HABERSHAM BANCORP


AND SUBSIDIARIES








Consolidated Financial Statements





December 31, 2004, 2003 and 2002





(with Independent Accountants’ Report
thereon)











REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







To the
Board of Directors and Stockholders


Habersham
Bancorp and subsidiaries








We have
audited the balance sheet of Habersham Bancorp and subsidiaries as of December
31, 2004 and the related consolidated statements of earnings, comprehensive
income, changes in stockholders’ equity, and cash flows for the year then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The consolidated financial statements of Habersham Bancorp and
subsidiaries as of December 31, 2003 and 2002, before the restatement described
in Note 3, were audited by other auditors whose report, dated January 23, 2004,
expressed an unqualified opinion on those statements.





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





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





We also
audited the adjustments described in Note 3 that were applied to restate the
2003 and 2002 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.













Atlanta,
Georgia


February
11, 2005










HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Balance Sheets





December
31, 2004 and 2003





Assets2004
    
    2003
      (as
      restated)Cash
      and cash equivalents
    
    $
    9,558,770
    
    
    8,381,184Investment
      securities available for sale
    
    
    70,313,485
    
    
    72,812,631Investment
      securities held to maturity, estimated fair value of $4,370,548 and
      $5,177,539, respectively
    
    
    4,111,041
    
    
    4,859,713Other
      investments
    
    
    2,469,134
    
    
    1,652,034Loans
      held for sale
    
    
    1,061,700
    
    
    1,521,900Loans,
      net of allowance for loan losses of $3,634,643 and
    $3,643,102
    
    
    277,137,222
    
    
    261,817,830Premises
      and equipment, net
    
    
    9,701,050
    
    
    9,674,177Accrued
      interest receivable
    
    
    1,593,837
    
    
    1,783,367Other
      real estate
    
    
    1,289,880
    
    
    2,634,673Goodwill
    
    
    2,488,540
    
    
    2,488,540Other
      assets
    
    
    6,208,790
    
    
    7,351,734Total
      assets
    
    $
    385,933,449
    
    
    374,977,783Liabilities
      and Stockholders’ EquityDeposits:Noninterest-bearing
      demand
    
    $
    44,316,403
    
    
    37,853,329Money
      market and NOW accounts
    
    
    66,381,857
    
    
    59,076,674Savings
    
    
    10,516,549
    
    
    9,473,852Time
      ($100,000 and over)
    
    
    67,878,559
    
    
    63,730,583Other
      time
    
    
    103,863,853
    
    
    109,465,530Total
      deposits
    
    
    292,957,221
    
    
    279,599,968Short-term
      borrowings
    
    
    786,036
    
    
    578,455Federal
      funds purchased and securities sold under retail repurchase
      agreements
    
    
    4,834,631
    
    
    12,383,776Federal
      Home Loan Bank advances
    
    
    36,000,000
    
    
    30,000,000Accrued
      interest payable
    
    
    1,639,174
    
    
    1,873,331Other
      liabilities
    
    
    1,710,593
    
    
    1,312,903Total
      liabilities
    
    
    337,927,655
    
    
    325,748,433CommitmentsStockholders’
      equity:Common
      stock, $1.00 par value; 10,000,000 shares authorized;
      2,900,192
      and 2,869,278 shares issued and outstanding
    
    
    2,900,192
    
    
    2,869,278Additional
      paid-in capital
    
    
    14,560,488
    
    
    14,176,580Retained
      earnings
    
    
    30,661,077
    
    
    32,019,682Accumulated
      other comprehensive income (loss)
    
    
    (115,963
    )
    
    163,810Total
      stockholders’ equity
    
    
    48,005,794
    
    
    49,229,350Total
      liabilities and stockholders’ equity
    
    $
    385,933,449
    
    
    374,977,783




See
accompanying notes to consolidated financial statements.




- 2
-


HABERSHAM
BANCORP AND SUBSIDIARIES


Consolidated
Statements of Earnings




For the
Years Ended December 31, 2004, 2003 and 2002




2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Interest
      income:Loans
    
    $
    17,537,761
    
    
    19,677,470
    
    
    23,723,373Investments:Taxable
      securities
    
    
    2,289,392
    
    
    1,900,731
    
    
    2,025,239Tax
      exempt securities
    
    
    751,363
    
    
    820,122
    
    
    928,576Other
      investments
    
    
    126,255
    
    
    139,894
    
    
    415,731Federal
      funds sold
    
    
    38,648
    
    
    54,593
    
    
    44,350Total
      interest income
    
    
    20,743,419
    
    
    22,592,810
    
    
    27,137,269Interest
      expense:Time
      deposits, $100,000 and over
    
    
    1,607,854
    
    
    2,243,234
    
    
    3,469,661Other
      deposits
    
    
    3,143,765
    
    
    4,009,389
    
    
    6,360,212Federal
      funds purchased and securities sold under repurchase
      agreements
    
    
    107,458
    
    
    77,504
    
    
    414,427Short-term
      and other borrowings, primarily FHLB advances
    
    
    1,932,428
    
    
    1,791,540
    
    
    1,796,787Total
      interest expense
    
    
    6,791,505
    
    
    8,121,667
    
    
    12,041,087Net
      interest income
    
    
    13,951,914
    
    
    14,471,143
    
    
    15,096,182Provision
      for loan losses
    
    
    482,500
    
    
    950,000
    
    
    1,307,000Net
      interest income after provision for loan losses
    
    
    13,469,414
    
    
    13,521,143
    
    
    13,789,182Noninterest
      income:Mortgage
      origination income
    
    
    1,002,184
    
    
    808,147
    
    
    192,800Service
      charges on deposit accounts
    
    
    709,695
    
    
    802,630
    
    
    724,295Other
      service charges and commissions
    
    
    185,499
    
    
    219,534
    
    
    262,021Securities
      gains, net
    
    
    51,816
    
    
    211,304
    
    
    850,869Gain
      on sale of other investments
    
    
    198,641
    
    
    60,000
    
    
    50,000Gain
      on sale of land
    
    
    879,453
    
    
    -
    
    
    -Equity
      in loss of investee
    
    
    -
    
    
    -
    
    
    (45,233
    )Gain
      on sale of CB Financial Corp. common stock
    
    
    -
    
    
    -
    
    
    277,182Income
      from Company-owned life insurance
    
    
    167,361
    
    
    177,336
    
    
    177,949Trust
      services fees
    
    
    200,338
    
    
    439,566
    
    
    561,583Other
      income
    
    
    1,035,515
    
    
    771,134
    
    
    568,216Total
      noninterest income
    
    
    4,430,502
    
    
    3,489,651
    
    
    3,619,682Noninterest
      expense:Salaries
      and employee benefits
    
    
    8,265,631
    
    
    7,613,744
    
    
    6,786,261Occupancy
      expenses
    
    
    1,835,487
    
    
    1,529,737
    
    
    1,345,206Computer
      services
    
    
    429,415
    
    
    390,086
    
    
    462,786Other
    
    
    4,246,351
    
    
    4,465,819
    
    
    4,262,330Total
      noninterest expense
    
    
    14,776,884
    
    
    13,999,386
    
    
    12,856,583Earnings
      from continuing operations before income taxes
    
    
    3,123,032
    
    
    3,011,408
    
    
    4,552,281Income
      tax expense
    
    
    779,759
    
    
    715,446
    
    
    1,105,271Earnings
      from continuing operations
    
    
    2,343,273
    
    
    2,295,962
    
    
    3,447,010Discontinued
      operations:Earnings
      from discontinued operations, net of taxes of $1,645,464 in 2002
    
    
    -
    
    
    -
    
    
    2,337,441Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451


- 3
-


HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Statements of Earnings (continued)





For the
Years Ended December 31, 2004, 2003 and 2002





2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Earnings
      from continuing operations per common share - basic
    
    $
    .81
    
    
    .81
    
    
    1.25Discontinued
      operations per common share - basic
    
    
    -
    
    
    -
    
    
    .85Net
      earnings per common share - basic
    
    $
    .81
    
    
    .81
    
    
    2.10Earnings
      from continuing operations per common share - diluted
    
    $
    .80
    
    
    .79
    
    
    1.22Discontinued
      operations per common share - diluted
    
    
    -
    
    
    -
    
    
    .83Net
      earnings per common share - diluted
    
    $
    .80
    
    
    .79
    
    
    2.05Weighted
      average number of common shares outstanding
    
    
    2,889,004
    
    
    2,839,063
    
    
    2,752,242Weighted
      average number of common and common equivalent shares
      outstanding
    
    
    2,939,951
    
    
    2,895,113
    
    
    2,815,972


See
accompanying notes to consolidated financial statements.





- 4
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Statements of Comprehensive Income





For the
Years Ended December 31, 2004, 2003 and 2002





2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451Other
      comprehensive income (loss):Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
    
    
    (249,116
    )
    
    (574,072
    )
    
    1,111,205Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
    
    
    (122,966
    )
    
    -
    
    
    -Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
    
    
    (51,816
    )
    
    (203,681
    )
    
    (850,869
    )Total
      other comprehensive income (loss) before tax
    
    
    (423,898
    )
    
    (777,753
    )
    
    260,336Income
      taxes related to other comprehensive income:Unrealized
      holding gains (losses) on investment securities available for sale arising
      during period
    
    
    84,699
    
    
    195,184
    
    
    (377,809
    )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
    
    
    41,809
    
    
    -
    
    
    -Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
    
    
    17,617
    
    
    69,252
    
    
    289,295Total
      income taxes related to other comprehensive income (loss)
    
    
    144,125
    
    
    264,436
    
    
    (88,514
    )Total
      other comprehensive (loss) income, net of tax
    
    
    (279,773
    )
    
    (513,317
    )
    
    171,822Total
      comprehensive income
    
    $
    2,063,500
    
    
    1,782,645
    
    
    5,956,273


See
accompanying notes to consolidated financial statements.




