
    
    
    
    390,334,429Shareholders equity
    
    
    51,664,126
    
    
    
    
    
    
    
    
    
    
    
    47,648,489Total liabilities and
shareholders equity
    
    $
    390,286,625
    
    
    
    
    
    
    
    
    
    
    $
    437,982,918Net interest income
    
    
    
    
    
    $
    14,023,335
    
    
    
    
    
    
    
    
    
    
    $
    14,337,129Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.95
    %
    
    
    
    
    
    
    
    
    
    
    3.91
    %




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##### Table of Contents



CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE
YIELDS EARNED AND RATES PAID, CONTINUED 2001Average
    
    Income/
    
    AverageBalance
    
    (Expense)
    
    Yield/CostInterest-earning assets:Loans, net (1)
    
    $
    333,320,432
    
    
    $
    30,602,652
    
    
    
    9.15
    %Investment securities (2):Taxable
    
    
    34,133,332
    
    
    
    1,902,153
    
    
    
    5.57
    %Tax exempt
    
    
    20,916,246
    
    
    
    1,012,499
    
    
    
    4.84
    %Federal funds sold
    
    
    1,708,000
    
    
    
    55,009
    
    
    
    3.22
    %Total interest-earning assets
    
    
    390,078,010
    
    
    
    33,572,313
    
    
    
    8.61
    %Noninterest-earning assets
    
    
    70,524,835Total assets
    
    $
    460,602,845Interest-bearing liabilities:Money market and NOW
    
    $
    52,263,513
    
    
    
    (996,734
    )
    
    
    1.91
    %Savings accounts
    
    
    7,431,483
    
    
    
    (124,870
    )
    
    
    1.68
    %Certificates of deposit
    
    
    261,260,988
    
    
    
    (15,937,259
    )
    
    
    6.10
    %Total deposits
    
    
    320,955,984
    
    
    
    (17,058,863
    )
    
    
    5.32
    %Short-term and other borrowings
    
    
    63,238,289
    
    
    
    (3,344,112
    )
    
    
    5.29
    %Total interest-bearing liabilities
    
    
    384,194,273
    
    
    
    (20,402,975
    )
    
    
    5.31
    %Noninterest-bearing liabilities
    
    
    34,675,505Total liabilities
    
    
    418,869,778Shareholders equity
    
    
    41,733,067Total
liabilities and shareholders equity
    

    $
    460,602,845Net interest income
    
    
    
    
    
    $
    13,169,338Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.38
    %
  (1)
    
    Interest earnings on nonaccrual loans are included in the foregoing analysis to the extent that such
interest earnings had been recorded during 2003, 2002, and 2001.(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.




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##### Table of Contents



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: 2003 vs. 2002
    
    2002 vs. 2001Increase (Decrease)
    
    Increase (Decrease)Due to
    
    Due toAverage
    
    Average
    
    
    
    
    
    Average
    
    AverageVolume (1)
    
    Rate (1)
    
    Net
    
    Volume (1)
    
    Rate (1)
    
    NetInterest Income:Loans
    
    $
    (1,889,614
    )
    
    $
    (2,218,439
    )
    
    $
    (4,108,053
    )
    
    $
    (2,413,741
    )
    
    $
    (4,808,860
    )
    
    $
    (7,222,601
    )Investment securities:Taxable
    
    
    695,635
    
    
    
    (820,143
    )
    
    
    (124,508
    )
    
    
    160,409
    
    
    
    (37,323
    )
    
    
    123,086Tax exempt
    
    
    (101,386
    )
    
    
    (7,068
    )
    
    
    (108,454
    )
    
    
    (67,169
    )
    
    
    (16,754
    )
    
    
    (83,923
    )Federal funds sold
    
    
    6,182
    
    
    
    4,061
    
    
    
    10,243
    
    
    
    47,861
    
    
    
    (58,520
    )
    
    
    (10,659
    )Loans held for sale
    
    
    97,558
    
    
    
    
    
    
    
    97,558
    
    
    
    
    
    
    
    
    
    
    
    Total interest-earning assets
    
    
    (1,191,625
    )
    
    
    (3,041,589
    )
    
    
    (4,233,214
    )
    
    
    (2,272,640
    )
    
    
    (4,921,457
    )
    
    
    (7,194,097
    )Interest Expense:Money market and NOW
    
    
    34,633
    
    
    
    (175,176
    )
    
    
    (140,543
    )
    
    
    28,780
    
    
    
    (529,956
    )
    
    
    (501,176
    )Savings accounts
    
    
    10,812
    
    
    
    (32,555
    )
    
    
    (21,743
    )
    
    
    8,663
    
    
    
    (70,253
    )
    
    
    (61,590
    )Certificates of deposit
    
    
    (1,894,056
    )
    
    
    (1,520,908
    )
    
    
    (3,414,964
    )
    
    
    (1,454,066
    )
    
    
    (5,212,158
    )
    
    
    (6,666,224
    )Short-term and other borrowings
    
    
    (343,045
    )
    
    
    875
    
    
    
    (342,170
    )
    
    
    (857,747
    )
    
    
    (275,151
    )
    
    
    (1,132,898
    )Total interest-bearing liabilities
    
    
    (2,191,656
    )
    
    
    (1,727,764
    )
    
    
    (3,919,420
    )
    
    
    (2,274,370
    )
    
    
    (6,087,518
    )
    
    
    (8,361,888
    )Change in net interest income
    
    $
    1,000,031
    
    
    $
    (1,313,825
    )
    
    $
    (313,794
    )
    
    $
    1,730
    
    
    $
    1,166,061
    
    
    $
    1,167,791
  (1)
    
