**HABERSHAM
      BANCORP**


**AND
      SUBSIDIARIES**








**Consolidated
      Financial Statements**





**December
      31, 2005, 2004 and 2003**





**(with
      Independent Accountants’ Report thereon)**








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS**














To
      the
      Board of Directors and Stockholders


Habersham
      Bancorp and Subsidiaries








We
      have
      audited the accompanying consolidated balance sheets of Habersham Bancorp and
      subsidiaries as of December 31, 2005 and 2004, and the related consolidated
      statements of earnings, comprehensive income, changes in stockholders’ equity
      and cash flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits. The
      consolidated financial statements of Habersham Bancorp and subsidiaries for
      the
      year ended December 31, 2003, were audited by other auditors whose report,
      dated
      January 23, 2004, expressed an unqualified opinion on those
      statements.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the 2005 and 2004 consolidated financial statements referred to above
      present fairly, in all material respects, the financial position of Habersham
      Bancorp and subsidiaries as of December 31, 2005 and 2004, and the results
      of
      their operations and their cash flows for the years then ended, in conformity
      with accounting principles generally accepted in the United States of
      America.







/s/
                Porter Keadle Moore,
                LLP




Atlanta,
      Georgia


March
      8,
      2006





Habersham
      Bancorp and Subsidiaries


Consolidated
      Balance Sheets


December
      31, 2005 and 2004





Assets2005
            
            2004Cash
                and due from banks
            
            $
            16,546,422
            
            
            9,558,770Federal
                funds sold
            
            
            36,320,000
            
            
            -Cash
                and cash equivalents
            
            
            52,866,422
            
            
            9,558,770Investment
                securities available for sale
            
            
            73,115,232
            
            
            70,313,485Investment
                securities held to maturity, estimated fair value of $3,514,273 and
                $4,340,548
            
            
            3,387,449
            
            
            4,111,041Other
                investments
            
            
            3,375,424
            
            
            2,469,134Loans
                held for sale
            
            
            2,119,438
            
            
            1,061,700Loans,
                net of allowance for loan loss of $3,944,525 and
                $3,634,643
            
            
            316,773,266
            
            
            277,137,222Premises
                and equipment, net
            
            
            10,519,442
            
            
            9,738,959Accrued
                interest receivable
            
            
            2,359,171
            
            
            1,593,837Other
                real estate
            
            
            2,773,662
            
            
            1,289,880Goodwill,
                net
            
            
            3,549,780
            
            
            2,488,540Other
                assets
            
            
            7,591,498
            
            
            6,170,881Total
                assets
            
            $
            478,430,784
            
            
            385,933,449Liabilities
                and Stockholders’ EquityDeposits:Noninterest-bearing
                demand
            
            $
            92,697,588
            
            
            44,316,403Money
                market and NOW accounts
            
            
            72,307,257
            
            
            66,381,857Savings
            
            
            12,297,543
            
            
            10,516,549Time
                ($100,000 and over)
            
            
            88,428,060
            
            
            67,878,559Other
                time
            
            
            107,031,498
            
            
            103,863,853Total
                deposits
            
            
            372,761,946
            
            
            292,957,221Short-term
                borrowings
            
            
            775,442
            
            
            786,036Federal
                funds purchased and securities sold under repurchase
                agreements
            
            
            8,423,323
            
            
            4,834,631Federal
                Home Loan Bank advances
            
            
            42,300,000
            
            
            36,000,000Accrued
                interest payable
            
            
            1,962,707
            
            
            1,639,174Other
                liabilities
            
            
            1,950,234
            
            
            1,710,593Total
                liabilities
            
            
            428,173,652
            
            
            337,927,655CommitmentsStockholders’
                equity:Common
                stock, $1.00 par value; 10,000,000 shares authorized; 2,921,240 and
                2,900,192 shares issued and outstanding
            
            
            2,921,240
            
            
            2,900,192Additional
                paid-in capital
            
            
            14,723,175
            
            
            14,560,488Retained
                earnings
            
            
            33,544,763
            
            
            30,661,077Accumulated
                other comprehensive income (loss)
            
            
            (932,046
            )
            
            (115,963
            )Total
                stockholders’ equity
            
            
            50,257,132
            
            
            48,005,794Total
                liabilities and stockholders’ equity
            
            $
            478,430,784
            
            
            385,933,449




See
      accompanying notes to consolidated financial statements.


-2-


Habersham
      Bancorp and Subsidiaries


Consolidated
      Statements of Earnings


For
      the
      Years Ended December 31, 2005, 2004 and 2003





2005
            
            2004
            
            2003Interest
                income:Loans
            
            $
            22,421,374
            
            
            17,537,761
            
            
            19,677,470Investments:Taxable
                securities
            
            
            2,371,946
            
            
            2,289,392
            
            
            1,900,731Tax
                exempt securities
            
            
            807,397
            
            
            751,363
            
            
            820,122Other
                investments
            
            
            158,061
            
            
            126,255
            
            
            139,894Federal
                funds sold
            
            
            177,491
            
            
            38,648
            
            
            54,593Total
                interest income
            
            
            25,936,269
            
            
            20,743,419
            
            
            22,592,810Interest
                expense:Time
                deposits, $100,000 and over
            
            
            2,091,969
            
            
            1,607,854
            
            
            2,243,234Other
                deposits
            
            
            4,291,317
            
            
            3,143,765
            
            
            4,009,389Federal
                funds purchased and securities sold under repurchase
                agreements
            
            
            235,025
            
            
            107,458
            
            
            77,504Short-term
                and other borrowings, primarily FHLB advances
            
            
            1,982,027
            
            
            1,932,428
            
            
            1,791,540Total
                interest expense
            
            
            8,600,338
            
            
            6,791,505
            
            
            8,121,667Net
                interest income
            
            
            17,335,931
            
            
            13,951,914
            
            
            14,471,143Provision
                for loan losses
            
            
            330,000
            
            
            482,500
            
            
            950,000Net
                interest income after provision for loan losses
            
            
            17,005,931
            
            
            13,469,414
            
            
            13,521,143Noninterest
                income:Mortgage
                origination income
            
            
            981,045
            
            
            1,002,166
            
            
            808,147Service
                charges on deposit accounts
            
            
            701,881
            
            
            709,695
            
            
            802,630Other
                service charges and commissions
            
            
            160,656
            
            
            185,499
            
            
            219,534Securities
                (losses) gains, net
            
            
            (5,654
            )
            
            51,816
            
            
            211,304Gain
                on sale of other investments
            
            
            -
            
            
            198,641
            
            
            60,000Gain
                on sale of premises and equipment
            
            
            14,000
            
            
            879,453
            
            
            -Income
                from Company-owned life insurance
            
            
            181,775
            
            
            167,361
            
            
            177,336Trust
                services fees
            
            
            238,124
            
            
            200,338
            
            
            439,566Other
                income
            
            
            1,379,622
            
            
            1,035,533
            
            
            771,134Total
                noninterest income
            
            
            3,651,449
            
            
            4,430,502
            
            
            3,489,651Noninterest
                expense:Salaries
                and employee benefits
            
            
            8,478,019
            
            
            8,265,631
            
            
            7,613,744Occupancy
                expenses
            
            
            1,930,771
            
            
            1,835,487
            
            
            1,529,737Computer
                services
            
            
            459,544
            
            
            429,415
            
            
            390,086Other
            
            
            4,326,603
            
            
            4,246,351
            
            
            4,465,819Total
                noninterest expense
            
            
            15,194,937
            
            
            14,776,884
            
            
            13,999,386Earnings
                before income taxes
            
            
            5,462,443
            
            
            3,123,032
            
            
            3,011,408Income
                tax expense
            
            
            1,648,972
            
            
            779,759
            
            
            715,446Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962Earnings
                per common share - basic
            
            $
            1.31
            
            
            .81
            
            
            .81Earnings
                per common share - diluted
            
            $
            1.30
            
            
            .80
            
            
            .79Weighted
                average number of common shares outstanding
            
            
            2,903,788
            
            
            2,889,004
            
            
            2,839,063Weighted
                average number of common and common equivalent shares
                outstanding
            
            
            2,938,698
            
            
            2,939,951
            
            
            2,895,113





See
      accompanying notes to consolidated financial statements.


-3-





Habersham
      Bancorp and Subsidiaries


Consolidated
      Statements of Comprehensive Income


For
      the
      Years Ended December 31, 2005, 2004 and 2003





2005
            
            2004
            
            2003Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962Other
                comprehensive income (loss):Unrealized
                holding gains (losses) on investment securities available for sale
                arising
                during period
            
            
            (1,445,125
            )
            
            (249,116
            )
            
            (574,072
            )Unrealized
                holding gains (losses) on derivative financial instruments classified
                as
                cash flow hedges arising during the period
            
            
            202,982
            
            
            (122,966
            )
            
            -Reclassification
                adjustment for (gains) losses on investment securities available
                for
                sale
            
            
            5,654
            
            
            (51,816
            )
            
            (203,681
            )Total
                other comprehensive income (loss) before tax
            
            
            (1,236,489
            )
            
            (423,898
            )
            
            (777,753
            )Income
                taxes related to other comprehensive income:Unrealized
                holding gains (losses) on investment securities available for sale
                arising
                during period
            
            
            491,343
            
            
            84,699
            
            
            195,184Unrealized
                holding gains (losses) on derivative financial instruments classified
                as
                cash flow hedges arising during the period
            
            
            (69,014
            )
            
            41,809
            
            
            -Reclassification
                adjustment for (gains) losses on investment securities available
                for
                sale
            
            
            (1,923
            )
            
            17,617
            
            
            69,252Total
                income taxes related to other comprehensive income (loss)
            
            
            420,406
            
            
            144,125
            
            
            264,436Total
                other comprehensive income (loss), net of tax
            
            
            (816,083
            )
            
            (279,773
            )
            
            (513,317
            )Total
                comprehensive income
            
            $
            2,997,388
            
            
            2,063,500
            
            
            1,782,645





See
      accompanying notes to consolidated financial statements.


