SECURITIES
AND EXCHANGE COMMISSION


Washington,
D. C. 20549





FORM
10-K





x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
fiscal year ended December 31, 2008.





oTRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from _____ to ___________________





Commission
file number 0-13153





HABERSHAM
BANCORP


(Exact
name of registrant as specified in its charter)





Georgia
                
                58-1563165(State
      or other jurisdiction ofIdentification
      Number)
                
                (I.R.S.
      Employerincorporation
      ororganization)





282 Historic Highway 441 North, P. O. Box 1980,
      Cornelia, Georgia
              
              30531(Address
      of principal executive offices)
              
              (Zip
      Code)





Registrant's
telephone number, including area code:   (706)
778-1000





Securities
registered pursuant to Section 12(b) of the Exchange Act:


Common Stock, $1.00 par
value





Securities
registered pursuant to Section 12(g) of the Exchange Act: None





Indicate
by check mark whether the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act.


Yes o  No x





Indicate
by check mark if the registrant is not required to file reports under Section 13
or Section 15(d) of the Act.


Yes o  No x





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.


Yes x  No o







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56





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Exchange Act Rule 12b-2:


Large
      accelerated filer o
              Accelerated
      filer  oNon-accelerated
      filer   o
              Smaller
      reporting company      x(do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o  No x





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked prices of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.





1,570,374 Shares of Common
Stock, $1.00 par value--$11,699,286 as of June 30, 2008 (based upon market value
of $7.45 /share as of that date).





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of March 10, 2009.





Common Stock, $1.00 par
value--2,818,593 shares








DOCUMENTS
INCORPORATED BY REFERENCE





(1)  Portions
of the Company's Annual Report to Shareholders for the year ended December 31,
2008


(the
“Annual Report”) are incorporated by reference into Part II.





(2)  Portions
of the Company's Proxy Statement relating to the 2009 Annual Meeting of
Shareholders (the “Proxy Statement”) are incorporated by reference into Part
III.





PART
I


Item
1.  BUSINESS.





History of the
Company





Habersham
Bancorp (the "Company"), a Georgia corporation, was organized on March 9,
1984.  Effective December 31, 1984, the Company acquired all of the
outstanding shares of common stock of Habersham Bank ("Habersham
Bank").  As a result of this transaction, the former shareholders of
Habersham Bank became shareholders of the Company, and Habersham Bank became the
wholly-owned subsidiary of the Company. Habersham Bank has one subsidiary,
Advantage Insurers, Inc., a property, casualty and life insurance agency
organized in 1997.





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Effective
June 30, 1995, the Company acquired Security Bancorp, Inc. and its subsidiary
bank, Security State Bank.  The Company consolidated the charters of
Security State Bank and Habersham Bank in 1999. The Company acquired Liberty
Bank & Trust on July 25, 2005 and subsequently merged that bank with and
into Habersham Bank.





Business of the
Bank





Habersham
Bank is a financial institution organized under the laws of the State of Georgia
in 1904.  Habersham Bank operates a full-service commercial banking
business based in Habersham, White, Cherokee, Warren, Gwinnett, Stephens,
Forsyth and Hall Counties, Georgia, providing such customary banking services as
checking and savings accounts, various types of time deposits, safe deposit
facilities and individual retirement accounts.  It also makes secured
and unsecured loans and provides other financial services to its
customers.  Habersham Bank has a full-time trust officer on staff and
offers a full spectrum of trust services, including trust administration, asset
management services, estate and will probate and administration, and other
services in the area of personal trusts.





Competition





The
banking industry is highly competitive.  During the past several
years, legislation and regulatory changes, together with competition from
unregulated entities, has resulted in the elimination of many traditional
distinctions between commercial banks, thrift institutions and other providers
of financial services.  Consequently, competition among financial
institutions of all types is virtually unlimited with respect to legal ability
and authority to provide most financial services.





Habersham
Bank's primary market area consists of Habersham, White, Cherokee, Warren,
Gwinnett, Stephens, Forsyth and Hall Counties, Georgia.  Habersham
Bank competes principally for all types of loans, deposits and other financial
services with large regional banks and other community banks located in its
primary market area. To a lesser extent, Habersham Bank competes for loans with
insurance companies, regulated small loan companies, credit unions, and certain
governmental agencies.





The
Company and its non-bank subsidiary, Advantage Insurers, also compete with
numerous other insurance agencies offering property, casualty and life
insurance.





See “Risk
Factors – Competition from Other Financial Institutions May Adversely Affect our
Profitability.”





Employees





As of
December 31, 2008, the Company had 161 full-time equivalent
employees.  Neither the Company nor any of its subsidiaries is a party
to any collective bargaining agreement.  In the opinion of management,
the Company and its subsidiaries enjoy satisfactory relations with their
respective employees.





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56





SUPERVISION
AND REGULATION




Both the
Company and the Bank are subject to extensive state and federal banking laws and
regulations that impose restrictions on and provide general regulatory oversight
of their operations.  These laws and regulations are generally
intended to protect depositors and not shareholders.  Legislation and
regulations authorized by legislation influence, among other
things:
















·
            how,
      when, and where we may expand
geographically;




·
            into
      what product or service market we may
enter;




·
            how
      we must manage our assets; and




·
            under
      what circumstances money may or must flow between the parent bank holding
      company and the subsidiary bank.




Set forth
below is an explanation of the major pieces of legislation affecting our
industry and how that legislation affects our actions.  The following
summary is qualified by reference to the statutory and regulatory provisions
discussed.  Changes in applicable laws or regulations may have a
material effect on our business and prospects, and legislative changes and the
policies of various regulatory authorities may significantly affect our
operations.  We cannot predict the effect that fiscal or monetary
policies, or new federal or state legislation may have on our business and
earnings in the future.




Habersham
Bancorp




Because
the Company owns all of the capital stock of the Bank, it is a bank holding
company under the federal Bank Holding Company Act of 1956.  As a
result, we are primarily subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act and the regulations of the Board of
Governors of the Federal Reserve System (the “Federal Reserve
Board”).  As a bank holding company located in Georgia, the Georgia
Department of Banking and Finance (the “GDBF”) also regulates and monitors all
significant aspects of our operations.




Acquisitions of
Banks.The Bank Holding
Company Act requires every bank holding company to obtain the Federal Reserve
Board’s prior approval before:




·
            acquiring
      direct or indirect ownership or control of any voting shares of any bank
      if, after the acquisition, the bank holding company will directly or
      indirectly own or control more than 5% of the bank’s voting
      shares;




·
            acquiring
      all or substantially all of the assets of any bank;
  or




·
            merging
      or consolidating with any other bank holding
  company.





Additionally,
the Bank Holding Company Act provides that the Federal Reserve Board may not
approve any of these transactions if it would result in or tend to create a
monopoly, substantially lessen competition, or otherwise function as a restraint
of trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served.  The Federal Reserve Board is also
required to consider the financial and managerial resources and future prospects
of the bank holding companies and banks concerned and the convenience and needs
of the community to be served.  The Federal Reserve Board’s
consideration of financial resources generally focuses on capital adequacy,
which is discussed below.





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56





Under the
Bank Holding Company Act, if adequately capitalized and adequately managed, the
Company or any other bank holding company located in Georgia may purchase a bank
located outside of Georgia.  Conversely, an adequately capitalized and
adequately managed bank holding company located outside of Georgia may purchase
a bank located inside Georgia.  In each case, however, restrictions
may be placed on the acquisition of a bank that has only been in existence for a
limited amount of time or will result in specified concentrations of
deposits.  Currently, Georgia law prohibits the acquisition of a bank
that has been chartered for less than three years.





Change in Bank
Control.Subject to various exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with related
regulations, require Federal Reserve Board approval prior to any person or
company acquiring “control” of a bank holding company.  Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the bank holding
company.  Control is also presumed to exist, although rebuttable, if a
person or company acquires 15% or more, but less than 25%, of any class of
voting securities and either:




·
            the
      bank holding company has registered securities under Section 12 of
      the Securities Exchange Act of 1934;
or




·
            no
      other person owns a greater percentage of that class of voting securities
      immediately after the transaction.





The
regulations provide a procedure for challenging the rebuttable presumption of
control.





Permitted
Activities.The Bank Holding
Company Act has generally prohibited a bank holding company from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries and from acquiring or retaining direct or indirect
control of any company engaged in any activities other than those determined by
the Federal Reserve to be closely related to banking or managing or controlling
banks as to be a proper incident thereto.  Provisions of the
Gramm-Leach-Bliley Act have expanded the permissible activities of a bank
holding company that qualifies as a financial holding company.  Under the
regulations implementing the Gramm-Leach-Bliley Act, a financial holding company
may engage in additional activities that are financial in nature or incidental
or complementary to financial activity.  Those activities include,
among other activities, certain insurance and securities
activities.





To
qualify to become a financial holding company, the Bank and any other depository
institution subsidiary of the Company must be well capitalized and well managed
and must have a Community Reinvestment Act rating of at least
“satisfactory.”  Additionally, the Company must file an election with
the Federal Reserve Board to become a financial holding company and must provide
the Federal Reserve Board with 30 days’ written notice prior to engaging in a
permitted financial activity. While the Company currently meets the
qualification standards applicable to financial holding companies, we have not
elected to become a financial holding company at this time.





Support of
Subsidiary Institutions.Under Federal
Reserve Board policy, we are expected to act as a source of financial strength
for the Bank and to commit resources to support the Bank.  This
support may be required at times when, without this Federal Reserve Board
policy, we might not be inclined to provide it.  In addition, any
capital loans made by us to the Bank will be repaid only after the Bank’s
deposits and various other obligations are repaid in full.  In the
event of our bankruptcy, any commitment that we give to a federal banking
regulator to maintain the capital of the Bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.





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56





Habersham
Bank





Because
the Bank is a commercial bank chartered under the laws of the State of Georgia,
it is primarily subject to the supervision, examination, and reporting
requirements of the FDIC and the GDBF.  The FDIC and the GDBF
regularly examine the Bank’s operations and have the authority to approve or
disapprove mergers, the establishment of branches, and similar corporate
actions.  Both regulatory agencies also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.  The Bank is also subject to numerous state and
federal statutes and regulations that affect the Bank’s business, activities,
and operations.





Branching.Under Georgia law, the
Bank may open branch offices throughout Georgia with the prior approval of its
primary bank regulator.  In addition, with prior regulatory approval,
the Bank may acquire branches of existing banks located in Georgia. The Bank and
any other national or state-chartered bank generally may branch across
state lines by merging with banks in other states if allowed by the target
states’ laws.  Georgia’s law, subject to limited exceptions, currently
permits branching across state lines through interstate mergers.





Under the
Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks
to branch into their state by establishing a new start-up branch in the
state.  Currently, Georgia has not opted-in to this
provision.  Therefore, interstate merger is the only method through
which a bank located outside of Georgia may branch into Georgia.  This
provides a limited barrier of entry into the Georgia banking market, which
protects us from an important segment of potential
competition.  However, because Georgia has elected not to opt-in, our
ability to establish a new start-up branch in another state may be
limited.   Consequently, until Georgia changes its election, the
only way the Bank will be able to branch into states that have elected to opt-in
on a reciprocal basis will be through interstate merger.





Prompt Corrective
Action.The Federal Deposit Insurance Corporation Improvement
Act of 1991 establishes a system of prompt corrective action to resolve the
problems of undercapitalized financial institutions.  Under this
system, the federal banking regulators have established five capital categories,
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, in which all institutions are
placed.  The federal banking agencies have also specified by
regulation the relevant capital levels for each of the other
categories.





Federal
banking regulators are required to take various mandatory supervisory actions
and are authorized to take
other discretionary actions with respect to institutions in the three
undercapitalized categories.  The severity of the
action depends upon the capital category in which the institution is
placed.  Generally, subject to a narrow exception,
the banking regulator must appoint a receiver or conservator for an institution
that is critically  undercapitalized.  The
other capital categories are well capitalized, adequately capitalized, and
undercapitalized.  As of
December 31, 2008, the Bank qualified for the well-capitalized
category.





A
“well-capitalized” bank is one that significantly exceeds all of its capital
requirements, which include maintaining a total risk-based capital ratio of at
least 10%, a tier 1 risk-based capital ratio of at least 6%, and a tier 1
leverage ratio of at least 5%.  Generally, a classification as well
capitalized will place a bank outside of the regulatory zone for purposes of
prompt corrective action.  However, a well-capitalized bank may be
reclassified as “adequately capitalized” based on criteria other than capital,
if the federal regulator determines that a bank is in an unsafe or unsound
condition, or is engaged in unsafe or unsound practices and has not corrected
the deficiency.





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FDIC Insurance
Assessments.The FDIC is an independent agency of the United
States government that uses the Deposit Insurance Fund to protect against the
loss of insured deposits if an FDIC-insured bank or savings association fails.
The FDIC must maintain the Deposit Insurance Fund within a range between 1.15
percent and 1.50 percent of all insured deposits.




The FDIC
has adopted a risk-based assessment system for insured depository institutions
that accounts for the risks attributable to different categories and
concentrations of assets and liabilities.  The system is designed to
assess higher rates on those institutions that pose greater risks to the Deposit
Insurance Fund.  The FDIC places each institution in one of four risk
categories using a two-step process based first on capital ratios (the capital
group assignment) and then on other relevant information (the supervisory group
assignment).  Within the lowest risk category, Risk Category I, rates
vary based on each institution’s CAMELS component ratings, certain financial
ratios, and long-term debt issuer ratings, if any.




Capital
group assignments are made quarterly and an institution is assigned to one of
three capital categories: (1) well capitalized, (2) adequately capitalized,
or (3) undercapitalized.  These three categories are substantially
similar to the prompt corrective action categories described above, with the
“undercapitalized” category including institutions that are undercapitalized,
significantly undercapitalized, and critically undercapitalized for prompt
corrective action purposes.  The FDIC also assigns an institution to
one of three supervisory subgroups based on a supervisory evaluation that the
institution’s primary federal banking regulator provides to the FDIC and
information that the FDIC determines to be relevant to the institution’s
financial condition and the risk posed to the deposit insurance
funds.




For 2008,
assessments ranged from 5 to 43 cents per $100 of deposits, depending on the
institution’s risk category.  Institutions in the lowest risk
category, Risk Category I, were charged a rate between 5 and 7 cents per $100 of
deposits.  Risk Categories II, III, and IV were charged 10 basis
points, 28 basis points and 43 basis points, respectively.




Because
the Deposit Insurance Fund reserve fell below 1.15 percent as of June 30, 2008,
and was expected to remain below 1.15 percent, the Federal Deposit Insurance
Reform Act of 2005 required the FDIC to establish and implement a restoration
plan to restore the reserve ratio to no less than 1.15 percent within five
years, absent extraordinary circumstances.




On
December 16, 2008, the FDIC adopted, as part of its restoration plan, a uniform
increase to the assessment rates by 7 basis points (annualized) for the first
quarter 2009 assessments.  As a result, institutions in Risk Category
I will be charged a rate between 12 and 14 cents per $100 of
deposits.  Risk Categories II, III, and IV will be charged 17 basis
points, 35 basis points, and 50 basis points, respectively.




On
February 27, 2009, the FDIC amended its restoration plan to extend the period
for restoration to seven years and further revised the risk-based assessment
system.  Starting with the second quarter of 2009, institutions in
Risk Category I will have a base assessment rate between 12 and 16 cents per
$100 of deposits.  Risk Categories II, III, and IV will have base
assessment rates of 22 basis points, 32 basis points, and 45 basis points,
respectively.  These base assessments will be subject to adjustments
based on each institution’s unsecured debt, secured liabilities, and use of
brokered deposits.  As a result of these adjustments, institutions in
Risk Category I will be charged rate between 7 and 24 cents per $100 of
deposits.  Risk Categories II, III, and IV will be charged between 17
and 43 basis points, 27 and 58 basis points, and 40 and 77.5 basis points,
respectively.





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Under an
interim rule adopted on February 27, 2009, the FDIC will impose an emergency
special assessment of 20 basis points as of June 30, 2009, and may impose
additional emergency special assessments of up to 10 basis points thereafter if
the reserve ratio is estimated to fall to a level that the FDIC believes would
adequately affect public confidence or to a level that shall be close to zero or
negative at the end of a calendar quarter.




The FDIC
may, without further notice-and-comment rulemaking, adopt rates that are higher
or lower than the stated base assessment rates, provided that the FDIC cannot
(i) increase or decrease the total rates from one quarter to the next by more
than three basis points, or (ii) deviate by more than three basis points from
the stated assessment rates.




The FDIC
may terminate its insurance of deposits if it finds that the institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC.




FDIC Temporary
Liquidity Guarantee Program.On October 14, 2008, the FDIC
announced that its Board of Directors, under the authority to prevent “systemic
risk” in the U.S. banking system, approved the Temporary Liquidity Guarantee
Program (“TLGP”). The purpose of the TLGP is to strengthen confidence and
encourage liquidity in the banking system.  The TLGP is composed of
two components, the Debt Guarantee Program and the Transaction Account Guarantee
Program, and institutions had the opportunity, prior to December 5, 2008, to
opt-out of either or both components of the TLGP.





The Debt
Guarantee Program.  Under the TLGP, the FDIC is permitted to
guarantee certain newly issued senior unsecured debt issued by participating
financial institutions.  The annualized fee that the FDIC will assess
to guarantee the senior unsecured debt varies by the length of maturity of the
debt.  For debt with a maturity of 180 days or less (excluding
overnight debt), the fee is 50 basis points; for debt with a maturity between
181 days and 364 days, the fee is 75 basis points, and for debt with a maturity
of 365 days or longer, the fee is 100 basis points.  The Bank did
not opt-out of the Debt Guarantee component of the TLGP.





The Transaction
Account Guarantee Program.  Under the TLGP, the
FDIC is permitted to fully insure non-interest bearing deposit accounts held at
participating FDIC-insured institutions, regardless of dollar amount. The
temporary guarantee will expire at the end of 2009.  For the eligible
non-interest-bearing transaction deposit accounts (including accounts swept from
a non-interest bearing transaction account into an non-interest bearing savings
deposit account), a 10 basis point annual rate surcharge will be applied to
non-bearing transaction deposit amounts over $250,000. Institutions will not be
assessed on amounts that are otherwise insured.  The Bank did not
opt-out of the Transaction Account Guarantee component of the TLGP.





Allowance for
Loan and Lease Losses.  The Allowance for Loan and Lease Losses
(the “ALLL”) represents one of the most significant estimates in the Bank’s
financial statements and regulatory reports.  Because of its
significance, the Bank has developed a system by which it develops, maintains,
and documents a comprehensive, systematic, and consistently applied process for
determining the amounts of the ALLL and the provision for loan and lease
losses.  The Interagency Policy Statement on the Allowance for Loan
and Lease Losses, issued on December 13, 2006 encourages all banks to ensure
controls are in place to consistently determine the ALLL in accordance with
GAAP, the bank’s stated policies and procedures, management’s best judgment, and
relevant supervisory guidance.  Consistent with supervisory guidance,
the Bank maintains a prudent and conservative, but not excessive, ALLL, that is
at a level that is appropriate to cover estimated credit losses on individually
evaluated loans determined to be impaired as well as estimated credit losses
inherent in the remainder of the loan and lease portfolio.  The Bank’s
estimate of credit losses reflects consideration of all significant factors that
affect the collectability of the portfolio as of the evaluation
date.  See “Management’s Discussion and Analysis – Critical Accounting
Policies.”