- 5
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Statements of Changes in Stockholders’ Equity





For the
Years Ended December 31, 2004, 2003 and 2002





Common
      Stock
    
    Additional
      Paid-in
      Capital
    
    Retained
      Earnings
    
    Accumulated
      Other
      Comprehensive
      Income
      (Loss)
    
    TotalBalance,
      December 31, 2001, as restated
    
    $
    2,698,746
    
    
    12,417,064
    
    
    27,979,411
    
    
    505,305
    
    
    43,600,526Net
      earnings, as restated
    
    
    -
    
    
    -
    
    
    5,784,451
    
    
    -
    
    
    5,784,451Unrealized
      gains on investment securities,
      net
      of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    171,822
    
    
    171,822Cash
      dividends, $.24 per share
    
    
    -
    
    
    -
    
    
    (661,328
    )
    
    -
    
    
    (661,328
    )Issuance
      of common stock upon exercise of stock options
    
    
    116,347
    
    
    1,303,836
    
    
    -
    
    
    -
    
    
    1,420,183Balance,
      December 31, 2002, as restated
    
    
    2,815,093
    
    
    13,720,900
    
    
    33,102,534
    
    
    677,127
    
    
    50,315,654Net
      earnings, as restated
    
    
    -
    
    
    -
    
    
    2,295,962
    
    
    -
    
    
    2,295,962Unrealized
      losses on investment securities,
      net
      of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    (513,317
    )
    
    (513,317
    )Cash
      dividends, $1.18 per share
    
    
    -
    
    
    -
    
    
    (3,378,814
    )
    
    -
    
    
    (3,378,814
    )Issuance
      of common stock upon exercise of stock options
    
    
    54,185
    
    
    455,680
    
    
    -
    
    
    -
    
    
    509,865Balance,
      December 31, 2003, as restated
    
    
    2,869,278
    
    
    14,176,580
    
    
    32,019,682
    
    
    163,810
    
    
    49,229,350Net
      earnings
    
    
    -
    
    
    -
    
    
    2,343,273
    
    
    -
    
    
    2,343,273Unrealized
      losses on investment securities,
      net
      of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    (279,773
    )
    
    (279,773
    )Cash
      dividends, $1.28 per share
    
    
    -
    
    
    -
    
    
    (3,701,878
    )
    
    -
    
    
    (3,701,878
    )Tax
      benefit from options exercised
    
    
    -
    
    
    50,449
    
    
    -
    
    
    -
    
    
    50,449Issuance
      of common stock upon exercise of stock options
    
    
    30,914
    
    
    333,459
    
    
    -
    
    
    -
    
    
    364,373Balance,
      December 31, 2004
    
    $
    2,900,192
    
    
    14,560,488
    
    
    30,661,077
    
    
    (115,963
    )
    
    48,005,794


See
accompanying notes to consolidated financial statements.





- 6
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Statements of Cash Flows





For the
Years Ended December 31, 2004, 2003 and 2002





2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Cash
      flows from operating activities:Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451Adjustments
      to reconcile net earnings to net cash provided by (used in) operating
      activities:Provision
      for loan losses
    
    
    482,500
    
    
    950,000
    
    
    1,307,000Provision
      for losses on other real estate owned
    
    
    30,000
    
    
    -
    
    
    -Depreciation
      expense
    
    
    921,222
    
    
    785,687
    
    
    616,025(Gain)
      loss on sale of premises and equipment
    
    
    (879,453
    )
    
    (2,087
    )
    
    8,513Net
      amortization (accretion) of premium/discount in investment
      securities
    
    
    494,191
    
    
    663,156
    
    
    38,307Securities
      gains, net
    
    
    (51,816
    )
    
    (211,304
    )
    
    (850,869
    )Gain
      on sale of other investments
    
    
    (198,641
    )
    
    (60,000
    )
    
    (50,000
    )Gain
      on sale of CB Financial Corp. common stock
    
    
    -
    
    
    -
    
    
    (277,182
    )Equity
      in loss of investee
    
    
    -
    
    
    -
    
    
    45,233Loss
      (gain) on sale of other real estate
    
    
    53,415
    
    
    8,467
    
    
    (2,481
    )Net
      gain on sale of loans
    
    
    (1,002,184
    )
    
    (808,147
    )
    
    (192,800
    )Proceeds
      from sales of loans
    
    
    39,701,998
    
    
    45,776,797
    
    
    -Net
      increase in loans held for sale
    
    
    (38,239,614
    )
    
    (46,490,550
    )
    
    -Amortization
      of intangible assets
    
    
    -
    
    
    -
    
    
    4,000Deferred
      income tax expense
    
    
    69,939
    
    
    (217,846
    )
    
    (155,276
    )Net
      cash used in discontinued operations
    
    
    -
    
    
    -
    
    
    (25,128,617
    )Changes
      in assets and liabilities:Decrease
      in accrued interest receivable
    
    
    189,530
    
    
    432,053
    
    
    438,028Decrease
      (increase) in other assets
    
    
    1,218,242
    
    
    (929,941
    )
    
    313,295Decrease
      in accrued interest payable
    
    
    (234,157
    )
    
    (587,280
    )
    
    (855,592
    )Increase
      (decrease) in other liabilities
    
    
    324,061
    
    
    110,896
    
    
    818Net
      cash provided by (used in) operating activities
    
    
    5,222,506
    
    
    1,715,863
    
    
    (18,957,147
    )Cash
      flows from investing activities:Investment
      securities available for sale:Proceeds
      from maturities
    
    
    12,101,837
    
    
    22,573,728
    
    
    12,932,887Proceeds
      from sales and calls
    
    
    12,179,914
    
    
    9,676,024
    
    
    12,918,166Purchases
    
    
    (22,484,240
    )
    
    (51,486,821
    )
    
    (32,091,287
    )Investment
      securities held to maturity:Proceeds
      from maturities
    
    
    607,000
    
    
    1,310,624
    
    
    2,565,680Proceeds
      from calls
    
    
    100,000
    
    
    732,700
    
    
    305,777Other
      investments:Proceeds
      from sales
    
    
    500,641
    
    
    1,434,200
    
    
    9,257,300Purchases
    
    
    (1,119,100
    )
    
    (637,100
    )
    
    (5,131,300
    )Proceeds
      from sale of CB Financial Corp. common stock
    
    
    -
    
    
    -
    
    
    3,308,879Loans:Proceeds
      from the sale of loans
    
    
    -
    
    
    -
    
    
    31,721,571Net
      (increase) decrease in loans
    
    
    (16,112,040
    )
    
    39,506,333
    
    
    (18,078,687
    )Purchases
      of premises and equipment
    
    
    (1,021,084
    )
    
    (3,524,355
    )
    
    (1,721,102
    )Proceeds
      from sales of premises and equipment
    
    
    952,442
    
    
    10,281
    
    
    331,433Dividends
      received from other investments
    
    
    -
    
    
    -
    
    
    62,042Net
      additions of other real estate
    
    
    (120,063
    )
    
    (76,756
    )
    
    (67,056
    )Proceeds
      from sale of other real estate
    
    
    1,691,589
    
    
    2,169,438
    
    
    4,450,021Proceeds
      from sale of subsidiary, including settlement of intercompany
      loan
    
    
    -
    
    
    -
    
    
    26,525,226Net
      cash provided by discontinued operations
    
    
    -
    
    
    -
    
    
    271,705Net
      cash provided by (used in) investing activities
    
    
    (12,723,104
    )
    
    21,688,296
    
    
    47,561,255


- 7
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Consolidated
Statements of Cash Flows, continued





For the
Years Ended December 31, 2004, 2003 and 2002





2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Cash
      flows from financing activities:Net
      increase (decrease) in deposits
    
    $
    13,357,253
    
    
    (56,926,472
    )
    
    166,154Net
      increase (decrease) in short-term borrowings
    
    
    207,581
    
    
    (353,210
    )
    
    662,219Repayment
      of other borrowings
    
    
    -
    
    
    -
    
    
    (5,773,000
    )Proceeds
      from FHLB advances
    
    
    11,000,000
    
    
    -
    
    
    -Repayment
      of FHLB advances
    
    
    (5,000,000
    )
    
    -
    
    
    -Net
      (decrease) increase in federal funds purchased and securities sold under
      repurchase agreements
    
    
    (7,549,145
    )
    
    4,156,662
    
    
    (22,223,552
    )Payment
      of cash dividends
    
    
    (3,701,878
    )
    
    (3,378,814
    )
    
    (661,328
    )Issuance
      of common stock upon exercise of stock options
    
    
    364,373
    
    
    509,865
    
    
    1,420,183Net
      cash provided by discontinued operations
    
    
    -
    
    
    -
    
    
    22,223,887Net
      cash provided by (used in) financing activities
    
    
    8,678,184
    
    
    (55,991,969
    )
    
    (4,185,437
    )Increase
      (decrease) in cash and cash equivalents
    
    
    1,177,586
    
    
    (32,587,810
    )
    
    24,418,671Cash
      and cash equivalents at beginning of the year
    
    
    8,381,184
    
    
    40,968,994
    
    
    16,550,323Cash
      and cash equivalents at end of year
    
    $
    9,558,770
    
    
    8,381,184
    
    
    40,968,994Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
    
    $
    7,025,662
    
    
    8,708,947
    
    
    12,896,679Income
      taxes
    
    $
    447,000
    
    
    650,000
    
    
    4,080,020Supplemental
      disclosures of noncash investing activities:Other
      real estate acquired through loan foreclosures
    
    $
    684,500
    
    
    1,727,535
    
    
    2,891,800Loans
      granted to facilitate the sale of other real estate
    
    $
    369,028
    
    
    188,733
    
    
    -
 
 See
accompanying notes to consolidated financial
statements.