-4-


Habersham
      Bancorp and Subsidiaries


Consolidated
      Statements of Changes in Stockholders’ Equity


For
      the
      Years Ended December 31, 2005, 2004 and 2003








Common
              Stock
            
            Additional
              Paid-in
              Capital
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
              Income
                (Loss)
            
            TotalBalance,
                December 31, 2002
            
            $
            2,815,093
            
            
            13,720,900
            
            
            33,102,534
            
            
            677,127
            
            
            50,315,654Net
                earnings
            
            
            -
            
            
            -
            
            
            2,295,962
            
            
            -
            
            
            2,295,962Change
                in other comprehensive income, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            (513,317
            )
            
            (513,317
            )Cash
                dividends, $1.18 per share
            
            
            -
            
            
            -
            
            
            (3,378,814
            )
            
            -
            
            
            (3,378,814
            )Issuance
                of common stock upon exercise of stock options
            
            
            54,185
            
            
            455,680
            
            
            -
            
            
            -
            
            
            509,865Balance,
                December 31, 2003
            
            
            2,869,278
            
            
            14,176,580
            
            
            32,019,682
            
            
            163,810
            
            
            49,229,350Net
                earnings
            
            
            -
            
            
            -
            
            
            2,343,273
            
            
            -
            
            
            2,343,273Change
                in other comprehensive income, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            (279,773
            )
            
            (279,773
            )Cash
                dividends, $1.28 per share
            
            
            -
            
            
            -
            
            
            (3,701,878
            )
            
            -
            
            
            (3,701,878
            )Tax
                benefit from options exercised
            
            
            -
            
            
            50,449
            
            
            -
            
            
            -
            
            
            50,449Issuance
                of common stock upon exercise of stock options
            
            
            30,914
            
            
            333,459
            
            
            -
            
            
            -
            
            
            364,373Balance,
                December 31, 2004
            
            
            2,900,192
            
            
            14,560,488
            
            
            30,661,077
            
            
            (115,963
            )
            
            48,005,794Net
                earnings
            
            
            -
            
            
            -
            
            
            3,813,471
            
            
            -
            
            
            3,813,471Change
                in other comprehensive income, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            (816,083
            )
            
            (816,083
            )Cash
                dividends, $.32 per share
            
            
            -
            
            
            -
            
            
            (929,785
            )
            
            -
            
            
            (929,785
            )Tax
                benefit from options exercised
            
            
            -
            
            
            15,534
            
            
            -
            
            
            -
            
            
            15,534Issuance
                of common stock upon exercise of stock options
            
            
            21,048
            
            
            147,153
            
            
            -
            
            
            -
            
            
            168,201Balance,
                December 31, 2005
            
            $
            2,921,240
            
            
            14,723,175
            
            
            33,544,763
            
            
            (932,046
            )
            
            50,257,132





See
      accompanying notes to consolidated financial statements.


-5-




Habersham
      Bancorp and Subsidiaries


Consolidated
      Statements of Cash Flows


For
      the
      Years Ended December 31, 2005, 2004 and 2003





2005
            
            2004
            
            2003Cash
                flows from operating activities:Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for loan losses
            
            
            330,000
            
            
            482,500
            
            
            950,000Provision
                for losses on other real estate owned
            
            
            -
            
            
            30,000
            
            
            -Depreciation
                expense
            
            
            959,014
            
            
            921,222
            
            
            785,687Loss
                (gain) on sale of premises and equipment
            
            
            7,343
            
            
            (879,453
            )
            
            (2,087
            )Net
                amortization (accretion) of premium/discount in investment
                securities
            
            
            366,709
            
            
            494,191
            
            
            663,156Securities
                (gain) loss, net
            
            
            5,654
            
            
            (51,816
            )
            
            (211,304
            )Gain
                on sale of other investments
            
            
            -
            
            
            (198,641
            )
            
            (60,000
            )Loss
                on sale of other real estate
            
            
            38,570
            
            
            53,415
            
            
            8,467Net
                gain on sale of loans
            
            
            (981,045
            )
            
            (1,002,184
            )
            
            (808,147
            )Proceeds
                from sales of loans
            
            
            40,366,137
            
            
            39,701,998
            
            
            45,776,797Increase
                in loans held for sale
            
            
            (40,442,830
            )
            
            (38,239,614
            )
            
            (46,490,550
            )Amortization
                of intangible assets
            
            
            25,860
            
            
            -
            
            
            -Deferred
                income tax (benefit) expense
            
            
            (5,123
            )
            
            69,939
            
            
            (217,846
            )Changes
                in assets and liabilities, net of effects of purchase acquisition
                in
                2005:(Increase)
                decrease in accrued interest receivable
            
            
            (664,333
            )
            
            189,530
            
            
            432,053(Increase)
                decrease in other assets
            
            
            (974,290
            )
            
            1,256,151
            
            
            (929,941
            )Increase
                (decrease) in accrued interest payable
            
            
            269,952
            
            
            (234,157
            )
            
            (587,280
            )Increase
                in other liabilities
            
            
            263,202
            
            
            324,061
            
            
            110,896Net
                cash provided by operating activities
            
            
            3,378,291
            
            
            5,260,415
            
            
            1,715,863Cash
                flows from investing activities, net of effects of purchase acquisition
                in
                2005:Payment
                for purchase of LB&T, net of cash acquired $4,631,073
            
            
            800,889
            
            
            -
            
            
            -Investment
                securities available for sale:Proceeds
                from maturities
            
            
            10,347,256
            
            
            12,101,837
            
            
            22,573,728Proceeds
                from sales and calls
            
            
            5,188,280
            
            
            12,179,914
            
            
            9,676,024Purchases
            
            
            (16,872,305
            )
            
            (22,484,240
            )
            
            (51,486,821
            )Investment
                securities held to maturity:Proceeds
                from maturities
            
            
            144,396
            
            
            607,000
            
            
            1,310,624Proceeds
                from calls
            
            
            596,708
            
            
            100,000
            
            
            732,700Other
                investments:Proceeds
                from sales
            
            
            450,000
            
            
            500,641
            
            
            1,434,200Purchases
            
            
            (1,356,290
            )
            
            (1,119,100
            )
            
            (637,100
            )Net
                (increase) decrease in loans
            
            
            (27,876,679
            )
            
            (16,112,040
            )
            
            39,506,333Purchases
                of premises and equipment
            
            
            (1,451,263
            )
            
            (1,058,993
            )
            
            (3,524,355
            )Proceeds
                from sales of premises and equipment
            
            
            15,622
            
            
            952,442
            
            
            10,281Net
                additions of other real estate
            
            
            (906
            )
            
            (120,063
            )
            
            (76,756
            )Proceeds
                from sale of other real estate
            
            
            1,012,650
            
            
            1,691,589
            
            
            2,169,438Net
                cash (used in) provided by investing activities
            
            $
            (29,001,642
            )
            
            (12,761,013
            )
            
            21,688,296




-6-


Habersham
      Bancorp and Subsidiaries


Consolidated
      Statements of Cash Flows, continued


For
      the
      Years Ended December 31, 2005, 2004 and 2003




2005
            
            2004
            
            2003Cash
                flows from financing activities, net of effects of purchase acquisition
                in
                2005:Net
                increase (decrease) in deposits
            
            $
            59,814,489
            
            
            13,357,253
            
            
            (56,926,472
            )Net
                (decrease) increase in short-term borrowings
            
            
            (10,594
            )
            
            207,581
            
            
            (353,210
            )Proceeds
                from FHLB advances
            
            
            16,300,000
            
            
            11,000,000
            
            
            -Repayment
                of FHLB advances
            
            
            (10,000,000
            )
            
            (5,000,000
            )
            
            -Net
                increase (decrease) in federal funds purchased and securities sold
                under
                repurchase agreements
            
            
            3,588,692
            
            
            (7,549,145
            )
            
            4,156,662Payment
                of cash dividends
            
            
            (929,785
            )
            
            (3,701,878
            )
            
            (3,378,814
            )Issuance
                of common stock upon exercise of stock options
            
            
            168,201
            
            
            364,373
            
            
            509,865Net
                cash provided by (used in) financing activities
            
            
            68,931,003
            
            
            8,678,184
            
            
            (55,991,969
            )Increase
                (decrease) in cash and cash equivalents
            
            
            43,307,652
            
            
            1,177,586
            
            
            (32,587,810
            )Cash
                and cash equivalents at beginning of the year
            
            
            9,558,770
            
            
            8,381,184
            
            
            40,968,994Cash
                and cash equivalents at end of year
            
            $
            52,866,422
            
            
            9,558,770
            
            
            8,381,184Supplemental
                disclosures of cash flow information:Cash
                paid during the year for:Interest
            
            $
            8,276,805
            
            
            7,025,662
            
            
            8,708,947Income
                taxes
            
            $
            1,430,000
            
            
            447,000
            
            
            650,000Supplemental
                disclosures of noncash investing activities:Other
                real estate acquired through loan foreclosures
            
            $
            3,026,470
            
            
            684,500
            
            
            1,727,535Loans
                granted to facilitate the sale of other real estate
            
            $
            500,260
            
            
            369,028
            
            
            188,733





On
      July
      25, 2005, the Company purchased all of the capital stock of Liberty Bank and
      Trust (Toccoa, Georgia) for $3,830,184, including certain acquisition costs
      of
      $194,184.





In
      conjunction with the acquisition, assets were acquired and liabilities were
      assumed as follows:





Fair
                value of assets acquired
            
            $
            23,891,175Liabilities
            
            
            20,060,991$
            3,830,184





See
      accompanying notes to consolidated financial statements.


-7-


Habersham
      Bancorp and Subsidiaries


Notes
      to
      Consolidated Financial Statements




**(1)**
            **Organization
                and Basis of Presentation**


The
      consolidated financial statements of Habersham Bancorp and subsidiaries
      (the “Company”) include the financial statements of Habersham Bancorp and
      its wholly owned subsidiaries: Habersham Bank (the “Bank”) and The
      Advantage Group, Inc. The Bank owns 100% of Advantage Insurers, Inc . All
      intercompany accounts and transactions have been eliminated in
      consolidation.