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Commercial Real
Estate Lending.The Bank’s lending
operations may be subject to enhanced scrutiny by federal banking regulators
based on its concentration of commercial real estate loans.  On
December 6, 2006, the federal banking regulators issued final guidance to remind
financial institutions of the risk posed by commercial real estate (“CRE”)
lending concentrations.  CRE loans generally include land development,
construction loans, and loans secured by multifamily property, and nonfarm,
nonresidential real property where the primary source of repayment is derived
from rental income associated with the property.  The guidance
prescribes the following guidelines for its examiners to help identify
institutions that are potentially exposed to significant CRE risk and may
warrant greater supervisory scrutiny:




·
            total
      reported loans for construction, land development and other land represent
      100% or more of the institution’s total capital,
  or




·
            total
      commercial real estate loans represent 300% or more of the institution’s
      total capital, and the outstanding balance of the institution’s commercial
      real estate loan portfolio has increased by 50% or
  more.





Community Reinvestment
Act.The Community
Reinvestment Act requires that, in connection with examinations of financial
institutions within their respective jurisdictions, the federal banking agencies
shall evaluate the record of each financial institution in meeting the credit
needs of its local community, including low- and moderate-income
neighborhoods.  These facts are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.  Failure
to adequately meet these criteria could impose additional requirements and
limitations on the Bank.  Additionally, the Bank must publicly
disclose the terms of various Community Reinvestment Act-related
agreements.





Other
Regulations.Interest and other charges collected or
contracted for by the Bank are subject to state usury laws and federal laws
concerning interest rates.  The Bank’s loan operations are also
subject to federal laws applicable to credit transactions, such as
the:




·
            Truth-In-Lending
      Act, governing disclosures of credit terms to consumer
      borrowers;




·
            Home
      Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to determine
      whether a financial institution is fulfilling its obligation to help meet
      the housing needs of the community it
serves;




·
            Equal
      Credit Opportunity Act, prohibiting discrimination on the basis of race,
      creed, or other prohibited factors in extending
  credit;




·
            Fair
      Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
      Transactions Act, governing the use and provision of information to credit
      reporting agencies, certain identity theft protections, and certain credit
      and other disclosures;




·
            Fair
      Debt Collection Act, governing the manner in which consumer debts may be
      collected by collection agencies;




·
            Soldiers’
      and Sailors’ Civil Relief Act of 1940, as amended, governing the repayment
      terms of, and property rights underlying, secured obligations of persons
      currently on active duty with the United States
  military;




·
            Talent
      Amendment in the 2007 Defense Authorization Act, establishing a 36% annual
      percentage rate ceiling, which includes a variety of charges including
      late fees, for certain types of consumer loans to military service members
      and their dependents; and




·
            rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing these federal
  laws.





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The
Bank’s deposit operations are subject to federal laws applicable to depository
accounts, such as the following:




·
            Right
      to Financial Privacy Act, which imposes a duty to maintain confidentiality
      of consumer financial records and prescribes procedures for complying with
      administrative subpoenas of financial
records;




·
            Truth-In-Savings
      Act, requiring certain disclosures for consumer deposit
      accounts;




·
            Electronic
      Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
      implement that act, which govern automatic deposits to and withdrawals
      from deposit accounts and customers’ rights and liabilities arising from
      the use of automated teller machines and other electronic banking
      services; and




·
            rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing these federal
  laws.





Capital
Adequacy





The
Company and the Bank are required to comply with the capital adequacy standards
established by the Federal Reserve Board, in the case of the Company, and the
FDIC in the case of the Bank.  The Federal Reserve Board has
established a risk-based and a leverage measure of capital adequacy for bank
holding companies.  Because the Company’s consolidated total assets
are less than $500 million, under the Federal Reserve Board’s capital
guidelines, our capital adequacy is measured on a bank-only basis, as opposed to
a consolidated basis.  The Bank is also subject to risk-based and
leverage capital requirements adopted by its primary regulator, which are
substantially similar to those adopted by the Federal Reserve Board for bank
holding companies.





The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure and to minimize
disincentives for holding liquid assets.  Assets and off-balance-sheet
items, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk weights.  The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.





The
minimum guideline for the ratio of total capital to risk-weighted assets is
8%.  Total capital consists of two components:  Tier 1
Capital and Tier 2 Capital.  Tier 1 Capital generally consists of
common stockholders’ equity, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and a limited amount of qualifying cumulative perpetual preferred stock, less
goodwill and other specified intangible assets.  Tier 1 Capital must
equal at least 4% of risk-weighted assets.  Tier 2 Capital generally
consists of subordinated debt, other preferred stock and hybrid capital, and a
limited amount of loan loss reserves.  The total amount of Tier 2
Capital is limited to 100% of Tier 1 Capital.  At December 31, 2008
our ratio of total capital to risk-weighted assets was 10.61% and our ratio of
Tier 1 Capital to risk-weighted assets was 9.33%.





In
addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies.  These guidelines provide for a
minimum ratio of Tier 1 Capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating and
implementing the Federal Reserve Board’s risk-based capital measure for market
risk.  All other bank holding companies generally are required to
maintain a leverage ratio of at least 4%.  At December 31, 2008, our
leverage ratio was 7.14%.  The guidelines also provide that bank
holding companies experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without reliance on intangible assets.  The Federal
Reserve Board considers the leverage ratio and other indicators of capital
strength in evaluating proposals for expansion or new activities.





Page 10 of
56





Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and certain other restrictions on its business.  As
described above, significant additional restrictions can be imposed on
FDIC-insured depository institutions that fail to meet applicable capital
requirements.  See “Prompt Corrective Action” above.





Payment
of Dividends





The
Company is a legal entity separate and distinct from the Bank.  The
principal source of the Company’s cash flow, including cash flow to pay
dividends to its shareholders, is dividends that the Bank pays to the Company as
the Bank’s sole shareholder.  Statutory and regulatory limitations
apply to the Bank’s payment of dividends to the Company as well as to the
Company’s payment of dividends to its shareholders. If, in the opinion of the
federal banking regulator, the Bank were engaged in or about to engage in an
unsafe or unsound practice, the federal banking regulator could require,
after notice and a hearing, that the Bank stop or refrain from engaging in the
practice.  The federal banking agencies have indicated that paying
dividends that deplete a depository institution’s capital base to
an inadequate level would be an unsafe and unsound banking
practice.  Under the Federal Deposit Insurance Corporation Improvement
Act of 1991, a depository institution may not pay any dividend if payment would
cause it to become undercapitalized or if it already is
undercapitalized.  Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.





The Bank
is required to obtain prior approval of the GDBF if the total of all dividends
declared by the Bank in any year will exceed 50% of the Bank’s net income for
the prior year.  The payment of dividends by the Company and the Bank
may also be affected by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.  At December 31, 2008,
the Bank could not pay cash dividends without prior regulatory
approval.




Restrictions
on Transactions with Affiliates





The
Company and the Bank are subject to the provisions of Section 23A of the Federal
Reserve Act.  Section 23A places limits on the amount of:







·
            a
      bank’s loans or extensions of credit to
  affiliates;




·
            a
      bank’s investment in affiliates;




·
            assets
      a bank may purchase from affiliates, except for real and personal property
      exempted by the Federal Reserve
Board;




·
            loans
      or extensions of credit to third parties collateralized by the securities
      or obligations of affiliates; and




·
            a
      bank’s guarantee, acceptance, or letter of credit issued on behalf of an
      affiliate.





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The total
amount of the above transactions is limited in amount, as to any one affiliate,
to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
20% of a bank’s capital and surplus.  In addition to the limitation on
the amount of these transactions, each of the above transactions must also meet
specified collateral requirements.  The Bank must also comply with
other provisions designed to avoid taking low-quality assets.





The
Company and the Bank are also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in the above transactions with affiliates unless the transactions are
on terms substantially the same, or at least as favorable to the institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.





The Bank
is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders, and their related
interests.  These extensions of credit (1) must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties, and
(2) must not involve more than the normal risk of repayment or present
other unfavorable features.





Proposed
Legislation and Regulatory Action





New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations, and competitive
relationships of financial institutions operating and doing business in the
United States.  We cannot predict whether or in what form any proposed
regulation or statute will be adopted or the extent to which our business may be
affected by any new regulation or statute.





Effect
of Governmental Monetary Policies





The
Bank’s earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and
its agencies.  The Federal Reserve Board’s monetary policies have
had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or
combat a recession.  The monetary policies of the Federal Reserve
Board affect the levels of bank loans, investments and deposits
through its control over the issuance of United States government
securities, its regulation of the discount rate applicable to member
banks, and its influence over reserve requirements to which member
banks are subject.  Neither the Company nor the Bank can predict
the nature or impact of future changes in monetary and fiscal
policies.




Item
1A.  RISK FACTORS





An
investment in the Company’s common stock involves a high degree of risk. If any
of the following risks other risks, which have not been identified of which we
may believe are immaterial or unlikely, actually occur, our business, financial
condition and results of operations could be harmed.  In such a case,
the trading price of our common stock could decline, and you may lose all or
part of your investment.  The risks discussed below also include
forward-looking statements, and our actual results may differ substantially from
those discussed in these forward-looking statements.





Investors
should consider carefully the risks described below and the other information in
this report before deciding to invest in the Company’s common
stock.





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56





Declines
in real estate values have adversely affected our credit quality and
profitability.




During
2008, confidence in the credit market for residential housing finance
significantly eroded, which resulted in a reduction in financing available to
buyers of new homes and borrowers wishing to refinance existing financing
terms.  The tightening of credit for residential housing led to lower
demand for residential housing and more foreclosures, and has reduced the
absorption rate for new and existing properties.  In turn, this
tightening of credit has caused market prices to fall as some property owners,
including lenders who acquired property by foreclosure, have accepted lower
prices to reduce their exposure to these real estate assets, which has reduced
the market values for comparable real estate.





The
declines in values and the increased level of marketing required to sell
properties has reduced or eliminated the potential profits to many of the
builders and developers of properties to whom we have extended
loans.  As a result, some of these borrowers have been unable to repay
their loans in accordance with their terms, which has led to an increase in our
past due and non-performing loans.  If these housing trends continue
or exacerbate, the Company expects that it will continue to experience increased
delinquencies and credit losses.  In addition, declining real estate
and other asset values may reduce the available equity associated with these
assets, which, in turn, would limit the ability of borrowers to use such equity
to support borrowings.




Moreover,
if the current recession continues, the Company may be required to further
increase our loan loss provision, and may experience significantly higher
delinquencies and credit losses.  An increase in our loan loss
provision or increased credit losses would reduce earnings and adversely affect
the Company’s financial condition.  Furthermore, to the extent that
real estate collateral is obtained through foreclosure, the costs of holding and
marketing the real estate collateral, as well as the ultimate values obtained
from disposition, could reduce the Company’s earnings and adversely affect the
Company’s financial condition.





The
Company’s business volume and growth is affected by the rate of growth and
demand for housing in specific geographic markets, and most of its loans are
secured by real estate located in northern Georgia, which is continuing to
experience high rates of foreclosures and declining real estate prices and
property values.





Based on
the activity discussed above, the Company’s future rate of growth, if any, could
be significantly less than its historical levels and its assets may in fact
shrink, depending on the duration and extent of the current disruption in the
housing and mortgage markets.





Page 13 of
56





We
make and hold in our portfolio a significant number of land acquisition and
development and construction loans, which pose more credit risk than other types
of loans typically made by financial institutions.




We offer
land acquisition and development, and construction loans for builders and
developers. As of December 31, 2008, approximately $148 million, or 46%, of our
total loan portfolio represented loans for which the related property is neither
presold nor preleased. These land acquisition and development, and construction
loans are considered more risky than other types of loans. The primary credit
risks associated with land acquisition and development and construction lending
are underwriting, project risks, and market risks. Project risks include cost
overruns, borrower credit risk, project completion risk, general contractor
credit risk, and environmental and other hazard risks. Market risks are risks
associated with the sale of the completed residential units. They include
affordability risk, which means the risk that borrowers cannot obtain affordable
financing, product design risk, and risks posed by competing projects. There can
be no assurance that losses in our land acquisition and development and
construction loan portfolio will not exceed our reserves, which could adversely
impact our earnings. Given the current environment, the non-performing loans in
our land acquisition and development and construction portfolio could increase
substantially in 2009, and these non-performing loans could result in a material
level of charge-offs, which will negatively impact our capital and
earnings.





Ongoing
deterioration in the housing market and the homebuilding industry may lead to
increased losses and further worsening of delinquencies and non-performing
assets in our loan portfolios. Consequently, our results of operations may be
adversely impacted.




There has
been substantial industry concern and publicity over asset quality among
financial institutions due in large part to issues related to subprime mortgage
lending, declining real estate values and general economic concerns. As of
December 31, 2008, our non-performing assets increased significantly to $84.2
million, or 25%, of our loan portfolio plus other real estate owned.
Furthermore, the housing and the residential mortgage markets recently have
experienced a variety of difficulties and changed economic conditions. If market
conditions continue to deteriorate, they may lead to additional valuation
adjustments on our loan portfolios and real estate owned as we continue to
reassess the market value of our loan portfolio, the losses associated with the
loans in default, and the net realizable value of real estate
owned.




The
homebuilding industry has experienced a significant and sustained decline in
demand for new homes and an oversupply of new and existing homes available for
sale in various markets, including some of the markets in which we lend. Our
customers who are builders and developers face greater difficulty in selling
their homes in markets where these trends are more pronounced. Consequently, we
are facing increased delinquencies and non-performing assets as these builders
and developers are forced to default on their loans with us. We do not know when
the housing market will improve, and accordingly, additional downgrades,
provisions for loan losses, and charge-offs related to our loan portfolio may
occur.





Weakness
in the economy and in the real estate market, including specific weakness within
our geographic footprint, has adversely affected us and may continue to
adversely affect us.





Declines
in the U.S. economy and our local real estate markets contributed to our
increasing provisions for loan losses during 2008, and may result in additional
loan losses and loss provisions for 2009.   These factors could
result in further increases in loan loss provisions, and additional
delinquencies, charge-offs, or both in future periods, any of which may
adversely affect our financial condition and results of
operations.  If the strength of the U.S. economy in general and the
strength of the local economies in which we conduct operations continue to
decline, this could result in, among other things, further deterioration in
credit quality or a reduced demand for credit, including a resultant adverse
effect on our loan portfolio and additional increases to our allowance for loan
and lease losses.





Page 14 of
56





In
addition, deterioration of the U.S. economy may adversely impact our banking
business more generally. Economic declines may be accompanied by a decrease in
demand for consumer or commercial credit and declining real estate and other
asset values. Declining real estate and other asset values may reduce the
ability of borrowers to use such equity to support borrowings. Delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Additionally, our servicing costs, collection costs, and credit
losses may also increase in periods of economic slowdown or recessions. Effects
of the current real estate slowdown have not been limited to those directly
involved in the real estate construction industry (such as builders and
developers). Rather, it has impacted a number of related businesses such as
building materials suppliers, equipment leasing firms, and real estate
attorneys, among others, and the current recession has negatively impacted
businesses of all types. All of these affected businesses have banking
relationships, and when their businesses suffer from an economic slowdown or
recession, the banking relationship suffers as well.





The
amount of “other real estate owned” (“OREO”) increased significantly in 2008 and
may continue to increase, resulting in additional losses and expenses that will
negatively affect our operations.





At
December 31, 2007, we had a total of $11.5 million of OREO, and at December 31,
2008, we had a total of $27.3 million of OREO, reflecting a $15.8 million
increase, or 138%, from 2007 to 2008.  This increase in OREO is due,
among other things, to the continued deterioration of the residential real
estate market and the tightening of the credit market.  As the amount
of OREO increases, our losses, and the costs and expenses to maintain the real
estate likewise increase.  Due to the on-going economic crisis, the
amount of OREO may continue to increase throughout 2009.  Any
additional increase in losses, and maintenance costs and expenses due to OREO
may have material adverse effects on our business, financial condition, and
results of operations.  Such effects may be particularly pronounced in
a market of reduced real estate values and excess inventory, which may make the
disposition of OREO properties more difficult, increase maintenance costs and
expenses, and reduce our ultimate realization from any OREO sales.





We
could suffer loan losses from a decline in credit quality.





We could
sustain losses if borrowers, guarantors, and related parties fail to perform in
accordance with the terms of their loans.  We have adopted
underwriting and credit monitoring procedures and policies, including the
establishment and review of the allowance for credit losses that we believe are
appropriate to minimize this risk by assessing the likelihood of nonperformance,
tracking loan performance and diversifying our credit
portfolio.  These policies and procedures, however, may not prevent
unexpected losses that could materially adversely affect our results of
operations.





Our
allowance for loan losses may not be adequate to cover actual loan losses, which
may require us to take a charge to our earnings and adversely impact our
financial condition and results of operations.





We
maintain an allowance for estimated loan losses that we believe is adequate for
absorbing any probable losses in our loan portfolio.  Management
determines the allowance for loan losses based upon an analysis of general
market conditions, credit quality of our loan portfolio, and performance of our
customers relative to their financial obligations to us.  The amount
of future losses is susceptible to changes in economic, operating, and other
conditions, including changes in interest rates,  that may be beyond
our control.  These future losses may exceed the allowance for
estimated loan losses.  Although management believes that the
allowance for estimated loan losses is adequate to absorb any probable losses on
existing loans that may become uncollectible, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses in the
future.  Significant increases to the provision for loan losses may be
necessary if material adverse changes in general economic conditions occur or
the performance of our loan portfolio deteriorates.  Additionally,
federal banking regulators, as an integral part of their supervisory function,
periodically review the allowance for estimated loan losses.  If these
regulatory agencies require us to increase the allowance for estimated loan
losses, it would have a negative effect on our results of operations and
financial condition.





Page 15 of
56





Our
profitability is vulnerable to interest rate fluctuations.




Our
profitability depends substantially upon our net interest income.  Net
interest income is the difference between the interest earned on assets, such as
loans and investment securities, and the interest paid for liabilities, such as
savings and time deposits and out-of-market certificates of
deposit.  Market interest rates for loans, investments, and deposits
are highly sensitive to many factors beyond our control.  Recently,
interest rate spreads have generally narrowed due to changing market conditions,
policies of various government and regulatory authorities, and competitive
pricing pressures, and we cannot predict whether these rate spreads will narrow
even further.  This narrowing of interest rate spreads could adversely
affect our financial condition and results of operations.




At
December 31, 2008 we were in a liability sensitive position, which generally
means that changes in interest rates affect our interest paid on liabilities
quicker than our interest earned on assets because the rates paid on our
liabilities reset sooner than rates earned on our
assets.  Accordingly, we anticipate that any interest rate increases
by the Federal Reserve throughout 2009 will have a negative affect on our net
interest income over the short term until the interest rates earned on our
assets reset.





In
addition, we cannot predict whether interest rates will continue to remain at
present levels.  Changes in interest rates may cause significant
changes, up or down, in our net interest income.  Depending on our
portfolio of loans and investments, our results of operations may be adversely
affected by changes in interest rates.





The
FDIC Deposit Insurance assessments that we are required to pay may materially
increase in the future, which would have an adverse effect on our
earnings.




As an
insured depository institution, we are required to pay quarterly deposit
insurance premium assessments to the FDIC.  These assessments are
required to ensure that FDIC deposit insurance reserve ratio is at least 1.15%
of insured deposits.  Under the Federal Deposit Insurance Act, the
FDIC, absent extraordinary circumstances, must establish and implement a plan to
restore the deposit insurance reserve ratio to 1.15% of insured deposits, over a
five-year period, when the reserve ratio falls below 1.15%.  The
recent failures of several financial institutions have significantly increased
the Deposit Insurance Fund’s loss provisions, resulting in a decline in the
reserve ratio.  The FDIC expects a higher rate of insured institution
failures in the next few years, which may result in a continued decline in the
reserve ratio.





