**SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D. C. 20549
 
 **FORM
10-K**
 
 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the fiscal year ended December 31, 2004.
 
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 
 For
the transition period from ___________________ to
___________________
 
 Commission
file number 0-13153
 
 **HABERSHAM
BANCORP**
 (Exact
name of registrant as specified in its charter)
 
 Georgia
    
    58-1563165(State
      or other jurisdiction of incorporation or organization)
    
    (I.R.S.
      Employer Identification Number)
 
 282
      Historic Highway 441 North, P. O. Box 1980, Cornelia,
    Georgia
    
    30531(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 Registrant's
telephone number, including area code:  (706)
778-1000
 
 Securities
registered pursuant to Section 12(b) of the Exchange Act:
 None
 
 Securities
registered pursuant to Section 12(g) of the Exchange Act:
 Common
Stock, $1.00 par value
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes x No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2):
 Yes o No x
 
 State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked prices of such common equity; as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
 
 1,525,194
Shares of Common Stock, $1.00 par value--$37,367,253 as of June 30, 2004 (based
upon market value of $24.50/share as of that date).
 
 
 
  Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of March 15, 2005
 
 Common
Stock, $1.00 par value--2,901,692 shares
 
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 (1)  
Portions of the Company's Annual Report to Shareholders for the year ended
December 31, 2004 (the "Annual Report") are incorporated by reference into Part
II.
 
 (2) 
 Portions of the Company's Proxy Statement relating to the 2005 Annual
Meeting of Shareholders (the "Proxy Statement") are incorporated by reference
into Part III.
 
 PART
I
 Item
1. BUSINESS.
 
 **Business
of the Company**
 
 Habersham
Bancorp (the "Company"), a Georgia corporation, was organized on March 9, 1984.
Effective December 31, 1984, the Company acquired all of the outstanding shares
of common stock of Habersham Bank ("Habersham Bank"). As a result of this
transaction, the former shareholders of Habersham Bank became shareholders of
the Company, and Habersham Bank became the wholly-owned subsidiary of the
Company. Habersham Bank has one subsidiary, Advantage Insurers, Inc., a
property, casualty and life insurance agency organized in 1997. Effective June
30, 1995, the Company acquired Security Bancorp, Inc. and its subsidiary bank,
Security State Bank. The Company consolidated the charters of Security State
Bank and Habersham Bank in 1999.
 
 Prior
to December 2002, the Company conducted mortgage banking operations through
BancMortgage Financial Corp. (“BancMortgage”). BancMortgage was organized as a
wholly-owned non-bank subsidiary of Habersham Bank in 1996. In December 2002,
the Company sold BancMortgage to the existing management of
BancMortgage.
 
 **Business
of the Bank**
 
 Habersham
Bank is a financial institution which was organized under the laws of the State
of Georgia in 1904. Habersham Bank operates a full-service commercial banking
business based in Habersham, White, Cherokee, Warren, and Gwinnett Counties,
Georgia, providing such customary banking services as checking and savings
accounts, various types of time deposits, safe deposit facilities and individual
retirement accounts. It also makes secured and unsecured loans and provides
other financial services to its customers. Habersham Bank has a full-time trust
officer on staff and offers a full spectrum of trust services, including trust
administration, asset management services, estate and will probate and
administration, and other services in the area of personal trusts.
 
 **Competition**
 
 The
banking industry is highly competitive. During the past few years, legislation
and regulatory changes, together with competition from unregulated entities, has
resulted in the elimination of many traditional distinctions between commercial
banks, thrift institutions and other providers of financial services.
Consequently, competition among financial institutions of all types is virtually
unlimited with respect to legal ability and authority to provide most financial
services.
  
  Habersham
Bank's primary market area consists of Habersham, White, Cherokee, Warren, and
Gwinnett Counties, Georgia. Habersham Bank competes principally for all types of
loans, deposits and other financial services with other financial institutions
located in its primary market area. To a lesser extent, Habersham Bank competes
for loans with insurance companies, regulated small loan companies, credit
unions, and certain governmental agencies.
 
 The
Company and its non-bank subsidiaries also compete with numerous other companies
and financial institutions engaged in similar lines of business, such as other
bank holding companies, mortgage companies, mortgage servicers, leasing
companies, insurance companies, companies providing data processing services,
and companies providing bank consulting services.
 
 **Employees**
 
 As
of December 31, 2004, the Company had 146 full-time equivalent employees.
Neither the Company nor any of its subsidiaries is a party to any collective
bargaining agreement. In the opinion of management, the Company and its
subsidiaries enjoy satisfactory relations with their respective
employees.
 
 **Supervision
& Regulation**
 
 Both
the Company and the Bank are subject to extensive state and federal banking
regulations that impose restrictions on and provide for general regulatory
oversight of their operations. These laws generally are intended to protect
depositors and not shareholders. The following discussion describes the material
elements of the regulatory framework that applies to us.
 
 **The
Company**
 
 Because
the Company owns all of the capital stock of the Bank, it is a bank holding
company under the federal Bank Holding Company Act of 1956. As a result, the
Company is primarily subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act and the regulations of the Board of
Governors of the Federal Reserve System (the “Federal Reserve”). As a bank
holding company located in Georgia, the Georgia Department of Banking and
Finance also regulates and monitors all significant aspects of the Company’s
operations.
 
 ***Acquisitions
of Banks.*** The Bank Holding Company Act requires every bank holding company to obtain the
Federal Reserve’s prior approval before:
 
 ·
    acquiring
      direct or indirect ownership or control of any voting shares of any bank
      if, after the acquisition, the bank holding company will directly or
      indirectly own or control more than 5% of the bank’s voting
      shares;
 
 ·
    acquiring
      all or substantially all of the assets of any bank;
or
 
 ·
    merging
      or consolidating with any other bank holding
company.
  
 
 Additionally,
the Bank Holding Company Act provides that the Federal Reserve may not approve
any of these transactions if it would result in or tend to create a monopoly or,
substantially lessen competition or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
 
 Under
the Bank Holding Company Act, if adequately capitalized and adequately managed,
the Company or any other bank holding company located in Georgia may purchase a
bank located outside of Georgia. Conversely, an adequately capitalized and
adequately managed bank holding company located outside of Georgia may purchase
a bank located inside Georgia. In each case, however, restrictions may be placed
on the acquisition of a bank that has only been in existence for a limited
amount of time or will result in specified concentrations of deposits.
Currently, Georgia law prohibits acquisitions of banks that have been chartered
for less than three years. Because the Bank has been chartered for more than
three years, this limitation does not apply to the Bank or to the
Company.
 
 ***Change
in Bank Control*** **.** Subject to various exceptions, the Bank Holding Company Act and the Change in
Bank Control Act, together with related regulations, require Federal Reserve
approval prior to any person or company acquiring “control” of a bank holding
company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is refutably presumed to exist if a person or company acquires
10% or more, but less than 25%, of any class of voting securities and either:
 
 ·
    the
      bank holding company has registered securities under Section 12 of
      the Securities Act of 1934; or
 
 ·
    no
      other person owns a greater percentage of that class of voting securities
      immediately after the transaction.
 
 Our
common stock is registered under Section 12 of the Securities Exchange Act of
1934. The regulations also provide a procedure for challenging the rebuttable
presumption of control.
 
 ***Permitted
Activities*** .
A bank holding company is generally permitted under the Bank Holding Company Act
to engage in or acquire direct or indirect control of more than 5% of the voting
shares of any company engaged in the following activities:
 
 ·
    Banking
      or managing or controlling banks; and
 
 ·
    Any
      activity that the Federal Reserve determines to be so closely related to
      banking as to be a proper incident to the business of
    banking.
  
  Activities
that the Federal Reserve has found to be so closely related to banking as to be
a proper incident to the business of banking include:
 
 ·
    Factoring
      accounts receivable;
 
 ·
    Making,
      acquiring, brokering or servicing loans and usual related
      activities;
 
 ·
    Leasing
      personal or real property;
 
 ·
    Operating
      a non-bank depository institution, such as a savings
      association;
 
 ·
    Trust
      company functions;
 
 ·
    Financial
      and investment advisory activities;
 
 ·
    Conducting
      discount securities brokerage activities;
 
 ·
    Underwriting
      and dealing in government obligations and money market
      instruments;
 
 ·
    Providing
      specified management consulting and counseling
  activities;
 
 ·
    Performing
      selected data processing services and support
services;
 
 ·
    Acting
      as agent or broker in selling credit life insurance and other types of
      insurance in connection with credit transactions;
and
 
 ·
    Performing
      selected insurance underwriting activities.
 
