Exhibit
13.0








HABERSHAM
BANCORP


AND
SUBSIDIARIES








Consolidated
Financial Statements





December
31, 2008, 2007 and 2006








(with
Independent Accountants’ Report thereon)








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS


- 1
-


To the
Board of Directors and Stockholders


Habersham
Bancorp and Subsidiaries








We have
audited the accompanying consolidated balance sheets of Habersham Bancorp and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Habersham Bancorp and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.








\s\Porter
Keadle Moore, LLP


Atlanta,
Georgia


March 2,
2009


- 2
-


Habersham
Bancorp and Subsidiaries





Consolidated
Balance Sheets





December
31, 2008 and 2007





Assets2008
                    
                    
                    2007Cash
      and due from banks
                    
                    $
                    13,639,940
                    
                    
                    
                    18,196,283Federal
      funds sold
                    
                    
                    620,036
                    
                    
                    
                    4,188,944Cash
      and cash equivalents
                    
                    
                    14,259,976
                    
                    
                    
                    22,385,227Investment
      securities available for sale
                    
                    
                    97,277,891
                    
                    
                    
                    89,890,102Investment
      securities held to maturity, estimated fair value of $1,052,829 and
      $2,751,684
                    
                    
                    1,025,435
                    
                    
                    
                    2,689,198Other
      investments
                    
                    
                    3,334,124
                    
                    
                    
                    3,408,924Loans
      held for sale
                    
                    
                    -
                    
                    
                    
                    1,865,850Loans,
      net of allowance for loan loss of  $12,167,645 and
      $2,136,848
                    
                    
                    310,606,916
                    
                    
                    
                    348,250,843Premises
      and equipment, net
                    
                    
                    19,479,393
                    
                    
                    
                    16,081,593Accrued
      interest receivable
                    
                    
                    2,221,546
                    
                    
                    
                    2,752,173Other
      real estate
                    
                    
                    27,336,874
                    
                    
                    
                    11,498,271Goodwill
                    
                    
                    -
                    
                    
                    
                    3,549,780Cash
      surrender value of life insurance
                    
                    
                    9,936,088
                    
                    
                    
                    9,538,611Income
      tax receivable
                    
                    
                    2,504,297
                    
                    
                    
                    332,161Other
      assets
                    
                    
                    6,886,725
                    
                    
                    
                    1,976,614Total
      assets
                    
                    $
                    494,869,265
                    
                    
                    
                    514,219,347Liabilities and Stockholders’
      EquityDeposits:Noninterest-bearing
      demand
                    
                    $
                    29,664,234
                    
                    
                    
                    29,740,791Money
      market and NOW accounts
                    
                    
                    77,638,103
                    
                    
                    
                    96,236,923Savings
                    
                    
                    43,180,202
                    
                    
                    
                    60,076,631Time
      ($100,000 and over)
                    
                    
                    102,390,560
                    
                    
                    
                    116,043,575Other
      time
                    
                    
                    140,014,565
                    
                    
                    
                    88,168,718Total
      deposits
                    
                    
                    392,887,664
                    
                    
                    
                    390,266,638Short-term
      borrowings
                    
                    
                    760,468
                    
                    
                    
                    766,608Federal
      funds purchased and securities sold under repurchase
      agreements
                    
                    
                    16,383,982
                    
                    
                    
                    26,183,807Federal
      Home Loan Bank advances
                    
                    
                    38,000,000
                    
                    
                    
                    38,000,000Accrued
      interest payable
                    
                    
                    2,805,353
                    
                    
                    
                    3,303,394Other
      liabilities
                    
                    
                    2,033,785
                    
                    
                    
                    1,516,725Total
      liabilities
                    
                    
                    452,871,252
                    
                    
                    
                    460,037,172CommitmentsStockholders’
      equity:Preferred
      stock; 10,000,000 shares authorized; 3,000 shares issued and outstanding
      in 2008
                    
                    
                    2,977,762
                    
                    
                    
                    -Common
      stock, $1.00 par value; 10,000,000 shares authorized; 2,818,593 shares
      issued and outstanding
                    
                    
                    2,818,593
                    
                    
                    
                    2,818,593Additional
      paid-in capital
                    
                    
                    13,490,587
                    
                    
                    
                    13,490,587Retained
      earnings
                    
                    
                    22,517,920
                    
                    
                    
                    38,135,126Accumulated
      other comprehensive income (loss)
                    
                    
                    193,151
                    
                    
                    
                    (262,131
                    )Total
      stockholders’ equity
                    
                    
                    41,998,013
                    
                    
                    
                    54,182,175Total
      liabilities and stockholders’ equity
                    
                    $
                    494,869,265
                    
                    
                    
                    514,219,347


See
accompanying notes to consolidated financial statements.


- 3
-


Habersham
Bancorp and Subsidiaries





Consolidated
Statements of Operations





For the
Years Ended December 31, 2008, 2007 and 2006





2008
                
                
                2007
                
                
                2006Interest
      income:Loans
                
                $
                21,416,324
                
                
                
                31,670,690
                
                
                
                29,927,711Investments:Taxable
      securities
                
                
                3,559,252
                
                
                
                3,086,017
                
                
                
                2,873,933Tax
      exempt securities
                
                
                906,024
                
                
                
                1,110,046
                
                
                
                982,884Other
      investments
                
                
                157,440
                
                
                
                236,914
                
                
                
                233,392Federal
      funds sold
                
                
                95,542
                
                
                
                271,871
                
                
                
                442,118Total
      interest income
                
                
                26,134,582
                
                
                
                36,375,538
                
                
                
                34,460,038Interest
      expense:Time
      deposits, $100,000 and over
                
                
                4,718,506
                
                
                
                5,792,183
                
                
                
                3,949,260Other
      deposits
                
                
                7,062,904
                
                
                
                8,345,735
                
                
                
                7,116,569Federal
      funds purchased and securities sold under repurchase
      agreements
                
                
                621,668
                
                
                
                611,682
                
                
                
                213,262Short-term
      and other borrowings, primarily FHLB advances
                
                
                1,884,968
                
                
                
                2,097,304
                
                
                
                1,938,568Total
      interest expense
                
                
                14,288,046
                
                
                
                16,846,904
                
                
                
                13,217,659Net
      interest income
                
                
                11,846,536
                
                
                
                19,528,634
                
                
                
                21,242,379Provision
      for loan losses
                
                
                16,020,862
                
                
                
                675,225
                
                
                
                -Net
      interest (loss) income after provision for loan losses
                
                
                (4,174,326
                )
                
                
                18,853,409
                
                
                
                21,242,379Noninterest
      income:Mortgage
      origination income
                
                
                402,275
                
                
                
                774,490
                
                
                
                785,147Service
      charges on deposit accounts
                
                
                1,081,228
                
                
                
                988,256
                
                
                
                902,238Other
      service charges and commissions
                
                
                264,526
                
                
                
                254,240
                
                
                
                265,653Securities
      gains (losses), net
                
                
                362,769
                
                
                
                4,900
                
                
                
                (13,216
                )Gain
      (loss) on sale of premises and equipment
                
                
                (7,576
                )
                
                
                7,545
                
                
                
                83,555Income
      from life insurance
                
                
                397,477
                
                
                
                190,084
                
                
                
                172,116Trust
      services fees
                
                
                481,730
                
                
                
                410,069
                
                
                
                314,139Other
      income
                
                
                1,134,373
                
                
                
                1,148,957
                
                
                
                1,146,118Total
      noninterest income
                
                
                4,116,802
                
                
                
                3,778,541
                
                
                
                3,655,750Noninterest
      expense:Salaries
      and employee benefits
                
                
                9,473,561
                
                
                
                10,544,056
                
                
                
                9,779,789Goodwill
      impairment
                
                
                3,549,780
                
                
                
                -
                
                
                
                -Occupancy
      expenses
                
                
                2,652,590
                
                
                
                2,401,145
                
                
                
                2,209,495Losses
      on sales, write-downs and other expenses on other real
    estate
                
                
                1,363,928
                
                
                
                177,733
                
                
                
                71,374Computer
      services
                
                
                608,457
                
                
                
                632,601
                
                
                
                553,849Telephone
                
                
                493,476
                
                
                
                453,464
                
                
                
                444,214Leased
      equipment expense
                
                
                470,217
                
                
                
                422,836
                
                
                
                375,769Other
                
                
                4,018,455
                
                
                
                4,040,338
                
                
                
                3,759,065Total
      noninterest expense
                
                
                22,630,464
                
                
                
                18,672,173
                
                
                
                17,193,555Earnings
      (loss) before income taxes
                
                
                (22,687,988
                )
                
                
                3,959,777
                
                
                
                7,704,574Income
      tax benefit (expense)
                
                
                7,838,667
                
                
                
                (1,020,420
                )
                
                
                (2,411,665
                )Net
      earnings (loss)
                
                $
                (14,849,321
                )
                
                
                2,939,357
                
                
                
                5,292,909Earnings
      (loss) per common share – basic
                
                $
                (5.27
                )
                
                
                1.00
                
                
                
                1.80Earnings
      (loss)  per common share – diluted
                
                $
                (5.27
                )
                
                
                1.00
                
                
                
                1.77Weighted
      average number of common shares outstanding
                
                
                2,818,593
                
                
                
                2,942,292
                
                
                
                2,942,737Weighted
      average number of common and common equivalent shares
      outstanding
                
                
                2,818,593
                
                
                
                2,952,528
                
                
                
                2,983,048





See
accompanying notes to consolidated financial statements.