    The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the rate component. NONINTEREST INCOME AND NONINTEREST EXPENSE Noninterest income in 2003 decreased slightly over 2002. Increases in
gain on sale of loans of $615,000 resulted from the creation of Habersham
Mortgage, a division of Habersham Bank, which began operation in 2003. During
2002, Habersham Bancorp sold its investments in common stock of FLAG Financial
Corp, CB Financial Corp, and Greater Rome for gains of $838,000, $277,000, and
$50,000, respectively, in order to focus primarily on enhancing financial
services offered at Habersham Bank. This resulted in lower gains on investment
securities for 2003. Noninterest income in 2002 increased $854,000 or
27.48% when compared to 2001. Noninterest income in 2002 when compared to 2001
increased primarily due to an increase in gains on sales of investment
securities available for sale of $660,000 in 2002 compared to 2001. Income
from trust services also increased in 2002 to $562,000 from $366,000 in 2001
due to growth in the trust department operations in 2002. Noninterest expense in 2003 increased approximately $1,254,000 or 9.81% as compared to
2002. The increase in salaries and employee benefits is due to additional
costs associated with the creation of Habersham Mortgage, a division of
Habersham Bank and staffing requirements for our new location in Braselton.
Occupancy expenses increased due to increased depreciation expense associated
with purchases of new mainframe computer hardware and software during the
fourth quarter of 2002, in addition to depreciation expense on purchases of




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##### Table of Contents



new teller machines and software and replacement of personal computers at all
locations during 2003. Noninterest expense in 2002 increased by approximately $497,000 or 4.05% as compared to 2001. The increase for 2002 was
primarily due to increases of $278,000 in salaries and employee benefits and
$281,000 in marketing expenses offset by a decrease of approximately $87,000 in
outside services expense. Salaries and employee benefits increased primarily
as a result of annual salary adjustments and additional staffing requirements.
Outside services expense consists of FDIC insurance, legal and professional
services, insurance, director fees, and Georgia Department of Banking and
Finance fees. INCOME TAX EXPENSE The effective tax rate for the Company
decreased during 2003 to 23.87% compared to the effective tax rate during 2002
of 24.43%. The effective tax rate for the year ended December 31, 2001 was
25.48%. Higher tax-exempt income as a percentage of pre-tax income each year is
the primary cause for these fluctuations. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents a
reserve for probable losses in the loan portfolio. The adequacy of the
allowance for loan losses is evaluated periodically based on a review of all
significant loans, with particular emphasis on impaired, non-accruing, past
due, and other loans that management believes require special attention. The
determination of the allowance for loan losses is subjective and based on
consideration of a number of factors and assumptions. As such, the accounting
policy followed in the determination of the allowance is considered a critical
accounting policy. See Critical Accounting Estimates. The allowance for loan
losses methodology is based on a loan classification system. For purposes of
determining the required allowance for loan losses and resulting periodic
provisions, the Company identifies the problem loans in its portfolio and
segregates the remainder of the loan portfolio into broad segments, such as
commercial, commercial real estate, residential mortgage and consumer. The
Company provides for a general allowance for losses inherent in the portfolio
for each of the above categories. The general allowance is calculated based on
estimates of inherent losses which probably exist as of the evaluation date.
Loss percentages used for non-problem loans in the portfolio are based on
historical loss factors. The general allowance for losses on problem loans is
based on a review and evaluation of these loans, taking into consideration
financial condition and strengths of the borrower, related collateral, cash
flows available for debt repayment, and known and expected economic conditions.
General loss percentages for the problem loans are determined based upon
historical loss experience and regulatory requirements. For loans considered impaired, specific allowances are provided in the event that the
specific collateral analysis on each problem loan indicates that the
liquidation of the collateral would not result in repayment of these loans if
the loan is collateral dependent or if the present value of expected future
cash flows on the loan are less than the balance. In addition to these
allocated allowances, the Company has established an unallocated allowance of
approximately $289,000 at December 31, 2003. The basis for the unallocated
allowance is due to a number of qualitative factors, such as concentrations of
credit and changes in the outlook for local and regional economic conditions.
Management believes its allowance for loan losses is adequate to absorb losses
on loans outstanding at December 31, 2003.




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##### Table of Contents



The allowance for loan losses allocation is based on subjective judgment
and estimates and, therefore, is not necessarily indicative of the specific
amounts or loan categories in which charge-offs may ultimately occur. The
allocation of the allowance for loan losses by loan category at December 31,
2003, 2002, 2001, 2000, and 1999 is as follows: 2003
    
    2002
    
    2001
    
    2000
    
    1999Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofLoans to
    
    
    
    
    
    Loans to
    
    
    
    
    
    Loans to
    
    
    
    
    
    Loans to
    
    
    
    
    
    Loans toAmount
    
    Total loans
    
    Amount
    
    Total loans
    
    Amount
    
    Total loans
    
    Amount
    
    Total loans
    
    Amount
    
    Total loansCommercial, financial and
agricultural
    
    $
    411,359
    
    
    
    5.6
    %
    
    $
    372,075
    
    
    
    5.6
    %
    
    $
    859,875
    
    
    
    7.4
    %
    
    $
    775,783
    
    
    
    6.7
    %
    
    $
    921,585
    
    
    
    5.2
    %Real estate
    
    
    2,315,343
    
    
    
    88.3
    %
    
    
    2,214,516
    
    
    
    87.5
    %
    
    
    1,968,745
    
    
    
    84.8
    %
    
    
    2,026,521
    
    
    
    86.7
    %
    
    
    1,619,563
    
    
    
    89.4
    %Installment loans to
individuals
    
    
    618,639
    
    
    
    6.1
    %
    
    
    724,794
    
    
    
    6.9
    %
    
    
    598,657
    
    
    
    7.8
    %
    
    
    386,883
    
    
    
    6.6
    %
    
    
    442,005
    
    
    
    5.4
    %Unallocated
    
    
    297,761
    
    
    
    
    
    
    
    221,924
    
    
    
    
    
    
    
    174,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,643,102
    
    
    
    100.0
    %
    
    $
    3,533,309
    
    
    
    100.0
    %
    
    $
    3,601,877
    
    
    
    100.0
    %
    
    $
    3,189,187
    
    
    
    100.0
    %
    
    $
    2,983,153
    
    
    
    100.0
    %
 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 $950,000 in 2003 as compared to $1,307,000
in 2002. Decreases in the loan portfolio due to the maturity and repayments of
construction loans originated by BancMortgage resulted in the decrease in the
provision. 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. The following table summarizes, for each of the years in
the five year period ended December 31, 2003, selected information related to
the allowance for loan losses. 2003
    
    2002
    
    2001
    
    2000
    
    1999Balance of allowance for loan
losses at beginning of period
    
    $
    3,533,309
    
    
    $
    3,601,877
    
    
    $
    3,189,187
    
    
    $
    2,983,153
    
    
    $
    2,653,070Charge-offs:Commercial, financial and
agricultural
    
    
    (329,905
    )
    