 Despite
prior approval, the Federal Reserve may order a bank holding company or its
subsidiaries to terminate any of these activities or to terminate its ownership
or control of any subsidiary when it has reasonable cause to believe that the
bank holding company’s continued ownership, activity or control constitutes a
serious risk to the financial safety, soundness, or stability of it or any of
its bank subsidiaries.
 
 In
addition to the permissible bank holding company activities listed above, a bank
holding company may qualify and elect to become a financial holding company,
permitting the bank holding company to engage in activities that are financial
in nature or incidental or complementary to financial activity. The Bank Holding
Company Act expressly lists the following activities as financial in nature:
  
 
 ·
    Lending,
      trust and other banking activities;
 
 ·
    Insuring,
      guaranteeing, or indemnifying against loss or harm, or providing and
      issuing annuities, and acting as principal, agent, or broker for these
      purposes, in any state;
 
 ·
    Providing
      financial, investment, or advisory
services;
 
 ·
    Issuing
      or selling instruments representing interests in pools of assets
      permissible for a bank to hold directly;
 
 ·
    Underwriting,
      dealing in or making a market in
securities;
 
 ·
    Other
      activities that the Federal Reserve may determine to be so closely related
      to banking or managing or controlling banks as to be a proper incident to
      managing or controlling banks;
 
 ·
    Foreign
      activities permitted outside of the United States if the Federal Reserve
      has determined them to be usual in connection with banking operations
      abroad;
 
 ·
    Merchant
      banking through securities or insurance affiliates;
and
 
 ·
    Insurance
      company portfolio investments.
  To
qualify to become a financial holding company, the Bank and any other depository
institution subsidiary of the Company must be well capitalized and well managed
and must have a Community Reinvestment Act rating of at least “satisfactory.”
Additionally, the Company must file an election with the Federal Reserve to
become a financial holding company and must provide the Federal Reserve with 30
days’ written notice prior to engaging in a permitted financial activity. While
the Company meets the qualification standards applicable to financial holding
companies, the Company has not elected to become a financial holding company at
this time.
 
 ***Support
of Subsidiary Institutions*** .
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for the Bank and to commit resources to support the Bank.
This support may be required at times when, without this Federal Reserve policy,
the Company might not be inclined to provide it. In addition, any capital loans
made by the Company to the Bank will be repaid only after the Bank’s deposits
and various other obligations are repaid in full. In the unlikely event of the
Company’s bankruptcy, any commitment by it to a federal bank regulatory agency
to maintain the capital of the Bank will be assumed by the bankruptcy trustee
and entitled to a priority of payment.
 
 **The
Bank**
 
 The
Bank is subject to extensive state and federal banking regulations that impose
restrictions on and provide for general regulatory oversight of our operations.
These laws are generally intended to protect depositors and not shareholders.
The following discussion describes the material elements of the regulatory
framework that applies to us.
  
 
 Because
the Bank is a commercial bank chartered under the laws of the State of Georgia,
it is primarily subject to the supervision, examination and reporting
requirements of the FDIC and the Georgia Department of Banking and Finance. The
FDIC and Georgia Department of Banking and Finance regularly examine the Bank’s
operations and have the authority to approve or disapprove mergers, the
establishment of branches and similar corporate actions. Both regulatory
agencies have the power to prevent the continuance or development of unsafe or
unsound banking practices or other violations of law. Additionally, the Bank’s
deposits are insured by the FDIC to the maximum extent provided by law. The Bank
is also subject to numerous state and federal statutes and regulations that
affect its business, activities and operations.
 
 ***Branching*** **.** Under current Georgia law, the Bank may open branch offices throughout Georgia
with the prior approval of the Georgia Department of Banking and Finance. In
addition, with prior regulatory approval, the Bank may acquire branches of
existing banks located in Georgia. The Bank and any other national or
state-chartered bank generally may branch across state lines by merging with
banks in other states if allowed by the laws of the applicable state (the
foreign state). Georgia law, with limited exceptions, currently permits
branching across state lines through interstate mergers.
 
 Under
the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state
banks to branch into their state by establishing a new start-up branch in the
state. Currently, Georgia has not opted-in to this provision. Therefore,
interstate merger is the only method through which a bank located outside of
Georgia may branch into Georgia. This provides a limited barrier of entry into
the Georgia banking market, which protects us from an important segment of
potential competition. However, because Georgia has elected not to opt-in, our
ability to establish a new start-up branch in another state may be limited. Many
states that have elected to opt-in have done so on a reciprocal basis, meaning
that an out-of-state bank may establish a new start-up branch only if their home
state has also elected to opt-in. Consequently, until Georgia changes its
election, the only way we will be able to branch into states that have elected
to opt-in on a reciprocal basis will be through interstate merger.
 
 ***Prompt
Corrective Action*** .
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a
system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have
established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) in which all institutions are placed. The federal banking
agencies have also specified by regulation the relevant capital levels for each
of the other categories. At December 31, 2004, the Bank qualified for the
well-capitalized category.
  
  Federal
banking regulators are required to take various mandatory supervisory actions
and are authorized to take other discretionary actions
with respect to institutions in the three undercapitalized categories. The
severity of the action depends upon the capital category in which the
institution is placed. Generally, subject to a narrow exception, the banking
regulator must appoint a receiver or conservator for an institution that is
critically undercapitalized.
 
 An
institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to various limitations. The
controlling holding company’s obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the
time it became undercapitalized or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval. The regulations also
establish procedures for downgrading
an institution to a lower capital category based on supervisory factors other
than capital.
 
 ***FDIC
Insurance Assessments.*** The
FDIC has adopted a risk-based assessment system for insured depository
institutions’ that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (1) well capitalized; (2)
adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the “undercapitalized” category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns an
institution to one of three supervisory subgroups based on a supervisory
evaluation that the institution’s primary federal regulator provides to the FDIC
and information that the FDIC determines to be relevant to the institution’s
financial condition and the risk posed to the deposit insurance funds.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution’s capital group and supervisory subgroup. In addition, the FDIC
imposes assessments to help pay off the $780 million in annual interest payments
on the $8 billion Financing Corporation bonds issued in the late 1980s as part
of the government rescue of the thrift industry. This assessment rate is
adjusted quarterly and is set at $1.44 per $100 of deposits for the first
quarter of 2005.
 
 The
FDIC may terminate its insurance of deposits if it finds that the institution
has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
  
  ***Community
Reinvestment Act*** .
The Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve or the FDIC shall evaluate the record of each financial institution in
meeting the credit needs of its local community, including low and
moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility. Failure to
adequately meet these criteria could impose additional requirements and
limitations on the Bank. Additionally, we must publicly disclose the terms of
various Community Reinvestment Act-related agreements.
 
 ***Other
Regulations*** .
Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. For example,
under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally
prohibited from charging an annual interest rate in excess of 6% on any
obligation for which the borrower is a person on active duty with the United
States military.
 
 The
Bank’s loan operations are also subject to federal laws applicable to credit
transactions, such as the:
 
 ·
    federal
      Truth-In-Lending Act, governing disclosures of credit terms to consumer
      borrowers;
 
 ·
    Home
      Mortgage Disclosure Act of 1975, requiring financial institutions to
      provide information to enable the public and public officials to determine
      whether a financial institution is fulfilling its obligation to help meet
      the housing needs of the community it serves;
 
 ·
    Equal
      Credit Opportunity Act, prohibiting discrimination on the basis of race,
      creed or other prohibited factors in extending
credit;
 
 ·
    Fair
      Credit Reporting Act of 1978, governing the use and provision of
      information to credit reporting agencies;
 
 ·
    Fair
      Debt Collection Act, governing the manner in which consumer debts may be
      collected by collection agencies;
 
 ·
    Soldiers’
      and Sailors’ Civil Relief Act of 1940, governing the repayment terms of,
      and property rights underlying, secured obligations of persons in military
      service; and
 
 ·
    rules
      and regulations of the various federal agencies charged with the
      responsibility of implementing these federal
laws.
 