Beginning
on January 1, 2009, there was a uniform seven basis points (annualized) increase
to the assessments that banks pay for deposit insurance.  The
increased assessment rates range from 12 to 50 basis points (annualized) for the
first quarter 2009 assessment, which will be owed on June 30,
2009.  Beginning on April 1, 2009, the FDIC will modify the risk-based
assessments to account for each institution’s unsecured debt, secured
liabilities and use of brokered deposits.  Assessment rates will range
from 7 to 77.5 basis points (annualized) starting with the second quarter 2009
assessments, which will be owed on September 30, 2009.  In addition,
the FDIC has adopted an interim rule to impose an emergency assessment of 20
basis points as of June 30, 2009, which will be owed on September 30,
2009.  The FDIC may also impose additional emergency special
assessments of up to 10 basis points thereafter if the reserve ratio is
estimated to fall to a level that the FDIC believes would adequately affect
public confidence or to a level that shall be close to zero or negative at the
end of a calendar quarter.





Page 16 of
56





Due to
the recent increases in the assessment rates, and the potential for additional
increases, we will be required to pay additional amounts to the Deposit
Insurance Fund throughout 2009, which could have an adverse effect on our
earnings.  If the deposit insurance premium assessment rate applicable
to us increases again, either because of our risk classification, because of
emergency assessments, or because of another uniform increase, our earnings
could be further adversely impacted.





The
Company’s ability to pay dividends is limited and we may be unable to pay future
dividends.  As a result, capital appreciation, if any, of our common
stock may be your sole opportunity for gains on your investment for the
foreseeable future.





We have
suspended dividend payment on our common stock and make no assurances that we
will pay any dividends in the future.  Any future determination
relating to dividend policy will be made at the discretion of our Board of
Directors and will depend on a number of factors, including our future earnings,
capital requirements, financial condition, future prospects, regulatory
restrictions, and other factors that our Board of Directors may deem
relevant.  The holders of our common stock are entitled to receive
dividends when, and if declared by our Board of Directors out of funds legally
available for that purpose.  As part of our consideration to pay cash
dividends, we intend to retain adequate funds from future earnings to support
the development and growth of our business.  In addition, our ability
to pay dividends is restricted by federal policies and
regulations.  It is the policy of the Federal Reserve Board that bank
holding companies should pay cash dividends on common stock only out of net
income available over the past year and only if prospective earnings retention
is consistent with the organization’s expected future needs and financial
condition.  Further, our principal source of funds to pay dividends is
cash dividends that we receive from the Bank, and Georgia Department of Banking
and Finance regulations prohibit the Bank from paying dividends in
2009.  See Item 5—“Market for Registrant’s Common Equity and Related
Shareholder Matters and Issuer Purchases of Equity Securities.”





Competition
from other financial institutions may adversely affect our
profitability.




The
banking business is highly competitive, and we experience strong competition
from many other financial institutions.  We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other financial institutions, which operate in our
primary market areas and elsewhere.




We
compete with these institutions both in attracting deposits and in making
loans.  In addition, we have to attract our customer base from other
existing financial institutions and from new residents.  Many of our
competitors are well established and much larger financial
institutions.  While we believe we can and do successfully compete
with these other financial institutions in our markets, we may face a
competitive disadvantage as a result of our smaller size and lack of geographic
diversification.





Although
we compete by concentrating our marketing efforts in our primary market area
with local advertisements, personal contacts, and greater flexibility in working
with local customers, we can give no assurance that this strategy will be
successful.





The
impact of the current economic downturn on the performance of other financial
institutions in our geographic area, actions taken by our competitors to address
the current economic downturn, and the public perception of and confidence in
the economy generally, and the banking industry specifically, could
negatively impact our performance and operations.





All
financial institutions are subject to the same risks resulting from a weakening
economy such as increased charge-offs and levels of past due loans and
nonperforming assets. As troubled institutions in our market area continue to
dispose of problem assets, the already excess inventory of residential homes and
land lots will continue to negatively affect home values and increase the time
it takes us or our borrowers to sell existing
inventory.  Additionally, the perception that smaller, community
banking institutions are risky institutions for purposes of regulatory
compliance or safeguarding deposits may cause depositors, nonetheless to move
their funds to larger institutions. If our depositors should move their funds
based on events happening at other financial institutions, our operating results
would suffer.





Page 17 of
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Negative
publicity about financial institutions, generally, or about the Company or Bank,
specifically, could damage the Company’s reputation and adversely impact its
business operations and financial results.




Reputation
risk, or the risk to our business from negative publicity, is inherent in our
business. Negative publicity can result from the actual or alleged conduct of
financial institutions, generally, or the Company or Bank, specifically, in any
number of activities, including leasing practices, corporate governance, and
actions taken by government regulators in response to those activities. Negative
publicity can adversely affect our ability to keep and attract customers and can
expose us to litigation and regulatory action, any of which could negatively
affect our business operations or financial results.





We are subject to
liquidity risk in our operations.





Liquidity
risk is the possibility of being unable, at a reasonable cost and within
acceptable risk tolerances, to pay obligations as they come due, to capitalize
on growth opportunities as they arise, or to pay regular dividends because of an
inability to liquidate assets or obtain adequate funding on a timely
basis.  Liquidity is required to fund various obligations, including
credit obligations to borrowers, mortgage originations, withdrawals by
depositors, repayment of debt, dividends to shareholders, operating expenses,
and capital expenditures.  Liquidity is derived primarily from retail
deposit growth and retention, principal and interest payments on loans and
investment securities, net cash provided from operations, and access to other
funding sources.  Our access to funding sources in amounts adequate to
finance our activities could be impaired by factors that affect us specifically
or the financial services industry in general.  Factors that could
detrimentally affect our access to liquidity sources include a decrease in the
level of our business activity due to a market downturn or adverse regulatory
action against us.  Our ability to borrow could also be impaired by
factors that are not specific to us, such as a severe disruption in the
financial markets or negative views and expectations about the prospects for the
financial services industry as a whole, given the recent turmoil faced by
banking organizations in the domestic and worldwide credit markets.




Adverse
market conditions and future losses may require us to raise additional capital
to support our operations, but that capital may not be available when it is
needed, which could adversely affect our financial condition and results of
operations.




We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations.  Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial
performance.  Accordingly, we cannot assure you of our ability to
raise additional capital, if needed, on terms acceptable to us.  If we
cannot raise additional capital when needed, our ability to further expand our
operations could be materially impaired.





Page 18 of
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Our
business strategy includes the continuation of growth plans, and our financial
condition and results of operations could be negatively affected if we fail to
grow or fail to manage our growth effectively.




We intend
to continue pursuing a growth strategy for our business.  Our
prospects must be considered in light of the risks, expenses, and difficulties
frequently encountered by companies in growth stages of
development.  We cannot assure you we will be able to expand our
market presence in our existing markets or successfully enter new markets or
that any such expansion will not adversely affect our results of
operations.  Failure to manage our growth effectively could have a
material adverse effect on our business, financial condition, results of
operations, or future prospects, and could adversely affect our ability to
successfully implement our business strategy.  Also, if our growth
occurs more slowly than anticipated or declines, our results of operations could
be materially adversely affected.





Our
ability to grow successfully will depend on a variety of factors including the
continued availability of desirable business opportunities, the competitive
responses from other financial institutions in our market areas and our ability
to manage our growth.  While we believe we have the management
resources and internal systems in place to manage our future growth, there can
be no assurance that growth opportunities will be available or growth will be
managed successfully.




Our
plans for future expansion depend, in some instances, on factors beyond our
control, and an unsuccessful attempt to achieve growth could have a material
adverse effect on our business, financial condition, results of operations, and
future prospects.




We expect
to continue to engage in new branch expansion.  We may also seek to
acquire other financial institutions, or parts of those institutions, though we
have no present plans in that regard.  Expansion involves a number of
risks, including the following:




•
            the
      time and costs of evaluating new markets, hiring experienced local
      management, and opening new
offices;




•
            the
      time lags between these activities and the generation of sufficient assets
      and deposits to support the costs of the
  expansion;




•
            our
      potential inability to finance an acquisition without diluting the
      interests of our existing
shareholders;




•
            the
      diversion of our management’s attention to the negotiation of a
      transaction may detract from their business
  productivity;




•
            entering
      into new markets where we may lack experience;
  and




•
            introducing
      into our business new products and services with which we have no prior
      experience.




If
we fail to retain our key employees, our growth and profitability could be
adversely affected.





Our
success is, and is expected to remain, highly dependent on our executive
management team, consisting of our Chief Executive Officer, David D. Stovall;
our President, Edward D. Ariail; and our Chief Operating Officer, Bonnie
Bowling.  This is particularly true because, as a community bank, we
depend on our management team’s ties to the community to generate business for
us.  Our growth will continue to place significant demands on our
management, and the loss of any such person’s services may have an adverse
effect upon our growth and profitability.





Page 19 of
56





Our
directors and executive officers own a significant portion of our common stock
and can influence stockholder decisions.





Our
directors and executive officers, as a group, beneficially owned approximately
48.6% of our fully diluted outstanding common stock as of December 31,
2008.  As a result of their ownership, the directors and executive
officers will have the ability, if they voted their shares in concert, to
influence the outcome of all matters submitted to our stockholders for approval,
including the election of directors.




Even
though our common stock is currently traded on the Nasdaq Global Market, it has
substantially less liquidity than the average stock quoted on a national
securities exchange.




The
trading volume in our common stock on the Nasdaq Global Market is relatively low
when compared with larger companies listed on the Nasdaq Global Market or other
stock exchanges.  We cannot say with any certainty that a more active
and liquid trading market for our common stock will develop.  Because
of this, it may be more difficult for you to sell a substantial number of shares
for the same price at which you could sell a smaller number of shares, and you
may not be able to sell your shares at all.




We cannot
predict the effect, if any, that future sales of our common stock in the market,
or their availability of shares of common stock for sale in the market, will
have on the market price of our common stock.  As a result, sales of
substantial amounts of our common stock in the market, or the potential for such
sales, could cause the price of our common stock to decline or impair our future
ability to raise capital through sales of our common stock.




We
are subject to extensive regulation that could limit or restrict our activities
and impose financial requirements or limitations on the conduct of our business,
which limitations or restrictions could adversely affect our
profitability.




As a bank
holding company, we are primarily regulated by the Board of Governors of the
Federal Reserve System (“Federal Reserve Board”).  Our subsidiary bank
is primarily regulated by the Federal Deposit Insurance Corporation (the “FDIC”)
and the Georgia Department of Banking and Finance.  Our compliance
with Federal Reserve Board, FDIC, and Department of Banking and Finance
regulations is costly and may limit our growth and restrict certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits
and locations of offices.  We are also subject to capital requirements
of our regulators.




The laws
and regulations applicable to the banking industry could change at any time, and
we cannot predict the effects of these changes on our business and
profitability.  Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.





The rules
and regulations promulgated by the SEC that currently apply to us, together with
related exchange rules and regulations, have increased the scope, complexity and
cost of our corporate governance, reporting, and disclosure
practices.  Additional legislation or regulations, or amendments to
current legislation or regulations, related to corporate governance, reporting,
and disclosure may cause us to experience greater compliance costs.




Natural
disasters or other adverse weather events could negatively affect our local
economies or disrupt our operations, which could have an adverse effect on our
business or results of operations.





Georgia’s
economy is affected, from time to time, by tornadoes and other natural
disasters.  We cannot predict whether, or to what extent, damage
caused by these events will affect our operations, our customers, or the
economies in our banking markets.  However, weather events could cause
a decline in loan originations, destruction or decline in the value of
properties securing our loans, or an increase in the risks of delinquencies,
foreclosures, and loan losses.





Page 20 of
56







Item
1B.  UNRESOLVED STAFF COMMENTS




Not
applicable.





Item
2.  PROPERTIES





The
Company's principal office (as well as that of Advantage Insurers, Inc.)is
located at Habersham Bank's Central Habersham office, 282 Historic Highway 441,
Cornelia, Georgia.  The telephone number of that office is (706)
778-1000.





Habersham
Bank's North Habersham (main) office is located at 1151 Washington Street,
Clarkesville, Georgia.  The telephone number of that office is (706)
778-1000.  Habersham Bank also has twelve full-service branch
offices.   Its Central Habersham office is located at 282
Historic Highway 441, Cornelia, Georgia; its South Habersham office is located
at 186 441 By-Pass, Baldwin, Georgia; its Cleveland Office is located at 575
South Main Street, Cleveland, Georgia; its Canton Office is located at 1925
Marietta Highway, Canton, Georgia; its Hickory Flat Office is located at 6782
Hickory Flat Highway, Canton, Georgia; its Warrenton Office is located at 189
Legion Drive, Warrenton, Georgia; its Braselton Office is located at 6322 Grand
Hickory Drive, Braselton, Georgia; its Toccoa Office is located at 27 North Big
A Road; its Eastanollee Office is located at 370 Wal-Mart Way, Eastanollee,
Georgia; its Cumming Office is located at 2740 Nuckolls Road, Cumming, Georgia
and its Flowery Branch Office is located at 5977 Sprout Springs Road, Flowery
Branch, Georgia.  Each office has a 24-hour teller machine, with the
exception of the Warrenton Office.  Habersham Bank owns its office
properties without encumbrance, with the exception of the Eastanollee Office,
which is leased.





Item
3.  LEGAL PROCEEDINGS





The
Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, and no such proceedings are known to be contemplated
by governmental authorities.





Item
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





A special
meeting of shareholders was held December 17, 2008 at the Company’s Central
Office at 282 Historic Highway 441 North, Cornelia,
Georgia  30531.





No
election of directors took place at this meeting.





The
following matters were voted on at the meeting as was previously identified in
the proxy material forwarded to each shareholder:





Proposal
to approve a proposed amendment to the Company’s Articles of Incorporation
authorizing a class of 10,000,000 shares of preferred stock, no par value, as
set forth in Appendix A to the Proxy statement.





Votes
were cast as follows:





For:  1,869,354     Against:  57,233     Abstain:  2,751     Broker
Non-votes:  0





Proposal
to authorize management of the Company to adjourn the meeting to another time
and date in order to allow the Board of Directors to solicit additional proxies
or attendance at the meeting.





Votes
were cast as follows:





For:  1,871,645     Against:  55,473     Abstain:  2,210     Broker
Non-votes:  0





Page 21 of
56





PART
II





Item
5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





The
common stock of Habersham Bancorp is traded on the Nasdaq Global Market
("Nasdaq") under the symbol HABC.  At December 31, 2008 Habersham
Bancorp had approximately 497 shareholders of record.  The following
table sets forth the high and low sale prices and the cash dividends paid on the
Company's common stock on a quarterly basis for the past two fiscal years and a
portion of the first quarter of 2009.  The Company suspended dividends
on its common stock on November 19, 2008.





2009
                                    
                                    High
                                    
                                    
                                    Low
                                    
                                    
                                    DividendFirst
      quarter (through March 5, 2009)
                                    
                                    
                                    4.74
                                    
                                    
                                    
                                    2.66
                                    
                                    
                                    
                                    .002008
                                    
                                    High
                                    
                                    
                                    Low
                                    
                                    
                                    DividendFourth
      quarter
                                    
                                    $
                                    7.00
                                    
                                    
                                    $
                                    2.35
                                    
                                    
                                    $
                                    -Third
      quarter
                                    
                                    
                                    7.09
                                    
                                    
                                    
                                    5.52
                                    
                                    
                                    
                                    0.05Second
      quarter
                                    
                                    
                                    14.20
                                    
                                    
                                    
                                    7.08
                                    
                                    
                                    
                                    0.10First
      quarter
                                    
                                    
                                    15.60
                                    
                                    
                                    
                                    13.28
                                    
                                    
                                    
                                    0.102007
                                    
                                    High
                                    
                                    
                                    Low
                                    
                                    
                                    DividendFourth
      quarter
                                    
                                    $
                                    17.01
                                    
                                    
                                    $
                                    12.82
                                    
                                    
                                    $
                                    0.60Third
      quarter
                                    
                                    
                                    20.00
                                    
                                    
                                    
                                    15.65
                                    
                                    
                                    
                                    0.10Second
      quarter
                                    
                                    
                                    23.97
                                    
                                    
                                    
                                    19.58
                                    
                                    
                                    
                                    0.10First
      quarter
                                    
                                    
                                    24.50
                                    
                                    
                                    
                                    22.00
                                    
                                    
                                    
                                    0.10





Cash dividends on Habersham
Bank’s common stock may be declared and paid only out of its retained earnings,
and dividends may not be distributed at any time when the Bank’s paid-in capital
and appropriated earnings do not, in combinations, equal at least 20% of its
capital stock account.  In addition, the GDBF’s rules and regulations
require prior approval before cash dividends may be declared and paid if: (i)
the Bank’s ratio of equity capital to adjusted total assets is less than 6%;
(ii) the aggregate amount of dividends declared or anticipated to be declared in
that calendar year exceeds 50% of the Bank’s net earnings, after taxes but
before dividends, for the previous calendar year, or (iii) the percentage of the
Bank’s loans classified as adverse as to repayment or recovery by the GDBF at
the most recent examination of the Bank exceeds 80% of the Bank’s equity as
reflected at such examination.  As of December 31, 2008 the Bank could
not declare dividends without regulatory approval.See “Risk Factors – The
Company’s ability to pay dividends is limited and we may be unable to pay future
dividends.  As a result, capital appreciation, if any, of our common
stock may be your sole opportunity for gain on your investments for the
foreseeable future.”





Page 22 of
56





Other
than the issuance of $3.0 million of Series A Preferred Stock as previously
reported in the Company’s current report on Form 8-K filed on January 5, 2009,
the Company did not issue any of its equity securities without registration
under the Securities Act of 1933, as amended, during 2008.





See Item
12—Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” for a table presenting information on equity securities
subject to future issuance under the Company’s equity compensation
plans.




Item
6.  SELECTED FINANCIAL DATA





SELECTED
FINANCIAL DATA


(In
thousands, except share and per share data)




For
      the years ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004SUMMARY
      OF OPERATIONSInterest
      income
                    
                    $
                    26,135
                    
                    
                    $
                    36,376
                    
                    
                    $
                    34,460
                    
                    
                    $
                    25,936
                    
                    
                    $
                    20,743Interest
      expense
                    
                    
                    14,288
                    
                    
                    
                    16,847
                    
                    
                    
                    13,218
                    
                    
                    
                    8,600
                    
                    
                    
                    6,791Provision
      for loan losses
                    
                    
                    16,021
                    
                    
                    
                    675
                    
                    
                    
                    -
                    
                    
                    
                    330
                    
                    
                    
                    483Other
      income
                    
                    
                    4,117
                    
                    
                    
                    3,779
                    
                    
                    
                    3,656
                    
                    
                    
                    3,448
                    
                    
                    
                    4,431Other
      expense
                    
                    
                    22,630
                    
                    
                    
                    18,672
                    
                    
                    
                    17,194
                    
                    
                    
                    14,991
                    
                    
                    
                    14,777Net
      (loss) earnings
                    
                    
                    (14,849
                    )
                    
                    
                    2,939
                    
                    
                    
                    5,293
                    
                    
                    
                    3,813
                    
                    
                    
                    2,343PER
      SHARE AMOUNTSNet
      (loss) earnings per common share-diluted
                    
                    $
                    (5.27
                    )
                    
                    $
                    1.00
                    
                    
                    $
                    1.77
                    
                    
                    $
                    1.30
                    
                    
                    $
                    0.80Dividends
                    
                    $
                    0.25
                    
                    
                    $
                    0.90
                    
                    
                    $
                    0.36
                    
                    
                    $
                    0.32
                    
                    
                    $
                    1.28Weighted
      average number of common and common equivalent shares
      outstanding
                    
                    
                    2,218,593
                    
                    
                    
                    2,952,528
                    
                    
                    
                    2,983,048
                    
                    
                    
                    2,938,698
                    
                    
                    
                    2,939,951AT
      DECEMBER 31Total
      assets
                    
                    $
                    494,869
                    
                    
                    $
                    514,219
                    
                    
                    $
                    555,738
                    
                    
                    $
                    478,431
                    
                    
                    $
                    385,933Earning
      assets
                    
                    
                    412,864
                    
                    
                    
                    450,294
                    
                    
                    
                    502,035
                    
                    
                    
                    435,091
                    
                    
                    
                    355,093Loans,
      net
                    
                    
                    310,607
                    
                    
                    
                    348,251
                    
                    
                    
                    342,816
                    
                    
                    
                    316,773
                    
                    
                    
                    277,137Deposits
                    
                    
                    392,888
                    
                    
                    
                    390,267
                    
                    
                    
                    450,629
                    
                    
                    
                    372,762
                    
                    
                    
                    292,957Long-term
      debt
                    
                    
                    38,000
                    
                    
                    
                    38,000
                    
                    
                    
                    38,000
                    
                    
                    
                    42,300
                    
                    
                    
                    36,000Stockholders’
      equity
                    
                    
                    41,998
                    
                    
                    
                    54,182
                    
                    
                    
                    55,564
                    
                    
                    
                    50,257
                    
                    
                    
                    48,006RATIOSReturn
      on average assets
                    
                    
                    (2.95
                    )%
                    
                    
                    .59
                    %
                    
                    
                    1.13
                    %
                    
                    
                    .91
                    %
                    
                    
                    .62
                    %Return
      on average equity
                    
                    
                    (31.21
                    )%
                    
                    
                    5.23
                    %
                    
                    
                    10.06
                    %
                    
                    
                    7.76
                    %
                    
                    
                    4.86
                    %Dividend
      payout ratio
                    
                    NM
                    
                    
                    
                    87.83
                    %
                    
                    
                    20.03
                    %
                    
                    
                    24.63
                    %
                    
                    
                    160.00
                    %Average
      equity to average assets ratio
                    
                    
                    9.44
                    %
                    
                    
                    11.24
                    %
                    
                    
                    11.25
                    %
                    
                    
                    11.77
                    %
                    
                    
                    12.66
                    %





NM – not
meaningful in a loss year





Page 23 of
56





Item
7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS




ORGANIZATION





Habersham
Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank
(“Habersham Bank”) and The Advantage Group, Inc.  Habersham Bank owns
all of the outstanding stock of Advantage Insurers, Inc. (“Advantage Insurers”).
Advantage Insurers offers a full line of property, casualty and life insurance
products. The Advantage Group, Inc. and Advantage Insurers do not comprise a
significant portion of the financial position, results of operations, or cash
flows of the Company and as a result management’s discussion and analysis, which
follows relates primarily to Habersham Bank.





