SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D. C. 20549
 
 FORM
        10-K
 
 x ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 For
        the
        fiscal year ended December 31, 2006.
 
 o TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
 For
        the
        transition period from _____ to ___________________
 
 Commission
        file number 0-13153
 
 HABERSHAM
                  BANCORP(Exact
                  name of registrant as specified in its
                  charter)
 
 Georgia
              
              58-1563165(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification Number)
 
 282
                  Historic Highway 441 North, P. O. Box 1980, Cornelia,
                  Georgia
              
              30531(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 
 Registrant's
        telephone number, including area code: (706) 778-1000
 
 Securities
        registered pursuant to Section 12(b) of the Exchange Act: None
 
 Securities
        registered pursuant to Section 12(g) of the Exchange Act: Common
        Stock, $1.00 par value
 
 Indicate
        by check mark whether the registrant is a well-known seasoned issuer as defined
        in Rule 405 of the Securities Act.
 Yes o No x
 
 Indicate
        by check mark if the registrant is not required to file reports under Section
        13
        or Section 15(d) of the Act.
 Yes o No x
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes x No o
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer (as defined in Exchange Act
        Rule
        12b-2):
 Large
                  accelerated filero
              
              Accelerated
                  filero
              
              Non-accelerated
                  filerx
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No x
 
 
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  State
        the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        last sold, or the average bid and asked prices of such common equity; as
        of the
        last business day of the registrant’s most recently completed second fiscal
        quarter.
 
 1,718,696
        Shares of Common Stock, $1.00 par value--$41,764,313 as of June
        30, 2006 (based upon market value of $24.30 /share as of that
        date).
  Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of March 15, 2007.
  Common
        Stock, $1.00 par value--2,968,593 shares
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 (1)
        Portions of the Company's Annual Report to Shareholders for the year ended
        December 31, 2006 (the "Annual Report") are incorporated by reference into
        Part
        II.
 
 (2)
        Portions of the Company's Proxy Statement relating to the 2007 Annual Meeting
        of
        Shareholders (the "Proxy Statement") are incorporated by reference into Part
        III.
 
 PART
        I
  Item
                  1.
              BUSINESS.
  **Business
        of the Company**
 
 Habersham
        Bancorp (the "Company"), a Georgia corporation, was organized on March 9,
        1984.
        Effective December 31, 1984, the Company acquired all of the outstanding
        shares
        of common stock of Habersham Bank ("Habersham Bank"). As a result of this
        transaction, the former shareholders of Habersham Bank became shareholders
        of
        the Company, and Habersham Bank became the wholly-owned subsidiary of the
        Company. Habersham Bank has one subsidiary, Advantage Insurers, Inc., a
        property, casualty and life insurance agency organized in 1997. Effective
        June
        30, 1995, the Company acquired Security Bancorp, Inc. and its subsidiary
        bank,
        Security State Bank. The Company consolidated the charters of Security State
        Bank and Habersham Bank in 1999.
 
 Prior
        to
        December 2002, the Company conducted mortgage banking operations through
        BancMortgage Financial Corp. (“BancMortgage”). BancMortgage was organized as a
        wholly-owned non-bank subsidiary of Habersham Bank in 1996. In December 2002,
        the Company sold BancMortgage to the existing management of
        BancMortgage.
 
 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
        Company’s consolidated statements of earnings since the effective date of the
        acquisition.
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  **Business
        of the Bank**
 
 Habersham
        Bank is a financial institution organized under the laws of the State of
        Georgia
        in 1904. Habersham Bank operates a full-service commercial banking business
        based in Habersham, White, Cherokee, Warren, Gwinnett, Stephens and Forsyth
        Counties, Georgia, providing such customary banking services as checking
        and
        savings accounts, various types of time deposits, safe deposit facilities
        and
        individual retirement accounts. It also makes secured and unsecured loans
        and
        provides other financial services to its customers. Habersham Bank has a
        full-time trust officer on staff and offers a full spectrum of trust services,
        including trust administration, asset management services, estate and will
        probate and administration, and other services in the area of personal
        trusts.
 
 **Competition**
 
 The
        banking industry is highly competitive. During the past several years,
        legislation and regulatory changes, together with competition from unregulated
        entities, has resulted in the elimination of many traditional distinctions
        between commercial banks, thrift institutions and other providers of financial
        services. Consequently, competition among financial institutions of all types
        is
        virtually unlimited with respect to legal ability and authority to provide
        most
        financial services.
 
 Habersham
        Bank's primary market area consists of Habersham, White, Cherokee, Warren,
        Gwinnett, Stephens and Forsyth Counties, Georgia. Habersham Bank competes
        principally for all types of loans, deposits and other financial services
        with
        large regional banks and other community banks located in its primary market
        area. To a lesser extent, Habersham Bank competes for loans with insurance
        companies, regulated small loan companies, credit unions, and certain
        governmental agencies.
 
 The
        Company and its non-bank subsidiary, Advantage Insurers, also compete with
        numerous other insurance agencies offering property, casualty and life
        insurance.
 
 See
“Risk
        Factors - Competition from Other Financial Institutions May Adversely Affect
        our
        Profitability.”
 
 **Employees**
 
 As
        of
        December 31, 2006, the Company had 180 full-time equivalent employees. Neither
        the Company nor any of its subsidiaries is a party to any collective bargaining
        agreement. In the opinion of management, the Company and its subsidiaries
        enjoy
        satisfactory relations with their respective employees.
 
 **Supervision
        & Regulation**
 
 Both
        Habersham Bancorp (the “Company”) and Habersham Bank (the “Bank”) are subject to
        extensive state and federal banking regulations that impose restrictions
        on and
        provide for general regulatory oversight of their operations. These laws
        are
        generally intended to protect depositors and not shareholders. The following
        discussion describes the material elements of the regulatory framework that
        applies to us.
 
 **Habersham
        Bancorp**
  Because
        the Company owns all of the capital stock of the Bank, it is a bank holding
        company under the federal Bank Holding Company Act of 1956. As a result,
        we are
        primarily subject to the supervision, examination and reporting requirements
        of
        the Bank Holding Company Act and the regulations of the Federal Reserve.
        As a
        bank holding company located in Georgia, the Georgia Department of Banking
        and
        Finance (the “GDBF”) also regulates and monitors all significant aspects of our
        operations.
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 ***Acquisitions
        of Banks.*** The Bank
        Holding Company Act requires every bank holding company to obtain the Federal
        Reserve’s prior approval before:
 ·
                acquiring
                    direct or indirect ownership or control of any voting shares
                    of any bank
                    if, after the acquisition, the bank holding company will directly
                    or
                    indirectly own or control more than 5% of the bank’s voting
                    shares;
  ·
                acquiring
                    all or substantially all of the assets of any bank;
                    or
  ·
                merging
                    or consolidating with any other bank holding
                    company.
 
 Additionally,
        the Bank Holding Company Act provides that the Federal Reserve may not approve
        any of these transactions if it would result in or tend to create a monopoly,
        substantially lessen competition or otherwise function as a restraint of
        trade,
        unless the anticompetitive effects of the proposed transaction are clearly
        outweighed by the public interest in meeting the convenience and needs of
        the
        community to be served. The Federal Reserve is also required to consider
        the
        financial and managerial resources and future prospects of the bank holding
        companies and banks concerned. The Federal Reserve’s consideration of financial
        resources generally focuses on capital adequacy, which is discussed
        below.
 
 Under
        the
        Bank Holding Company Act, if we are adequately capitalized and adequately
        managed, we or any other bank holding company located in Georgia may purchase
        a
        bank located outside of Georgia. Conversely, an adequately capitalized and
        adequately managed bank holding company located outside of Georgia may purchase
        a bank located inside of Georgia. In each case, however, restrictions may
        be
        placed on the acquisition of a bank that has only been in existence for a
        limited amount of time or will result in specified concentrations of deposits.
        Currently, Georgia law prohibits acquisitions of banks that have been chartered
        for less than three years. Because the Bank has been chartered for more than
        three years, this restriction would not limit our ability to sell.
  ***Change
        in Bank Control*** .
        Subject
        to various exceptions, the Bank Holding Company Act and the Change in Bank
        Control Act, together with related regulations, require Federal Reserve approval
        prior to any person or company acquiring “control” of the bank holding company.
        Control is conclusively presumed to exist if an individual or company acquires
        25% or more of any class of voting securities of a bank holding company.
        Control
        is also presumed to exist, although rebuttable, if a person or company acquires
        10% or more, but less than 25%, of any class of voting securities and either:
  ·
              the
                  bank holding company has registered securities under Section 12 of
                  the Securities Exchange Act of 1934;
                  or
  ·
              no
                  other person owns a greater percentage of that class of voting
                  securities
                  immediately after the transaction.
 
 The
        regulations provide a procedure for challenging rebuttable presumptions of
        control.
  ***Permitted
        Activities.*** A bank
        holding company is generally permitted under the Bank Holding Company Act,
        to
        engage in, or acquire direct or indirect control of more than 5% of the voting
        shares of any company engaged in, the following activities:
  ·
              banking
                  or managing or controlling banks;
                  and
  ·
              any
                  activity that the Federal Reserve determines to be so closely related
                  to
                  banking as to be a proper incident to the business of
                  banking.
 
 Activities
        that the Federal Reserve has found to be so closely related to banking as
        to be
        a proper incident to the business of banking include:
  ·
              factoring
                  accounts receivable;
 ·
              making,
                  acquiring, brokering or servicing loans and usual related
                  activities;
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  ·
              leasing
                  personal or real property;
 ·
              operating
                  a non-bank depository institution, such as a savings
                  association;
 ·
              trust
                  company functions;
 ·
              financial
                  and investment advisory activities;
 ·
              conducting
                  discount securities brokerage
                  activities;
 ·
              underwriting
                  and dealing in government obligations and money market
                  instruments;
 ·
              providing
                  specified management consulting and counseling
                  activities;
 ·
              performing
                  selected data processing services and support
                  services;
 ·
              acting
                  as agent or broker in selling credit life insurance and other types
                  of
                  insurance in connection with credit transactions;
                  and
 ·
              performing
                  selected insurance underwriting
                  activities.
 
 Despite
        prior approval, the Federal Reserve may order a bank holding company or its
        subsidiaries to terminate any of these activities or to terminate its ownership
        or control of any subsidiary when it has reasonable cause to believe that
        the
        bank holding company’s continued ownership, activity or control constitutes a
        serious risk to the financial safety, soundness or stability of it or any
        of its
        bank subsidiaries.
  In
        addition to the permissible bank holding company activities listed above,
        the
        Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act,
        revised and expanded the provisions of the Bank Holding Company Act by
        permitting a bank holding company to qualify and elect to become a financial
        holding company. Under the regulations implementing the Gramm-Leach-Bliley
        Act,
        a financial holding company may engage in additional activities that are
        financial in nature or incidental or complementary to financial activity.
        The
        following activities are considered financial in nature:
  ·
              lending,
                  trust and other banking activities;
 ·
              insuring,
                  guaranteeing or indemnifying against loss or harm, or providing
                  and
                  issuing annuities and acting as principal, agent or broker for
                  these
                  purposes, in any state;
 ·
              providing
                  financial, investment or advisory
                  services;
 ·
              issuing
                  or selling instruments representing interests in pools of assets
                  permissible for a bank to hold
                  directly;
 ·
              underwriting,
                  dealing in or making a market in
                  securities;
 ·
              other
                  activities that the Federal Reserve may determine to be so closely
                  related
                  to banking or managing or controlling banks as to be a proper incident
                  to
                  managing or controlling banks;
 ·
              foreign
                  activities permitted outside of the United States if the Federal
                  Reserve
                  has determined them to be usual in connection with banking operations
                  abroad;
 ·
              merchant
                  banking through securities or insurance affiliates;
                  and
 ·
              insurance
                  company portfolio investments.
 
 On
        December 18, 2006, the SEC and the Federal Reserve issued joint proposed
        rules,
        which would implement the “broker” exception for banks under Section 3(a)(4) of
        the Exchange Act of 1934 and would be adopted as part of the Gramm-Leach-Bliley
        Act. The proposed rules would implement the statutory exceptions that allow
        a
        bank, subject to certain conditions, to continue to conduct securities
        transactions for the Bank’s customers as part of its trust and fiduciary,
        custodial and deposit “sweep” functions, and to refer customers to a securities
        broker-dealer pursuant to a networking arrangement with the
        broker-dealer.
 
 To
        qualify to become a financial holding company, the Bank and any other depository
        institution subsidiary of the Company must be well capitalized and well managed
        and must have a Community Reinvestment Act rating of at least “satisfactory.”
Additionally, the Company must file an election with the Federal Reserve
        to
        become a financial holding company and must provide the Federal Reserve with
        30
        days’ written notice prior to engaging in a permitted financial activity. While
        the Company meets the qualification standards applicable to financial holding
        companies, we have not elected to become a financial holding company at this
        time.
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  ***Support
        of Subsidiary Institutions.*** Under
        Federal Reserve policy, we are expected to act as a source of financial strength
        for the Bank and to commit resources to support the Bank. This support may
        be
        required at times when, without this Federal Reserve policy, we might not
        be
        inclined to provide it. In addition, any capital loans made by us to the
        Bank
        will be repaid only after its deposits and various other obligations are
        repaid
        in full. In the unlikely event of our bankruptcy, any commitment by it to
        a
        federal banking regulator to maintain the capital of the Bank will be assumed
        by
        the bankruptcy trustee and entitled to a priority of payment.
 
 **Habersham
        Bank** ****
  Because
        the Bank is a commercial bank chartered under the laws of the State of Georgia,
        it is primarily subject to the supervision, examination and reporting
        requirements of the FDIC and the GDBF. The FDIC and the GDBF regularly examine
        the Bank’s operations and have the authority to approve or disapprove mergers,
        the establishment of branches and similar corporate actions. Both regulatory
        agencies also have the power to prevent the continuance or development of
        unsafe
        or unsound banking practices or other violations of law. Because the Bank’s
        deposits are insured by the FDIC to the maximum extent provided by law, it
        is
        also subject to certain FDIC regulations. The Bank is also subject to numerous
        state and federal statutes and regulations that affect its business, activities
        and operations.
 