 In
addition to the federal and state laws noted above, the Georgia Fair Lending Act
(“GAFLA”) imposes restrictions and procedural requirements on most mortgage
loans made in Georgia, including home equity loans and lines of credit. On
August 5, 2003, the Office of the Comptroller of the Currency issued a formal
opinion stating that the entirety of GAFLA is preempted by federal law for
national banks and their operating subsidiaries. GAFLA contains a provision that
preempts GAFLA as to state banks in the event that the Office of the Comptroller
of the Currency preempts GAFLA as to national banks. Therefore, the Bank is
exempt from the requirements of GAFLA.
  
  
 The
deposit operations of the Bank are subject to:
 
 ·
    the
      Right to Financial Privacy Act, which imposes a duty to maintain
      confidentiality of consumer financial records and prescribes procedures
      for complying with administrative subpoenas of financial records;
      and
 
 ·
    the
      Electronic Funds Transfer Act and Regulation E issued by the Federal
      Reserve to implement that act, which govern automatic deposits to and
      withdrawals from deposit accounts and customers’ rights and liabilities
      arising from the use of automated teller machines and other electronic
      banking services.
 
 ***Capital
Adequacy***
 
 The
Company and the Bank are required to comply with the capital adequacy standards
established by the Federal Reserve, in the case of the Company, and the FDIC, in
the case of the Bank. The Federal Reserve has established a risk-based and a
leverage measure of capital adequacy for bank holding companies. The Bank is
also subject to risk-based and leverage capital requirements adopted by the
FDIC, which are substantially similar to those adopted by the Federal Reserve
for bank holding companies.
 
 The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
 
 The
minimum guideline for the ratio of total capital to risk-weighted assets is 8%.
Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consists of common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock, and a limited amount of qualifying cumulative perpetual preferred stock,
less goodwill and other specified intangible assets. Tier 1 Capital must equal
at least 4% of risk-weighted assets. Tier 2 Capital generally consists of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1
Capital. At
December 31, 2004, the Bank’s ratio of total capital to risk-weighted assets was
15.24% and the Bank’s ratio of Tier 1 Capital to risk-weighted assets was
14.06%. At December 31, 2004, the Company’s ratio of total capital to
risk-weighted assets was 15.91% and the Company’s ratio of Tier 1 Capital to
risk-weighted assets was 14.73%.
  
 
 In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum ratio of Tier
1 Capital to average assets, less goodwill and other specified intangible
assets, of 3% for bank holding companies that meet specified criteria, including
having the highest regulatory rating and implementing the Federal Reserve’s
risk-based capital measure for market risk. All other bank holding companies
generally are required to maintain a leverage ratio of at least 4%. At
December 31, 2004, our leverage ratio was 11.62%. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without reliance on
intangible assets. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new
activities.
 
 Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and certain other restrictions on its business. As described
above, significant additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital
requirements.
 
 ***Payment
of Dividends***
 
 The
Company is a legal entity separate and distinct from the Bank. The principal
sources of the Company’s cash flow, including cash flow to pay dividends to its
shareholders, are dividends that the Bank pays to its sole shareholder, the
Company. Statutory and regulatory limitations apply to the Bank’s payment of
dividends. If, in the opinion of the federal banking regulator, the Bank were
engaged in or about to engage in an unsafe or unsound practice, the federal
banking regulator could require, after notice and a hearing, that it stop or
refrain from engaging in the questioned practice. The federal banking agencies
have indicated that paying dividends that deplete a depository institution’s
capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of
1991, a depository institution may not pay any dividend if payment would cause
it to become undercapitalized or if it already is undercapitalized. Moreover,
the federal agencies have issued policy statements that provide that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings. See “The Bank—Prompt Corrective
Action.”
 
 The
Georgia Department of Banking and Finance also regulates the Bank’s dividend
payments and must approve dividend payments that would exceed 50% of the Bank’s
net income for the prior year. Our payment of dividends may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
  
  At
December 31, 2004, the Bank could pay cash dividends without prior regulatory
approval.
 
 ***Restrictions
on Transactions with Affiliates***
 
 The
Company and the Bank are subject to the provisions of Section 23A of the Federal
Reserve Act. Section 23A places limits on the amount of:
 
 ·
    a
      bank’s loans or extensions of credit to
affiliates;
 
 ·
    a
      bank’s investment in affiliates;
 
 ·
    assets
      a bank may purchase from affiliates, except for real and personal property
      exempted by the Federal Reserve;
 
 ·
    loans
      or extensions of credit made by a bank to third parties collateralized by
      the securities or obligations of affiliates;
and
 
 ·
    a
      bank’s guarantee, acceptance or letter of credit issued on behalf of an
      affiliate.
 
 The
total amount of the above transactions is limited in amount, as to any one
affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates
combined, to 20% of a bank’s capital and surplus. In addition to the limitation
on the amount of these transactions, each of the above transactions must also
meet specified collateral requirements. The Bank must also comply with other
provisions designed to avoid the taking of low-quality assets.
 
 The
Company and the Bank are also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in the above transactions with affiliates unless the transactions are
on terms substantially the same, or at least as favorable to the institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
 
 The
Bank is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders and their related interests. These
extensions of credit (1) must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (2) must not involve more than the normal
risk of repayment or present other unfavorable features.
  
  ***Privacy***
 
 Financial
institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer or when the financial
institution is jointly sponsoring a product or service with a nonaffiliated
third party. Additionally, financial institutions generally may not disclose
consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing to consumers.
 
 ***Consumer
Credit Reporting***
 
 On
December 4, 2003, President Bush signed the Fair and Accurate Credit
Transactions Act (the “FAIR Act”), amending the federal Fair Credit Reporting
Act (the “FCRA”). These amendments to the FCRA (the “FCRA Amendments”) became
effective in 2004.
 
 The
FCRA Amendments include, among other things:
 
 ·
    requirements
      for financial institutions to develop policies and procedures to identify
      potential identity theft and, upon the request of a consumer, place a
      fraud alert in the consumer’s credit file stating that the consumer may be
      the victim of identity theft or other
fraud;
 
 ·
    for
      entities that furnish information to consumer reporting agencies (which
      would include the Bank), new requirements to implement procedures and
      policies regarding the accuracy and integrity of the furnished information
      and regarding the correction of previously furnished information that is
      later determined to be inaccurate; and
 
 ·
    a
      requirement for mortgage lenders to disclose credit scores to
      consumers.
 
 The
FCRA Amendments also prohibit a business that receives consumer information from
an affiliate from using that information for marketing purposes unless the
consumer is first provided a notice and an opportunity to direct the business
not to use the information for such marketing purposes (the “opt-out”), subject
to certain exceptions. While the FCRA Amendments limit the Company’s ability to
share information with its affiliates for marketing purposes, the actual impact
of these limitations depends on the extent to which our customers elect to
prohibit the use of their personal information for marketing
purposes.
 
 ***Anti-Terrorism
and Money Laundering Legislation***
 
 The
Bank is subject to the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (the “USA PATRIOT
Act”), the Bank Secrecy Act, and rules and regulations of
the Office of Foreign Assets Control the “OFAC”). These statutes and related
rules and regulations impose requirements and limitations on specified financial
transactions and account relationships, intended to guard
against money laundering and terrorism financing. The Bank has established a
customer identification program pursuant to Section 326 of the USA PATRIOT Act
and the Bank Secrecy Act and has otherwise implemented policies and procedures
to comply with the foregoing rules.
  ******
 ***Proposed
Legislation and Regulatory Action***
  New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of financial institutions operating or doing business in the United States. We
cannot predict whether or in what form any proposed regulation or statute will
be adopted or the extent to which our business may be affected by any new
regulation or statute.
 
 ***Effect
of Governmental Monetary Police***
 
 Our
earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve Bank’s monetary policies have had, and are likely to continue to have,
an important impact on the operating results of commercial banks through its
power to implement national
 monetary
policy in order, among other things, to curb inflation or combat a recession.
The monetary policies of the Federal Reserve affect the levels of bank loans,
investments and deposits through its control over the issuance of United States
government securities, its regulation of the discount rate applicable to member
banks and its influence over
 reserve
requirements to which member banks are subject. We cannot predict the nature or
impact of future changes in monetary and fiscal policies.
 