    
    (372,583
    )
    
    
    (481,978
    )
    
    
    (266,960
    )
    
    
    (117,133
    )Real estate
    
    
    (137,861
    )
    
    
    (470,433
    )
    
    
    (283,163
    )
    
    
    (151,517
    )
    
    
    (6,106
    )Installment loans to individuals
    
    
    (660,230
    )
    
    
    (670,977
    )
    
    
    (444,584
    )
    
    
    (324,084
    )
    
    
    (141,661
    )Other
    
    
    (20,279
    )
    
    
    (33,729
    )
    
    
    (47,415
    )
    
    
    (43,377
    )
    
    
    (32,059
    )Total charge-offs
    
    
    (1,148,275
    )
    
    
    (1,547,722
    )
    
    
    (1,257,140
    )
    
    
    (785,938
    )
    
    
    (296,959
    )Recoveries:Commercial, financial and
agricultural
    
    
    130,864
    
    
    
    25,759
    
    
    
    63,451
    
    
    
    
    
    
    
    4,128Real estate
    
    
    45,581
    
    
    
    25,244
    
    
    
    24,720
    
    
    
    965
    
    
    
    59,570Installment loans to individuals
    
    
    125,179
    
    
    
    112,017
    
    
    
    105,671
    
    
    
    32,052
    
    
    
    57,872Other
    
    
    6,444
    
    
    
    9,134
    
    
    
    12,988
    
    
    
    3,955
    
    
    
    5,472Total recoveries
    
    
    308,068
    
    
    
    172,154
    
    
    
    206,830
    
    
    
    36,972
    
    
    
    127,042Net charge-offs
    
    
    (840,207
    )
    
    
    (1,375,568
    )
    
    
    (1,050,310
    )
    
    
    (748,966
    )
    
    
    (169,917
    )Provision for loan losses
    
    
    950,000
    
    
    
    1,307,000
    
    
    
    1,463,000
    
    
    
    955,000
    
    
    
    500,000Balance of allowance
for loan losses at end of period
    
    $
    3,643,102
    
    
    $
    3,533,309
    
    
    $
    3,601,877
    
    
    $
    3,189,187
    
    
    $
    2,983,153Average amount of loans
    
    $
    282,142,667
    
    
    $
    306,940,750
    
    
    $
    333,320,432
    
    
    $
    346,749,588
    
    
    $
    255,925,990Ratio of net charge-offs during
the period to average loans
outstanding during the period
    
    
    .30
    %
    
    
    .45
    %
    
    
    .32
    %
    
    
    .22
    %
    
    
    .07
    %Ratio of allowance to year-end loans
    
    
    1.37
    %
    
    
    1.15
    %
    
    
    1.11
    %
    
    
    .57
    %
    
    
    .94
    %




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##### Table of Contents



Net charge-offs amounted to $840,207 in 2003. There were 11 commercial
loans charged-off with an average balance of $29,991. Real estate secured
loans charged-off totaled 11 with an average balance of $47,200. Installment
loans charge-offs totaled 143 with an average charge-off balance of $4,800.
Commercial loan recoveries totaled 8 loans for an average amount of $16,000,
real estate secured loans recoveries totaled 7 loans for an average amount of
$5,000, and installment loan recoveries totaled 104 loans for an average of
$1,000. 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. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions, the financial condition of borrowers and other
factors. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Companys allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. LOANS 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 discount on SBA loans sold. The Company had no foreign loans at
December 31 in any of the last five years. 2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial, financial
and agricultural
    
    $
    14,651,171
    
    
    $
    17,070,602
    
    
    $
    23,921,875
    
    
    $
    25,566,931
    
    
    $
    16,623,264Real estate  construction
    
    
    50,134,674
    
    
    
    106,759,853
    
    
    
    119,663,535
    
    
    
    113,201,531
    
    
    
    106,915,963Real estate  mortgage
    
    
    184,348,892
    
    
    
    162,281,200
    
    
    
    156,022,201
    
    
    
    218,040,964
    
    
    
    174,244,063Installment loans to
individuals
    
    
    16,355,654
    
    
    
    21,294,151
    
    
    
    25,531,911
    
    
    
    25,287,734
    
    
    
    20,168,672Total
    
    $
    265,490,391
    
    
    $
    307,405,806
    
    
    $
    325,139,522
    
    
    $
    382,097,160
    
    
    $
    317,951,962
 Loans decreased approximately $41.9 million or 13.63% in 2003 as compared to 2002. Decreases in the real estate
construction portfolio, primarily due to the maturity and payoffs of
construction loans in the Atlanta area that had been originated by BancMortgage
Financial Corp, were offset by new residential mortgages and commercial real
estate. Decreases also occurred in the commercial, financial, and agricultural
portfolio and in the consumer lending portfolio due to interest rate and
economic pressures. The decrease in loans in 2002 resulted primarily
from decreases in the commercial and consumer loan portfolios of approximately
$6.8 million and $4.2 million, respectively, in addition to the sale of
residential mortgages and construction loans of approximately $31.5 million
offset by new residential mortgage and construction loans of approximately
$24.9 million.




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##### Table of Contents



The following table sets forth the maturities and sensitivities to changes
in interest rates of loans at December 31, 2003. DUE AFTERDUE IN
    
    ONE THROUGH
    
    DUE AFTERONE YEAR
    
    FIVE YEARS
    
    FIVE YEARS
    
    TOTALLOAN MATURITY:Commercial, financial
and agricultural
    
    $
    10,511,117
    
    
    $
    4,085,115
    
    
    $
    54,939
    
    
    $
    14,651,171Real estate  construction
    
    
    50,134,674
    
    
    
    
    
    
    
    
    
    
    
    50,134,674Real estate  mortgage
    
    
    115,948,544
    
    
    
    64,522,002
    
    
    
    3,878,346
    
    
    
    184,348,892Installment loans to
individuals
    
    
    5,663,795
    
    
    
    10,641,093
    
    
    
    50,766
    
    
    
    16,355,654TOTAL
    
    $
    182,258,130
    
    
    $
    79,248,210
    
    
    $
    3,984,051
    
    
    $
    265,490,391LOAN INTEREST RATE SENSITIVITY:Loans with:Predetermined interest rates
    