The
      Company’s continuing primary business is the operation of banks in rural and
      suburban communities in Habersham, White, Cherokee, Warren, Gwinnett and
      Stephens counties in Georgia. The Company’s primary source of revenue is
      providing loans to businesses and individuals in its market area.




***Use
      of Estimates***


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




Material
      estimates that are particularly susceptible to significant change in the near
      term relate to the determination of the allowance for loan losses and the
      valuation of real estate acquired in connection with foreclosures or in
      satisfaction of loans. In connection with the determination of the allowance
      for
      loan losses and the valuation of other real estate, management obtains
      independent appraisals for significant properties. A substantial portion of
      the
      Company’s loans is secured by real estate in Habersham, White, and Cherokee
      Counties and the metropolitan Atlanta area. Accordingly, the ultimate
      collectibility of a substantial portion of the Company’s loan portfolio is
      susceptible to changes in real estate market conditions in these
      areas.




***Interest
      Rate Risk***


The
      Company’s assets and liabilities are generally monetary in nature and interest
      rates have an impact on the Company’s performance. The Company manages the
      effect of interest rates on its performance by striving to match maturities
      and
      interest sensitivity between loans, investment securities, deposits and other
      borrowings. However, a significant change in interest rates could have an effect
      on the Company’s results of operations.




**(2)**
            **Summary
                of Significant Accounting
                Policies**


The
      accounting and reporting policies of the Company conform with accounting
      principles generally accepted in the United States of America and general
      practices within the banking industry. The following is a summary of the more
      significant accounting policies:




***Cash
      and Cash Equivalents***


Cash
      and
      cash equivalents include cash on hand, amounts due from banks, and Federal
      funds
      sold. Federal funds are generally sold for one-day periods.




***Investment
      Securities***


The
      Company classifies its investment securities into one of two categories:
      available for sale or held to maturity.




Investment
      securities classified as available for sale are carried at fair value. The
      related unrealized gain or loss, net of deferred income taxes, is included
      as a
      separate component of stockholders’ equity. Gains and losses from dispositions
      are based on the net proceeds and the adjusted carrying amounts of the
      securities sold, using the specific identification method.




Investment
      securities classified as held to maturity are stated at cost, adjusted for
      amortization of premiums, and accretion of discounts. The Company has the intent
      and ability to hold these investment securities to maturity.




Purchase
      premiums and discounts on investment securities are amortized and accreted
      to
      interest income using the level yield method on the outstanding principal
      balances, taking into consideration prepayment assumptions.




A
      decline
      in the fair value of any security below cost that is deemed other than temporary
      is charged to income resulting in the establishment of a new cost basis for
      the
      security.




-8-




***Other
      Investments***


At
      December 31, 2005 and 2004, other investments are primarily comprised of
      stock of the Federal Home Loan Bank of Atlanta.




Investment
      in stock of a Federal Home Loan Bank is required of every federally insured
      institution that utilizes its services. Federal Home Loan Bank stock is
      considered restricted stock, as defined in Statement of Financial Accounting
      Standards (SFAS) No. 115; accordingly, the provisions of
      SFAS No. 115 are not applicable to this investment. The Federal Home
      Loan Bank stock is reported in the consolidated financial statements at cost.
      Dividend income is recognized when earned.




***Loans
      Held for Sale***


Mortgage
      loans held for sale are carried at the lower of cost or market determined on
      an
      aggregate basis. Market values are determined on the basis of relevant delivery
      prices in the secondary mortgage market. At December 31, 2005 and 2004,
      there were no valuation allowances relating to mortgage loans held for
      sale.




***Loans***


Loans
      are
      stated at the amount of unpaid principal, reduced by unearned income and the
      allowance for loan losses.




Interest
      on loans is generally recorded over the term of the loans using the simple
      interest method on the unpaid principal balance. Accrual of interest is
      discontinued when either principal or interest becomes 90 days past due,
      unless the loan is both well secured and in the process of collection, or when
      in management’s opinion, reasonable doubt exists as to the full collection of
      interest or principal. Income on such loans is then recognized only to the
      extent that cash is received and where the future collection of principal is
      probable.




Loan
      origination fees and certain direct origination costs are deferred and
      capitalized, respectively, and recognized over the life of the loan as an
      adjustment of the yield on the related loan based on the interest
      method.




Impaired
      loans are measured based on the present value of expected future cash flows,
      discounted at the loan’s effective interest rate, or at the loan’s observable
      market price, or the fair value of the collateral if the loan is collateral
      dependent. Loans that are determined to be impaired require a valuation
      allowance equivalent to the amount of the impairment. The valuation allowance
      is
      established through the provision for loan losses.




A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Company will be unable to collect all amounts due according
      to
      the contractual terms of the note agreement. Cash receipts on impaired loans,
      which are accruing interest, are applied to principal and interest under the
      contractual terms of the loan agreement. Cash receipts on impaired loans for
      which the accrual of interest has been discontinued are applied to reduce the
      principal amount of such loans until the required principal payments have been
      brought current and, if the future collection of principal is probable, are
      recognized as interest income thereafter.




***Allowance
      for Loan Losses***


The
      allowance for loan losses is maintained at a level estimated to be adequate
      to
      provide for probable losses in the loan portfolio. Management follows a
      consistent procedural discipline and accounts for loan loss contingencies in
      accordance with SFAS No. 5, *Accounting
      for Contingencies* .
      The
      following is a description of how each portion of the allowance for loan losses
      is determined.




For
      the
      purposes of determining the required allowance for loan losses and resulting
      periodic provisions, the Company segregates the loan portfolio into broad
      segments, such as: commercial real estate; residential real estate;
      construction; commercial business; and consumer loans. The Company provides
      for
      a general allowance for losses inherent in the portfolio by the above
      categories. The general allowance for losses on problem loans in these
      categories is based on a review and evaluation of these loans, taking into
      consideration financial condition and strengths of the borrower, related
      collateral, cash flows available for debt repayment, and known and expected
      economic trends and conditions. General loss percentages for the problem loans
      are determined based upon loss percentages by loan classification as well as
      historical loss experience. Specific allowances are provided in the event that
      the specific collateral analysis on each problem loan indicates that the
      probable loss upon liquidation of collateral would be in excess of the general
      percentage allocation. For the remainder of the portfolio, general allowances
      for losses are calculated based on estimates of inherent losses which probably
      exist as of the evaluation date even though they might not have been identified
      by the more objective processes used for the portion of the allowance described
      above.




-9-


Loss
      percentages used for this portion of the portfolio are generally based on
      historical loss factors adjusted where necessary for qualitative factors. This
      portion of the allowance is particularly subjective and requires judgments
      based
      on qualitative factors which do not lend themselves to exact mathematical
      calculations, such as: trends in delinquencies and nonaccruals; migration trends
      in the portfolio; trends in volume, terms, and portfolio mix; changes in lending
      policies and procedures; evaluations of the risk identification process; changes
      in the outlook for local and regional economic conditions; concentrations of
      credit; and peer group comparisons.




Loans
      deemed uncollectible are charged to the allowance. Provisions for loan losses
      and recoveries on loans previously charged off are added to the
      allowance.




Management
      believes 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.




***Other
      Real Estate***


Other
      real estate includes real estate acquired through foreclosure. Other real estate
      is carried at the lower of its recorded amount at the date of foreclosure or
      estimated fair value less costs to sell. Any excess of carrying value of the
      related loan over the fair value of the real estate at date of foreclosure
      is
      charged against the allowance for loan losses. Any expense incurred in
      connection with holding such real estate or resulting from any writedowns
      subsequent to foreclosure is included in other noninterest expense.




***Premises
      and Equipment***


Premises
      and equipment are stated at cost less accumulated depreciation. Depreciation
      is
      computed using primarily the straight-line method over the estimated useful
      lives of the assets. Useful lives for depreciation are three years for
      computer software and automobiles; primarily 40 years for buildings;
      ten years for furniture, fixtures, and equipment; and the lease term or the
      life of the property, whichever is shorter, for leasehold
      improvements.




***Goodwill
      and Other Intangible Assets***


Goodwill represents the excess of the purchase price for bank acquisitions over the
      fair
      value of the net assets acquired. Goodwill is tested annually for impairment
      unless events or circumstances arise that would indicate the need for more
      frequent testing. The impairment tests are performed at the reporting level
      which in the bank’s case is effectively the entire entity. There were no
      goodwill impairment losses in the financial statements.




***Income
      Taxes***


Income
      taxes are accounted for under the asset and liability method. Provisions for
      income taxes are based upon amounts reported in the statements of earnings
      (after exclusion of nontaxable income such as interest on state and municipal
      securities) and include deferred taxes on temporary differences between
      financial statement and tax bases of assets and liabilities measured using
      enacted tax rates expected to apply to taxable income in the year in which
      the
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in income in
      the
      period that includes the enactment date.




***Earnings
      Per Share***


Basic
      earnings per share is computed by dividing net earnings by weighted average
      shares outstanding. Diluted earnings per share is computed by dividing net
      earnings by weighted average shares outstanding plus common share equivalents
      resulting from dilutive stock options, determined using the treasury stock
      method. Options on 54,500 and 66,500 shares were not included in the diluted
      earnings per share computation for 2005 and 2004, respectively, as they were
      antidilutive.




***Comprehensive
      Income***


Other
      comprehensive income for the Company consists of items recorded directly in
      equity under SFAS No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* and the
      net of tax effect of changes in the fair value of cash flow hedges.




***Stock-Based
      Compensation***


In
      December 2002, the FASB issued SFAS No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure an Amendment of FASB
      Statement No. 123* .
      SFAS
      No. 148 amends SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      provide alternative methods of transition for an entity that voluntarily changes
      to the fair value based method of accounting for stock-based employee
      compensation. It also amends the disclosure provisions of SFAS No. 123 to
      require prominent disclosure about the effects on reported net earnings of
      an
      entity’s accounting policy decisions with respect to stock-based employee
      compensation. Finally, SFAS No. 148 also amends Accounting Principles Board
      (APB) Opinion No. 28, *Interim
      Financial Reporting* ,
      to
      require disclosure about those effects in the interim financial information.




