EXHIBIT
13.0




HABERSHAM
BANCORP


AND
SUBSIDIARIES








Consolidated
Financial Statements





December
31, 2006, 2005 and 2004





(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, 2006 and 2005, and the related consolidated
statements of earnings, comprehensive income, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Habersham Bancorp and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.








\s\Porter
Keadle Moore, LLP


Atlanta,
Georgia


March   6,
2007










Habersham
Bancorp and Subsidiaries


Consolidated
Balance Sheets


December
31, 2006 and 2005





Assets2006
            
            
            2005Cash
      and due from banks
            
            $
            26,119,137
            
            
            
            16,546,422Federal
      funds sold
            
            
            64,398,671
            
            
            
            36,320,000Cash
      and cash equivalents
            
            
            90,517,808
            
            
            
            52,866,422Investment
      securities available for sale
            
            
            84,982,415
            
            
            
            73,115,232Investment
      securities held to maturity, estimated fair value of $3,367,941 and
      $3,514,273
            
            
            3,289,322
            
            
            
            3,387,449Other
      investments
            
            
            3,365,224
            
            
            
            3,375,424Loans
      held for sale
            
            
            3,183,115
            
            
            
            2,119,438Loans,
      net of allowance for loan loss of $3,444,789 and
$3,944,525
            
            
            342,816,012
            
            
            
            316,773,266Premises
      and equipment, net
            
            
            12,923,720
            
            
            
            10,519,442Accrued
      interest receivable
            
            
            2,937,981
            
            
            
            2,359,171Other
      real estate
            
            
            537,975
            
            
            
            2,773,662Goodwill,
      net
            
            
            3,549,780
            
            
            
            3,549,780Other
      assets
            
            
            7,634,932
            
            
            
            7,591,498Total
      assets
            
            $
            555,738,284
            
            
            
            478,430,784Liabilities and
      Stockholders’ EquityDeposits:Noninterest-bearing
      demand
            
            $
            47,286,172
            
            
            
            92,697,588Money
      market and NOW accounts
            
            
            86,120,584
            
            
            
            72,307,257Savings
            
            
            62,200,262
            
            
            
            55,449,665Time
      ($100,000 and over)
            
            
            176,651,417
            
            
            
            72,864,375Other
      time
            
            
            78,370,325
            
            
            
            79,443,061Total
      deposits
            
            
            450,628,760
            
            
            
            372,761,946Short-term
      borrowings
            
            
            778,778
            
            
            
            775,442Federal
      funds purchased and securities sold under repurchase
      agreements
            
            
            5,873,955
            
            
            
            8,423,323Federal
      Home Loan Bank advances
            
            
            38,000,000
            
            
            
            42,300,000Accrued
      interest payable
            
            
            2,979,288
            
            
            
            1,962,707Other
      liabilities
            
            
            1,913,382
            
            
            
            1,950,234Total
      liabilities
            
            
            500,174,163
            
            
            
            428,173,652CommitmentsStockholders’
      equity:Common
      stock, $1.00 par value; 10,000,000 shares authorized;2,968,593
      and 2,921,240 shares issued and outstanding
            
            
            2,968,593
            
            
            
            2,921,240Additional
      paid-in capital
            
            
            15,530,587
            
            
            
            14,723,175Retained
      earnings
            
            
            37,777,500
            
            
            
            33,544,763Accumulated
      other comprehensive income (loss)
            
            
            (712,559
            )
            
            
            (932,046
            )Total
      stockholders’ equity
            
            
            55,564,121
            
            
            
            50,257,132Total
      liabilities and stockholders’ equity
            
            $
            555,738,284
            
            
            
            478,430,784








- 2
-




Habersham
Bancorp and Subsidiaries


Consolidated
Statements of Earnings


For the
Years Ended December 31, 2006, 2005 and 2004




2006
            
            
            2005
            
            
            2004Interest
      income:Loans
            
            $
            29,927,711
            
            
            
            22,421,374
            
            
            
            17,537,761Investments:Taxable
      securities
            
            
            2,873,933
            
            
            
            2,371,946
            
            
            
            2,289,392Tax
      exempt securities
            
            
            982,884
            
            
            
            807,397
            
            
            
            751,363Other
      investments
            
            
            233,392
            
            
            
            158,061
            
            
            
            126,255Federal
      funds sold
            
            
            442,118
            
            
            
            177,491
            
            
            
            38,648Total
      interest income
            
            
            34,460,038
            
            
            
            25,936,269
            
            
            
            20,743,419Interest
      expense:Time
      deposits, $100,000 and over
            
            
            3,949,260
            
            
            
            2,091,969
            
            
            
            1,607,854Other
      deposits
            
            
            7,116,569
            
            
            
            4,291,317
            
            
            
            3,143,765Federal
      funds purchased and securities sold under repurchase
      agreements
            
            
            213,262
            
            
            
            235,025
            
            
            
            107,458Short-term
      and other borrowings, primarily FHLB advances
            
            
            1,938,568
            
            
            
            1,982,027
            
            
            
            1,932,428Total
      interest expense
            
            
            13,217,659
            
            
            
            8,600,338
            
            
            
            6,791,505Net
      interest income
            
            
            21,242,379
            
            
            
            17,335,931
            
            
            
            13,951,914Provision
      for loan losses
            
            
            -
            
            
            
            330,000
            
            
            
            482,500Net
      interest income after provision for loan losses
            
            
            21,242,379
            
            
            
            17,005,931
            
            
            
            13,469,414Noninterest
      income:Mortgage
      origination income
            
            
            785,147
            
            
            
            981,045
            
            
            
            1,002,166Service
      charges on deposit accounts
            
            
            902,238
            
            
            
            701,881
            
            
            
            709,695Other
      service charges and commissions
            
            
            265,653
            
            
            
            260,893
            
            
            
            282,367Securities
      (losses) gains, net
            
            
            (13,216
            )
            
            
            (5,654
            )
            
            
            51,816Gain
      on sale of other investments
            
            
            -
            
            
            
            -
            
            
            
            198,641Gain
      on sale of premises and equipment
            
            
            83,555
            
            
            
            14,000
            
            
            
            879,453Income
      from Company-owned life insurance
            
            
            172,116
            
            
            
            181,775
            
            
            
            167,361Trust
      services fees
            
            
            314,139
            
            
            
            238,124
            
            
            
            200,338Other
      income
            
            
            1,146,118
            
            
            
            1,075,769
            
            
            
            938,665Total
      noninterest income
            
            
            3,655,750
            
            
            
            3,447,833
            
            
            
            4,430,502Noninterest
      expense:Salaries
      and employee benefits
            
            
            9,779,789
            
            
            