- 4
-


Habersham
Bancorp and Subsidiaries





Consolidated
Statements of Comprehensive Income





For the
Years Ended December 31, 2008, 2007 and 2006





2008
                
                
                2007
                
                
                2006Net
      (loss) earnings
                
                $
                (14,849,321
                )
                
                
                2,939,357
                
                
                
                5,292,909Other
      comprehensive income:Unrealized
      holding gains on investment securities available for sale arising during
      period
                
                
                1,097,054
                
                
                
                836,769
                
                
                
                283,072Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges arising during the period
                
                
                (62,356
                )
                
                
                (149,402
                )
                
                
                36,269Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
                
                
                (344,877
                )
                
                
                (4,900
                )
                
                
                13,216Total
      other comprehensive income before tax
                
                
                689,821
                
                
                
                682,467
                
                
                
                332,557Income
      taxes related to other comprehensive income:Unrealized
      holding gains on investment securities available for sale arising during
      period
                
                
                (372,998
                )
                
                
                (284,502
                )
                
                
                (96,244
                )Unrealized
      holding (gains) losses on derivative financial instruments classified as
      cash flow hedges arising during the period
                
                
                21,201
                
                
                
                50,797
                
                
                
                (12,332
                )Reclassification
      adjustment for gains (losses) on investment securities available for
      sale
                
                
                117,258
                
                
                
                1,666
                
                
                
                (4,494
                )Total
      income taxes related to other comprehensive income
                
                
                (234,539
                )
                
                
                (232,039
                )
                
                
                (113,070
                )Total
      other comprehensive income, net of tax
                
                
                455,282
                
                
                
                450,428
                
                
                
                219,487Total
      comprehensive income (loss)
                
                $
                (14,394,039
                )
                
                
                3,389,785
                
                
                
                5,512,396




See
accompanying notes to consolidated financial statements.


- 5
-


Habersham
Bancorp and Subsidiaries





Consolidated
Statements of Changes in Stockholders’ Equity





For the
Years Ended December 31, 2008, 2007 and 2006




Preferred
      Stock
                
                
                Common
      Stock
                
                
                Additional
      Paid-in Capital
                
                
                Retained
      Earnings
                
                
                Accumulated
      Other Comprehensive Income
      (Loss)
                
                
                TotalBalance,
      December 31, 2005
                
                $
                -
                
                
                
                2,921,240
                
                
                
                14,723,175
                
                
                
                33,544,763
                
                
                
                (932,046
                )
                
                
                50,257,132Net
      earnings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,292,909
                
                
                
                -
                
                
                
                5,292,909Change
      in other comprehensive income, net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                219,487
                
                
                
                219,487Cash
      dividends, $.36 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,060,172
                )
                
                
                -
                
                
                
                (1,060,172
                )Tax
      benefit from options exercised
                
                
                -
                
                
                
                -
                
                
                
                84,280
                
                
                
                -
                
                
                
                -
                
                
                
                84,280Issuance
      of common stock upon exercise of stock options
                
                
                -
                
                
                
                47,353
                
                
                
                723,132
                
                
                
                -
                
                
                
                -
                
                
                
                770,485Balance,
      December 31, 2006
                
                
                -
                
                
                
                2,968,593
                
                
                
                15,530,587
                
                
                
                37,777,500
                
                
                
                (712,559
                )
                
                
                55,564,121Net
      earnings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,939,357
                
                
                
                -
                
                
                
                2,939,357Change
      in other comprehensive income, net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                450,428
                
                
                
                450,428Common
      stock repurchase  - 150,000 shares
                
                
                -
                
                
                
                (150,000
                )
                
                
                (2,040,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (2,190,000
                )Cash
      dividends, $.90 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,581,731
                )
                
                
                -
                
                
                
                (2,581,731
                )Balance,
      December 31, 2007
                
                
                -
                
                
                
                2,818,593
                
                
                
                13,490,587
                
                
                
                38,135,126
                
                
                
                (262,131
                )
                
                
                54,182,175Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,849,321
                )
                
                
                -
                
                
                
                (14,849,321
                )Change
      in other comprehensive income, net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                455,282
                
                
                
                455,282Cumulative
      effect of change in accounting principle due to adoption of EITF
      06-10
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (63,237
                )
                
                
                -
                
                
                
                (63,237
                )Issuance
      of preferred stock , net of issuance costs of $22,238
                
                
                2,977,762
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,977,762Cash
      dividends, $.25 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (704,648
                )
                
                
                -
                
                
                
                (704,648
                )Balance,
      December 31, 2008
                
                $
                2,977,762
                
                
                
                2,818,593
                
                
                
                13,490,587
                
                
                
                22,517,920
                
                
                
                193,151
                
                
                
                41,998,013




See
accompanying notes to consolidated financial statements.


- 6
-


Habersham
Bancorp and Subsidiaries





Consolidated
Statements of Cash Flows





For the
Years Ended December 31, 2008, 2007 and 2006





2008
                
                
                2007
                
                
                2006Cash
      flows from operating activities:Net
      (loss) earnings
                
                $
                (14,849,321
                )
                
                
                2,939,357
                
                
                
                5,292,909Adjustments
      to reconcile net earnings (loss) to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                16,020,862
                
                
                
                675,225
                
                
                
                -Write
      downs of real estate owned
                
                
                451,616
                
                
                
                142,000
                
                
                
                16,500Goodwill
      impairment
                
                
                3,549,780
                
                
                
                -
                
                
                
                -Income
      from life insurance
                
                
                (397,477
                )
                
                
                (190,084
                )
                
                
                (172,116
                )Depreciation
      expense
                
                
                1,110,407
                
                
                
                1,170,791
                
                
                
                1,052,771Loss
      (gain) on sale and disposals of premises and equipment
                
                
                7,576
                
                
                
                (7,545
                )
                
                
                (83,555
                )Net
      amortization of premium/discount in investment securities
                
                
                140,531
                
                
                
                80,651
                
                
                
                133,912Securities
      (gain) loss, net
                
                
                (362,769
                )
                
                
                (4,900
                )
                
                
                13,216Loss
      (gain) on sale of other real estate
                
                
                175,167
                
                
                
                (82,556
                )
                
                
                (15,454
                )Net
      gain on sale of loans
                
                
                (147,027
                )
                
                
                (774,490
                )
                
                
                (785,147
                )Proceeds
      from sales of loans
                
                
                20,886,277
                
                
                
                35,732,752
                
                
                
                33,611,309Increase
      in loans held for sale
                
                
                (18,873,400
                )
                
                
                (33,640,997
                )
                
                
                (33,889,839
                )Amortization
      of intangible assets
                
                
                62,064
                
                
                
                62,064
                
                
                
                62,064Deferred
      income tax (benefit) expense
                
                
                (4,850,715
                )
                
                
                301,978
                
                
                
                189,186Changes
      in assets and liabilities:(Increase)
      decrease in accrued interest receivable
                
                
                530,627
                
                
                
                185,808
                
                
                
                (578,810
                )(Increase)
      decrease in other assets
                
                
                (2,590,491
                )
                
                
                (466,156
                )
                
                
                (199,369
                )Increase
      (decrease) in accrued interest payable
                
                
                (498,041
                )
                
                
                324,106
                
                
                
                1,016,581Increase
      (decrease) in other liabilities
                
                
                453,823
                
                
                
                (396,657
                )
                
                
                27,769Net
      cash provided by operating activities
                
                
                819,489
                
                
                
                6,051,347
                
                
                
                5,691,927Cash
      flows from investing activities:Investment
      securities available for sale:Proceeds
      from maturities
                
                
                9,265,767
                
                
                
                6,555,706
                
                
                
                6,767,710Proceeds
      from sales and calls
                
                
                46,279,585
                
                
                
                4,136,400
                
                
                
                2,013,278Purchases
                
                
                (61,976,570
                )
                
                
                (14,843,351
                )
                
                
                (20,512,685
                )Investment
      securities held to maturity:Proceeds
      from maturities
                
                
                431,192
                
                
                
                599,800
                
                
                
                31,801Proceeds
      from calls
                
                
                1,250,415
                
                
                
                -
                
                
                
                80,000Other
      investments:Proceeds
      from sales
                
                
                74,800
                
                
                
                -
                
                
                
                553,500Purchases
                
                
                -
                
                
                
                (43,700
                )
                
                
                (543,300
                )Net
      decrease (increase)  in loans
                
                
                3,770,333
                
                
                
                (17,310,848
                )
                
                
                (27,098,118
                )Purchases
      of premises and equipment
                
                
                (4,515,783
                )
                
                
                (4,364,275
                )
                
                
                (3,592,734
                )Proceeds
      from sales of premises and equipment
                
                
                -
                
                
                
                43,156
                
                
                
                219,240Capitalized
      completion costs of other real estate
                
                
                (1,759,558
                )
                
                
                (435,179
                )
                
                
                -Purchase
      of  life insurance
                
                
                -
                
                
                
                (4,501,753
                )
                
                
                -Redemption
      of life insurance
                
                
                -
                
                
                
                200,056
                
                
                
                -Proceeds
      from sales of other real estate
                
                
                3,146,904
                
                
                
                616,231
                
                
                
                3,309,672Net
      cash used in investing activities
                
                
                (4,032,915
                )
                
                
                (29,347,757
                )
                
                
                (38,771,636
                )


- 7
-


Habersham
Bancorp and Subsidiaries





Consolidated
Statements of Cash Flows, continued





For the
Years Ended December 31, 2008, 2007 and 2006




2008
                
                
                2007
                
                
                2006Cash
      flows from financing activities:Net
      increase (decrease) in deposits
                
                $
                2,621,026
                
                
                
                (60,362,122
                )
                
                
                77,866,814Net
      (decrease) increase in short-term borrowings
                
                
                (6,140
                )
                
                
                (12,170
                )
                
                
                3,336Proceeds
      from  FHLB advances
                
                
                7,000,000
                
                
                
                4,000,000
                
                
                
                8,000,000Repayment
      of FHLB advances
                
                
                (7,000,000
                )
                
                
                (4,000,000
                )
                
                
                (12,300,000
                )Net
      (decrease) increase in federal funds purchased and securities sold under
      repurchase agreements
                
                
                (9,799,825
                )
                
                
                20,309,852
                
                
                
                (2,549,368
                )Payment
      of cash dividends
                
                
                (704,648
                )
                
                
                (2,581,731
                )
                
                
                (1,060,172
                )Common
      stock repurchase
                
                
                -
                
                
                
                (2,190,000
                )
                
                
                -Issuance
      of  preferred stock
                
                
                3,000,000
                
                
                
                -
                
                
                
                -Preferred
      stock issuance costs
                
                
                (22,238
                )
                
                
                -
                
                
                
                -Issuance
      of common stock upon exercise of stock options
                
                
                -
                
                
                
                -
                
                
                
                770,485Net
      cash (used) provided by financing activities
                
                
                (4,911,825
                )
                
                
                (44,836,171
                )
                
                
                70,731,095Change
      in cash and cash equivalents
                
                
                (8,125,251
                )
                
                
                (68,132,581
                )
                
                
                37,651,386Cash
      and cash equivalents at beginning of the year
                
                
                22,385,227
                
                
                
                90,517,808
                
                
                
                52,866,422Cash
      and cash equivalents at end of year
                
                $
                14,259,976
                
                
                
                22,385,227
                
                
                
                90,517,808Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
                
                $
                14,786,087
                
                
                
                16,522,798
                
                
                
                12,201,078Income
      taxes
                
                $
                -
                
                
                
                1,261,000
                
                
                
                2,403,000Supplemental
      disclosures of noncash investing activities:Other
      real estate acquired through loan foreclosures
                
                $
                17,852,732
                
                
                
                11,200,792
                
                
                
                1,055,372




See
accompanying notes to consolidated financial statements.