    $
    53,977,780
    
    
    $
    78,916,626
    
    
    $
    3,939,649
    
    
    $
    136,834,055Floating or adjustable
interest rates
    
    
    128,280,350
    
    
    
    331,584
    
    
    
    44,402
    
    
    
    128,656,336TOTAL
    
    $
    182,258,130
    
    
    $
    79,248,210
    
    
    $
    3,984,051
    
    
    $
    265,490,391
 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. 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. 2003
    
    2002
    
    2001
    
    2000
    
    1999NONPERFORMING ASSETS:Accruing loans 90 days past due
    
    $
    503,954
    
    
    $
    2,178,898
    
    
    $
    3,031,122
    
    
    $
    1,814,820
    
    
    $
    319,731Nonaccrual
    
    
    2,299,796
    
    
    
    2,115,485
    
    
    
    2,097,964
    
    
    
    789,341
    
    
    
    623,114Restructured loans
    
    
    26,217
    
    
    
    492,064
    
    
    
    689,510
    
    
    
    709,787
    
    
    
    781,803Other real estate owned
    
    
    2,634,673
    
    
    
    3,197,020
    
    
    
    4,685,704
    
    
    
    1,579,245
    
    
    
    1,440,084Total nonperforming assets
    
    $
    5,464,640
    
    
    $
    7,983,467
    
    
    $
    10,504,300
    
    
    $
    4,893,193
    
    
    $
    3,164,732RATIOS:Nonperforming loans (excluding
restructured loans) to total loans
    
    
    1.06
    %
    
    
    1.40
    %
    
    
    1.58
    %
    
    
    .68
    %
    
    
    .30
    %Nonperforming assets to total loans
plus other real estate owned
    
    
    2.04
    %
    
    
    2.57
    %
    
    
    3.18
    %
    
    
    1.28
    %
    
    
    .99
    %Allowance to nonperforming loans
    
    
    128.73
    %
    
    
    73.82
    %
    
    
    61.90
    %
    
    
    96.24
    %
    
    
    172.97
    %
 Most of the classifications of nonperforming assets had decreased at
December 31, 2003 over December 31, 2002 with the exception of nonaccrual
loans. Accruing loans over 90 days at December 31, 2002 consisted primarily of
twenty loans collateralized with residential properties which were moved into
the other real estate or collected. At December 31, 2003, accruing loans 90
days past due consisted of five real estate secured loans of approximately
$263,000 with the remainder in consumer and commercial loans of approximately
$126,000 and $114,000, respectively. The increase in loans on nonaccrual
status during 2003 was primarily due to the movement of approximately
$1,633,000 of loans collateralized by 1-4 family residential properties to
nonaccrual status during 2003. Restructured loans decreased during 2003 due to the reclassification of
one note of approximately $492,000 and one note of approximately $26,000
classified as a restructured loan.




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##### Table of Contents



During 2003, additions to other real
estate of approximately $1.7 million were offset by sales of other real estate
of approximately $2.2 million. At December 31, 2003, other real estate
consisted of three properties of approximately $1.6 million which are secured
by commercial real estate and thirteen properties of approximately $1 million
which are secured by residential properties. 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 $217,088, $298,461, and $353,847 in 2003, 2002, and 2001,
respectively, compared with interest income recognized of $113,450, $91,914,
and $145,584, respectively. At December 31, 2003, 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. Habersham
Bank held a concentration in mortgages for agribusiness purposes in the poultry
industry which totaled approximately $5.7 million and $6 million at December
31, 2003 and 2002, or approximately 2.18% and 1.97% of total net loans at
December 31, 2003 and 2002, respectively. These mortgages for agribusiness
purposes are primarily secured by real estate consisting of residences, poultry
houses, and equipment. None of the mortgages are considered individually
significant. Habersham Bank held a concentration in commercial loans for the
travel accommodation industry which total approximately $19.7 million at
December 31, 2003, or approximately 7.41% of total net loans. These loans are
primarily secured by commercial real estate. INVESTMENT SECURITIES The Company has classified its investment securities as available for sale and
held to maturity. 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,
2003 approximately $72.8 million of investment securities were classified as
available for sale. Approximately $164,000 of net unrealized gain, net of
income taxes, was included in shareholders equity related to available for
sale investment securities. The following table sets forth the
carrying amounts of investment securities at December 31, 2003, 2002, and 2001. 2003
    
    2002
    
    2001Investment securities available for sale:U.S. Treasury
    
    $
    14,667,221
    
    
    $
    514,608
    
    
    $
    1,544,065U.S. Government agencies
    
    
    45,272,660
    
    
    
    41,589,860
    
    
    
    31,131,435States & political subdivisions
    
    
    12,194,882
    
    
    
    12,011,458
    
    
    
    12,176,829Other investments
    
    
    677,868
    
    
    
    702,974
    
    
    
    2,768,062Total
    
    $
    72,812,631
    
    
    $
    54,818,900
    
    
    $
    47,620,391Investment securities held to maturity:U.S. Government agencies
    
    $
    193,008
    
    
    $
    248,840
    
    
    $
    2,100,963States & political subdivisions
    
    
    4,666,705
    
    
    
    6,640,464
    
    
    
    7,545,175Total
    
    $
    4,859,713
    
    
    $
    6,889,304
    
    
    $
    9,646,138




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##### Table of Contents



The following table sets forth the maturities of debt investment
securities at carrying value at December 31, 2003 and the related weighted
yields of such securities on a tax equivalent basis (assuming a 34% tax rate). MATURING INONE YEAR
    
    1-5
    
    5-10
    
    AFTER 10OR LESS
    
    YEARS
    
    YEARS
    
    YEARSInvestment securities available for sale:Carrying value:U.S. Treasury
    
    $
    
    
    
    $
    2,653,782
    
    
    $
    7,133,201
    
    
    $
    4,880,238U.S. Government agencies
    
    
    
    
    
    
    1,300,212
    
    
    
    7,079,868
    
    
    
    36,892,580States & political subdivisions
    
    
    205,743
    
    
    
    1,431,235
    
    
    
    3,735,983
    
    
    
    6,821,921Weighted average yields:U.S. Treasury
    
    
    