            8,478,019
            
            
            
            8,265,631Occupancy
      expenses
            
            
            2,209,495
            
            
            
            1,930,771
            
            
            
            1,835,487Computer
      services
            
            
            553,849
            
            
            
            459,544
            
            
            
            429,415Telephone
            
            
            444,214
            
            
            
            408,838
            
            
            
            408,036Other
            
            
            4,206,208
            
            
            
            3,714,149
            
            
            
            3,838,315Total
      noninterest expense
            
            
            17,193,555
            
            
            
            14,991,321
            
            
            
            14,776,884Earnings
      before income taxes
            
            
            7,704,574
            
            
            
            5,462,443
            
            
            
            3,123,032Income
      tax expense
            
            
            2,411,665
            
            
            
            1,648,972
            
            
            
            779,759Net
      earnings
            
            $
            5,292,909
            
            
            
            3,813,471
            
            
            
            2,343,273Earnings
      per common share – basic
            
            $
            1.80
            
            
            
            1.31
            
            
            
            .81Earnings
      per common share – diluted
            
            $
            1.77
            
            
            
            1.30
            
            
            
            .80Weighted
      average number of common shares outstanding
            
            
            2,942,737
            
            
            
            2,903,788
            
            
            
            2,889,004Weighted
      average number of common and common equivalent shares
      outstanding
            
            
            2,983,048
            
            
            
            2,938,698
            
            
            
            2,939,951







- 3
-




Habersham
Bancorp and Subsidiaries


Consolidated
Statements of Comprehensive Income


For the
Years Ended December 31, 2006, 2005 and 2004





2006
            
            
            2005
            
            
            2004Net
      earnings
            
            $
            5,292,909
            
            
            
            3,813,471
            
            
            
            2,343,273Other
      comprehensive income (loss):Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
            
            
            283,072
            
            
            
            (1,445,125
            )
            
            
            (249,116
            )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
            
            
            36,269
            
            
            
            202,982
            
            
            
            (122,966
            )Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
            
            
            13,216
            
            
            
            5,654
            
            
            
            (51,816
            )Total
      other comprehensive income (loss) before tax
            
            
            332,557
            
            
            
            (1,236,489
            )
            
            
            (423,898
            )Income
      taxes related to other comprehensive income:Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
            
            
            (96,244
            )
            
            
            491,343
            
            
            
            84,699Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
            
            
            (12,332
            )
            
            
            (69,014
            )
            
            
            41,809Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
            
            
            (4,494
            )
            
            
            (1,923
            )
            
            
            17,617Total
      income taxes related to other comprehensive income (loss)
            
            
            (113,070
            )
            
            
            420,406
            
            
            
            144,125Total
      other comprehensive income (loss), net of tax
            
            
            219,487
            
            
            
            (816,083
            )
            
            
            (279,773
            )Total
      comprehensive income
            
            $
            5,512,396
            
            
            
            2,997,388
            
            
            
            2,063,500




- 4
-




Habersham
Bancorp and Subsidiaries


Consolidated
Statements of Changes in Stockholders’ Equity


For the
Years Ended December 31, 2006, 2005 and 2004




Common
              Stock
            
            
            Additional
              Paid-in
              Capital
            
            
            Retained
              Earnings
            
            
            Accumulated
              Other
              Comprehensive
              Income (Loss)
            
            
            TotalBalance,
      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
            )
            
            
            50,257,132Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            5,292,909
            
            
            
            -
            
            
            
            5,292,909Change
      in other comprehensive income, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            219,487
            
            
            
            219,487Cash
      dividends, $.36 per share
            
            
            -
            
            
            
            -
            
            
            
            (1,060,172
            )
            
            
            -
            
            
            
            (1,060,172
            )Tax
      benefit from options exercised
            
            
            -
            
            
            
            84,280
            
            
            
            -
            
            
            
            -
            
            
            
            84,280Issuance
      of common stock upon exercise of stock options
            
            
            47,353
            
            
            
            723,132
            
            
            
            -
            
            
            
            -
            
            
            
            770,485Balance,
      December 31, 2006
            
            $
            2,968,593
            
            
            
            15,530,587
            
            
            
            37,777,500
            
            
            
            (712,559
            )
            
            
            55,564,121








- 5
-




Habersham
Bancorp and Subsidiaries


Consolidated
Statements of Cash Flows


For the
Years Ended December 31, 2006, 2005 and 2004





2006
            
            
            2005
            
            
            2004Cash
      flows from operating activities:Net
      earnings
            
            $
            5,292,909
            
            
            
            3,813,471
            
            
            
            2,343,273Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            -
            
            
            
            330,000
            
            
            
            482,500Provision
      for losses on other real estate owned
            
            
            16,500
            
            
            
            -
            
            
            
            30,000Depreciation
      expense
            
            
            1,052,771
            
            
            
            959,014
            
            
            
            921,222Loss
      (gain) on sale of premises and equipment
            
            
            (
      83,555
            )
            
            
            7,343
            
            
            
            (879,453
            )Net
      amortization (accretion) of premium/discount in investment
      securities
            
            
            133,912
            
            
            
            366,709
            
            
            
            494,191Securities
      (gain) loss, net
            
            
            13,216
            
            
            
            5,654
            
            
            
            (51,816
            )Gain
      on sale of other investments
            
            
            -
            
            
            
            -
            
            
            
            (198,641
            )(Gain)
      loss on sale of other real estate
            
            
            (15,454
            )
            
            
            38,570
            
            
            
            53,415Net
      gain on sale of loans
            
            
            (785,147
            )
            
            
            (981,045
            )
            
            
            (1,002,184
            )Proceeds
      from sales of loans
            
            
            33,611,309
            
            
            
            40,366,137
            
            
            
            39,701,998Increase
      in loans held for sale
            
            
            (33,889,839
            )
            
            
            (40,442,830
            )
            
            
            (38,239,614
            )Amortization
      of intangible assets
            
            
            62,064
            
            
            
            25,860
            
            
            
            -Deferred
      income tax (benefit) expense
            
            
            189,186
            
            
            
            (5,123
            )
            
            
            69,939Changes
      in assets and liabilities, net of effects of purchase acquisition in
      2005:(Increase)
      decrease in accrued interest receivable
            
            
            (578,810
            )
            
            
            (664,333
            )
            
            
            189,530(Increase)
      decrease in other assets
            
            
            (371,485
            )
            
            
            (974,290
            )
            
            
            1,256,151Increase
      (decrease) in accrued interest payable
            
            
            1,016,581
            
            
            
            269,952
            
            
            
            (234,157
            )Increase
      in other liabilities
            
            
            27,769
            
            
            