 ***Branching.*** Under
        Georgia law, the Bank may open branch offices throughout Georgia with the
        prior
        approval of its primary bank regulator. In addition, with prior regulatory
        approval, the Bank may acquire branches of existing banks located in Georgia.
        The Bank and any other national or state-chartered bank generally may branch
        across state lines by merging with banks in other states if allowed by the
        applicable states’ laws. Georgia law, with limited exceptions, currently permits
        branching across state lines through interstate mergers.
  Under
        the
        Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks
        to branch into their state by establishing a new start-up branch in the state.
        Currently, Georgia has not opted-in to this provision. Therefore, interstate
        merger is the only method through which a bank located outside of Georgia
        may
        branch into Georgia. This provides a limited barrier of entry into the Georgia
        banking market, which protects us from an important segment of potential
        competition. However, because Georgia has elected not to opt-in, our ability
        to
        establish a new start-up branch in another state may be limited. Many states
        that have elected to opt-in have done so on a reciprocal basis, meaning that
        an
        out-of-state bank may establish a new start-up branch only if their home
        state
        has also elected to opt-in. Consequently, until Georgia changes its election,
        the only way the Bank will be able to branch into states that have elected
        to
        opt-in on a reciprocal basis will be through interstate merger.
  ***Prompt
        Corrective Action.*** The
        Federal Deposit Insurance Corporation Improvement Act of 1991 establishes
        a
        system of prompt corrective action to resolve the problems of undercapitalized
        financial institutions. Under this system, the federal banking regulators
        have
        established five capital categories, well capitalized, adequately capitalized,
        undercapitalized, significantly undercapitalized and critically
        undercapitalized, in which all institutions are placed. The federal banking
        regulators have also specified by regulation the relevant capital levels
        for
        each of the other categories. As of December 31, 2006, the Bank qualified
        for
        the well-capitalized category.
  Federal
        banking regulators are required to take various mandatory supervisory actions
        and are authorized to take other discretionary actions with respect to
        institutions in the three undercapitalized categories. The severity of the
        action depends upon the capital category in which the institution is placed.
        Generally, subject to a narrow exception, the banking regulator must appoint
        a
        receiver or conservator for an institution that is critically undercapitalized.
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  An
        institution that is assigned to any of the “undercapitalized,” “significantly
        undercapitalized” or “critically undercapitalized” categories is required to
        submit an acceptable capital restoration plan to its appropriate federal
        banking
        regulators. A bank holding company must guarantee that a subsidiary depository
        institution meets its capital restoration plan, subject to various limitations.
        The controlling holding company’s obligation to fund a capital restoration plan
        is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the
        time it became undercapitalized or the amount required to meet regulatory
        capital requirements. An undercapitalized institution is also generally
        prohibited from increasing its average total assets, making acquisitions,
        establishing any branches or engaging in any new line of business, except
        under
        an accepted capital restoration plan or with FDIC approval. The regulations
        also
        establish procedures for downgrading an institution to a lower capital category
        based on supervisory factors other than capital.
  ***FDIC
        Insurance Assessments.*** The FDIC
        has adopted a risk-based assessment system for insured depository institutions
        that takes into account the risks attributable to different categories and
        concentrations of assets and liabilities. The system assesses higher rates
        on
        those institutions that pose greater risks to the Deposit Insurance Fund
        (the
“DIF”). The FDIC places each institution in one of four risk categories using
        a
        two-step process based first on capital ratios (the capital group assignment)
        and then on other relevant information (the supervisory group assignment).
        Within the lower risk category, Risk Category I, rates will vary based on
        each
        institution’s CAMELS component ratings, certain financial ratios, and long-term
        debt issuer ratings.
  Capital
        group assignments are made quarterly and an institution is assigned to one
        of
        three capital categories: (1) well capitalized; (2) adequately capitalized;
        and (3) undercapitalized. These three categories are substantially similar
        to
        the prompt corrective action categories described above, with the
“undercapitalized” category including institutions that are undercapitalized,
        significantly undercapitalized and critically undercapitalized for prompt
        corrective action purposes. The FDIC also assigns an institution to one of
        three
        supervisory subgroups based on a supervisory evaluation that the institution’s
        primary federal banking regulator provides to the FDIC and information that
        the
        FDIC determines to be relevant to the institution’s financial condition and the
        risk posed to the deposit insurance funds. Assessments range from 5 to 43
        cents
        per $100 of deposits, depending on the institution’s capital group and
        supervisory subgroup. Institutions that are well capitalized will be charged
        a
        rate between 5 and 7 cents per $100 of deposits.
  In
        addition, the FDIC imposes assessments to help pay off the $780 million in
        annual interest payments on the $8 billion Financing Corporation bonds issued
        in
        the late 1980s as part of the government rescue of the thrift industry. This
        assessment rate is adjusted quarterly and is set at 1.22 cents per $100 of
        deposits for the first quarter of 2007.
  The
        FDIC
        may terminate its insurance of deposits if it finds that the institution
        has
        engaged in unsafe and unsound practices, is in an unsafe or unsound condition
        to
        continue operations, or has violated any applicable law, regulation, rule,
        order
        or condition imposed by the FDIC.
  ***Community
        Reinvestment Act.*** The
        Community Reinvestment Act requires that, in connection with examinations
        of
        financial institutions within their respective jurisdictions, the federal
        bank
        regulators shall evaluate the record of each financial institution in meeting
        the credit needs of its local community, including low and moderate-income
        neighborhoods. These facts are also considered in evaluating mergers,
        acquisitions and applications to open a branch or facility. Failure to
        adequately meet these criteria could impose additional requirements and
        limitations on the Bank. Additionally, the Bank must publicly disclose the
        terms
        of various Community Reinvestment Act-related agreements.
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  ***Allowance
        for Loan and Lease Losses.*** The
        Allowance for Loan and Lease Losses (the “ALLL”) represents one of the most
        significant estimates in the Bank’s financial statements and regulatory reports.
        Because of its significance, the Bank has developed a system by which it
        develops, maintains and documents a comprehensive, systematic and consistently
        applied process for determining the amounts of the ALLL and the provision
        for
        loan and lease losses. The Interagency Policy Statement on the Allowance
        for
        Loan and Lease Losses, issued on December 13, 2006, encourages all banks
        to
        ensure controls are in place to consistently determine the ALLL in accordance
        with GAAP, the bank’s stated policies and procedures, management’s best judgment
        and relevant supervisory guidance. Consistent with supervisory guidance,
        the
        Bank maintains a prudent and conservative, but not excessive, ALLL, that
        is at a
        level that is appropriate to cover estimated credit losses on individually
        evaluated loans determined to be impaired as well as estimated credit losses
        inherent in the remainder of the loan and lease portfolio. The Bank’s estimate
        of credit losses reflects consideration of all significant factors that affect
        the collectibility of the portfolio as of the evaluation date. See “Management’s
        Discussion and Analysis - Critical Accounting Policies.”
  ***Commercial
        Real Estate Lending.*** The
        Bank’s lending operations may be subject to enhanced scrutiny by federal banking
        regulators based on its concentration of commercial real estate loans. On
        December 6, 2006, the federal banking regulators issued final guidance to
        remind
        financial institutions of the risk posed by commercial real estate (“CRE”)
        lending concentrations. CRE loans generally include land development,
        construction loans and loans secured by multifamily property, and nonfarm,
        nonresidential real property where the primary source of repayment is derived
        from rental income associated with the property. The guidance prescribes
        the
        following guidelines for its examiners to help identify institutions that
        are
        potentially exposed to significant CRE risk and may warrant greater supervisory
        scrutiny:
  ·
              total
                  reported loans for construction, land development and other land represent
                  100% or more of the institutions total capital,
                  or
  ·
              total
                  commercial real estate loans represent 300% or more of the institution’s
                  total capital, and the outstanding balance of the institution’s commercial
                  real estate loan portfolio has increased by 50% or more during
                  the prior
                  36 months.
  ***Other
        Regulations.*** Interest
        and other charges collected or contracted for by the Bank are subject to
        state
        usury laws and federal laws concerning interest rates. The Bank’s loan
        operations are also subject to federal laws applicable to credit transactions,
        such as the:
  ·
              Truth-In-Lending
                  Act, governing disclosures of credit terms to consumer borrowers;
  ·
              Home
                  Mortgage Disclosure Act of 1975, requiring financial institutions
                  to
                  provide information to enable the public and public officials to
                  determine
                  whether a financial institution is fulfilling its obligation to
                  help meet
                  the housing needs of the community it serves;
  ·
              Equal
                  Credit Opportunity Act, prohibiting discrimination on the basis
                  of race,
                  creed or other prohibited factors in extending
                  credit;
  ·
              Fair
                  Credit Reporting Act of 1978, as amended by the Fair and Accurate
                  Credit
                  Transactions Act, governing the use and provision of information
                  to credit
                  reporting agencies, certain identify theft protections, and certain
                  credit
                  and other disclosures;
  ·
              Fair
                  Debt Collection Act, governing the manner in which consumer debts
                  may be
                  collected by collection agencies;
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  ·
              Soldiers’
                  and Sailors’ Civil Relief Act of 1940, as amended by the Servicemembers’
                  Civil Relief Act, governing the repayment terms of, and property
                  rights
                  underlying, secured obligations of persons currently on active
                  duty with
                  the United States military;
  ·
              Talent
                  Amendment in the 2007 Defense Authorization Act, establishing a
                  36% annual
                  percentage rate ceiling, which includes a variety of charges including
                  late fees, for consumer loans to military service members and their
                  dependents; and
  ·
              rules
                  and regulations of the various federal banking regulators charged
                  with the
                  responsibility of implementing these federal
                  laws.
 
 The
        Bank’s deposit operations are subject to federal laws applicable to depository
        accounts, such as the:
 
 ·
              Truth-In-Savings
                  Act, requiring certain disclosures for consumer deposit
                  accounts;
 
 ·
              Right
                  to Financial Privacy Act, which imposes a duty to maintain confidentiality
                  of consumer financial records and prescribes procedures for complying
                  with
                  administrative subpoenas of financial records;
 
 ·
              Electronic
                  Funds Transfer Act and Regulation E issued by the Federal Reserve
                  to
                  implement that act, which govern automatic deposits to and withdrawals
                  from deposit accounts and customers’ rights and liabilities arising from
                  the use of automated teller machines and other electronic banking
                  services; and
 
 ·
              rules
                  and regulations of the various federal banking regulators charged
                  with the
                  responsibility of implementing these federal
                  laws.
 
 **Capital
        Adequacy**
  The
        Company and the Bank are required to comply with the capital adequacy standards
        established by the Federal Reserve, in the case of the Company and the FDIC
        in
        the case of the Bank. The Federal Reserve has established a risk-based and
        a
        leverage measure of capital adequacy for bank holding companies. The Bank
        is
        also subject to risk-based and leverage capital requirements adopted by its
        primary regulator, which are substantially similar to those adopted by the
        Federal Reserve for bank holding companies.
  The
        risk-based capital standards are designed to make regulatory capital
        requirements more sensitive to differences in risk profiles among banks and
        bank
        holding companies, to account for off-balance-sheet exposure, and to minimize
        disincentives for holding liquid assets. Assets and off-balance-sheet items,
        such as letters of credit and unfunded loan commitments, are assigned to
        broad
        risk categories, each with appropriate risk weights. The resulting capital
        ratios represent capital as a percentage of total risk-weighted assets and
        off-balance-sheet items.
  The
        minimum guideline for the ratio of total capital to risk-weighted assets
        is 8%.
        Total capital consists of two components; Tier 1 Capital and Tier 2 Capital.
        Tier 1 Capital generally consists of common stockholders’ equity, minority
        interests in the equity accounts of consolidated subsidiaries, qualifying
        noncumulative perpetual preferred stock, and a limited amount of qualifying
        cumulative perpetual preferred stock, less goodwill and other specified
        intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted
        assets. Tier 2 Capital generally consists of subordinated debt, other preferred
        stock and hybrid capital, and a limited amount of loan loss reserves. The
        total
        amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December
        31,
        2006 our ratio of total capital to risk-weighted assets was 14.03% and our
        ratio
        of Tier 1 Capital to risk-weighted assets was 13.16%.
  Page
            9 of
            47
  In
        addition, the Federal Reserve has established minimum leverage ratio guidelines
        for bank holding companies. These guidelines provide for a minimum ratio
        of Tier
        1 Capital to average assets, less goodwill and other specified intangible
        assets, of 3% for bank holding companies that meet specified criteria, including
        having the highest regulatory rating and implementing the Federal Reserve’s
        risk-based capital measure for market risk. All other bank holding companies
        generally are required to maintain a leverage ratio of at least 4%. At December
        31, 2006, our leverage ratio was 10.83%. The
        guidelines also provide that bank holding companies experiencing internal
        growth
        or making acquisitions will be expected to maintain strong capital positions
        substantially above the minimum supervisory levels without reliance on
        intangible assets. The Federal Reserve considers the leverage ratio and other
        indicators of capital strength in evaluating proposals for expansion or new
        activities.
 
 Failure
        to meet capital guidelines could subject a bank or bank holding company to
        a
        variety of enforcement remedies, including issuance of a capital directive,
        the
        termination of deposit insurance by the FDIC, a prohibition on accepting
        brokered deposits and certain other restrictions on its business. As described
        above, significant additional restrictions can be imposed on FDIC-insured
        depository institutions that fail to meet applicable capital requirements.
        See
“[Bank] - Prompt Corrective Action” above.
  **Payment
        of Dividends**
  The
        Company is a legal entity separate and distinct from the Bank. The principal
        source of the Company’s cash flow, including cash flow to pay dividends to its
        shareholders, is dividends that the Bank pays to the Company as its sole
        shareholder. Statutory and regulatory limitations apply to the Bank’s payment of
        dividends to the Company as well as to the Company’s payment of dividends to its
        shareholders.
  The
        Bank
        is required to obtain prior approval of the GDBF if the total of all dividends
        declared by the Bank in any year will exceed 50% of the Bank’s net income for
        the prior year. The payment of dividends by the Company and the Bank may
        also be
        affected by other factors, such as the requirement to maintain adequate capital
        above regulatory guidelines. At December 31, 2006, the Bank could pay cash
        dividends without prior regulatory approval.
  If,
        in
        the opinion of the federal banking regulator, the Bank was engaged in or
        about
        to engage in unsafe or unsound practice, the federal banking regulator could
        require, after notice and a hearing, that the Bank stop or refrain from engaging
        in the practice it considers unsafe or unsound. The federal banking regulators
        have indicated that paying dividends that deplete a depository institution’s
        capital base to an inadequate level would be an unsafe and unsound banking
        practice. Under the Federal Deposit Insurance Corporation Improvement Act
        of
        1991, a depository institution may not pay any dividend if payment would
        cause
        it to become undercapitalized or if it already is undercapitalized. Moreover,
        the federal banking regulators have issued policy statements that provide
        that
        bank holding companies and insured banks should generally only pay dividends
        out
        of current operating earnings.
  **Restrictions
        on Transactions with Affiliates**
  The
        Company and the Bank are subject to the provisions of Section 23A of the
        Federal
        Reserve Act. Section 23A places limits on the amount of:
  ·
              a
                  bank’s loans or extensions of credit to
                  affiliates;
  ·
              a
                  bank’s investment in affiliates;
  ·
              assets
                  a bank may purchase from affiliates, except for real and personal
                  property
                  exempted by the Federal Reserve;
  ·
              loans
                  or extensions of credit to third parties collateralized by the
                  securities
                  or obligations of affiliates; and
  ·
              a
                  bank’s guarantee, acceptance or letter of credit issued on behalf of
                  an
                  affiliate.
  Page
            10 of
            47
 
 The
        total
        amount of the above transactions is limited in amount, as to any one affiliate,
        to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
        20% of a bank’s capital and surplus. In addition to the limitation on the amount
        of these transactions, each of the above transactions must also meet specified
        collateral requirements. The Bank must also comply with other provisions
        designed to avoid the taking of low-quality assets.
  The
        Company and the Bank are also subject to the provisions of Section 23B of
        the
        Federal Reserve Act which, among other things, prohibit an institution from
        engaging in the above transactions with affiliates unless the transactions
        are
        on terms substantially the same, or at least as favorable to the institution
        or
        its subsidiaries, as those prevailing at the time for comparable transactions
        with nonaffiliated companies.
  The
        Bank
        is also subject to restrictions on extensions of credit to their executive
        officers, directors, principal shareholders and their related interests.
        These
        extensions of credit (1) must be made on substantially the same terms,
        including interest rates and collateral, as those prevailing at the time
        for
        comparable transactions with third parties and (2) must not involve more
        than the normal risk of repayment or present other unfavorable
        features.
  **Privacy**
  Financial
        institutions are required to disclose their policies for collecting and
        protecting confidential information. Customers generally may prevent financial
        institutions from sharing nonpublic personal financial information with
        nonaffiliated third parties except under narrow circumstances, such as the
        processing of transactions requested by the consumer or when the financial
        institution is jointly sponsoring a product or service with a nonaffiliated
        third party. Additionally, financial institutions generally may not disclose
        consumer account numbers to any nonaffiliated third party for use in
        telemarketing, direct mail marketing or other marketing to consumers.
 
 **Anti-Terrorism
        and Money Laundering Legislation**
  The
        Bank
        is subject to the Uniting and Strengthening America by Providing Appropriate
        Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT
        Act”) as it amended the Bank Secrecy Act and the rules and regulations of the
        Office of Foreign Assets Control. These statutes and related rules and
        regulations impose requirements and limitations on specific financial
        transactions and account relationships, intended to guard against money
        laundering and terrorism financing. The Bank has established a customer
        identification program pursuant to Section 326 of the USA PATRIOT Act and
        the
        Bank Secrecy Act, and otherwise has implemented policies and procedures to
        comply with the foregoing rules.
  **Federal
        Deposit Insurance Reform**
  On
        February 8, 2006, President Bush signed the Federal Deposit Insurance Reform
        Act
        of 2005 (the “FDIRA”). Among other things, FDIRA changes the federal deposit
        insurance system by:
  ·
              raising
                  the coverage level for qualifying retirement accounts to $250,000,
                  subject
                  to future indexing;
  ·
              authorizing
                  the FDIC and the National Credit Union Administration to index
                  deposit
                  insurance coverage for inflation, for standard accounts and qualifying
                  retirement accounts, every five years beginning April 1,
                  2007;
  Page
            11 of
            47
  ·
              prohibiting
                  undercapitalized financial institutions from accepting employee
                  benefit
                  plan deposits;
  ·
              merging
                  the Bank Insurance Fund and Savings Association Insurance Fund
                  into a new
                  Deposit Insurance Fund (the DIF);
                  and
  ·
              providing
                  credits to financial institutions that capitalized the FDIC prior
                  to 1996
                  to offset future assessment
                  premiums.
  FDIRA
        also authorizes the FDIC to revise the current risk-based assessment system,
        subject to notice and comment and caps the amount of the DIF at 1.50% of
        domestic deposits. The FDIC must issue cash dividends, awarded on a historical
        basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the
        DIF
        exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash
        dividends, awarded on a historical basis, for half of the amount of the excess.
  **Financial
        Services Regulatory Relief Act**
  President
        Bush signed the Financial Services Regulatory Relief Act of 2006 (“Regulatory
        Relief Act”) into law on October 13, 2006. The Regulatory Relief Act repeals
        certain reporting requirements regarding loans to bank executive officers
        and
        principal shareholders. These changes have eliminated the statutory requirements
        for (1) the report to the Board of Directors when an executive officer becomes
        indebted to another institution in an aggregate amount that is greater than
        the
        officer would receive from his or her own institution; (2) the report filed
        by
        the institution that listed all credits made to executive officers since
        the
        previous report of condition; and (3) the report to the Board of Directors
        that
        is required when an executive officer or a principal shareholder become indebted
        to a correspondent bank.
  The
        Regulatory Relief Act increased the size of a bank eligible for 18-month
        (rather
        than annual) examinations from $250 million to $500 million. The Regulatory
        Relief Act amends the privacy rules of Gramm-Leach-Bliley to clarify that
        CPA’s
        are not required to notify their customers of privacy and disclosure policies
        as
        long as they are subject to state law restraints on disclosure of non-public
        personal information without customer approval. Finally, the Regulatory Relief
        Act requires that the federal banking regulators develop model privacy notice
        forms, and banks adopting the model forms will be afforded a regulatory safe
        harbor under the disclosure requirements of Gramm-Leach-Bliley.
  **Proposed
        Legislation and Regulatory Action**
  New
        regulations and statutes are regularly proposed that contain wide-ranging
        proposals for altering the structures, regulations and competitive relationships
        of financial institutions operating and doing business in the United States.
        We
        cannot predict whether or in what form any proposed regulation or statute
        will
        be adopted or the extent to which our business may be affected by any new
        regulation or statute.
  **Effect
        of Governmental Monetary Policies**
  The
        Bank’s earnings are affected by domestic economic conditions and the monetary
        and fiscal policies of the United States government and its agencies. The
        Federal Reserve’s monetary policies have had, and are likely to continue to
        have, an important impact on the operating results of commercial banks through
        its power to implement national monetary policy in order, among other things,
        to
        curb inflation or combat a recession. The monetary policies of the Federal
        Reserve affect the levels of bank loans, investments and deposits through
        its
        control over the issuance of United States government securities, its regulation
        of the discount rate applicable to member banks and its influence over reserve
        requirements to which member banks are subject. Neither the Company nor the
        Bank
        can predict the nature or impact of future changes in monetary and fiscal
        policies.
 