- 8
-


Habersham
Bancorp and Subsidiaries





Notes to
Consolidated Financial Statements





(1)
            Organization
      and Basis of Presentation


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




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




Use
      of Estimates


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




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




Interest
      Rate Risk


The
Company’s assets and liabilities are generally monetary in nature and interest
rates have an impact on the Company’s performance. The Company manages the
effect of interest rates on its performance by striving to match maturities and
interest sensitivity between loans, investment securities, deposits and other
borrowings. On a limited basis, the Company utilized derivative instruments to
minimize fluctuation in earnings that are caused by interest rate volatility.
However, a significant change in interest rates could have an effect on the
Company’s results of operations.




Reclassifications


Certain
2007 and 2006 amounts have been reclassified to conform with the 2008
presentation. These reclassifications had no effect on the operations, financial
condition or cash flows of the company.




(2)
            Summary
      of Significant Accounting Policies


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




Cash
      and Cash Equivalents


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




Investment
      Securities


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




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


- 9
-


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




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




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




Other
      Investments


At
December 31, 2008 and 2007, other investments are primarily comprised of
stock of the Federal Home Loan Bank of Atlanta.




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




Loans
      Held for Sale


Mortgage
loans held for sale are carried at the lower of cost or market determined on an
aggregate basis. Market values are determined on the basis of relevant delivery
prices in the secondary mortgage market.  There were no loans held for
sale at December 31, 2008.  There was no valuation allowance relating
to mortgage loans held for sale at December 31, 2007.




Loans


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




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




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




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




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




Allowance
      for Loan Losses


The
allowance for loan losses is maintained at a level estimated to be adequate to
provide for probable losses in the loan portfolio. Management follows a
consistent procedural discipline and accounts for loan loss contingencies in
accordance with SFAS No. 5, Accounting for Contingencies
and SFAS No. 114, Accounting
by Creditors for Impairment of a Loan.   The following is
a description of how each portion of the allowance for loan losses is
determined.




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


- 10
-


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




Management
uses a devoted internal loan reviewer who is independent of the lending function
to challenge and corroborate the loan grading system and provide additional
analysis in determining the adequacy of the allowance for loan losses and the
future provisions for estimated loan losses.  From time to time, the
Company utilizes independent external loan reviewers to supplement and challenge
the internal loan reviewers.




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




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




Other
      Real Estate


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




Premises
      and Equipment


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




Goodwill
      and Other Intangible Assets


Goodwill
represents the excess of the purchase price for bank acquisitions over the fair
value of the net assets acquired.  Goodwill is tested annually for
impairment unless events or circumstances arise that would indicate the need for
more frequent testing.  The impairment tests are performed at the
reporting level which in the Company’s case is effectively the entire
entity.   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 $3,549,780 was recorded to operations during the
fourth quarter of 2008.




Derivative
      Instruments and Hedging Activities


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


- 11
-


Income
Taxes


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




Earnings
      (Loss) Per Share


Basic
earnings (loss) per share is computed by dividing net earnings (loss) by the
weighted average of common shares outstanding. Diluted earnings (loss) per
share is computed by dividing net earnings (loss) by the weighted average of
common shares outstanding plus common share equivalents resulting from dilutive
stock options, determined using the treasury stock method.  Options on
174,750, 201,625 and 50,500 shares were not included in the diluted earnings
(loss) per share computation for 2008, 2007 and 2006, respectively, as they were
antidilutive.




Comprehensive
      Income


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




Recent
Accounting Pronouncements


Business
Combinations


In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”
 SFAS No. 141 (R) will significantly changed how entities apply the
acquisition method to business combinations.  The most significant changes
affecting how the Corporation will account for business combinations under this
Statement include: the acquisition date is the date the acquirer obtains
control; (and only) identifiable assets acquired, liabilities assumed, and
non-controlling interests in the acquiree are stated at fair value on the
acquisition date; assets or liabilities arising from non-contractual
contingencies are measured at their acquisition date fair value only if it is
more likely than not that they meet the definition of an asset or liability on
the acquisition date; adjustments subsequently made to the provisional amounts
recorded on the acquisition date are made retroactively during a measurement
period not to exceed one year; acquisition related restructuring costs that do
not meet the criteria of SFAS No.146, “Accounting for Cost Associated with
Exit or Disposal Activities,” are expensed as incurred; transaction costs
are expensed as incurred; reversals of deferred income tax valuation allowances
and income tax contingencies are recognized in the earnings subsequent to the
measurement period; and the allowance for loan losses of an acquiree is not
permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R)
requires new and modified disclosures surrounding subsequent changes to
acquisition–related contingencies, contingent consideration, non-controlling
interest interests, acquisition-related transaction costs, fair values and cash
flows not expected to be collected for acquired loans and an enhanced goodwill
rollforward.  The Company is required to apply SFAS No. 141(R)
prospectively to all business combinations completed after January 1,
2009.





Accounting for Transfers of
Financial Assets and Repurchase Financing Transaction


In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions.”   This
statement provides guidance regarding the accounting for a transfer of a
financial asset and repurchase financing where the counterparties for both
transactions are the same.  In these circumstances, certain criteria must
be met in order to not account for the transactions as a linked transaction.
 This FSP becomes effective for the fiscal years and interim periods within
those fiscal years, beginning on or after November 15, 2008.  The Company
does not anticipate that this FSP will have a material effect on the Company’s
financial position, results of operations, or disclosures.




Disclosures about Derivative
Instruments and Hedging Activities


In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” SFAS No. 161 is an amendment to SFAS
No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The objective of SFAS No.
161 is to expand the disclosure requirements of SFAS No. 133 with the intent to
improve the financial reporting of how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows.  The statement is effective for
financial statements issued for fiscal years beginning after November 15, 2008.
 The Company does not anticipate the new accounting principle to have a
material effect on its financial position or results of
operation.


- 12
-


Hierarchy of Generally
Accepted Accounting Principles


In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  The current GAAP hierarchy, as set
forth in the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles, has been
criticized because (1) it is directed to the auditor rather than the entity, (2)
it is complex, and (3) it ranks FASB Statements of Financial Accounting
Concepts, which are subject to the same level of due process as FASB Statements
of Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due process.
 The FASB believes that the GAAP hierarchy should be directed to entities
because it is the entity (not its auditor) that is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP.  Accordingly, the FASB concluded that the GAAP hierarchy should
reside in the accounting literature established by the FASB and is issuing this
Statement to achieve that result.  The Company does not anticipate the new
accounting principle to have a material effect on its financial position or
results of operation.





Determining the Fair Value
of a Financial Asset When the Market for that Asset is Not
Active


In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active.”  This
FASB Staff Position clarifies the application of SFAS No. 157, “Fair Value Measurements,” in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP FAS 157-3 provides
guidance on (1) how an entity’s own assumption should be considered when
measuring fair value when relevant observable inputs do not exist, (2) how
available observable inputs in a market that is not active should be considered
when measuring fair value and (3) how the use of market quotes should be
considered when assessing the relevance of observable and unobservable inputs
available to measure fair value.  This FASB Staff Position is effective
immediately.  The Company does not anticipate the new accounting principle
to have a material effect on its financial position or results of
operation.




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




(3)
            Cumulative
      Effect of Change in Accounting
Principle


Effective
January 1, 2008, the Company adopted Emerging Issues Task Force Issue No.
06-10, Accounting for
Collateral Assignment Split-Dollar Life Insurance Arrangements (“EITF
06-10”).  EITF 06-10 requires a company to recognize a liability for
the postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement if the employer has agreed to maintain a life insurance
policy during the employee’s retirement or provide the employee with a death
benefit based on the substantive agreement with the employee.  The
Company has post retirement benefits with several of its executives and
directors.  Refer to Note 17 – “Employee Benefit and Stock Option
Plans.”  Since the Company has agreed to maintain life insurance
policies in place during the retirement years of these individuals, the Company
must record a liability for the present value of the future costs to maintain
the policies in force (mortality costs.)  EITF 06-10 allows companies
to record the effects of adopting the EITF as a change in accounting principle
through a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption.  On January 1, 2008, the Company recorded a
liability and a cumulative-effect adjustment to retained earnings in the amount
of $63,237, net of tax.  Additional increases in the liability will be
charged to earnings in the year incurred.  For the year ended December
31, 2008, $17,784 was recorded to expense for the increase in the liability for
future mortality costs.





(4)
              Reserve
      Requirements


At
December 31, 2008 and 2007, the Federal Reserve Bank required that the Bank
maintain average reserve balances of $1,008,000 and $926,000,
respectively.


- 13
-


(5)
            Investment
      Securities Available for Sale


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




December 31, 2008
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueU.S.
      government-sponsored enterprises
                
                $
                26,698,164
                
                
                
                450,650
                
                
                
                16,018
                
                
                
                27,132,796Mortgage-backed
      securities
                
                
                55,390,658
                
                
                
                1,066,636
                
                
                
                45,143
                
                
                
                56,412,151State
      and political subdivisions
                
                
                14,591,833
                
                
                
                30,802
                
                
                
                1,075,052
                
                
                
                13,547,583Equity
      securities
                
                
                209,110
                
                
                
                -
                
                
                
                23,749
                
                
                
                185,361Total
                
                $
                96,889,765
                
                
                
                1,548,088
                
                
                
                1,159,962
                
                
                
                97,277,891December 31, 2007
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueU.S.
      government-sponsored enterprises
                
                $
                33,384,277
                
                
                
                225,251
                
                
                
                42,142
                
                
                
                33,567,386Mortgage-backed
      securities
                
                
                30,362,134
                
                
                
                88,900
                
                
                
                523,674
                
                
                
                29,927,360State
      and political subdivisions
                
                
                26,298,632
                
                
                
                215,492
                
                
                
                300,766
                
                
                
                26,213,358Equity
      securities
                
                
                209,110
                
                
                
                -
                
                
                
                27,112
                
                
                
                181,998Total
                
                $
                90,254,153
                
                
                
                529,643
                
                
                
                893,694
                
                
                
                89,890,102





Proceeds
from sales and calls of available for sale securities during 2008, 2007 and 2006
were $46,279,585, $4,136,400 and $2,013,278, respectively.