            263,202
            
            
            
            324,061Net
      cash provided by operating activities
            
            
            5,691,927
            
            
            
            3,378,291
            
            
            
            5,260,415Cash
      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
            
            
            6,767,710
            
            
            
            10,347,256
            
            
            
            12,101,837Proceeds
      from sales and calls
            
            
            2,013,278
            
            
            
            5,188,280
            
            
            
            12,179,914Purchases
            
            
            (20,512,685
            )
            
            
            (16,872,305
            )
            
            
            (22,484,240
            )Investment
      securities held to maturity:Proceeds
      from maturities
            
            
            31,801
            
            
            
            144,396
            
            
            
            607,000Proceeds
      from calls
            
            
            80,000
            
            
            
            596,708
            
            
            
            100,000Other
      investments:Proceeds
      from sales
            
            
            553,500
            
            
            
            450,000
            
            
            
            500,641Purchases
            
            
            (543,300
            )
            
            
            (1,356,290
            )
            
            
            (1,119,100
            )Net
      increase in loans
            
            
            (27,098,118
            )
            
            
            (27,876,679
            )
            
            
            (16,112,040
            )Purchases
      of premises and equipment
            
            
            (3,592,734
            )
            
            
            (1,451,263
            )
            
            
            (1,058,993
            )Proceeds
      from sales of premises and equipment
            
            
            219,240
            
            
            
            15,622
            
            
            
            952,442Net
      additions of other real estate
            
            
            -
            
            
            
            (906
            )
            
            
            (120,063
            )Proceeds
      from sale of other real estate
            
            
            3,309,672
            
            
            
            1,012,650
            
            
            
            1,691,589Net
      cash used in investing activities
            
            $
            (38,771,636
            )
            
            
            (29,001,642
            )
            
            
            (12,761,013
            )




- 6
-





Habersham
Bancorp and Subsidiaries


Consolidated
Statements of Cash Flows, continued


For the
Years Ended December 31, 2006, 2005 and 2004




2006
            
            
            2005
            
            
            2004Cash
      flows from financing activities, net of effects of purchase acquisition in
      2005:Net
      increase in deposits
            
            $
            77,866,814
            
            
            
            59,814,489
            
            
            
            13,357,253Net
      (decrease) increase in short-term borrowings
            
            
            3,336
            
            
            
            (10,594
            )
            
            
            207,581Proceeds
      from  FHLB advances
            
            
            8,000,000
            
            
            
            16,300,000
            
            
            
            11,000,000Repayment
      of FHLB advances
            
            
            (12,300,000
            )
            
            
            (10,000,000
            )
            
            
            (5,000,000
            )Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
            
            
            (2,549,368
            )
            
            
            3,588,692
            
            
            
            (7,549,145
            )Payment
      of cash dividends
            
            
            (1,060,172
            )
            
            
            (929,785
            )
            
            
            (3,701,878
            )Issuance
      of common stock upon exercise of stock options
            
            
            770,485
            
            
            
            168,201
            
            
            
            364,373Net
      cash provided by financing activities
            
            
            70,731,095
            
            
            
            68,931,003
            
            
            
            8,678,184Increase
      in cash and cash equivalents
            
            
            37,651,386
            
            
            
            43,307,652
            
            
            
            1,177,586Cash
      and cash equivalents at beginning of the year
            
            
            52,866,422
            
            
            
            9,558,770
            
            
            
            8,381,184Cash
      and cash equivalents at end of year
            
            $
            90,517,808
            
            
            
            52,866,422
            
            
            
            9,558,770Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            12,201,078
            
            
            
            8,276,805
            
            
            
            7,025,662Income
      taxes
            
            $
            2,403,000
            
            
            
            1,430,000
            
            
            
            447,000Supplemental
      disclosures of noncash investing activities:Other
      real estate acquired through loan foreclosures
            
            $
            1,055,372
            
            
            
            3,026,470
            
            
            
            684,500Loans
      granted to facilitate the sale of other real estate
            
            $
            -
            
            
            
            500,260
            
            
            
            369,028





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







- 7
-




Habersham
Bancorp and Subsidiaries




Notes to
Consolidated Financial Statements




(1)
            Organization
      and Basis of Presentation


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




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




Use
of Estimates


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




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




Interest
Rate Risk


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




Reclassifications


Certain
2005 and 2004 amounts have been reclassified to conform with the 2006
presentation.




(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.




- 8
-




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.




Other
Investments


At
December 31, 2006 and 2005, 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, 2006 and 2005,
there were no valuation allowances relating to mortgage loans held for
sale.




Loans


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




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




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




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




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




Allowance
for Loan Losses


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




Derivative
Instruments and Hedging Activities


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




Income
Taxes


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




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  50,500, 54,500 and 66,500 shares
were not included in the diluted earnings per share computation for 2006, 2005
and 2004, respectively, as they were antidilutive.




- 10
-




Comprehensive
Income


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




Stock-Based
Compensation


On
January 1, 2006, the Company adopted Statement of Financial Accounting Standard
No. 123(R), Share-based
payments (“SFAS No. 123(R)”).  SFAS No. 123(R) requires all
share-based payments, including stock options, to be recognized in the financial
statements based on their fair value at the grant date.   As the
Company had no vesting of previously awarded share-based compensation that
occurred during 2006 and there were no stock option grants during 2006, the
implementation of SFAS No. 123(R) had no effect on the operations, financial
condition or cash flow of the Company for the year ended December 31,
2006.




Prior to
2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, compensation cost was measured as the excess, if any, of the
quoted market price of the Company’s stock at the date of grant over the amount
an employee must pay to acquire the stock.




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




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





Recent
Accounting Pronouncements


Accounting for Uncertainty
in Income Taxes




In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (“FIN
48”).  This interpretation clarifies that management is expected to
evaluate an income tax position taken or expected to be taken for likelihood of
realization before recording any amounts for such position in the financial
statement.  FIN 48 also requires expanded disclosure with respect to
income tax positions taken that are not certain to be realized.  This
interpretation is effective for fiscal years beginning after December 15, 2006,
and will require management to evaluate every open tax position that exists in
every jurisdiction on the date of initial adoption.  The Company has
not fully completed an assessment of the impact but believes that no material
adjustment to the Company’s tax accounts will be necessary.




Fair Value
Measurements




In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  SFAS No. 157 does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  However, the application of this Statement may change how fair
value is determined.  The Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.  The financial statement impact is
not expected to be material to the Company’s financial position, results of
operations or disclosures.




- 11
-




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.