-10-


The
      Company applies APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations in accounting for its stock option plans. Accordingly,
      compensation cost is measured as the excess, if any, of the quoted market price
      of the Company’s stock at the date of grant over the amount an employee must pay
      to acquire the stock.




Had
      compensation cost for the Company’s stock option plans been determined based on
      the fair value at the grant dates for awards under those plans consistent with
      the method included in SFAS No. 123, the Company’s net earnings and
      earnings per share for 2005, 2004 and 2003 would have been reduced to the
      proforma amounts indicated below:




2005
            
            2004
            
            2003Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962Deduct:Total
                stock-based compensation expense determined under fair value based
                method,
                net of related tax effect
            
            
            (1,271,404
            )
            
            (948,565
            )
            
            (686,291
            )Proforma
                net earnings
            
            $
            2,542,067
            
            
            1,394,708
            
            
            1,609,671Net
                earnings per common share - basic:As
                reported
            
            $
            1.31
            
            
            .81
            
            
            .81Proforma
            
            $
            .88
            
            
            .48
            
            
            .57Net
                earnings per common share - diluted:As
                reported
            
            $
            1.30
            
            
            .80
            
            
            .79Proforma
            
            $
            .87
            
            
            .47
            
            
            .56





***Recent
      Accounting Pronouncements***


In
      December 2004, the Financial Accounting Standards Board (“FASB”) adopted
      Statement of Financial Accounting Standards No. 123(R), *Share-Based
      Payment* (“SFAS
      No. 123(R)”), which revises and amends SFAS No. 123. SFAS No. 123(R) requires
      all share-based payments to employees, including stock options, to be recognized
      in the financial statements based on their fair values. Pro forma disclosure
      is
      no longer an alternative to financial statement recognition. SFAS No. 123(R)
      is
      effective for periods beginning after December 15, 2005. The Company will adopt
      SFAS No. 123(R) in the first quarter of 2006. The financial statement impact
      of
      the pronouncement depends on the share-based payments that the Company makes
      to
      its employees beginning in 2006, as the fair value of such payments will be
      recognized in the financial statements.




Other
      accounting standards that have been issued or proposed by the FASB and other
      standard setting entities that do not require adoption until a future date
      are
      not expected to have a material impact on the Company’s consolidated financial
      statements upon adoption.







**(3)**
            **Business
                Combination**


On
      July
      25, 2005, the Company consummated an agreement to acquire all of the outstanding
      shares of Liberty Bank & Trust (“Liberty”) for $3.6 million in cash plus
      certain acquisition costs totaling $194,000. Additionally, the purchase price
      could include approximately $789,000 of contingent cash consideration that
      will
      be released from escrow only upon the lapse of the expiration period and
      resolution of the contingencies. The cash proceeds to consummate the purchase
      were obtained from cash dividends paid to the Company by its bank subsidiary,
      Habersham Bank. Liberty was a commercial bank based in Toccoa, (Stephens
      County), Georgia and had total assets of $23.2 million, including total loans
      of
      $15 million and total investments of $3.3 million. Additionally, Liberty had
      $20
      million in deposits. The Company accounted for the transaction using the
      purchase method and accordingly, the purchase price was allocated to assets
      and
      liabilities acquired based upon their fair values at the date of the
      acquisition. The excess of the purchase price over the fair value of the net
      assets acquired (goodwill) was approximately $1.1 million, none of which will
      be
      deductible for income tax purposes. Operations of Liberty are included in the
      consolidated statements of earnings since its acquisition.


-11-




**(4)**
            **Reserve
                Requirements**


At
      December 31, 2005 and 2004, the Federal Reserve Bank required that the Bank
      maintain average reserve balances of $799,000 and $572,000,
      respectively.




**(5)**
            **Investment
                Securities Available for
                Sale**


Amortized
      cost, estimated fair values, and gross unrealized gains and losses of investment
      securities available for sale are as follows:





December
                31, 2005
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
                ValueU.S.
                treasuries
            
            $
            22,916,184
            
            
            -
            
            
            473,209
            
            
            22,442,975U.S.
                government agencies
            
            
            35,499,494
            
            
            23,613
            
            
            1,157,411
            
            
            34,365,696State
                and political subdivisions
            
            
            15,837,581
            
            
            281,638
            
            
            121,868
            
            
            15,997,351Equity
                securities
            
            
            354,181
            
            
            -
            
            
            44,971
            
            
            309,210Total
            
            $
            74,607,440
            
            
            305,251
            
            
            1,797,459
            
            
            73,115,232





December
                31, 2004
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
                ValueU.S.
                treasuries
            
            $
            14,775,597
            
            
            3,655
            
            
            157,951
            
            
            14,621,301U.S.
                government agencies
            
            
            41,320,858
            
            
            132,675
            
            
            447,869
            
            
            41,005,664State
                and political subdivisions
            
            
            13,519,765
            
            
            528,097
            
            
            30,172
            
            
            14,017,690Equity
                securities
            
            
            750,000
            
            
            -
            
            
            81,170
            
            
            668,830Total
            
            $
            70,366,220
            
            
            664,427
            
            
            717,162
            
            
            70,313,485




Proceeds
      from sales and calls of available for sale securities during 2005, 2004 and
      2003
      were $5,188,280, $12,179,914 and $9,676,024, respectively.





Gross
      gains of $35,802, $77,669 and $215,014 were recognized on those sales for 2005,
      2004 and 2003, respectively. Gross losses of $50,737, $25,853 and $11,333 were
      recognized on those sales for 2005, 2004 and 2003, respectively.




The
      following investments available for sale have an unrealized loss at December
      31,
      2005 and 2004 for which an other than temporary impairment has not been
      recognized:





2005
            
            2004Estimated
              Fair
                Value
            
            Unrealized
              Losses
            
            Estimated
              Fair
                Value
            
            Unrealized
              LossesUnrealized
                loss for less than 12 months:U.S.
                treasuries
            
            $
            11,529,119
            
            
            201,907
            
            
            9,277,959
            
            
            69,087U.S.
                government agencies
            
            
            11,821,579
            
            
            250,936
            
            
            17,011,471
            
            
            229,602State
                and political subdivisions
            
            
            5,677,754
            
            
            93,448
            
            
            1,882,101
            
            
            17,473$
            29,028,452
            
            
            546,291
            
            
            28,171,531
            
            
            316,162


-12-





Unrealized
                loss for greater than 12 months:U.S.
                treasuries
            
            $
            10,907,828
            
            
            271,302
            
            
            3,986,926
            
            
            88,864U.S.
                government agencies
            
            
            20,849,590
            
            
            906,475
            
            
            11,035,431
            
            
            218,267State
                and political subdivisions
            
            
            942,928
            
            
            28,420
            
            
            720,944
            
            
            12,699Equity
                securities
            
            
            309,210
            
            
            44,971
            
            
            668,830
            
            
            81,17033,009,556
            
            
            1,251,168
            
            
            16,412,131
            
            
            401,000$
            62,038,008
            
            
            1,797,459
            
            
            44,583,662
            
            
            717,162





At
      December 31, 2005, there were 24 U.S. Treasury, 36 U.S. government agency,
      and
      23 state and political subdivision securities with an unrealized loss for less
      than 12 months and 21 U.S. government agency security, 44 U.S. government
      agency, and 4 state and political subdivision securities and one equity
      investment with an unrealized loss for more than 12 months. The total fair
      value
      of the securities with an unrealized loss at December 31, 2005 represented
      97.18% of their amortized cost; therefore, the impairment is not considered
      severe. While the duration is dependent on the market, the existing unrealized
      loss could be shortened by the issuing agency calling the
      securities.





The
      amortized cost and estimated fair values of investment securities available
      for
      sale, exclusive of equity investments, at December 31, 2005, by contractual
      maturity, are shown below. Expected maturities will differ from contractual
      maturities because borrowers may have the right to call or prepay obligations
      with or without call or prepayment penalties. Callable securities and
      mortgage-backed securities are included in the year of their contractual
      maturity date.





Amortized
              Cost
            
            Estimated
              Fair
                ValueDue
                in one year or less
            
            $
            144,764
            
            
            143,174Due
                after one year through five years
            
            
            8,238,285
            
            
            8,128,916Due
                after five years through ten years
            
            
            21,278,046
            
            
            20,958,580Due
                after 10 years
            
            
            44,592,164
            
            
            43,575,352Total
            
            $
            74,253,259
            
            
            72,806,022





Investment
      securities available for sale with carrying values of approximately $63,842,000
      and $49,549,000 were pledged as collateral at December 31, 2005 and 2004,
      respectively, for Federal Home Loan Bank advances, public deposits, and other
      deposits, as required by law.





**(6)**
            **Investment
                Securities Held to
                Maturity**


Amortized
      cost, estimated fair values, and gross unrealized gains and losses of investment
      securities held to maturity are as follows:





December
                31, 2005
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
                ValueU.S.
                government agencies
            
            $
            100,164
            
            
            4,249
            
            
            -
            
            
            104,413State
                and political subdivisions
            
            
            3,287,285
            
            
            122,575
            
            
            -
            
            
            3,409,860Total
            
            $
            3,387,449
            
            
            126,824
            
            
            -
            
            
            3,514,273





December
                31, 2004
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gains
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
                ValueU.S.
                government agencies
            
            $
            144,900
            
            
            7,764
            
            
            -
            
            
            152,664State
                and political subdivisions
            
            
            3,966,141
            
            
            251,743
            
            
            -
            
            
            4,217,884Total
            
            $
            4,111,041
            
            
            259,507
            
            
            -
            
            
            4,370,548





There
      were no investments held to maturity at December 31, 2005 and 2004 that had
      an
      unrealized loss.


-13-


Proceeds
      from calls of investment securities held to maturity during 2005, 2004 and
      2003
      were $596,708, $100,000 and $732,700, respectively. Gross gains of $9,281 were
      recognized on those calls for 2005. Gross gains of $7,623 were recognized on
      calls for 2003.