    %
    
    
    3.51
    %
    
    
    3.66
    %
    
    
    4.27
    %U.S. Government agencies
    
    
    
    %
    
    
    2.82
    %
    
    
    3.81
    %
    
    
    4.32
    %States & political subdivisions
    
    
    5.73
    %
    
    
    3.90
    %
    
    
    4.77
    %
    
    
    4.59
    %Investment securities held to maturity:Carrying value:U.S. Government agencies
    
    $
    
    
    
    $
    64,505
    
    
    $
    99,447
    
    
    $
    29,056States & political subdivisions
    
    
    505,034
    
    
    
    1,648,986
    
    
    
    994,312
    
    
    
    1,518,373Weighted average yields:U.S. Government agencies
    
    
    
    %
    
    
    6.27
    %
    
    
    8.31
    %
    
    
    5.86
    %States & political subdivisions
    
    
    4.71
    %
    
    
    4.76
    %
    
    
    4.64
    %
    
    
    4.93
    %
 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, 2003. DERIVATIVE INSTRUMENTS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended, on January 1, 2001.
In accordance with the transition provisions of SFAS No. 133, the Company
recorded a net-of-tax cumulative effect loss of $162,000 on January 1, 2001 to
reflect the fair value of forward commitments to sell mortgage-backed
securities held by BancMortgage. The provisions of SFAS No. 133 allowed for a
one time transfer of investment securities previously classified as held to
maturity to available for sale upon adoption. As a result, the Company
transferred approximately $999,000 of investment securities previously
classified as held to maturity to its available for sale portfolio on January
1, 2001. In the normal course of business, as part of its former
mortgage banking operations, the Company extended interest rate lock
commitments to borrowers who applied for loan funding and met certain credit
and underwriting criteria. Such commitments were typically for short terms.
Such commitments to originate fixed-rate mortgage loans for resale and forward
commitments to sell mortgage-backed securities were the Companys only
derivative instruments. At December 31, 2003, other than a minimal amount of interest rate lock
commitments to originate mortgage loans for resale, the Company did not have
any derivative instruments.




---



##### Table of Contents



DEPOSITS Average deposits decreased approximately $40.0 million and decreased approximately $14.2 million during
2003 and 2002, 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,
2003, 2002, and 2001. 2003
    
    
    
    
    
    2002
    
    
    
    
    
    2001AVG. AMT
    
    AVG
    
    AVG. AMT
    
    AVG
    
    AVG. AMT
    
    AVGOUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATE
    
    OUTSTANDING
    
    RATEInterest-bearing demand deposits
    
    $
    57,534,840
    
    
    
    .62
    %
    
    $
    53,770,339
    
    
    
    .92
    %
    
    $
    52,263,513
    
    
    
    1.91
    %Nonininterest-bearing demand deposits
    
    
    39,691,635
    
    
    
    n/a
    
    
    
    36,264,247
    
    
    
    n/a
    
    
    
    28,669,906
    
    
    
    n/aTime certificates of deposit
    
    
    188,858,305
    
    
    
    3.10
    %
    
    
    237,423,845
    
    
    
    3.90
    %
    
    
    261,260,988
    
    
    
    6.10
    %
 At December 31, 2003, time certificates of deposit of $100,000 or more totaled
$63,730,583. The maturities of all time certificates of deposit over $100,000
are as follows: 3 months or less
    
    $
    13,290,442Over 3 but less than 6 months
    
    
    24,060,994Over 6 but not more than 12 months
    
    
    12,128,073Over 1 year but not more than 5 years
    
    
    14,251,074TOTAL
    
    $
    63,730,583
 BORROWINGS Borrowings increased approximately $3.8
million during 2003 compared to 2002 primarily due to the purchase of federal
funds at year-end of approximately $4.2 million. Other short-term borrowings,
the treasury note and securities sold under repurchase agreements, decreased
approximately $354,000 and $32,000, respectively. At December 31, 2003,
the Company has a Daily Rate Credit line and a Warehouse line of credit with
the Federal Home Loan Bank totaling $230,833,000 of which $30,000,000 was
advanced and $200,833,000 was available. Both of these lines of credit are
specific collateral agreements. The Daily Rate Credit line is secured by
qualifying first mortgage loans, commercial loans, and pledged securities. The
Warehouse line of credit is secured by qualifying first mortgage loans. The
advances outstanding at December 31, 2003 and 2002 consist of three fixed rate
advances of $10,000,000 each that bear interest at 6.72%, 6.02%, and 4.93% and
mature in 2005, 2010, and 2011 (callable each year), respectively. At
December 31, 2003, the Company had available repurchase agreement line of
credit commitments with Compass Bank totaling $22,950,000 of which none was
advanced. The Company also had available repurchase agreement line of credit
commitments with the National Bank of Commerce totaling $1,901,000 at December
31, 2003 of which none was advanced. 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.




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##### Table of Contents



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, 2003, that the Company meets
all capital adequacy requirements to which it is subject. As of December
31, 2003, the most recent notifications from both the Federal Deposit Insurance
Corporation and the Federal Reserve Bank of Atlanta categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Banks categories. The Companys and
the Banks actual capital amounts and ratios as of December 31, 2003 follow (in
thousands): TO BE WELLCAPITALIZEDUNDER PROMPTCORRECTIVEFOR CAPITAL
    
    ACTIONACTUAL
    
    ADEQUACY PURPOSES
    
    PROVISIONSAMOUNT
    
    RATIO
    
    AMOUNT
    
    RATIO
    
    AMOUNT
    
    RATIOAs of December 31, 2003Total Capital (to risk-weighted assets):Company
    
    $
    50,543
    
    
    
    17.26
    %
    
    $
    23,433
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/AHabersham Bank
    
    
    46,366
    
    
    
    15.94
    %
    
    
    23,270
    
    
    
    8
    %
    
    $
    29,087
    
    
    
    10
    %Tier I Capital (to risk-weighted assets):Company
    
    $
    46,954
    
    
    
    16.03
    %
    
    $
    11,717
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AHabersham Bank
    
    
    42,777
    
    
    
    14.71
    %
    
    
    11,635
    
    
    
    4
    %
    
    $
    17,452
    
    
    
    6
    %Tier I Capital (to average assets):Company
    
    $
    46,954
    
    
    
    12.34
    %
    
    $
    15,224
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AHabersham Bank
    
    
    42,777
    
    
    
    11.35
    %
    
    
    15,071
    
    
    
    4
    %
    
    $
    18,838
    
    
    
    5
    %
 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. Cash dividends were paid at a rate of $.06 per share in March, June, and September
of 2003, with a special dividend of $1.00 paid in December of 2003. The
special dividend was paid in celebration of Habersham Banks 100th anniversary
coming in 2004 and in light of the favorable tax treatment of dividend income
under recent tax law changes. Cash dividends were paid at a rate of $.06 per
share in each of March, June, September, and December for 2002. 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.