(4)
            Reserve
      Requirements


At
December 31, 2006 and 2005, the Federal Reserve Bank required that the Bank
maintain average reserve balances of $1,737,000 and $799,000,
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,
      2006
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueU.S.
      government-sponsored enterprises
            
            $
            31,049,720
            
            
            
            9,505
            
            
            
            385,376
            
            
            
            30,673,849Mortgage-backed
      securities
            
            
            32,115,158
            
            
            
            27,293
            
            
            
            951,369
            
            
            
            31,191,082State
      and political subdivisions
            
            
            22,804,347
            
            
            
            226,646
            
            
            
            93,547
            
            
            
            22,937,446Equity
      securities
            
            
            209,109
            
            
            
            -
            
            
            
            29,071
            
            
            
            180,038Total
            
            $
            86,178,334
            
            
            
            263,444
            
            
            
            1,459,363
            
            
            
            84,982,415December
      31, 2005
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueU.S.
      government-sponsored enterprises
            
            $
            22,916,184
            
            
            
            -
            
            
            
            473,209
            
            
            
            22,442,975Mortgage-backed
      securities
            
            
            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




Proceeds
from sales and calls of available for sale securities during 2006, 2005 and 2004
were $2,013,278, $5,188,280 and $12,179,914, respectively.




Gross
gains of $9,881, $35,802 and $77,669 were recognized on those sales for 2006,
2005 and 2004, respectively.  Gross losses of $23,097, $50,737 and
$25,853 were recognized on those sales for 2006, 2005 and 2004,
respectively.




- 12
-




The
following investments available for sale have an unrealized loss at December 31,
2006 and 2005 for which an other than temporary impairment has not been
recognized:




2006
            
            
            2005Estimated
      Fair Value
            
            
            Unrealized
              Losses
            
            
            Estimated
      Fair Value
            
            
            Unrealized
      LossesUnrealized
      loss for less than 12 months:U.S.
      government-sponsored enterprises
            
            $
            6,901,880
            
            
            
            42,746
            
            
            
            11,529,119
            
            
            
            201,907Mortgage-backed
      securities
            
            
            2,755,736
            
            
            
            37,684
            
            
            
            11,821,579
            
            
            
            250,936State
      and political subdivisions
            
            
            4,330,457
            
            
            
            44,412
            
            
            
            5,677,754
            
            
            
            93,448$
            13,988,073
            
            
            
            124,842
            
            
            
            29,028,452
            
            
            
            546,291


Unrealized
      loss for greater than 12 months:U.S.
      government-sponsored enterprises
            
            $
            20,572,302
            
            
            
            342,629
            
            
            
            10,907,828
            
            
            
            271,302Mortgage-backed
      securities
            
            
            26,367,202
            
            
            
            913,685
            
            
            
            20,849,590
            
            
            
            906,475State
      and political subdivisions
            
            
            3,259,021
            
            
            
            49,136
            
            
            
            942,928
            
            
            
            28,420Equity
      securities
            
            
            180,038
            
            
            
            29,071
            
            
            
            309,210
            
            
            
            44,97150,378,563
            
            
            
            1,334,521
            
            
            
            33,009,556
            
            
            
            1,251,168$
            64,366,636
            
            
            
            1,459,363
            
            
            
            62,038,008
            
            
            
            1,797,459





At
December 31, 2006, there were 12 U.S. government-sponsored
enterprises,  11 mortgage-backed securities, and 12 state and
political subdivision securities with an unrealized loss for less than 12 months
and 42 U.S. government-sponsored enterprises,  73 mortgage-backed
securities, and 13 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, 2006 represented
97.81% 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, 2006, by contractual
maturity, are shown below.  Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Callable securities
and mortgage-backed securities are included in the year of their contractual
maturity date.




Amortized
              Cost
            
            
            Estimated
              Fair ValueDue
      in one year or less
            
            $
            1,409,885
            
            
            
            1,408,963Due
      after one year through five years
            
            
            9,902,281
            
            
            
            9,813,527Due
      after five years through ten years
            
            
            20,268,656
            
            
            
            20,054,664Due
      after ten years
            
            
            54,388,403
            
            
            
            53,525,223Total
            
            $
            85,969,225
            
            
            
            84,802,377





Investment
securities available for sale with carrying values of approximately $65,505,000
and $63,842,000 were pledged as collateral at December 31, 2006 and 2005,
respectively, for Federal Home Loan Bank advances, public deposits, and other
deposits, as required by law.




- 13
-








(6)
            Investment
      Securities Held to Maturity


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




December 31,
      2006
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueMortgage-backed
      securities
            
            $
            68,124
            
            
            
            1,822
            
            
            
            -
            
            
            
            69,946State
      and political subdivisions
            
            
            3,221,198
            
            
            
            80,639
            
            
            
            3,842
            
            
            
            3,297,995Total
            
            $
            3,289,322
            
            
            
            82,461
            
            
            
            3,842
            
            
            
            3,367,941December 31,
      2005
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueMortgage-backed
      securities
            
            $
            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





Proceeds
from calls of investment securities held to maturity during 2006, 2005 and 2004
were $80,000, $596,708 and $100,000, respectively. Gross gains of $9,281 were
recognized on those calls for 2005.   There were no gains or
losses on maturities or calls in 2006.





The
amortized cost and estimated fair values of securities held to maturity at
December 31, 2006, 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
            
            $
            490,021
            
            
            
            486,607Due
      after one year through five years
            
            
            1,164,418
            
            
            
            1,186,053Due
      after five years through ten years
            
            
            1,229,621
            
            
            
            1,274,818Due
      after ten years
            
            
            405,262
            
            
            
            420,463Total
            
            $
            3,289,322
            
            
            
            3,367,941





Investment
securities held to maturity with carrying values of approximately $1,680,000 and
$3,107,000 were pledged as collateral at December 31, 2006 and 2005,
respectively, for public deposits and other deposits, as required by
law.