- 8
-


HABERSHAM BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(1)**
    **Organization
      and Basis of Presentation**
 The consolidated financial statements of Habersham
      Bancorp and subsidiaries (the “Company”) include the financial statements
      of Habersham Bancorp and its wholly owned subsidiaries: Habersham Bank
      (the "Bank”) and The Advantage Group, Inc. The Bank owns 100% of Advantage
      Insurers, Inc. and, prior to December 2002, 100% of BancMortgage Financial
      Corp (BancMortgage) - (see note 4). All intercompany accounts and
      transactions have been eliminated in
consolidation.
  During
      1999, BancMortgage formed a wholly owned subsidiary, BancMortgage
      Reinsurance Ltd., a reinsurance company incorporated in Turks and Caicos.
      The subsidiary provided reinsurance to companies offering private mortgage
      insurance. During 2002, the Company sold BancMortgage to the then existing
      management of BancMortgage.
  The
      Company’s continuing primary business is the operation of banks in rural
      and suburban communities in Habersham, White, Cherokee, Warren, and
      Gwinnett counties in Georgia. The Company’s primary source of revenue is
      interest income on loans to businesses and individuals in its market
      area.
  ***(a)***
    ***Use
      of Estimates***
 The
      preparation of financial statements in conformity with accounting
      principles generally accepted in theUnited
      States of America requires management to make estimates and assumptions
      that affect the reportedamounts
      of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.
  Material
      estimates that are particularly susceptible to significant change in the
      near term relate to the determination of the allowance for loan losses and
      the valuation of real estate acquired in connection with foreclosures or
      in satisfaction of loans. In connection with the determination of the
      allowance for loan losses and the valuation of other real estate,
      management obtains independent appraisals for significant properties. A
      substantial portion of the Company’s loans is secured by real estate in
      Habersham, White, and Cherokee Counties and the metropolitan Atlanta area.
      Accordingly, the ultimate collectibility of a substantial portion of the
      Company’s loan portfolio is susceptible to changes in real estate market
      conditions in these areas.
  ***(b)***
    ***Interest
      Rate Risk***
 The Company’s assets and liabilities are generally
      monetary in nature and interest rates have an impact on the Company’s
      performance. The Company manages the effect of interest rates on its
      performance by striving to match maturities and interest sensitivity
      between loans, investment securities, deposits, and other borrowings.
      However, a significant change in interest rates could have an effect on
      the Company’s results of operations.
  ***(c)***
    ***Discontinued
      Operations***
 The consolidated financial statements for all years are
      presented to separately report results of discontinued operations from
      results of continuing operations. Disclosures included herein pertain to
      the Company’s continuing operations unless otherwise noted (see note
      4).
  ***(d)***
    ***Reclassifications***
 Certain
      amounts in 2003 and 2002 have been reclassified to conform to the 2004
      presentation.
 
 **(2)**
    **Summary
      of Significant Accounting Policies**
 The
      accounting and reporting policies of the Company conform with accounting
      principles generally accepted in the United States of America and with
      general practice within the banking industry. The following is a summary
      of the more significant accounting
policies:
 ******
 ***(a)***
    ***Cash
      and Cash Equivalents***
 Cash and cash equivalents include cash on hand, amounts
      due from banks, and Federal funds sold. Federal funds are generally sold
      for one-day periods.
 ************
 ***(b)***
    ***Investment
      Securities***
 The
      Company classifies its investment securities into one of two categories:
      available for sale or held to
maturity.


- 9
-




HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


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


***(b)***
    ***Investment
      Securities, continued***


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





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





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





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





***(c)***
    ***Other
      Investments***


At
      December 31, 2004 and 2003, other investments are primarily comprised of
      stock of the Federal Home Loan Bank of
Atlanta.





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





The
      Company’s investment in CB Financial Corp. was accounted for using the
      equity method. Under the equity method, the investment was initially
      recorded at cost. Subsequently, the carrying amount of the investment was
      increased to reflect the Company’s share of income of the investee and
      reduced to reflect the Company’s share of losses of the investee or
      dividends received from the investee. This investment was sold in 2002 and
      the Company recognized a gain of $277,182.





***(d)***
    ***Loans
      Held for Sale***


Mortgage
      loans held for sale are carried at the lower of cost or market determined
      on an aggregate basis. Market values are determined on the basis of
      relevant delivery prices in the secondary mortgage market. At December 31,
      2004 and 2003, there were no valuation allowances relating to mortgage
      loans held for sale.





***(e)***
    ***Loans***


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





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





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





- 10
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


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


***(e)***
    ***Loans,
      continued***


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





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





***(f)***
    ***Allowance
      for Loan Losses***


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





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





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





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





Management
      believes that the allowance for loan losses is adequate. While management
      uses available information to recognize losses on loans, future additions
      to the allowance may be necessary based on changes in economic conditions,
      the financial condition of borrowers and other factors. In addition,
      various regulatory agencies, as an integral part of their examination
      process, periodically review the Company’s allowance for loan losses. Such
      agencies may require the Company to recognize additions to the allowance
      based on their judgments about information available to them at the time
      of their examination.





- 11
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


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


***(g)***
    ***Other
      Real Estate***


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





***(h)***
    ***Premises
      and Equipment***


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





***(i)***
    ***Goodwill
      and Other Intangible Assets***


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





***(j)***
    ***Income
      Taxes***


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





***(k)***
    ***Earnings
      Per Share***


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





***(l)***
    ***Comprehensive
      Income***


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





***(m)***
    ***Segment
      Information***


SFAS
      No. 131 requires that certain disclosures be made by public business
      enterprises to report information about operating segments in annual
      financial statements and requires those enterprises to report selected
      information about operating segments in interim financial reports issued
      to shareholders. It also establishes standards for related disclosures
      about products and services, geographic areas, and major customers. Prior
      to the sale of BancMortgage, the Company’s principal segments were banking
      and mortgage banking. Subsequently, the Company operates primarily as one
      segment.





- 12
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements




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


***(n)***
    ***Stock-Based
      Compensation***


In
      December 2002, the FASB issued SFAS No. 148,*Accounting
      for Stock-Based Compensation - Transition and Disclosure an amendment of
      FASB Statement No. 123*.
      SFAS No. 148 amends SFAS No. 123,*Accounting
      for Stock-Based Compensation*,
      to provide alternative methods of transition for an entity that
      voluntarily changes to the fair value based method of accounting for
      stock-based employee compensation. It also amends the disclosure
      provisions of SFAS No. 123 to require prominent disclosure about the
      effects on reported net earnings of an entity’s accounting policy
      decisions with respect to stock-based employee compensation. Finally, SFAS
      No. 148 also amends Accounting Principles Board (APB) Opinion No. 28,*Interim
      Financial Reporting*,
      to require disclosure about those effects in the interim financial
      information. The Bank adopted the provisions of SFAS No. 148 effective
      December 31, 2002.





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





Had
      compensation cost for the Company’s stock option plans been determined
      based on the fair value at the grant dates for awards under those plans
      consistent with the method included in SFAS No. 123, the Company’s net
      earnings and earnings per share for 2004, 2003 and 2002 would have been
      reduced to the pro forma amounts indicated
below:





2004
    
    2003
    
    2002Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451Deduct:Total
      stock-based compensation expense determined under fair value based method,
      net of related tax effect
    
    
    (757,410
    )
    
    (686,291
    )
    
    (981,163
    )Pro
      forma net earnings
    
    $
    1,585,863
    
    
    1,609,671
    
    
    4,803,288Net
      earnings per common share - basic:As
      reported
    
    $
    .81
    
    
    .81
    
    
    2.10Proforma
    
    $
    .55
    
    
    .57
    
    
    1.75Net
      earnings per common share - diluted:As
      reported
    
    $
    .80
    
    
    .79
    
    
    2.05Proforma
    
    $
    .54
    
    
    .56
    
    
    1.71





***(o)***
    ***Recent
      Accounting Pronouncements***


**Meaning
      of Other-Than-Temporary-Impairment**


In
      March 2004, The Emerging Issues Task Force (“EITF”) issued EITF 03-1,*The
      Meaning of Other-Than-Temporary Impairment and its Application to Certain
      Investments (*“EITF
      03-1”). EITF 03-1 provides guidance for evaluating whether an investment
      is other-than-temporarily impaired. The disclosure guidance was effective
      for other-than-temporary impairment evaluations made in reporting periods
      beginning after June 15, 2004, whereas the recognition and measurement
      guidance has been deferred. The disclosures required by EITF 03-1 are
      included in Note 6 to the consolidated financial statements. The Bank did
      not recognize an impairment loss on any investment in 2004 or
      2003.





**Share-Based
      Payment**


In
      December 2004, the FASB revised SFAS No. 123 (“SFAS No. 123 (R)”). SFAS
      No. 123 (R),*Share-Based
      Payment*,
      requires all share-based payments to employees and directors, including
      grants of employee stock options, to be recognized in the financial
      statements based on their fair values. Pro forma disclosure is no longer
      an alternative to financial statement recognition. For the Company, SFAS
      No. 123 (R) is effective for periods beginning after June 15, 2005. The
      Company is still evaluating the transition provisions allowed by SFAS No.
      123 (R) and expects to adopt it in the third quarter of 2005. The
      financial statement impact is not expected to be materially different from
      that shown in the existing pro forma disclosure required under the
      original SFAS No. 123.