 Page
            12 of
            47
 Item
                  1A.
              RISK
                  FACTORS
 
 An
        investment in the Company’s common stock involves a high degree of risk.
        Investors should consider carefully the risks described below and the other
        information in this report before deciding to invest in the Company’s common
        stock.
  **If
        the value of real estate in our core market were to decline materially, a
        significant portion of our loan portfolio could become under-collateralized,
        which could have a material adverse effect on our business, financial condition
        and results of operations.**
  At
        December 31, 2006, approximately 90.55% of our loans had real estate as a
        primary or secondary component of collateral. The real estate collateral
        in each
        case provides an alternate source of repayment in the event of default by
        the
        borrower and may deteriorate in value during the time the credit is extended.
        If
        we are required to liquidate the collateral securing a loan to satisfy the
        debt
        during a period of reduced real estate values, our earnings and capital could
        be
        adversely affected. With most of our loans secured by commercial and residential
        real estate, a decline in local economic conditions could adversely affect
        the
        values of our real estate collateral. Consequently, a decline in local economic
        conditions in northern Georgia may have a greater effect on our earnings
        and
        capital than on the earnings and capital of larger financial institutions
        whose
        real estate loan portfolios are geographically diverse.
  **An
        economic downturn, especially one affecting our market areas, could adversely
        affect our financial condition, results of operations or cash flows.**
  Our
        success depends upon the growth in population, income levels, deposits and
        housing starts in our primary market areas. If the communities in which we
        operate do not grow, or if prevailing economic conditions locally or nationally
        are unfavorable, our business may not succeed. Unpredictable economic conditions
        may have an adverse effect on the quality of our loan portfolio and our
        financial performance. Economic recession over a prolonged period or other
        economic problems in our market areas could have a material adverse impact
        on
        the quality of the loan portfolio and the demand for our products and services.
        Future adverse changes in the economies in our market areas may have a material
        adverse effect on our financial condition, results of operations or cash
        flows.
        Further, the banking industry in Georgia is affected by general economic
        conditions such as inflation, recession, unemployment and other factors beyond
        our control. As a community bank, we are less able to spread the risk of
        unfavorable local economic conditions than larger or more regional banks.
        Moreover, we cannot give any assurance that we will benefit from any market
        growth or favorable economic conditions in our primary market areas even
        if they
        do occur.
  **Opening
        new offices may not result in increased assets or revenues for
        us.**
  The
        investment necessary for branch expansion may negatively impact our efficiency
        ratio. There is a risk that we will be unable to manage our growth, as the
        process of opening new branches may divert our time and resources. There
        is also
        risk that we may fail to open any additional branches, and a risk that, if
        we do
        open these branches, they may not be profitable which would negatively impact
        our results of operations.
  **Competition
        from other financial institutions may adversely affect our profitability.**
 
 The
        banking business is highly competitive, and we experience strong competition
        from many other financial institutions. We compete with commercial banks,
        credit
        unions, savings and loan associations, mortgage banking firms, consumer finance
        companies, securities brokerage firms, insurance companies, money market
        funds
        and other financial institutions, which operate in our primary market areas
        and
        elsewhere. Our market areas are served principally by community and regional
        banks.
  Page
            13 of
            47
 
 We
        compete with these institutions both in attracting deposits and in making
        loans.
        In addition, we have to attract our customer base from other existing financial
        institutions and from new residents. Many of our competitors are
        well-established and much larger financial institutions. We may face a
        competitive disadvantage as a result of our smaller size and lack of geographic
        diversification, and we have no assurance that our competitive strategy will
        be
        successful.
  **If
        we fail to retain our key employees, our growth and profitability could be
        adversely affected.**
  Our
        success is, and is expected to remain, highly dependent on our executive
        management team of Habersham Bank, consisting of our Chief Executive Officer,
        David Stovall, and our President, Edward D. Ariail. This is particularly
        true
        because, as a community bank, we depend on our management team’s ties to the
        community to generate business for us. Our operations will continue to place
        significant demands on our management, and the loss of any such person’s
        services may have an adverse effect upon our growth and profitability.
  **Our
        directors and executive officers own a significant portion of our common
        stock
        and can influence stockholder decisions.**
  Our
        directors and executive officers, as a group, beneficially owned approximately
        45.7% of our fully diluted outstanding common stock as of December 31, 2006.
        As
        a result of their ownership, the directors and executive officers will have
        the
        ability, if they voted their shares in concert, to influence the outcome
        of all
        matters submitted to our shareholders for approval, including the election
        of
        directors.
  **We
        could suffer loan losses from a decline in credit quality.**
  We
        could
        sustain losses if borrowers, guarantors and related parties fail to perform
        in
        accordance with the terms of their loans. Our underwriting and credit monitoring
        procedures and credit policies, including the establishment and review of
        the
        allowance for loan losses, may not prevent unexpected losses that could
        materially adversely affect our results of operations.
  **If
        our allowance for loan losses is not sufficient to cover actual loan losses,
        our
        earnings could decrease.**
 
 Our
        loan
        customers may not repay their loans according to the terms of these loans,
        and
        the collateral securing the payment of these loans may be insufficient to
        assure
        repayment. We may experience significant loan losses, which could have a
        material adverse effect on our operating results. Management makes various
        assumptions and judgments about the collectibility of our loan portfolio,
        including the creditworthiness of our borrowers and the value of the real
        estate
        and other assets serving as collateral for the repayment of many of our loans.
        We maintain an allowance for loan losses in an attempt to cover any loan
        losses
        that may occur. In determining the size of the allowance, we rely on an analysis
        of our loan portfolio based on historical loss experience, volume and types
        of
        loans, trends in classifications, volume and trends in delinquencies and
        non-accruals, national and local economic conditions and other pertinent
        information.
 
 If
        our
        assumptions are wrong, our current allowance may not be sufficient to cover
        our
        loan losses, and adjustments may be necessary to allow for different economic
        conditions or adverse developments in our loan portfolio. Material additions
        to
        our allowance would materially decrease our net income. Our allowance for
        loan
        losses was $3,444,789, or .99% of loans, as of December 31,
        2006.
  Page
            14 of
            47
  In
        addition, federal and state regulators periodically review our allowance
        for
        loan losses and may require us to increase our provision for loan losses
        or
        recognize future loan charge-offs based on judgments different than those
        of our
        management. Any increase in our allowance for loan losses or loan charge-offs
        as
        required by these regulatory agencies could have a negative effect on our
        operating results.
  **Our
        profitability is vulnerable to interest rate fluctuations.**
 
 Our
        profitability depends substantially upon our net interest income. Net interest
        income is the difference between the interest earned on assets, such as loans
        and investment securities, and the interest paid for liabilities, such as
        savings and time deposits and out-of-market certificates of deposit. Market
        interest rates for loans, investments and deposits are highly sensitive to
        many
        factors beyond our control. Recently, interest rate spreads have generally
        narrowed due to changing market conditions, policies of various government
        and
        regulatory authorities and competitive pricing pressures, and we cannot predict
        whether these rate spreads will narrow even further. This narrowing of interest
        rate spreads could adversely affect our financial condition and results of
        operations. In addition, we cannot predict whether interest rates will continue
        to remain at present levels. Changes in interest rates may cause significant
        changes, up or down, in our net interest income. Depending on our portfolio
        of
        loans and investments, our results of operations may be adversely affected
        by
        changes in interest rates.
  **Even
        though our common stock is currently traded on the Nasdaq Global Market,
        it has
        substantially less liquidity than the average stock quoted on a national
        securities exchange.**
 
 The
        trading volume in our common stock on the Nasdaq Global Market is relatively
        low
        when compared with larger companies listed on the Nasdaq Global Market or
        stock
        exchanges. We cannot say with any certainty that a more active and liquid
        trading market for our common stock will develop. Because of this, it may
        be
        more difficult for you to sell a substantial number of shares for the same
        price
        at which you could sell a smaller number of shares, and you may not be able
        to
        sell your shares at all.
 
 We
        cannot
        predict the effect, if any, that future sales of our common stock in the
        market,
        or the availability of shares of common stock for sale in the market, will
        have
        on the market price of our common stock. As a result, sales of substantial
        amounts of our common stock in the market, or the potential for such sales,
        could cause the price of our common stock to decline or impair our future
        ability to raise capital through sales of our common stock.
  **Our
        business strategy includes the continuation of growth plans, and our financial
        condition and results of operations could be negatively affected if we fail
        to
        grow or fail to manage our growth effectively.**
 
 We
        intend
        to continue pursuing a growth strategy for our business. Our ability to grow
        successfully will depend on a variety of factors, including the continued
        availability of desirable business opportunities, the competitive responses
        from
        other financial institutions in our market areas and our ability to manage
        our
        growth. Our prospects must be considered in light of the risks, expenses
        and
        difficulties frequently encountered by companies in growth stages of
        development. We cannot assure you we will be able to expand our market presence
        in our existing markets or successfully enter new markets or that any such
        expansion will not adversely affect our results of operations. Failure to
        manage
        our growth effectively could have a material adverse effect on our business,
        financial condition, results of operations, or future prospects, and could
        adversely affect our ability to successfully implement our business strategy.
        Also, if our growth occurs more slowly than anticipated or declines, our
        results
        of operations could be materially adversely affected.
  Page
            15 of
            47
  **Our
        plans for future expansion depend, in some instances, on factors beyond our
        control, and an unsuccessful attempt to achieve growth could have a material
        adverse effect on our business, financial condition, results of operations
        and
        future prospects.**
  We
        may
        engage in new branch expansion in the future. We may also seek to acquire
        other
        financial institutions, or parts of those institutions, though we have no
        present plans in that regard. Expansion involves a number of risks, including:
  ·
              the
                  time and costs of evaluating new markets, hiring experienced local
                  management and opening new offices;
  ·
              the
                  time lags between these activities and the generation of sufficient
                  assets
                  and deposits to support the costs of the expansion;
  ·
              we
                  may not be able to finance an acquisition without diluting the
                  interests
                  of our existing shareholders;
  ·
              the
                  diversion of our management’s attention to the negotiation of a
                  transaction may detract from their business productivity;
  ·
              we
                  may enter into new markets where we lack experience; and
  ·
              we
                  may introduce new products and services with which we have no prior
                  experience into our business.
  **Additional
        growth may require us to raise additional capital in the future, but that
        capital may not be available when it is needed, which could adversely affect
        our
        financial condition and results of operations.**
  We
        are
        required by federal and state regulatory authorities to maintain adequate
        levels
        of capital to support our operations. We anticipate that our current capital
        resources will satisfy our capital requirements for the foreseeable future.
        We
        may at some point, however, need to raise additional capital to support our
        continued growth.
  Our
        ability to raise additional capital, if needed, will depend on conditions
        in the
        capital markets at that time, which are outside our control, and on our
        financial performance. Accordingly, we cannot assure you of our ability to
        raise
        additional capital, if needed, on terms acceptable to us. If we cannot raise
        additional capital when needed, our ability to further expand our operations
        could be materially impaired.
  **We
        are subject to extensive regulation that could limit or restrict our activities
        and impose financial requirements or limitations on the conduct of our business,
        which limitations or restrictions could adversely affect our profitability.**
  As
        a bank
        holding company, we are primarily regulated by the Board of Governors of
        the
        Federal Reserve System (“Federal Reserve Board”). Our subsidiary bank is
        primarily regulated by the Federal Deposit Insurance Corporation (the “FDIC”)
        and the Georgia Department of Banking and Finance. Our compliance with the
        Federal Reserve Board, FDIC and Department of Banking and Finance regulations
        is
        costly and may limit our growth and restrict certain of our activities,
        including payment of dividends, mergers and acquisitions, investments, loans
        and
        interest rates charged, interest rates paid on deposits and locations of
        offices. We are also subject to capital requirements of our regulators.
  The
        laws
        and regulations applicable to the banking industry could change at any time,
        and
        we cannot predict the effects of these changes on our business and
        profitability. Because government regulation greatly affects the business
        and
        financial results of all commercial banks and bank holding companies, our
        cost
        of compliance could adversely affect our ability to operate profitably.
  Page
            16 of
            47
  **Changes
        in monetary policies may have an adverse effect on our business, financial
        condition and results of operations.**
  Our
        financial condition and results of operations are affected by credit policies
        of
        monetary authorities, particularly the Federal Reserve Board. Actions by
        monetary and fiscal authorities, could have an adverse effect on our deposit
        levels, loan demand or business and earnings.
  **As
        a community bank, we have different lending risks than larger banks.**
  We
        provide services to our local communities. Our ability to diversify our economic
        risks is limited by our own local markets and economies. We lend primarily
        to
        small to medium-sized businesses, and, to a lesser extent, individuals which
        may
        expose us to greater lending risks than those of banks lending to larger,
        better-capitalized businesses with longer operating histories.
  We
        manage
        our credit exposure through careful monitoring of loan applicants and loan
        concentrations in particular industries, and through loan approval and review
        procedures. We have established an evaluation process designed to determine
        the
        adequacy of our allowance for loan losses. The classification of loans and
        the
        establishment of the allowance for loan losses is an estimate based on
        experience, judgment and expectations regarding our borrowers, the economies
        in
        which we and our borrowers operate, as well as the judgment of our regulators.
        We cannot be certain that our loan loss reserves will be sufficient to absorb
        future loan losses or prevent a material adverse effect on our business,
        financial condition, or results of operations.
  **Our
        recent results may not be indicative of our future results, and may not provide
        guidance to assess the risk of an investment in our common stock.**
  We
        may
        not be able to sustain our historical rate of growth or may not even be able
        to
        grow our business at all. In the future, we may not have the benefit of several
        recently favorable factors, such as a generally increasing interest rate
        environment, a strong residential mortgage market or the ability to find
        suitable expansion opportunities. Various factors, such as economic conditions,
        regulatory and legislative considerations and competition, may also impede
        or
        prohibit our ability to expand our market presence. If we experience a
        significant decrease in our historical rate of growth, our results of operations
        and financial condition may be adversely affected due to a high percentage
        of
        our operating costs being fixed expenses.
  **Natural
        disasters could negatively affect our local economies or disrupt our operations,
        which could have an adverse effect on our business or results of
        operations.**
  The
        economy of northern Georgia is affected, from time to time, by tornadoes
        and
        other natural disasters. We cannot predict whether, or to what extent, damage
        caused by these events will affect our operations, our customers or the
        economies in our banking markets. However, weather events could cause a decline
        in loan originations, destruction or decline in the value of properties securing
        our loans, or an increase in the risks of delinquencies, foreclosures and
        loan
        losses.
  Item
                  1B.
              UNRESOLVED
                  STAFF COMMENTS
  None
  Page
            17 of
            47
  Item
                  2.
              PROPERTIES
 
 The
        Company's principal office is located at Habersham Bank's Central Habersham
        office, 282 Historic Highway 441, Cornelia, Georgia. The telephone number
        of
        that office is (706) 778-1000.
 
 Habersham
        Bank's North Habersham (main) office is located at 1151 Washington Street,
        Clarkesville, Georgia. The telephone number of that office is (706) 778-1000.
        Habersham Bank also has seven full-service branch offices. Its Central Habersham
        office is located at 282 Historic Highway 441, Cornelia, Georgia; its South
        Habersham office is located at 186 441 By-Pass, Baldwin, Georgia; its Cleveland
        Office is located at 575 South Main Street, Cleveland, Georgia; its Canton
        Office is located at 1925 Marietta Highway, Canton, Georgia; its Hickory
        Flat
        Office is located at 6782 Hickory Flat Highway, Canton, Georgia; its Warrenton
        Office is located at 217 East Main Street, Warrenton, Georgia; its Braselton
        Office is located at 6322 Grand Hickory Drive, Braselton, Georgia; its Toccoa
        Office is located at 27 North Big A Road; its Eastanollee Office is located
        at
        370 Wal-Mart Way, Eastanollee, Georgia and its Cumming Office is located
        at 2740
        Nuckolls Road, Cumming, Georgia. Each office has a 24-hour teller machine.
        Habersham Bank owns its office properties without encumbrance, with the
        exception of the Warrenton Office, which is leased on a month to month basis.
  Advantage
        Insurers, Inc.’s principal office is located at 282 Historic Highway 441,
        Cornelia, Georgia, and the telephone number of that office is (706) 778-2277.
 
 Item
                  3.
              LEGAL
                  PROCEEDINGS
 
 The
        Company is not a party to, nor is any of its property the subject of, any
        material pending legal proceedings, other than ordinary routine litigation
        incidental to its business, and no such proceedings are known to be contemplated
        by governmental authorities.
 
 Item
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
 
 None.
  PART
        II
  Item
                  5.
              MARKET
                  FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                  ISSUER
                  PURCHASES OF EQUITY SECURITIES
 
 The
        common stock of Habersham Bancorp is traded on the Nasdaq Global Market
        ("Nasdaq") under the symbol HABC. At December 31, 2006 Habersham Bancorp
        had
        approximately 505 shareholders of record. The following table sets forth
        the
        high and low sale prices and the cash dividends paid on the Company's common
        stock on a quarterly basis for the past two fiscal years and a portion of
        the
        first quarter of 2007.
 
 **2007**
              
              **High**
              
              **Low**
              
              **Dividends**First
                  quarter(through
                  March 19, 2007) $24.00
              
              $
              24.00
              
              $
              22.49
              
              $
              0.10
 
 **2006:**
              
              **High**
              
              **Low**
              
              **Dividend**Fourth
                  Quarter
              
              $
              25.00
              
              $
              24.00
              
              $
              .09Third
                  Quarter
              
              
              25.05
              
              
              24.00
              
              
              .09Second
                  Quarter
              
              
              25.50
              
              
              22.05
              
              
              .09First
                  Quarter
              
              
              25.50
              
              
              21.91
              
              
              .09
 
 **2005:**
              
              **High**
              
              **Low**
              
              **Dividend**Fourth
                  Quarter
              
              $
              24.18
              
              $
              21.50
              
              $
              .08Third
                  Quarter
              
              
              23.60
              
              
              20.75
              
              
              .08Second
                  Quarter
              
              
              24.00
              
              
              20.11
              
              
              .08First
                  Quarter
              
              
              23.00
              
              
              20.42
              
              
              .08
  Page
            18 of
            47
  The
        approval of the Georgia Department of Banking and Finance is required if
        dividends declared by the Bank to the Company in any year will exceed 50%
        of the
        net earnings of the Bank for the previous calendar year .
        As of December 31, 2006 the Bank could declare dividends to the Company up
        to
        approximately $3,080,000 without regulatory approval.
 
 The
        Company did not repurchase any of its outstanding common stock during the
        fourth
        quarter of 2006 or issue any of its equity securities without registration
        under
        the Securities Act of 1933, as amended, during 2006.
 