 
 Item
2. PROPERTIES
 
 The
Company's principal office is located at Habersham Bank's Central Habersham
office, 282 Historic Highway 441, Cornelia, Georgia. The telephone number of
that office is (706) 778-1000.
 
 Habersham
Bank's North Habersham (main) office is located at 1151 Washington Street,
Clarkesville, Georgia. The telephone number of that office is (706) 778-1000.
Habersham Bank also has seven full-service branch offices. Its Central Habersham
office is located at 282 Historic Highway 441, Cornelia, Georgia; its South
Habersham office is located at 186 441 By-Pass, Baldwin, Georgia; its Cleveland
Office is located at 575 South Main Street, Cleveland, Georgia; its Canton
Office is located at 1925 Marietta Highway, Canton, Georgia; its Hickory Flat
Office is located at 6782 Hickory Flat Highway, Canton, Georgia; its Warrenton
Office is located at 217 East Main Street, Warrenton, Georgia; and its Braselton
Office is located at 6322 Grand Hickory Drive, Braselton, Georgia. Each office
has a 24-hour teller machine. Habersham Bank owns its office properties without
encumbrance, with the exception of the Warrenton Office which is leased on a
month to month basis.
 
 Advantage
Insurers, Inc.’s principal office is located at 282 Historic Highway 441,
Cornelia, Georgia, and the telephone number of that office is (706) 778-2277.
 
 Item
3. LEGAL PROCEEDINGS
 
 The
Company is not a party to, nor is any of its property the subject of, any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, and no such proceedings are known to be contemplated
by governmental authorities.
  
  Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 
 PART
II
 
 Item
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
 The
common stock of Habersham Bancorp is traded on the Nasdaq Stock Market
("Nasdaq") under the symbol HABC. At December 31, 2004, Habersham Bancorp had
approximately 495 shareholders of record. The following table sets forth the
high and low sale prices, and the cash dividends paid on the Company's common
stock on a quarterly basis for the past two fiscal years and the first quarter
of 2005 to date.
 
 **High**
    
    **Low**
    
    **Dividends****2005**First
      quarter (through
      March 15, 2005)
    
    $
    21.75
    
    $
    20.42
    
    $
    0.08**2004:**
    
    
    **High**
    
    
    **Low**
    
    
    **Dividend**Fourth
      Quarter
    
    $
    21.85
    
    $
    19.75
    
    $
    0.07Third
      Quarter
    
    
    23.70
    
    
    19.69
    
    
    0.07Second
      Quarter
    
    
    28.71
    
    
    23.22
    
    
    1.07First
      Quarter
    
    
    25.93
    
    
    24.00
    
    
    0.07**2003:**
    
    
    **High**
    
    
    **Low**
    
    
    **Dividend**Fourth
      Quarter
    
    $
    25.50
    
    $
    22.55
    
    $
    1.00Third
      Quarter
    
    
    23.00
    
    
    19.83
    
    
    0.06Second
      Quarter
    
    
    21.12
    
    
    17.31
    
    
    0.06First
      Quarter
    
    
    19.68
    
    
    17.08
    
    
    0.06
 
 The
approval of the Georgia Department of Banking and Finance is required if
dividends declared by the Bank to the Company in any year will exceed 50% of the
net earnings of the Bank for the previous calendar year. As of December 31,
2004, the Bank could declare dividends to the Company up to approximately
$1,572,000 without regulatory approval.
 
 The
Company did not repurchase any of its outstanding common stock during the fourth
quarter of 2004.
 
  
  Item
6.     SELECTED FINANCIAL DATA
 
 SELECTED
FINANCIAL DATA
 (In
thousands, except share and per share data)
 
 **For
      the years ended December 31****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****SUMMARY
      OF OPERATIONS**Interest
      income
    
    $
    20,743
    
    $
    22,593
    
    $
    27,137
    
    $
    34,510
    
    $
    37,510Interest
      expense
    
    
    6,791
    
    
    8,122
    
    
    12,041
    
    
    20,403
    
    
    22,781Provision
      for loan losses
    
    
    483
    
    
    950
    
    
    1,307
    
    
    1,463
    
    
    955Other
      income
    
    
    4,431
    
    
    3,490
    
    
    3,620
    
    
    2,861
    
    
    2,330Other
      expense
    
    
    14,777
    
    
    14,000
    
    
    12,857
    
    
    12,322
    
    
    11,914Earnings
      from continuing operations
    
    $
    2,343
    
    $
    2,296
    
    $
    3,447
    
    $
    2,375
    
    $
    2,875Earnings
      (loss) from discontinuedoperations
    
    
    -
    
    
    -
    
    
    2,337
    
    
    3,109
    
    
    124Cumulative
      effect ofchange
      in accounting principle
    
    
    -
    
    
    -
    
    
    -
    
    
    (162
    )
    
    -Net
      earnings
    
    $
    2,343
    
    $
    2,296
    
    $
    5,784
    
    $
    5,322
    
    $
    2,999**PER
      SHARE AMOUNTS**Earnings
      from continuingoperations
      - diluted
    
    $
    .80
    
    $
    .79
    
    $
    1.22
    
    $
    .87
    
    $
    1.07Earnings
      (loss) from discontinuedoperations
      - diluted
    
    
    -
    
    
    -
    
    
    .83
    
    
    1.14
    
    
    .04Cumulative
      effect of change inaccounting
      principle - diluted
    
    
    -
    
    
    -
    
    
    -
    
    
    (.06
    )
    
    -Net
      earnings per common share-diluted
    
    $
    .80
    
    $
    .79
    
    $
    2.05
    
    $
    1.95
    
    $
    1.11Dividends
    
    $
    1.28
    
    $
    1.18
    
    $
    .24
    
    $
    .24
    
    $
    .24Weighted
      average number of common and common equivalent shares
      outstanding
    
    
    2,939,951
    
    
    2,895,113
    
    
    2,815,972
    
    
    2,729,291
    
    
    2,699,949**AT
      DECEMBER 31**Total
      assets
    
    $
    385,933
    
    $
    374,978
    
    $
    429,411
    
    $
    546,503
    
    $
    543,108Earning
      assets
    
    
    355,093
    
    
    342,664
    
    
    395,047
    
    
    503,562
    
    
    504,640Loans
    
    
    277,137
    
    
    261,818
    
    
    303,813
    
    
    440,527
    
    
    441,850Deposits
    
    
    292,957
    
    
    279,600
    
    
    336,526
    
    
    336,360
    
    
    341,032Long-term
      debt
    
    
    36,000
    
    
    30,000
    
    
    30,000
    
    
    35,775
    
    
    21,950Stockholders’
      equity
    
    $
    48,006
    
    $
    49,229
    
    $
    50,315
    
    $
    43,600
    
    $
    38,390**RATIOS**Return
      on average assets
    
    
    .62
    %
    
    .58
    %
    
    1.32
    %
    
    1.22
    %
    
    .68
    %Return
      on average equity
    
    
    4.86
    %
    
    4.44
    %
    
    12.14
    %
    
    12.80
    %
    
    8.21
    %Dividend
      payout ratio
    
    
    160.00
    %
    
    149.37
    %
    
    11.70
    %
    
    12.25
    %
    
    21.43
    %Average
      equity to average assets ratio
    
    
    12.66
    %
    
    13.24
    %
    
    10.88
    %
    
    9.55
    %
    
    8.32
    %
 
 
 Balance
sheet amounts have not been adjusted to reflect discontinued operations.
  
  Item
7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 **ORGANIZATION**
 
 Habersham
Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank
("Habersham Bank") and The Advantage Group, Inc. Habersham Bank owns all of the
outstanding stock of Advantage Insurers, Inc. (“Advantage Insurers”) and prior
to December 2002, owned all of the outstanding stock of BancMortgage Financial
Corp (“BancMortgage”). The Advantage Group, Inc., a non-bank subsidiary
providing marketing and advertising services, ceased operations September 30,
2001. Advantage Insurers, which began operations on March 31, 1997, offers a
full line of property, casualty, and life insurance products. The Advantage
Group, Inc. and Advantage Insurers do not comprise a significant portion of the
financial position, results of operations, or cash flows of the Company.
 