- 13
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


**(3)**
    **Restatement
      of the Consolidated Financial
Statements**
 In
      April 2004, the Company determined that it had incorrectly recorded
      compensation expense in years prior to 2004 (beginning in 1998) relating
      to post-retirement benefit obligations included in deferred compensation
      agreements the Bank has with certain members of management and its board
      of directors. The estimates of expense previously recorded by the Company
      did not include amounts relating to the post-retirement benefit
      obligations. The impact of this error, net of tax, was $218,000, $115,000,
      $28,000, $21,000, $46,000 and $22,000 in 1998, 1999, 2000, 2001, 2002 and
      2003 respectively. The net unrecorded liability at December 31, 2003 was
      $714,000 ($450,000, net of tax effects) and is not considered material to
      the Company’s consolidated financial statements as of December 31, 2003.
      However, the Bank has been required to reflect the correction as a prior
      period adjustment in its regulatory reports and, accordingly, the
      accompanying consolidated balance sheet as of December 31, 2003 has been
      restated to conform the presentation with the regulatory filing. The
      Company recorded $382,000 of this amount as an adjustment to opening
      stockholders’ equity at January 1, 2002 and also restated its 2002 and
      2003 statements of earnings to reduce net earnings by the amounts of
      $46,000 and $22,000, respectively.
  The
      following presents the amounts originally reported as of December 31, 2003
      that are affected by the restatement compared to the amounts that are
      reported in the accompanying financial
statements.




As
      Originally
      Reported
    
    As
      Restated(Amounts
      in thousands)Other
      assets
    
    $
    7,088
    
    
    7,352Total
      assets
    
    
    374,714
    
    
    374,978Other
      liabilities
    
    
    599
    
    
    1,313Total
      liabilities
    
    
    325,034
    
    
    325,748Retained
      earnings
    
    
    32,469
    
    
    32,019Total
      shareholders’ equity
    
    
    49,679
    
    
    49,229Total
      liabilities and shareholders’ equity
    
    
    374,714
    
    
    374,978




The following presents the amounts
      originally reported for the years ended December 31, 2003 and 2002 (after
      reclassifications to conform to the 2004 presentation) that are affected
      by the restatement compared to the amounts that are reported in the
      accompanying financial statements.




As
      OriginallyReported
    
    AsRestated2003
    
    2002
    
    2003
    
    2002(Amounts
      in thousands, except per share data)Other
      noninterest expense
    
    $
    4,432
    
    
    4,193
    
    
    4,466
    
    
    4,263Total
      noninterest expense
    
    
    13,966
    
    
    12,787
    
    
    14,000
    
    
    12,857Earnings
      from continuing operations before income taxes
    
    
    3,045
    
    
    4,622
    
    
    3,011
    
    
    4,552Income
      tax expense
    
    
    727
    
    
    1,129
    
    
    715
    
    
    1,105Net
      earnings
    
    
    2,318
    
    
    5,830
    
    
    2,296
    
    
    5,784Earnings
      from continuing operations:Basic
    
    
    .82
    
    
    1.27
    
    
    .81
    
    
    1.25Diluted
    
    
    .80
    
    
    1.24
    
    
    .79
    
    
    1.22Net
      earnings:Basic
    
    
    .82
    
    
    2.12
    
    
    .81
    
    
    2.10Diluted
    
    
    .80
    
    
    2.07
    
    
    .79
    
    
    2.05




- 14
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


**(4)**
    **Discontinued
      Operations**
 During
      the year ended December 31, 2002, the Company sold its mortgage banking
      subsidiary, BancMortgage Financial Corp., to the then existing management
      of BancMortgage, resulting in a loss of $110,064. The Company’s
      consolidated financial statements have been reclassified to reflect the
      operations of BancMortgage as discontinued for the year ended December 31,
      2002. Financial information for the discontinued operations including the
      loss on sale is as follows:
 ****





Net
      interest income
    
    $
    4,344,227Provision
      for loan losses
    
    
    (360,619
    )Gain
      on sale of loans
    
    
    24,901,895Other
      income
    
    
    4,039,416Salaries
      and employee benefits
    
    
    (24,008,524
    )Other
      expense
    
    
    (4,933,490
    )Income
      tax expense
    
    
    (1,645,464
    )Net
      earnings
    
    $
    2,337,441


**(5)**
    **Reserve
      Requirements**
 At
      December 31, 2004 and 2003, the Federal Reserve Bank required that the
      Bank maintain average reserve balances of $572,000 and $576,000,
      respectively.


**(6)**
    ****Investment
      Securities Available for
    Sale****
 
 Amortized cost, estimated fair values, and
      gross unrealized gains and losses of investment securities available for
      sale are as follows:





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





December
      31, 2003
    
    Amortized
      Cost
    
    Gross
      Unrealized
      Gains
    
    Gross
      Unrealized
      Losses
    
    Estimated
      Fair
      ValueU.S.
      treasuries
    
    $
    14,770,436
    
    
    54,925
    
    
    158,140
    
    
    14,667,221U.S.
      Government agencies
    
    
    45,399,109
    
    
    292,602
    
    
    419,051
    
    
    45,272,660State
      and political subdivisions
    
    
    11,644,889
    
    
    591,844
    
    
    41,851
    
    
    12,194,882Equity
      securities
    
    
    750,000
    
    
    -
    
    
    72,132
    
    
    677,868Total
    
    $
    72,564,434
    
    
    939,371
    
    
    691,174
    
    
    72,812,631


Proceeds from sales and calls of available
      for sale securities during 2004, 2003 and 2002 were $12,179,914,
      $9,676,024 and $12,918,166,
respectively.


Gross
      gains of $77,669, $215,014 and $876,548 were recognized on those sales for
      2004, 2003 and 2002, respectively. Gross losses of $25,853, $11,333 and
      $25,679 were recognized on those sales for 2004, 2003 and 2002,
      respectively.




- 15
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


****


**(6)**
    **Investment
      Securities Available for Sale,
continued**
 The
      following investments available for sale had unrealized losses at December
      31, 2004 and 2003 for which other than temporary impairment has not been
      recognized:


2004
    
    2003Estimated
      Fair
      Value
    
    Unrealized
      Losses
    
    Estimated
      Fair
      Value
    
    Unrealized
      LossesUnrealized
      loss for less than 12 months:U.S.
      treasuries
    
    $
    9,277,959
    
    
    69,087
    
    
    8,650,151
    
    
    158,140U.S.
      government agencies
    
    
    17,011,471
    
    
    229,602
    
    
    27,055,607
    
    
    417,297State
      and political subdivisions
    
    
    1,882,101
    
    
    17,473
    
    
    1,889,711
    
    
    41,85128,171,531
    
    
    316,162
    
    
    37,595,469
    
    
    617,288Unrealized
      loss for greater than 12 months:U.S.
      treasuries
    
    
    3,986,926
    
    
    88,864
    
    
    -
    
    
    -U.S.
      government agencies
    
    
    11,035,431
    
    
    218,267
    
    
    368,105
    
    
    1,754State
      and political subdivisions
    
    
    720,944
    
    
    12,699
    
    
    -
    
    
    -Equitysecurities
    
    
    668,830
    
    
    81,170
    
    
    677,868
    
    
    72,13216,412,131
    
    
    401,000
    
    
    1,045,973
    
    
    73,886$
    44,583,662
    
    
    717,162
    
    
    38,641,442
    
    
    691,174




At
      December 31, 2004, there were 18 U.S. Treasury, 29 U.S. government agency,
      and 8 state and political subdivisions securities with an unrealized loss
      for less than 12 months and 7 U.S. Treasury, 20 U.S. government agency,
      and 3 state and political subdivisions securities and one equity
      investment with an unrealized loss for more than 12 months. The total fair
      value of the securities with an unrealized loss at December 31, 2004
      represented 98.58% of their amortized cost; therefore, the impairment is
      not considered severe. While the duration is dependent on the market, 33%
      of the duration of theexisting
      unrealized loss could be shortened by the issuing agency calling the
      securities.


The
      amortized cost and estimated fair values of investment securities
      available for sale, exclusive of equity investments, at December 31, 2004,
      by contractual maturity, are shown below. Expected maturities will differ
      from contractual maturities because borrowers may have the right to call
      or prepay obligations with or without call or prepayment penalties.
      Callable securities and mortgage-backed securities are included in the
      year of their contractual maturity
date.


Amortized
      Cost
    
    Estimated
      Fair
      ValueDue
      in one year or less
    
    $
    100,000
    
    
    100,084Due
      after one year through five years
    
    
    3,997,688
    
    
    4,042,210Due
      after five years through ten years
    
    
    17,346,221
    
    
    17,363,990Due
      after 10 years
    
    
    48,172,311
    
    
    48,138,371Total
    
    $
    69,616,220
    
    
    69,644,655





Investment
      securities available for sale with carrying values of approximately
      $49,549,000 and $44,527,000 were pledged as collateral at December 31,
      2004 and 2003, respectively, for Federal Home Loan Bank advances, public
      deposits, and other deposits, as required by
law.


- 16
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements


**(7)**
    **Investment
      Securities Held to Maturity**
 Amortized cost, estimated fair values, and
      gross unrealized gains and losses of investment securities held to
      maturity are as follows:


December
      31, 2004
    
    Amortized
      Cost
    
    Gross
      Unrealized
      Gains
    
    Gross
      Unrealized
      Losses
    
    Estimated
      Fair
      ValueU.S.
      Government agencies
    
    $
    144,900
    
    
    7,764
    
    
    -
    
    
    152,664State
      and political subdivisions
    
    
    3,966,141
    
    
    251,743
    
    
    -
    
    
    4,217,884Total
    
    $
    4,111,041
    
    
    259,507
    
    
    -
    
    
    4,370,548December
      31, 2003
    
    
    Amortized
      Cost
    
    
    Gross
      Unrealized
      Gains
    
    
    Gross
      Unrealized
      Losses
    
    
    Estimated
      Fair
      ValueU.S.
      Government agencies
    
    $
    193,008
    
    
    12,985
    
    
    -
    
    
    205,993State
      and political subdivisions
    
    
    4,666,705
    
    
    304,841
    
    
    -
    
    
    4,971,546Total
    
    $
    4,859,713
    
    
    317,826
    
    
    -
    
    
    5,177,539


Proceeds
      from calls of investment securities held to maturity during 2004, 2003 and
      2002 were $100,000, $732,700 and $305,777, respectively. Gross gains of
      $7,623 were recognized on calls for 2003. There were no gains or losses
      for 2004.