The
      amortized cost and estimated fair values of securities held to maturity at
      December 31, 2005, by contractual maturity, are shown below. Expected
      maturities will differ from contractual maturities because borrowers may have
      the right to call or prepay obligations with or without call or prepayment
      penalties. Callable securities and mortgage-backed securities are included
      in
      the year of their contractual maturity date.





Amortized
              Cost
            
            Estimated
              Fair
                ValueDue
                in one year or less
            
            $
            -
            
            
            -Due
                after one year through five years
            
            
            1,693,124
            
            
            1,739,509Due
                after five years through ten years
            
            
            727,165
            
            
            765,480Due
                after 10 years
            
            
            967,160
            
            
            1,009,284Total
            
            $
            3,387,449
            
            
            3,514,273





Investment
      securities held to maturity with carrying values of approximately $3,107,000
      and
      $2,821,000 were pledged as collateral at December 31, 2005 and 2004,
      respectively, for public deposits and other deposits, as required by
      law.





**(7)**
            **Loans**


Loans
      at
      December 31, 2005 and 2004 are summarized as follows:





2005
            
            2004Real
                estate:Construction
            
            $
            120,872,011
            
            
            79,673,838Other
            
            
            169,649,663
            
            
            170,533,184Commercial,
                financial and agricultural
            
            
            16,551,300
            
            
            16,790,560Consumer
                installment
            
            
            13,775,048
            
            
            13,931,081320,848,022
            
            
            280,928,663Less:Unamortized
                loan origination fees, net
            
            
            113,738
            
            
            138,250Unearned
                credit life premiums
            
            
            16,493
            
            
            16,492Unamortized
                discount on SBA loans sold
            
            
            -
            
            
            2,056Allowance
                for loan losses
            
            
            3,944,525
            
            
            3,634,643Total
            
            $
            316,773,266
            
            
            277,137,222





Changes
      in the allowance for loan losses are as follows:





2005
            
            2004
            
            2003Balance,
                January 1
            
            $
            3,634,643
            
            
            3,643,102
            
            
            3,533,309Provision
                for loan losses
            
            
            330,000
            
            
            482,500
            
            
            950,000Loans
                charged off
            
            
            (444,351
            )
            
            (812,192
            )
            
            (1,148,275
            )Recoveries
            
            
            209,154
            
            
            321,233
            
            
            308,068Allowance
                from purchase acquisition
            
            
            215,079
            
            
            -
            
            
            -Balance,
                December 31
            
            $
            3,944,525
            
            
            3,634,643
            
            
            3,643,102





The
      Company considers a loan to be impaired when it is probable that it will be
      unable to collect all amounts due according to the original terms of the loan
      agreement. The Company measures impairment of a loan on a loan-by-loan basis
      for
      commercial real estate, commercial business, and agricultural loans. Residential
      mortgages, installment, and other consumer loans are considered smaller balance,
      homogenous loans which are not evaluated individually for impairment. Amounts
      of
      impaired loans that are not probable of collection are charged off immediately.
      Impaired loans and related amounts included in the allowance for loan losses
      at
      December 31, 2005 and 2004 are as follows:


-14-





2005
            
            2004Balance
            
            Allowance
              Amount
            
            Balance
            
            Allowance
              AmountImpaired
                loans with a related allowance
            
            $
            162,609
            
            
            35,300
            
            
            3,077,486
            
            
            263,100Impaired
                loans without a related allowance
            
            
            200,394
            
            
            -
            
            
            174,978
            
            
            -





The
      average amount of impaired loans during 2005, 2004 and 2003 was $1,014,810,
      $1,569,496 and $2,446,028, respectively. The interest income recognized on
      such
      loans was $37,569 in 2005, $169,648 in 2004 and $113,450 in 2003, which
      approximated the amount of interest received on the cash basis.





As
      of
      December 31, 2005 and 2004, Habersham Bank’s loans to customers for
      agribusiness purposes in the poultry industry were approximately $4.4 million
      and $5.9 million, respectively. Habersham Bank held a concentration in
      commercial loans for the travel accommodation industry, which totaled
      approximately $14.8 and $22 million at December 31, 2005 and 2004, respectively.





The
      Company is a party to financial instruments with off-balance-sheet risk in
      the
      normal course of its lending activities to meet the financing needs of its
      customers. These financial instruments include commitments to extend credit
      and
      standby letters of credit. The Company’s exposure to credit loss in the event of
      nonperformance by the other party to the financial instrument for commitments
      to
      extend credit and standby letters of credit is represented by the contractual
      amount of those instruments. The Company uses the same credit policies in making
      these commitments as it does for on-balance-sheet instruments and evaluates
      each
      customer’s creditworthiness on a case-by-case basis. At December 31, 2005
      and 2004, the Company had outstanding loan commitments approximating $78,272,000
      and $57,125,000, respectively, and standby letters of credit approximating
      $7,959,000 and $8,522,000, respectively. The amount of collateral obtained,
      if
      deemed necessary, for these financial instruments by the Company, upon extension
      of credit, is based on management’s credit evaluation of the customer.
      Collateral held, if any, varies but may include inventory, equipment, real
      estate, or other property. The accounting loss the Company would incur if any
      party to the financial instrument failed completely to perform according to
      the
      terms of the contract and the collateral proved to be of no value is equal
      to
      the face amount of the financial instrument.





**(8)**
            **Premises
                and Equipment**


Premises
      and equipment are summarized as follows:





2005
            
            2004Land
            
            $
            1,672,677
            
            
            1,393,677Buildings
            
            
            10,235,771
            
            
            9,292,848Construction
                in progress
            
            
            98,133
            
            
            37,909Furniture
                and equipment
            
            
            6,822,951
            
            
            6,370,455Total
            
            
            18,829,532
            
            
            17,094,889Less
                accumulated depreciation
            
            
            8,310,090
            
            
            7,355,930Premises
                and equipment, net
            
            $
            10,519,442
            
            
            9,738,959





The
      company has entered into operating lease agreements for property. Approximate
      minimum rentals under such leases are as follows:





2006
            
            $
            315,1562007
            
            
            315,1562008
            
            
            302,4662009
            
            
            233,1312010
            
            
            4,330$
            1,170,239





Rental
      expense was $362,138 in 2005, $220,071 in 2004 and $169,350 in
      2003.


-15-





**(9)**
            **Deposits
                and Borrowings**


At
      December 31, 2005, the scheduled maturities of time deposits are as
      follows:




2006
            
            $
            144,954,9552007
            
            
            24,655,0712008
            
            
            9,649,7582009
            
            
            12,398,9532010
                and thereafter
            
            
            3,800,821$
            195,459,558





Short-term
      borrowings of $775,442 and $786,036 at December 31, 2005 and 2004, respectively,
      consist of a U.S. Treasury, tax and loan deposit note.





**(10)**
            **Federal
                Funds Purchased and Securities Sold Under Repurchase
                Agreements**


Certain
      information related to the Company’s securities sold under repurchase agreements
      is summarized as follows:




2005
            
            2004Balance
                at year-end
            
            $
            8,423,323
            
            
            4,287,631Maximum
                outstanding during the year
            
            
            13,444,600
            
            
            14,058,135Average
                outstanding during the year
            
            
            8,265,132
            
            
            6,629,749Weighted
                average interest rate during the year
            
            
            1.23
            %
            
            .61
            %Weighted
                average interest rate at end of year
            
            
            1.25
            %
            
            .60
            %





At
      December 31, 2005 and 2004, the Company had available repurchase agreement
      line of credit commitments with a regional bank totaling $2,736,000 and
      $10,085,000, respectively. No amounts were outstanding under that commitment
      at
      December 31, 2005 and 2004. **** All
      securities sold under repurchase agreements are held by independent trustees.
      The Company also had available repurchase agreement line of credit commitments
      with another regional bank totaling $180,000 and $1,667,000 at December 31,
      2005 and 2004, respectively. No amounts were outstanding under that commitment
      at December 31, 2005 and 2004. **** Securities sold under repurchase agreements at December 31, 2005 and 2004
      are collateralized by investment securities with aggregate carrying values
      of
      approximately $11,248,000 and $14,069,000, respectively.





The
      Company did not have any federal funds purchased at December 31, 2005. Federal
      funds purchased at December 31, 2004 totaled $547,000. At December 31, 2005
      and 2004, the Company had unused lines for overnight borrowings through Federal
      Funds purchased of $30,000,000 and $29,453,000.





**(11)**
            **FHLB
                Advances**


At
      December 31, 2005, the Company had available line of credit commitments
      with the Federal Home Loan Bank (FHLB) totaling $42,610,000 of which $42,300,000
      was advanced and $310,000 was available.





Advances
      outstanding at December 31, 2005 consist of:





Advance
                date
            
            Amount
            
            Interest
                Rate
            
            Maturity
                Date
            
            Rate
            
            Call
                FeatureMarch
                30, 2000
            
            $
            10,000,000
            
            
            6.02%
            
            
            March
                30, 2010
            
            
            Fixed
            
            
            Callable
                each yearJanuary
                12, 2001
            
            
            10,000,000
            
            
            4.93%
            
            
            January
                12, 2011
            
            
            Fixed
            
            
            Callable
                each yearMay
                21, 2004
            
            
            3,000,000
            
            
            4.60%
            
            
            May
                21, 2009
            
            
            Floating
            
            
            No
                call provisionAugust
                26, 2004
            
            
            3,000,000
            
            
            4.62%
            
            
            August
                26, 2009
            
            
            Floating
            
            
            No
                call provisionMay
                17,2005
            
            
            4,000,000
            
            
            4.18%
            
            
            May
                19, 2008
            
            
            Fixed
            
            
            No
                call provisionMay
                19, 2005
            
            
            3,000,000
            
            
            3.87%
            
            
            May
                19, 2010
            
            
            Fixed
            
            
            Callable
                each yearAugust
                4, 2005
            
            
            4,300,000
            
            
            4.44%
            
            
            August
                4, 2006
            
            
            Floating
            
            
            No
                call provisionAugust
                8, 2005
            
            
            5,000,000
            
            
            4.32%
            
            
            August
                8, 2006
            
            
            Fixed
            
            
            No
                call provision$
            42,300,000





At
      December 31, 2005, the Company has pledged against FHLB advances, certain
      investment securities, all stock of the FHLB, cash totaling $300,000 and certain
      qualifying first mortgage loans with an outstanding balance of
      $24,478,000.