The
Company’s continuing primary business is the operation of banks in rural and
suburban communities in Habersham, White, Cherokee, Warren, Gwinnett, Stephens,
Forsyth and Hall counties in Georgia.  Habersham Bank’s main office is
located in Cornelia, Georgia, and it has 11 branch offices, with its most recent
branch office having been opened in Flowery Branch (Hall County), Georgia in the
fourth quarter of 2008.  The Company’s primary source of revenue is
interest income on loans to businesses and individuals in its market
area.





EXECUTIVE
SUMMARY





Year Ended December 31,
2008


The
Company’s primary source of income is interest income from loans and investment
securities.  Its profitability depends largely on net interest income,
which is the difference between the interest received on interest-earning assets
and the interest paid on deposits, borrowings, and other interest-bearing
liabilities.





Net loss
for the year ended December 31, 2008 was $14.8 million or $5.27 per diluted
share, a decrease of $17.8 million or 605.19% when compared to net earnings of
$2.9 million or $1.00 per diluted share for the year ended December 31,
2007.  The decrease resulted primarily from a decrease in net interest
income, increased provisions for loan losses and a goodwill impairment charge of
approximately $7.7 million, $15.3 million and $3.5 million,
respectively.





The
decrease in net interest income was attributable to increases in the number and
balances of loans on nonaccrual status and the number and balances of variable
rate loans repricing at lower rates and a smaller net interest
margin.  Interest income for the year ended December 31, 2008 was
approximately $26.1 million, representing a decrease of approximately 28.15%,
when compared to 2007. The decrease resulted from: 1) the effect of the falling
prime interest rate on outstanding variable rate loans totaling approximately
$245.4 million, 2) average loan balances decreasing approximately $16.2 million
when compared to 2007, and 3) nonaccrual loans increasing approximately $37.7
million.   Interest expense for the year ended December 31, 2008
was approximately $14.3 million, representing a decrease of approximately $2.6
million when compared to 2007.  This decrease resulted from declining
rates paid on deposit and borrowing balances during 2008.  The net
interest margin for the year ended December 31, 2008 was 2.79%, a decrease from
4.41% for the year ended December 31, 2007.   In addition,
increases in interest costs outpaced increases in interest earned as variable
rate interest loans repriced at lower interest rates more quickly than the rates
paid on deposit balances as each responded to decreases in the interest rates
set by the Federal Reserve Bank.





Net
interest income before provision for loan loss for the year ended December 31,
2008, decreased approximately $7.7 million or 39.34% when compared to 2007 as a
result of the items discussed above.  Declines in the U.S. economy and
our local real estate markets contributed to our increase in the provision for
loan losses.  As delinquencies and foreclosures increased, Habersham
Bank recorded provisions to its allowance for loan losses of approximately $16.0
million for 2008.





Page 24 of
56





During
the fourth quarter of 2008, the Company engaged an independent business
valuation firm to perform an assessment of the Company’s
goodwill.  The assessment concluded that the Company had an impairment
of its goodwill.  The fair value was determined based on two different
approaches, the market approach and the income approach. Based on the
assessment, the Company concluded that all of the goodwill was impaired and a
non-cash impairment charge of $3.5 million was recorded to operations during the
fourth quarter of 2008.





At
December 31, 2008, Habersham Bank’s other real estate portfolio totaled
approximately $27.3 million, an increase of approximately $15.8 million when
compared to December 31, 2007.  This increase resulted in higher legal
and professional services expenses for 2008 in foreclosure and maintenance
costs.  The other real estate properties are primarily located in the
metro Atlanta area and the surrounding counties.





The
Company’s total assets decreased $19.3 million, or 3.76%, to $494.9 million at
December 31, 2008 when compared to $514.2 million at December 31,
2007.  Decreases in loans, cash and cash equivalents, and in goodwill
of approximately $39.5 million, $8.1 million and $3.5 million, respectively,
were offset by increases in other real estate, other assets (income tax
receivable and deferred tax accounts, accrued interest receivable, company owned
life insurance, etc.), investment securities and premises and equipment of
approximately $15.8 million, $7.5 million, $5.7 million and $3.4 million,
respectively.





The
Company’s total liabilities (deposits, borrowings and other liabilities) at
December 31, 2008 decreased approximately $7.2 million or 1.56% to $452.9 at
December 31, 2008 from $460.0 million at December 31,
2007.   Decreases in other borrowings of approximately $9.8
million were offset by increases in deposits of approximately $2.6 million. A
decrease in total stockholders’ equity of approximately $12.2 million resulted
from the year-to-date loss of approximately $14.8 million and dividend payments
of approximately $705,000, offset by the sale of preferred stock of
approximately $3 million.





The
following discussion sets forth the major factors that affect the Company’s
results of operations and financial condition.  These comments should
be read in conjunction with the consolidated financial statements and related
notes.





This
discussion contains forward-looking statements involving risks and
uncertainties.  Results may differ significantly from those discussed
in the forward-looking statements.  Factors that might cause such a
difference include, but are not limited to, risks involving the potential
adverse effect of changes in U.S., state and local economic and real estate
market conditions, unexpected changes in interest rates and the current interest
rate environment, difficulties in expanding into new market areas, loan losses
and the adequacy of the Company’s loan loss allowance, changes in regulation and
legislation, competition and other risks identified in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008 and its other filings
with the Securities and Exchange Commission.





CRITICAL
ACCOUNTING ESTIMATES





In
reviewing and understanding financial information for the Company, you are
encouraged to read and understand the significant accounting policies which are
used in preparing the consolidated financial statements of the
Company.  These policies are described in Note 2 to the consolidated
financial statements which are presented elsewhere in this annual
report.  Of these policies, management believes that the accounting
for the allowance for loan losses is the most critical.  This is
because of the subjective nature of the estimates used in establishing the
allowance and the effect these estimates have on the Company’s
earnings.  Because the allowance is replenished by means of a
provision for loan losses that is charged as an expense against net earnings,
the estimation of the allowance affects the Company’s earnings
directly.  Losses on loans result from a broad range of causes, from
borrower-specific problems to industry issues to the impact of the economic
environment.  The identification of the factors that lead to default
or non-performance under a loan agreement and the estimation of loss in these
situations is very subjective.  In addition, a dramatic change in the
performance of one or a small number of borrowers can have a significant impact
on the estimate of losses.  As described further below, under
“Allowance for Loan Losses,” management has implemented a process that has been
applied consistently to systematically consider the many variables that impact
the estimation of the allowance for loan losses.





Page 25 of
56





Certain
economic factors could have a material impact on the loan loss allowance
determination and its adequacy.  The depth and duration of any
economic recession would have an impact on the credit risk associated with the
loan portfolio. Another factor that can impact the determination is a
consideration of concentrations in collateral which secure the loan
portfolio.  The Company’s loan portfolio is secured primarily by
commercial and residential real estate, with such loans comprising approximately
90% of the total loan portfolio at December 31, 2008.





The
commercial and residential real estate loan portfolio is segregated into
construction and land development, loans secured by commercial properties, 1-4
family residential properties, and other land loans totaling approximately
$148.1 million, $82.0 million, $60.8 million and $1.2 million, respectively. The
construction, land development and other land loan portfolios have been the
hardest hit by the downturn in the economy resulting in increases in
nonperforming assets.    Habersham Bank held concentrations
of loans totaling 100% or more of Tier 1 Capital to borrowers in land and
subdivision development and real estate lessors (amortized non-owner occupied)
at December 31, 2008 and 2007.  See “Loans.”





The
Company will, from time to time, make unsecured loans.  The risk to
the Company is greater for unsecured loans as the ultimate repayment of the loan
is only dependent on the borrower’s ability to pay.  The balance of
unsecured loans at December 31, 2008 and 2007 was $14.2 million and $11.9
million, respectively.





Refer to
the section entitled “Allowance for Loan Losses” for an additional discussion of
the key assumptions and methods used in determining the allowance for loan
losses, as well as inherent risks in estimating the allowance.





RESULTS
OF OPERATIONS





Habersham
Bancorp experienced a net loss of $14.8 million for the year ended December 31,
2008, or diluted loss of $5.27 per share, representing a decrease of 605.19%
from 2007.  For the years ended December 31, 2007 and 2006, net
earnings were $2.9 million and $5.3 million, respectively, with related diluted
earnings per common and common equivalent share of, $1.00 and $1.77,
respectively, representing a decrease of 44.50% from 2006 to 2007.





For the
year ended December 31, 2008, the net loss represented a loss on average equity
of 31.21%.  For the years ended December 31, 2007 and 2006, net
earnings represented a return on average equity of 5.23% and 10.06% in 2007 and
2006, respectively.





The
decrease in net earnings for the year ended December 31, 2008, when compared to
the year ended December 31, 2007, was primarily due to a decrease in net
interest income of approximately $7.7 million or 39.3% and in increases in
noninterest expense of approximately $4.0 million or 21.20% and in the provision
for loan losses of $15.3 million or 2272.6% when compared to 2007. The provision
for loan loss was increased in order to maintain an adequate allowance for loan
losses.  The decrease in Interest income includes the loss of interest
income of approximately $2.4 million on nonaccrual loans during
2008.  The increase in noninterest expense is primarily attributable
to a $3.5 million goodwill impairment expense.  Additional factors
include:  increases in other real estate expenses, occupancy expense,
telephone and leased equipment expense totaling approximately $1.2 million,
$251,000, $40,000 and $47,000, respectively, when compared to 2007
expenses.





Page 26 of
56





Goodwill
was determined to be impaired primarily due to the decrease in the valuation of
the Company’s common stock based on market trading prices versus its much higher
tangible book value.  Therefore, a $3.5 million goodwill impairment
charge was taken during the fourth quarter of 2008.





Net
earnings for the year ended December 31, 2007 were $2.9 million or $1.00 per
diluted share, a decrease of 44.5% when compared to $5.3 million or $1.77 per
diluted share for the year ended December 31, 2006.   The
decrease was attributable primarily to an increase in nonaccrual loans, which
reduced interest income and increased expenses related to the provision for loan
losses.  During 2007, nonaccrual loans increased by $17.8 million, or
3549.1%, and net interest income decreased by $1.7 million, or approximately
8.1%.  The increase in nonaccrual loans resulted principally from a
decline in the 1-4 family real estate market in both construction lending and
new mortgages.  To maintain an adequate allowance for loan losses, the
Company increased the provision for loan losses to $675,225 during
2007.  In addition, increases in interest costs outpaced increases in
interest earned as variable rate interest loans repriced at lower interest rates
more quickly than the rates paid on deposit balances as each responded to
decreases in the interest rates set by the Federal Reserve
Bank.  Increases in noninterest expense, which includes salaries and
employee benefits, occupancy expenses, computer expenses, telephone expense,
etc. of approximately $1.5 million resulted primarily from the staffing and
operation of the Cumming office, which began operation in January
2007.





NET
INTEREST INCOME





Net
interest income is the largest single source of income for the
Company.  Management strives to attain a level of earning asset growth
while providing a net yield on earning assets that will cover overhead and other
costs and provide a reasonable return to our stockholders.





2008
                        2007
                        2006Net
      interest income
                        $
      11.8 million
                        $
      19.5 million
                        $
      21.2
million





Net
interest income for 2008 decreased approximately $7.7 million or 39.3% when
compared to 2007, which had decreased approximately $1.7 million or 8.07% when
compared to 2006.  Net interest income is affected by interest income
from loans, investment securities and federal funds sold offset by interest paid
on deposits and borrowings.  The following table compares the weighted
average tax equivalent yields for loans, investment securities and federal funds
sold and the weighted average rates for deposits and borrowings for 2008, 2007
and 2006.





2008
                    
                    
                    2007
                    
                    
                    2006Interest
      yields earned:
                    
                    Yields
                    
                    
                    Yields
                    
                    
                    YieldsLoans
                    
                    
                    6.32
                    %
                    
                    
                    8.91
                    %
                    
                    
                    9.01
                    %Investment
      securities
                    
                    
                    5.16
                    %
                    
                    
                    5.32
                    %
                    
                    
                    5.08
                    %Federal
      funds sold
                    
                    
                    2.29
                    %
                    
                    
                    4.93
                    %
                    
                    
                    4.89
                    %Loans
      held for sale
                    
                    
                    5.68
                    %
                    
                    
                    5.58
                    %
                    
                    
                    4.72
                    %Interest
      rates paid:
                    
                    Rates
                    
                    
                    Rates
                    
                    
                    RatesDeposits
                    
                    
                    3.39
                    %
                    
                    
                    4.15
                    %
                    
                    
                    3.54
                    %Borrowings
                    
                    
                    3.91
                    %
                    
                    
                    5.00
                    %
                    
                    
                    4.71
                    %





Page 27 of
56





Yields
and rates reflect adjustments in pricing as the Federal Reserve moves the prime
interest rate.





During
2008, average balances in interest earning assets decreased approximately $14.1
million or 3.08%.  During the same time period, average balances in
interest bearing liabilities increased approximately $16.9 million or
4.29%.      During 2007, average balances in
interest earning assets increased approximately $23.8 million or 5.49% in the
aggregate.  During the same time period, average balances in interest
bearing liabilities increased approximately $36.4 million or
10.16%.





During
2008, interest income decreased approximately $10.2 million when compared to
2007.  Decreases in loan interest income and federal funds sold of
approximately $10.3 million and $176,000, respectively, were offset by increases
in investment securities income of approximately $190,000.  Loss of
interest income on nonaccrual loans totaled approximately $2.4 million during
2008.  Loan yields decreased by 259 basis points when comparing yields
for 2008 to yields for 2007, as variable rate loans repriced in response to the
decreasing prime rate.





During
2007, interest income increased approximately $1.9 million when compared to
2006.  Increases in interest income resulting from the loan portfolio
and investment securities totaling approximately $1.7 million and $343,000,
respectively, were offset by decreases in federal funds sold income of
approximately $170,000.  Interest income from loans was net of
interest losses on nonaccrual loans totaling approximately $616,000 during
2007.  Loan yields also decreased by 10 basis points when comparing
yields for 2007 to yields for 2006, as variable rate loans repriced in response
to the decreasing prime rate.





Interest
expense for 2008 decreased approximately $2.6 million, or 15.19%, when compared
to 2007.  Interest expense for deposits and borrowings decreased
approximately $2.4 million and $202,000, respectively.   Average
interest rates paid on deposit balances was 3.39% for 2008 compared to 4.15% for
2007.  Increases in average certificate of deposit balances totaling
approximately $16.9 million were offset by decreases in average savings, money
market and NOW accounts of approximately $10.0 million, as depositors moved into
higher yielding accounts.   Average borrowing balances for 2008
increased approximately $10.0 million when compared to 2007, primarily in
securities sold under repurchase agreements.





Interest
expense for 2007 increased approximately $3.6 million, or 27.46% when compared
to 2006.  Interest expense for deposits and borrowings increased
approximately $3.1 million and $557,000, respectively.  Increases in
the average balances of time deposits of approximately $30.1 million were offset
by decreases in average balances in the interest bearing demand and savings
deposits totaling approximately $1.2 million and $1.0 million, respectively.
Increases in average short-term and other borrowings balances of approximately
$8.5 million primarily resulted from an increase in securities sold under
repurchase agreements.





The tax
equivalent net interest margin of the Company was 2.79% in 2008, 4.41% in 2007
and 5.03% in 2006.  The net interest margin of the Company decreased
due to decreases in loan yields, increases in deposit and short-term borrowing
rates and the loss of interest on nonaccrual loans.





Page 28 of
56





CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID





Average
balances in the total loan portfolio decreased approximately $16.2 million, or
4.59% at December 31, 2008 from 2007 average balances.  The total loan
portfolio decreased approximately $27.6 million during
2008.  Decreases in the real estate construction and land development
portfolios, commercial loans, commercial real estate portfolios and consumer
lending totaling approximately $27.8 million, $3.7 million, $1.3 million and
$581,000, respectively, were offset by increases in the residential mortgage
portfolio of approximately $5.6 million. The decrease in the real estate
construction and land development portfolios is net of approximately $17.8
million of foreclosures of loans as result of the decline in the real estate
market for both construction lending and acquisition and development of
residential properties.





Average
balances in the total loan portfolio increased approximately $22.9 million, or
6.91% at December 31, 2007 from 2006 average balances.  The total loan
portfolio increased approximately $4.1 million during
2007.   Increases in the commercial and real estate secured
lending portfolios totaled approximately $4.7 million and $336,000,
respectively, offset by a decrease in the consumer lending portfolio of
approximately $872,000.  The real estate secured lending portfolio
increase is net of approximately $11.0 million of foreclosures of construction
loans secured by 1-4 family residential properties as a result of the decline in
the real estate market for both construction lending and acquisition and
development of residential properties.





Average
balances of investment securities increased approximately $4.2 million, or
4.43%, from year-end 2007 to 2008.  Purchases of investment securities
totaled approximately $62 million during 2008, offset by sales and calls and
maturities of investment securities of approximately $47.6 million and $9.7
million, respectively.   Purchases of U.S. government-sponsored
enterprises and tax-exempt state and political subdivisions securities totaled
approximately $60.2 million and $1.8 million, respectively.





Average
balances of investment securities increased approximately $4.3 million, or
4.72%, from year-end 2006 to 2007.  Purchases of investment securities
totaled approximately $14.9 million during 2007 offset by maturities, sales and
calls of investment securities of approximately $7.2 million and $4.1 million,
respectively. Purchases of U.S. government-sponsored enterprises and tax-exempt
state and political subdivisions securities totaled approximately $8.9 million
and $5.9 million, respectively.