The
      amortized cost and estimated fair values of securities held to maturity at
      December 31, 2004, by contractual maturity, are shown below. Expected
      maturities will differ from contractual maturities because borrowers may
      have the right to call or prepay obligations with or without call or
      prepayment penalties. Callable securities and mortgage-backed securities
      are included in the year of their contractual maturity
      date.


Amortized
      Cost
    
    Estimated
      Fair
      ValueDue
      in one year or less
    
    $
    375,294
    
    
    377,577Due
      after one year through five years
    
    
    1,363,899
    
    
    1,452,543Due
      after five years through ten years
    
    
    1,132,754
    
    
    1,203,928Due
      after 10 years
    
    
    1,239,094
    
    
    1,336,500Total
    
    $
    4,111,041
    
    
    4,370,548


Investment
      securities held to maturity with carrying values of approximately
      $2,821,000 and $3,453,000 were pledged as collateral at December 31,
      2004 and 2003, respectively, for public deposits and other deposits, as
      required by law.


- 17
-


HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements


**(8)**
    **Loans**





Loans
      at December 31, 2004 and 2003 are summarized as follows:
    
    2004
    
    2003Real
      estate:Construction
    
    $
    79,673,838
    
    
    51,053,828Other
    
    
    170,533,184
    
    
    183,429,787Commercial,
      financial and agricultural
    
    
    16,790,560
    
    
    14,771,944Consumer
      installment
    
    
    13,931,081
    
    
    16,355,605280,928,663
    
    
    265,611,164Less:Unamortized
      loan origination fees, net
    
    
    138,250
    
    
    117,089Unearned
      credit life premiums
    
    
    16,492
    
    
    29,459Unamortized
      discount on SBA loans sold
    
    
    2,056
    
    
    3,684Allowance
      for loan losses
    
    
    3,634,643
    
    
    3,643,102Total
    
    $
    277,137,222
    
    
    261,817,830





****
    Changes
      in the allowance for loan losses are as
follows:


2004
    
    2003
    
    2002Balance
      January 1
    
    $
    3,643,102
    
    
    3,533,309
    
    
    3,601,877Provision
      for loan losses
    
    
    482,500
    
    
    950,000
    
    
    1,307,000Loans
      charged off
    
    
    (812,192
    )
    
    (1,148,275
    )
    
    (1,547,722
    )Recoveries
    
    
    321,233
    
    
    308,068
    
    
    172,154Balance,
      December 31
    
    $
    3,634,643
    
    
    3,643,102
    
    
    3,533,309


****
    The
      Company considers a loan to be impaired when it is probable that it will
      be unable to collect all amounts due according to the original terms of
      the loan agreement. The Company measures impairment of a loan on a
      loan-by-loan basis for commercial real estate, commercial business, and
      agricultural loans. Residential mortgages, installment, and other consumer
      loans are considered smaller balance, homogenous loans which are not
      evaluated individually for impairment. Amounts of impaired loans that are
      not probable of collection are charged off immediately. Impaired loans and
      related amounts included in the allowance for loan losses at December 31,
      2004 and 2003 are as follows:


2004
    
    2003Balance
    
    Allowance
      Amount
    
    Balance
    
    Allowance
      AmountImpaired
      loans with a related allowance
    
    $
    3,077,486
    
    
    263,100
    
    
    1,823,990
    
    
    345,450Impaired
      loans without a related allowance
    
    $
    174,978
    
    
    -
    
    
    475,806
    
    
    -


****
    The
      average amount of impaired loans during 2004, 2003 and 2002 was
      $1,569,496, $2,446,028 and $3,204,728, respectively. The interest income
      recognized on such loans was $169,648 in 2004, $113,450 in 2003 and
      $91,914 in 2002, which approximated the amount of interest received on the
      cash basis.


****
    As
      of December 31, 2004 and 2003, Habersham Bank’s loans to customers for
      agribusiness purposes in the poultry industry were approximately $5.9
      million and $5.7 million, respectively. Habersham Bank held a
      concentration in commercial loans for the travel accommodation industry
      which totaled approximately $22 million and $19.7 million at December 31,
      2004 and 2003, respectively.


- 18
-





HABERSHAM
BANCORP AND SUBSIDIARIES





Notes to
Consolidated Financial Statements





**(8)**
    **Loans,
      continued**


The
      Company is a party to financial instruments with off-balance-sheet risk in
      the normal course of its lending activities to meet the financing needs of
      its customers. These financial instruments include commitments to extend
      credit and standby letters of credit. The Company’s exposure to credit
      loss in the event of nonperformance by the other party to the financial
      instrument for commitments to extend credit and standby letters of credit
      is represented by the contractual amount of those instruments. The Company
      uses the same credit policies in making these commitments as it does for
      on-balance-sheet instruments and evaluates each customer’s
      creditworthiness on a case-by-case basis. At December 31, 2004 and 2003,
      the Company had outstanding loan commitments approximating $57,125,000 and
      $45,900,000, respectively, and standby letters of credit approximating
      $8,522,000 and $3,852,000, respectively. The amount of collateral
      obtained, if deemed necessary, for these financial instruments by the
      Company, upon extension of credit, is based on management’s credit
      evaluation of the customer. Collateral held, if any, varies but may
      include inventory, equipment, real estate, or other property. The
      accounting loss the Company would incur if any party to the financial
      instrument failed completely to perform according to the terms of the
      contract and the collateral proved to be of no value is equal to the face
      amount of the financial instrument.





**(9)**
    **Premises
      and Equipment**


Premises
      and equipment are summarized as
follows:




2004
    
    2003Land
    
    $
    1,393,677
    
    
    1,448,000Buildings
    
    
    9,292,848
    
    
    8,915,400Furniture
      and equipment
    
    
    6,370,455
    
    
    6,248,47017,056,980
    
    
    16,611,870Less:
      Accumulated depreciation
    
    
    7,355,930
    
    
    6,937,693Premises
      and equipment, net
    
    $
    9,701,050
    
    
    9,674,177


****
    The
      Bank has entered into operating lease agreements for equipment.
      Approximate minimum rentals under such leases are as
      follows:




2005
    
    $
    292,5452006
    
    
    284,3292007
    
    
    259,5972008
    
    
    240,4812009
      and thereafter
    
    
    191,549$
    1,268,501


****
    Rental
      expense was $220,071 in 2004, $169,350 in 2003 and $131,196 in
      2002.


**(10)**
    
    **Deposits
      and
Borrowings**


****
    At
      December 31, 2004, the scheduled maturities of certificates of deposit are
      as
follows:


2005
    
    $
    117,387,4302006
    
    
    26,740,5502007
    
    
    14,234,1792008
    
    
    12,063,7892009
      and thereafter
    
    
    1,316,464Total
    
    $
    171,742,412





****
    Short-term
      borrowings of $786,036 and $578,455 at December 31, 2004 and 2003,
      respectively, consists of a U.S. Treasury, tax and loan deposit
      note.


- 19
-


HABERSHAM
BANCORP AND SUBSIDIARIES


Notes to
Consolidated Financial Statements
 
 **(11)**
    ****
    **Federal
      Funds Purchased and Securities Sold Under Repurchase
      Agreements**
 Certain
      information related to the Company’s securities sold under repurchase
      agreements is summarized as follows:
 
 2004
    
    2003Balance
      at year-end
    
    $
    4,287,632
    
    
    8,194,776Maximum
      outstanding during the year
    
    
    14,058,135
    
    
    27,642,492Average
      outstanding during the year
    
    
    6,629,749
    
    
    8,368,577Weighted
      average interest rate during the year
    
    
    .61
    %
    
    .72
    %Weighted
      average interest rate at end of year
    
    
    .60
    %
    
    .60
    %
 
 ****
    At
      December 31, 2004 and 2003, the Company had available repurchase agreement
      line of credit commitments with a regional bank totaling $10,085,000 and
      $22,950,000, respectively. No amounts were outstanding under that
      commitment at December 31, 2004 and 2003.****All
      securities sold under repurchase agreements are held by independent
      trustees. The Company also had available repurchase agreement line of
      credit commitments with another regional bank totaling $1,667,000 and
      $1,901,000 at December 31, 2004 and 2003, respectively. No amounts were
      outstanding under that commitment at December 31, 2004 and
      2003.****Securities sold under repurchase agreements at December 31, 2004 and 2003
      are collateralized by investment securities with aggregate carrying values
      of approximately $14,069,000 and $11,294,000,
      respectively.


Federal
      funds purchased at December 31, 2004 and 2003 amounted to $547,000 and
      $4,189,000, respectively.
 **(12)**
    
    **FHLB
      Advances**
 At
      December 31, 2004, the Company had available line of credit commitments
      with the Federal Home Loan Bank (FHLB) totaling $230,833,000 of which
      $36,000,000 was advanced and $194,833,000 was
available.
 