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##### Table of Contents



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 an 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. INTEREST RATE SENSITIVITY ANALYSIS DUE IN
    
    DUE AFTER
    
    DUE AFTER
    
    DUE AFTER
    
    DUE AFTERTHREE
    
    THREE THROUGH
    
    SIX THROUGH
    
    ONE THROUGH
    
    FIVEMONTHS
    
    SIX MONTHS
    
    TWELVE MONTHS
    
    FIVE YEARS
    
    YEARS
    
    TOTALINTEREST-EARNING
ASSETS:Investment securities
    
    $
    200,382
    
    
    $
    304,981
    
    
    $
    205,414
    
    
    $
    7,098,720
    
    
    $
    69,184,979
    
    
    $
    76,994,476Loans
    
    
    132,878,489
    
    
    
    24,444,667
    
    
    
    24,934,974
    
    
    
    79,248,210
    
    
    
    3,984,052
    
    
    
    265,490,392Total interest-earning assets
    
    
    133,078,871
    
    
    
    24,749,648
    
    
    
    25,140,388
    
    
    
    86,346,930
    
    
    
    73,169,031
    
    
    
    342,484,868INTEREST-BEARING
LIABILITIES:Deposits:Money market and NOW
    
    
    59,076,674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,076,674Savings
    
    
    9,473,852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,473,852Certificates of deposit
    
    
    38,821,434
    
    
    
    59,091,492
    
    
    
    29,595,506
    
    
    
    45,680,059
    
    
    
    7,622
    
    
    
    173,196,113Borrowings
    
    
    12,962,231
    
    
    
    
    
    
    
    
    
    
    
    10,000,000
    
    
    
    20,000,000
    
    
    
    42,962,231Total interest-bearing liabilities
    
    
    120,334,191
    
    
    
    59,091,492
    
    
    
    29,595,506
    
    
    
    55,680,059
    
    
    
    20,007,622
    
    
    
    284,708,870Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities
    
    $
    12,744,680
    
    
    $
    (34,341,844
    )
    
    $
    (4,455,118
    )
    
    $
    30,666,871
    
    
    $
    53,161,409
    
    
    $
    57,775,998Cumulative gap
    
    $
    12,744,680
    
    
    $
    (21,597,164
    )
    
    $
    (26,052,282
    )
    
    $
    4,614,589
    
    
    $
    57,775,998Ratio of cumulative gap to
total cumulative earning-assets
    
    
    9.58
    %
    
    
    (13.68
    )%
    
    
    (14.24
    )%
    
    
    1.71
    %
    
    
    16.87
    %Ratio of interest-earning
assets to interest-bearing liabilities
    
    
    110.59
    %
    
    
    87.96
    %
    
    
    87.54
    %
    
    
    101.74
    %
    
    
    120.29
    %
 The Companys strategy is
to maintain a ratio of interest sensitive assets to interest sensitive
liabilities in the range of 80% to 120% at the less-than one-year-time frame.
At December 31, 2003, the Company was able to meet such objective. The
interest rate sensitivity analysis has a negative one year gap of approximately
$26 million (excess of interest-bearing liabilities to interest-earning assets
repricing within one year). However, the Companys experience has shown that
NOW, money market, and savings deposits of approximately $68.5 million are less
sensitive to short term rate movements, thus the negative one year gap is
likely lower. 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.




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##### Table of Contents



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 Company is also subject to equity
risk as a result of changes in market values of its equity securities. 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, 2003. 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, 2003. MARKET RISK INFORMATION (in thousands) Principal/Notional Amount Maturing in:
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    ValueRate-sensitive assets:Fixed interest rate loans
    
    $
    53,978
    
    
    $
    33,608
    
    
    $
    33,994
    
    
    $
    6,322
    
    
    $
    4,992
    
    
    $
    3,940
    
    
    $
    136,834
    
    
    $
    146,148Average interest rate
    
    
    6.27
    %
    
    
    6.23
    %
    
    
    6.43
    %
    
    
    7.24
    %
    
    
    6.85
    %
    
    
    5.64
    %
    
    
    6.35
    %Variable interest rate loans
    
    
    128,280
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    128,656
    
    
    
    128,656Average interest rate
    
    
    5.23
    %
    
    
    5.50
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    3.89
    %
    
    
    5.23
    %Fixed interest rate securities
    
    
    711
    
    
    
    481
    
    
    
    1,376
    
    
    
    2,209
    
    
    
    3,033
    
    
    
    68,062
    
    
    
    75,872
    
    
    
    76,190Average interest rate
    
    
    5.01
    %
    
    
    4.77
    %
    
    
    3.25
    %
    
    
    4.12
    %
    
    
    3.49
    %
    
    
    4.29
    %
    
    
    4.24
    %Variable interest rate securities
    
    
    1,122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,122
    
    
    
    1,122Average interest rate
    
    
    3.31
    
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    3.31
    %Rate-sensitive liabilities:Savings and interest-bearing deposits
    
    
    68,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,551
    
    
    
    68,551Average interest rate
    
    
    .46
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    .46
    %Fixed interest rate time deposits
    
    
    127,488
    
    
    
    16,268
    
    
    
    20,146
    
    
    
    6,878
    
    
    
    2,388
    
    
    
    8
    
    
    
    173,176
    
    
    
    225,009Average interest rate
    
    
    2.98
    %
    
    
    4.73
    %
    
    
    4.68
    %
    
    
    4.96
    %
    
    
    4.32
    
    
    
    
    %
    
    
    3.52
    %Variable interest rate time deposits
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Average interest rate
    
    
    3.45
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    3.45
    %Fixed interest rate Borrowings
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    30,000
    
    
    
    33,090Average interest rate
    
    
    
    %
    
    
    6.72
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    5.48
    %
    
    
    5.89
    %Variable interest rate borrowings
    
    
    12,962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,962
    
    
    
    12,962Average interest rate
    
    
    .86
    %
    
    
    
    %
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    %
    
    
    .86
    %
 Equity investments of $750,000 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.