Average
balances in the total deposit portfolio increased approximately $3.2 million, or
..84% during 2008.  Average account balances in time deposits increased
approximately $17.0 million.  Decreases in average account balances in
noninterest bearing accounts, savings and interest bearing demand deposits
totaled approximately $3.8 million, $8.6 million and $1.4 million,
respectively.   Deposit balances moved from lower interest rates
in money market and savings accounts to higher yields in time deposit
accounts.





Average
balances in the total deposit portfolio increased approximately $18.9 million,
or 5.18% during 2007.  Average account balances in time deposits
increased approximately $30.1 million.  Decreases in account balances
in noninterest bearing accounts, interest bearing demand deposits and in savings
totaled approximately $9.0 million, $1.2 million and $1.0 million, respectively.
Deposit balances moved from lower interest rates in money market and savings
accounts to higher yields in time deposit accounts.





The
following table sets forth the consolidated average balance sheets for the
Company, average rates earned on interest-earning assets, average rates paid on
interest-bearing liabilities, interest income and interest expense for each
category of interest-earning assets and interest-bearing liabilities, and net
interest margin.  Yields on non-taxable instruments are reported on a
tax-equivalent basis.  This information is presented for the years
ended December 31, 2008, 2007 and 2006.





Page 29 of
56





CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID





2008
                
                
                2007Average
                  Balance
                
                
                Income/
      (Expense)
                
                
                Average
      Yield/
                  Cost
                
                
                Average
                  Balance
                
                
                Income/
      (Expense)
                
                
                Average
      Yield/
                  CostInterest-earning
      assets:Loans,
      net (1)
                
                $
                338,026,055
                
                
                $
                21,360,453
                
                
                
                6.32
                %
                
                $
                354,273,983
                
                
                $
                31,578,826
                
                
                
                8.91
                %Investment
      securities (2):Taxable
                
                
                76,663,491
                
                
                
                3,716,692
                
                
                
                4.85
                %
                
                
                67,679,357
                
                
                
                3,322,931
                
                
                
                4.91
                %Tax
      exempt
                
                
                22,154,481
                
                
                
                906,024
                
                
                
                6.24
                %
                
                
                26,944,544
                
                
                
                1,110,046
                
                
                
                6.24
                %Federal
      funds sold
                
                
                4,165,253
                
                
                
                95,542
                
                
                
                2.29
                %
                
                
                5,515,521
                
                
                
                271,871
                
                
                
                4.93
                %Loans
      held for sale
                
                
                983,884
                
                
                
                55,871
                
                
                
                5.68
                %
                
                
                1,647,006
                
                
                
                91,864
                
                
                
                5.58
                %Total
      interest-earning assets
                
                
                441,993,164
                
                
                
                26,134,582
                
                
                
                6.02
                %
                
                
                456,060,411
                
                
                
                36,375,538
                
                
                
                8.10
                %Noninterest-earning
      assets
                
                
                62,205,657
                
                
                
                
                
                
                
                
                
                
                
                43,047,263Total
      assets
                
                $
                504,198,821
                
                
                
                
                
                
                
                
                
                
                $
                499,107,674Interest-bearing
      liabilities:Money
      market and NOW
                
                $
                83,975,857
                
                
                
                (924,060
                )
                
                
                1.10
                %
                
                $
                85,395,092
                
                
                
                (1,636,616
                )
                
                
                1.92
                %Savings
      accounts
                
                
                51,737,301
                
                
                
                (1,257,566
                )
                
                
                2.43
                %
                
                
                60,330,900
                
                
                
                (2,512,417
                )
                
                
                4.16
                %Certificates
      of deposit
                
                
                211,884,695
                
                
                
                (9,599,784
                )
                
                
                4.53
                %
                
                
                194,897,350
                
                
                
                (9,988,885
                )
                
                
                5.13
                %Total  deposits
                
                
                347,597,853
                
                
                
                (11,781,410
                )
                
                
                3.39
                %
                
                
                340,623,342
                
                
                
                (14,137,918
                )
                
                
                4.15
                %Short-term
      and other borrowings
                
                
                64,172,407
                
                
                
                (2,506,636
                )
                
                
                3.91
                %
                
                
                54,190,150
                
                
                
                (2,708,986
                )
                
                
                5.00
                %Total
      interest-bearing liabilities
                
                
                411,770,260
                
                
                
                (14,288,046
                )
                
                
                3.47
                %
                
                
                394,813,492
                
                
                
                (16,846,904
                )
                
                
                4.27
                %Noninterest-
      bearing deposits
                
                
                38,732,731
                
                
                
                
                
                
                
                
                
                
                
                42,484,417Other
      noninterest-bearing liabilities
                
                
                6,112,510
                
                
                
                
                
                
                
                
                
                
                
                5,686,245Total
      liabilities
                
                
                456,615,501
                
                
                
                
                
                
                
                
                
                
                
                442,984,154Stockholders’
      equity
                
                
                47,583,320
                
                
                
                
                
                
                
                
                
                
                
                56,123,520Total
      liabilities and stockholders’ equity
                
                $
                504,198,821
                
                
                
                
                
                
                
                
                
                
                $
                499,107,674Net
      interest income
                
                
                
                
                
                $
                11,846,536
                
                
                
                
                
                
                
                
                
                
                $
                19,528,634Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.79
                %
                
                
                
                
                
                
                
                
                
                
                4.41
                %Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.55
                %
                
                
                
                
                
                
                
                
                
                
                3.83
                %





Page 30 of
56





CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID, continued





2006Average Balance
                
                
                Income/
      (Expense)
                
                
                Average
      Yield/
                  CostInterest-earning
      assets:Loans,
      net (1)
                
                $
                331,363,746
                
                
                $
                29,854,762
                
                
                
                9.01
                %Investment
      securities (2):Taxable
                
                
                67,479,130
                
                
                
                3,107,325
                
                
                
                4.60
                %Tax
      exempt
                
                
                22,882,099
                
                
                
                982,884
                
                
                
                6.51
                %Federal
      funds sold
                
                
                9,036,945
                
                
                
                442,118
                
                
                
                4.89
                %Loans
      held for sale
                
                
                1,545,039
                
                
                
                72,949
                
                
                
                4.72
                %Total
      interest-earning assets
                
                
                432,306,959
                
                
                
                34,460,038
                
                
                
                8.09
                %Noninterest-earning
      assets
                
                
                35,179,810Total
      assets
                
                $
                467,486,769Interest-bearing
      liabilities:Money
      market and NOW
                
                $
                86,590,932
                
                
                
                (1,533,639
                )
                
                
                1.77
                %Savings
      accounts
                
                
                61,332,587
                
                
                
                (2,351,977
                )
                
                
                3.83
                %Certificates
      of deposit
                
                
                164,822,662
                
                
                
                (7,180,212
                )
                
                
                4.36
                %Total
      deposits
                
                
                312,746,181
                
                
                
                (11,065,828
                )
                
                
                3.54
                %Short-term
      and other borrowings
                
                
                45,652,371
                
                
                
                (2,151,831
                )
                
                
                4.71
                %Total
      interest-bearing liabilities
                
                
                358,398,552
                
                
                
                (13,217,659
                )
                
                
                3.69
                %Noninterest-
      bearing deposits
                
                
                51,482,129Other
      noninterest-bearing  Liabilities
                
                
                5,001,319Total
      liabilities
                
                
                414,882,000Stockholders’
      equity
                
                
                52,604,769Total
      liabilities and stockholders’ equity
                
                $
                467,486,769Net
      interest income
                
                
                
                
                
                $
                21,242,379Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                5.03
                %Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                4.40
                %





(1)
            Interest
      earnings on nonaccrual loans are included in the foregoing analysis to the
      extent that such interest earnings had been recorded during 2008, 2007 and
      2006.  Income includes loan fees of $1,208,229, $1,459,325 and
      $2,037,032 for 2008, 2007 and 2006,
  respectively.





(2)
            Average
      yields for available for sale securities are computed using the historical
      cost balances.  Such yields do not give effect to changes in
      fair value that are reflected as a component of stockholders’
      equity.





Page 31 of
56





The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in volume and rates for the periods
indicated:





2008
      vs. 2007
                
                
                
                
                
                
                
                
                2007
      vs. 2006Increase
      (Decrease)
                
                
                
                
                
                
                
                
                Increase
      (Decrease)Due
      to
                
                
                
                
                
                
                
                
                Due
      toAverage
                
                
                Average
                
                
                
                
                
                Average
                
                
                AverageVolume (1)
                
                
                Rate (1)
                
                
                Net
                
                
                Volume (1)
                
                
                Rate (1)
                
                
                NetInterest
      Income:Loans
                
                $
                (1,448,287
                )
                
                $
                (8,770,087
                )
                
                $
                (10,218,374
                )
                
                $
                2,064,212
                
                
                $
                (340,148
                )
                
                $
                1,724,064Investment
      securities:Taxable
                
                
                441,104
                
                
                
                (47,343
                )
                
                
                393,761
                
                
                
                18,389
                
                
                
                197,217
                
                
                
                215,606Tax
      exempt
                
                
                (298,900
                )
                
                
                94,878
                
                
                
                (204,022
                )
                
                
                264,465
                
                
                
                (137,303
                )
                
                
                127,162Federal
      funds sold
                
                
                (66,557
                )
                
                
                (109,772
                )
                
                
                (176,329
                )
                
                
                (172,198
                )
                
                
                1,951
                
                
                
                (170,247
                )Loans
      held for sale
                
                
                (36,987
                )
                
                
                994
                
                
                
                (35,993
                )
                
                
                4,813
                
                
                
                14,102
                
                
                
                18,915Total
      interest-earning assets
                
                $
                (1,409,627
                )
                
                $
                (8,831,330
                )
                
                $
                (10,240,957
                )
                
                $
                2,179,681
                
                
                $
                (264,181
                )
                
                $
                1,915,500Interest
      Expense:Money
      market and NOW
                
                $
                (27,200
                )
                
                $
                (685,356
                )
                
                $
                (712,556
                )
                
                $
                (21,166
                )
                
                $
                124,143
                
                
                $
                102,977Savings
      accounts
                
                
                (357,871
                )
                
                
                (896,980
                )
                
                
                (1,254,851
                )
                
                
                (38,365
                )
                
                
                198,805
                
                
                
                160,440Certificates
      of deposit
                
                
                870,636
                
                
                
                (1,259,737
                )
                
                
                (389,101
                )
                
                
                1,311,256
                
                
                
                1,497,417
                
                
                
                2,808,673Short-term
      and other borrowings
                
                
                499,017
                
                
                
                (701,367
                )
                
                
                (202,350
                )
                
                
                402,129
                
                
                
                155,026
                
                
                
                557,155Total
      interest-bearing liabilities
                
                $
                984,582
                
                
                $
                (3,543,440
                )
                
                $
                (2,558,858
                )
                
                $
                1,653,854
                
                
                $
                1,975,391
                
                
                $
                3,629,245Change
      in net interest income
                
                $
                (2,394,209
                )
                
                $
                (5,287,890
                )
                
                $
                (7,682,099
                )
                
                $
                525,827
                
                
                $
                (2,239,572
                )
                
                $
                (1,713,745
                )





(1)
            The
      changesin
      interest income and/or expense not due solely to rate or volume have been
      allocated to the rate component.





NONINTEREST INCOME AND NONINTEREST
EXPENSE





In 2008,
noninterest income increased approximately $338,000, or 8.95% when compared to
2007.





2008
                
                
                2007
                
                
                Increase/
                  (Decrease)Mortgage
      origination income
                
                $
                402,275
                
                
                
                774,490
                
                
                
                (372,215
                )Service
      charges on deposit accounts
                
                
                1,081,228
                
                
                
                988,256
                
                
                
                92,972Other
      service charges and commissions
                
                
                264,526
                
                
                
                254,240
                
                
                
                10,286Securities
      gains (losses), net
                
                
                362,769
                
                
                
                4,900
                
                
                
                357,869Gain
      (loss) on sale of premises and equipment
                
                
                (7,576
                )
                
                
                7,545
                
                
                
                (15,121
                )Income
      from life insurance
                
                
                397,477
                
                
                
                190,084
                
                
                
                207,393Trust
      service fees
                
                
                481,730
                
                
                
                410,069
                
                
                
                71,661Other
      income
                
                
                1,134,373
                
                
                
                1,148,957
                
                
                
                (14,584
                )$
                4,116,802
                
                
                
                3,778,541
                
                
                
                338,261





Noninterest
income increased primarily due to increases occurring in net security gains,
income from company-owned life insurance and service charges on deposit
accounts, offset by decreases in mortgage origination income.  The
security gains were a result of sales and calls of investment securities as the
securities market reacted to the lower interest rate
environment.  Mortgage origination activity was down in 2008 as a
result of the decline in the 1-4 family residential market, which reduced income
for 2008 when compared to 2007.





Page 32 of
56





In 2007,
noninterest income increased approximately $123,000, or 3.36% when compared to
2006.





2007
                
                
                2006
                
                
                Increase/
                  (Decrease)Mortgage
      origination income
                
                $
                774,490
                
                
                
                785,147
                
                
                
                (10,657
                )Service
      charges on deposit accounts
                
                
                988,256
                
                
                
                902,238
                
                
                
                86,018Other
      service charges and commissions
                
                
                254,240
                
                
                
                265,653
                
                
                
                (11,413
                )Securities
      gains (losses), net
                
                
                4,900
                
                
                
                (13,216
                )
                
                
                18,116Gain
      (loss) on sale of premises and equipment
                
                
                7,545
                
                
                
                83,555
                
                
                
                (76,010
                )Income
      from life insurance
                
                
                190,084
                
                
                
                172,116
                
                
                
                17,968Trust
      service fees
                
                
                410,069
                
                
                
                314,139
                
                
                
                95,930Other
      income
                
                
                1,148,957
                
                
                
                1,146,118
                
                
                
                2,839$
                3,778,541
                
                
                
                3,655,750
                
                
                
                122,791





Noninterest
income increased primarily from increases in trust services fees, service
charges on deposit accounts and income from bank-owned life
insurance.  These increases were offset by decreases in gain on sale
of premises and equipment, other service charges and mortgage origination
income.  Net security gains in 2007 totaled approximately $5,000
compared to a net loss of approximately $13,000 for 2006.





An
overdraft protection product and a business development plan for the Trust
Department, each introduced in 2006, continued to generate additional NSF fees
and trust fees in 2007.  Income from bank-owned life insurance
increased with the addition of a Senior Executive Retirement Plan (“SERP”)
funded by the purchase of bank-owned life insurance during 2007.





In 2008,
noninterest expense increased approximately $4.0 million or 21.20% when compared
to 2007.





2008
                
                
                2007
                
                
                Increase/
                  (Decrease)Salaries
      and employee benefits
                
                $
                9,473,561
                
                
                
                10,544,056
                
                
                
                (1,070,495
                )Goodwill
      impairment
                
                
                3,549,780
                
                
                
                -
                
                
                
                3,549,780Occupancy
      expenses
                
                
                2,652,590
                
                
                
                2,401,145
                
                
                
                251,445Losses
      on sales, write-downs and other expenses on other real
    estate
                
                
                1,363,928
                
                
                
                177,733
                
                
                
                1,186,195Computer
      services
                
                
                608,457
                
                
                
                632,601
                
                
                
                (24,144
                )Telephone
                
                
                493,476
                
                
                
                453,464
                
                
                
                40,012Leased
      equipment expense
                
                
                470,217
                
                
                
                422,836
                
                
                
                47,381Other
      expense
                
                
                4,018,455
                
                
                
                4,040,338
                
                
                
                (21,883
                )$
                22,630,464
                
                
                
                18,672,173
                
                
                
                3,958,291





Page 33 of
56





Noninterest
expense increased primarily from a goodwill impairment expense and increased
expenses associated with other real estate as the number of these properties
increased.  These increases were offset by a reduction in salaries and
employee benefits resulting from a decision not to provide for any bonus or
incentive programs, the reduction of personnel when possible, the elimination of
overtime and the reduction in office hours.





In 2007,
noninterest expense increased approximately $1.5 million or 8.6% when compared
to 2006.





2007
                
                
                2006
                
                
                Increase/
                  (Decrease)Salaries
      and employee benefits
                
                $
                10,544,056
                
                
                
                9,779,789
                
                
                
                764,267Occupancy
      expenses
                
                
                2,401,145
                
                
                
                2,209,495
                
                
                
                191,650Losses
      on sales, write-downs and other expenses on other real
    estate
                
                
                177,733
                
                
                
                71,374
                
                
                
                106,359Computer
      services
                
                
                632,601
                
                
                
                553,849
                
                
                
                78,752Telephone
                
                
                453,464
                
                
                
                444,214
                
                
                
                9,250Leased
      equipment expense
                
                
                422,836
                
                
                
                375,769
                
                
                
                47,067Other
      expense
                
                
                4,040,338
                
                
                
                3,759,065
                
                
                
                281,273$
                18,672,173
                
                
                
                17,193,555
                
                
                
                1,478,618




The major
sources of the increase in noninterest expense in 2007 was in salaries and
employee benefits, occupancy expenses, computer expenses and telephone expenses
primarily due to the staffing and operation of the Cumming office, which began
operation in January 2007.





INCOME
TAX EXPENSE





Income
tax benefit for the period ended December 31, 2008 was approximately $7.8 and
income tax expense for the periods ended December 31, 2007 and 2006 was
approximately $1.0 and $2.4, respectively.  The effective tax rate for
the periods ended December 31, 2008, 2007 and 2006 was (34.5%), 25.77% and
31.30%, respectively.  Tax-exempt income on municipal bonds and loans
for the periods ended December 31, 2008, 2007 and 2006 was 3.99%, 28.03% and
12.76% of pre-tax income, respectively.  Income tax expense for the
years ended December 31, 2008, 2007 and 2006 is more fully explained in Note
14 to the consolidated financial statements.





ALLOWANCE
FOR LOAN LOSSES





The
allowance for loan losses represents a reserve for probable losses in the loan
portfolio.  The adequacy of the allowance for loan losses is evaluated
monthly based on a review of all significant loans, with particular emphasis on
impaired, nonaccruing, past due and other loans that management believes require
special attention.  The determination of the allowance for loan losses
is subjective and is based on the consideration of a number of factors and
assumptions. As such, the accounting policy followed in the determination of the
allowance is considered a critical accounting policy.  See “Critical
Accounting Estimates.”





The
allowance for loan losses methodology is partially based on a loan
classification system.  For purposes of determining the required
allowance for loan losses and resulting periodic provisions, the Company
identifies problem loans in its portfolio and segregates the remainder of the
loan portfolio into broad segments, such as commercial, commercial real estate,
residential mortgage and consumer.  The Company provides for a general
allowance for losses inherent in the portfolio for each of the above
categories.  The general allowance is calculated based on estimates of
inherent losses which are likely to exist as of the evaluation
date.  Loss percentages used for non-problem loans in the portfolio
are based on historical loss factors and supplemented by various qualitative
factors.  Specific allowance allocations for losses on problem loans
are based on a review and evaluation of these loans, taking into consideration
the financial condition and strengths of the borrower, related collateral, cash
flows available for debt repayment, and known and expected economic
conditions.





Page 34 of
56





For loans
considered impaired, specific allowances are provided in the event that the
specific collateral analysis on each problem loan indicates that the liquidation
of the collateral would not result in repayment of these loans if the loan is
collateral dependent or if the present value of expected future cash flows on
the loan are less than the balance.  In addition to these allocated
allowances, at any point in time, the Company may have an unallocated component
of the allowance.  Unallocated portions of the allowance are due to a
number of quantitative and qualitative factors, such as improvement in the
condition of impaired loans and credit concentrations.  The level of
the unallocated portion of the allowance serves as a prime indicator to
management for the need of additional provisions for loan loss as management
prospectively accounts for this critical accounting estimate.