Gross
gains of $373,313, $4,900 and $9,881 were recognized on those sales for 2008,
2007 and 2006, respectively.


Gross
losses of $28,436 and $23,097 were recognized on those sales for 2008 and 2006,
respectively.   There were no losses recognized in
2007.





The
following investments available for sale have an unrealized loss at December 31,
2008 and 2007 for which an other than temporary impairment has not been
recognized:





2008
                  
                  
                  2007Estimated
      Fair Value
                  
                  
                  Unrealized
      Losses
                  
                  
                  Estimated
      Fair Value
                  
                  
                  Unrealized
      LossesUnrealized
      loss for less than 12 months:U.S.
      government-sponsored enterprises
                  
                  $
                  858,685
                  
                  
                  
                  14,391
                  
                  
                  
                  2,287,869
                  
                  
                  
                  4,399Mortgage-backed
      securities
                  
                  
                  2,621,883
                  
                  
                  
                  12,534
                  
                  
                  
                  527,339
                  
                  
                  
                  13,067State
      and political subdivisions
                  
                  
                  9,974,570
                  
                  
                  
                  860,452
                  
                  
                  
                  7,646,042
                  
                  
                  
                  197,502$
                  13,455,138
                  
                  
                  
                  887,377
                  
                  
                  
                  10,461,250
                  
                  
                  
                  214,968Unrealized
      loss for greater than 12 months:U.S.
      government-sponsored enterprises
                  
                  $
                  60,555
                  
                  
                  
                  1,627
                  
                  
                  
                  5,796,199
                  
                  
                  
                  37,743Mortgage-backed
      securities
                  
                  
                  4,599,716
                  
                  
                  
                  32,609
                  
                  
                  
                  21,917,295
                  
                  
                  
                  510,607State
      and political subdivisions
                  
                  
                  1,519,588
                  
                  
                  
                  214,600
                  
                  
                  
                  4,414,426
                  
                  
                  
                  103,264Equity
      securities
                  
                  
                  185,361
                  
                  
                  
                  23,749
                  
                  
                  
                  181,998
                  
                  
                  
                  27,1126,365,220
                  
                  
                  
                  272,585
                  
                  
                  
                  32,309,918
                  
                  
                  
                  678,726$
                  19,820,358
                  
                  
                  
                  1,159,962
                  
                  
                  
                  42,771,168
                  
                  
                  
                  893,694





At
December 31, 2008, there was one U.S. government-sponsored enterprise security,
15 mortgage-backed securities, and 32 state and political subdivision securities
with an unrealized loss for less than 12 months and one U.S.
government-sponsored enterprise security, 14 mortgage-backed securities, and 5
state and political subdivision securities with an unrealized loss for more than
12 months. The total fair value of the securities with an unrealized loss at
December 31, 2008 represented 94.15% of their amortized cost; therefore, the
impairment is not considered severe. While the duration is dependent on the
market, the existing unrealized loss could be shortened by the issuing agency
calling the securities.


- 14
-


The
amortized cost and estimated fair values of investment securities available for
sale, exclusive of equity investments, at December 31, 2008, by contractual
maturity, are shown below.  Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Callable securities
and mortgage-backed securities are included in the year of their contractual
maturity date.




Amortized
                      Cost
                    
                    
                    Estimated
                      Fair ValueDue
      in one year or less
                    
                    $
                    83,613
                    
                    
                    
                    84,269Due
      after one year through five years
                    
                    
                    2,323,812
                    
                    
                    
                    2,325,313Due
      after five years through ten years
                    
                    
                    16,583,966
                    
                    
                    
                    16,808,370Due
      after ten years
                    
                    
                    77,689,264
                    
                    
                    
                    77,874,578Total
                    
                    $
                    96,680,655
                    
                    
                    
                    97,092,530





Investment
securities available for sale with carrying values of approximately $76,782,000
and $78,008,000 were pledged as collateral at December 31, 2008 and 2007,
respectively, for Federal Home Loan Bank advances, public deposits, and other
deposits, as required by law.





(6)
            Investment
      Securities Held to Maturity


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




December 31, 2008
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueMortgage-backed
      securities
                
                $
                26,835
                
                
                
                890
                
                
                
                84
                
                
                
                27,641State
      and political subdivisions
                
                
                998,600
                
                
                
                26,588
                
                
                
                -
                
                
                
                1,025,188Total
                
                $
                1,025,435
                
                
                
                27,478
                
                
                
                84
                
                
                
                1,052,829December 31, 2007
                
                Amortized
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueMortgage-backed
      securities
                
                $
                43,179
                
                
                
                868
                
                
                
                2
                
                
                
                44,045State
      and political subdivisions
                
                
                2,646,019
                
                
                
                61,620
                
                
                
                -
                
                
                
                2,707,639Total
                
                $
                2,689,198
                
                
                
                62,488
                
                
                
                2
                
                
                
                2,751,684





Proceeds
from calls of held to maturity securities during 2008 were
$1,250,415.  There were no proceeds from calls in
2007.  Proceeds from calls of investment securities held to maturity
during 2006 were $80,000.





Gross
gains of $18,477 and gross losses of $585 were recognized on the calls in
2008.  There were no gains or losses on calls in 2007 or
2006.





The
amortized cost and estimated fair values of securities held to maturity at
December 31, 2008, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. Callable securities and mortgage-backed securities are included in
the year of their contractual maturity date.




Amortized
                    Cost
                  
                  
                  Estimated
                    Fair ValueDue
      in one year or less
                  
                  $
                  135,000
                  
                  
                  
                  136,659Due
      after one year through five years
                  
                  
                  561,700
                  
                  
                  
                  569,500Due
      after five years through ten years
                  
                  
                  324,149
                  
                  
                  
                  342,167Due
      after ten years
                  
                  
                  4,586
                  
                  
                  
                  4,503Total
                  
                  $
                  1,025,435
                  
                  
                  
                  1,052,829





Investment
securities held to maturity with carrying values of approximately $999,000 and
$2,564,000 were pledged as collateral at December 31, 2008 and 2007,
respectively, for public deposits and other deposits, as required by
law.


- 15
-


(7)
            Loans


Loans at
December 31, 2008 and 2007 are summarized as follows:





2008
                  
                  
                  2007Real
      estate:Construction
                  
                  $
                  148,110,567
                  
                  
                  
                  175,904,135Other
                  
                  
                  142,862,216
                  
                  
                  
                  138,401,227Commercial,
      financial and agricultural
                  
                  
                  16,808,412
                  
                  
                  
                  20,496,647Consumer
      installment
                  
                  
                  15,049,635
                  
                  
                  
                  15,630,413322,830,830
                  
                  
                  
                  350,432,422Less:Unamortized
      loan origination fees, net
                  
                  
                  34,888
                  
                  
                  
                  28,060Unearned
      credit life premiums
                  
                  
                  21,381
                  
                  
                  
                  16,671Allowance
      for loan losses
                  
                  
                  12,167,645
                  
                  
                  
                  2,136,848Total
                  
                  $
                  310,606,916
                  
                  
                  
                  348,250,843





Changes
in the allowance for loan losses are as follows:





2008
                  
                  
                  2007
                  
                  
                  2006Balance,
      January 1
                  
                  $
                  2,136,848
                  
                  
                  
                  3,444,789
                  
                  
                  
                  3,944,525Provision
      for loan losses
                  
                  
                  16,020,862
                  
                  
                  
                  675,225
                  
                  
                  
                  -Loans
      charged off
                  
                  
                  (6,045,113
                  )
                  
                  
                  (2,116,001
                  )
                  
                  
                  (702,626
                  )Recoveries
                  
                  
                  55,048
                  
                  
                  
                  132,835
                  
                  
                  
                  202,890Balance,
      December 31
                  
                  $
                  12,167,645
                  
                  
                  
                  2,136,848
                  
                  
                  
                  3,444,789





The
Company considers a loan to be impaired when it is probable that it will be
unable to collect all amounts due according to the original terms of the loan
agreement. The Company measures impairment of a loan on a loan-by-loan basis for
commercial real estate, commercial business, and agricultural loans. Residential
mortgages, installment, and other consumer loans are considered smaller balance,
homogenous loans which are not evaluated individually for impairment. Amounts of
impaired loans that are not probable of collection are charged off immediately.
Impaired loans and related amounts included in the allowance for loan losses at
December 31, 2008 and 2007 are as follows:





2008
                  
                  
                  2007Balance
                  
                  
                  Allowance
                    Amount
                  
                  
                  Balance
                  
                  
                  Allowance
                    AmountImpaired
      loans with a related allowance
                  
                  $
                  57,683,000
                  
                  
                  
                  11,054,000
                  
                  
                  
                  18,327,000
                  
                  
                  
                  102,000Impaired
      loans without a related allowance
                  
                  
                  12,031,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





The
average amount of impaired loans and the related interest income recognized
during 2008, 2007 and 2006 was as follows:





2008
                  
                  
                  2007
                  
                  
                  2006Average
      impaired loans
                  
                  $
                  31,172,000
                  
                  
                  
                  6,152,000
                  
                  
                  
                  530,000Interest
      income recognized on nonaccrual loans
                  
                  
                  349,000
                  
                  
                  
                  593,000
                  
                  
                  
                  10,000





Habersham
Bank held concentrations of loans to customers, which totaled 100% or more of
Tier 1 capital by the following classifications 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


- 16
-


Nonperforming
loans consist of nonaccrual loans and accruing loans 90 days past due. The
following summarizes nonperforming loans at December 31, 2008 and
2007:





2008
                  
                  
                  2007Accruing
      loans 90 days past due
                  
                  $
                  802,267
                  
                  
                  
                  41,594Nonaccrual
      loans
                  
                  
                  56,055,277
                  
                  
                  
                  18,326,924Total
      nonperforming loans
                  
                  $
                  56,857,544
                  
                  
                  
                  18,368,518





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





Number
      of loans
                  
                  
                  2008
                  
                  
                  Number
      of loans
                  
                  
                  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
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of its lending activities to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments and evaluates each
customer’s creditworthiness on a case-by-case basis. At December 31, 2008
and 2007, the Company had outstanding loan commitments approximating $64,825,000
and $73,283,000, respectively, and standby letters of credit approximating
$1,761,000 and $5,499,000, respectively. The amount of collateral obtained, if
deemed necessary, for these financial instruments by the Company, upon extension
of credit, is based on management’s credit evaluation of the customer.
Collateral held, if any, varies but may include inventory, equipment, real
estate, or other property. The accounting loss the Company would incur if any
party to the financial instrument failed completely to perform according to the
terms of the contract and the collateral proved to be of no value is equal to
the face amount of the financial instrument.