(7)
            Loans


Loans at
December 31, 2006 and 2005 are summarized as follows:




2006
            
            
            2005Real
      estate:Construction
            
            $
            152,752,981
            
            
            
            120,872,011Other
            
            
            161,190,348
            
            
            
            169,649,663Commercial,
      financial and agricultural
            
            
            15,901,820
            
            
            
            16,551,300Consumer
      installment
            
            
            16,503,399
            
            
            
            13,775,048346,348,548
            
            
            
            320,848,022Less:Unamortized
      loan origination fees, net
            
            
            71,254
            
            
            
            113,738Unearned
      credit life premiums
            
            
            16,493
            
            
            
            16,493Allowance
      for loan losses
            
            
            3,444,789
            
            
            
            3,944,525Total
            
            $
            342,816,012
            
            
            
            316,773,266




- 14
-




Changes
in the allowance for loan losses are as follows:




2006
            
            
            2005
            
            
            2004Balance,
      January 1
            
            $
            3,944,525
            
            
            
            3,634,643
            
            
            
            3,643,102Provision
      for loan losses
            
            
            -
            
            
            
            330,000
            
            
            
            482,500Loans
      charged off
            
            
            (702,626
            )
            
            
            (444,351
            )
            
            
            (812,192
            )Recoveries
            
            
            202,890
            
            
            
            209,154
            
            
            
            321,233Allowance
      from purchase acquisition
            
            
            -
            
            
            
            215,079
            
            
            
            -Balance,
      December 31
            
            $
            3,444,789
            
            
            
            3,944,525
            
            
            
            3,634,643





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, 2006 and 2005 are as follows:





2006
            
            
            2005Balance
            
            
            Allowance
              Amount
            
            
            Balance
            
            
            Allowance
              AmountImpaired
      loans with a related allowance
            
            $
            344,930
            
            
            
            52,000
            
            
            
            162,609
            
            
            
            35,300Impaired
      loans without a related allowance
            
            
            157,303
            
            
            
            -
            
            
            
            200,394
            
            
            
            -





The
average amount of impaired loans during 2006, 2005 and 2004 was $530,258,
$1,014,810 and $1,569,496, respectively. The interest income recognized on such
loans was $10,058 in 2006, $37,569 in 2005 and $169,648 in 2004, which
approximated the amount of interest received on the cash basis.





As of
December 31, 2006 and 2005, Habersham Bank’s loans to customers for
agribusiness purposes in the poultry industry were approximately $4.0 million
and $4.4 million, respectively.  Habersham Bank held a concentration
in commercial loans for the travel accommodation industry, which totaled
approximately $13.2 million and $14.8 million at December 31, 2006 and 2005,
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, 2006
and 2005, the Company had outstanding loan commitments approximating
$103,796,000 and $78,272,000, respectively, and standby letters of credit
approximating $5,881,000 and $7,959,000, respectively. The amount of collateral
obtained, if deemed necessary, for these financial instruments by the Company,
upon extension of credit, is based on management’s credit evaluation of the
customer. Collateral held, if any, varies but may include inventory, equipment,
real estate, or other property. The accounting loss the Company would incur if
any party to the financial instrument failed completely to perform according to
the terms of the contract and the collateral proved to be of no value is equal
to the face amount of the financial instrument.





- 15
-








(8)
            Premises
      and Equipment


Premises
and equipment are summarized as follows:




2006
            
            
            2005Land
            
            $
            2,545,691
            
            
            
            1,672,677Buildings
            
            
            10,464,309
            
            
            
            10,235,771Leasehold
      improvements
            
            
            150,310
            
            
            
            -Construction
      in progress
            
            
            1,420,585
            
            
            
            98,133Furniture
      and equipment
            
            
            7,397,361
            
            
            
            6,822,951Total
            
            
            21,978,256
            
            
            
            18,829,532Less
      accumulated depreciation
            
            
            9,054,536
            
            
            
            8,310,090Premises
      and equipment, net
            
            $
            12,923,720
            
            
            
            10,519,442








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




2007
            
            $
            504,7482008
            
            
            502,6122009
            
            
            459,8022010
            
            
            363,6222011
            
            
            242,970Thereafter
            
            
            10,554$
            2,084,308





Rental
expense was $460,625 in 2006, $362,138 in 2005 and $220,071 in
2004.





(9)
            Deposits
      and Borrowings


At
December 31, 2006, the scheduled maturities of time deposits are as
follows:




2007
            
            $
            212,219,6582008
            
            
            15,434,0972009
            
            
            6,564,1362010
            
            
            17,771,4462011
      and thereafter
            
            
            3,032,405Total
            
            $
            255,021,742


Short-term
borrowings of $778,778 and $775,442 at December 31, 2006 and 2005, 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:




2006
            
            
            2005Balance
      at year-end
            
            $
            5,873,955
            
            
            
            8,423,323Maximum
      outstanding during the year
            
            
            13,083,955
            
            
            
            13,444,600Average
      outstanding during the year
            
            
            6,395,038
            
            
            
            8,265,132Weighted
      average interest rate during the year
            
            
            2.45
            %
            
            
            1.23
            %Weighted
      average interest rate at end of year
            
            
            4.04
            %
            
            
            1.25
            %





At
December 31, 2006 and 2005, the Company had available repurchase agreement
line of credit commitments with a regional bank totaling $5,860,000 and
$2,736,000, respectively. No amounts were outstanding under that commitment at
December 31, 2006 and 2005.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 $133,500 and $180,000 at December 31, 2006 and 2005,
respectively. No amounts were outstanding under that commitment at
December 31, 2006 and 2005. Securities sold under
repurchase agreements at December 31, 2006 and 2005 are collateralized by
investment securities with aggregate carrying values of approximately $9,314,000
and $11,248,000, respectively.





- 16
-




The
Company did not have any federal funds purchased at December 31, 2006 and
2005.  At December 31, 2006 and 2005, the Company had unused lines for
overnight borrowings through Federal Funds purchased
of  $30,000,000.





(11)
            FHLB
    Advances


At
December 31, 2006, the Company had available line of credit commitments
with the Federal Home Loan Bank (FHLB) totaling $38,195,000 of which $38,000,000
was advanced and $195,000 was available.





Advances
outstanding at December 31, 2006 consisted of:





Advance date
            
            Amount
            
            
            Interest Rate
            
            
            Maturity Date
            
            Rate
            
            Call FeatureMarch
      30, 2000
            
            $
            10,000,000
            
            
            
            6.02
            %
            
            March
      30, 2010
            
            Fixed
            
            Callable
      each yearJanuary
      12, 2001
            
            
            10,000,000
            
            
            
            4.93
            %
            
            January
      12, 2011
            
            Fixed
            
            Callable
      each yearMay
      21, 2004
            
            
            3,000,000
            
            
            
            5.61
            %
            
            May
      21, 2009
            
            Floating
            
            No
      call provisionAugust
      26, 2004
            
            
            3,000,000
            
            
            
            5.60
            %
            
            August
      26, 2009
            
            Floating
            
            No
      call provisionMay
      17, 2005
            
            
            4,000,000
            
            
            
            4.18
            %
            
            May
      19, 2008
            
            Fixed
            
            No
      call provisionMay
      22, 2006
            
            
            3,000,000
            
            
            
            5.46
            %
            
            May
      22, 2008
            
            Fixed
            
            No
      call provisionSeptember
      13, 2006
            
            
            5,000,000
            
            
            
            5.36
            %
            
            September
      14, 2009
            
            Floating
            
            No
      call provision$
            38,000,000





At
December 31, 2006, the Company has pledged against FHLB advances, certain
investment securities, all stock of the FHLB, cash totaling $12,332,000 and
certain qualifying first mortgage loans with an outstanding balance of
$27,671,000.