  Advances
      outstanding at December 31, 2004 and 2003 consists
of:
  ***Advance
      date***
    
    ***Amount***
    
    ***Interest
      Rate***
    
    ***Maturity
      Date***
    
    ***Rate***
    
    ***Call
      Feature***May
      26, 2000
    
    $
    10,000,000
    
    
    6.72
    %
    
    5-26-2005
    
    
    Fixed
    
    
    Callable
      each yearMarch
      30, 2000
    
    $
    10,000,000
    
    
    6.02
    %
    
    3-30-2010
    
    
    Fixed
    
    
    Callable
      each yearJanuary
      12, 2001
    
    $
    10,000,000
    
    
    4.93
    %
    
    1-12-2011
    
    
    Fixed
    
    
    Callable
      each yearMay
      21, 2004
    
    $
    3,000,000
    
    
    2.57
    %
    
    5-21-2009
    
    
    Floating
    
    
    No
      call provisionAugust
      26, 2004
    
    $
    3,000,000
    
    
    2.61
    %
    
    8-26-2009
    
    
    Floating
    
    
    No
      call provision
  At
      December 31, 2004, the Company has pledged against FHLB advances, certain
      investment securities, all stock of the FHLB, and certain qualifying first
      mortgage loans with an outstanding balance of approximately
      $23,965,000.
 **(13)**
    ****
    **Deriviative
      Instruments and Hedging Activities**
 The fair value of derivatives is
      recognized in the financial statements as assets or liabilities. The
      accounting for the changes in the fair value of a derivative depends on
      the intended use of the derivative instrument at inception. The change in
      fair value of instruments used as fair value hedges is accounted for in
      the income of the period simultaneous with accounting for the fair value
      change of the item being hedged. The change in fair value of the effective
      portion of cash flow hedges is accounted for in comprehensive income
      rather than income. The change in fair value of derivative instruments
      that do not qualify as hedges, are accounted for in the income of the
      period of the change.
  The
      Company maintains an overall interest rate risk-management strategy that
      incorporates the limited use of derivative instruments to minimize
      fluctuations in earnings that are caused by interest rate volatility. The
      goal is to manage interest rate sensitivity by modifying the repricing or
      maturity characteristics of certain balance sheet assets and liabilities
      so that the net interest margin is not, on a material basis, adversely
      affected by movements in interest rates. As a result of interest rate
      fluctuations, hedged assets and liabilities will appreciate or depreciate
      in fair value. The effect of this unrealized appreciation or depreciation
      will generally be offset by earnings or loss on the derivative instruments
      that are linked to the hedged assets and liabilities. The Company views
      this strategy as a prudent
      management of interest rate sensitivity, such that earnings are not
      exposed to undue risk presented by changes in interest
      rates.
 - 20
-
 HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(13)**
    **Deriviative
      Instruments and Hedging Activities,
continued**
 Derivative
      instruments that are used as part of the Company’s interest-rate risk
      management strategy include interest rate swap contracts. Interest rate
      swaps generally involve the exchange of fixed- and variable-rate interest
      payments between two parties, based on a common notional principal amount
      and maturity date.
  By
      using derivative instruments, the Company is exposed to credit and market
      risk. If the counterparty fails to perform, credit risk is equal to the
      extent of the fair-value gain in a derivative. When the fair value of a
      derivative contract is positive, this generally indicates that the
      counterparty owes the Company, and, therefore, creates a repayment risk
      for the Company. When the fair value of a derivative contract is negative,
      the Company owes the counterparty and, therefore, it has no repayment
      risk. The Company minimizes the credit risk in derivative instruments by
      entering into transactions with high-quality counterparties that are
      reviewed periodically.
 The Company’s derivative activities are
      monitored by its asset/liability management function as part of that
      group’s oversight of asset/liability and treasury functions. This group is
      responsible for implementing various hedging strategies that are developed
      through its analysis of data from financial simulation models and other
      internal and industry sources. The resulting hedging strategies are then
      incorporated into the overall interest-rate risk management.
 During
      2004, the Bank entered into two interest rate swap agreements with a
      regional bank to partially offset the interest rate risk associated with
      variable rate Federal Home Loan Bank (“FHLB”) borrowings. Each FHLB loan
      amount is $3 million with quarterly adjustable rates set at 23 basis
      points above the three month LIBOR. The first swap contract was entered
      into during the second quarter of 2004 and is for a 4.5% fixed rate on a
      $3 million notional amount. The swap matures on May 21, 2009. The second
      swap contract was entered into during the third quarter of 2004 and is for
      a 4.05% fixed rate on a $3 million notional amount. The swap matures on
      August 26, 2009.
 At December 31, 2004, 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, 2004, the Bank
      recorded a liability for approximately $123,000 to reflect the fair value
      of the swaps. No hedge ineffectiveness from these cash flow hedges was
      recognized in the consolidated statement of earnings.
 **(14)**
    **Income
      Taxes**
 Income
      tax expense (benefit) relating to continuing operations for the years
      ended December 31, 2004, 2003 and 2002 are as
  follows:
 
 2004
    
    2003
    
    2002Current:Federal
    
    $
    709,820
    
    
    905,978
    
    
    1,159,108State
    
    
    -
    
    
    27,314
    
    
    101,439Total
      current
    
    
    709,820
    
    
    933,292
    
    
    1,260,547Deferred:Federal
    
    
    46,183
    
    
    (186,871
    )
    
    39,712State
    
    
    23,756
    
    
    (30,975
    )
    
    (194,988
    )Total
      deferred
    
    
    69,939
    
    
    (217,846
    )
    
    (155,276
    )Total
    
    $
    779,759
    
    
    715,446
    
    
    1,105,271
 
 The
      provision for income taxes is less than that computed by applying the
      Federal statutory rate of 34% to earnings before income taxes as indicated
      by the following:
 2004
    
    2003
    
    2002Income
      tax on earnings before income taxes at statutory rate
    
    $
    1,061,831
    
    
    1,023,879
    
    
    1,547,776Differences
      resulting from:Tax-exempt
      income
    
    
    (260,947
    )
    
    (265,337
    )
    
    (300,556
    )Earnings
      on cash surrender value of life insurance
    
    
    (56,903
    )
    
    (60,294
    )
    
    (60,503
    )State
      income tax, net of Federal tax effect
    
    
    15,679
    
    
    (2,416
    )
    
    (61,742
    )Other
    
    
    20,099
    
    
    19,614
    
    
    (19,704
    )$
    779,759
    
    
    715,446
    
    
    1,105,271
  - 21
-
  HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(14)**
    **Income
      Taxes, continued**
 At
      December 31, 2004 and 2003, the significant components of the Company’s
      net deferred tax assets and liabilities are as
follows:
 
 2004
    
    2003Deferred
      tax assets:Allowance
      for loan losses
    
    $
    1,380,089
    
    
    1,216,879Other
      real estate
    
    
    51,065
    
    
    163,578Deferred
      compensation
    
    
    391,773
    
    
    425,877Furniture,
      fixtures and equipment due to difference in depreciation
      methods
    
    
    76,417
    
    
    77,345Unearned
      credit life premiums
    
    
    6,261
    
    
    11,116Unrealized
      loss on investment securities available for sale
    
    
    17,930
    
    
    -Unrealized
      loss on derivative
    
    
    41,808
    
    
    -Other
    
    
    12,363
    
    
    1,7021,977,706
    
    
    1,896,497Deferred
      tax liabilities:Unrealized
      gain on investments securities available for sale
    
    
    -
    
    
    (84,387
    )Deferred
      loan fees
    
    
    (52,480
    )
    
    (230
    )Prepaid
      expenses
    
    
    (164,758
    )
    
    (125,598
    )(217,238
    )
    
    (210,215
    )Net
      deferred tax asset
    
    $
    1,760,468
    
    
    1,686,282
 
 The
      net deferred tax asset is included in other assets in the consolidated
      balance sheets.
 **(15)**
    **Stockholders’
      Equity**
 The Company and the Bank are subject to
      various regulatory capital requirements administered by the Federal
      banking agencies. Failure to meet minimum capital requirements can
      initiate certain mandatory and possibly additional discretionary actions
      by regulators that, if undertaken, could have a direct material effect on
      the Company’s consolidated financial statements. Under capital adequacy
      guidelines, the Company and the Bank must meet specific capital guidelines
      that involve quantitative measures of the Company’s and the Bank’s assets,
      liabilities, and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s and the Bank’s capital
      amounts and the Bank’s classifications under the regulatory framework for
      prompt corrective action are also subject to qualitative judgments by the
      regulators about components, risk weightings, and other
      factors.
  Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios (set forth in
      the table below) of total and Tier I capital (as defined in the
      regulations) to risk-weighted assets (as defined), and of Tier I capital
      (as defined) to average assets (as defined). Management believes, as of
      December 31, 2004 and 2003, that the Company and the Bank meet all capital
      adequacy requirements to which they are
subject.
  As of December 31, 2004, the most recent
      notifications from bank regulators categorized the Bank as
      well-capitalized under the regulatory framework for prompt corrective
      action. To be categorized as well capitalized, the Bank must maintain
      minimum total risk-based, Tier I risk-based, and Tier I leverage
      ratios as set forth in the table. There are no conditions or events since
      that notification that management believes have changed the Bank’s capital
      categories.
  - 22
-
  HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(15)**
    **Stockholders’
      Equity, continued**
 The
      Company’s and the Bank’s actual capital amounts and ratios as of December
      31, 2004 and 2003 are as follows (dollars in
thousands):
 
 Actual
    
    For
      Capital
      Adequacy
      Purposes
    
    To
      Be Well
      Capitalized
      Under
      Prompt
      Corrective
      Action
      ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio**As
      of December 31, 2004:**Total
      Capital (to Risk- Weighted Assets):Company
    
    $
    49,214
    
    
    15.91
    %
    
    24,749
    
    
    8.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    46,840
    
    
    15.24
    %
    
    24,580
    
    
    8.00
    %
    
    30,725
    
    
    10.00
    %Tier
      I Capital (to Risk-Weighted Assets):Company
    
    $
    45,579
    
    
    14.73
    %
    
    12,374
    
    
    4.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    43,205
    
    
    14.06
    %
    
    12,290
    
    
    4.00
    %
    
    18,435
    
    
    6.00
    %Tier
      I Capital (to Average Assets):Company
    
    $
    45,579
    
    
    11.62
    %
    
    15,689
    
    
    4.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    43,205
    
    
    11.08
    %
    
    15,591
    
    
    4.00
    %
    
    19,488
    
    
    5.00
    %**As
      of December 31, 2003:**Total
      Capital (to Risk- Weighted Assets):Company
    