 PERFORMANCE
        GRAPH
 
 The
        Performance Graph below compares the yearly percentage change in the cumulative
        total shareholder return on our common stock to the cumulative total return
        on
        the Nasdaq Stock Market (U.S.) Index and the Nasdaq Bank Stock Index from
        December 31, 2001, through the last trading day of each succeeding fiscal
        year
        through December 31, 2006. The Performance Graph assumes reinvestment of
        dividends, where applicable.
  **Comparison
        of Five - Year Cumulative Total Returns**
 Performance
        Graph for
 Habersham
        Bancorp
  Produced
        on 02/26/2007 including data to 12/29/2006
  
  Prepared
        by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices,
        Graduate School of Business, The University of Chicago. Used with permission.
        All rights reserved.
  Item
                6.
              SELECTED
                  FINANCIAL DATA
 
 SELECTED
        FINANCIAL DATA
 (In
        thousands, except share and per share data)
 
 
 **For
                  the years ended December 31****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****SUMMARY
                  OF OPERATIONS**Interest
                  income
              
              $
              34,460
              
              $
              25,936
              
              $
              20,743
              
              $
              22,593
              
              $
              27,137Interest
                  expense
              
              
              13,218
              
              
              8,600
              
              
              6,791
              
              
              8,122
              
              
              12,041Provision
                  for loan losses
              
              
              -
              
              
              330
              
              
              483
              
              
              950
              
              
              1,307Other
                  income
              
              
              3,656
              
              
              3,448
              
              
              4,431
              
              
              3,490
              
              
              3,620Other
                  expense
              
              
              17,194
              
              
              14,991
              
              
              14,777
              
              
              14,000
              
              
              12,857Income
                  from continuing operations
              
              
              5,293
              
              
              3,813
              
              
              2,343
              
              
              2,296
              
              
              3,447Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,337Net
                  earnings
              
              $
              5,293
              
              $
              3,813
              
              $
              2,343
              
              $
              2,296
              
              $
              5,784**PER
                  SHARE AMOUNTS**Earnings
                  from continuing operations - diluted
              
              $
              1.77
              
              $
              1.30
              
              $
              .80
              
              $
              .79
              
              $
              1.22Earnings
                  from discontinued operations - diluted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              .83Net
                  earnings per common share-diluted
              
              $
              1.77
              
              $
              1.30
              
              $
              .80
              
              $
              .79
              
              $
              2.05Dividends
              
              $
              .36
              
              $
              .32
              
              $
              1.28
              
              $
              1.18
              
              $
              .24Weighted
                  average number of common and common equivalentshares
                  outstanding
              
              
              2,983,048
              
              
              2,938,698
              
              
              2,939,951
              
              
              2,895,113
              
              
              2,815,972**AT
                  DECEMBER 31**Total
                  assets
              
              $
              555,738
              
              $
              478,431
              
              $
              385,933
              
              $
              374,978
              
              $
              429,411Earning
                  assets
              
              
              502,035
              
              
              435,091
              
              
              355,093
              
              
              342,664
              
              
              395,047Loans,
                  net
              
              
              342,816
              
              
              316,773
              
              
              277,137
              
              
              261,818
              
              
              303,813Deposits
              
              
              450,629
              
              
              372,762
              
              
              292,957
              
              
              279,600
              
              
              336,526Long-term
                  debt
              
              
              38,000
              
              
              42,300
              
              
              36,000
              
              
              30,000
              
              
              30,000Stockholders’
                  equity
              
              
              55,564
              
              
              50,257
              
              
              48,006
              
              
              49,229
              
              
              50,315**RATIOS**Return
                  on average assets
              
              
              1.13
              %
              
              .91
              %
              
              .62
              %
              
              .58
              %
              
              1.32
              %Return
                  on average equity
              
              
              10.06
              %
              
              7.76
              %
              
              4.86
              %
              
              4.44
              %
              
              12.14
              %Dividend
                  payout ratio
              
              
              20.03
              %
              
              24.63
              %
              
              160.00
              %
              
              149.37
              %
              
              11.70
              %Average
                  equity to average assets ratio
              
              
              11.25
              %
              
              11.77
              %
              
              12.66
              %
              
              13.24
              %
              
              10.88
              %
 
 Balance
        sheet amounts have not been adjusted to reflect discontinued operations.
  Page
            19 of
            47
  Item
                  7.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 **ORGANIZATION**
 
 Habersham
        Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank
        ("Habersham Bank") and The Advantage Group, Inc. Habersham Bank owns all
        of the
        outstanding stock of Advantage Insurers, Inc. (“Advantage Insurers”). Advantage
        Insurers, which began operations on March 31, 1997, offers a full line of
        property, casualty and life insurance products. The Advantage Group, Inc.
        and
        Advantage Insurers do not comprise a significant portion of the financial
        position, results of operations, or cash flows of the Company and as a result
        management’s discussion and analysis, which follows relates primarily to
        Habersham Bank.
  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
        interest income on loans to businesses and individuals in its market
        area.
 
 **EXECUTIVE
        SUMMARY**
 
 The
        Company’s primary source of income is interest income from loans and investment
        securities. Its profitability depends largely on net interest income, which
        is
        the difference between the interest received on interest-earning assets and
        the
        interest paid on deposits, borrowings and other interest-bearing
        liabilities.
 
 *Year
        Ended December 31, 2006*
 
 Net
        earnings for 2006 were $5,292,909, representing an increase of 38.80% from
        2005.
        Diluted earnings per share were $1.77, up $.47 per share from 2005, and return
        on average equity was 10.06% as compared to 7.76% for 2005. Year-to-date
        net
        earnings reflect the increase in net interest income of approximately $3.9
        million when compared to net earnings of 2005.
 
 Habersham
        Bank has been able to maintain a healthy tax equivalent net interest margin
        during 2006 with an average net interest margin of 5.03% compared to 4.61%
        during 2005. The increase in the net interest margin is primarily due to
        loan
        growth of approximately $25.5 million primarily in real estate construction
        lending in expanding markets in Cherokee and Gwinnett counties and increases
        in
        commercial lending in new markets in metro Atlanta.
 
 The
        variable rate loan portfolio increased during 2006 by approximately $18.8
        million which allows for quicker response to increases in the prime interest
        lending rate than the deposit portfolio. The majority of the variable rate
        loan
        portfolio is a daily adjustable rate product tied to the prime rate and can
        adjust immediately to prime rate increases while interest bearing deposits
        are
        primarily adjusted at maturity. Maintaining a profitable net interest margin
        (net interest income divided by average earning assets) continued to be the
        focus of management during 2006.
  Page
            20 of
            47
  Total
        assets of $556 million at December 31, 2006, reflect an increase of $77.3
        million or 16.16% from $478 million at December 31, 2005. Management reported
        that the increase is due primarily due to excess cash from a short term deposit
        made at year-end invested in federal funds sold and in cash and due from
        banks,
        loan growth in the Cherokee County and Gwinnett County markets, purchases
        of
        investment securities and investment in premises and equipment of approximately
        $37.7 million, $25.5 million, and $11.8 million and $2.4 million, respectively.
 
 Management
        has developed strategies for asset growth and expansion of its financial
        services into selective growth markets in North Georgia. During 2006, Habersham
        Bank expanded its services into Forsyth County with the operation of a Loan
        Production Office while a new branch building was under construction. The
        new
        building was officially opened for business in January 2007.
  *Year
        Ended December 31, 2005*
  Net
        earnings for 2005 were $3,813,471, representing an increase of 62.74% from
        2004.
        Diluted earnings per share were $1.30, up $.50 per share from 2004, and return
        on average equity was 7.76% as compared to 4.86% for 2004.
 
 Year-to-date
        net earnings were impacted by growth in the loan portfolio and the improvement
        in the net interest margin of Habersham Bank. Habersham Bank’s balance sheet and
        earnings increased during 2005 as a result of the merger on July 25, 2005
        of
        Liberty Bank & Trust (“Liberty”) located in Toccoa, Georgia. The Liberty
        merger added two additional offices for Habersham Bank in the city of Toccoa
        and
        Stephens County, Georgia and approximately $23 million in assets, primarily
        loans, to the balance sheet. Additional income and expenses related to the
        operation of the Toccoa branches are reflected in the third and fourth quarter’s
        earnings.
 
 Net
        interest income for 2005 increased approximately $3,384,000 during 2005
        primarily as a result of rates tied to prime in the variable rate loan portfolio
        adjusting to increases in the prime rate during the year. An increase in
        Habersham Bank’s net loan growth of $39.6 million also impacted interest income.
        Loan growth, primarily in the real estate lending portfolio of approximately
        $40.3 million was slightly offset by decreases in the commercial and consumer
        lending portfolios of approximately $239,000 and $156,000, respectively.
        Balances in the deposit portfolio increased approximately $79.8 million when
        compared to December 31, 2004. Noninterest bearing deposits increased
        approximately $48.4 million and interest earning accounts increased
        approximately $31.4 million. The increase in deposits was the result of new
        branch locations in Toccoa, which added approximately $18.7 million to Habersham
        Bank’s deposit portfolios, and growth in branch market areas, which added
        approximately $61.1 million.
 
 Total
        assets of $478 million at December 31, 2005, reflect an increase of $92 million
        or 23.83% from $386 million at December 31, 2004. Management reported that
        the
        increase is due primarily to increases in cash and due from banks, and federal
        funds sold of approximately $43.3 million, in addition to increases in the
        loan
        portfolio of Habersham Bank of approximately $39.9 million. Growth in Habersham
        Bank’s loan portfolio was divided between internally generated growth of
        approximately $25.2 million and the addition of approximately $14.4 million
        from
        the merger with Liberty. An increase in deposit balances at December 31,
        2005,
        resulted in a short-term investment in federal funds sold of $36.3 million.
  The
        following discussion sets forth the major factors that affect the Company's
        results of operations and financial condition. These comments should be read
        in
        conjunction with the consolidated financial statements and related
        notes.
 
 This
        discussion contains forward-looking statements involving risks and
        uncertainties. Results may differ significantly from those discussed in the
        forward-looking statements. Factors that might cause such a difference include,
        but are not limited to, risks involving the potential adverse effect of
        unexpected changes in interest rates and the current interest rate environment,
        difficulties in expanding into new market areas, loan losses and the adequacy
        of
        the Company’s loan loss allowance, changes in regulation and legislation,
        competition and other risks identified in the Company’s filings with the
        Securities and Exchange  Commission.
  Page
            21 of
            47
 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 In
        reviewing and understanding financial information for the Company, you are
        encouraged to read and understand the significant accounting policies which
        are
        used in preparing the consolidated financial statements of the Company. These
        policies are described in Note 2 to the consolidated financial statements
        which
        are presented elsewhere in this annual report. Of these policies, management
        believes that the accounting for the allowance for loan losses is the most
        critical. This is because of the subjective nature of the estimates used
        in
        establishing the allowance and the effect these estimates have on the Company’s
        earnings. Because the allowance is replenished by means of a provision for
        loan
        losses that is charged as an expense against net earnings, the estimation
        of the
        allowance affects the Company’s earnings directly. Losses on loans result from a
        broad range of causes, from borrower-specific problems to industry issues
        to the
        impact of the economic environment. The identification of the factors that
        lead
        to default or non-performance under a loan agreement and the estimation of
        loss
        in these situations is very subjective. In addition, a dramatic change in
        the
        performance of one or a small number of borrowers can have a significant
        impact
        on the estimate of losses. As described further below, under “Allowance for Loan
        Losses”, management has implemented a process that has been applied consistently
        to systematically consider the many variables that impact the estimation
        of the
        allowance for loan losses.
 
 Certain
        economic factors could have a material impact on the loan loss allowance
        determination and its adequacy. The depth and duration of any economic recession
        would have an impact on the credit risk associated with the loan portfolio.
        Another factor that can impact the determination is a consideration of
        concentrations in collateral which secure the loan portfolio. The Company’s loan
        portfolio is secured primarily by commercial and residential real estate,
        with
        such loans comprising approximately_90.64% of the total loan portfolio at
        December 31, 2006. While there is a risk that the value of the real estate
        securing the loans in the portfolio could decrease during an economic recession,
        14.68% of the real estate securing the loan portfolio was 1 - 4 family
        residential properties at December 31, 2006 and these loans are generally
        not as
        affected by downturns in the economy. The Company also has concentrations
        in
        mortgages for agribusiness purposes in the poultry industry and in commercial
        loans for the travel accommodation industry. See “Loans.”
 
 The
        Company will, from time to time, make unsecured loans. The risk to the Company
        is greater for unsecured loans as the ultimate repayment of the loan is only
        dependent on the borrower’s ability to pay. The balance of unsecured loans at
        December 31, 2006 was $8.7 million, which does not pose a significant risk
        to
        the Company.
 
 The
        Company is not aware of any large loan relationships that if defaulted would
        have a significant impact on the allowance for loan losses.
 
 Refer
        to
        the section entitled “Allowance for Loan Losses” for an additional discussion of
        the key assumptions and methods used in determining the allowance for loan
        losses, as well as inherent risks in estimating the allowance.
 
 **RESULTS
        OF OPERATIONS**
 
 Habersham
        Bancorp’s net earnings were $5,292,909, $3,813,471 and $2,343,273, for the years
        ended December 31, 2006, 2005 and 2004, respectively, with related diluted
        earnings per common and common equivalent share of, $1.77, $1.30 and $.80
        respectively, representing an increase of 36.15% from 2005 to 2006 and an
        increase of 62.50% from 2004 to 2005.
 
 Net
        earnings represents a return on average equity of 10.06%, 7.76% and 4.86%
        in
        2006, 2005 and 2004, respectively.
  Page
            22 of
            47
 
 The
        total
        loan portfolio for 2006 when compared to 2005 increased approximately $25.5
        million. An increase in the real estate construction lending portfolio totaled
        approximately $23.4 million as a result of loan growth occurring in the Cherokee
        and Braselton market areas. The consumer lending portfolio also increased
        approximately $2.7 million during 2006. The commercial lending portfolio
        decreased approximately $649,000 during 2006. The average yields on the total
        loan portfolio for 2006 and 2005 were 9.01% and 7.52%, respectively.
  At
        December 31, 2006 and 2005, the deposit portfolio included large short-term
        deposits from a customer and its affiliates totaling approximately $78.5
        million
        and $36.3 million, respectively. Excluding these short-term deposits, the
        deposit portfolio increased approximately $35.7 million, or 10.60% for 2006
        when
        compared to 2005. Increases in interest bearing deposits totaling approximately
        $44.8 million were offset by decreases in noninterest bearing deposits totaling
        approximately $9.1 million. The average rates paid on interest bearing deposits
        for 2006 and 2005 were 3.54% and 2.46%, respectively.
 
 The
        average balance of the total loan portfolio for 2005 when compared to 2004
        increased approximately $25.8 million, or 9.51% due to increases in average
        balances of internally generated loans of approximately $14.3 million and
        the
        average loan balances of approximately $11.4 million generated from the addition
        of Liberty’s loan portfolio. The average balance of the deposit portfolio during
        2005 increased approximately $31.1 million when compared to 2004. This increase
        in average deposits resulted from the addition of approximately $18.4 million
        in
        Liberty’s deposit portfolio and growth in the deposit portfolios at other branch
        offices of approximately $12.7 million. Average interest bearing and noninterest
        bearing deposit balances increased approximately $19.3 million and $11.8
        million, respectively, for 2005 when compared to average deposit balances
        in
        2004.
 
 The
        increase in net earnings for the year ended December 31, 2006, when compared
        to
        the year ended December 31, 2005, was primarily due to the increase in net
        interest income of approximately $3.9 million. Noninterest income for 2006
        increased approximately $208,000, or 6.03% when compared to 2005, primarily
        due
        to increases in service charges on deposit accounts totaling approximately
        $200,000. Noninterest expense increased approximately $2.2 million, or 14.69%
        when compared to 2005. This increase is attributable to increases in salaries
        and employee benefits, occupancy expense, computer services, and other expense
        totaling approximately $1.3 million, $279,000, $94,000 and $527,000,
        respectively.
 
 The
        increase in net earnings for 2005, when compared to 2004, was primarily due
        to
        the increase in net interest income. Net earnings was impacted by a net decrease
        in noninterest income of approximately $779,000 and increases in noninterest
        expense of approximately $418,000. Increases in other income, trust service
        fees
        and income from company-owned life insurance of approximately $344,000, $38,000
        and $14,000, respectively, were offset by decreases in noninterest income
        relating to the sale of land and the common stock investments of approximately
        $879,000 and $199,000, respectively. Mortgage origination income decreased
        approximately $21,000 as a result of the slowing of the secondary mortgage
        market. A net loss of $5,654 occurred on securities sales for 2005 compared
        to a
        net gain of $51,816 for 2004.
  **NET
        INTEREST INCOME**
 
 Net
        interest income is the largest single source of income for the Company.
        Management strives to attain a level of earning asset growth while providing
        a
        net yield on earning assets that will cover overhead and other costs and
        provide
        a reasonable return to our stockholders.
  2006
              
              2005
              
              2004Net
                  interest income
              
              $
              21,242,379
              
              $
              17,335,931
              
              $
              13,951,914
 Page
              23 of
              47
  Net
        interest income for 2006 increased approximately $3,906,000, or 22.53%, when
        compared to 2005, which had increased approximately $3,384,000, or 24.25%,
        when
        compared to 2004. Net interest income is affected by interest income from
        loans,
        investment securities and federal funds sold offset by interest paid on deposits
        and borrowings. The following table compares the weighted average tax equivalent
        yields for loans, investment securities and federal funds sold and the weighted
        average rates for deposits and borrowings for 2006, 2005 and 2004.
  2006
              
              2005
              
              2004Interest
                  Yields Earned:
              
              Yields
              
              Yields
              
              YieldsLoans
              
              
              9.01
              %
              
              7.52
              %
              
              6.42
              %Investment
                  Securities
              
              
              5.08
              %
              
              4.67
              %
              
              4.69
              %Federal
                  Funds Sold
              
              
              4.89
              %
              
              2.86
              %
              
              1.54
              %Loans
                  Held for Sale
              
              
              4.72
              %
              
              3.15
              %
              
              5.61
              %Interest
                  Rates Paid:
              
              Rates
              
              Rates
              
              RatesDeposits
              
              
              5.40
              %
              
              2.46
              %
              
              1.98
              %Borrowings
              
              
              4.71
              %
              
              4.52
              %
              
              4.57
              %
 
 Yields
        and rates reflect adjustments in pricing as the Federal Reserve moves the
        prime
        interest rate.
 
 During
        2006, average balances in Habersham Bank’s loan portfolio, the investment
        securities portfolio and in federal funds sold increased approximately $46.6
        million, or 12.12% in the aggregate. Average balances in interest bearing
        deposits increased approximately $52.7 million offset by a decrease in average
        borrowings of approximately $3.4 million during 2006.
  During
        2006, interest income increased approximately $8.5 million, or 32.86%, when
        compared to 2005. Increases in interest income resulted from interest on
        loans,
        investment securities and federal funds sold totaling approximately $7,506,000,
        $753,000 and $265,000, respectively. The increase in interest income from
        loans
        resulted primarily from the increase in average balances in Habersham Bank’s
        loan portfolio during 2006. Loan production in commercial and residential
        real
        estate secured loans during 2006 created an increase in loan balances of
        approximately $23 million during 2006. Increases in the prime lending rate
        during the first six months of 2006 from 7.25% at December 31, 2005 to 8.25%
        at
        June 30, 2006 also positively affected interest income as variable rate loans
        in
        Habersham Bank’s loan portfolio repriced in response to the prime rate changes.
  During
        2005, interest income increased approximately $5.2 million, or 25.03%, when
        compared to 2004. Increases in interest income resulted from interest on
        loans,
        investments and in federal funds sold totaling approximately $4.9 million,
        $170,000 and $139,000, respectively. The increase in interest income from
        loans
        resulted from the impact of rising interest rates and increases in loan
        balances. Average
        balances in Habersham Bank’s loan portfolio increased during 2005, reversing a
        downward trend occurring during 2004. Habersham Bank increased its loan
        production in commercial and residential real estate secured loans by
        approximately $39.9 million during 2005. The merger with Liberty added loans
        to
        the commercial, residential real estate mortgage and consumer portfolios
        totaling $6.6 million, $3.5 million and $1.3 million, respectively. Interest
        income from investment securities and federal funds sold increased primarily
        due
        to increases in balances in these investments.
 