 The
Company’s continuing primary business is the operation of banks in rural and
suburban communities in Habersham, White, Cherokee, Warren, and Gwinnett
counties in Georgia. The Company’s primary source of revenue is interest income
on loans to businesses and individuals in its market area.
 
 
 **EXECUTIVE
SUMMARY**
 
 Net
earnings for 2004 were $2,343,273, representing an increase of 2.06% from 2003.
Diluted earnings per share were $0.80, up $0.01 per share from 2003, and return
on average equity was 4.86% as compared to 4.44% for 2003. The increase in
earnings resulted principally from sales of land and common stock investments
totaling $1,078,000. See “Results of Operations” below.
 
 The
Company’s primary source of income is interest income from loans and investment
securities. Its profitability depends largely on net interest income, which is
the difference between the interest received on interest-earning assets and the
interest paid on deposits, borrowings, and other interest-bearing liabilities.
Interest rates remained at low levels during 2004 and 2003, but rose during the
course of 2004 with five increases in the prime rate. Maintaining a profitable
net interest margin (net interest income divided by average earning assets)
continued to be the focus of management during 2004.
 
 Net
interest income decreased by approximately $519,000 during 2004 and was impacted
by payoffs of construction loans generated by Habersham Bank’s former mortgage
subsidiary, BancMortgage Financial Corp (“BMFC”) (sold in December 2002); by net
loan dollars generated by Habersham Bank; and by maturing certificates of
deposit. Habersham Bank’s net loan growth of $15.3 million during 2004 was
primarily the result of increases in the real estate lending portfolio and in
the commercial lending portfolio of approximately $41.9 million and $2 million,
respectively. This growth was offset by decreases in the consumer lending
portfolio of approximately $2.4 million and in the real estate lending portfolio
by payoffs of construction loans generated by BMFC totaling approximately $26.2
million. Approximately $8.2 million in construction loans generated by BMFC
remain in Habersham Bank’s loan portfolio with a weighted yield of
6.01%.
 
 The
balances in the deposit portfolio increased approximately $13.3 million when
compared to December 31, 2003. Noninterest bearing accounts increased
approximately $6.5 million and interest bearing accounts increased $6.9 million.
The increase in interest bearing account balances consisted of approximately
$7.3 million and $1 million in the shorter term accounts of money market and
regular savings accounts, respectively, offset by decreases in time deposit
balances of approximately $1.5 million at December 31, 2004. Habersham Bank’s
new branch locations in Braselton and Hickory Flat added approximately $6.4
million and $2.7 million in new accounts during 2004.
 
 During
2004, Habersham Bank entered into two interest rate protection product
transactions with Compass Bank in Birmingham, Alabama. The elements of these
transactions will allow Habersham Bank to borrow funds from the Federal Home
Loan Bank (FHLB) at a variable rate and then exchange the variable rate payment
for a fixed rate payment with Compass Bank. The benefit of this particular
interest rate swap is that it allows Habersham Bank to fund longer-term
fixed-rate commercial loans. At December 31, 2004, Habersham Bank had $6 million
advanced in this product.
  
  Habersham
Bank recorded gains on the sale of 7.18 acres of land behind the Cornelia Office
and on the sale of common stock investments in Southeast Bankcard Association
and GA Community Life Insurance Co during 2004 of approximately $879,000 and
$199,000, respectively.
 
 Operational
expenses associated with the opening of an office in Hickory Flat in Cherokee
County and a new office in Braselton in Gwinnett County (opened November 2003)
are reflected in the 2004 results.
 
 Management
has developed a strategy for asset growth and expansion of its financial
services through branching into selective growth markets in North Georgia.
Habersham Bank began this expansion program of its traditional banking business
with the completion of a branch office in Braselton, Georgia. Braselton is the
home of Chateau Elan, a winery and golf community, and an area of rapid growth
of residential properties. Additionally, Habersham Bank purchased an existing
branch location from a regional bank in the Hickory Flat area of eastern
Cherokee County. The Hickory Flat location opened for operation in March 2004
and replaced the Waleska Office which closed during the first quarter of 2004.
Cherokee County is considered one of the fastest growing communities in Georgia.
 
 The
following discussion sets forth the major factors that affect the Company's
results of operations and financial condition. These comments should be read in
conjunction with the consolidated financial statements and related
notes.
 
 This
discussion contains forward-looking statements involving risks and
uncertainties. Results may differ significantly from those discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, risks involving the potential adverse effect of
unexpected changes in interest rates and the current interest rate environment,
loan losses and the adequacy of the Company’s loan loss allowance, changes in
regulation and legislation, and competition.
 
 
 **CRITICAL
ACCOUNTING ESTIMATES**
 
 In
reviewing and understanding financial information for the Company, you are
encouraged to read and understand the significant accounting policies which are
used in preparing the consolidated financial statements of the Company. These
policies are described in Note 2 to the consolidated financial statements which
are presented elsewhere in this annual report. Of these policies, management
believes that the accounting for the allowance for loan losses is the most
critical. This is because of the subjective nature of the estimates used in
establishing the allowance and the effect these estimates have on the Company’s
earnings. Because the allowance is replenished by means of a provision for loan
losses that is charged as an expense against net earnings, the estimation of the
allowance affects the Company’s earnings directly. Losses on loans result from a
broad range of causes, from borrower-specific problems to industry issues to the
impact of the economic environment. The identification of the factors that lead
to default or non-performance under a loan agreement and the estimation of loss
in these situations is very subjective. In addition, a dramatic change in the
performance of one or a small number of borrowers can have a significant impact
in the estimate of losses. As described further below, under “Allowance for Loan
Losses”, management has implemented a process that has been applied consistently
to systematically consider the many variables that impact the estimation of the
allowance for loan losses.
  
  Certain
economic factors could have a material impact on the loan loss allowance
determination and its adequacy. The depth and duration of any economic recession
would have an impact on the credit risk associated with the loan portfolio.
Another factor that can impact the determination is a consideration of
concentrations in collateral which secure the loan portfolio. The Company’s loan
portfolio is secured primarily by commercial and residential real estate with
such loans comprising approximately 89.1% of the total loan portfolio. While
there is a risk that the value of the real estate securing the loans in the
portfolio could decrease during an economic recession, the majority of the real
estate securing the loan portfolio is 1 - 4 family residential properties which
are generally not as affected by downturns in the economy. The Company also has
concentrations in mortgages for agribusiness purposes in the poultry industry
and in commercial loans for the travel accommodation industry. See
“Nonperforming Assets and Past Due Loans.”
 
 The
Company will, from time to time, make unsecured loans. The risk to the Company
is greater for unsecured loans as the ultimate repayment of the loan is only
dependent on the borrower’s ability to pay. The balance of unsecured loans at
December 31, 2004 was $6.8 million, which does not pose a significant risk to
the Company.
 
 The
Company is not aware of any large loan relationships that if defaulted would
have a significant impact on the allowance for loan losses.
 
 Refer
to the section entitled “Allowance for Loan Losses” for an additional discussion
of the key assumptions and methods used in determining the allowance for loan
losses, as well as inherent risks in estimating the allowance.
 
 **RESULTS
OF OPERATIONS**
 
 Habersham
Bancorp’s net earnings were $2,343,273, $2,295,962 and $5,784,451, for the years
ended December 31, 2004, 2003 and 2002, respectively, with related diluted
earnings per common and common equivalent share of $.80, $.79 and $2.05,
respectively, representing an increase of 1.26% from 2003 to 2004 and a decrease
of 61.46% from 2002 to 2003.
 
 Net
earnings represents a return on average equity of 4.86%, 4.44% and 12.14% for
2004, 2003 and 2002, respectively.
 
 During
the year ended December 31, 2002, the Company sold BancMortgage to the existing
management of BancMortgage resulting in a loss of $110,064. The Company’s
consolidated financial statements have been reclassified to reflect the
operations of BancMortgage as discontinued. Management’s discussion and
analysis, which follows, relates primarily to Habersham Bank.
  