Advances
outstanding at December 31, 2005 consisted of:





Advance date
            
            Amount
            
            
            Interest Rate
            
            
            Maturity Date
            
            Rate
            
            Call FeatureMarch
      30, 2000
            
            $
            10,000,000
            
            
            
            6.02
            %
            
            March
      30, 2010
            
            Fixed
            
            Callable
      each yearJanuary
      12, 2001
            
            
            10,000,000
            
            
            
            4.93
            %
            
            January
      12, 2011
            
            Fixed
            
            Callable
      each yearMay
      21, 2004
            
            
            3,000,000
            
            
            
            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.





(12)
            Derivative
      Instruments and Hedging Activities


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




- 17
-




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




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




During
2004, Habersham Bank entered into two interest rate swap agreements with a
regional bank to partially offset the interest rate risk associated with
variable rate Federal Home Loan Bank (“FHLB”) borrowings.  Each FHLB
loan amount is $3 million with quarterly adjustable rates set at 23 basis points
above the three-month LIBOR.  The 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, 2006 and
2005.  The fair values are included in other comprehensive income, net
of taxes.  At December 31, 2006 and 2005, Habersham Bank recorded an
asset of approximately $116,000 and $80,000 to reflect the fair value of the
swaps, respectively.




The
hedges were designed to be highly effective as all terms of the swaps are
matched to the FHLB advances.  The Company utilizes the long-haul
methodology to measure the effectiveness of the hedges.  Because of
the matching terms of the advances and the interest rate swaps, with the
exception of the prepayment ability, the hedges would continue to be highly
effective as long as the FHLB advances continued to be
outstanding.  On a quarterly basis, the Company ensures the debt
remains outstanding and that the credit risk of the swap counterparty has not
diminished.  If the debt is outstanding and there has been no change
in the credit risk of the swap counterparty, the hedge is deemed to remain
effective.  Any changes in the fair value of the swaps are recorded on
the balance sheet and accounted for in accumulated other comprehensive income,
net of tax.  If the debt were no longer outstanding, or there was a
credit risk problem (default) of the swap counterparty, the hedge would no
longer be deemed effective and the fair value of the swaps would be reclassified
from accumulated other comprehensive income to current earnings.  No
hedge ineffectiveness from these cash flow hedges was recognized in the
consolidated statement of earnings for the year ending December 31, 2006, 2005
and 2004.





- 18
-








(13)
            Income
      Taxes


Income
tax expense (benefit) relating to continuing operations for the years ended
December 31, 2006, 2005 and 2004 are as follows:




2006
            
            
            2005
            
            
            2004Current:Federal
            
            $
            1,943,753
            
            
            
            1,493,741
            
            
            
            709,820State
            
            
            278,726
            
            
            
            160,354
            
            
            
            -Total
      current
            
            
            2,222,479
            
            
            
            1,654,095
            
            
            
            709,820Deferred:Federal
            
            
            160,719
            
            
            
            (4,589
            )
            
            
            46,183State
            
            
            28,467
            
            
            
            (534
            )
            
            
            23,756Total
      deferred
            
            
            189,186
            
            
            
            (5,123
            )
            
            
            69,939Total
            
            $
            2,411,665
            
            
            
            1,648,972
            
            
            
            779,759




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




2006
            
            
            2005
            
            
            2004Income
      tax on earnings before income taxes at statutory rate
            
            $
            2,619,555
            
            
            
            1,857,231
            
            
            
            1,061,831Differences
      resulting from:Tax-exempt
      income
            
            
            (338,217
            )
            
            
            (278,379
            )
            
            
            (260,947
            )Earnings
      on cash surrender value of life insurance
            
            
            (58,519
            )
            
            
            (61,804
            )
            
            
            (56,903
            )State
      income tax, net of Federal tax effect
            
            
            202,747
            
            
            
            105,481
            
            
            
            15,679Other
            
            
            (13,901
            )
            
            
            26,443
            
            
            
            20,099$
            2,411,665
            
            
            
            1,648,972
            
            
            
            779,759




At
December 31, 2006 and 2005, the significant components of the Company’s net
deferred tax assets and liabilities are as follows:




2006
            
            
            2005Deferred
      tax assets:Allowance
      for loan losses
            
            $
            1,307,642
            
            
            
            1,497,342Other
      real estate
            
            
            81,434
            
            
            
            108,039Deferred
      compensation
            
            
            409,593
            
            
            
            400,273Furniture,
      fixtures and equipment due to difference in depreciation
      methods
            
            
            23,106
            
            
            
            4,450Unearned
      credit life premiums
            
            
            6,261
            
            
            
            6,261Unrealized
      loss on investment securities available for sale
            
            
            406,612
            
            
            
            507,351Loan
      discount
            
            
            53,939
            
            
            
            83,840Other
            
            
            196
            
            
            
            13,8892,288,783
            
            
            
            2,621,445Deferred
      tax liabilities:Unrealized
      gain on derivative
            
            
            (39,536
            )
            
            
            (27,205
            )Core
      deposit intangible
            
            
            (202,219
            )
            
            
            (225,779
            )Deferred
      loan fees
            
            
            (27,048
            )
            
            
            (43,175
            )Unearned
      safe deposit box income
            
            
            (9,824
            )
            
            
            -Prepaid
      expenses
            
            
            (126,413
            )
            
            
            (139,287
            )(405,040
            )
            
            
            (435,446
            )Net
      deferred tax asset
            
            $
            1,883,743
            
            
            
            2,185,999





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





(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.





- 19
-




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, 2006 and 2005, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.