 Interest
        expense for 2006 increased approximately $4.6 million, or 53.69%, when compared
        to 2005, primarily as a result of increases of approximately $52.7 million
        in
        the average balances of the interest bearing deposit portfolios at Habersham
        Bank, offset by decreases of approximately $3.4 million in other borrowings.
        During 2006, average balances in time deposit accounts, interest bearing
        demand
        deposit accounts and in savings accounts increased approximately $21.2 million,
        $17.l million and $14.4 million, respectively, when compared to average balances
        in the same portfolios in 2005.
  Page
            24 of
            47
  Interest
        expense for 2005 increased approximately $1.8 million, or 26.63%, when compared
        to 2004 primarily as a result of increases within the deposit portfolios
        at
        Habersham Bank and increases in borrowing activity. The average interest-bearing
        deposit portfolios of certificates of deposit, Money Market & NOW accounts
        and savings increased approximately $13.6 million, $4.7 million and $1.0
        million, respectively.
 
 The
        tax
        equivalent net interest margin of the Company was 5.03% in 2006, 4.61% in
        2005
        and 4.08% in 2004. The net interest margin of the Company was maintained
        due to
        close management of yields earned on loans and investment securities and
        on
        rates paid for deposits and borrowings.
 
 **CONSOLIDATED
        AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED
        AND
        RATES PAID**
  Average
        balances in the total loan portfolio increased approximately $33.8 million,
        or
        11.36%, at December 31, 2006 from 2005 average balances. The total loan
        portfolios increased approximately $25.5 million, or 7.95%, when comparing
        December 31, 2006 to December 31, 2005. Increases in the lending portfolio
        of
        commercial and residential real estate and in the consumer lending portfolio
        totaled approximately $23.4 million and $2.7 million, respectively. These
        increases were offset by a decrease in the commercial lending portfolio of
        approximately $649,000. Increased activity within the commercial and residential
        construction portfolio resulted in an increase of approximately $31.9 million
        offset by a decrease in the remaining real estate secured portfolio of
        approximately $8.5 million.
  Average
        balances in the loan portfolio at December 31, 2005 increased approximately
        $25.8 million, or 9.51% from December 31, 2004 average balances. The
        total
        loan portfolios increases approximately $39.9 million, or 14.21%, when comparing
        December 31, 2005 to December 31, 2004. At December 31, 2005, the mix of
        the
        loan portfolio had changed from the loan balance mix at December 31, 2004
        with
        increases in the commercial and residential real estate portfolio of
        approximately $40.3 million offset by decreases in the commercial and consumer
        portfolios of approximately $239,000 and $156,000, respectively. The increase
        in
        the commercial and residential real estate portfolio was primarily in commercial
        and residential construction lending of approximately $35.1 million and in
        commercial real estate mortgages of approximately $3.8 million. Increases
        in the
        residential real estate mortgage portfolio also totaled approximately $1.4
        million.
 
 Average
        balances of investment securities increased approximately $9.9 million, or
        12.36%, from year-end 2005 to 2006. Purchases of investment securities totaled
        approximately $20.5 million during 2006 offset by maturities, sales and calls
        of
        investment securities of approximately $6.8 million and $2.0 million,
        respectively. Purchases of U.S. government-sponsored enterprises and tax-exempt
        state and political subdivisions securities totaled approximately $12.5 million
        and $8.0 million, respectively, during 2006.
 
 Average
        balances of investment securities increased approximately $4.5 million, or
        5.92%, from year-end 2004 to 2005. The increase in investment securities
        was a
        result of purchases of approximately $18.2 million offset by proceeds from
        maturities, sales and calls of investment securities of approximately $16.7
        million. Average federal funds sold increased approximately $3.0 million
        or
        92.78% in 2005 over 2004.
 
 The
        average balances in the total deposit portfolio increased approximately $48.6
        million during 2006. Interest bearing account balances of time deposits,
        interest bearing demand deposits and savings deposits increased approximately
        $21.2 million, $17.1 million and $14.4 million, respectively. Noninterest
        bearing demand deposit account balances decreased approximately $4.1 million.
  Page
            25 of
            47
 
 The
        average balances in the deposit portfolio during 2005 increased approximately
        $31.1 million during 2005. Increases within the average noninterest bearing
        deposit balances totaled approximately $11.8 million and within the average
        interest-bearing deposit balances totaled approximately $19.3 million. The
        average interest-bearing deposit portfolios of certificates of deposit, Money
        Market accounts, NOW accounts and savings increased approximately $13.6 million,
        $4.7 million and $1.0 million, respectively. The increase in noninterest-bearing
        deposit balances had a positive impact upon the net interest margin at December
        31, 2005.
 
 The
        following table sets forth the consolidated average balance sheets for the
        Company, average rates earned on interest-earning assets, average rates paid
        on
        interest-bearing liabilities, interest income and interest expense for each
        category of interest-earning assets and interest-bearing liabilities, and
        net
        interest margin. Yields on non-taxable instruments are reported on a
        tax-equivalent basis. This information is presented for the years ended December
        31, 2006, 2005 and 2004.
 
 **CONSOLIDATED
        AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED
        AND
        RATES PAID, CONTINUED**
 2006
              
              2005Average
                  Balance
              
              Income/
                  (Expense)
              
              Average
                  Yield/Cost
              
              Average
                  Balance
              
              Income/
                  (Expense)
              
              Average
                  Yield/CostInterest-earning
                  assets:Loans,
                  net (1)
              
              $
              331,363,746
              
              
              29,854,762
              
              
              9.01
              %
              $
              297,566,778
              
              
              22,381,406
              
              
              7.52
              %Investment
                  securities (2):Taxable
              
              
              67,479,130
              
              
              3,107,325
              
              
              4.60
              %
              
              62,143,278
              
              
              2,530,007
              
              
              4.07
              %Tax
                  exempt
              
              
              22,882,099
              
              
              982,884
              
              
              6.51
              %
              
              18,280,795
              
              
              807,397
              
              
              6.69
              %Federal
                  funds sold
              
              
              9,036,945
              
              
              442,118
              
              
              4.89
              %
              
              6,206,271
              
              
              177,491
              
              
              2.86
              %Loans
                  held for sale
              
              
              1,545,039
              
              
              72,949
              
              
              4.72
              %
              
              1,270,199
              
              
              39,968
              
              
              3.15
              %Total
                  interest-earning assets
              
              
              432,306,959
              
              
              34,460,038
              
              
              8.09
              %
              
              385,467,321
              
              
              25,936,269
              
              
              6.84
              %Noninterest-earning
                  assets
              
              
              35,179,810
              
              
              
              
              
              
              
              
              31,953,575Total
                  assets
              
              $
              467,486,769
              
              
              
              
              
              
              
              $
              417,420,896Interest-bearing
                  liabilities:Money
                  Market and NOW
              
              $
              86,590,932
              
              
              (1,533,639
              )
              
              1.77
              %
              $
              69,479,318
              
              
              (710,963
              )
              
              1.02
              %Savings
                  accounts
              
              
              61,332,587
              
              
              (2,351,977
              )
              
              3.83
              %
              
              46,961,741
              
              
              (1,110,185
              )
              
              2.36
              %Certificates
                  of deposit
              
              
              164,822,662
              
              
              (7,180,212
              )
              
              4.36
              %
              
              143,560,942
              
              
              (4,562,138
              )
              
              3.18
              %Total
                  deposits
              
              
              312,746,181
              
              
              (11,065,828
              )
              
              3.54
              %
              
              260,002,001
              
              
              (6,383,286
              )
              
              2.46
              %Short-term
                  and other borrowings
              
              
              45,652,371
              
              
              (2,151,831
              )
              
              4.71
              %
              
              49,097,093
              
              
              (2,217,052
              )
              
              4.52
              %Total
                  interest-bearing liabilities
              
              
              358,398,552
              
              
              (13,217,659
              )
              
              3.69
              %
              
              309,099,094
              
              
              (8,600,338
              )
              
              2.78
              %Noninterest-
                  bearing deposits
              
              
              51,482,129
              
              
              
              
              
              
              
              
              55,581,576Other
                  noninterest-bearingLiabilities
              
              
              5,001,319
              
              
              
              
              
              
              
              
              3,483,422Total
                  liabilities
              
              
              414,882,000
              
              
              
              
              
              
              
              
              368,164,092Stockholders'
                  equity
              
              
              52,604,769
              
              
              
              
              
              
              
              
              49,256,804Total
                  liabilities and stockholders' equity
              
              $
              467,486,769
              
              
              
              
              
              
              
              $
              417,420,896Net
                  interest income
              
              
              
              
              $
              21,242,379
              
              
              
              
              
              
              
              $
              17,335,931Net
                  interest margin
              
              
              
              
              
              
              
              
              5.03
              %
              
              
              
              
              
              
              
              4.61
              %Interest
                  rate spread
              
              
              
              
              
              
              
              
              4.40
              %
              
              
              
              
              
              
              
              4.06
              %
  Page
            26 of
            47
 
 **CONSOLIDATED
        AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED
        AND
        RATES PAID, CONTINUED**
 2004Average
                  Balance
              
              Income/
                  (Expense)
              
              Average
                  Yield/CostInterest-earning
                  assets:Loans,
                  net (1)
              
              $
              271,736,598
              
              $
              17,472,126
              
              
              6.42
              %Investment
                  securities (2):Taxable
              
              
              59,419,846
              
              
              2,415,647
              
              
              4.07
              %Tax
                  exempt
              
              
              16,506,185
              
              
              751,363
              
              
              6.90
              %Federal
                  funds sold
              
              
              2,507,353
              
              
              38,648
              
              
              1.54
              %Loans
                  held for sale
              
              
              1,169,145
              
              
              65,635
              
              
              5.61
              %Total
                  interest-earning assets
              
              
              351,339,127
              
              
              20,743,419
              
              
              6.01
              %Noninterest-earning
                  assets
              
              
              27,663,565Total
                  assets
              
              $
              379,002,692Interest-bearing
                  liabilities:Money
                  Market and NOW
              
              $
              63,863,610
              
              
              (425,621
              )
              
              0.67
              %Savings
                  accounts
              
              
              32,025,495
              
              
              (329,545
              )
              
              1.03
              %Certificates
                  of deposit
              
              
              143,730,711
              
              
              (3,996,453
              )
              
              2.77
              %Total
                  deposits
              
              
              239,619,816
              
              
              (4,751,619
              )
              
              1.98
              %Short-term
                  and other borrowings
              
              
              44,678,086
              
              
              (2,039,886
              )
              
              4.57
              %Total
                  interest-bearing liabilities
              
              
              284,297,902
              
              
              (6,791,505
              )
              
              2.38
              %Noninterest-
                  bearing deposits
              
              
              42,236,275Other
                  noninterest-bearingLiabilities
              
              
              3,674,730Total
                  liabilities
              
              
              330,208,907Stockholders'
                  equity
              
              
              48,793,785Total
                  liabilities and stockholders' equity
              
              $
              379,002,692Net
                  interest income
              
              
              
              
              $
              13,951,914Net
                  interest margin
              
              
              
              
              
              
              
              
              4.08
              %Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.63
              %
   (1)
              Interest
                  earnings on nonaccrual loans are included in the foregoing analysis
                  to the
                  extent that such interest earnings had been recorded during 2006,
                  2005 and
                  2004. Income includes loan fees of $2,037,032, $1,869,748 and $1,393,790
                  for 2006, 2005 and 2004,
                  respectively.
 (2)
              Average
                  yields for available for sale securities are computed using the
                  historical
                  cost balances. Such yields do not give effect to changes in fair
                  value
                  that are reflected as a component of stockholders’
                  equity.
  Page
            27 of
            47
  The
        following table sets forth a summary of the changes in interest income and
        interest expense resulting from changes in volume and rates for the periods
        indicated:
  2006
                  vs. 2005
                Increase
                (Decrease)
                Due
                  to
              
              2005
                  vs. 2004
                Increase
                (Decrease)
                Due
                  toAverage
              
              Average
              
              
              
              Average
              
              AverageVolume
                  (1)
              
              Rate
                  (1)
              
              Net
              
              Volume
                  (1)
              
              Rate
                  (1)
              
              NetInterest
                  Income:Loans
              
              $
              2,541,532
              
              $
              4,931,824
              
              $
              7,473,356
              
              $
              1,658,298
              
              $
              3,250,982
              
              $
              4,909,280Investment
                  securities:Taxable
              
              
              217,169
              
              
              360,149
              
              
              577,318
              
              
              110,844
              
              
              3,516
              
              
              114,360Tax
                  exempt
              
              
              307,827
              
              
              (132,340
              )
              
              175,487
              
              
              122,448
              
              
              (66,414
              )
              
              56,034Federal
                  funds sold
              
              
              80,957
              
              
              183,670
              
              
              264,627
              
              
              56,963
              
              
              81,880
              
              
              138,843Loans
                  held for sale
              
              
              8,657
              
              
              24,324
              
              
              32,981
              
              
              5,669
              
              
              (31,336
              )
              
              (25,667
              )Total
                  interest-earning assets
              
              $
              3,156,142
              
              $
              5,367,627
              
              $
              8,523,769
              
              $
              1,954,222
              
              $
              3,238,628
              
              $
              5,192,850Interest
                  Expense:Money
                  Market and NOW
              
              $
              174,538
              
              $
              648,138
              
              $
              822,676
              
              $
              37,064
              
              $
              248,278
              
              $
              285,342Savings
                  accounts
              
              
              341,457
              
              
              900,335
              
              
              1,241,792
              
              
              153,843
              
              
              626,797
              
              
              780,640Certificates
                  of deposit
              
              
              674,958
              
              
              1,943,116
              
              
              2,618,074
              
              
              (169,769
              )
              
              735,454
              
              
              565,685Short-term
                  and other borrowings
              
              
              (155,701
              )
              
              90,480
              
              
              (65,221
              )
              
              201,065
              
              
              (23,899
              )
              
              177,166Total
                  interest-bearing liabilities
              
              $
              1,035,252
              
              $
              3,582,069
              
              $
              4,617,321
              
              $
              222,203
              
              $
              1,586,630
              
              $
              1,808,833Change
                  in net interest income
              
              $
              2,120,890
              
              $
              1,785,558
              
              $
              3,906,448
              
              $
              1,732,019
              
              $
              1,651,998
              
              $
              3,384,017
 
 (1)
              The
                  changesin
                  interest income and/or expense not due solely to rate or volume
                  have been
                  allocated to the rate component.
  Page
            28 of
            47
 
 **NONINTEREST
        INCOME AND NONINTEREST EXPENSE**
  Noninterest
        income increased approximately $208,000, or 6.03%, during 2006 resulting
        primarily from increases in service charges on deposit accounts, trust services
        fees, gains from the sale of premises and equipment, and in other income
        of
        approximately $200,000, $76,000, $70,000 and $75,000, respectively. These
        increases were offset by decreases in mortgage origination income and in
        income
        from company-owned life insurance of approximately $196,000 and $10,000,
        respectively. A net loss of $13,216 occurred on securities sales in 2006
        compared to a net loss of $5,654 in 2005. The increase in service charges
        on
        deposit accounts resulted from the introduction of an overdraft protection
        product which generated additional NSF fees during 2006. The Trust Department
        introduced a business development plan in 2006 which produced additional
        accounts and increases in trust fees. The gain on sale of premises and equipment
        resulted from the sale of a portion of land to the Georgia Department of
        Transportation for right-of-way and the sale of computer equipment during
        2006.
        Increases in other income primarily consisted of additional activity in master
        money transactions and insurance commissions approximately $49,000 and $22,000,
        respectively, with the remaining increase spread over various accounts.
 
 Noninterest
        income decreased approximately $983,000, or 22.18%, during 2005. Noninterest
        income for 2004 included gains recorded on the sale of land and investments
        in
        common stock of Georgia Community Life Insurance Company and Southeast Bankcard
        Association Inc. of approximately $879,000 and $199,000, respectively. Without
        the gains reported in 2004, noninterest income during 2005 increased
        approximately $95,000. Increases occurred primarily in other income, trust
        service fees and income from company-owned life insurance of approximately
        $137,000, $38,000 and $14,000, respectively, and were offset by decreases
        in
        mortgage origination income of approximately $21,000 as a result of the slowing
        of the secondary mortgage market and a decrease in service charges on deposit
        accounts and in other service charges of approximately $29,000. The majority
        of
        the increase of $137,000 in other income resulted from the additional rental
        income received from foreclosed property of approximately $185,000, an increase
        in data processing income of approximately $20,000, and an increase of
        approximately $7,000 from twelve months of rental income from the Waleska
        property offset by a decrease in merchant discount fees occurring with the
        sale
        of the MasterCard portfolio in 2004. A net loss of $5,654 occurred on securities
        sales for 2005 compared to a net gain of $51,816 for 2004.
 
 Noninterest
        expense in 2006 increased approximately $2,202,000 or 14.69% as compared
        to
        2005. Increases in salaries and employee benefits, occupancy expenses and
        computer expenses totaled approximately $1,302,000, $279,000 and $94,000,
        respectively. These increases reflect the impact of a full year’s expense in
        salaries and employee benefits, occupancy expenses and computer expense
        occurring as a result of the Liberty merger in July of 2005 compared to six
        months of expense in 2005 as well as annual salary adjustments. Other expense
        increased approximately $527,000 or 12.79% when compared to 2005. Increases
        in
        other expenses, outside services, advertising and public relations, office
        supplies and telephone totaled approximately $225,000, $112,000, $80,000,
        $75,000 and $35,000, respectively.
 
 Noninterest
        expense in 2005 increased approximately $214,000 or 1.45% as compared to
        2004.
        Increases in salaries and employee benefits, occupancy expenses, and computer
        expenses, totaled approximately $212,000, $95,000 and $30,000, respectively.
        These increases were primarily due to the Liberty merger which occurred July
        25,
        2005. The merger increased the number of employees with additional salary
        and
        benefit expenses, additional occupancy and data processing expenses.
  Page
            29 of
            47
  **INCOME
        TAX EXPENSE**
 
 Income
        tax expense for the periods ended December 31, 2006, 2005 and 2004 was
        approximately $2,412,000, $1,649,000 and $780,000, respectively. The effective
        tax rate for the periods ended December 31, 2006, 2005 and 2004 was 31.30%,
        30.19% and 24.97%, respectively. Tax-exempt income on investment securities
        in
        municipal bonds for the periods ended December 31, 2006, 2005 and 2004 was
        12.76%, 14.78% and 24.06% of pre-tax income, respectively. Income tax expense
        for the years ended December 31, 2006, 2005 and 2004 is more fully explained
        in
        note 13  to
        the
        consolidated financial statements.
  **ALLOWANCE
        FOR LOAN LOSSES**
 
 The
        allowance for loan losses represents a reserve for probable losses in the
        loan
        portfolio. The adequacy of the allowance for loan losses is evaluated
        periodically based on a review of all significant loans, with particular
        emphasis on impaired, nonaccruing, past due and other loans that management
        believes require special attention. The determination of the allowance for
        loan
        losses is subjective and based on consideration of a number of factors and
        assumptions. As such, the accounting policy followed in the determination
        of the
        allowance is considered a critical accounting policy. See “Critical Accounting
        Estimates.”
 