(8)
            Premises
      and Equipment


Premises
and equipment are summarized as follows:




2008
                  
                  
                  2007Land
                  
                  $
                  5,121,361
                  
                  
                  
                  5,121,361Buildings
                  
                  
                  17,171,787
                  
                  
                  
                  12,612,790Leasehold
      improvements
                  
                  
                  148,637
                  
                  
                  
                  148,637Construction
      in progress
                  
                  
                  -
                  
                  
                  
                  663,046Furniture
      and equipment
                  
                  
                  7,771,007
                  
                  
                  
                  7,455,704Total
                  
                  
                  30,212,792
                  
                  
                  
                  26,001,538Less
      accumulated depreciation
                  
                  
                  10,733,399
                  
                  
                  
                  9,919,945Premises
      and equipment, net
                  
                  $
                  19,479,393
                  
                  
                  
                  16,081,593





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




2009
                  
                  $
                  617,3032010
                  
                  
                  530,3582011
                  
                  
                  355,5632012
                  
                  
                  63,830$
                  1,567,054




Rental
and lease expense was $730,117 in 2008, $530,297 in 2007 and $460,625 in
2006.


- 17
-


(9)
            Other
      Real Estate


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 years ended
December 31, 2008 and 2007:





2008
                  
                  
                  2007Number
      of Properties
                  
                  
                  Carrying
                    Amount
                  
                  
                  Number
      of Properties
                  
                  
                  Carrying
                    AmountBalance
      at the beginning of the year
                  
                  
                  64
                  
                  
                  $
                  11,498,271
                  
                  
                  
                  6
                  
                  
                  $
                  537,975Foreclosed
      properties
                  
                  
                  260
                  
                  
                  
                  17,852,732
                  
                  
                  
                  64
                  
                  
                  
                  11,200,792Capitalized
      completion costs
                  
                  
                  -
                  
                  
                  
                  1,759,558
                  
                  
                  
                  -
                  
                  
                  
                  435,179Sales
      of properties
                  
                  
                  (14
                  )
                  
                  
                  (3,322,071
                  )
                  
                  
                  (6
                  )
                  
                  
                  (533,675
                  )Write-downs
                  
                  
                  -
                  
                  
                  
                  (451,616
                  )
                  
                  
                  -
                  
                  
                  
                  (142,000
                  )Balance
      at the end of the year
                  
                  
                  310
                  
                  
                  $
                  27,336,874
                  
                  
                  
                  64
                  
                  
                  $
                  11,498,271





Carrying
values for foreclosed properties are based on independent appraisals performed
by local credentialed appraisers at the date of foreclosure adjusted for
estimated disposal costs and quick sale concessions, which is management’s best
estimate of fair value.  While management uses available information
to record foreclosed properties at fair value, future write-downs may be
necessary based on changes in economic conditions and other
factors.





(10)
            Deposits
      and Short-Term Borrowings


At
December 31, 2008, the scheduled maturities of time deposits are as
follows:





2009
                      
                      $
                      189,639,9602010
                      
                      
                      39,724,3962011
                      
                      
                      9,500,3922012
                      
                      
                      2,856,8722013
                      
                      
                      683,505Total
                      
                      $
                      242,405,125





Short-term
borrowings of $760,468 and $766,608 at December 31, 2008 and 2007, respectively,
consist of a U.S. Treasury, tax and loan deposit note.





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.


- 18
-


(11)
            Federal
      Funds Purchased and Securities Sold Under Repurchase
      Agreements


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




2008
                  
                  
                  2007Balance
      at year-end
                  
                  $
                  16,383,982
                  
                  
                  
                  26,183,807Maximum
      outstanding during the year
                  
                  
                  42,720,547
                  
                  
                  
                  34,867,414Average
      outstanding during the year
                  
                  
                  24,175,635
                  
                  
                  
                  14,213,048Weighted
      average interest rate during the year
                  
                  
                  3.57
                  %
                  
                  
                  4.30
                  %Weighted
      average interest rate at end of year
                  
                  
                  3.79
                  %
                  
                  
                  3.87
                  %





All
securities sold under repurchase agreements are held by independent
trustees.Securities sold under
repurchase agreements at December 31, 2008 and 2007 are collateralized by
investment securities with aggregate carrying values of approximately
$19,264,000 and $13,724,000, respectively.





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.





At
December 31, 2008, the Company has pledged against the Federal Discount Window,
certain investment securities totaling approximately $696,000 and certain
qualifying loans with an outstanding balance of $22,985,000.





(12)
              FHLB
      Advances


At
December 31, 2008, the Company had available line of credit commitments
with the Federal Home Loan Bank (FHLB) totaling approximately $38,211,000, of
which the following was outstanding at December 31, 2008:





Advance date
                                  
                                  Amount
                                  
                                  
                                  Interest Rate
                                  
                                  
                                  Maturity Date
                                  
                                  Rate
                                  
                                  Call FeatureMarch
      30, 2000
                                  
                                  $
                                  10,000,000
                                  
                                  
                                  
                                  6.02
                                  %
                                  
                                  March
      30, 2010
                                  
                                  Fixed
                                  
                                  Callable
      each yearJanuary
      12, 2001
                                  
                                  
                                  10,000,000
                                  
                                  
                                  
                                  4.93
                                  %
                                  
                                  January
      12, 2011
                                  
                                  Fixed
                                  
                                  Callable
      each yearMay
      21, 2004
                                  
                                  
                                  3,000,000
                                  
                                  
                                  
                                  2.40
                                  %
                                  
                                  May
      21, 2009
                                  
                                  Floating
                                  
                                  No
      call provisionAugust
      26, 2004
                                  
                                  
                                  3,000,000
                                  
                                  
                                  
                                  2.40
                                  %
                                  
                                  August
      26, 2009
                                  
                                  Floating
                                  
                                  No
      call provisionMay
      19, 2008
                                  
                                  
                                  4,000,000
                                  
                                  
                                  
                                  2.91
                                  %
                                  
                                  May
      19, 2009
                                  
                                  Fixed
                                  
                                  No
      call provisionMay
      22, 2008
                                  
                                  
                                  3,000,000
                                  
                                  
                                  
                                  3.26
                                  %
                                  
                                  May
      22, 2013
                                  
                                  Fixed
                                  
                                  No
      call provisionSeptember
      13, 2006
                                  
                                  
                                  5,000,000
                                  
                                  
                                  
                                  2.00
                                  %
                                  
                                  September
      14, 2009
                                  
                                  Floating
                                  
                                  No
      call provision$
                                  38,000,000





At
December 31, 2008, the Company has pledged against FHLB advances, certain
investment securities, all stock of the FHLB totaling approximately $2,634,000,
cash totaling $1,955,000 and certain qualifying first mortgage loans with an
outstanding balance of $49,493,000.


- 19
-


At
December 31, 2007, the Company had available line of credit commitments
with the Federal Home Loan Bank (FHLB) totaling approximately $38,221,000, of
which the following was outstanding at December 31, 2007:





Advance date
                                
                                Amount
                                
                                
                                Interest Rate
                                
                                
                                Maturity Date
                                
                                Rate
                                
                                Call FeatureMarch
      30, 2000
                                
                                $
                                10,000,000
                                
                                
                                
                                6.02
                                %
                                
                                March
      30, 2010
                                
                                Fixed
                                
                                Callable
      each yearJanuary
      12, 2001
                                
                                
                                10,000,000
                                
                                
                                
                                4.93
                                %
                                
                                January
      12, 2011
                                
                                Fixed
                                
                                Callable
      each yearMay
      21, 2004
                                
                                
                                3,000,000
                                
                                
                                
                                5.21
                                %
                                
                                May
      21, 2009
                                
                                Floating
                                
                                No
      call provisionAugust
      26, 2004
                                
                                
                                3,000,000
                                
                                
                                
                                5.26
                                %
                                
                                August
      26, 2009
                                
                                Floating
                                
                                No
      call provisionMay
      17, 2005
                                
                                
                                4,000,000
                                
                                
                                
                                4.18
                                %
                                
                                May
      19, 2008
                                
                                Fixed
                                
                                No
      call provisionMay
      22, 2006
                                
                                
                                3,000,000
                                
                                
                                
                                5.46
                                %
                                
                                May
      22, 2008
                                
                                Fixed
                                
                                No
      call provisionSeptember
      13, 2006
                                
                                
                                5,000,000
                                
                                
                                
                                5.06
                                %
                                
                                September
      14, 2009
                                
                                Floating
                                
                                No
      call provision$
                                38,000,000





At
December 31, 2007, the Company has pledged against FHLB advances, certain
investment securities, all stock of the FHLB, cash totaling $500,000 and certain
qualifying first mortgage loans with an outstanding balance of
$25,704,000.





(13)
              Derivative
      Instruments and Hedging
Activities


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




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




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




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




During
2004, Habersham Bank entered into two interest rate swap agreements with a
regional bank to partially offset the interest rate risk associated with
variable rate FHLB borrowings.  Each FHLB loan amount is $3 million
with quarterly adjustable rates set at 23 basis points above the three-month
LIBOR.  The three-month LIBOR rate at December 31, 2008 was 1.42%. The
first swap contract was entered into during the second quarter of 2004 and is
for a 4.5% fixed rate on a $3 million notional amount.  The swap
matures on May 21, 2009.  The second swap contract was entered into
during the third quarter of 2004 and is for a 4.05% fixed rate on a $3 million
notional amount. The swap matures on August 26, 2009.