As of
December 31, 2006, 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, 2006 and 2005 are as follows (dollars in
thousands):




Actual
            
            
            For
      Capital
              Adequacy Purposes
            
            
            To
      Be Well
              Capitalized
      Under
              Prompt
      Corrective
              Action ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2006:Total
      Capital (to Risk-Weighted Assets):Company
            
            $
            55,610
            
            
            
            14.03
            %
            
            
            31,720
            
            
            
            8.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            $
            51,915
            
            
            
            13.19
            %
            
            
            31,477
            
            
            
            8.00
            %
            
            
            39,346
            
            
            
            10.00
            %Tier
      I Capital (to Risk-Weighted Assets):Company
            
            $
            52,165
            
            
            
            13.16
            %
            
            
            15,860
            
            
            
            4.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            $
            48,470
            
            
            
            12.32
            %
            
            
            15,738
            
            
            
            4.00
            %
            
            
            23,608
            
            
            
            6.00
            %Tier
      I Capital (to Average Assets):Company
            
            $
            52,165
            
            
            
            10.83
            %
            
            
            19,260
            
            
            
            4.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            $
            48,470
            
            
            
            10.14
            %
            
            
            19,115
            
            
            
            4.00
            %
            
            
            23,893
            
            
            
            5.00
            %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
            %




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
2007 is approximately $3,080,000, subject to maintenance of the minimum capital
requirements.  As a result of this restriction, at December 31, 2006,
approximately $48,789,000 of the parent company’s investment in the Bank is
restricted as to dividend payments from the Bank to the parent
company.





- 20
-




(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 $196,760 in 2006, $149,489 in 2005 and $145,927 in
2004.





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, 2006 and 2005, the cash
surrender values of the life insurance policies totaled $5,046,830 and
$4,874,714, 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, 2006 and 2005.





The
following table summarizes information about stock options outstanding at
December 31, 2006:





Number
              Outstanding
      and
              Exercisable
      at
              December 31, 2006
            
            
            Weighted
              Average
      Remaining
              Contractual
      Life
              in Years
            
            
            Weighted
      Average Exercise Price67,500
            
            
            
            2.48
            
            
            $
            17.8271,250
            
            
            
            4.40
            
            
            
            20.60109,000
            
            
            
            5.38
            
            
            
            22.9550,500
            
            
            
            2.00
            
            
            
            24.49298,250
            
            
            
            3.92
            
            
            
            21.49





A summary
of the status of the Company’s stock option plans and changes during 2006, 2005
and 2004 is presented below:




2006
            
            
            2005
            
            
            2004Shares
            
            Weighted
      Avg.
              ExercisePrice
            
            
            Shares
            
            Weighted
      Avg.
              ExercisePrice
            
            
            Shares
            
            Weighted
      Avg.
              ExercisePriceOutstanding
      at beginning of the year
            
            
            367,750
            
            
            $
            20.98
            
            
            
            314,500
            
            
            $
            19.41
            
            
            
            262,953
            
            
            $
            18.21Granted
            
            
            -
            
            
            
            -
            
            
            
            117,750
            
            
            
            22.95
            
            
            
            97,500
            
            
            
            20.60Exercised
            
            
            (63,000
            )
            
            
            18.27
            
            
            
            (26,500
            )
            
            
            11.10
            
            
            
            (36,453
            )
            
            
            14.19Terminated
            
            
            (6,500
            )
            
            
            23.54
            
            
            
            (38,000
            )
            
            
            21.02
            
            
            
            (9,500
            )
            
            
            18.53Outstanding
      and exercisable at end of year
            
            
            298,250
            
            
            
            21.49
            
            
            
            367,750
            
            
            
            20.98
            
            
            
            314,500
            
            
            
            19.41





The total
intrinsic value of options exercised in 2006, 2005 and 2004 was $361,157,
$311,228 and $432,357, respectively.  The intrinsic value of
exercisable options at December 31, 2006 was $773,850 based on market price
of  $24.00.





- 21
-




The
estimated fair value of options granted during 2005 and 2004 was $13.05 and
$11.77 respectively, per share. The fair value of options granted under the
Company’s fixed stock option plans during 2005 and 2004, 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% and 3.36% in
2005 and 2004, respectively; expected volatility of 85% in 2005 and 88% in 2004;
weighted average risk-free interest rate of 4.25% and 3.75% in 2005 and 2004,
respectively; and an expected weighted average life of five years in 2005
and 2004.





(16)
            Other
      Expenses




Items
comprising other expenses for the years ended December 31,
2006,  2005 and 2004 are as follows:




2006
            
            
            2005
            
            
            2004Outside
      services
            
            $
            1,089,565
            
            
            
            977,933
            
            
            
            1,078,463Advertising
      and public relations
            
            
            678,622
            
            
            
            598,857
            
            
            
            640,151Office
      supplies
            
            
            514,175
            
            
            
            438,765
            
            
            
            454,593Other
            
            
            1,923,846
            
            
            
            1,698,594
            
            
            
            1,665,108Total
            
            $
            4,206,208
            
            
            
            3,714,149
            
            
            
            3,838,315




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.





2006
            
            
            2005Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueAssets:Cash
      and cash equivalents
            
            $
            90,517,808
            
            
            
            90,517,808
            
            
            
            52,866,422
            
            
            
            52,866,422Investment
      securities available for sale
            
            
            84,982,415
            
            
            
            84,982,415
            
            
            
            73,115,232
            
            
            
            73,115,232Investment
      securities held to maturity
            
            
            3,289,322
            
            
            
            3,367,941
            
            
            
            3,387,449
            
            
            
            3,514,273Other
      investments
            
            
            3,365,224
            
            
            
            3,365,224
            
            
            
            3,375,424
            
            
            
            3,375,424Loans
      held for sale
            
            
            3,183,115
            
            
            
            3,196,032
            
            
            
            2,119,438
            
            
            
            2,127,819Loans,
      net
            
            
            342,816,012
            
            
            
            340,071,367
            
            
            
            316,773,266
            
            
            
            314,701,278Interest
      rate swaps
            
            
            116,285
            
            
            
            116,285
            
            
            
            80,016
            
            
            
            80,016Liabilities:Deposits
            
            $
            450,628,760
            
            
            
            452,735,267
            
            
            
            372,761,946
            
            
            
            373,117,355Short-term
      borrowings
            
            
            778,778
            
            
            
            778,778
            
            
            
            775,442
            
            
            
            775,442Federal
      funds purchased and securities sold under repurchase
      agreements
            
            
            5,873,955
            
            
            
            5,873,955
            
            
            
            8,423,323
            
            
            
            8,423,323FHLB
      advances
            
            
            38,000,000
            
            
            
            38,410,681
            
            
            
            42,300,000
            
            
            
            42,941,953





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.





- 22
-




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.





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, 2006 and 2005. 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 2006 of loans to executive officers, directors,
and principal stockholders is as follows:





Balance,
      January 1
            
            $
            14,078,674Amounts
      advanced
            
            
            8,685,700Repayments
            
            
            (14,706,971
            )Balance,
      December 31
            
            $
            8,057,403





Deposits
from related parties totaled approximately $88,834,000 and $47,658,000 at
December 31, 2006 and 2005, respectively.   At December 31, 2006,
the Bank had one significant deposit relationship (balance greater than 5% of
total deposits) with a total deposit balance of $80,043,000.