 The
        allowance for loan losses methodology is based on a loan classification system.
        For purposes of determining the required allowance for loan losses and resulting
        periodic provisions, the Company identifies problem loans in its portfolio
        and
        segregates the remainder of the loan portfolio into broad segments, such
        as
        commercial, commercial real estate, residential mortgage and consumer. The
        Company provides for a general allowance for losses inherent in the portfolio
        for each of the above categories. The general allowance is calculated based
        on
        estimates of inherent losses which probably exist as of the evaluation date.
        Loss percentages used for non-problem loans in the portfolio are based on
        historical loss factors. The general allowance for losses on problem loans
        is
        based on a review and evaluation of these loans, taking into consideration
        financial condition and strengths of the borrower, related collateral, cash
        flows available for debt repayment, and known and expected economic conditions.
        General loss percentages for the problem loans are determined based upon
        historical loss experience and regulatory requirements.
 
 For
        loans
        considered impaired, specific allowances are provided in the event that the
        specific collateral analysis on each problem loan indicates that the liquidation
        of the collateral would not result in repayment of these loans if the loan
        is
        collateral dependent or if the present value of expected future cash flows
        on
        the loan are less than the balance. In addition to these allocated allowances,
        the Company has established an unallocated allowance of approximately $837,000
        at December 31, 2006. The basis for the unallocated allowance is due to a
        number
        of qualitative factors, such as concentrations of credit and changes in the
        outlook for local and regional economic conditions.
  The
        allowance for loan losses allocation is based on subjective judgment and
        estimates and, therefore, is not necessarily indicative of the specific amounts
        or loan categories in which charge-offs may ultimately occur. The allocation
        of
        the allowance for loan losses by loan category at December 31, 2006, 2005,
        2004,
        2003 and 2002 is as follows:
 
 2006
              
              2005
              
              2004
              
              2003
              
              2002Amount
              
              Percent
                  of
                Loans
                  to
                Total
                  loans
              
              Amount
              
              Percent
                  of
                Loans
                  to
                Total
                  loans
              
              Amount
              
              Percent
                    of
                  Loans
                    to
                  Total
                    loans
              
              Amount
              
              Percent
                    of
                  Loans
                    to
                  Total
                    loans
              
              Amount
              
              Percent
                    of
                  Loans
                    to
                  Total
                    loansCommercial,
                  financial and agricultural
              
              $
              217,535
              
              
              4.6
              %
              $
              69,844
              
              
              5.2
              %
              $
              366,110
              
              
              5.9
              %
              $
              411,359
              
              
              5.5
              %
              $
              372,075
              
              
              5.6
              %Real
                  estate
              
              
              2,090,590
              
              
              90.6
              %
              
              2,714,789
              
              
              90.5
              %
              
              2,564,713
              
              
              89.1
              %
              
              2,315,343
              
              
              88.3
              %
              
              2,214,516
              
              
              87.5
              %Installment
                  loans to individuals
              
              
              299,478
              
              
              4.8
              %
              
              981,002
              
              
              4.3
              %
              
              629,068
              
              
              5.0
              %
              
              618,639
              
              
              6.2
              %
              
              724,794
              
              
              6.9
              %Unallocated
              
              
              837,186
              
              
              -
              
              
              178,890
              
              
              -
              
              
              74,752
              
              
              -
              
              
              297,761
              
              
              -
              
              
              221,924
              
              
              -Total
              
              $
              3,444,789
              
              
              100.0
              %
              $
              3,944,525
              
              
              100.0
              %
              $
              3,634,643
              
              
              100.0
              %
              $
              3,643,102
              
              
              100.0
              %
              $
              3,533,309
              
              
              100.0
              %
  Page
            30 of
            47
  The
        Company's provision for loan losses is intended to create an adequate allowance
        for losses in the loan portfolio at the end of each reporting period. No
        provision for loan losses was expensed in 2006, as management determined
        the
        allowance for loan losses to be adequate for this period.
 
 The
        provision for loan losses was $330,000 in 2005 as compared to $482,500 in
        2004.
        A decrease in the provision for loan losses expense was determined to be
        appropriate due to the decrease in net charge-offs for 2005. Net charge-offs
        totaled approximately $235,000 compared to $491,000 in 2004.
 
 The
        following table summarizes, for each of the years in the five year period
        ended
        December 31, 2006, selected information related to the allowance for loan
        losses.
 
 **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Balance
                  of allowance for loan losses at beginning of period
              
              $
              3,944,525
              
              $
              3,634,643
              
              $
              3,643,102
              
              $
              3,533,309
              
              $
              3,601,877Liberty
                  Bank and Trust allowance
              
              
              -
              
              
              215,079
              
              
              -
              
              
              -
              
              
              -Charge-offs:Commercial,
                  financial andagricultural
              
              
              (254,672
              )
              
              (44,799
              )
              
              (145,422
              )
              
              (329,905
              )
              
              (372,583
              )Real
                  estate
              
              
              (180,191
              )
              
              (113,310
              )
              
              (427,365
              )
              
              (137,861
              )
              
              (470,433
              )Installment
                  loans to individuals
              
              
              (251,983
              )
              
              (273,935
              )
              
              (228,331
              )
              
              (660,230
              )
              
              (670,977
              )Other
              
              
              (15,780
              )
              
              (12,307
              )
              
              (11,074
              )
              
              (20,279
              )
              
              (33,729
              )Total
                  charge-offs
              
              
              (702,626
              )
              
              (444,351
              )
              
              (812,192
              )
              
              (1,148,275
              )
              
              (1,547,722
              )Recoveries:Commercial,
                  financial and agricultural
              
              
              34,030
              
              
              29,952
              
              
              56,558
              
              
              130,864
              
              
              25,759Real
                  estate
              
              
              18,595
              
              
              45,409
              
              
              143,308
              
              
              45,581
              
              
              25,244Installment
                  loans to individuals
              
              
              146,841
              
              
              131,120
              
              
              114,624
              
              
              125,179
              
              
              112,017Other
              
              
              3,424
              
              
              2,673
              
              
              6,743
              
              
              6,444
              
              
              9,134Total
                  recoveries
              
              
              202,890
              
              
              209,154
              
              
              321,233
              
              
              308,068
              
              
              172,154Net
                  charge-offs
              
              
              (499,736
              )
              
              (235,197
              )
              
              (490,959
              )
              
              (840,207
              )
              
              (1,375,568
              )Provision
                  for loan losses
              
              
              -
              
              
              330,000
              
              
              482,500
              
              
              950,000
              
              
              1,307,000Balance
                  of allowance for loanlosses at end of period
              
              $
              3,444,789
              
              $
              3,944,525
              
              $
              3,634,643
              
              $
              3,643,102
              
              $
              3,533,309Average
                  amount of loans
              
              $
              331,363,746
              
              $
              297,566,778
              
              $
              271,736,598
              
              $
              282,142,667
              
              $
              306,940,750Ratio
                  of net charge-offs during the period to average loansoutstanding during the period
              
              
              .15
              %
              
              .08
              %
              
              .18
              %
              
              .30
              %
              
              .45
              %Ratio
                  of allowance to total year-end loans
              
              
              .99
              %
              
              1.23
              %
              
              1.29
              %
              
              1.37
              %
              
              1.15
              %
 
 During
        2006, charge-offs of consumer loans, real estate secured loans and commercial
        loans which totaled approximately $268,000, $180,000 and $255,000, were offset
        by recoveries of $150,000, $19,000 and $34,000, respectively. During 2005,
        charge-offs of consumer loans, real estate secured loans and commercial loans
        which totaled approximately $286,000, $113,000 and $45,000, were offset by
        recoveries of $134,000, $45,000 and $30,000, respectively. The number and
        the
        average balance of charge-offs during 2006 and 2005 by category follow:
 
 2006
              
              2005Category
              
              Number
              
              Average
                  Charge-off
              
              Number
              
              Average
                  Charge-offReal
                  estate
              
              10
              
              $
              18,019
              
              5
              
              $
              22,662Consumer
              
              46
              
              
              5,821
              
              74
              
              
              3,868Commercial
              
              11
              
              
              23,152
              
              4
              
              
              11,200
 
 The
        risk
        associated with loans varies with the creditworthiness of the borrower, the
        type
        of loan (consumer, commercial or real estate) and its maturity. Cash flows
        adequate to support a repayment schedule is an element considered for all
        types
        of loans. Real estate loans are impacted by market conditions regarding the
        value of the underlying property used as collateral. Commercial loans are
        also
        impacted by the management of the business as well as economic conditions.
  Page
            31 of
            47
  Management
        believes that the allowance for loan losses is adequate. While management
        uses
        available information to recognize losses on loans, future additions to the
        allowance may be necessary based on changes in economic conditions, the
        financial condition of borrowers and other factors. In addition, various
        regulatory agencies, as an integral part of their examination process,
        periodically review the Company’s allowance for loan losses. Such agencies may
        require the Company to recognize additions to the allowance based on their
        judgments about information available to them at the time of their examination.
 
 **LOANS**
 
 The
        amount of loans (net of unearned fees) outstanding at December 31 for each
        of
        the last five years is set forth in the following table according to type
        of
        loan and is net of unamortized loan origination fees and unamortized discount
        on
        SBA loans sold. The Company had no foreign loans at December 31 in any of
        the
        last five years.
 
 **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Commercial,
                  financialand
                  agricultural
              
              $
              15,833,001
              
              $
              16,465,079
              
              $
              16,673,310
              
              $
              14,651,171
              
              $
              17,070,602Real
                  estate - construction
              
              
              152,752,981
              
              
              120,872,011
              
              
              79,683,839
              
              
              50,134,674
              
              
              106,759,853Real
                  estate - mortgage
              
              
              161,188,518
              
              
              169,645,585
              
              
              170,504,085
              
              
              184,348,892
              
              
              162,281,200Installment
                  loans to individuals
              
              
              16,502,794
              
              
              13,751,608
              
              
              13,927,123
              
              
              16,355,654
              
              
              21,294,151Total
              
              $
              346,277,294
              
              $
              320,734,283
              
              $
              280,788,357
              
              $
              265,490,391
              
              $
              307,405,806
 
 Loans
        increased approximately $25.5 million or 7.96% at December 31, 2006 as compared
        to December 31, 2005. Increases in real estate construction lending and consumer
        lending totaling approximately $31.9 million and $2.8 million, respectively
        were
        offset by maturity and payoffs in real estate mortgages and commercial lending
        of approximately $8.5 million and $632,000, respectively.
 
 Loans
        increased approximately $39.9 million or 14.21% at December 31, 2005 as compared
        to December 31, 2004. Increases in real estate construction lending totaling
        approximately $41.2 million were offset by maturity and payoffs in real estate
        mortgages, consumer and commercial loans.
 
 The
        following table sets forth the maturities and sensitivities to changes in
        interest rates of loans at December 31, 2006.
 
 
 LOAN
                  MATURITY:
              
              **DUE
                  IN**
                **ONE
                  YEAR**
              
              **DUE
                  AFTER**
                **ONE
                  TROUGH**
                **FIVE
                  YEARS**
              
              **DUE
                  AFTER**
                **FIVE
                  YEARS**
              
              **TOTAL**Commercial,
                  financial and agricultural
              
              $
              12,444,683
              
              $
              3,341,117
              
              $
              47,201
              
              $
              15,833,001Real
                  estate - construction
              
              
              151,750,886
              
              
              1,002,095
              
              
              -
              
              
              152,752,981Real
                  estate - mortgage
              
              
              114,235,894
              
              
              45,578,041
              
              
              1,374,583
              
              
              161,188,518Installment
                  loans to individuals
              
              
              9,245,903
              
              
              _7,183,611
              
              
              73,280
              
              
              16,502,794TOTAL
              
              $
              287,677,366
              
              $
              57,104,864
              
              $
              1,495,064
              
              $
              346,277,294LOAN
                  INTEREST RATE SENSITIVITY:Loans
                  with:Predetermined
                  interest rates
              
              $
              45,446,673
              
              $
              57,447,388
              
              $
              1,456,176
              
              $
              104,350,237Floating
                  or adjustable interest rates
              
              
              241,927,057
              
              
              -
              
              
              -
              
              
              241,927,057TOTAL
              
              $
              287,373,730
              
              $
              57,447,388
              
              $
              1,456,176
              
              $
              346,277,294
  Page
            32 of
            47
  **NONPERFORMING
        ASSETS AND PAST DUE LOANS**
 
 Nonperforming
        assets consist of nonaccrual loans, accruing loans 90 days past due,
        restructured loans, and other real estate owned. 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.
  The
        following table sets forth the totals of nonperforming assets, selected ratios,
        and accruing loans past due 90 days or more at December 31 for each of the
        last
        five years.
 
 **NONPERFORMING
                  ASSETS:**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Accruing
                  loans 90 days past due
              
              $
              37,585
              
              $
              799,128
              
              $
              381,670
              
              $
              503,954
              
              $
              2,178,898Nonaccrual
                  loans
              
              
              502,233
              
              
              363,003
              
              
              3,252,464
              
              
              2,299,796
              
              
              2,115,485Restructured
                  loans
              
              
              52,560
              
              
              130,613
              
              
              119,031
              
              
              26,217
              
              
              492,064Other
                  real estate owned
              
              
              537,975
              
              
              2,773,662
              
              
              1,289,880
              
              
              2,634,673
              
              
              3,197,020Total
                  nonperforming assets
              
              $
              1,130,353
              
              $
              4,066,406
              
              $
              5,043,045
              
              $
              5,464,640
              
              $
              7,983,467**RATIOS:**Nonperforming
                  loans (excluding restructured loans) to total loans
              
              
              .16
              %
              
              .36
              %
              
              1.29
              %
              
              1.06
              %
              
              1.40
              %Nonperforming
                  assets to total loans plus other real estate owned
              
              
              .33
              %
              
              1.27
              %
              
              1.79
              %
              
              2.04
              %
              
              2.57
              %Allowance
                  to nonperforming loans
              
              
              581.52
              %
              
              305.13
              %
              
              96.84
              %
              
              128.73
              %
              
              73.82
              %
  Nonperforming
        assets decreased approximately $2,936,000 or 72.20% from December 31, 2005
        to
        December 31, 2006. The decrease was primarily due to decreases in other real
        estate, accruing loans 90 days past due and in restructured loans of
        approximately $2,236,000, $762,000 and $78,000, respectively, offset by an
        increase in nonaccrual loans of approximately $139,000.
 
 Nonperforming
        assets decreased approximately $977,000 or 19.37% from December 31, 2004
        to
        December 31, 2005. The decrease was primarily due to decreases in nonaccrual
        loans of approximately $2,889,000 offset by increases in other real estate
        owed,
        accruing loans 90 days past due and restructured loans of approximately
        $1,484,000, $417,000 and $12,000, respectively.
 
 Loans
        classified as 90 days past due decreased approximately $762,000 from December
        31, 2005 to December 31, 2006. The decrease is the net result of the following
        changes:
  Balance
                  at December 31, 2005
              
              $
              799,128New
                  loans classified to 90 days past due status
              
              
              687,25790
                  days past due loans charged-off
              
              
              (133,056
              )Payments
                  received
              
              
              (1,315,744
              )Balance
                  at December 31, 2006
              
              $
              37,585
 
 The
        following summarizes accruing loans 90 days past due at December 31,
        2006:
 
 Balance
                  at December 31, 2006
              
              NumberReal
                  estate secured loans
              
              1
              
              $
              23,126Consumer
                  loans
              
              3
              
              
              14,459Total
                  accruing loans 90 days past due
              
              4
              
              $
              37,585
 
 The
        Company had impaired loans of $502,233 and $363,003 at December 31, 2006
        and
        2005, respectively. Impaired loans consist of loans on nonaccrual status.
        The
        increase is the net result of the following changes:
  Balance
                  at December 31, 2005
              
              $
              363,003Advances
              
              
              5,586Loans
                  reclassified to nonaccrual status
              
              
              1,644,675Payments
                  received on nonaccrual loans
              
              
              (258,994
              )Nonaccrual
                  loans charged-off
              
              
              (309,881
              )Nonaccrual
                  loans reclassified to other real estate
              
              
              (679,750
              )Nonaccrual
                  loan reclassified back to accrual status
              
              
              (262,406
              )Balance
                  at December 31, 2006
              
              $
              502,233
 
 Page
            33 of
            47
  The
        following summarized nonaccrual loans at December 31, 2006:
 
 Balance
                  at December 31, 2006
              
              NumberReal
                  estate - residential loans
              
              6
              
              $
              132,455Real
                  estate - commercial loans
              
              3
              
              
              362,015Consumer
                  loans
              
              3
              
              
              7,763Total
                  nonaccural loans
              
              12
              
              $
              502,233
 
 The
        increase in loans on nonaccrual status during 2006 was the result of the
        addition of three commercial real estate loans to nonaccrual status totaling
        approximately $362,000. This increase was offset by decreases in residential
        real estate loans and consumer loans in nonaccrual status totaling approximately
        $164,000 and $59,000, respectively.
 
 The
        decrease in loans on nonaccrual status during 2005 was primarily due to the
        foreclosure of one loan collateralized by multi-family residential property
        of
        approximately $2,471,000 during the first quarter of 2005. At December 31,
        2005,
        nonaccrual loans consisted of twelve loans secured by residential real estate
        and four consumer loans totaling approximately $296,001 and $67,002,
        respectively.
 
 Restructured
        loans decreased during 2006 due to the payoff of one loan and payments received
        totaling approximately $77,000 and $1,000, respectively.
  During
        2005, one loan was added to the restructured loan listing for approximately
        $20,000, offset by payments received of approximately $8,000.
 
 The
        Company’s other real estate consists of six properties totaling approximately
        $538,000 at December 31, 2006 and eight properties totaling approximately
        $2,774,000 at December 2005. This decrease was primarily due to the sale
        of a
        multi-family residential property totaling approximately $2,470,000 during
        the
        third quarter of 2006. Other sales totaling approximately $821,000 were offset
        by increases in foreclosures of residential properties totaling approximately
        $1,055,000.
 