    $
    50,093
    
    
    17.10
    %
    
    23,433
    
    
    8.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    45,916
    
    
    15.79
    %
    
    23,270
    
    
    8.00
    %
    
    29,087
    
    
    10.00
    %Tier
      I Capital (to Risk-Weighted Assets):Company
    
    $
    46,504
    
    
    15.88
    %
    
    11,717
    
    
    4.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    42,327
    
    
    14.55
    %
    
    11,635
    
    
    4.00
    %
    
    17,452
    
    
    6.00
    %Tier
      I Capital (to Average Assets):Company
    
    $
    46,504
    
    
    12.22
    %
    
    15,224
    
    
    4.00
    %
    
    N/A
    
    
    N/ABank
    
    $
    42,327
    
    
    11.23
    %
    
    15,071
    
    
    4.00
    %
    
    18,838
    
    
    5.00
    %
 The Department of Banking and Finance
      requires the prior approval for a bank to pay dividends in excess of 50%
      of the preceding year’s earnings. Based on this limitation, the amount of
      cash dividends available from the Bank for payment in 2005 is
      approximately $1,572,000, subject to maintenance of the minimum capital
      requirements. As a result of this restriction, at December 31, 2004,
      approximately $44,060,000 of the parent company’s investment in the Bank
      is restricted as to dividend payments from the Bank to the parent
      company.
 **(16)**
    **Employee
      Benefit and Stock Option Plans**
 The
      Company has a contributory profit sharing plan under Internal Revenue Code
      Section 401(k) - (the 401(k) Plan). The 401(k) Plan covers substantially
      all employees. Employees may contribute up to 15% of their annual salaries
      not to exceed the amount allowed by the IRS. At its discretion, the
      Company may make matching contributions in an amount not to exceed 100% of
      each participant’s first 3% of compensation contributed. The Company’s
      contributions to the plan totaled $145,927 in 2004, $118,772 in 2003 and
      $171,093 in 2002.
  During
      1998, the Bank’s board of directors approved the Director’s Retirement
      Plan (the Plan), a noncontributory retirement plan. Amounts earned on the
      life insurance policies purchased by the Bank over the rate, as defined in
      the Plan, to be retained for the benefit of the Bank are to be deferred
      and paid to the directors upon retirement. As of December 31, 2004 and
      2003, the cash surrender values of the life insurance policies totaled
      $4,691,962 and $4,524,601, respectively, and is included in other assets
      in the balance sheet.
  The
      Company has an Incentive Stock Option Plan that provides that officers and
      certain employees of the Company may be granted options to purchase shares
      of common stock of the Company at an amount equal to the fair market value
      of the stock at the date of grant. The options, which may be exercised
      immediately, expire five years from the date of
grant.
  - 23
-
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(16)**
    **Employee
      Benefit and Stock Option Plans,
continued**
 The
      Company’s Outside Directors Stock Option Plan provides that outside
      directors of Habersham Bancorp and its subsidiaries may be granted options
      to purchase shares of common stock of the Company at an amount equal to
      the fair market value of the stock at the date of grant. The options are
      fully vested on the date of grant, exercisable six months from the date of
      grant, and expire ten years from the date of grant. Shares reserved for
      future grants under this plan are approximately 253,675 at December 31,
      2004.
  The
      following table summarizes information about stock options outstanding at
      December 31, 2004:
  **Range
      of****Exercise****Prices**
    
    **Number**
      **Outstanding
      at**
      **December
      31, 2004**
    
    **Weighted**
      **Average
      Remaining**
      **Contractual
      Life**
      **in
      Years**
    
    **Weighted
      Average Exercise****Price**$9.69
    
    19,000
    
    1.00
    
    $9.6913.50
    
    5,000
    
    1.00
    
    13.5016.50
      - 16.88
    
    38,250
    
    2.00
    
    16.7717.82
    
    77,000
    
    3.00
    
    17.8218.50
      - 19.00
    
    11,250
    
    2.25
    
    18.9320.60
    
    97,500
    
    5.00
    
    20.6024.49
    
    66,500
    
    4.00
    
    24.49314,500
    
    3.46
    
    19.41
 
 A
      summary of the status of the Company’s stock option plans and changes
      during 2004, 2003 and 2002 is presented below:
  2004
    
    2003
    
    2002Shares
    
    Weighted
      Avg.
      Exercise
      Price
    
    Shares
    
    Weighted
      Avg.
      Exercise
      Price
    
    Shares
    
    Weighted
      Avg.
      Exercise
      PriceOutstanding
      at beginning of the year
    
    
    262,953
    
    $
    18.21
    
    
    313,410
    
    $
    15.23
    
    
    414,272
    
    $
    14.22Granted
    
    
    97,500
    
    
    20.60
    
    
    68,500
    
    
    24.49
    
    
    122,500
    
    
    17.91Exercised
    
    
    (36,453
    )
    
    14.19
    
    
    (73,655
    )
    
    12.26
    
    
    (116,347
    )
    
    12.19Terminated
    
    
    (9,500
    )
    
    18.53
    
    
    (45,302
    )
    
    16.83
    
    
    (107,015
    )
    
    17.35Outstanding
      at end of year
    
    
    314,500
    
    
    19.41
    
    
    262,953
    
    
    18.21
    
    
    313,410
    
    
    15.23
 Except
      for 25,000 stock options issued under the Outside Directors Stock Option
      Plan, all stock options were exercisable at December 31,
2004.
  The estimated fair value of options
      granted during 2004, 2003 and 2002 was $11.77, $15.22 and $12.51,
      respectively, per share. The fair value of options granted under the
      Company’s fixed stock option plans during 2004, 2003 and 2002 was
      estimated on the date of grant using the Black-Scholes option-pricing
      model with the following weighted average assumptions used: expected
      dividend yield of 3.36%, 2.54% and 1.55% in 2004, 2003 and 2002,
      respectively; expected volatility of 88% in 2004, 93% in 2003 and 97% in
      2002; weighted average risk-free interest rate of 3.75%, 3.35% and 3.03%
      in 2004, 2003 and 2002, respectively; and an expected weighted average
      life of five years in 2004, 2003 and 2002.
  **(17)**
    **Other
      Expenses**
  Items
      comprising other expenses for the years ended December 31, 2004, 2003 and
      2002 are as follows:
  2004
    
    2003
    
    2002Outside
      services
    
    $
    1,078,463
    
    
    988,986
    
    
    1,071,419Advertising
      and public relations
    
    
    640,151
    
    
    565,173
    
    
    745,738Office
      supplies
    
    
    454,593
    
    
    415,029
    
    
    406,491Other
    
    
    2,073,144
    
    
    2,496,631
    
    
    2,038,682Total
    
    $
    4,246,351
    
    
    4,465,819
    
    
    4,262,330
 
 Outside
      services include charges for FDIC insurance, legal and professional
      services, insurance, director fees, and State of Georgia Department of
      Banking fees.
 - 24
-
  HABERSHAM
BANCORP AND SUBSIDIARIES
 Notes to
Consolidated Financial Statements
 
 **(18)**
    **Fair
      Value of Financial Instruments**
 The
      following disclosure of the estimated fair value of financial instruments
      is made in accordance with the requirements of SFAS No. 107,*Disclosures
      about Fair Value of Financial Instruments*.
      The estimated fair value amounts have been determined by the Company using
      available market information and appropriate valuation methodologies.
      However, considerable judgment is required to interpret market data to
      develop the estimates of fair value. Accordingly, the estimates presented
      herein are not necessarily indicative of the amounts the Company could
      realize in a current market exchange. The use of different market
      assumptions and/or estimation methodologies may have a material effect on
      the estimated fair value amounts.
 
 December
      31, 2004
    
    December
      31, 2003Carrying
      Amount
    
    Fair
      Value
    
    Carrying
      Amount
    
    Fair
      ValueAssets:Cash
      and cash equivalents
    
    $
    9,558,770
    
    
    9,558,770
    
    
    8,381,184
    
    
    8,381,184Investment
      securities available for sale
    
    
    70,313,485
    
    
    70,313,485
    
    
    72,812,631
    
    
    72,812,631Investment
      securities held to maturity
    
    
    4,111,041
    
    
    4,370,548
    
    
    4,859,713
    
    
    5,177,539Other
      investments
    
    
    2,469,134
    
    
    2,469,134
    
    
    1,652,034
    
    
    1,652,034Loans
      held for sale
    
    
    1,061,700
    
    
    1,076,988
    
    
    1,521,900
    
    
    1,530,500Loans
    
    
    277,137,222
    
    
    276,923,710
    
    
    261,717,830
    
    
    274,803,722Liabilities:Deposits
    
    $
    292,957,221
    
    
    293,857,182
    
    
    279,599,968
    
    
    293,579,966Short-term
      borrowings
    
    
    786,036
    
    
    786,036
    
    
    578,455
    
    
    578,455Federal
      funds purchased and securities sold under repurchase
      agreements
    
    
    4,834,631
    
    
    4,834,631
    
    
    12,383,776
    
    
    12,383,776FHLB
      advances
    
    
    36,000,000
    
    
    37,834,030
    
    
    30,000,000
    
    
    33,090,314Interest
      rate swaps
    
    
    122,966
    
    
    122,966
    
    
    -
    
    
    -
 
 The carrying amounts of cash and cash equivalents,
      interest-bearing demand and savings accounts, short-term borrowings, and
      federal funds purchased and securities sold under repurchase agreements
      are a reasonable estimate of their fair value due to the short-term nature
      or short term to maturity of these financial instruments. The fair value
      of investment securities available for sale and investment securities held
      to maturity is based on quoted market prices and dealer quotes. Fair
      values of mortgage loans held for sale are determined based on relevant
      delivery prices in the secondary mortgage market. The fair value of other
      loans, time deposits, and FHLB advances is estimated by discounting the
      future cash flows using interest rates currently charged/paid by the Bank
      for such financial instruments with similar credit risks and
      maturities.
  The fair value of Federal Home Loan Bank
      stock approximates carrying value. Other insignificant investments have
      been reflected above with fair values equaling carrying
      values.
  As
      required by SFAS No. 107, demand deposits are shown at their carrying
      value. No value has been ascribed to core deposits, which generally bear a
      low rate of interest or no interest and do not fluctuate in response to
      changes in interest rates.
  The
      carrying values and fair values of commitments to extend credit and
      standby letters of credit are not
significant.
  The fair value estimates presented herein
      are based on pertinent information available to management as of December
      31, 2004 and 2003. Although management is not aware of any factors that
      would significantly affect the estimated fair value amounts, such amounts
      have not been comprehensively revalued for purposes of these financial
      statements and, therefore, current estimates of fair value may differ
      significantly from the amounts presented herein.
  - 25
-
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(19)**
    **Related
      Party Transactions**
 In
      the ordinary course of business, the Company extends loans to its
      directors, executive officers, and principal stockholders and their
      affiliates at terms and rates comparable to those prevailing at the time
      for comparable transactions with other customers. In the opinion of
      management, these loans do not involve more than the normal credit risk
      nor present other unfavorable features. An analysis of the activity during
      2004 of loans to executive officers, directors, and principal shareholders
      is as follows:
 