-16-





Advances
      outstanding at December 31, 2004 consisted of:





Advance
                date
            
            Amount
            
            Interest
                Rate
            
            Maturity
                Date
            
            Rate
            
            Call
                FeatureMay
                26,2000
            
            $
            10,000,000
            
            
            6.72%
            
            
            May
                26, 2005
            
            
            Fixed
            
            
            Callable
                each yearMarch
                30, 2000
            
            
            10,000,000
            
            
            6.02%
            
            
            March
                30, 2010
            
            
            Fixed
            
            
            Callable
                each yearJanuary
                12, 2001
            
            
            10,000,000
            
            
            4.93%
            
            
            January
                12, 2011
            
            
            Fixed
            
            
            Callable
                each yearMay
                21, 2004
            
            
            3,000,000
            
            
            2.57%
            
            
            May
                21, 2009
            
            
            Floating
            
            
            No
                call provisionAugust
                26, 2004
            
            
            3,000,000
            
            
            2.61%
            
            
            August
                26, 2009
            
            
            Floating
            
            
            No
                call provision$
            36,000,000





At
      December 31, 2004, the Company has pledged against FHLB advances, certain
      investment securities, all stock of the FHLB and certain qualifying first
      mortgage loans with an outstanding balance of $23,965,000.





**(12)**
            **Derivative
                Instruments and Hedging Activities**


The
      fair
      value of derivatives is recognized in the financial statements as assets or
      liabilities. The accounting for the changes in the fair value of a derivative
      depends on the intended use of the derivative instrument at inception. The
      change in fair value of instruments used as fair value hedges is accounted
      for
      in the income of the period simultaneous with accounting for the fair value
      change of the item being hedged. The change in fair value of the effective
      portion of cash flow hedges is accounted for in comprehensive income rather
      than
      income. The change in fair value of derivative instruments that do not qualify
      as a hedge is accounted for in the income of the period of the change.




The
      Company maintains an overall interest rate risk-management strategy that
      incorporates the limited use of derivative instruments to minimize fluctuations
      in earnings that are caused by interest rate volatility. The goal is to manage
      interest rate sensitivity by modifying the repricing or maturity characteristics
      of certain balance sheet assets and liabilities so the net interest margin
      is
      not, on a material basis, adversely affected by movements in interest rates.
      As
      a result of interest rate fluctuations, hedged assets and liabilities will
      appreciate or depreciate in fair value. The effect of this unrealized
      appreciation or depreciation will generally be offset by earnings or loss on
      the
      derivative instruments that are linked to the hedged assets and liabilities.
      The
      Company views this strategy as a prudent management of interest rate
      sensitivity, such that earnings are not exposed to undue risk presented by
      changes in interest rates.




Derivative
      instruments that are used as part of the Company’s interest rate risk-management
      strategy include interest rate swap contracts. Interest rate swaps generally
      involve the exchange of fixed- and variable-rate interest payments between
      two
      parties, based on a common notional principal amount and maturity date.




By
      using
      derivative instruments, the Company is exposed to credit and market risk. If
      the
      courterparty fails to perform, credit risk is equal to the extent of the fair
      value gain in a derivative. When the fair value of a derivative contract is
      positive, this generally indicates that the counterparty owes the Company,
      and,
      therefore, creates a repayment risk for the Company. When the fair value of
      a
      derivative contract is negative, the Company owes the counterparty and,
      therefore, it has no repayment risk. The Company minimizes the credit risk
      in
      derivative instruments by entering into transactions with high-quality
      counterparties that are reviewed periodically.




The
      Company’s derivative activities are monitored by its asset/liability management
      function as part of that group’s oversight of asset/liability and treasury
      functions. This group is responsible for implementing various hedging strategies
      that are developed through its analysis of data from financial simulation models
      and other internal and industry sources. The resulting hedging strategies are
      then incorporated into the overall interest-rate risk management.




During
      2004, Habersham Bank entered into two interest rate swap agreements with a
      regional bank to partially offset the interest rate risk associated with
      variable rate Federal Home Loan Bank (“FHLB”) borrowings. Each FHLB loan amount
      is $3 million with a quarterly adjustable rates set at 23 basis points above
      the
      three-month LIBOR. The first swap contract was entered into during the second
      quarter of 2004 and is for a 4.5% fixed rate on a $3 million notional amount.
      The swap matures on May 21, 2009. The second swap contract was entered into
      during the third quarter of 2004 and is for a 4.05% fixed rate on a $3 million
      notional amount. The swap matures on August 26, 2009.




The
      swaps
      are being accounted for as cash flow hedges at December 31, 2005 and 2004.
      The
      fair values are included in other comprehensive income, net of taxes. At
      December 31, 2005 and 2004, Habersham Bank recorded an asset of approximately
      $80,000 and a liability of approximately $123,000 to reflect the fair value
      of
      the swaps, respectively. No hedge ineffectiveness from these cash flow hedges
      was recognized in the consolidated statement of earnings.




-17-




**(13)**
            **Income
                Taxes**


Income
      tax expense (benefit) relating to continuing operations for the years ended
      December 31, 2005, 2004 and 2003 are as follows:





2005
            
            2004
            
            2003Current:Federal
            
            $
            1,493,741
            
            
            709,820
            
            
            905,978State
            
            
            160,354
            
            
            -
            
            
            27,314Total
                current
            
            
            1,654,095
            
            
            709,820
            
            
            933,292Deferred:Federal
            
            
            (4,589
            )
            
            46,183
            
            
            (186,871
            )State
            
            
            (534
            )
            
            23,756
            
            
            (30,975
            )Total
                deferred
            
            
            (5,123
            )
            
            69,939
            
            
            (217,846
            )Total
            
            $
            1,648,972
            
            
            779,759
            
            
            715,446





The
      provision for income taxes is less than that computed by applying the Federal
      statutory rate of 34% to income before income taxes as indicated by the
      following:





2005
            
            2004
            
            2003Income
                tax on earnings before income taxes at statutory rate
            
            $
            1,857,231
            
            
            1,061,831
            
            
            1,023,879Differences
                resulting from:Tax-exempt
                income
            
            
            (278,379
            )
            
            (260,947
            )
            
            (265,337
            )Earnings
                on cash surrender value of life insurance
            
            
            (61,804
            )
            
            (56,903
            )
            
            (60,294
            )State
                income tax, net of Federal tax effect
            
            
            105,481
            
            
            15,679
            
            
            (2,416
            )Other
            
            
            26,443
            
            
            20,099
            
            
            19,614$
            1,648,972
            
            
            779,759
            
            
            715,446





At
      December 31, 2005 and 2004, the significant components of the Company’s net
      deferred tax assets and liabilities are as follows:





2005
            
            2004Deferred
                tax assets:Allowance
                for loan losses
            
            $
            1,497,342
            
            
            1,380,089Other
                real estate
            
            
            108,039
            
            
            51,065Deferred
                compensation
            
            
            400,273
            
            
            391,773Furniture,
                fixtures and equipment due to difference in depreciation
                methods
            
            
            4,450
            
            
            76,417Unearned
                credit life premiums
            
            
            6,261
            
            
            6,261Unrealized
                loss on investment securities available for sale
            
            
            507,351
            
            
            17,930Loan
                discount
            
            
            83,840
            
            
            -Unrealized
                loss on derivative
            
            
            -
            
            
            41,808Other
            
            
            13,889
            
            
            12,3632,621,445
            
            
            1,977,706Deferred
                tax liabilities:Unrealized
                gain on derivative
            
            
            (27,205
            )
            
            -Core
                deposit intangible
            
            
            (225,779
            )
            
            -Deferred
                loan fees
            
            
            (43,175
            )
            
            (52,480
            )Prepaid
                expenses
            
            
            (139,287
            )
            
            (164,758
            )(435,446
            )
            
            (217,238
            )Net
                deferred tax asset
            
            $
            2,185,999
            
            
            1,760,468





The
      net
      deferred tax asset is included in other assets in the consolidated balance
      sheets.


-18-





**(14)**
            **Stockholders’
                Equity**


The
      Company and the Bank are subject to various regulatory capital requirements
      administered by the Federal banking agencies. Failure to meet minimum capital
      requirements can initiate certain mandatory and possibly additional
      discretionary actions by regulators that, if undertaken, could have a direct
      material effect on the Company’s consolidated financial statements. Under
      capital adequacy guidelines, the Company and the Bank must meet specific capital
      guidelines that involve quantitative measures of the Company’s and the Bank’s
      assets, liabilities, and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s and the Bank’s capital amounts
      and the Bank’s classifications under the regulatory framework for prompt
      corrective action are also subject to qualitative judgments by the regulators
      about components, risk weightings, and other factors.





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios (set forth in the
      table below) of total and Tier I capital (as defined in the
      regulations) to risk-weighted assets (as defined), and of Tier I capital
      (as defined) to average assets (as defined). Management believes, as of
      December 31, 2005 and 2004, that the Company and the Bank meet all capital
      adequacy requirements to which they are subject.





As
      of
      December 31, 2005, the most recent notifications from both the Federal
      Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
      categorized the Bank as well capitalized under the regulatory framework for
      prompt corrective action. To be categorized as well capitalized, the Bank must
      maintain minimum total risk-based, Tier I risk-based, and Tier I
      leverage ratios as set forth in the table. There are no conditions or events
      since that notification that management believes have changed the Bank’s capital
      categories.