The swaps
are being accounted for as cash flow hedges at December 31, 2008 and
2007.  The fair values are included in other comprehensive income, net
of taxes.  Habersham Bank recorded liabilities at December 2008 and
2007 of approximately $95,000 and $33,000, respectively, to reflect the fair
value of the swaps.




The
hedges were designed to be highly effective as all terms of the swaps are
matched to the FHLB advances.    The Company utilizes the
long-haul methodology to measure the effectiveness of the
hedges.  Because of the matching terms of the advances and the
interest rate swaps, with the exception of the prepayment ability, the hedges
would continue to be highly effective as long as the FHLB advances continued to
be outstanding.  On a quarterly basis, the company ensures the debt
remains outstanding and that the credit risk of the swap counterparty has not
diminished.  If the debt is outstanding and there has been no change
in the credit risk of the swap counterparty, the hedge is deemed to remain
effective.  Any changes in the fair value of the swaps are recorded on
the balance sheet and accounted for in accumulated other comprehensive income,
net of tax.  If the debt were no longer outstanding, or there was a
credit risk problem (default) with the swap counterparty, the hedge would no
longer be deemed effective and the fair value of the swaps would be reclassified
from accumulated other comprehensive income to current earnings.  No
hedge ineffectiveness from these cash flow hedges was recognized in the
consolidated statement of earnings for the years ending December 31, 2008, 2007
and 2006.


- 20
-


(14)
            Income
      Taxes


Income
tax benefit (expense) for the years ended December 31, 2008, 2007 and 2006
are as follows:





2008
                  
                  
                  2007
                  
                  
                  2006Current:Federal
                  
                  $
                  2,235,459
                  
                  
                  
                  (718,442
                  )
                  
                  
                  (1,943,753
                  )State
                  
                  
                  752,493
                  
                  
                  
                  -
                  
                  
                  
                  (278,726
                  )Total
      current
                  
                  
                  2,987,952
                  
                  
                  
                  (718,442
                  )
                  
                  
                  (2,222,479
                  )Deferred:Federal
                  
                  
                  4,344,687
                  
                  
                  
                  (270,476
                  )
                  
                  
                  (160,719
                  )State
                  
                  
                  506,028
                  
                  
                  
                  (31,502
                  )
                  
                  
                  (28,467
                  )Total
      deferred
                  
                  
                  4,850,715
                  
                  
                  
                  (301,978
                  )
                  
                  
                  (189,186
                  )Total
                  
                  $
                  7,838,667
                  
                  
                  
                  (1,020,420
                  )
                  
                  
                  (2,411,665
                  )





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





2008
                  
                  
                  2007
                  
                  
                  2006Income
      benefit (tax) on earnings before income taxes at statutory
      rate
                  
                  $
                  7,713,916
                  
                  
                  
                  (1,346,324
                  )
                  
                  
                  (2,619,555
                  )Differences
      resulting from:Goodwill
      impairment
                  
                  
                  (1,206,925
                  )
                  
                  
                  -
                  
                  
                  
                  -Tax-exempt
      income
                  
                  
                  339,547
                  
                  
                  
                  394,833
                  
                  
                  
                  338,217Earnings
      on cash surrender value of life insurance
                  
                  
                  135,142
                  
                  
                  
                  62,281
                  
                  
                  
                  58,519Nondeductible
      interest expense
                  
                  
                  (46,081
                  )
                  
                  
                  (64,088
                  )
                  
                  
                  (44,288
                  )State
      income tax, net of Federal tax effect
                  
                  
                  830,624
                  
                  
                  
                  (20,791
                  )
                  
                  
                  (202,747
                  )Other
                  
                  
                  72,444
                  
                  
                  
                  (46,331
                  )
                  
                  
                  58,189$
                  7,838,667
                  
                  
                  
                  (1,020,420
                  )
                  
                  
                  (2,411,665
                  )





At
December 31, 2008 and 2007, the significant components of the Company’s net
deferred tax assets and liabilities are as follows:





2008
                  
                  
                  2007Deferred
      tax assets:Allowance
      for loan losses
                  
                  $
                  4,619,048
                  
                  
                  
                  811,147Other
      real estate
                  
                  
                  1,052,100
                  
                  
                  
                  193,872Deferred
      compensation
                  
                  
                  440,158
                  
                  
                  
                  386,674Furniture,
      fixtures and equipment due to difference in depreciation
      methods
                  
                  
                  90,376
                  
                  
                  
                  157,921Unearned
      credit life premiums
                  
                  
                  8,116
                  
                  
                  
                  6,329Unrealized
      loss on investment securities available for sale
                  
                  
                  (131,963
                  )
                  
                  
                  123,777Unrealized
      loss on derivatives
                  
                  
                  32,461
                  
                  
                  
                  11,260Loan
      discount
                  
                  
                  11,456
                  
                  
                  
                  29,824Other
                  
                  
                  233,604
                  
                  
                  
                  17,6166,355,356
                  
                  
                  
                  1,738,420Deferred
      tax liabilities:Core
      deposit intangible
                  
                  
                  (155,100
                  )
                  
                  
                  (178,660
                  )Deferred
      loan fees
                  
                  
                  (13,244
                  )
                  
                  
                  (10,651
                  )Prepaid
      expenses
                  
                  
                  (221,110
                  )
                  
                  
                  (199,383
                  )(389,454
                  )
                  
                  
                  (388,694
                  )Net
      deferred tax asset
                  
                  $
                  5,965,902
                  
                  
                  
                  1,349,726





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


- 21
-


(15)
            Preferred
      Stock


On December 29, 2008, the Company
amended its Amended and Restated Articles of Incorporation to authorize the
issuance of up to 10,000,000 shares of Preferred Stock.  The
individual terms of the issuances are established by the Company’s Board of
Directors.





The
Company approved the issuance of up to 10,000 shares of Series A Preferred Stock
to Fieldale Farms, Inc., a Georgia based poultry company.  The
Company’s Chairman of the Board of Directors is affiliated with Fieldale Farms,
Inc.  The Series A Preferred Stock is nonvoting except as permitted by
law: will receive a 6% per annum non-cumulative dividend, payable quarterly; has
a liquidation preference of $1,000 per share; and may be redeemed by the Company
at any time, subject to any required regulatory or third party
approvals.  The Company did not pay any underwriting or placement fees
or commissions with respect to the sale, and it relied on the exemption from
registration provided by Rule 506 under the Securities Act of 1933, as amended,
for the offer and sale of the securities.  On December 31, 2008, the
Company issued 3,000 shares of the Series A Preferred Stock for aggregate cash
proceeds of $3 million.   The Company incurred $22,238 in
issuance costs associated with the preferred stock offering.





(16)
            Regulatory
      Matters


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





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 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 table. There are no conditions or events
since that notification that management believes have changed the Bank’s capital
categories.





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





Actual
              
              
              For
      Capital
                Adequacy Purposes
              
              
              To
      Be Well
                Capitalized
      Under
                Prompt
      Corrective
                Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 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
              %


- 22
-




Actual
              
              
              For
      Capital
                Adequacy Purposes
              
              
              To
      Be Well
                Capitalized
      Under
                Prompt
      Corrective
                Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      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
Department of Banking and Finance requires prior approval for a bank to pay
dividends in excess of 50% of the preceding year’s earnings. Based on this
limitation, the Bank is not permitted to pay cash dividends in
2009.





(17)
            Employee
      Benefit and Stock Option Plans


The
Company has a contributory profit sharing plan under Internal Revenue Code
Section 401(k) – (the 401(k) Plan). The 401(k) Plan covers
substantially all employees. Employees may contribute up to 15% of their annual
salaries not to exceed the amount allowed by the IRS. At its discretion, the
Company may make matching contributions in an amount not to exceed 100% of each
participant’s first 3% of compensation contributed. The Company’s contributions
to the plan totaled $180,844 in 2008, $220,162 in 2007 and, $196,760 in
2006.





During
1998, the Bank’s board of directors approved the Director’s Retirement Plan (the
Plan), a noncontributory retirement plan. Amounts earned on the life insurance
policies purchased by the Bank over the rate, as defined in the Plan, to be
retained for the benefit of the Bank are to be deferred and paid to the
directors upon retirement. As of December 31, 2008 and 2007, the cash
surrender values of the life insurance policies totaled $5,227,186 and
$5,029,954, respectively, and are included in cash surrender values of life
insurance in the balance sheet.





During
2006, the Bank’s board of directors approved a Senior Executive Retirement Plan
(“SERP”) for five of the Bank’s key employees to be funded by the purchase of
bank-owned life insurance.  The SERP, a noncontributory retirement
plan, provides amounts earned on the life insurance policies purchased by the
Bank over the rate, as defined in the Plan, to be retained for the benefit of
the Bank are to be deferred and paid to the employees upon
retirement.  During 2007, the Bank purchased the life insurance
policies under this SERP which became effective January 1, 2008.  As
of December 31, 2008 and 2007, the cash surrender values of the life
insurance policies totaled $4,708,902 and $4,508,657, respectively and is
included in cash surrender values of life insurance in the balance
sheet.





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





The
Company’s Outside Directors Stock Option Plan provides that outside directors of
Habersham Bancorp and its subsidiaries may be granted options to purchase shares
of common stock of the Company at an amount equal to the fair market value of
the stock at the date of grant. The options are fully vested on the date of
grant, exercisable six months from the date of grant, and expire
ten years from the date of grant. Shares reserved for future grants under
this plan are approximately 203,675 at December 31, 2008 and
2007.