The
allowance for loan losses allocation is based on subjective judgment and
estimates and, therefore, is not necessarily indicative of the specific amounts
or loan categories in which charge-offs may ultimately occur. The allocation of
the allowance for loan losses by loan category at December 31, 2008, 2007, 2006,
2005 and 2004 is as follows:





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Amount
                
                
                Percent
      of Loans to Total Loans
                
                
                Amount
                
                
                Percent of Loans toTotal
      Loans
                
                
                Amount
                
                
                Percent
      of Loans to TotalLoans
                
                
                Amount
                
                
                Percent
      of Loans to TotalLoans
                
                
                Amount
                
                
                Percent
      of Loans to TotalLoansCommercial,
      financial and agricultural
                
                $
                670,653
                
                
                
                5.21
                %
                
                $
                65,151
                
                
                
                5.80
                %
                
                $
                217,535
                
                
                
                4.60
                %
                
                $
                69,844
                
                
                
                5.20
                %
                
                $
                366,110
                
                
                
                5.90
                %Real
      estate
                
                
                10,933,344
                
                
                
                90.13
                %
                
                
                1,734,310
                
                
                
                89.70
                %
                
                
                2,090,590
                
                
                
                90.60
                %
                
                
                2,714,789
                
                
                
                90.50
                %
                
                
                2,564,713
                
                
                
                89.10
                %Installment
      loans to individuals
                
                
                461,556
                
                
                
                4.66
                %
                
                
                322,676
                
                
                
                4.50
                %
                
                
                299,478
                
                
                
                4.80
                %
                
                
                981,002
                
                
                
                4.30
                %
                
                
                629,068
                
                
                
                5.00
                %Unallocated
                
                
                102,092
                
                
                
                -
                
                
                
                14,711
                
                
                
                -
                
                
                
                837,186
                
                
                
                -
                
                
                
                178,890
                
                
                
                -
                
                
                
                74,752
                
                
                
                -Total
                
                $
                12,167,645
                
                
                
                100.00
                %
                
                $
                2,136,848
                
                
                
                100.00
                %
                
                $
                3,444,789
                
                
                
                100.00
                %
                
                $
                3,944,525
                
                
                
                100.00
                %
                
                $
                3,634,643
                
                
                
                100.00
                %





Page 35 of
56





The
Company’s provision for loan losses is intended to create an adequate allowance
for losses in the loan portfolio at the end of each reporting
period.





The
following table summarizes, for each of the years in the five year period ended
December 31, 2008, selected information related to the allowance for loan
losses.




2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance
      of allowance for loan losses at beginning of period
                
                $
                2,136,848
                
                
                $
                3,444,789
                
                
                $
                3,944,525
                
                
                $
                3,634,643
                
                
                $
                3,643,102Acquired
      bank allowance
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                215,079
                
                
                
                -Charge-offs:Commercial,
      financial and agricultural
                
                
                (240,429
                )
                
                
                (89,474
                )
                
                
                (254,672
                )
                
                
                (44,799
                )
                
                
                (145,422
                )Real
      estate
                
                
                (5,406,563
                )
                
                
                (1,744,773
                )
                
                
                (180,191
                )
                
                
                (113,310
                )
                
                
                (427,365
                )Installment
      loans to individuals
                
                
                (392,107
                )
                
                
                (262,191
                )
                
                
                (251,983
                )
                
                
                (273,935
                )
                
                
                (228,331
                )Other
                
                
                (6,014
                )
                
                
                (19,563
                )
                
                
                (15,780
                )
                
                
                (12,307
                )
                
                
                (11,074
                )Total
      charge-offs
                
                
                (6,045,113
                )
                
                
                (2,116,001
                )
                
                
                (702,626
                )
                
                
                (444,351
                )
                
                
                (812,192
                )Recoveries:Commercial,
      financial and agricultural
                
                
                5,351
                
                
                
                2,663
                
                
                
                34,030
                
                
                
                29,952
                
                
                
                56,558Real
      estate
                
                
                1,048
                
                
                
                50,085
                
                
                
                18,595
                
                
                
                45,409
                
                
                
                143,308Installment
      loans to individuals
                
                
                48,509
                
                
                
                76,975
                
                
                
                146,841
                
                
                
                131,120
                
                
                
                114,624Other
                
                
                140
                
                
                
                3,112
                
                
                
                3,424
                
                
                
                2,673
                
                
                
                6,743Total
      recoveries
                
                
                55,048
                
                
                
                132,835
                
                
                
                202,890
                
                
                
                209,154
                
                
                
                321,233Net
      charge-offs
                
                
                (5,990,065
                )
                
                
                (1,983,166
                )
                
                
                (499,736
                )
                
                
                (235,197
                )
                
                
                (490,959
                )Provision
      for loan losses
                
                
                16,020,862
                
                
                
                675,225
                
                
                
                -
                
                
                
                330,000
                
                
                
                482,500Balance
      of allowance for loan losses at end of period
                
                $
                12,167,645
                
                
                $
                2,136,848
                
                
                $
                3,444,789
                
                
                $
                3,944,525
                
                
                $
                3,634,643Average
      amount of loans
                
                $
                338,026,055
                
                
                $
                354,273,983
                
                
                $
                331,363,746
                
                
                $
                297,566,778
                
                
                $
                271,736,598Ratio
      of net charge-offs during the period to average loans outstanding during
      the period
                
                
                1.77
                %
                
                
                0.56
                %
                
                
                0.15
                %
                
                
                0.08
                %
                
                
                0.18
                %Ratio
      of allowance to total year-end loans
                
                
                3.77
                %
                
                
                0.61
                %
                
                
                0.99
                %
                
                
                1.23
                %
                
                
                1.29
                %





The
number and the average balance of charge-offs during 2008 and 2007 by category
follow:





2008
                    
                    
                    
                    
                    
                    2007Average
                    
                    
                    
                    
                    
                    AverageCategory
                    
                    Number
                    
                    
                    Charge-off
                    
                    
                    Number
                    
                    
                    Charge-offReal
      estate
                    
                    
                    28
                    
                    
                    
                    193,092
                    
                    
                    
                    25
                    
                    
                    
                    69,791Consumer
                    
                    
                    78
                    
                    
                    
                    5,104
                    
                    
                    
                    82
                    
                    
                    
                    3,436Commercial
                    
                    
                    9
                    
                    
                    
                    26,714
                    
                    
                    
                    5
                    
                    
                    
                    17,895





The risk
associated with loans varies with the creditworthiness of the borrower, the type
of loan (consumer, commercial or real estate) and its maturity.  Cash
flows adequate to support a repayment schedule is an element considered for all
types of loans.  Real estate loans are impacted by market conditions
regarding the value of the underlying property used as
collateral.  Commercial loans are also impacted by the management of
the business as well as economic conditions.





Management
believes 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.





Page 36 of
56





LOANS





The total
loan portfolio for 2008 decreased approximately $27.6 million when compared to
2007. During 2008, decreases occurred in the real estate secured lending,
commercial lending and consumer lending portfolios totaling approximately $23.3
million, $3.7 million and $581,000, respectively. The average yields on the
total loan portfolio for 2008 and 2007 were 6.32% and 8.91%,
respectively.





The total
loan portfolio for 2007 when compared to 2006 increased approximately $4.1
million.  During 2007, increases in the commercial lending and real
estate secured lending portfolios of approximately $4.6 million and $336,000,
respectively, were offset by decreases in the consumer lending portfolio of
approximately $872,000 during 2007.  The average yields on the total
loan portfolio for 2007 and 2006 were 8.91% and 9.01%,
respectively.





The
amount of loans (net of unearned loan origination fees) outstanding at December
31 for each of the last five years is set forth in the following table according
to type of loan. The Company had no foreign loans at December 31 in any of the
last five years.





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Commercial,
      financial and agricultural
                
                $
                16,808,412
                
                
                $
                20,496,648
                
                
                $
                15,833,001
                
                
                $
                16,465,079
                
                
                $
                16,673,310Real
      estate- construction
                
                
                148,110,567
                
                
                
                175,904,135
                
                
                
                152,752,981
                
                
                
                120,872,011
                
                
                
                79,683,839Real
      estate - mortgage
                
                
                142,827,328
                
                
                
                138,373,167
                
                
                
                161,188,518
                
                
                
                169,645,585
                
                
                
                170,504,085Installment
      loans
                
                
                15,049,635
                
                
                
                15,630,412
                
                
                
                16,502,794
                
                
                
                13,751,608
                
                
                
                13,927,123Total
                
                $
                322,795,942
                
                
                $
                350,404,362
                
                
                $
                346,277,294
                
                
                $
                320,734,283
                
                
                $
                280,788,357





The
following table sets forth the maturities and sensitivities to changes in
interest rates of loans at December 31, 2008.





DUE
      AFTERDUE
      IN
                
                
                ONE
      THROUGH
                
                
                DUE
      AFTERONE YEAR
                
                
                FIVE YEARS
                
                
                FIVE YEARS
                
                
                TOTALLOAN
      MATURITY:Commercial,
      financial and agricultural
                
                $
                13,847,936
                
                
                
                2,913,923
                
                
                
                46,553
                
                
                
                16,808,412Real
      estate - construction
                
                
                146,353,264
                
                
                
                1,691,988
                
                
                
                65,315
                
                
                
                148,110,567Real
      estate
                
                
                99,674,927
                
                
                
                42,416,646
                
                
                
                770,643
                
                
                
                142,862,216Installment
      loan to individuals
                
                
                8,580,908
                
                
                
                6,444,277
                
                
                
                24,450
                
                
                
                15,049,635TOTAL
                
                $
                268,457,035
                
                
                
                53,466,834
                
                
                
                906,961
                
                
                
                322,830,830LOAN
      INTEREST RATE SENSITIVITYLoans
      with:Predetermined
      interest rates
                
                $
                38,141,260
                
                
                
                53,466,834
                
                
                
                906,961
                
                
                
                92,515,055Floating
      or adjustable interest rates
                
                
                230,315,775
                
                
                
                -
                
                
                
                -
                
                
                
                230,315,775TOTAL
                
                $
                268,457,035
                
                
                
                53,466,834
                
                
                
                906,961
                
                
                
                322,830,830





NONPERFORMING ASSETS AND PAST DUE
LOANS





Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due,
restructured loans, and other real estate owned. Accrual of interest is
discontinued when either principal or interest becomes 90 days past due,
unless the loan is both well secured and in the process of collection, or when
in management’s opinion, reasonable doubt exists as to the full collection of
interest or principal. Income on such loans is then recognized only to the
extent that cash is received and where the future collection of principal is
probable.





Page 37 of
56





The
following table sets forth the totals of nonperforming assets, selected ratios,
and accruing loans past due 90 days or more at December 31 for each of the last
five years.





NONPERFORMING
      ASSETS
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Accruing
      loans 90 days past due
                
                $
                802,267
                
                
                $
                41,594
                
                
                $
                37,585
                
                
                $
                799,128
                
                
                $
                381,670Nonaccrual
      loans
                
                
                56,055,277
                
                
                
                18,326,924
                
                
                
                502,233
                
                
                
                363,003
                
                
                
                3,252,464Restructured
      loans
                
                
                -
                
                
                
                -
                
                
                
                52,560
                
                
                
                130,613
                
                
                
                119,031Other
      real estate owned
                
                
                27,336,874
                
                
                
                11,498,271
                
                
                
                537,975
                
                
                
                2,773,662
                
                
                
                1,289,880Total
      nonperforming assets
                
                $
                84,194,418
                
                
                $
                29,866,789
                
                
                $
                1,130,353
                
                
                $
                4,066,406
                
                
                $
                5,043,045RATIOSNonperforming
      loans (excluding restructured loans) to net loans
                
                
                18.31
                %
                
                
                5.27
                %
                
                
                .16
                %
                
                
                .36
                %
                
                
                1.29
                %Nonperforming
      assets to net loans plus other real estate owned
                
                
                24.91
                %
                
                
                8.30
                %
                
                
                .33
                %
                
                
                1.27
                %
                
                
                1.79
                %Allowance
      to nonperforming loans
                
                
                21.40
                %
                
                
                11.63
                %
                
                
                581.52
                %
                
                
                305.13
                %
                
                
                96.84
                %





Nonperforming
assets increased approximately $54.3 million or 181.90% from December 31, 2007
to December 31, 2008.  Increases occurred as the decline in the 1-4
family real estate market in both construction lending and new mortgages
continued during 2008.  The result of this activity is reflected in
the increases in nonaccrual loans, other real estate and accruing loans 90 days
past due totaling approximately $37.7 million, $15.8 million and $761,000,
respectively.  The effects of the real estate market decline are
visible in the loan portfolio as loans move from 90 days past due, to nonaccrual
status, to foreclosure and finally to other real estate.   See
the discussion that follows within this section for a description of the assets
that comprised this increase.





Loans
classified as 90 days past due increased $760,673 or 1828.80% from December 31,
2007 to December 31, 2008. The increase is the net result of the following
changes:





2008
                              
                              
                              2007Balance
      at beginning of period
                              
                              $
                              41,594
                              
                              
                              $
                              37,585New
      loans classified to 90 days past due status
                              
                              
                              1,530,199
                              
                              
                              
                              508,121Payments
      received
                              
                              
                              (742,346
                              )
                              
                              
                              (67,492
                              )Charged-off
                              
                              
                              (27,180
                              )
                              
                              
                              (436,620
                              )Balance
      at end of period
                              
                              $
                              802,267
                              
                              
                              $
                              41,594The
      following summarizes accruing loans 90 days past due by type at
      December 31, 2008 and 2007:Real
      estate secured construction loans
                              
                              $
                              25,526
                              
                              
                              $
                              -Residential
      loans
                              
                              
                              771,866
                              
                              
                              
                              41,594Consumer
      loans
                              
                              
                              4,875
                              
                              
                              
                              -Total
      accruing loans 90 days past due
                              
                              $
                              802,267
                              
                              
                              $
                              41,594





Page 38 of
56





Impaired
loans include loans on nonaccrual status.  Loans classified as
nonaccrual increased $37.7 million or 205.86% from December 31, 2007 to December
31, 2008.





The
following summarizes nonaccrual loans at December 31, 2008 and December 31,
2007:





Number
                
                
                2008
                
                
                Number
                
                
                2007Real
      Estate – construction & development loans
                
                
                50
                
                
                $
                52,442,846
                
                
                
                30
                
                
                $
                17,898,772Real
      Estate – residential loans
                
                
                11
                
                
                
                313,004
                
                
                
                5
                
                
                
                170,794Real
      Estate – commercial
                
                
                4
                
                
                
                2,689,491
                
                
                
                2
                
                
                
                219,297Commercial
      loans
                
                
                4
                
                
                
                459,389
                
                
                
                1
                
                
                
                25,350Consumer
      loans
                
                
                23
                
                
                
                150,547
                
                
                
                4
                
                
                
                12,711Total
      nonaccrual loans
                
                
                92
                
                
                $
                56,055,277
                
                
                
                42
                
                
                $
                18,326,924





The
increase from 2007 to 2008 is the net result of the following
changes:





Balance
      at December 31, 2007
                  
                  $
                  18,326,924Loans
      reclassified to nonaccrual status in 2008
                  
                  
                  71,643,372Payments
      received on nonaccrual loans during 2008
                  
                  
                  (5,333,364
                  )Nonaccrual
      loans charged-off during 2008
                  
                  
                  (5,950,021
                  )Nonaccrual
      loans reclassified to other real estate
                  
                  
                  (17,852,732
                  )Nonaccrual
      loans reclassified to accrual status in 2008
                  
                  
                  (4,778,902
                  )Balance
      at December 31, 2008
                  
                  $
                  56,055,277





Additions
in 2008 to loans on nonaccrual status consisted of the following:





Real
      Estate – construction & development loans
                  
                  $
                  66,490,612Real
      Estate – residential loans
                  
                  
                  1,154,699Real
      Estate – commercial
                  
                  
                  2,686,691Commercial
      loans
                  
                  
                  684,167Consumer
      loans
                  
                  
                  627,203Total
                  
                  $
                  71,643,372





Accrual
of interest is discontinued when either principal or interest becomes 90 days
past due unless the loan is both well secured and in the process of collection,
or in management’s opinion, when reasonable doubt exists as to the full
collection of interest or principal.  Interest income that would have
been recorded on these nonaccrual and restructured loans in accordance with
their original terms totaled $2.8 million, $1.2 million and $26,112 in 2008,
2007 and 2006, respectively, compared with interest income recognized of
$349,197, $592,664 and $10,058, respectively.





Page 39 of
56





Other
real estate at December 31, 2008 increased approximately $15.8 million or
137.75% when compared to December 31, 2007.  The following summarizes
other real estate at December 31, 2008 and 2007:





2008
                  
                  
                  2007Number
      of Properties
                  
                  
                  Carrying
                    Amount
                  
                  
                  Number
      of Properties
                  
                  
                  Carrying
                    AmountCommercial
      properties
                  
                  
                  41
                  
                  
                  $
                  15,714,994
                  
                  
                  
                  22
                  
                  
                  $
                  6,324,444Residential
      properties
                  
                  
                  2
                  
                  
                  
                  673,250
                  
                  
                  
                  1
                  
                  
                  
                  33,844Vacant
      lots
                  
                  
                  266
                  
                  
                  
                  10,785,430
                  
                  
                  
                  39
                  
                  
                  
                  4,500,483Residential
      construction properties
                  
                  
                  1
                  
                  
                  
                  163,200
                  
                  
                  
                  2
                  
                  
                  
                  639,500310
                  
                  
                  $
                  27,336,874
                  
                  
                  
                  64
                  
                  
                  $
                  11,498,271





The
following is a summary of the changes in other real estate for the year ended
December 31, 2008:





Number
      of Properties
                
                
                Carrying
                  AmountBalance
      at the beginning of the year
                
                
                64
                
                
                $
                11,498,271Foreclosed
      properties
                
                
                260
                
                
                
                17,852,732Capitalized
      completion costs
                
                
                -
                
                
                
                1,759,558Sales
      of properties
                
                
                (14
                )
                
                
                (3,322,071
                )Write-downs
                
                
                -
                
                
                
                (451,616
                )Balance
      at the end of the year
                
                
                310
                
                
                $
                27,336,874





The
Company’s other real estate increase was primarily due to foreclosures in
acquisition and development of residential properties and construction
lending  portfolios as a result of the decline in the real estate
market during 2008.  The foreclosed properties are located in the
Metro Atlanta area and surrounding counties and have appraised values totaling
approximately $31.8.  Construction efforts are underway to complete
houses which were in various stages of construction at foreclosure
date.  During 2008, twenty 1-4 family residential houses totaling
approximately $7.1 million were under construction with appraised values of
approximately $8.2 million when completed.   In addition,
construction efforts are underway to complete a multi-family townhouse
development totaling approximately $3.3 million with appraised value of $4.5
million upon completion. At
December 31, 2008, the Company estimates the cost to complete construction
properties in other real estate to be approximately $795,000.





Our other
real estate owned (“OREO”) policies and procedures provide that a foreclosure
appraisal be obtained.  Our policies require a certified appraiser
conducts the appraisal for foreclosed property to obtain a fair market value and
a disposition (quick sale) value.  To qualify and be approved as an
appraiser for Habersham Bank, appraisers must have met the Appraisal
Qualifications Board requirements and have not had any disciplinary
actions.  Additionally, an appraiser must submit to us their resume,
license, area of coverage, and samples of their work for review before being
approved for appraisal work.  At foreclosure, the lesser of the loan
balance or the quick sale value is transferred to OREO with any remaining loan
balance submitted for charge off.  Upon transfer into OREO, the
property is listed with a realtor to begin sales efforts.





At
December 31, 2008, management was not aware of any loans classified for
regulatory purposes as loss, doubtful, substandard or special mention that have
not been disclosed which, 1) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity or capital resources, or 2) represent material credits about
which management is aware of any information which causes management to have
serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.