 At
        December 31, 2006, the Company’s other real estate consisted of the following:
  Number
                  of Properties
              
              AmountCommercial
                  properties
              
              1
              
              $
              399,500Lots
              
              5
              
              
              138,475$
              537,975
 
 Our
        Other
        Real Estate Owned (“OREO”) procedures provide that a foreclosure appraisal be
        obtained which provides a fair market value and a disposition (quick sale)
        value. The disposition value is the valuation used to place the property
        into
        OREO. Any difference between the disposition value and the loan balance is
        recommended for charge-off. Once the property is in OREO, the property is
        listed
        with a realtor to begin sales efforts.
  Accrual
        of interest is discontinued when either principal or interest becomes 90
        days
        past due unless the loan is both well secured and in the process of collection,
        or in management's opinion, when reasonable doubt exists as to the full
        collection of interest or principal. Interest income that would have been
        recorded on these nonaccrual and restructured loans in accordance with their
        original terms totaled $26,112, $73,603 and $271,446 in 2006, 2005 and 2004,
        respectively, compared with interest income recognized of $5,269, $37,569
        and
        $169,648, respectively.
  Page
            34 of
            47
  At
        December 31, 2006, management was not aware of any loans classified for
        regulatory purposes as loss, doubtful, substandard or special mention that
        have
        not been disclosed which 1) represent or result from trends or uncertainties
        which management reasonably expects will materially impact future operating
        results, liquidity or capital resources, or 2) represent material credits
        about
        which management is aware of any information which causes management to have
        serious doubts as to the ability of such borrowers to comply with the loan
        repayment terms. However, management decided on January 22, 2007, to move
        a $2.5
        million loan secured by residential lake property to nonaccrual status.
 
 Habersham
        Bank held a concentration in mortgages for agribusiness purposes in the poultry
        industry which totaled approximately $4.0 million and $4.4 million at December
        31, 2006 and 2005, or approximately 1.17% and 1.39% of total net loans at
        December 31, 2006 and 2005, respectively. These mortgages for agribusiness
        purposes are primarily secured by real estate consisting of residences, poultry
        houses and equipment. None of the mortgages are considered individually
        significant. Habersham Bank also held a concentration in commercial loans
        for
        the travel accommodation industry which total approximately $13.2 million
        and
        $14.8 million or approximately 3.85% and 4.62% of total net loans at December
        31, 2006 and 2005, respectively. These loans are primarily secured by commercial
        real estate.
 
 **INVESTMENT
        SECURITIES**
 
 The
        Company has classified its investment securities as available for sale and
        held
        to maturity. The classification of certain investment securities as available
        for sale is consistent with the Company's investment philosophy of maintaining
        flexibility to manage the securities portfolio. At December 31, 2006
        approximately $85.0 million of investment securities were classified as
        available for sale and approximately $3.3 million of investment securities
        were
        classified as held to maturity. Approximately $789,000 of net unrealized
        loss,
        net of income taxes, was included in shareholders' equity related to available
        for sale investment securities.
 
 The
        following table sets forth the carrying amounts of investment securities
        at
        December 31, 2006, 2005 and 2004.
 
 **2006**
              
              **2005**
              
              **2004**Investment
                  securities available for sale:U.S.
                  government-sponsored enterprises
              
              $
              30,673,849
              
              $
              22,442,975
              
              $
              14,621,301Mortgage-backed
                  securities
              
              
              31,191,082
              
              
              34,365,696
              
              
              41,005,664State
                  and political subdivisions
              
              
              22,937,446
              
              
              15,997,351
              
              
              14,017,690Other
                  investments
              
              
              180,038
              
              
              309,210
              
              
              668,830Total
              
              $
              84,982,415
              
              $
              73,115,232
              
              $
              70,313,485Investment
                  securities held to maturity:Mortgage-backed
                  securities
              
              $
              68,124
              
              $
              100,164
              
              $
              144,900State
                  and political subdivisions
              
              
              3,221,198
              
              
              3,287,285
              
              
              3,966,141Total
              
              $
              3,289,322
              
              $
              3,387,449
              
              $
              4,111,041
  Page
            35 of
            47
 
 The
        following table sets forth the maturities of debt investment securities at
        carrying value at December 31, 2006 and the related weighted tax equivalent
        yields.
 
 **MATURING
                  IN****ONE
                  YEAR**
              
              **1-5**
              
              **5-10**
              
              **AFTER
                  10****OR
                  LESS**
              
              **YEARS**
              
              **YEARS**
              
              **YEARS**Investment
                  securities available for sale:Carrying
                  value:U.S.
                  government-sponsored enterprises
              
              $
              -
              
              $
              5,664,409
              
              $
              12,292,027
              
              $
              12,717,413Mortgage-backed
                  securities
              
              
              91,864
              
              
              1,461,614
              
              
              2,534,753
              
              
              27,102,851State
                  and political subdivisions
              
              
              1,317,099
              
              
              2,687,504
              
              
              5,227,883
              
              
              13,704,960Weighted
                  average yields:U.S.
                  government-sponsored enterprises
              
              
              -
              %
              
              3.70
              %
              
              4.16
              %
              
              5.06
              %Mortgage-backed
                  securities
              
              
              3.46
              %
              
              3.49
              %
              
              3.95
              %
              
              4.71
              %State
                  and political subdivisions
              
              
              5.04
              %
              
              6.00
              %
              
              6.10
              %
              
              6.15
              %Investment
                  securities held to maturity:Carrying
                  value:Mortgage-backed
                  securities
              
              $
              -
              
              $
              54,127
              
              $
              6,213
              
              $
              7,784State
                  and political subdivisions
              
              
              490,021
              
              
              1,110,291
              
              
              1,223,407
              
              
              397,479Weighted
                  average yields:Mortgage-backed
                  securities
              
              
              -
              %
              
              7.75
              %
              
              4.04
              %
              
              5.51
              %State
                  and political subdivisions
              
              
              7.31
              %
              
              6.41
              %
              
              6.80
              %
              
              5.00
              %
  No securities were held which represent a combined total for one issuer which
        is in
        excess of 10% of the Company's shareholders’ equity at December 31, 2006.
  **DERIVATIVE
        INSTRUMENTS**
  During
        2004, Habersham Bank entered into two interest rate swap agreements with
        Compass
        Bank to partially offset the interest rate risk associated with variable
        rate
        Federal Home Loan Bank (“FHLB”) borrowings. Each FHLB loan amount is $3 million
        with a quarterly adjustable rate 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.
 
 At
        December 31, 2006 and 2005, the swaps are being accounted for as cash flow
        hedges and the fair values are included in other comprehensive income, net
        of
        taxes. At December 31, 2006, Habersham Bank recorded an asset for approximately
        $116,000 to reflect the fair value of the swaps. At December 31, 2005, Habersham
        Bank recorded an asset for approximately $80,000 to reflect the fair value
        of
        the swaps. No hedge ineffectiveness from these cash flow hedges was recognized
        in the consolidated statement of earnings.
 
 Refer
        to
        Note 12 of the consolidated financial statements for a more complete description
        of the use of derivatives and hedging activities.
  Page
            36 of
            47
  **DEPOSITS**
 
 Average
        deposits increased approximately $48.6 million, or 15.41%, and $33.7 million,
        or
        11.96%, during 2006 and 2005, respectively.
 
 The
        following table sets forth the average amount of deposits and average rate
        paid
        on such deposits for the years ended December 31, 2006, 2005 and 2004.
 
 2006
              
              
              
              2005
              
              
              
              2004AVG.
                  AMT
              
              AVG
              
              AVG.
                  AMT
              
              AVG
              
              AVG.
                  AMT
              
              AVGOUTSTANDING
              
              RATE
              
              OUTSTANDING
              
              RATE
              
              OUTSTANDING
              
              RATEInterest-bearing
                  demand deposits
              
              $
              86,590,932
              
              
              1.77
              %
              $
              69,479,318
              
              
              1.02
              %
              $
              63,863,610
              
              
              .66
              %Saving
                  deposits
              
              
              61,332,587
              
              
              3.83
              %
              
              46,961,741
              
              
              2.37
              %
              
              32,025,495
              
              
              1.03
              %Noninterest-bearing
                  demand deposits
              
              
              51,482,129
              
              
              n/a
              
              
              55,581,576
              
              
              n/a
              
              
              42,236,275
              
              
              n/aTime
                  deposits
              
              
              164,822,662
              
              
              4.36
              %
              
              143,560,942
              
              
              3.18
              %
              
              143,730,711
              
              
              2.77
              %Total
                  average deposits
              
              $
              364,228,310
              
              
              
              
              $
              315,583,577
              
              
              
              
              $
              281,856,091
  At
        December 31, 2006, time certificates of deposit of $100,000 or more, totaled
        $176,651,417. The maturities of all time certificates of deposit over $100,000
        are as follows:
 
 3
                  months or less
              
              $
              91,422,488Over
                  3 but less than 6 months
              
              
              23,696,743Over
                  6 but not more than 12 months
              
              
              42,231,905Over
                  1 year but not more than 5 years
              
              
              19,300,281TOTAL
              
              $
              176,651,417
 
 **BORROWINGS**
 
 Total
        borrowings decreased approximately $6.8 million, or 13.29%, during 2006 compared
        to 2005 primarily due to the net repayments of Federal Home Loan Bank advances
        totaling $4.3 million in 2006. Balances in securities sold under repurchase
        agreements decreased approximately $2.6 million during 2006 compared to 2005.
 
 Total
        borrowings increased approximately $9.9 million, or 23.73%, during 2005 compared
        to 2004 primarily due to increases in Federal Home Loan Bank advances and
        in
        securities sold under repurchase agreements of approximately $6.3 million
        and
        $3.6 million, respectively.
  The
        composition of FHLB advances is more fully explained in Note 11 to the
        consolidated financial statements.
 
 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. 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.
 
 **CAPITAL
        RESOURCES**
  The
        Company and the Bank are subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimal capital
        requirements can initiate certain mandatory and possibly additional
        discretionary actions by regulators that, if undertaken, could have a direct
        material effect on the Company’s financial statements. Under capital adequacy
        guidelines and the regulatory framework for prompt corrective action, the
        Company 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 classification are
        also subject to qualitative judgments by the regulators about components,
        risk
        weightings, and other factors.
  Page
            37 of
            47
  Quantitative
        measures established by regulations to ensure capital adequacy require the
        Company and the Bank to maintain minimum amounts and ratios (set forth below
        in
        the table) of total and Tier I capital (as defined in the regulations) to
        risk-weighted assets (as defined), and of Tier I capital (as defined) to
        average
        assets (as defined). Management believes, as of December 31, 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 following table. There are no conditions or events since that notification
        that management believes have changed the Bank’s categories .
 
 The
        Company’s and the Bank’s actual capital amounts and ratios as of December 31,
        2006 follow (in thousands):
 
 **ACTUAL**
              
              **FOR
                  CAPITAL**
                **ADEQUACY****PURPOSES**
              
              **TO
                  BE WELL**
                **CAPITALIZED
                  UNDER**
                **PROMPT
                  CORRECTIVE**
                **ACTION
                  PROVISIONS****AMOUNT**
              
              **RATIO**
              
              **AMOUNT**
              
              **RATIO**
              
              **AMOUNT**
              
              **RATIO**As
                  of December 31, 2006Total
                  Capital (to Risk-Weighted Assets):Company
              
              $
              55,610
              
              
              14.03
              %
              $
              31,720
              
              
              8
              %
              
              N/A
              
              
              N/AHabersham
                  Ban k
              
              
              51,915
              
              
              13.19
              %
              
              31,477
              
              
              8
              %
              $
              39,346
              
              
              10
              %Tier
                  I Capital (to Risk-Weighted Assets):Company
              
              $
              52,165
              
              
              13.16
              %
              $
              15,860
              
              
              4
              %
              
              N/A
              
              
              N/AHabersham
                  Bank
              
              
              48,470
              
              
              12.32
              %
              
              15,738
              
              
              4
              %
              $
              23,608
              
              
              6
              %Tier
                  I Capital (to Average Assets):Company
              
              $
              52,165
              
              
              10.83
              %
              $
              19,260
              
              
              4
              %
              
              N/A
              
              
              N/AHabersham
                  Bank
              
              
              48,470
              
              
              10.14
              %
              
              19,115
              
              
              4
              %
              $
              23,893
              
              
              5
              %
 
 While
        management believes that the current level of capital is sufficient for the
        current and foreseeable needs of the Company, capital needs are continually
        evaluated by management.
 
 Cash
        dividends were paid at a rate of $.09 per share in March, June, September
        and
        December of 2006. Cash dividends were paid at a rate of $.08 per share in
        March,
        June, September and December of 2005.
 
 Management
        is not aware of any required regulatory changes or any recommendation by
        any
        regulatory authority which will have a material effect on the Company's
        liquidity, capital or results of operations.
 
 It
        is the
        policy of the Federal Reserve that bank holding companies should pay cash
        dividends on common stock only out of net income available over the past
        year
        and only if prospective earnings retention is consistent with the organization’s
        expected future needs and financial condition. The policy provides that bank
        holding companies should not maintain a level of cash dividends that undermines
        the bank holding company’s ability to serve as a source of strength to its
        banking subsidiaries.
  Page
            38 of
            47
  Furthermore,
        the approval of the Georgia Department of Banking and Finance is required
        if
        dividends declared by Habersham Bank to the Company in any year will exceed
        50%
        of the bank’s net earnings for the previous calendar year. As of December 31,
        2006, Habersham Bank could declare dividends to the Company up to approximately
        $3,080,000 with regulatory approval.
 
 **INTEREST
        RATE SENSITIVITY**
 
 The
        objective of asset and liability management is to manage and measure the
        level
        and volatility of earnings and capital by controlling interest rate risk.
        To
        accomplish this objective, management makes use of interest rate and income
        simulation models to perform current and dynamic projections of interest
        income
        and equity, as well as more traditional asset and liability management methods.
 
 The
        Company’s historical performance in various economic climates is considered by
        management in making long-term asset and liability decisions for the
        Company.
  The
        relative interest rate sensitivity of the Company’s assets and liabilities
        indicates the extent to which the Company’s net interest income may be affected
        by interest rate movements. The Company’s ability to reprice assets and
        liabilities in the same dollar amounts and at the same time minimizes interest
        rate risks. One method of measuring the impact of interest rate changes on
        net
        interest income is to measure, in a number of time frames, the interest
        sensitivity gap by subtracting interest sensitive liabilities from interest
        sensitive assets, as reflected in the following table. Such an interest
        sensitivity gap represents the risk, or opportunity, in repricing. If more
        assets than liabilities are repriced at a given time in a rising rate
        environment, net interest income improves; in a declining rate environment,
        net
        interest income deteriorates. Conversely, if more liabilities than assets
        are
        repriced while interest rates are rising, net interest income deteriorates;
        if
        interest rates are falling, net interest income improves.
 
 **INTEREST
        RATE SENSITIVITY ANALYSIS** ****
 
 **INTEREST-EARNING
                  ASSETS:**
              
              **DUE
                  IN THREE****MONTHS**
              
              **DUE
                  AFTER THREE THROUGH SIX MONTHS**
              
              **DUE
                  AFTER SIX THROUGH TWELVE MONTHS**
              
              **DUE
                  AFTER ONE THROUGH FIVE YEARS**
              
              **DUE
                  AFTER FIVE YEARS**
              
              **TOTAL**Federal
                  funds sold
              
              $
              64,398,671
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              64,398,671Investment
                  securities
              
              
              305,476
              
              
              100,085
              
              
              1,673,460
              
              
              10,977,944
              
              
              75,214,772
              
              
              88,271,737Loans
              
              
              256,695,775
              
              
              13,926,926
              
              
              16,751,030
              
              
              57,430,894
              
              
              1,456,176
              
              
              346,260,801Total
                  interest-earning assets
              
              
              321,399,922
              
              
              14,027,011
              
              
              18,424,490
              
              
              68,408,838
              
              
              76,670,948
              
              
              498,931,209**INTEREST-BEARING
                  LIABILITIES:**Deposits:Money
                  Market and NOW
              
              
              86,120,584
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              86,120,584Savings
              
              
              62,200,262
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              62,200,262Certificates
                  of deposit
              
              
              102,118,928
              
              
              34,755,588
              
              
              75,345,062
              
              
              42,802,164
              
              
              -
              
              
              255,021,742Borrowings
              
              
              6,652,733
              
              
              -
              
              
              -
              
              
              38,000,000
              
              
              -
              
              
              44,652,733Total
                  interest-bearing liabilities
              
              
              257,092,507
              
              
              34,755,588
              
              
              75,345,062
              
              
              80,802,164
              
              
              -
              
              
              447,995,321Excess
                  (deficiency) of interest-earning assets over interest- bearing
                  liabilities
              
              $
              64,307,415
              
              $
              (20,728,577
              )
              $
              (56,920,572
              )
              $
              (12,393,326
              )
              $
              76,670,948
              
              $
              50,935,888Cumulative
                  gap
              
              $
              64,307,415
              
              $
              43,578,838
              
              $
              (13,341,734
              )
              $
              (25,735,060
              )
              $
              50,935,888Ratio
                  of cumulative gap to total cumulative interest-earning
                  assets
              
              
              20.01
              %
              
              12.99
              %
              
              (3.77
              %)
              
              (6.09
              %)
              
              10.21
              %Ratio
                  of interest-earning assets to interest-bearing liabilities
              
              
              125.01
              %
              
              114.93
              %
              
              96.37
              %
              
              94.26
              %
              
              111.37
              %
  Page
            39 of
            47
  The
        Company’s strategy is to maintain a ratio of interest sensitive assets to
        interest sensitive liabilities in the range of 80% to 120% at the less-than
        one-year-time frame. At December 31, 2006, the Company’s ratio of
        interest-earning assets to interest-bearing liabilities was 96.37%. The interest
        rate sensitivity analysis has a negative one-year gap of approximately $13.3
        million (excess of interest-bearing liabilities repricing over interest-earning
        assets). The Company’s experience has shown that NOW, Money Market, and savings
        deposits of approximately $148.3 million are less sensitive to short term
        rate
        movements.
 
 **MARKET
        RISK**
 
 Market
        risk reflects the risk of economic loss resulting from adverse changes in
        market
        prices and interest rates. The risk of loss can be reflected in either
        diminished current market values or reduced potential net interest income
        in
        future periods.
 
 Market
        risk arises primarily from interest rate risk inherent in the Company’s lending
        and deposit taking activities. The structure of the Company’s loan and deposit
        portfolios is such that a significant decline in the prime rate may adversely
        impact net market values and interest income. Management seeks to manage
        this
        risk through the use of its investment securities portfolio. The composition
        and
        size of the investment portfolio is managed so as to reduce the interest
        rate
        risk in the deposit and loan portfolios while at the same time maximizing
        the
        yield generated from the portfolio. The Company is also subject to equity
        risk
        as a result of changes in market values of its equity securities.
 
 The
        table
        below presents in tabular form the contractual balances and the estimated
        fair
        value of the Company’s balance sheet fixed rate financial instruments and their
        expected maturity dates as of December 31, 2006. Variable rate financial
        instruments are presented at their next rate change date. The expected maturity
        categories take into consideration historical prepayments experience as well
        as
        management’s expectations based on the interest rate environment as of December
        31, 2006.
 