- 23
-


The
following table summarizes information about stock options outstanding at
December 31, 2008:





Number
                    Outstanding
      and
                    Exercisable
      at
                    December 31, 2008
                  
                  
                  Weighted
                    Average
      Remaining
                    Contractual
      Life
                    in Years
                  
                  
                  Weighted
      Average Exercise Price71,250
                  
                  
                  
                  2.4
                  
                  
                  $
                  20.60103,500
                  
                  
                  
                  3.4
                  
                  
                  
                  22.95174,750
                  
                  
                  
                  3.0
                  
                  
                  
                  21.99





A summary
of the status of the Company’s stock option plans and changes during 2008, 2007
and 2006 is presented below:





2008
                
                
                2007
                
                
                2006Shares
                
                
                Weighted
      Avg.
                  ExercisePrice
                
                
                Shares
                
                
                Weighted
      Avg.
                  ExercisePrice
                
                
                Shares
                
                
                Weighted
      Avg.
                  ExercisePriceOutstanding
      at beginning of the year
                
                
                230,750
                
                
                $
                22.56
                
                
                
                298,250
                
                
                $
                21.49
                
                
                
                367,750
                
                
                $
                20.98Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (63,000
                )
                
                
                18.27Terminated
      and expired
                
                
                (56,000
                )
                
                
                24.34
                
                
                
                (67,500
                )
                
                
                17.82
                
                
                
                (6,500
                )
                
                
                23.54Outstanding
      and exercisable at end of year
                
                
                174,750
                
                
                
                21.99
                
                
                
                230,750
                
                
                
                22.56
                
                
                
                298,250
                
                
                
                21.49





There
were no options exercised during 2008 and 2007.  There was no
intrinsic value of exercisable options at December 31, 2008 and 2007 based on a
market price of $2.40 and $15.61, respectively.  The total intrinsic
value of options exercised in 2006 was $311,228.





(18)
            Other
      Expenses


Items
comprising other expenses for the years ended December 31, 2008, 2007 and
2006 are as follows:




2008
                  
                  
                  2007
                  
                  
                  2006Legal
      and other outside services
                  
                  $
                  1,326,610
                  
                  
                  
                  1,198,210
                  
                  
                  
                  1,089,565Advertising
      and public relations
                  
                  
                  599,926
                  
                  
                  
                  721,683
                  
                  
                  
                  678,622Office
      supplies
                  
                  
                  486,689
                  
                  
                  
                  535,841
                  
                  
                  
                  514,175Other
                  
                  
                  1,605,230
                  
                  
                  
                  1,584,604
                  
                  
                  
                  1,476,703Total
                  
                  $
                  4,018,455
                  
                  
                  
                  4,040,338
                  
                  
                  
                  3,759,065




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





(19)
            Fair
      Value Measurements and Disclosures


Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement No. 157, Fair Value Measurements
(“SFAS No. 157”), which provides a framework for measuring fair value under
generally accepted accounting principles.  SFAS No. 157 applies to all
financial statement elements that are being measured and reported on a fair
value basis.





The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures.  Securities available-for-sale and interest rate swap
derivatives are recorded at fair value on a recurring basis.  From
time to time, the Company may be required to record at fair value other assets
on a nonrecurring basis, such as impaired loans and foreclosed real
estate.  Additionally, the Company is required to disclose, but not
record, the fair value of other financial instruments.


- 24
-


Fair Value
Hierarchy


Under
SFAS No. 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
value.  These levels are:





Level
      1 –
              Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.





Level
      2 –
              Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments in markets that are not
      active, and model-based valuation techniques for which all
      significant assumptions are observable in the
  market.





Level
      3 –
              Valuation
      is generated from model-based techniques that use at least one significant
      assumption not observable in the market. These unobservable assumptions
      reflect estimates of assumptions that market participants would use
      in pricing the asset or liability.  Valuation techniques
      include use of option pricing models, discounted cash flow models and
      similar techniques.





Following
is a description of valuation methodologies used for assets and liabilities
which are either recorded or disclosed at fair value.





Cash and Cash
Equivalents


For
disclosure purposes for cash, due from banks and Federal funds sold, the
carrying amount is a reasonable estimate of fair value.





Investment Securities
Available for Sale


Investment
securities available for sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing models or other model-based valuation
techniques such as the present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities include those traded on
an active exchange, such as the New York Stock Exchange and U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
market funds.  Level 2 securities include mortgage-backed securities
issued by government sponsored enterprises and state, county and municipal
bonds.  Securities classified as Level 3 include asset-backed
securities in less liquid markets.





Investment Securities Held
to Maturity


For
disclosure purposes the fair value of investment securities held to maturity is
based on quoted market prices and dealer quotes.





Other
Investments


For
disclosure purposes the carrying value of other investments approximate fair
value.





Loans and Mortgage Loans
Held for Sale


The
Company does not record loans at fair value on a recurring
basis.  However, from time to time, a loan is considered impaired and
a specific allocation is established within the allowance for loan
losses.  Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired.  Once a loan in identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, “Accounting by
Creditors for Impairment of a Loans,” (“SFAS No. 114”).  The
fair value of impaired loans is estimated using one of three methods, including
collateral value, market value of similar debt, and discounted cash
flows.  Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans.  In accordance with SFAS No.
157, impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy.  When
the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the impaired loan as nonrecurring
Level 2.  When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
impaired loan as nonrecurring Level 3.





For
disclosure purposes, the fair value of fixed rate loans which are not considered
impaired, is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings. For unimpaired variable rate loans, the carrying amount is a reasonable
estimate of fair value for disclosure purposes.





Loans
held for sale are recorded at the lower of cost or market value.  The
fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics.  As
such, the Company classifies loans held for sale subject to nonrecurring fair
value adjustments as Level 2.


- 25
-


Other Real
Estate


Other
real estate properties are adjusted to fair value upon transfer of the loans to
other real estate.  Subsequently, other real estate assets are carried
at the lower of carrying value or fair value.  Fair value is based
upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral.  When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the other real estate as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the other real
estate asset as nonrecurring Level 3.





Cash Surrender Value of Life
Insurance


For
disclosure purposes the carrying value of the cash surrender value of life
insurance reasonably approximates its fair value.





Derivative Instruments and
Hedging Activities


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





Deposits


For
disclosure purposes, the fair value of demand deposits, savings accounts, NOW
accounts and money market deposits is the amount payable on demand at the
reporting date, while the fair value of fixed maturity certificates of deposit
is estimated by discounting the future cash flows using current rates at which
comparable certificates would be issued.





Federal Funds Purchased and
Retail Repurchase Agreements


For
disclosure purposes the carrying amount for Federal funds purchased and retail
repurchase agreements is a reasonable estimate of fair value due to the
short-term nature of these financial instruments.





FHLB
Advances


For
disclosure purposes the fair value of the FHLB fixed rate borrowing is estimated
using discounted cash flows, based on the current incremental borrowing rates
for similar types of borrowing arrangements.





Commitments to Extend Credit
and Standby Letters of Credit


Because
commitments to extend credit and standby letters of credit are made using
variable rates and have short maturities, the carrying value and the fair value
are immaterial for disclosure.





Assets Recorded at Fair
Value on a Recurring Basis


The table
below presents the recorded amount of assets (liabilities) measured at fair
value on a recurring basis as of December 31, 2008.





Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Investment
      securities  available for sale
                  
                  $
                  97,277,891
                  
                  
                  
                  8,411,357
                  
                  
                  
                  88,866,534
                  
                  
                  
                  -Interest
      rate swap
                  
                  
                  (95,473
                  )
                  
                  
                  -
                  
                  
                  
                  (95,473
                  )
                  
                  
                  -Total
      net assets at fair value
                  
                  $
                  97,182,418
                  
                  
                  
                  8,411,357
                  
                  
                  
                  88,771,061
                  
                  
                  
                  -


- 26
-


Assets Recorded at Fair
Value on a Nonrecurring Basis


The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles.  These include assets that are measured at the
lower of cost or market that were recognized at fair value below cost at the end
of the period.  Assets measured at fair value on a nonrecurring basis
are included in the table below as of December 31, 2008.





Total
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Other
      real estate
                    
                    $
                    27,336,874
                    
                    
                    
                    -
                    
                    
                    
                    27,336,874
                    
                    
                    
                    -Loans
                    
                    
                    58,660,423
                    
                    
                    
                    -
                    
                    
                    
                    58,660,423
                    
                    
                    
                    -$
                    85,997,297
                    
                    
                    
                    -
                    
                    
                    
                    85,997,297
                    
                    
                    
                    -




The
carrying amount and estimated fair values of the Company’s assets and
liabilities which are required to be either disclosed or recorded at fair value
at December 31, 2008 and 2007 are as follows:





2008
                    
                    
                    2007Carrying
                      Amount
                    
                    
                    Fair
                      Value
                    
                    
                    Carrying
                      Amount
                    
                    
                    Fair
                      ValueAssets:Cash
      and cash equivalents
                    
                    $
                    14,259,976
                    
                    
                    
                    14,259,976
                    
                    
                    
                    22,385,227
                    
                    
                    
                    22,385,227Investment
      securities available for sale
                    
                    
                    97,277,891
                    
                    
                    
                    97,277,891
                    
                    
                    
                    89,890,102
                    
                    
                    
                    89,890,102Investment
      securities held to maturity
                    
                    
                    1,025,435
                    
                    
                    
                    1,052,829
                    
                    
                    
                    2,689,198
                    
                    
                    
                    2,751,684Other
      investments
                    
                    
                    3,334,124
                    
                    
                    
                    3,334,124
                    
                    
                    
                    3,408,924
                    
                    
                    
                    3,408,924Loans
      held for sale
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,865,850
                    
                    
                    
                    1,879,102Loans,
      net
                    
                    
                    310,606,916
                    
                    
                    
                    311,010,207
                    
                    
                    
                    348,250,843
                    
                    
                    
                    349,180,116Cash
      surrender value of  life insurance
                    
                    
                    9,936,088
                    
                    
                    
                    9,936,088
                    
                    
                    
                    9,538,611
                    
                    
                    
                    9,538,611Liabilities:Deposits
                    
                    $
                    392,887,664
                    
                    
                    
                    396,813,058
                    
                    
                    
                    390,266,638
                    
                    
                    
                    392,776,117Short-term
      borrowings
                    
                    
                    760,468
                    
                    
                    
                    760,468
                    
                    
                    
                    766,608
                    
                    
                    
                    766,608Federal
      funds purchased and securities sold under repurchase
      agreements
                    
                    
                    16,383,982
                    
                    
                    
                    16,383,982
                    
                    
                    
                    26,183,807
                    
                    
                    
                    26,183,807FHLB
      advances
                    
                    
                    38,000,000
                    
                    
                    
                    39,280,490
                    
                    
                    
                    38,000,000
                    
                    
                    
                    38,794,791Interest
      rate swaps
                    
                    
                    95,473
                    
                    
                    
                    95,473
                    
                    
                    
                    33,117
                    
                    
                    
                    33,117





Limitations


Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial statement element. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.