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##### Table of Contents



LIQUIDITY Liquidity management involves the matching of the cash flow requirements of
customers, either depositors withdrawing funds or borrowers needing loans, and
the ability of the Company to meet those requirements. The Companys
liquidity program is designed and intended to provide guidance in funding the
credit and investment activities of the Company while at the same time ensuring
that the deposit obligations of the Company 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. Scheduled amortization and prepayments of loans, maturities and calls of
investment securities and funds from operations provide a daily source of
liquidity. In addition, the Company may and does seek outside sources of
funds. The Company has the ability, on a short-term basis, to purchase
federal funds from other financial institutions up to $25,000,000. At December
31, 2003, federal funds purchased from other financial institutions total
$4,189,000. The Company can borrow funds from the FHLB, subject to eligible
collateral of loans. At December 31, 2003, our maximum borrowing capacity from
the FHLB was $230,833,000 and the Company had outstanding borrowings of
$30,000,000 leaving available unused borrowing capacity of $200,833,000. In
addition, the Company has made arrangements with commercial banks for
short-term advances up to $24,851,000 under repurchase agreement lines of
credit of which none was advanced at December 31, 2003. Loan repayments
and maturing investment securities are a relatively predictable source of
funds. However, deposit flows, calls of investment securities and prepayment
of loans are strongly influenced by interest rates, general and local economic
conditions, and competition in the marketplace. These factors reduce the
predictability of the timing of these sources of funds. Habersham Banks
liquidity policy requires a minimum ratio of 20% of cash and certain short-term
investments to net withdrawable deposit accounts. The Banks liquidity ratios
at December 31, 2003 and 2002 were 33.50% and 21.11%, respectively. OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS The Company is
a party to financial instruments with off-balance-sheet risk in the normal
course of its lending activities to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. The Companys exposure to credit losses in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the
contractual amounts of those instruments. The Company uses the same credit
policies in making these commitments as it does for on-balance-sheet
instruments and evaluates each customers creditworthiness on a case by case
basis. At December 31, 2003, the Company had outstanding loan commitments
approximating $45,900,000 and standby letters of credit approximating
$3,852,000. The amount of collateral obtained, if deemed necessary, for these
financial instruments by the Company, upon extension of
credit, is based on managements credit evaluation of the customer. Collateral
held, if any, varies but may include inventory, equipment, real estate, or
other property. The accounting loss the Company would incur if any party to the
financial instrument failed completely to perform according to the term of the
contract and the collateral proved to be of no value is equal to the face
amount of the financial instrument. The Companys commitments are funded
through internal funding sources of scheduled repayments of loans and sales and
maturities of investment securities available for sale or external funding
sources through acceptance of deposits from customers or borrowing from other
financial institutions.




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##### Table of Contents



The following table is a summary of the
Companys commitments to extend credit, commitments under contractual leases as
well as the Companys contractual obligations, consisting of deposits, FHLB
advances and borrowed funds by contractual maturity date. 2004
    
    2005
    
    2006
    
    2007
    
    2008Commitments on lines of credit
    
    
    45,900,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    3,851,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commitments under lease agreements
    
    
    126,420
    
    
    
    114,078
    
    
    
    81,040
    
    
    
    27,958
    
    
    
    4,011Deposits
    
    
    233,912,287
    
    
    
    16,268,443
    
    
    
    20,146,357
    
    
    
    6,877,652
    
    
    
    2,387,607FHLB advances
    
    
    
    
    
    
    10,000,000
    
    
    
    
    
    
    
    
    
    
    
    Short-term borrowings
    
    
    578,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal funds purchased and securities
sold under repurchased agreements
    
    
    12,383,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total commitments and
contractual obligations
    
    $
    296,752,719
    
    
    $
    26,382,521
    
    
    $
    20,227,397
    
    
    $
    6,905,610
    
    
    $
    2,391,618
 Although management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability
should the need arise, management believes that the risk of all customers fully
drawing on all these lines of credit at the same time is remote. ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45
requires that the guarantor recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing such
guarantee. FIN 45 also requires additional disclosure about the guarantors
obligations under certain guarantees that it has issued. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002
and the disclosure requirements are effective for financial statements for
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material impact on the Companys financial condition or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities and Interpretation of ARB No. 51(FIN 46). In
December 2003, the FASB reissued FIN 46 (FIN46R). FIN 46 establishes the
criteria for consolidating variable interest entities. The adoption of FIN 46
and FIN 46R is not
expected to have a material impact on the consolidated financial statements of
the Company as the Company does not have a variable interest in any entity. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003. The adoption of SFAS No. 149 did not have a significant effect
on the Companys consolidated financial statements. In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity, and imposes
certain additional disclosure requirements. The provisions of SFAS No. 150 are
generally




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##### Table of Contents



effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this standard did
not have a significant effect on the Companys consolidated financial
statements. 
 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. 
 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated balance sheets of the Company and subsidiaries as of December
31, 2003 and 2002, 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 year period ended
December 31, 2003, the report issued thereon by the Companys independent
auditors and quarterly financial data (unaudited) are incorporated herein by
reference to the Companys 2003 Annual Report to Shareholders and are attached
as Exhibit 13 hereto. 
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 
 Item 9a. CONTROLS AND PROCEDURES As of the end of the period covered by this
report, the Companys management, including the Companys Executive Officer and
Chief Financial Officer, reviewed and evaluated the effectiveness of the design
and operation of the Companys disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company, (including its consolidated
subsidiaries) that is required to be included in the Companys periodic filings
with the Securities and Exchange Commission. There have been no significant
Changes in the Companys internal controls or, to managements knowledge, in
other factors that could significantly affect those internal controls during
the last fiscal quarter of 2003, and there have been no corrective actions with
respect to significant deficiencies or material weaknesses. 
 PART III 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Companys Code of Ethics that applies to its senior management,
including its Chief Executive Officer, Chief Financial Officer and Comptroller,
is attached as Exhibit 14 hereto. Additional information concerning the
Companys directors and executive officers Appears in the Proxy Statement
under the headings Election of Directors-Nominees, -Compliance with Section
16(a) of the Exchange Act and Executive Officers and is incorporated by
reference herein. 
 Item l1. EXECUTIVE COMPENSATION Additional
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.