Page 40 of
56





Loan
concentrations are monitored based upon purpose codes as defined by Federal
Banking Regulations and by North American Industry Classification System (NAICS)
industry codes.  Habersham Bank held concentrations of loans based on
purpose codes to customers, which totaled 100% or more of Tier 1 Capital at
December 31, 2008 and 2007 as follows:





2008
                    
                    
                    2007Land
      and subdivision development
                    
                    $
                    77,725,875
                    
                    
                    
                    100,880,811Real
      estate lessors (amortized non-owner occupied)
                    
                    
                    69,291,195
                    
                    
                    
                    73,456,063$
                    147,017,070
                    
                    
                    
                    174,336,874





INVESTMENT
SECURITIES





The
Company has classified its investment securities as available for sale and held
to maturity.  The classification of certain investment securities as
available for sale is consistent with the Company’s investment philosophy of
maintaining flexibility to manage the securities portfolio.  At
December 31, 2008 approximately $97.3 million of investment securities were
classified as available for sale and approximately $1 million of investment
securities were classified as held to maturity.  Approximately
$256,000 of net unrealized loss, net of income taxes, was included in
stockholders’ equity related to available for sale investment
securities.





The
following table sets forth the carrying amounts of investment securities at
December 31, 2008, 2007 and 2006.





2008
                  
                  
                  2007
                  
                  
                  2006Investment
      securities available for sale:U.S.
      government-sponsored enterprises
                  
                  $
                  27,132,796
                  
                  
                  $
                  33,567,386
                  
                  
                  $
                  30,673,849Mortgage-backed
      securities
                  
                  
                  56,412,151
                  
                  
                  
                  29,927,360
                  
                  
                  
                  31,191,082State
      and political subdivisions
                  
                  
                  13,547,583
                  
                  
                  
                  26,213,358
                  
                  
                  
                  22,937,446Other
      investments
                  
                  
                  185,361
                  
                  
                  
                  181,998
                  
                  
                  
                  180,038Total
                  
                  $
                  97,277,891
                  
                  
                  $
                  89,890,102
                  
                  
                  $
                  84,982,415Investment
      securities held to maturity:Mortgage-backed
      securities
                  
                  $
                  26,835
                  
                  
                  $
                  43,179
                  
                  
                  $
                  68,124State
      and political subdivisions
                  
                  
                  998,600
                  
                  
                  
                  2,646,019
                  
                  
                  
                  3,221,198Total
                  
                  $
                  1,025,435
                  
                  
                  $
                  2,689,198
                  
                  
                  $
                  3,289,322





Page 41 of
56





The
following table sets forth the maturities of debt investment securities at
carrying value at December 31, 2008 and the related weighted tax equivalent
yields.





ONE
      YEAR
                    
                    
                    1-5
                    
                    
                    5-10
                    
                    
                    AFTER
      10OR
      LESS
                    
                    
                    YEARS
                    
                    
                    YEARS
                    
                    
                    YEARSInvestment
      securities available for sale:U.S.
      government-sponsored enterprises
                    
                    $
                    -
                    
                    
                    $
                    870,975
                    
                    
                    $
                    6,331,439
                    
                    
                    $
                    19,930,382Mortgage-backed
      securities
                    
                    $
                    84,269
                    
                    
                    $
                    962,652
                    
                    
                    $
                    8,393,236
                    
                    
                    $
                    46,971,994State
      and political subdivisions
                    
                    $
                    -
                    
                    
                    $
                    491,686
                    
                    
                    $
                    2,083,695
                    
                    
                    $
                    10,972,202Weighted
      average yields:U.S.
      government-sponsored enterprises
                    
                    
                    -
                    
                    
                    
                    3.27
                    %
                    
                    
                    4.78
                    %
                    
                    
                    5.00
                    %Mortgage-backed
      securities
                    
                    
                    3.07
                    %
                    
                    
                    3.61
                    %
                    
                    
                    4.53
                    %
                    
                    
                    5.02
                    %State
      and political subdivisions
                    
                    
                    -
                    
                    
                    
                    4.67
                    %
                    
                    
                    5.38
                    %
                    
                    
                    5.87
                    %Investment
      securities held to maturity:Mortgage-backed
      securities
                    
                    $
                    -
                    
                    
                    $
                    16,994
                    
                    
                    $
                    5,254
                    
                    
                    $
                    4,587State
      and political subdivisions
                    
                    $
                    135,000
                    
                    
                    $
                    544,705
                    
                    
                    $
                    318,895
                    
                    
                    $
                    -Weighted
      average yields:Mortgage-backed
      securities
                    
                    
                    -
                    
                    
                    
                    7.95
                    %
                    
                    
                    10.53
                    %
                    
                    
                    4.54
                    %State
      and political subdivisions
                    
                    
                    6.29
                    %
                    
                    
                    6.43
                    %
                    
                    
                    7.31
                    %
                    
                    
                    -





No securities were held
which represent a combined total for one issuer which is in excess of 10% of the
Company’s stockholders’ equity at December 31, 2008.





DERIVATIVE
INSTRUMENTS





During
2004, Habersham Bank entered into two interest rate swap agreements with Compass
Bank to partially offset the interest rate risk associated with variable rate
Federal Home Loan Bank (“FHLB”) borrowings.




At
December 31, 2008 and 2007, the swaps were being accounted for as cash flow
hedges and the fair values are included in other comprehensive income, net of
taxes.  At December 31, 2008, Habersham Bank recorded a liability for
approximately $95,000 to reflect the fair value of the swaps.  At
December 31, 2007, Habersham Bank recorded a liability for approximately $33,000
to reflect the fair value of the swaps.  No hedge ineffectiveness from
these cash flow hedges was recognized in the consolidated statement of
operations.




Refer
to Note 13 of the consolidated financial statements for a more complete
description of the use of derivatives and hedging activities.





DEPOSITS




The
deposit portfolio increased for 2008 approximately $2.6 million when compared to
2007.   Increases in brokered time deposits and other time
deposits less than $100,000 totaled approximately $17.1 million and $34.7
million, respectively, were offset by decreases in interest bearing deposits
(NOW, money market and savings), time deposits greater than $100,000 and
noninterest bearing deposits of approximately $35.5 million, $13.7 million and
$77,000, respectively.  The average rates paid on interest bearing
deposits for 2008 and 2007 were 3.39% and 4.15%, respectively.





At
December 31, 2008 and 2007, the Bank held approximately $30.1 million and $13.0
million, respectively in certificates of deposit obtained through the efforts of
third party brokers. The daily average balance of such deposits totaled
approximately $21.2 million and $5.9 million in 2008 and 2007,
respectively.  The weighted average yield during 2008 was 2.97% while
the weighted average rate at December 31, 2008 was 3.98%.  The
weighted average yield during 2007 was 4.64% while the weighted average rate at
December 31, 2007 was 4.87%.  The deposits at December 31, 2008 have
maturity dates ranging from April 2009 to August 2010.





Page 42 of
56





The
deposit portfolio increased for 2007 approximately $18.1 million after excluding
large short-term deposits from a customer and its affiliates totaling
approximately $78.5 million held at December 31, 2006. Increases in time
deposits, money market and NOW account balances totaled approximately $27.6
million and $10.1 million, respectively, were offset by decreases in noninterest
bearing and savings account balances of approximately $17.5 million and $2.1
million, respectively. The average rates paid on interest bearing deposits for
2007 and 2006 were 4.15% and 3.54%, respectively.





Average
deposits increased approximately $3.2 million, or .84%, and $18.8 million, or
5.18%, during 2008 and 2007, respectively.   The following table
sets forth the average amount of interest bearing deposits and average rate paid
on such deposits for the years ended December 31, 2008, 2007 and
2006.





2008
                
                
                2007
                
                
                2006Avg.
      Amt Outstanding
                
                
                Rate
                
                
                Avg.
      Amt Outstanding
                
                
                Rate
                
                
                Avg.
      Amt Outstanding
                
                
                RateInterest-bearing
      demand deposits
                
                $
                83,975,857
                
                
                
                1.10
                %
                
                $
                85,395,092
                
                
                
                1.92
                %
                
                $
                86,590,932
                
                
                
                1.77
                %Saving
      deposits
                
                
                51,737,301
                
                
                
                2.43
                %
                
                
                60,330,900
                
                
                
                4.16
                %
                
                
                61,332,587
                
                
                
                3.83
                %Noninterest-bearing
      demand deposits
                
                
                38,732,731
                
                
                
                n/a
                
                
                
                42,484,417
                
                
                
                n/a
                
                
                
                51,482,129
                
                
                
                n/aTime
      deposits
                
                
                211,884,695
                
                
                
                4.53
                %
                
                
                194,897,350
                
                
                
                5.13
                %
                
                
                164,822,662
                
                
                
                4.36
                %Total
      average deposits
                
                $
                386,330,584
                
                
                
                
                
                
                $
                383,107,759
                
                
                
                
                
                
                $
                364,228,310





At
December 31, 2008 and 2007, certificates of deposit of $100,000 or more, totaled
$102,390,560 and $116,043,575, respectively.  The maturities of all
time certificates of deposit over $100,000 at December 31, 2008, were as
follows:





3
      months or less
                    
                    $
                    14,891,320Over
      3 but less than 6 months
                    
                    
                    20,180,066Over
      6 but not more than 12 months
                    
                    
                    47,115,015Over
      1 year but not more than 5 years
                    
                    
                    20,204,159Total
                    
                    $
                    102,390,560





BORROWINGS




Total
borrowings decreased approximately $9.8 million, or 15.10%, during 2008 compared
to 2007.  This decrease was a result of a decline of approximately
$14.8 million in securities sold under repurchase agreements, which was offset
by a longer term repurchase agreement advance of $5 million.





The
composition of FHLB advances is more fully explained in Note 12 to the
consolidated financial statements.





CAPITAL
RESOURCES




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





Page 43 of
56





Quantitative
measures established by regulations to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth below in
the table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of December 31, 2008 and
2007, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.





As of
December 31, 2008, the most recent notifications from both the Federal Deposit
Insurance Corporation and the Federal Reserve Bank of Atlanta categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the following table. There are no conditions or events since that notification
that management believes have changed the Bank’s categories.





The
Company’s and the Bank’s actual capital amounts and ratios as of December 31,
2008 and 2007 follow (in thousands):





Actual
                            
                            
                            For
      Capital
                              Adequacy Purposes
                            
                            
                            To
      Be Well
                              Capitalized
      Under
                              Prompt
      Corrective
                              Action ProvisionsAmount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            Ratio
                            
                            
                            Amount
                            
                            
                            RatioAs
      of December 31, 2008:Total
      Capital (to Risk-Weighted Assets):Company
                            
                            $
                            44,428
                            
                            
                            
                            11.60
                            %
                            
                            
                            30,643
                            
                            
                            
                            8
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            40,320
                            
                            
                            
                            10.61
                            %
                            
                            
                            30,408
                            
                            
                            
                            8
                            %
                            
                            
                            38,010
                            
                            
                            
                            10
                            %Tier
      I Capital (to Risk-Weighted Assets):Company
                            
                            $
                            39,591
                            
                            
                            
                            10.34
                            %
                            
                            
                            15,321
                            
                            
                            
                            4
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            35,483
                            
                            
                            
                            9.33
                            %
                            
                            
                            15,204
                            
                            
                            
                            4
                            %
                            
                            
                            22,806
                            
                            
                            
                            6
                            %Tier
      I Capital (to Average Assets):Company
                            
                            $
                            39,591
                            
                            
                            
                            7.94
                            %
                            
                            
                            19,943
                            
                            
                            
                            4
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            35,483
                            
                            
                            
                            7.14
                            %
                            
                            
                            19,872
                            
                            
                            
                            4
                            %
                            
                            
                            24,840
                            
                            
                            
                            5
                            %As
      of December 31, 2007:Total
      Capital (to Risk-Weighted Assets):Company
                            
                            $
                            52,542
                            
                            
                            
                            12.90
                            %
                            
                            
                            32,589
                            
                            
                            
                            8
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            49,322
                            
                            
                            
                            12.13
                            %
                            
                            
                            32,521
                            
                            
                            
                            8
                            %
                            
                            
                            40,651
                            
                            
                            
                            10
                            %Tier
      I Capital (to Risk-Weighted Assets):Company
                            
                            $
                            50,405
                            
                            
                            
                            12.37
                            %
                            
                            
                            16,295
                            
                            
                            
                            4
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            47,185
                            
                            
                            
                            11.61
                            %
                            
                            
                            16,260
                            
                            
                            
                            4
                            %
                            
                            
                            24,391
                            
                            
                            
                            6
                            %Tier
      I Capital (to Average Assets):Company
                            
                            $
                            50,405
                            
                            
                            
                            9.99
                            %
                            
                            
                            20,192
                            
                            
                            
                            4
                            %
                            
                            
                            N/A
                            
                            
                            
                            N/ABank
                            
                            $
                            47,185
                            
                            
                            
                            9.38
                            %
                            
                            
                            20,131
                            
                            
                            
                            4
                            %
                            
                            
                            25,164
                            
                            
                            
                            5
                            %





The
company has withdrawn its application for approximately $3.0 to $11.0 million
for capital under the U.S. Treasury’s Troubled Asset Relief Program (“TARP”)
Capital Purchase Program, but believes its current level of capital is
sufficient for the current and foreseeable needs of the Company.  The
Company received $3.0 million of capital through its issuance of Series A
Preferred Stock in a private placement to a single investor on December 31,
2008, and has the ability to issue up to an additional $7.0 million of such
stock at any time under the terms of its subscription agreement.  The
Company does not presently intend to issue the additional shares under this
agreement, but retains the ability to do so at any time based on its on-going
review of its capital requirements.  See Note 15 to the consolidated
financial statements for additional information regarding the terms of the
Series A Preferred Stock.





Page 44 of
56





Cash
dividends were paid at a rate of $.10 per share in March and June of 2008 and
$.05 per share in September of 2008.   On November 24, 2008, the
Board of Directors voted to suspend regular cash dividends on its common stock
for an indefinite period.  Cash dividends were paid at a rate of $.10
per share in March, June, September and December of 2007.  Also, a
special cash dividend of $.50 was paid in December 2007.  Cash
dividends were paid at a rate of $.09 per share in each quarter of
2006.





Except as
otherwise disclosed in this report, management is not aware of any required
regulatory changes or any recommendation by any regulatory authority which will
have a material effect on the Company’s liquidity, capital or results of
operations.





It is the
policy of the Federal Reserve that bank holding companies should pay cash
dividends on common stock only out of net earnings available over the past year
and only if prospective earnings retention is consistent with the organization’s
expected future needs and financial condition.  The policy provides
that bank holding companies should not maintain a level of cash dividends that
undermines the bank holding company’s ability to serve as a source of strength
to its banking subsidiaries.





Furthermore,
the approval of the Georgia Department of Banking and Finance is required if
dividends declared by Habersham Bank to the Company in any year will exceed 50%
of the bank’s net earnings for the previous calendar year.  As of
December 31, 2008, Habersham Bank could not declare dividends to the Company
without regulatory approval.





INTEREST RATE
SENSITIVITY





The
objective of asset and liability management is to manage and measure the level
and volatility of earnings and capital by controlling interest rate
risk.  To accomplish this objective, management makes use of interest
rate and income simulation models to perform current and dynamic projections of
interest income and equity, as well as more traditional asset and liability
management methods.





The
Company’s historical performance in various economic climates is considered by
management in making long-term asset and liability decisions for the
Company.





The
relative interest rate sensitivity of the Company’s assets and liabilities
indicates the extent to which the Company’s net interest income may be affected
by interest rate movements.  The Company’s ability to reprice assets
and liabilities in the same dollar amounts and at the same time minimizes
interest rate risks.  One method of measuring the impact of interest
rate changes on net interest income is to measure, in a number of time frames,
the interest sensitivity gap by subtracting interest sensitive liabilities from
interest sensitive assets, as reflected in the following table.  Such
an interest sensitivity gap represents the risk, or opportunity, in
repricing.  If more assets than liabilities are repriced at a given
time in a rising rate environment, net interest income improves; in a declining
rate environment, net interest income deteriorates.  Conversely, if
more liabilities than assets are repriced while interest rates are rising, net
interest income deteriorates; if interest rates are falling, net interest income
improves.





Page 45 of
56




INTEREST
      RATE SENSITIVITY ANALYSISDUE
      IN
                  
                  
                  DUE
      AFTER
                  
                  
                  DUE
      AFTER
                  
                  
                  DUE
      AFTER3
                  
                  
                  3
      THROUGH
                  
                  
                  6
      THROUGH
                  
                  
                  ONE
      THROUGH
                  
                  
                  DUE
      AFTERMONTHS
                  
                  
                  6 MONTHS
                  
                  
                  12 MONTHS
                  
                  
                  FIVE YEARS
                  
                  
                  FIVE YEARS
                  
                  
                  TOTALINTEREST-
      EARNING ASSETS:Fed
      funds sold
                  
                  $
                  620,036
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  620,036Investment
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  219,269
                  
                  
                  
                  2,887,013
                  
                  
                  
                  95,197,044
                  
                  
                  
                  98,303,326Loans
                  
                  
                  244,410,452
                  
                  
                  
                  10,451,023
                  
                  
                  
                  13,595,559
                  
                  
                  
                  53,410,566
                  
                  
                  
                  906,961
                  
                  
                  
                  322,774,561Total
      earning assets
                  
                  $
                  245,030,488
                  
                  
                  $
                  10,451,023
                  
                  
                  $
                  13,814,828
                  
                  
                  $
                  56,297,579
                  
                  
                  $
                  96,104,005
                  
                  
                  $
                  421,697,923INTEREST-
      BEARING LIABILITIES:DepositsMoney
      Market and NOW
                  
                  $
                  77,638,103
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  77,638,103Savings
                  
                  
                  43,180,202
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  43,180,202Certificates
      of deposit
                  
                  
                  32,181,475
                  
                  
                  
                  38,714,165
                  
                  
                  
                  118,744,319
                  
                  
                  
                  52,765,166
                  
                  
                  
                  -
                  
                  
                  
                  242,405,125Borrowings
                  
                  
                  12,144,450
                  
                  
                  
                  7,000,000
                  
                  
                  
                  8,000,000
                  
                  
                  
                  23,000,000
                  
                  
                  
                  5,000,000
                  
                  
                  
                  55,144,450Total
      interest bearing liabilities
                  
                  $
                  165,144,230
                  
                  
                  $
                  45,714,165
                  
                  
                  $
                  126,744,319
                  
                  
                  $
                  75,765,166
                  
                  
                  $
                  5,000,000
                  
                  
                  $
                  418,367,880Excess
      (deficiency) of interest-earning assets over interest-bearing
      liabilities
                  
                  $
                  79,886,258
                  
                  
                  $
                  (35,263,142
                  )
                  
                  $
                  (112,929,491
                  )
                  
                  $
                  (19,467,587
                  )
                  
                  $
                  91,104,005
                  
                  
                  $
                  3,330,043Cumulative
      Gap
                  
                  $
                  79,886,258
                  
                  
                  $
                  44,623,116
                  
                  
                  $
                  (68,306,375
                  )
                  
                  $
                  (87,773,962
                  )
                  
                  $
                  3,330,043Ratio
      of cumulative gap to total cumulative earning assets
                  
                  
                  32.60
                  %
                  
                  
                  17.47
                  %
                  
                  
                  -25.36
                  %
                  
                  
                  -26.96
                  %
                  
                  
                  0.80
                  %Ratio
      of  cumulative earning assets to cumulative interest bearing
      liabilities
                  
                  
                  148.37
                  %
                  
                  
                  121.16
                  %
                  
                  
                  79.77
                  %
                  
                  
                  78.76
                  %
                  
                  
                  100.79
                  %





The
Company’s strategy is to maintain a ratio of interest sensitive assets to
interest sensitive liabilities in the range of 80% to 120% at the less-than
one-year-time frame.  At December 31, 2008, the Company’s ratio of
interest-earning assets to interest-bearing liabilities was
79.77%.  The interest rate sensitivity analysis has a negative
one-year gap of approximately $68.3 million (excess of interest-bearing
liabilities repricing over interest-earning assets).  The Company’s
experience has shown that NOW, money market, and savings deposits of
approximately $120.8 million are less sensitive to short term rate
movements.