 Balance,
      January 1
    
    $
    10,777,987Amounts
      advanced
    
    
    5,167,726Repayments
    
    
    (7,550,740
    )Balance,
      December 31
    
    $
    8,394,973
  Deposits from related parties totaled approximately
      $9,824,000 and $3,672,000 at December 31, 2004 and 2003,
      respectively.
  **(20)**
    **Condensed
      Financial Statements of Habersham Bancorp (Parent
      Only)**
 The
      parent company only condensed financial statements are presented
      below:
 
 **Condensed
Balance Sheets**
 
 December
31, 2004 and 2003
  **Assets**2004
    
    2003
      (as
      restated)Cash
    
    $
    431,025
    
    
    2,258,955Investment
      in subsidiaries
    
    
    45,631,651
    
    
    45,085,170Equipment,
      net
    
    
    47,847
    
    
    99,496Other
      assets
    
    
    2,059,701
    
    
    1,945,164Total
      assets
    
    $
    48,170,224
    
    
    49,388,785**Liabilities
      and Stockholders’ Equity**Accounts
      payable
    
    $
    164,430
    
    
    159,435Stockholders’
      equity:Common
      stock
    
    
    2,900,192
    
    
    2,869,278Additional
      paid-in capital
    
    
    14,560,488
    
    
    14,176,580Retained
      earnings
    
    
    30,661,077
    
    
    32,019,682Accumulated
      other comprehensive income (loss)
    
    
    (115,963
    )
    
    163,810Total
      shareholders’ equity
    
    
    48,005,794
    
    
    49,229,350Total
      liabilities and shareholders’ equity
    
    $
    48,170,224
    
    
    49,388,785
  - 26
-
  HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(20)**
    **Condensed
      Financial Statements of Habersham Bancorp (Parent Only),
      continued**
 
 **Condensed
Statements of Earnings**
 
 **For
the Years Ended December 31, 2004, 2003 and 2002**
 
 2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Income:Dividends
      from banks
    
    $
    2,300,000
    
    
    4,700,000
    
    
    1,110,650Equity
      in (loss) earnings of investee
    
    
    -
    
    
    -
    
    
    (45,233
    )Management
      fees from subsidiaries
    
    
    668,666
    
    
    668,666
    
    
    1,346,508Gains
      on sale of investment securities available for sale
    
    
    -
    
    
    -
    
    
    838,355Gain
      on sale of CB Financial Corp common stock
    
    
    -
    
    
    -
    
    
    277,182Gains
      on sale of other investment
    
    
    -
    
    
    60,000
    
    
    50,000Other
      income
    
    
    4,500
    
    
    2,087
    
    
    35,137Total
      income
    
    
    2,973,166
    
    
    5,430,753
    
    
    3,612,599Expenses:General
      and administrative
    
    
    1,957,040
    
    
    1,957,856
    
    
    2,184,360Earnings
      before income taxes and equity in undistributed earning of
      subsidiaries
    
    
    1,016,126
    
    
    3,472,897
    
    
    1,428,239Income
      tax benefit (expense)
    
    
    482,856
    
    
    353,134
    
    
    (108,564
    )Earnings
      before equity in undistributed earnings of subsidiaries
    
    
    1,498,982
    
    
    3,826,031
    
    
    1,319,675(Distributions
      in excess of earnings) equity in undistributed earnings of
      subsidiaries
    
    
    844,291
    
    
    (1,530,069
    )
    
    4,464,776Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451
  - 27
-
  HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(20)**
    **Condensed
      Financial Statements of Habersham Bancorp (Parent Only),
      continued**
 
 **Condensed
Statements of Cash Flows**
 
 **For
the Years Ended December 31, 2004, 2003 and 2002**
 
 2004
    
    2003
      (as
      restated)
    
    2002
      (as
      restated)Cash
      flows from operating activities:Net
      earnings
    
    $
    2,343,273
    
    
    2,295,962
    
    
    5,784,451Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Depreciation
    
    
    46,032
    
    
    88,903
    
    
    65,099Gain
      on sale of equipment
    
    
    (4,500
    )
    
    (2,087
    )
    
    (6,268
    )Gain
      on sale of investment securities available for sale
    
    
    -
    
    
    -
    
    
    (838,355
    )Gain
      on sale of other investment
    
    
    -
    
    
    (60,000
    )
    
    (50,000
    )Gain
      on sale of CB Financial Corp. common stock
    
    
    -
    
    
    -
    
    
    (277,182
    )(Increase)
      decrease in other assets
    
    
    (79,083
    )
    
    (358,288
    )
    
    80,746(Decrease)
      increase in other liabilities
    
    
    4,995
    
    
    (56,579
    )
    
    56,036Equity
      in loss (earnings) of investee
    
    
    -
    
    
    -
    
    
    45,233Distributions
      in excess of earnings (equity in undistributed earnings) of
      subsidiaries
    
    
    (844,291
    )
    
    1,530,069
    
    
    (4,464,776
    )Net
      cash provided by operating activities
    
    
    1,466,426
    
    
    3,437,980
    
    
    394,984Cash
      flows from investing activities:Dividends
      received from other investment
    
    
    -
    
    
    -
    
    
    62,042Proceeds
      from sale of CB Financial Corp. common stock
    
    
    -
    
    
    -
    
    
    3,308,879Proceeds
      from sale of investment securities available for sale
    
    
    -
    
    
    -
    
    
    2,246,875Proceeds
      from sale of other investments
    
    
    -
    
    
    160,000
    
    
    150,000Proceeds
      from other investment
    
    
    33,032
    
    
    -
    
    
    -Purchase
      of equipment
    
    
    (916
    )
    
    (47,914
    )
    
    (98,214
    )Proceeds
      from sale of equipment
    
    
    11,033
    
    
    4,500
    
    
    19,001Net
      cash provided by investing activities
    
    
    43,149
    
    
    116,586
    
    
    5,688,583Cash
      flows from financing activities:Payment
      of borrowings
    
    
    -
    
    
    -
    
    
    (5,773,000
    )Payment
      of cash dividends
    
    
    (3,701,878
    )
    
    (3,378,814
    )
    
    (661,328
    )Proceeds
      from issuance of common stock upon exercise of stock
    options
    
    
    364,373
    
    
    509,865
    
    
    1,420,183Net
      cash (used in) financing activities
    
    
    (3,337,505
    )
    
    (2,868,949
    )
    
    (5,014,145
    )(Decrease)
      increase in cash
    
    
    (1,827,930
    )
    
    685,617
    
    
    1,069,422Cash
      at beginning of year
    
    
    2,258,955
    
    
    1,573,338
    
    
    503,916Cash
      at end of year
    
    $
    431,025
    
    
    2,258,955
    
    
    1,573,338
  - 28
-
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Notes to
Consolidated Financial Statements
 
 **(21)**
    **Quarterly
      Financial Data (Unaudited)**
 The
      supplemental quarterly financial data for the years ended December 31,
      2004 and 2003 (as restated) is summarized as
follows:
 
 Quarter
      EndedMarch
      31
      2004
    
    June
      30
      2004
    
    September
      30
      2004
    
    December
      31
      2004Interest
      income
    
    $
    5,060,119
    
    
    5,041,600
    
    
    5,249,292
    
    
    5,392,407Interest
      expense
    
    
    1,666,929
    
    
    1,624,401
    
    
    1,720,941
    
    
    1,779,233Net
      interest income
    
    
    3,393,191
    
    
    3,417,199
    
    
    3,528,351
    
    
    3,613,174Provision
      for loan losses
    
    
    162,500
    
    
    120,000
    
    
    120,000
    
    
    80,000Net
      earnings
    
    
    359,052
    
    
    802,329
    
    
    535,402
    
    
    646,490Net
      earnings per share - basic
    
    
    0.13
    
    
    0.28
    
    
    0.19
    
    
    0.21Net
      earnings per share - diluted
    
    
    0.12
    
    
    0.27
    
    
    0.18
    
    
    0.21March
      31
      2003
    
    
    June
      30
      2003
    
    
    September
      30
      2003
    
    
    December
      31
      2003Interest
      income
    
    $
    5,984,084
    
    
    5,872,594
    
    
    5,452,113
    
    
    5,284,019Interest
      expense
    
    
    2,256,984
    
    
    2,119,777
    
    
    1,934,152
    
    
    1,810,754Net
      interest income
    
    
    3,727,100
    
    
    3,752,818
    
    
    3,517,961
    
    
    3,473,264Provision
      for loan losses
    
    
    262,500
    
    
    262,500
    
    
    262,500
    
    
    162,500Net
      earnings
    
    
    758,278
    
    
    767,730
    
    
    376,659
    
    
    393,295Net
      earnings per share - basic
    
    
    0.27
    
    
    0.27
    
    
    0.13
    
    
    0.14Net
      earnings per share - diluted
    
    
    0.26
    
    
    0.27
    
    
    0.13
    
    
    0.13
 
  - 29
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