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##### Table of Contents



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER Matters The following table provides
information regarding compensation plans under which equity securities of the
Company are authorized for issuance. All data is presented as of December 31,
2003. Equity Compensation Plan Table (a)
    
    (b)
    
    (c)Number of securitiesremaining available forfuture issuance underNumber of securities to be
    
    Weighted-average
    
    equity compensationissued upon exercise of
    
    exercise price of
    
    plans (excludingoutstanding options,
    
    outstanding options,
    
    securities reflected inPlan category
    
    warrants and rights
    
    warrants and rights
    
    column (a))Equity compensation
plans approved by
security holders
    
    
    262,953
    
    
    $
    18.21
    
    
    
    484,549Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    262,953
    
    
    $
    18.21
    
    
    
    484,549
 Additional 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. 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accountant fees and services
appears in the Proxy Statement under the heading Audit Committee Matters 
Audit Fees and is incorporated herein by reference. 
 PART IV 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K See Item 8 for a list of the financial statements filed as
a part of this report. No financial statement schedules are applicable as the
required information is included in the financial statements in Item 8.




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##### Table of Contents



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. Exhibit No.
    
    Document3.1
    
    Amended and restated Articles of Incorporation of Habersham
Bancorp, as amended by amendment dated April 16, 1988 (1) and
further amended by amendment dated April 15, 2000 (2)3.2
    
    By-laws of Habersham Bancorp, as amended as of November 20,
1989 (3) and as of March 16, 1991. (4)10.1*
    
    Habersham Bancorp Savings Investment Plan, as amended and
restated March 17, 1990, and the related Trust Agreements, as
amended March 17, 1990. (3)10.2*
    
    Habersham Bancorp Incentive Stock Option Plan, as amended
February 26, 1994. (5)10.3*
    
    Habersham Bancorp Outside Directors Stock Option Plan (6), as
amended January 17, 2004. (7)10.4*
    
    Habersham Bancorp 1996 Incentive Stock Option Plan, as amended
by the First Amendment thereto dated January 29, 2000. (8)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. (9)13.0
    
    Financial statements and notes thereto contained in the
Habersham Bancorp 2003 Annual Report and quarterly financial
data (unaudited).14.0
    
    Code of Ethics.21.0
    
    Subsidiaries of Habersham Bancorp.23.1
    
    Independent Accountants Consent31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350 as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (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 3.1 to Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000 (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, 1989
(File No. 0-13153). (4) 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).




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##### Table of Contents



(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, 1993
(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, 1994
(File No. 0-13153). (7) Incorporated by reference to Appendix B to the Registrants 2004 Proxy
Statement for its Annual Meeting of Shareholders filed on Schedule 14A (File No.
0-13153). (8) 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). (9) 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). * Indicates the Registrants plans, management contracts and compensatory
arrangements.  (b)
    
    Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter of the year ended December 31, 2003: Report of Third Quarter 2003 earnings filed on October 29, 2003. Report of Changes in the Board of Directors filed on October 15, 2003. Report of special dividend filed on October 15, 2003.




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized. HABERSHAM BANCORP (Registrant) /s/ David D. Stovall
    
    Date: March 30, 2004By:
    
    Director, President andChief 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. Signature
    
    Title
    
    Date/s/ Thomas A. Arrendale, III
    
    Chairman of the Board
and Director
    
    March 30, 2004/s/ David D. Stovall
    
    Director, President and
Chief Executive Officer *
    
    March 30, 2004/s/ Edward D. Ariail
    
    Director, Vice President and
Corporate Secretary
    
    March 30, 2004/s/ Michael C. Martin
    
    Director
    
    March 30, 2004/s/ James A. Stapleton, Jr.
    
    Director
    
    March 30, 2004/s/ Calvin R. Wilbanks
    
    Director
    
    March 30, 2004/s/ Michael L. Owen
    
    Director
    
    March 30, 2004/s/ Annette Banks
    
    Vice President and
Chief Financial Officer **
    
    March 30, 2004
 * Principal executive
officer.
** Principal financial and accounting officer.




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Document3.1
    
    Amended and restated Articles of Incorporation of Habersham
Bancorp, as amended by amendment dated April 16, 1998 (1) and
as further amended by amendment dated April 15, 2000. (2)3.2
    
    By-laws of Habersham Bancorp, as amended as of November 20,
1989 (3) and as of March 16, 1991. (4)10.1*
    
    Habersham Bancorp Savings Investment Plan, as amended and
restated March 17, 1990, and the related Trust Agreements, as
amended March 17, 1990. (3)10.2*
    
    Habersham Bancorp Incentive Stock Option Plan, as amended
February 26, 1994. (5)10.3*
    
    Habersham Bancorp Outside Directors Stock Plan (6), as amended
January 17, 2004. (7)10.4*
    
    Habersham Bancorp 1996 Incentive Stock Option Plan, as amended
by the First Amendment thereto dated January 29, 2000. (8)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. (9)13.0
    
    Financial statements and notes thereto contained in the
Habersham Bancorp 2003 Annual Report and quarterly financial
data.14.0
    
    Code of Ethics.21.0
    
    Subsidiaries of Habersham Bancorp23.1
    
    Independent Accountants Consent31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350 as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (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 be reference to
exhibit 3.1 to Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 (File No. 0-13153).




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##### Table of Contents



(3) Incorporated herein by reference to
exhibit of same number in the Registrants Annual Report on Form 10-K for the
year December 31, 1989 (File No. 0-13153). (4) 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). (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, 1993. (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, 1994. (File No.
0-13153). (7) Incorporated by reference to Appendix b to the Registrants
2004 Proxy Statement for its Annual Meeting of Shareholders filed on Schedule
14A (File No. 0-13153). (8) 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). (9) 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). * Indicates the Registrants plans, management contracts and compensatory
arrangements.