MARKET
RISK





Market
risk reflects the risk of economic loss resulting from adverse changes in market
prices and interest rates.  The risk of loss can be reflected in
either diminished current market values or reduced potential net interest income
in future periods.





Market
risk arises primarily from interest rate risk inherent in the Company’s lending
and deposit taking activities. The structure of the Company’s loan and deposit
portfolios is such that a significant decline in the prime rate may adversely
impact net market values and interest income.  Management seeks to
manage this risk through the use of its investment securities portfolio. The
composition and size of the investment portfolio is managed so as to reduce the
interest rate risk in the deposit and loan portfolios while at the same time
maximizing the yield generated from the portfolio.  The Company is
also subject to equity risk as a result of changes in market values of its
equity securities.





The table
below presents the contractual balances and the estimated fair value of the
Company’s balance sheet fixed rate financial instruments and their expected
maturity dates as of December 31, 2008. Variable rate financial instruments are
presented at their next rate change date.  The expected maturity
categories take into consideration historical prepayments experience as well as
management’s expectations based on the interest rate environment as of December
31, 2008.





Page 46 of
56




MARKET
      RISK INFORMATION (in thousands)Fair2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter
                
                
                Total
                
                
                ValueRate-sensitive
      assets:Fixed
      interest rate loans
                
                
                35,153
                
                
                
                31,220
                
                
                
                10,528
                
                
                
                10,603
                
                
                
                703
                
                
                
                907
                
                
                
                89,114
                
                
                
                89,518Average
      interest rate
                
                
                7.40
                %
                
                
                6.91
                %
                
                
                7.81
                %
                
                
                6.63
                %
                
                
                6.41
                %
                
                
                6.01
                %
                
                
                7.16
                %Variable
      interest rate loans
                
                
                177,605
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                177,605
                
                
                
                177,605Average
      interest rate
                
                
                5.54
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5.54
                %Fixed
      interest rate securities
                
                
                219
                
                
                
                641
                
                
                
                534
                
                
                
                411
                
                
                
                1,301
                
                
                
                94,450
                
                
                
                97,556
                
                
                
                97,583Average
      interest rate
                
                
                5.05
                %
                
                
                4.89
                %
                
                
                2.88
                %
                
                
                5.18
                %
                
                
                4.19
                %
                
                
                5.07
                %
                
                
                5.05
                %Variable
      interest rate securities
                
                
                562
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                562
                
                
                
                562Average
      interest rate
                
                
                4.85
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4.85
                %Rate-sensitive
      liabilities:Savings
      and interest-bearing deposits
                
                
                120,818
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                120,818
                
                
                
                120,992Average
      interest rate
                
                
                1.07
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1.07
                %Fixed
      interest rate time deposits
                
                
                189,640
                
                
                
                39,724
                
                
                
                9,500
                
                
                
                2,857
                
                
                
                684
                
                
                
                -
                
                
                
                242,405
                
                
                
                246,156Average
      interest rate
                
                
                3.93
                %
                
                
                4.61
                %
                
                
                5.22
                %
                
                
                4.35
                %
                
                
                3.22
                %
                
                
                0.00
                %
                
                
                4.09
                %Fixed
      interest rate borrowings
                
                
                16,144
                
                
                
                10,000
                
                
                
                10,000
                
                
                
                -
                
                
                
                3,000
                
                
                
                5,000
                
                
                
                44,144
                
                
                
                45,425Average
      interest rate
                
                
                1.98
                %
                
                
                6.02
                %
                
                
                4.93
                %
                
                
                -
                
                
                
                3.26
                %
                
                
                3.28
                %
                
                
                3.80
                %Variable
      interest rate borrowings
                
                
                11,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,000
                
                
                
                11,000Average
      interest rate
                
                
                2.94
                %
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2.94
                %





INFLATION





The
Company’s assets and liabilities are generally monetary in
nature.  Therefore, interest rates have a greater impact on the
Company’s performance than the effects of general levels of
inflation.  Interest rates do not necessarily move in the same
direction or magnitude as the prices of goods and services.  See
“Interest Rate Sensitivity Analysis” section above.





LIQUIDITY




Liquidity
management involves the matching of the cash flow requirements of customers,
either depositors withdrawing funds or borrowers needing loans, and the ability
of the Company to meet those requirements.





The
Company’s liquidity program is designed and intended to provide guidance in
funding the credit and investment activities of the Company while at the same
time ensuring that the deposit obligations of the Company are met on a timely
basis.  In order to permit active and timely management of assets and
liabilities, these accounts are monitored regularly in regard to volume, mix and
maturity.





Scheduled
amortization and prepayments of loans, maturities and calls of investment
securities and funds from operations provide a daily source of
liquidity.  In addition, the Company may and does seek outside sources
of funds.





Page 47 of
56





At
December 31, 2008 and 2007, the Company had additional line of credit
commitments available as shown below:





2008
                    
                    
                    2007Total
      Available
                    
                    
                    Total
      AvailableFederal
      discount window
                    
                    $
                    24,630,000
                    
                    
                    
                    -Federal
      funds line
                    
                    
                    10,000,000
                    
                    
                    
                    30,000,000Retail
      repurchase agreement
                    
                    
                    921,000
                    
                    
                    
                    -Retail
      repurchase agreement (subject to available securities)
                    
                    
                    3,950,000
                    
                    
                    
                    2,650,000





At
December 31, 2008, the Company had pledged certain investment securities for the
Federal funds line and the retail repurchase agreements.  At December
31, 2007, the Company had pledged certain investment securities for the retail
repurchase agreements.  No amounts were outstanding on the above
commitments at December 31, 2008 or 2007.





Loan
repayments and maturing investment securities are a relatively predictable
source of funds.  However, deposit flows, calls of investment
securities and prepayment of loans are strongly influenced by interest rates,
general and local economic conditions, and competition in the
marketplace.  These factors reduce the predictability of the timing of
these sources of funds.





The
Company’s liquidity position depends primarily upon the liquidity of its assets
relative to its need to respond to short-term demand for funds caused by
withdrawals from deposit accounts and loan funding
commitments.  Primary sources of liquidity are scheduled repayments on
the Company’s loans and interest on and maturities of its investment
securities.  Sales of investment securities available for sale
represent another source of liquidity to the Company.  The Company may
also utilize its cash and due from banks and federal funds sold to meet
liquidity requirements as needed.





Liquidity
as a percent of deposits and total liabilities, with a target of 10%, is
recommended to be calculated and monitored daily.   Based on
these guidelines, the Bank’s liquidity ratios as a percent of deposits and total
liabilities follow:





December 31, 2008
                  
                  
                  December 31, 2007Liquidity
      as a percent of deposits
                  
                  
                  16.70
                  %
                  
                  
                  13.65
                  %Liquidity
      as a percent of total liabilities
                  
                  
                  14.72
                  %
                  
                  
                  11.53
                  %





OFF-BALANCE
SHEET COMMITMENTS




The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of its lending activities to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit.  The Company’s exposure to credit losses in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual amounts of those instruments.  The Company uses the same
credit policies in making these commitments as it does for on-balance-sheet
instruments and evaluates each customer’s creditworthiness on a case by case
basis.  At December 31, 2008, the Company had outstanding loan
commitments approximating $64,825,000 and standby letters of credit
approximating $1,761,000.  The amount of collateral obtained, if
deemed necessary, for these financial instruments by the Company, upon extension
of credit, is based on management’s credit evaluation of the
customer.  Collateral held, if any, varies but may include inventory,
equipment, real estate, or other property. The accounting loss the Company would
incur if any party to the financial instrument failed completely to perform
according to the term of the contract and the collateral proved to be of no
value is equal to the face amount of the financial instrument.





Page 48 of
56





The
Company’s commitments are funded through internal funding sources of scheduled
repayments of loans and sales and maturities of investment securities available
for sale or external funding sources through acceptance of deposits from
customers or borrowing from other financial institutions.





CONTRACTUAL
OBLIGATIONS




The
following table is a summary of the Company’s commitments to extend credit,
commitments under contractual leases as well as the Company’s contractual
obligations, consisting of deposits, FHLB advances and borrowed funds by
contractual maturity date.





2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                ThereafterCommitments
      on lines of credit
                
                $
                64,825,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Standby
      letters of credit
                
                
                1,761,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Deposits
                
                
                340,122,499
                
                
                
                39,724,396
                
                
                
                9,500,392
                
                
                
                2,856,872
                
                
                
                683,505
                
                
                
                -FHLB
      advances
                
                
                15,000,000
                
                
                
                10,000,000
                
                
                
                10,000,000
                
                
                
                -
                
                
                
                3,000,000
                
                
                
                -Short-term
      borrowings
                
                
                760,468
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Federal
      funds purchased and securities sold under repurchase
      agreements
                
                
                11,383,982
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,000,000Total
      commitments and contractual obligations
                
                $
                433,852,949
                
                
                
                49,724,396
                
                
                
                19,500,392
                
                
                
                2,856,872
                
                
                
                3,683,505
                
                
                
                5,000,000





Although
management regularly monitors the balance of outstanding commitments to fund
loans to ensure funding availability should the need arise, management believes
that the risk of all customers fully drawing on all these lines of credit at the
same time is remote.





Item
7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





See
“Market Risk” under Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.





Item
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
consolidated balance sheets of the Company and subsidiaries as of December 31,
2008 and 2007, the related consolidated statements of earnings, changes in
stockholders’ equity, comprehensive income, and cash flows and notes to the
consolidated financial statements for each of the years in the three year period
ended December 31, 2008, the report issued thereon by the Company’s independent
auditors and quarterly financial data (unaudited) are incorporated herein by
reference to the Company’s 2008 Annual Report to Shareholders and are attached
as Exhibit 13 hereto.





Item
9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE





None.





Page 49 of
56





Item
9A(T). CONTROLS AND PROCEDURES





Disclosure
Controls





As of the end of the period covered by
this Annual Report on Form 10-K, our principal executive officer and principal
financial officer have evaluated the effectiveness of our “disclosure controls
and procedures” (“Disclosure Controls”).  Disclosure Controls, as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Disclosure Controls are also designed
with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.





Our management, including the CEO and
CFO, does not expect that our Disclosure Controls will prevent all errors and
all fraud.  A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.





Based upon their controls evaluation,
our CEO and CFO have concluded that our Disclosure Controls are effective at a
reasonable assurance level.





Changes
in Internal Control over Financial Reporting





Management of the Company as evaluated,
with the participation of the Company’s Chief Executive Officer and Chief
Financial officer, changes in the Company’s internal control over financial
reporting (as defined in rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the quarter ended December 31, 2008.  Based upon that
evaluation management has determined that there have been no changes to the
Company’s internal control over financial reporting that occurred since the
beginning of the Company’s fourth quarter of 2008 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934.  Our internal control over
financial reporting is a process designed to provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition,
transactions are executed in accordance with appropriate management
authorization and accounting records are reliable for the preparation of
financial statements in accordance with generally accepted accounting
principles.





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Page 50 of
56





Management assessed the effectiveness
of our internal control over financial reporting as of December 31,
2008.  Management based this assessment on criteria for effective
internal control over financial reporting described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Management’s assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial
reporting.  Management has reviewed the results of its assessment with
the Audit Committee of our Board of Directors.





Based on this assessment, management
believes that the Company maintained effective internal control over financial
reporting as of December 31, 2008.





This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting.  Management’s report was
not subject to attestation by the company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.





Item
9B.  OTHER INFORMATION





None




PART
III


Item
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
Company has a Code of Ethics that applies to its senior management, including
its Chief Executive Officer, Chief Financial Officer and Comptroller. See
Exhibit 14 hereto.





Additional
information concerning the Company's directors and executive officers appears in
the Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under
the headings "Election of Directors,” -“Compliance with Section 16(a) of the
Exchange Act” and "Executive Officers" and is incorporated by reference
herein.





Item
l1.  EXECUTIVE COMPENSATION





Additional
information concerning the compensation of the Company's management appears in
the Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under
the headings "Executive Compensation" and “Election of Directors - Compensation
of Directors” and is incorporated by reference herein.





Page 51 of
56





Item
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS





The
following table provides information regarding compensation plans under which
equity securities of the Company are authorized for issuance.  All
data is presented as of December 31, 2008.





Equity
      Compensation Plan Table(a)
                            
                            
                            (b)
                            
                            
                            (c)Plan
      category
                            
                            Number
      of securities to be
                              issued
      upon exercise of
                              outstanding
      options,
                              warrants
      and rights
                            
                            
                            Weighted-average
      exercise
                              price
      of outstanding
                              options,
      warrants and rights
                            
                            
                            Number
      of securities
                              remaining
      available for
                              future
      issuance under equity
                              compensation
      plans
                              (excluding
      securities
                              reflected
      in column (a))Equity
      compensation plans approved by security holders
                            
                            
                            174,750
                            
                            
                            $
                            21.99
                            
                            
                            
                            316,799Equity
      compensation plans not approved by security holders
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Total
                            
                            
                            174,750
                            
                            
                            $
                            21.99
                            
                            
                            
                            316,799





Additional
information concerning beneficial owners of more than 5% of the Company's stock
and information concerning the stock owned by the Company's management appears
in the Proxy Statement under the heading "Ownership of Stock" and is
incorporated by reference herein.





Item
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE





Information
concerning certain relationships and related transactions appears in the
Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under the
heading "Certain Transactions" and is incorporated by reference
herein.  Information regarding director independence appears in the
Company’s Proxy Statement for its 2009 Annual Meeting of Shareholders under the
heading “Election of Directors” and is incorporated by reference
herein.





Item
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Information
concerning principal accountant fees and services appears in the Company’s Proxy
Statement for its 2009 Annual Meeting of Shareholders under the heading “Audit
Committee Matters – Audit Fees” and is incorporated herein by
reference.





Page 52 of
56





PART
IV





Item
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
            See
      Item 8 for a list of the financial statements filed as a part of this
      report. No financial statement schedules are applicable as the required
      information is included in the financial statements in Item
    8.





See the
attached Exhibit Index, appearing behind the signature page to this report, for
the exhibits required by Item 601 of Regulation S-K.





Page 53 of
56





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





HABERSHAM
      BANCORP (Registrant)/s/ David D. Stovall
                Date:
                March 13, 2009By:
                Director,
      President andChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant in the capacities
and on the dates indicated.





Signature
                      
                      Title
                      
                      Date/s/ Thomas A. Arrendale,
III
                      
                      Chairman
      of the Board
                      
                      March
      13, 2009and
      Director/s/
      David D. Stovall
                      
                      Director,
      President and
                      
                      March
      13, 2009Chief
      Executive Officer */s/
      Edward D. Ariail
                      
                      Director,
      Vice President and
                      
                      March
      13, 2009Corporate
      Secretary/s/ Bonnie
      C. Bowling
                      
                      Director,
      Executive Vice
                      
                      March
      13, 2009President
      and Chief Operations Officer/s/ Michael
      C. Martin
                      
                      Director
                      
                      March
      13, 2009/s/
      James A. Stapleton, Jr.
                      
                      Director
                      
                      March
      13, 2009/s/
      Calvin R. Wilbanks
                      
                      Director
                      
                      March
      13, 2009/s/
      Michael L. Owen
                      
                      Director
                      
                      March
      13, 2009/s/
      Ben F. Cheek, III
                      
                      Director
                      
                      March
      13, 2009/s/
      Annette Banks
                      
                      Vice
      President and
                      
                      March
      13, 2009Chief
      Financial Officer **





*
Principal executive officer.


**
Principal financial and accounting officer.





Page 54 of
56





EXHIBIT
INDEX





Exhibit No.
                  Document3.1
                  Amended
      and Restated Articles of Incorporation of Habersham Bancorp, as
      amended3.2
                  By-laws
      of Habersham Bancorp, as amended by resolutions dated January 29, 2000
      (1)10.1*
                  Subscription
      Agreement for Series A Preferred Stock between Fieldale Farms, Inc. and
      Habersham Bancorp dated December 31, 2008.10.2*
                  Form
      of Director Supplemental Retirement Plan Agreement and Split Dollar
      Endorsement, with summary of terms specific to each director
      (1)10.3*
                  Habersham
      Bancorp Outside Directors Stock Option Plan (2)10.3(a)*
                  Form
      of option agreement under Habersham Bancorp Outside Directors Stock Option
      Plan (3)10.4*
                  Habersham
      Bancorp 1996 Incentive Stock Option Plan, (4) as amended by the First
      Amendment theretodated January 29, 2000 (5)10.4(a)*
                  Form
      of incentive stock option agreement under Habersham Bancorp 1996 Incentive
      Stock Option Plan(1)10.4(b)*
                  Form
      of non-qualified stock option agreement under Habersham Bancorp 1996
      Incentive Stock Option   Plan (1)10.5*
                  Form
      of Split Dollar Agreement and Collateral Assignment dated January 1, 1991,
      with summary of terms applicable to Mr. Ariail and Mr. Stovall
      (1)10.6*
                  Habersham
      Bancorp 2005 Stock Option Plan (6)10.6(a)*
                  Form
      of non-qualified stock option award pursuant to the 2005 Stock Option Plan
      (7)10.6(b)*
                  Form
      of Incentive Stock Option award pursuant to the 2005 Stock Option Plan
      (8)10.7*
                  Supplemental
      Executive Retirement Agreement Dated as of January 1, 2008 between the
      Company and David D. Stovall (9)10.8*
                  Supplemental
      Executive retirement Agreement dated as of January 1, 2008 between the
      Bank and Edward D. Ariail (10)10.9*
                  Supplemental
      Executive Retirement Agreement dated as of January 1, 2008 between the
      Company and Bonnie C. Bowling (11)13.0
                  Financial
      statements and notes thereto contained in the Habersham Bancorp 2008
      Annual Report and quarterly financial data (unaudited)14.0
                  Code
      of Ethics (12)





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56




21.0
                Subsidiaries
      of Habersham Bancorp  (12)23.1
                Consent
      of Porter Keadle Moore, LLP31.1
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
                Certification
      Pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934 and
      18 U.S.C Section 1350 as adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002.





(1)   Incorporated
here in by reference to Exhibit of the same number in the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2004 (File No.
0-13153)





(2)   Incorporated
herein by reference to Appendix B to the Registrant’s 2005 Proxy Statement for
its Annual Meeting of Shareholders (File No. 0-13153)





(3)   Incorporated
by reference to Exhibit 10.3 to the Registrant’s Quarterly Report of Form 10-Q
for the quarter ended June 30, 2005 (File No. 0-13153)





(4) 
 Incorporated herein by reference to Appendix A to the Registrant’s 1996
Proxy Statement for its Annual Meeting of the Shareholders (File No.
0-13153)





(5)   Incorporated
herein by reference to Appendix A to the Registrant’s 2000 Proxy Statement for
its Annual Meeting of Shareholders filed on Schedule 14A (File No.
0-13153)





(6)   Incorporated
herein by reference to Appendix A to the Registrant’s 2005 Proxy Statement for
its Annual Meeting of Shareholders (File No. 0-13153)





(7)   Incorporated
by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File No. 0-13153)





(8)   Incorporated
by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 (File No. 0-13153)





(9)  
Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed on January 11, 2008 (File No. 0-13153)





(10)
Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on January 11, 2008 (File No. 0-13153)





(11)
Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K filed on January 11, 2008 (File No. 0-13153)





(12) Incorporated
herein by reference to exhibit of same number in the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2003 (File No.
0-13153)








*
Indicates the Registrant’s plans, management contracts and compensatory
arrangements.






Page 56 of 56