 The
average balance of the total loan portfolio for 2004 when compared to 2003
decreased approximately $14.1 million. The primary reason for the decline in the
average balance in the loan portfolio is due to approximately $15.7 million of
payoffs on construction loans generated by Habersham Bank’s former mortgage
subsidiary, which have been offset by new loans generated internally by
Habersham Bank. The average balance of the deposit portfolio during 2004
decreased approximately $10.9 million when compared to 2003. The average of
interest-bearing accounts decreased $15 million. During the same period, average
balances in noninterest-bearing accounts increased approximately $4.1 million.
Due to increases in noninterest-bearing accounts, Habersham Bank was in a
position not to aggressively pursue certificates of deposit accounts as they
matured which resulted in decreases in the certificates of deposit portfolio of
approximately $23.0 million. The decrease in certificates of deposit account
balances was offset by increases in money market, NOW, regular savings and
Adv+COD accounts (a six-month term certificate of deposit which matures each
June 30 and December 31) of approximately $8.0 million as customers preferred
the shorter term deposit accounts.
  
  The
increase in earnings from continuing operations for the year ended December 31,
2004, when compared to the year ended December 31, 2003, was primarily due to
increases in noninterest income relating to sales of land and common stock
investments of $879,000 and $199,000, respectively. Mortgage origination income
increased approximately $194,000 during 2004. These increases were partially
offset by decreases during 2004 in trust fees, deposit fees and other service
charges of approximately $239,000, $93,000 and $34,000, respectively. Increases
in noninterest expense also impacted earnings from continuing operations during
2004 with approximately $652,000 and $306,000 in additional salaries and
employee benefits as well as occupancy expense, respectively, related to a full
year of operating branches located in Braselton and Hickory Flat.
 
 The
decrease in earnings from continuing operations for the year ended December 31,
2003, when compared to the year ended December 31, 2002, was primarily due to
additional salary and other expenses associated with the establishment of a new
mortgage lending division (“Habersham Mortgage”) during the first quarter of
2003 and the building and staffing of a new branch located in Braselton, Georgia
during the fourth quarter of 2003. Also, contributing to the decrease in
earnings from continuing operations was a decrease in gains on the sale of
investment securities and other investments. These decreases were partially
offset by an increase in the net interest margin for the year ended December 31,
2003 to 4.05% when compared to 4.04% for the year ended December 31, 2002.
 
 
 **NET
INTEREST INCOME**
 
 Net
interest income is the largest single source of income for the Company.
Management strives to attain a level of earning asset growth while providing a
net yield on earning assets that will cover overhead and other costs and provide
a reasonable return to our shareholders.
 
 **2004**
    
    **2003**
    
    **2002**Net
      interest income
    
    $
    13,951,914
    
    $
    14,471,143
    
    $
    15,096,182
 
 Net
interest income for 2004 decreased approximately $519,000 when compared to 2003
and decreased approximately $625,000 when compared to 2002. Fluctuations
occurring in interest rates and balances in the loan, securities, and deposit
portfolios directly impacted net interest income. Other borrowings are also
impacted by rate movements and balances. Net interest income is impacted by
interest income from loans, investment securities, and federal funds sold offset
by interest paid on deposits and borrowings. The weighted average yield on loans
was 6.52%, 6.94% and 7.73%, for the years ended December 31, 2004, 2003 and
2002, respectively. The weighted average yield on investment securities was
4.17%, 4.15% and 5.27%, for the years ended December 31, 2004, 2003 and 2002,
respectively. Average yields on federal funds sold were 1.20%, 1.50% and 1.39%
for the years ended December 31, 2004, 2003 and 2002, respectively.
 
 Average
balances in Habersham Bank’s loan portfolio have been trending downward over the
last three years, primarily due to the maturities and payoffs of construction
loans generated by BMFC totaling approximately $15.7 million in 2004, $67.2
million in 2003 and $104.1 million in 2002. Habersham Bank has been able to
replace these balances with increases in other loan categories. At December 31,
2004, approximately $8.2 million of BMFC loans remained in Habersham Bank’s loan
portfolio. During most of this three-year period, interest rates were declining
as the prime interest rate decreased. Average investment securities balances
increased over the last three years as Habersham Bank was able to invest
additional cash received from the maturities and payoffs of the BMFC loans.
  
 
 During
2004, interest income decreased approximately $1.8 million when compared to
2003. The decrease in interest income from loans was approximately $2.1 million
primarily due to decreases in the average yield on loans from 6.94% in 2003 to
6.52% in 2004 and a decrease in the volume of loans in 2004 compared to 2003.
This decrease was partially offset by increases in interest income from
investment securities of approximately $306,000 as a result of increases in
average investment balances and in the average yield on investment securities
from 4.15% during 2003 to 4.17% during 2004.
 
 During
2003, interest income decreased approximately $4.5 million when compared to 2002
as a result of average loan balances in 2003 decreasing approximately $24.8
million when compared to 2002 in addition to the average loan rates in 2003
decreasing approximately .79% when compared to 2002. The decrease in the loan
portfolio is primarily the result of payoffs of real estate construction loans.
Interest income on investment securities decreased approximately $509,000 when
compared to 2002 primarily due to decreases in the interest yield of
approximately 1.12%.
 
 Interest
expense for 2004 decreased approximately $1.3 million when compared to 2003 as a
result of average interest-bearing deposit balances in 2004 decreasing
approximately $15 million. At the same time, the weighted average interest rate
paid on interest-bearing deposits decreased from 2.45% in 2003 to 1.97% in 2004.
The decrease in average balances was primarily due to maturities of certificates
of deposit of approximately $23 million, offset by increases in average balances
of money market and NOW accounts as well as increases in regular savings average
balances of approximately $7.2 million and $780,000, respectively.
 
 Interest
expense for 2003 decreased approximately $3.9 million when compared to 2002 as a
result of average interest-bearing deposit balances in 2003 decreasing
approximately $43.4 million when compared to 2002 in addition to the average
deposit rate in 2003 decreasing approximately .84% when compared to 2002. The
decrease in the deposit portfolio is primarily the result of the redemption of
national market certificates of deposit during the year.
 
 The
net interest margin of the Company was 4.00% in 2004, 4.05% in 2003 and 4.04% in
2002. The net interest margin of the Company was maintained due to close
management of yields earned on loans and investment securities and on rates paid
for deposits and borrowings.
 
 
 **CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID**
 
 Average
balances in the loan portfolio declined approximately $14.1 million over 2004 as
compared to 2003. The mix of the loan portfolio changed during 2004 with
decreases in real estate and consumer lending portfolios of approximately $49
million and $2.5 million, respectively, offset by increases in the commercial
lending and home equity line of credit portfolio of approximately $32.2 million
and $5.2 million, respectively. The average balances of maturities and payoffs
of construction loans generated by BMFC which totaled approximately $15.7
million during 2004 are reflected in the decrease of real estate secured loans
which were offset by new loans in the residential and commercial real estate
portfolio and commercial lending portfolio. The consumer lending portfolio
decreased as customers moved from fixed rate installment loans to home equity
lines of credit.
  
 
 Average
loan balances declined approximately $24.8 million or 8.08% in 2003 from 2002
primarily as a result of the maturity and payoffs of real estate construction
and mortgage loans of approximately $40.6 million offset by new commercial loans
of approximately $15.8 million.
 
 An
increase of approximately $6.9 million in the average balances of investment
securities in 2004 over 2003 resulted from increases in U.S. treasuries and U.S.
Government agency bonds of approximately $7.8 million offset by decreases in
municipal bonds of approximately $887,000. Weighted average interest yields
increased to 4.17% during 2004 from 4.15% during 2003.
 
 Average
balances of investment securities increased approximately $5.0 million or 7.84%
in 2003 over 2002 as a result of investing the excess cash from loan maturities
and payoffs in investment securities. Available for sale mortgage backed and
treasury securities purchases totaled approximately $51.5 million offset by
proceeds from maturities, sales, and calls of approximately $32.2 million during
2003. Held to maturity investment securities and other stock investments
decreased as a result of calls and maturities of approximately $1.3 million and
$.8 million, respectively. Average federal funds sold increased approximately
$444,000 or 13.91% in 2003 over 2002.
 