 
 **MARKET
        RISK INFORMATION (in thousands)**
 **Principal/Notional
                  Amount Maturing in:**
              
              **Fair****2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **Thereafter**
              
              **Total**
              
              **Value****Rate-sensitive
                  assets:**Fixed
                  interest rate loans
              
              $
              45,446
              
              $
              25,617
              
              $
              19,055
              
              $
              6,582
              
              $
              6,194
              
              $
              1,456
              
              $
              104,350
              
              $
              101,589Average
                  interest rate
              
              
              8.15
              %
              
              8.35
              %
              
              8.26
              %
              
              6.84
              %
              
              8.28
              %
              
              7.85
              %
              
              8.14
              %Variable
                  interest rate loans
              
              
              241,927
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              241,927
              
              
              241,927Average
                  interest rate
              
              
              8.88
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              8.88
              %Fixed
                  interest rate securities
              
              
              1,899
              
              
              2,379
              
              
              1,700
              
              
              4,064
              
              
              2,835
              
              
              74,321
              
              
              87,198
              
              
              87,475Average
                  interest rate
              
              
              5.55
              %
              
              4.96
              %
              
              4.19
              %
              
              3.98
              %
              
              5.11
              %
              
              5.05
              %
              
              4.99
              %Variable
                  interest rate securities
              
              
              8
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              886
              
              
              894
              
              
              875Average
                  interest rate
              
              
              5.51
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              4.86
              %
              
              4.87
              %**Rate-sensitive
                  liabilities**:Savings
                  and interest-bearing deposits
              
              
              148,321
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              148,321
              
              
              148,321Average
                  interest rate
              
              
              3.03
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              3.03
              %Fixed
                  interest rate time deposits
              
              
              212,219
              
              
              15,434
              
              
              6,564
              
              
              17,771
              
              
              3,034
              
              
              -
              
              
              255,022
              
              
              257,128Average
                  interest rate
              
              
              4.99
              %
              
              4.56
              %
              
              4.42
              %
              
              4.27
              %
              
              4.71
              %
              
              -
              %
              
              4.90
              %Fixed
                  interest rate Borrowings
              
              
              -
              
              
              7,000
              
              
              -
              
              
              10,000
              
              
              10,000
              
              
              -
              
              
              27,000
              
              
              27,411Average
                  interest rate
              
              
              -
              %
              
              4.73
              %
              
              -
              %
              
              6.02
              %
              
              4.93
              %
              
              -
              %
              
              5.28
              %Variable
                  interest rate borrowings
              
              
              -
              
              
              -
              
              
              11,000
              
              
              -
              
              
              -
              
              
              -
              
              
              11,000
              
              
              11,000Average
                  interest rate
              
              
              -
              %
              
              -
              %
              
              5.36
              %
              
              -
              %
              
              -
              %
              
              -
              %
              
              5.36
              %
 
 Equity
        securities of $209,109 are subject to changes in market values.
  Page
            40 of
            47
  **INFLATION**
 
 The
        Company's assets and liabilities are generally monetary in nature. Therefore,
        interest rates have a greater impact on the Company's performance than the
        effects of general levels of inflation. Interest rates do not necessarily
        move
        in the same direction or magnitude as the prices of goods and services. See
        “Interest Rate Sensitivity” above.
  **LIQUIDITY**
 
 Liquidity
        management involves the matching of the cash flow requirements of customers,
        either depositors withdrawing funds or borrowers needing loans, and the ability
        of the Company to meet those requirements.
 
 The
        Company's liquidity program is designed and intended to provide guidance
        in
        funding the credit and investment activities of the Company while at the
        same
        time ensuring that the deposit obligations of the Company are met on a timely
        basis. In order to permit active and timely management of assets and
        liabilities, these accounts are monitored regularly in regard to volume,
        mix and
        maturity.
 
 Scheduled
        amortization and prepayments of loans, maturities and calls of investment
        securities and funds from operations provide a daily source of liquidity.
        In
        addition, the Company may and does seek outside sources of funds.
 
 The
        Company has the ability, on a short-term basis, to purchase federal funds
        from
        other financial institutions up to $30,000,000. At December 31, 2006, there
        were
        no federal funds purchased from other financial institutions. The Company
        can
        borrow funds from the FHLB, subject to eligible collateral of loans. At December
        31, 2006, our maximum borrowing capacity from the FHLB was $38,195,000 and
        the
        Company had outstanding borrowings of $38,000,000 leaving available unused
        borrowing capacity of $195,000. In addition, the Company has made arrangements
        with commercial banks for short-term advances up to $5,994,000 under repurchase
        agreement lines of credit of which none was advanced at December 31,
        2006 .
 
 Loan
        repayments and maturing investment securities are a relatively predictable
        source of funds. However, deposit flows, calls of investment securities and
        prepayment of loans are strongly influenced by interest rates, general and
        local
        economic conditions, and competition in the marketplace. These factors reduce
        the predictability of the timing of these sources of funds.
 
 Habersham
        Bank's liquidity policy requires a minimum ratio of 20% of cash and certain
        short-term investments to net withdrawable deposit accounts. The Bank’s
        liquidity ratios at December 31, 2006 and 2005 were 44.52% and 28.43%,
        respectively.
  **OFF-BALANCE
        SHEET COMMITMENTS**
 
 The
        Company is a party to financial instruments with off-balance-sheet risk in
        the
        normal course of its lending activities to meet the financing needs of its
        customers. These financial instruments include commitments to extend credit
        and
        standby letters of credit. The Company’s exposure to credit losses in the event
        of nonperformance by the other party to the financial instrument for commitments
        to extend credit and standby letters of credit is represented by the contractual
        amounts of those instruments. The Company uses the same credit policies in
        making these commitments as it does for on-balance-sheet instruments and
        evaluates each customer’s creditworthiness on a case by case basis. At December
        31, 2006, the Company had outstanding loan commitments approximating
        $103,796,000 and standby letters of credit approximating $5,881,000. The
        amount
        of collateral obtained, if deemed necessary, for these financial instruments
        by
        the Company, upon extension of credit, is based on management’s credit
        evaluation of the customer. Collateral held, if any, varies but may include
        inventory, equipment, real estate, or other property. The accounting loss
        the
        Company would incur if any party to the financial instrument failed completely
        to perform according to the term of the contract and the collateral proved
        to be
        of no value is equal to the face amount of the financial instrument.
  Page
            41 of
            47
 
 The
        Company’s commitments are funded through internal funding sources of scheduled
        repayments of loans and sales and maturities of investment securities available
        for sale or external funding sources through acceptance of deposits from
        customers or borrowing from other financial institutions.
  **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following table is a summary of the Company’s commitments to extend credit,
        commitments under contractual leases as well as the Company’s contractual
        obligations, consisting of deposits, FHLB advances and borrowed funds by
        contractual maturity date.
 
 **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **2011**Commitments
                  on lines of credit
              
              
              103,796,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -Standby
                  letters of credit
              
              
              5,881,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -Commitments
                  under lease agreements
              
              
              504,748
              
              
              502,612
              
              
              459,802
              
              
              363,622
              
              
              242,970Deposits
              
              
              407,826,676
              
              
              15,434,097
              
              
              6,564,136
              
              
              17,771,446
              
              
              3,032,405FHLB
                  advances
              
              
              -
              
              
              7,000,000
              
              
              11,000,000
              
              
              10,000,000
              
              
              10,000,000Short-term
                  borrowings
              
              
              778,778
              
              
              -
              
              
              -
              
              
              -
              
              
              -Federal
                  funds purchased and securities sold under repurchased
                  agreements
              
              
              5,873,955
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  commitments and contractual obligations
              
              $
              524,661,157
              
              $
              22,936,709
              
              $
              18,023,938
              
              $
              28,135,068
              
              $
              13,275,375
  Although
        management regularly monitors the balance of outstanding commitments to fund
        loans to ensure funding availability should the need arise, management believes
        that the risk of all customers fully drawing on all these lines of credit
        at the
        same time is remote.
 
 The
        common stock of the Company is traded on the Nasdaq Global Market (“Nasdaq”)
        under the symbol HABC. At December 31, 2006, the Company had approximately
        505
        shareholders of record. The following table sets forth the high and low sales
        prices, and the cash dividends paid on, the Company’s common stock on a
        quarterly basis for the last two fiscal years.
  **2006:**
              
              **High**
              
              **Low**
              
              **Dividend**Fourth
                  Quarter
              
              $
              25.00
              
              $
              24.00
              
              $
              .09Third
                  Quarter
              
              
              25.05
              
              
              24.00
              
              
              .09Second
                  Quarter
              
              
              25.50
              
              
              22.05
              
              
              .09First
                  Quarter
              
              
              25.50
              
              
              21.91
              
              
              .09
 
 **2005:**
              
              **High**
              
              **Low**
              
              **Dividend**Fourth
                  Quarter
              
              $
              24.18
              
              $
              21.50
              
              $
              .08Third
                  Quarter
              
              
              23.60
              
              
              20.75
              
              
              .08Second
                  Quarter
              
              
              24.00
              
              
              20.11
              
              
              .08First
                  Quarter
              
              
              23.00
              
              
              20.42
              
              
              .08
  Page
            42 of
            47
  Item
                  7a.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 See
        “Market Risk” under Item 7, “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations”.
  Item
                8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
  The
        consolidated balance sheets of the Company and subsidiaries as of December
        31,
        2006 and 2005, the related consolidated statements of earnings, changes in
        stockholders’ equity, comprehensive income, and cash flows and notes to the
        consolidated financial statements for each of the years in the three year
        period
        ended December 31, 2006, the report issued thereon by the Company’s independent
        auditors and quarterly financial data (unaudited) are incorporated herein
        by
        reference to the Company’s 2006 Annual Report to Shareholders and are attached
        as Exhibit 13 hereto.
  Item
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
 
 None.
  Item
                  9A.
              CONTROLS
                  AND PROCEDURES
 
 As
        of the
        end of the period covered by this report, the Company’s management, including
        the Company’s Chief Executive Officer and Chief Financial Officer, reviewed and
        evaluated the effectiveness of the design and operation of the Company’s
        disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
        Based
        upon that evaluation, the Company’s Chief Executive Officer and Chief Financial
        Officer concluded that the Company’s disclosure controls and procedures are
        effective in timely alerting them to material information relating to the
        Company, (including its consolidated subsidiaries) that is required to be
        included in the Company’s periodic filings with the Securities and Exchange
        Commission. There have been no significant changes in the Company’s internal
        controls or, to management’s knowledge, in other factors that could
        significantly affect those internal controls during the last fiscal quarter
        of
        2006, and there have been no corrective actions with respect to significant
        deficiencies or material weaknesses.
  Item
                  9B.
              OTHER
                  INFORMATION
 
 On
        December 20, 2006, the Compensation Committee set the following annual base
        salaries for the following executive officers for 2006:
 
 David
                  Stovall:
              
              $
              275,206Edward
                  Ariail:
              
              $
              179,158Bonnie
                  Bowling:
              
              $
              178,624Annette
                  Banks
              
              $
              92,246
  Page
            43 of
            47
  PART
        III
 Item
                  10.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT
  The
        Company has a Code of Ethics that applies to its senior management, including
        its Chief Executive Officer, Chief Financial Officer and Comptroller. See
        Exhibit 14 hereto.
 
 Additional
        information concerning the Company's directors and executive officers appears
        in
        the Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders under
        the headings "Election of Directors-Nominees,” - “Compliance with Section 16(a)
        of the Exchange Act” and "Executive Officers" and is incorporated by reference
        herein.
  Item
                  l1.
              EXECUTIVE
                  COMPENSATION
 
 Additional
        information concerning the compensation of the Company's management appears
        in
        the Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders under
        the headings "Executive Compensation" and “Election of Directors - Compensation
        of Directors” and is incorporated by reference herein.
  Item
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER
                  MATTERS
 
 The
        following table provides information regarding compensation plans under which
        equity securities of the Company are authorized for issuance. All data is
        presented as of December 31, 2006.
 
 Equity
                  Compensation Plan Table(a)
              (b)
              (c)Plan
                  category
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              298,250
              $21.49
              316,799Equity
                  compensation plans not approved by security holders
              0
              0
              0Total
              298,250
              $21.49
              316,799
  Additional
        information concerning beneficial owners of more than 5% of the Company's
        stock
        and information concerning the stock owned by the Company's management appears
        in the Proxy Statement under the heading "Ownership of Stock" and is
        incorporated by reference herein.
  Page
            44 of
            47
  Item
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 Information
        concerning certain relationships and related transactions appears in the
        Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders under the
        heading "Certain Transactions" and is incorporated by reference
        herein.
 
 Item
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
 
 Information
        concerning principal accountant fees and services appears in the Company’s Proxy
        Statement for its 2007 Annual Meeting of Shareholders under the heading “Audit
        Committee Matters - Audit Fees” and is incorporated herein by reference.
 
 PART
        IV
 
 Item
                  15.
              EXHIBITS
                  AND FINANCIAL STATEMENT SCHEDULES
 
 (a)
              See
                  Item 8 for a list of the financial statements filed as a part of
                  this
                  report. No financial statement schedules are applicable as the
                  required
                  information is included in the financial statements in Item
                  8.
 
 See
        the
        attached Exhibit Index, appearing behind the signature page to this report,
        for
        the exhibits required by Item 601 of Regulation S-K.
  SIGNATURES
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
  HABERSHAM
                  BANCORP (Registrant)/s/
                  David D. Stovall
              
              Date:March
                  29, 2007By:
              Director,
                  President andChief
                  Executive Officer
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed by the following persons on behalf of the Registrant in the capacities
        and on the dates indicated.
 
 Signature
              
              Title
              
              Date/s/
                  Thomas A. Arrendale, III
              
              Chairman
                  of the Board
              
              March
                  29, 2007and
                  Director/s/
                  David D. Stovall
              
              Director,
                  President and
              
              March
                  29, 2007Chief
                  Executive Officer */s/
                  Edward D. Ariail
              
              Director,
                  Vice President and
              
              March
                  29, 2007Corporate
                  Secretary/s/
                  Michael C. Martin
              
              Director
              
              March
                  29, 2007/s/
                  James A. Stapleton, Jr.
              
              Director
              
              March
                  29, 2007/s/
                  Calvin R. Wilbanks
              
              Director
              
              March
                  29, 2007/s/
                  Michael L. Owen
              
              Director
              
              March
                  29, 2007/s/
                  Ben F. Cheek, III
              
              Director
              
              March
                  29, 2007/s/
                  Annette Banks
              
              Vice
                  President and
              
              March
                  29, 2007Chief
                  Financial Officer **
  *
              Principal
                  executive officer.
 **
              Principal
                  financial and accounting
                  officer.
  Page
            45 of
            47
  EXHIBIT
        INDEX
 
 Exhibit
                  No.
              
              Document3.1
              
              Amended
                  and restated Articles of Incorporation of Habersham Bancorp, as
                  amended by
                  amendment dated April 16, 1988 (1) and further amended by amendment
                  dated
                  April 15, 2000 (2)3.2
              
              By-laws
                  of Habersham Bancorp, as amended by resolutions dated January 29,
                  2000
                  (3)10.2*
              
              Form
                  of Director Supplemental Retirement Plan Agreement and Split Dollar
                  Endorsement, with summary of terms specific to each director
                  (3)10.3*
              
              Habersham
                  Bancorp Outside Directors Stock Option Plan (4)10.3(a)*
              
              Form
                  of option agreement under Habersham Bancorp Outside Directors Stock
                  Option
                  Plan (5)10.4*
              
              Habersham
                  Bancorp 1996 Incentive Stock Option Plan, (6) as amended by the
                  First
                  Amendment thereto dated January 29, 2000 (7)10.4(a)*
              
              Form
                  of incentive stock option agreement under Habersham Bancorp 1996
                  Incentive
                  Stock Option Plan (3)10.4(b)*
              
              Form
                  of non-qualified stock option agreement under Habersham Bancorp
                  1996
                  Incentive Stock Option Plan (3)10.5*
              
              Form
                  of Split Dollar Agreement and Collateral Assignment dated January
                  1, 1991,
                  with summary of terms applicable to Mr. Ariail and Mr. Stovall
                  (3)10.6*
              
              Habersham
                  Bancorp 2005 Stock Option Plan (8)10.6(a)*
              
              Form
                  of non-qualified stock option award pursuant to the 2005 Stock
                  Option Plan
                  (9)10.6(b)*
              
              Form
                  of Incentive Stock Option award pursuant to the 2005 Stock Option
                  Plan
                  (10)13.0
              
              Financial
                  statements and notes thereto contained in the Habersham Bancorp
                  2006
                  Annual Report and unaudited quarterly financial data14.0
              
              Code
                  of Ethics (11)
  Page
            46 of
            47
  21.0
              
              Subsidiaries
                  of Habersham Bancorp (11)23.1
              
              Consent
                  of Porter KeadleMoore, LLP31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  Pursuant to Rule 13a-14(b) of the Securities and Exchange Act of
                  1934 and
                  18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
  (1)
              Incorporated
                  herein by reference to Exhibit 3(a) in Amendment No. 1 to Registrant's
                  Registration Statement on Form S-4 (Regis. No.
                  33-57915)(2)
              Incorporated
                  herein by reference to Exhibit 3.1 to Registrant’s Quarterly Report on
                  Form 10-Q for the quarter ended March 31, 2000 (File No.
                  0-13153)(3)
              Incorporated
                  here in by reference to Exhibit of the same number in the Registrant’s
                  Annual Report on Form 10-K for the fiscal year ended December 31,
                  2004
                  (File No. 0-13153)(4)
              Incorporated
                  herein by reference to Appendix B to the Registrant’s 2005 Proxy Statement
                  for its Annual Meeting of Shareholders (File No. 0-13153)(5)
              Incorporated
                  by reference to Exhibit 10.3 to the Registrant’s Quarterly Report of Form
                  10-Q for the quarter ended June 30, 2005 (File No. 0-13153)(6)
              Incorporated
                  herein by reference to Appendix A to the Registrant’s 1996 Proxy Statement
                  for its Annual Meeting of the Shareholders (File No. 0-13153)(7)
              Incorporated
                  herein by reference to Appendix A to the Registrant’s 2000 Proxy Statement
                  for its Annual Meeting of Shareholders filed on Schedule 14A (File
                  No.
                  0-13153)(8)
              Incorporated
                  herein by reference to Appendix A to the Registrant’s 2005 Proxy Statement
                  for its Annual Meeting of Shareholders (File No.
                  0-13153)(9)
              Incorporated
                  by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
                  10-Q for the quarter ended June 30, 2005 (File No.
                  0-13153)(10)
              Incorporated
                  by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
                  10-Q for the quarter ended June 30, 2005 (File No.
                  0-13153)(11)
              Incorporated
                  herein by reference to exhibit of same number in the Registrant’s Annual
                  Report on Form 10-K for the year ended December 31, 2003 (File
                  No.
                  0-13153)
 
 *
        Indicates the Registrant’s plans, management contracts and compensatory
        arrangements.
   Page
        47 of
        47