Fair
value estimates included herein are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the fair value of assets and liabilities that are not
required to be recorded or disclosed at fair value like premises and equipment.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.





(20)
              Related
      Party Transactions


In the
ordinary course of business, the Company extends loans to its directors,
executive officers, and principal stockholders and their affiliates at terms and
rates comparable to those prevailing at the time for comparable transactions
with other customers. In the opinion of management, these loans do not involve
more than the normal credit risk nor present other unfavorable features. An
analysis of the activity during 2008 of loans to executive officers, directors,
and principal stockholders is as follows:





Balance,
      January 1
                  
                  $
                  11,537,924Amounts
      advanced
                  
                  
                  8,670,585Repayments
                  
                  
                  (9,202,178
                  )Balance,
      December 31
                  
                  $
                  11,006,331





Deposits
from related parties totaled approximately $13,404,000 and $22,252,000 at
December 31, 2008 and 2007, respectively.





Habersham
Bank began construction of a new branch in Flowery Branch, Georgia during 2007
and was completed in 2008.  The lowest bid in a competitive bid
process for the design and construction of the new branch was submitted by Lusk
Construction, Inc., of which one of the Company’s directors is
president.  The design and construction costs paid to Lusk
Construction during 2008 and 2007 totaled approximately $3,405,000 and $645,000,
respectively.  As a result of the bidding process, management believes
the terms of the construction contract were no less favorable to the Company
than could be obtained from an independent third party.


- 27
-


(21)
            Condensed
      Financial Statements of Habersham Bancorp (Parent
  Only)


The
parent company only condensed financial statements are presented
below:




CONDENSED
BALANCE SHEETS





December
31, 2008 and 2007





Assets2008
                  
                  
                  2007Cash
                  
                  $
                  1,352,342
                  
                  
                  
                  242,296Investment
      in subsidiaries
                  
                  
                  37,890,470
                  
                  
                  
                  50,969,192Other
      investments
                  
                  
                  599,990
                  
                  
                  
                  599,990Equipment,
      net
                  
                  
                  34,228
                  
                  
                  
                  76,080Other
      assets
                  
                  
                  2,283,550
                  
                  
                  
                  2,420,597Total
      assets
                  
                  $
                  42,160,580
                  
                  
                  
                  54,308,155Liabilities
      and Stockholders’ EquityLiabilities
      consisting of accounts payable
                  
                  $
                  162,567
                  
                  
                  
                  125,980Stockholders’
      equity:Preferred
      stock
                  
                  
                  2,977,762
                  
                  
                  
                  -Common
      stock
                  
                  
                  2,818,593
                  
                  
                  
                  2,818,593Additional
      paid-in capital
                  
                  
                  13,490,587
                  
                  
                  
                  13,490,587Retained
      earnings
                  
                  
                  22,517,920
                  
                  
                  
                  38,135,126Accumulated
      other comprehensive income (loss)
                  
                  
                  193,151
                  
                  
                  
                  (262,131
                  )Total
      stockholders’ equity
                  
                  
                  41,998,013
                  
                  
                  
                  54,182,175Total
      liabilities and stockholders’ equity
                  
                  $
                  42,160,580
                  
                  
                  
                  54,308,155




CONDENSED
STATEMENTS OF OPERATIONS




For the
Years Ended December 31, 2008, 2007 and 2006




2008
                
                
                2007
                
                
                2006Income:Dividends
      from bank
                
                $
                2,100,000
                
                
                
                5,300,000
                
                
                
                1,500,000Management
      fees from subsidiaries
                
                
                672,000
                
                
                
                672,000
                
                
                
                668,666Other
      income
                
                
                605
                
                
                
                5,306
                
                
                
                10,000Total
      income
                
                
                2,772,605
                
                
                
                5,977,306
                
                
                
                2,178,666Expenses:General
      and administrative
                
                
                2,286,450
                
                
                
                2,296,202
                
                
                
                2,070,585Earnings
      before income taxes and equity in undistributed earnings of
      subsidiaries
                
                
                486,155
                
                
                
                3,681,104
                
                
                
                108,081Income
      tax benefit
                
                
                635,290
                
                
                
                608,353
                
                
                
                524,445Earnings
      before equity in undistributed earnings of subsidiaries
                
                
                1,121,445
                
                
                
                4,289,457
                
                
                
                632,526(Distributions
      in excess of earnings) equity in undistributed earnings of
      subsidiaries
                
                
                (15,970,766
                )
                
                
                (1,350,100
                )
                
                
                4,660,383Net
      (loss) earnings
                
                $
                (14,849,321
                )
                
                
                2,939,357
                
                
                
                5,292,909


- 28
-


CONDENSED
STATEMENTS OF CASH FLOWS




For the
Years Ended December 31, 2008, 2007 and 2006




2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) earnings
                
                $
                (14,849,321
                )
                
                
                2,939,357
                
                
                
                5,292,909Adjustments
      to reconcile net (loss) earnings to net cash provided by operating
      activities:Depreciation
                
                
                43,045
                
                
                
                47,708
                
                
                
                47,289Gain
      on sale of equipment
                
                
                -
                
                
                
                (5,306
                )
                
                
                (10,000
                )Decrease
      (Increase) in other assets
                
                
                137,047
                
                
                
                (105,224
                )
                
                
                (97,665
                )Increase
      in other liabilities
                
                
                36,587
                
                
                
                52,076
                
                
                
                59,433Distributions
      in excess of earnings (equity in undistributed earnings) of
      subsidiaries
                
                
                15,970,766
                
                
                
                1,350,100
                
                
                
                (4,660,383
                )Net
      cash provided by operating activities
                
                
                1,338,124
                
                
                
                4,278,711
                
                
                
                631,583CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      infusion to Habersham Bank
                
                
                (2,500,000
                )
                
                
                -
                
                
                
                -Purchase
      of equipment
                
                
                (1,192
                )
                
                
                (45,705
                )
                
                
                (45,703
                )Proceeds
      from sale of equipment
                
                
                -
                
                
                
                34,860
                
                
                
                10,000Net
      cash used in investing activities
                
                
                (2,501,192
                )
                
                
                (10,845
                )
                
                
                (35,703
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Issuance
      of preferred stock
                
                
                3,000,000
                
                
                
                -
                
                
                
                -Preferred
      stock issuance costs
                
                
                (22,238
                )
                
                
                -
                
                
                
                -Payment
      of cash dividends
                
                
                (704,648
                )
                
                
                (2,581,731
                )
                
                
                (1,060,172
                )Common
      stock repurchase
                
                
                -
                
                
                
                (2,190,000
                )
                
                
                -Proceeds
      from issuance of common stock upon exercise of stock
    options
                
                
                -
                
                
                
                -
                
                
                
                770,485Net
      cash provided by (used in) financing activities
                
                
                2,273,114
                
                
                
                (4,771,731
                )
                
                
                (289,687
                )Increase
      (decrease) in cash
                
                
                1,110,046
                
                
                
                (503,865
                )
                
                
                306,193Cash
      at beginning of year
                
                
                242,296
                
                
                
                746,161
                
                
                
                439,968Cash
      at end of year
                
                $
                1,352,342
                
                
                
                242,296
                
                
                
                746,161





(22)
              Quarterly
      Financial Data (Unaudited)


The
supplemental quarterly financial data for the years ended December 31, 2008 and
2007 is summarized as follows:




Quarter
      EndedMarch
      31,
                    2008
                  
                  
                  June
      30,
                    2008
                  
                  
                  September
      30,
                    2008
                  
                  
                  December
      31,
                    2008Interest
      income
                  
                  $
                  7,603,340
                  
                  
                  
                  6,834,602
                  
                  
                  
                  6,211,641
                  
                  
                  
                  5,484,999Interest
      expense
                  
                  
                  4,000,369
                  
                  
                  
                  3,558,306
                  
                  
                  
                  3,342,040
                  
                  
                  
                  3,387,331Net
      interest income
                  
                  
                  3,602,971
                  
                  
                  
                  3,276,296
                  
                  
                  
                  2,869,601
                  
                  
                  
                  2,097,668Provision
      for loan losses
                  
                  
                  423,000
                  
                  
                  
                  654,000
                  
                  
                  
                  6,293,000
                  
                  
                  
                  8,650,862Net
      earnings
                  
                  
                  58,942
                  
                  
                  
                  (375,160
                  )
                  
                  
                  (4,291,332
                  )
                  
                  
                  (10,241,771
                  )Net
      earnings per share – basic
                  
                  
                  .02
                  
                  
                  
                  (.13
                  )
                  
                  
                  (1.52
                  )
                  
                  
                  (3.63
                  )Net
      earnings per share – diluted
                  
                  
                  .02
                  
                  
                  
                  (.13
                  )
                  
                  
                  (1.52
                  )
                  
                  
                  (3.63
                  )March
      31,
                    2007
                  
                  
                  June
      30,
                    2007
                  
                  
                  September
      30,
                    2007
                  
                  
                  December
      31,
                    2007Interest
      income
                  
                  $
                  9,037,996
                  
                  
                  
                  9,351,395
                  
                  
                  
                  9,295,267
                  
                  
                  
                  8,690,880Interest
      expense
                  
                  
                  3,980,126
                  
                  
                  
                  4,118,754
                  
                  
                  
                  4,396,180
                  
                  
                  
                  4,351,844Net
      interest income
                  
                  
                  5,057,870
                  
                  
                  
                  5,232,641
                  
                  
                  
                  4,899,087
                  
                  
                  
                  4,339,036Provision
      for loan losses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  80,000
                  
                  
                  
                  595,225Net
      earnings
                  
                  
                  984,455
                  
                  
                  
                  1,034,329
                  
                  
                  
                  854,776
                  
                  
                  
                  65,797Net
      earnings per share – basic
                  
                  
                  .33
                  
                  
                  
                  .35
                  
                  
                  
                  .29
                  
                  
                  
                  .02Net
      earnings per share – diluted
                  
                  
                  .33
                  
                  
                  
                  .35
                  
                  
                  
                  .29
                  
                  
                  
                  .02






- 29 -