 The
average balances in the deposit portfolio during 2004 decreased approximately
$10.9 million. Decreases in interest-bearing accounts of approximately $15
million were offset by increases is noninterest-bearing accounts of
approximately $4.1 million. This increase in noninterest-bearing accounts
allowed Habersham Bank not to aggressively pursue certificates of deposit as
they matured, resulting in decreases in the certificate of deposit portfolio.
The average interest rate paid on deposits declined to 1.97% in 2004 from 2.45%
in 2003.
 
 The
average balance of deposits, excluding noninterest-bearing deposits, for 2003
decreased by approximately $43.4 million or 14.52% from 2002. The decrease in
average deposits for 2003 is primarily due to the redemption at maturity of
national market certificates of deposit of approximately $48.5 million partially
offset by increases in money market and savings accounts of approximately $3.7
million and $1.4 million, respectively.
 
 The
following table sets forth the consolidated average balance sheets for the
Company, average rates earned on interest-earning assets, average rates paid on
interest-bearing liabilities, interest income and interest expense for each
category of interest-earning assets and interest-bearing liabilities, and net
interest margin. This information is presented for the years ended December 31,
2004, 2003 and 2002.
  
  **CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID, CONTINUED**
 
 2004
    
    2003Average
      Balance
    
    Income/
      (Expense)
    
    Average
      Yield/Cost
    
    Average
      Balance
    
    Income/
      (Expense)
    
    Average
      Yield/CostInterest-earning
      assets:Loans,
      net (1)
    
    $
    268,041,043
    
    $
    17,472,126
    
    
    6.52
    %
    $
    282,142,667
    
    $
    19,579,912
    
    
    6.94
    %Investment
      securities (2):Taxable
    
    
    59,403,527
    
    
    2,415,647
    
    
    4.07
    %
    
    51,563,715
    
    
    2,040,625
    
    
    3.96
    %Tax
      exempt
    
    
    16,507,276
    
    
    751,363
    
    
    4.55
    %
    
    17,394,027
    
    
    820,122
    
    
    4.71
    %Federal
      funds sold
    
    
    3,219,333
    
    
    38,648
    
    
    1.20
    %
    
    3,639,083
    
    
    54,593
    
    
    1.50
    %Loans
      held for sale
    
    
    1,282,460
    
    
    65,635
    
    
    5.12
    %
    
    2,523,729
    
    
    97,558
    
    
    3.87
    %Total
      interest-earning assets
    
    
    348,453,639
    
    
    20,743,419
    
    
    5.95
    %
    
    357,263,221
    
    
    22,592,810
    
    
    6.32
    %Noninterest-earning
      assets
    
    
    31,920,862
    
    
    
    
    
    
    
    
    33,023,404Total
      assets
    
    $
    380,374,501
    
    
    
    
    
    
    
    $
    390,286,625Interest-bearing
      liabilities:Money
      market and NOW
    
    $
    64,767,791
    
    
    (425,621
    )
    
    0.66
    %
    $
    57,534,840
    
    
    (355,015
    )
    
    0.62
    %Savings
      accounts
    
    
    10,079,223
    
    
    (24,528
    )
    
    0.24
    %
    
    9,298,757
    
    
    (41,537
    )
    
    0.45
    %Certificates
      of deposit
    
    
    165,829,698
    
    
    (4,301,470
    )
    
    2.59
    %
    
    188,858,305
    
    
    (5,856,071
    )
    
    3.10
    %Total
      deposits
    
    
    240,676,712
    
    
    (4,751,619
    )
    
    1.97
    %
    
    255,691,902
    
    
    (6,252,623
    )
    
    2.45
    %Short-term
      and other borrowings
    
    
    44,661,916
    
    
    (2,039,886
    )
    
    4.57
    %
    
    39,724,975
    
    
    (1,869,044
    )
    
    4.70
    %Total
      interest-bearing liabilities
    
    
    285,338,628
    
    
    (6,791,505
    )
    
    2.38
    %
    
    295,416,877
    
    
    (8,121,667
    )
    
    2.75
    %Noninterest-
      bearing deposits
    
    
    43,795,027
    
    
    
    
    
    
    
    
    39,691,635Other
      noninterest-bearingLiabilities
    
    
    3,074,133
    
    
    
    
    
    
    
    
    3,513,987Total
      liabilities
    
    
    332,207,788
    
    
    
    
    
    
    
    
    338,622,499Stockholders'
      equity
    
    
    48,166,713
    
    
    
    
    
    
    
    
    51,664,126Total
      liabilities andshareholders'
      equity
    
    $
    380,374,501
    
    
    
    
    
    
    
    $
    390,286,625Net
      interest income
    
    
    
    
    $
    13,951,914
    
    
    
    
    
    
    
    $
    14,471,143Net
      interest margin
    
    
    
    
    
    
    
    
    4.00
    %
    
    
    
    
    
    
    
    4.05
    %Interest
      Rate Spread
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    
    
    
    
    
    3.57
    %
 
  
  **CONSOLIDATED
AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND
RATES PAID, CONTINUED**
 
 2002Average
      Balance
    
    Income/
      (Expense)
    
    Average
      Yield/CostInterest-earning
      assets:Loans,
      net (1)
    
    $
    306,940,750
    
    $
    23,723,373
    
    
    7.73
    %Investment
      securities (2):Taxable
    
    
    44,416,895
    
    
    2,440,970
    
    
    5.50
    %Tax
      exempt
    
    
    19,528,459
    
    
    928,576
    
    
    4.75
    %Federal
      funds sold
    
    
    3,194,367
    
    
    44,350
    
    
    1.39
    %Total
      interest-earning assets
    
    
    374,080,471
    
    
    27,137,269
    
    
    7.25
    %Noninterest-earning
      assets
    
    
    63,902,447Total
      assets
    
    $
    437,982,918Interest-bearing
      liabilities:Money
      market and NOW
    
    $
    53,770,339
    
    
    (495,558
    )
    
    .92
    %Savings
      accounts
    
    
    7,947,215
    
    
    (63,280
    )
    
    .80
    %Certificates
      of deposit
    
    
    237,423,845
    
    
    (9,271,035
    )
    
    3.90
    %Total
      deposits
    
    
    299,141,399
    
    
    (9,829,873
    )
    
    3.29
    %Short-term
      and other borrowings
    
    
    47,023,799
    
    
    (2,211,214
    )
    
    4.70
    %Total
      interest-bearing liabilities
    
    
    346,165,198
    
    
    (12,041,087
    )
    
    3.48
    %Noninterest-bearing
      deposits
    
    
    36,264,247Other
      noninterest-bearingliabilities
    
    
    7,904,984Total
      liabilities
    
    
    390,334,429Stockholders'
      equity
    
    
    47,648,489Total
      liabilities andshareholders'
      equity
    
    $
    437,982,918Net
      interest income
    
    
    
    
    $
    15,096,182Net
      interest margin
    
    
    
    
    
    
    
    
    4.04
    %Interest
      rate spread
    
    
    
    
    
    
    
    
    3.77
    %
 
 (1)
    Interest
      earnings on nonaccrual loans are included in the foregoing analysis to the
      extent that such interest earnings had been recorded during 2004, 2003 and
      2002.
      Income
      includes loan fees of $1,393,790, $ 1,277,034 and $1,388,966 for 2004,
      2003 and 2002, respectively.
 
 (2)
    Average
      yields for available for sale securities are computed using the historical
      cost balances. Such yields do not give effect to changes in fair value
      that are reflected as a component of shareholders'
  equity.
  