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


The
parent company only condensed financial statements are presented
below:




CONDENSED
BALANCE SHEETS




AssetsDecember 312006
            
            
            2005Cash
            
            $
            746,161
            
            
            
            439,968Investment
      in subsidiaries, primarily banks
            
            
            51,868,864
            
            
            
            46,988,993Other
      investments
            
            
            599,990
            
            
            
            599,990Equipment,
      net
            
            
            107,637
            
            
            
            109,224Other
      assets
            
            
            2,315,373
            
            
            
            2,217,708Total
      assets
            
            $
            55,638,025
            
            
            
            50,355,883




- 23
-




Liabilities
      and Stockholders’ EquityAccounts
      payable
            
            $
            73,904
            
            
            
            98,751Stockholders’
      equity:Common
      stock
            
            
            2,968,593
            
            
            
            2,921,240Additional
      paid-in capital
            
            
            15,530,587
            
            
            
            14,723,175Retained
      earnings
            
            
            37,777,500
            
            
            
            33,544,763Accumulated
      other comprehensive income (loss)
            
            
            (712,559
            )
            
            
            (932,046
            )Total
      stockholders’ equity
            
            
            55,564,121
            
            
            
            50,257,132Total
      liabilities and stockholders’ equity
            
            $
            55,638,025
            
            
            
            50,355,883




CONDENSED
STATEMENTS OF EARNINGS




For the
Years Ended December 31, 2006, 2005 and 2004




2006
            
            
            2005
            
            
            2004Income:Dividends
      from bank
            
            $
            1,500,000
            
            
            
            7,500,000
            
            
            
            2,300,000Management
      fees from subsidiaries
            
            
            668,666
            
            
            
            668,666
            
            
            
            668,666Other
      income
            
            
            10,000
            
            
            
            29,695
            
            
            
            4,500Total
      income
            
            
            2,178,666
            
            
            
            8,198,361
            
            
            
            2,973,166Expenses:General
      and administrative
            
            
            2,070,585
            
            
            
            1,766,390
            
            
            
            1,957,040Earnings
      before income taxes and equity in undistributed earnings of
      subsidiaries
            
            
            108,081
            
            
            
            6,431,971
            
            
            
            1,016,126Income
      tax benefit
            
            
            524,445
            
            
            
            402,314
            
            
            
            482,856Earnings
      before equity in undistributed earnings of subsidiaries
            
            
            632,526
            
            
            
            6,834,285
            
            
            
            1,498,982(Distributions
      in excess of earnings) equity in undistributed earnings of
      subsidiaries
            
            
            4,660,383
            
            
            
            (3,020,814
            )
            
            
            844,291Net
      earnings
            
            $
            5,292,909
            
            
            
            3,813,471
            
            
            
            2,343,273




- 24
-





CONDENSED
STATEMENTS OF CASH FLOWS




For the
Years Ended December 31, 2006, 2005 and 2004




2006
            
            
            2005
            
            
            2004CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      earnings
            
            $
            5,292,909
            
            
            
            3,813,471
            
            
            
            2,343,273Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Depreciation
            
            
            47,289
            
            
            
            31,977
            
            
            
            46,032Gain
      on sale of equipment
            
            
            (10,000
            )
            
            
            -
            
            
            
            (4,500
            )(Increase)
      decrease in other assets
            
            
            (97,665
            )
            
            
            (142,525
            )
            
            
            (79,083
            )(Decrease)
      increase in other liabilities
            
            
            59,433
            
            
            
            (65,683
            )
            
            
            4,995Distributions
      in excess of earnings (equity in undistributed earnings) of
      subsidiaries
            
            
            (4,660,383
            )
            
            
            3,020,814
            
            
            
            (844,291
            )Net
      cash provided by operating activities
            
            
            631,583
            
            
            
            6,658,054
            
            
            
            1,466,426CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of Liberty Bank & Trust, net of cash acquired of
      $4,631,073
            
            
            -
            
            
            
            (563,111
            )
            
            
            -Contributions
      to bank subsidiary
            
            
            -
            
            
            
            (4,631,073
            )
            
            
            -Purchase
      of other investment
            
            
            -
            
            
            
            (599,990
            )
            
            
            -Proceeds
      from other investment
            
            
            -
            
            
            
            -
            
            
            
            33,032Purchase
      of equipment
            
            
            (45,703
            )
            
            
            (93,353
            )
            
            
            (916
            )Proceeds
      from sale of equipment
            
            
            10,000
            
            
            
            -
            
            
            
            11,033Net
      cash (used in) provided by investing activities
            
            
            (35,703
            )
            
            
            (5,887,527
            )
            
            
            43,149CASH
      FLOWS FROM FINANCING ACTIVITIES:Payment
      of cash dividends
            
            
            (1,060,172
            )
            
            
            (929,785
            )
            
            
            (3,701,878
            )Proceeds
      from issuance of common stock upon exercise of stock
    options
            
            
            770,485
            
            
            
            168,201
            
            
            
            364,373Net
      cash used in financing activities
            
            
            (289,687
            )
            
            
            (761,584
            )
            
            
            (3,337,505
            )(Decrease)
      increase in cash
            
            
            306,193
            
            
            
            8,943
            
            
            
            (1,827,930
            )Cash
      at beginning of year
            
            
            439,968
            
            
            
            431,025
            
            
            
            2,258,955Cash
      at end of year
            
            $
            746,161
            
            
            
            439,968
            
            
            
            431,025




(20)
            Quarterly
      Financial Data (Unaudited)


The
supplemental quarterly financial data for the years ended December 31, 2006 and
2005 is summarized as follows:




Quarter
      EndedMarch
      31
              2006
            
            
            June
      30
              2006
            
            
            September
      30
              2006
            
            
            December
      31
              2006Interest
      income
            
            $
            7,963,941
            
            
            
            8,258,056
            
            
            
            9,122,968
            
            
            
            9,115,073Interest
      expense
            
            
            2,884,292
            
            
            
            3,051,091
            
            
            
            3,471,205
            
            
            
            3,811,071Net
      interest income
            
            
            5,079,649
            
            
            
            5,206,965
            
            
            
            5,651,764
            
            
            
            5,304,001Provision
      for loan losses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      earnings
            
            
            1,271,224
            
            
            
            1,325,275
            
            
            
            1,532,890
            
            
            
            1,163,520Net
      earnings per share – basic
            
            
            .43
            
            
            
            .45
            
            
            
            .52
            
            
            
            .39Net
      earnings per share – diluted
            
            
            .43
            
            
            
            .44
            
            
            
            .51
            
            
            
            .39March
      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