The
      Company’s and the Bank’s actual capital amounts and ratios as of
      December 31, 2005 and 2004 are as follows (dollars in
      thousands):





Actual
            
            For
                Capital
              Adequacy
                Purposes
            
            To
                Be Well
              Capitalized
                Under
              Prompt
                Corrective
              Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio**As
                of December 31, 2005:**Total
                Capital (to Risk-Weighted Assets):Company
            
            $
            50,988
            
            
            14.29
            %
            
            28,536
            
            
            8.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            47,720
            
            
            13.49
            %
            
            28,302
            
            
            8.00
            %
            
            35,377
            
            
            10.00
            %Tier
                I Capital (to Risk-Weighted Assets):Company
            
            $
            47,043
            
            
            13.19
            %
            
            14,268
            
            
            4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            43,775
            
            
            12.37
            %
            
            14,151
            
            
            4.00
            %
            
            21,226
            
            
            6.00
            %Tier
                I Capital (to Average Assets):Company
            
            $
            47,043
            
            
            10.30
            %
            
            18,271
            
            
            4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            43,775
            
            
            9.69
            %
            
            18,079
            
            
            4.00
            %
            
            22,599
            
            
            5.00
            %**As
                of December 31, 2004:**Total
                Capital (to Risk-Weighted Assets):Company
            
            $
            49,214
            
            
            15.91
            %
            
            24,749
            
            
            8.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            46,840
            
            
            15.24
            %
            
            24,580
            
            
            8.00
            %
            
            30,725
            
            
            10.00
            %Tier
                I Capital (to Risk-Weighted Assets):Company
            
            $
            45,579
            
            
            14.73
            %
            
            12,374
            
            
            4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            43,205
            
            
            14.06
            %
            
            12,290
            
            
            4.00
            %
            
            18,435
            
            
            6.00
            %Tier
                I Capital (to Average Assets):Company
            
            $
            45,579
            
            
            11.62
            %
            
            15,689
            
            
            4.00
            %
            
            N/A
            
            
            N/ABank
            
            $
            43,205
            
            
            11.08
            %
            
            15,591
            
            
            4.00
            %
            
            19,488
            
            
            5.00
            %





The
      Department of Banking and Finance requires prior approval for a bank to pay
      dividends in excess of 50% of the preceding year’s earnings. Based on this
      limitation, the amount of cash dividends available from the Bank for payment
      in
      2006 is approximately $2,240,000, subject to maintenance of the minimum capital
      requirements. As a result of this restriction, at December 31, 2005,
      approximately $44,749,000 of the parent company’s investment in the Bank is
      restricted as to dividend payments from the Bank to the parent company.


-19-





**(15)**
            **Employee
                Benefit and Stock Option
                Plans**


The
      Company has a contributory profit sharing plan under Internal Revenue Code
      Section 401(k) - (the 401(k) Plan). The 401(k) Plan covers
      substantially all employees. Employees may contribute up to 15% of their annual
      salaries not to exceed the amount allowed by the IRS. At its discretion, the
      Company may make matching contributions in an amount not to exceed 100% of
      each
      participant’s first 3% of compensation contributed. The Company’s contributions
      to the plan totaled $149,489 in 2005, $145,927 in 2004 and $118,772 in
      2003.





During
      1998, the Bank’s board of directors approved the Director’s Retirement Plan (the
      Plan), a noncontributory retirement plan. Amounts earned on the life insurance
      policies purchased by the Bank over the rate, as defined in the Plan, to be
      retained for the benefit of the Bank are to be deferred and paid to the
      directors upon retirement. As of December 31, 2005 and 2004, the cash
      surrender values of the life insurance policies totaled $4,874,714 and
      $4,691,962, respectively, and are included in other assets in the balance
      sheet.





The
      Company has an Incentive Stock Option Plan that provides that officers and
      certain employees of the Company may be granted options to purchase shares
      of
      common stock of the Company at an amount equal to the fair market value of
      the
      stock at the date of grant. The options, which may be exercised immediately,
      expire five years from the date of grant.





The
      Company’s Outside Directors Stock Option Plan provides that outside directors of
      Habersham Bancorp and its subsidiaries may be granted options to purchase shares
      of common stock of the Company at an amount equal to the fair market value
      of
      the stock at the date of grant. The options are fully vested on the date of
      grant, exercisable six months from the date of grant, and expire
      ten years from the date of grant. Shares reserved for future grants under
      this plan are approximately 203,675 at December 31, 2005.





The
      following table summarizes information about stock options outstanding at
      December 31, 2005:


**Range
                  of**
                **Exercise****Prices**
              
              **Number**
                **Outstanding
                  and**
                **Exercisable
                  at**
                **December
                  31, 2005**
              
              **Weighted**
                **Average
                  Remaining**
                **Contractual
                  Life**
                **in
                  Years**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**$
              16.50
                  - 16.88
              
              
              36,750
              
              
              1.00
              
              $
              16.5417.82
              
              
              71,000
              
              
              3.41
              
              
              17.8218.56
              
              
              1,250
              
              
              1.00
              
              
              18.5620.60
              
              
              86,500
              
              
              5.45
              
              
              20.6022.95
              
              
              117,750
              
              
              6.27
              
              
              22.9524.49
              
              
              54,500
              
              
              3.00
              
              
              24.49367,750
              
              
              4.50
              
              $
              20.98





A
      summary
      of the status of the Company’s stock option plans and changes during 2005, 2004
      and 2003 is presented below:





2005
            
            2004
            
            2003Shares
            
            Weighted
              Avg.
              Exercise
              Price
            
            Shares
            
            Weighted
              Avg.
              Exercise
              Price
            
            Shares
            
            Weighted
              Avg.
              Exercise
              PriceOutstanding
                at beginning of the year
            
            
            314,500
            
            $
            19.41
            
            
            262,953
            
            $
            18.21
            
            
            313,410
            
            $
            15.23Granted
            
            
            117,750
            
            
            22.95
            
            
            97,500
            
            
            20.60
            
            
            68,500
            
            
            24.49Exercised
            
            
            (26,500
            )
            
            11.10
            
            
            (36,453
            )
            
            14.19
            
            
            (73,655
            )
            
            12.26Terminated
            
            
            (38,000
            )
            
            21.02
            
            
            (9,500
            )
            
            18.53
            
            
            (45,302
            )
            
            16.83Outstanding
                and exercisable at end of year
            
            
            367,750
            
            
            20.98
            
            
            314,500
            
            
            19.41
            
            
            262,953
            
            
            18.21





The
      estimated fair value of options granted during 2005, 2004 and 2003 was $13.05,
      $11.77 and $15.22, respectively, per share. The fair value of options granted
      under the Company’s fixed stock option plans during 2005, 2004 and 2003, was
      estimated on the date of grant using the Black-Scholes option-pricing model
      with
      the following weighted average assumptions used: expected dividend yield of
      3.20%, 3.36% and 2.54% in 2005, 2004 and 2003, respectively; expected volatility
      of 85% in 2005, 88% in 2004 and 93% in 2003; weighted average risk-free interest
      rate of 4.25%, 3.75% and 3.35% in 2005, 2004 and 2003, respectively; and an
      expected weighted average life of five years in 2005, 2004 and
      2003.





-20-




**(16)**
            **Other
                Expenses**


Items
      comprising other expenses for the years ended December 31, 2005, 2004 and
      2003 are as follows:





2005
            
            2004
            
            2003Outside
                services
            
            $
            977,933
            
            
            1,078,463
            
            
            988,986Advertising
                and public relations
            
            
            598,857
            
            
            640,151
            
            
            565,173Office
                supplies
            
            
            438,765
            
            
            454,593
            
            
            415,029Other
            
            
            2,311,048
            
            
            2,073,144
            
            
            2,496,631Total
            
            $
            4,326,603
            
            
            4,246,351
            
            
            4,465,819




Outside
      services include charges for FDIC insurance, legal and professional services,
      insurance, director fees, and State of Georgia Department of Banking
      fees.





**(17)**
            **Fair
                Value of Financial
                Instruments**


The
      following disclosure of the estimated fair value of financial instruments is
      made in accordance with the requirements of SFAS No. 107, *Disclosures
      about Fair Value of Financial Instruments* .
      The
      estimated fair value amounts have been determined by the Company using available
      market information and appropriate valuation methodologies. However,
      considerable judgment is necessarily required to interpret market data to
      develop the estimates of fair value. Accordingly, the estimates presented herein
      are not necessarily indicative of the amounts the Company could realize in
      a
      current market exchange. The use of different market assumptions and/or
      estimation methodologies may have a material effect on the estimated fair value
      amounts.





2005
            
            2004Carrying
              Amount
            
            Fair
              Value
            
            Carrying
              Amount
            
            Fair
              Value**Assets:**Cash
                and cash equivalents
            
            $
            52,866,422
            
            
            52,866,422
            
            
            9,558,770
            
            
            9,558,770Investment
                securities available for sale
            
            
            73,115,232
            
            
            73,115,232
            
            
            70,313,485
            
            
            70,313,485Investment
                securities held to maturity
            
            
            3,387,449
            
            
            3,514,273
            
            
            4,111,041
            
            
            4,370,548Other
                investments
            
            
            3,375,424
            
            
            3,375,424
            
            
            2,469,134
            
            
            2,469,134Loans
                held for sale
            
            
            2,119,438
            
            
            2,127,819
            
            
            1,061,700
            
            
            1,076,988Loans
            
            
            316,773,266
            
            
            314,701,278
            
            
            277,137,222
            
            
            276,923,710Interest
                rate swaps
            
            
            80,016
            
            
            80,016
            
            
            -
            
            
            -**Liabilities:**Deposits
            
            $
            372,761,946
            
            
            373,117,355
            
            
            292,957,221
            
            
            293,857,182Short-term
                borrowings
            
            
            775,442
            
            
            775,442
            
            
            786,036
            
            
            786,036Federal
                funds purchased and securities sold under repurchase
                agreements
            
            
            8,423,323
            
            
            8,423,323
            
            
            4,834,631
            
            
            4,834,631FHLB
                advances
            
            
            42,300,000
            
            
            42,941,953
            
            
            36,000,000
            
            
            37,384,030Interest
                rate swaps
            
            
            -
            
            
            -
            
            
            122,966
            
            
            122,966





The
      carrying amounts of cash and cash equivalents, interest-bearing demand and
      savings accounts, short-term borrowings, and federal funds purchased and
      securities sold under repurchase agreements are a reasonable estimate of their
      fair value due to the short-term nature or short term to maturity of these
      financial instruments. The fair value of investment securities available for
      sale and investment securities held to maturity is based on quoted market prices
      and dealer quotes. Fair values of mortgage loans held for sale are determined
      based on relevant delivery prices in the secondary mortgage market. The fair
      value of other loans, time deposits, and FHLB advances is estimated by
      discounting the future cash flows using interest rates currently charged/paid
      by
      the Bank for such financial instruments with similar credit risks and
      maturities.





The
      fair
      value of Federal Home Loan Bank stock approximates carrying value. Other
      insignificant investments have been reflected above with fair values equaling
      carrying values.





-21-




For
      derivative instruments, fair value is estimated as the amount that the Company
      would receive or pay to terminate the contracts at the reporting date, taking
      into account the current unrealized gains or losses on open
      contracts.





As
      required by SFAS No. 107, demand deposits are shown at their carrying
      value. No value has been ascribed to core deposits, which generally bear a
      low
      rate of interest or no interest and do not fluctuate in response to changes
      in
      interest rates.





The
      carrying values and fair values of commitments to extend credit and standby
      letters of credit are not significant.





The
      fair
      value estimates presented herein are based on pertinent information available
      to
      management as of December 31, 2005 and 2004. Although management is not
      aware of any factors that would significantly affect the estimated fair value
      amounts, such amounts have not been comprehensively revalued for purposes of
      these financial statements and, therefore, current estimates of fair value
      may
      differ significantly from the amounts presented herein.





**(18)**
            **Related
                Party Transactions**


In
      the
      ordinary course of business, the Company extends loans to its directors,
      executive officers, and principal stockholders and their affiliates at terms
      and
      rates comparable to those prevailing at the time for comparable transactions
      with other customers. In the opinion of management, these loans do not involve
      more than the normal credit risk nor present other unfavorable features. An
      analysis of the activity during 2005 of loans to executive officers, directors,
      and principal stockholders is as follows:





Balance,
                January 1
            
            $
            7,489,541Amounts
                advanced
            
            
            14,791,208Repayments
            
            
            (8,202,075
            )Balance,
                December 31
            
            $
            14,078,674





Deposits
      from related parties totaled approximately $47,658,000 and $9,824,000 at
      December 31, 2005 and 2004, respectively.





**(19)**
            **Condensed
                Financial Statements of Habersham Bancorp (Parent
                Only)**


The
      parent company only condensed financial statements are presented
      below:




**CONDENSED
      BALANCE SHEETS**




**Assets**December
                31,2005
            
            2004Cash
            
            $
            439,968
            
            
            431,025Investment
                in subsidiaries, primarily banks
            
            
            46,988,993
            
            
            45,631,651Other
                investments
            
            
            599,990
            
            
            -Equipment,
                net
            
            
            109,224
            
            
            47,847Other
                assets
            
            
            2,217,708
            
            
            2,059,701Total
                assets
            
            $
            50,355,883
            
            
            48,170,224


-22-




**Liabilities
                and Stockholders’ Equity**Accounts
                payable
            
            $
            98,751
            
            
            164,430Stockholders’
                equity:Common
                stock
            
            
            2,921,240
            
            
            2,900,192Additional
                paid-in capital
            
            
            14,723,175
            
            
            14,560,488Retained
                earnings
            
            
            33,544,763
            
            
            30,661,077Accumulated
                other comprehensive income
            
            
            (932,046
            )
            
            (115,963
            )Total
                stockholders’ equity
            
            
            50,257,132
            
            
            48,005,794Total
                liabilities and stockholders’ equity
            
            $
            50,355,883
            
            
            48,170,224







**CONDENSED
      STATEMENTS OF EARNINGS**




For
      the
      Years Ended December 31, 2005, 2004 and 2003




2005
            
            2004
            
            2003Income:Dividends
                from banks
            
            $
            7,500,000
            
            
            2,300,000
            
            
            4,700,000Management
                fees from subsidiaries
            
            
            668,666
            
            
            668,666
            
            
            668,666Gains
                on sale of other investment
            
            
            -
            
            
            -
            
            
            60,000Other
                income
            
            
            29,695
            
            
            4,500
            
            
            2,087Total
                income
            
            
            8,198,361
            
            
            2,973,166
            
            
            5,430,753Expenses:General
                and administrative
            
            
            1,766,390
            
            
            1,957,040
            
            
            1,957,856Earnings
                before income taxes and equity in undistributed earnings of
                subsidiaries
            
            
            6,431,971
            
            
            1,016,126
            
            
            3,472,897Income
                tax benefit
            
            
            402,314
            
            
            482,856
            
            
            353,134Earnings
                before equity in undistributed earnings of subsidiaries
            
            
            6,834,285
            
            
            1,498,982
            
            
            3,826,031(Distributions
                in excess of earnings) equity in undistributed earnings of
                subsidiaries
            
            
            (3,020,814
            )
            
            844,291
            
            
            (1,530,069
            )Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962




-23-


**CONDENSED
      STATEMENTS OF CASH FLOWS**




For
      the
      Years Ended December 31, 2005, 2004 and 2003




2005
            
            2004
            
            2003CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                earnings
            
            $
            3,813,471
            
            
            2,343,273
            
            
            2,295,962Adjustments
                to reconcile net earnings to net cash provided by operating
                activities:Depreciation
            
            
            31,977
            
            
            46,032
            
            
            88,903Gain
                on sale of equipment
            
            
            -
            
            
            (4,500
            )
            
            (2,087
            )Gain
                on sale of other investment
            
            
            -
            
            
            -
            
            
            (60,000
            )(Increase)
                decrease in other assets
            
            
            (142,525
            )
            
            (79,083
            )
            
            (358,288
            )(Decrease)
                increase in other liabilities
            
            
            (65,683
            )
            
            4,995
            
            
            (56,579
            )Distributions
                in excess of earnings (equity in undistributed earnings) of
                subsidiaries
            
            
            3,020,814
            
            
            (844,291
            )
            
            1,530,069Net
                cash provided by operating activities
            
            
            6,658,054
            
            
            1,466,426
            
            
            3,437,980Cash
                flows from investing activities:Purchase
                of Liberty Bank & Trust, net of cash acquired of
                $4,631,073
            
            
            (563,111
            )
            
            -
            
            
            -Contributions
                to bank subsidiary
            
            
            (4,631,073
            )
            
            -
            
            
            -Proceeds
                from sale of other investments
            
            
            -
            
            
            -
            
            
            160,000Purchase
                of other investment
            
            
            (599,990
            )
            
            -
            
            
            -Proceeds
                from other investment
            
            
            -
            
            
            33,032
            
            
            -Purchase
                of equipment
            
            
            (93,353
            )
            
            (916
            )
            
            (47,914
            )Proceeds
                from sale of equipment
            
            
            -
            
            
            11,033
            
            
            4,500Net
                cash (used in) provided by investing activities
            
            
            (5,887,527
            )
            
            43,149
            
            
            116,586Cash
                flows from financing activities:Payment
                of cash dividends
            
            
            (929,785
            )
            
            (3,701,878
            )
            
            (3,378,814
            )Proceeds
                from issuance of common stock upon exercise of stock
                options
            
            
            168,201
            
            
            364,373
            
            
            509,865Net
                cash used in financing activities
            
            
            (761,584
            )
            
            (3,337,505
            )
            
            (2,868,949
            )(Decrease)
                increase in cash
            
            
            8,943
            
            
            (1,827,930
            )
            
            685,617Cash
                at beginning of year
            
            
            431,025
            
            
            2,258,955
            
            
            1,573,338Cash
                at end of year
            
            $
            439,968
            
            
            431,025
            
            
            2,258,955





**(20)**
            **Quarterly
                Financial Data (Unaudited)**


The
      supplemental quarterly financial data for the years ended December 31, 2005
      and
      2004 is summarized as follows:





Quarter
                EndedMarch
                31
              2005
            
            June
                30
              2005
            
            September
                30
              2005
            
            December
                31
              2005Interest
                income
            
            $
            5,562,893
            
            
            5,993,048
            
            
            6,902,595
            
            
            7,477,733Interest
                expense
            
            
            1,852,779
            
            
            1,947,664
            
            
            2,248,835
            
            
            2,551,060Net
                interest income
            
            
            3,710,114
            
            
            4,045,384
            
            
            4,653,760
            
            
            4,926,673Provision
                for loan losses
            
            
            120,000
            
            
            120,000
            
            
            90,000
            
            
            -Net
                earnings
            
            
            706,076
            
            
            851,374
            
            
            1,176,956
            
            
            1,079,065Net
                earnings per share - basic
            
            
            .24
            
            
            .29
            
            
            .41
            
            
            .37Net
                earnings per share - diluted
            
            
            .24
            
            
            .29
            
            
            .40
            
            
            .37





March
                31
              2004
            
            June
                30
              2004
            
            September
                30
              2004
            
            December
                31
              2004Interest
                income
            
            $
            5,060,119
            
            
            5,041,600
            
            
            5,249,292
            
            
            5,392,407Interest
                expense
            
            
            1,666,929
            
            
            1,624,401
            
            
            1,720,941
            
            
            1,779,233Net
                interest income
            
            
            3,393,191
            
            
            3,417,199
            
            
            3,528,351
            
            
            3,613,174Provision
                for loan losses
            
            
            162,500
            
            
            120,000
            
            
            120,000
            
            
            80,000Net
                earnings
            
            
            359,052
            
            
            802,329
            
            
            535,402
            
            
            646,490Net
                earnings per share - basic
            
            
            .13
            
            
            .28
            
            
            .19
            
            
            .21Net
                earnings per share - diluted
            
            
            .12
            
            
            .27
            
            
            .18
            
            
            .21






-24-