  The
following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in volume and rates for the periods
indicated:
 
 2004
      vs. 2003
    
    2003
      vs. 2002Increase
      (Decrease)
    
    Increase
      (Decrease)Due
      to
    
    Due
      toAverage
    
    Average
    
    
    
    Average
    
    AverageVolume
      (1)
    
    Rate
      (1)
    
    Net
    
    Volume
      (1)
    
    Rate
      (1)
    
    NetInterest
      Income:Loans
    
    $
    (978,653
    )
    $
    (1,129,133
    )
    $
    (2,107,786
    )
    $
    (320,289
    )
    $
    (3,823,172
    )
    $
    (4,143,461
    )Investment
      securities:Taxable
    
    
    310,456
    
    
    64,566
    
    
    375,022
    
    
    393,075
    
    
    (793,420
    )
    
    (400,345
    )Tax
      exempt
    
    
    (41,766
    )
    
    (26,993
    )
    
    (68,759
    )
    
    (101,386
    )
    
    (7,068
    )
    
    (108,454
    )Federal
      funds sold
    
    
    (6,296
    )
    
    (9,649
    )
    
    (15,945
    )
    
    6,182
    
    
    4,061
    
    
    10,243Loans
      held for sale
    
    
    (48,037
    )
    
    16,114
    
    
    (31,923
    )
    
    97,558
    
    
    -
    
    
    97,558Total
      interest-earning assets
    
    
    (764,296
    )
    
    (1,085,095
    )
    
    (1,849,391
    )
    
    75,140
    
    
    (4,619,599
    )
    
    (4,544,459
    )Interest
      Expense:Money
      market and NOW
    
    
    44,844
    
    
    25,762
    
    
    70,606
    
    
    34,633
    
    
    (175,176
    )
    
    (140,543
    )Savings
      accounts
    
    
    3,512
    
    
    (20,521
    )
    
    (17,009
    )
    
    10,812
    
    
    (32,555
    )
    
    (21,743
    )Certificates
      of deposit
    
    
    (713,887
    )
    
    (840,714
    )
    
    (1,554,601
    )
    
    (1,894,056
    )
    
    (1,520,908
    )
    
    (3,414,964
    )Short-term
      and other borrowings
    
    
    232,036
    
    
    (61,194
    )
    
    170,842
    
    
    (343,045
    )
    
    875
    
    
    (342,170
    )Total
      interest-bearing liabilities
    
    
    (433,495
    )
    
    (896,667
    )
    
    (1,330,162
    )
    
    (2,191,656
    )
    
    (1,727,764
    )
    
    (3,919,420
    )Change
      in net interest income
    
    $
    (330,801
    )
    $
    (188,428
    )
    $
    (519,229
    )
    $
    2,266,796
    
    $
    (2,891,835
    )
    $
    (625,039
    )
 
 (1)
    The
      changes in interest income and/or expense not due solely to rate or volume
      have been allocated to the rate component.
 
 
 **NONINTEREST
INCOME AND NONINTEREST EXPENSE**
 
 Noninterest
income increased approximately $941,000 during 2004 primarily due to gains
recorded on the sale of land and investments in common stock of Georgia
Community Life Insurance Co and Southeast Bankcard Association Inc. of
approximately $879,000 and $199,000, respectively. Mortgage origination income
increased approximately $194,000 during 2004 reflecting increased activity
generated by Habersham Mortgage. These increases were offset somewhat by
decreases during 2004 in trust fees, deposit fees and other service charges of
approximately $239,000, $93,000 and $34,000, respectively. The Trust Department
is no longer serving as trustee for several large accounts which resulted in
lower trust income. The majority of new deposit account customers have selected
a new free checking account product which Habersham Bank offered during
2004.
  
  Noninterest
income in 2003 decreased slightly over 2002. Increases in mortgage origination
income of $615,000 resulted from the creation of Habersham Mortgage, a division
of Habersham Bank, which began operation in 2003. During 2002, Habersham Bancorp
sold its investments in common stock of FLAG Financial Corp, CB Financial Corp,
and Greater Rome for gains of $838,000, $277,000, and $50,000, respectively, in
order to focus primarily on enhancing financial services offered at Habersham
Bank. This resulted in lower gains on investment securities for 2003.
 
 Noninterest
expense in 2004 increased approximately $777,000 or 5.54% as compared to 2003.
The majority of the increase is directly attributable to expenses related to the
Braselton and Hickory Flat offices for salaries and employee benefits as well as
occupancy expenses for the full year. The Braselton Office opened during the
fourth quarter of 2003 and the Hickory Flat Office opened during the first
quarter of 2004.
 
 Noninterest
expense in 2003 increased approximately $1,143,000 or 8.89% as compared to 2002.
The increase in salaries and employee benefits was due to additional costs
associated with the creation of Habersham Mortgage, a division of Habersham Bank
and staffing requirements for our new location in Braselton. Occupancy expenses
increased due to increased depreciation expense associated with purchases of new
mainframe computer hardware and software during the fourth quarter of 2002, in
addition to depreciation expense on purchases of new teller machines and
software and replacement of personal computers at all locations during
2003.
 
 
 **INCOME
TAX EXPENSE**
 
 Income
tax expense for the periods ended December 31, 2004, 2003 and 2002 was
approximately $780,000, $715,000 and $1,105,000, respectively. The effective tax
rate for the periods ended December 31, 2004, 2003 and 2002 was 24.97%, 23.76%
and 24.28%, respectively. Tax-exempt income on investment securities in
municipal bonds for the periods ended December 31, 2004, 2003 and 2002 was
24.06%, 27.23% and 20.39% of pre-tax income, respectively. Income tax expense
for the years ended December 31, 2004, 2003 and 2002 is more fully explained in
note 14 to the consolidated financial statements.
 
 
 **ALLOWANCE
FOR LOAN LOSSES**
 
 The
allowance for loan losses represents a reserve for probable losses in the loan
portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is subjective and based on consideration of a number of factors and
assumptions. As such, the accounting policy followed in the determination of the
allowance is considered a critical accounting policy. See “Critical Accounting
Estimates.”
 
 The
allowance for loan losses methodology is based on a loan classification system.
For purposes of determining the required allowance for loan losses and resulting
periodic provisions, the Company identifies problem loans in its portfolio and
segregates the remainder of the loan portfolio into broad segments, such as
commercial, commercial real estate, residential mortgage and consumer. The
Company provides for a general allowance for losses inherent in the portfolio
for each of the above categories. The general allowance is calculated based on
estimates of inherent losses which probably exist as of the evaluation date.
Loss percentages used for non-problem loans in the portfolio are based on
historical loss factors. The general allowance for losses on problem loans is
based on a review and evaluation of these loans, taking into consideration
financial condition and strengths of the borrower, related collateral, cash
flows available for debt repayment, and known and expected economic conditions.
General loss percentages for the problem loans are determined based upon
historical loss experience and regulatory requirements.
  
  For
loans considered impaired, specific allowances are provided in the event that
the specific collateral analysis on each problem loan indicates that the
liquidation of the collateral would not result in repayment of these loans if
the loan is collateral dependent or if the present value of expected future cash
flows on the loan are less than the balance. In addition to these allocated
allowances, the Company has established an unallocated allowance of
approximately $75,000 at December 31, 2004. The basis for the unallocated
allowance is due to a number of qualitative factors, such as concentrations of
credit and changes in the outlook for local and regional economic
conditions.
 
 The
allowance for loan losses allocation is based on subjective judgment and
estimates and, therefore, is not necessarily indicative of the specific amounts
or loan categories in which charge-offs may ultimately occur. The allocation of
the allowance for loan losses by loan category at December 31, 2004, 2003, 2002,
2001 and 2000 is as follows:
 
 2004
    
    2003
    
    2002
    
    2001
    
    2000Amount
    
    Percent
      of Total loans
    
    Amount
    
    Percent
      of Total loans
    
    Amount
    
    Percent
      of Total loans
    
    Amount
    
    Percent
      of Total loans
    
    Amount
    
    Percent
      of Total loansCommercial,
      financial andagricultural
    
    $
    366,110
    
    
    5.9
    %
    $
    411,359
    
    
    5.5
    %
    $
    372,075
    
    
    5.6
    %
    $
    859,875
    
    
    7.3
    %
    $
    775,783
    
    
    6.7
    %Real
      estate
    
    
    2,564,713
    
    
    89.1
    %
    
    2,315,343
    
    
    88.3
    %
    
    2,214,516
    
    
    87.5
    %
    
    1,968,745
    
    
    84.8
    %
    
    2,026,521
    
    
    86.7
    %Installment
      loans to individuals
    
    
    629,068
    
    
    5.0
    %
    
    618,639
    
    
    6.2
    %
    
    724,794
    
    
    6.9
    %
    
    598,657
    
    
    7.9
    %
    
    386,883
    
    
    6.6
    %Unallocated
    
    
    74,752
    
    
    -
    
    
    297,761
    
    
    -
    
    
    221,924
    
    
    -
    
    
    174,600
    
    
    -
    
    
    -
    
    
    -Total
    
    $
    3,634,643
    
    
    100.0
    %
    $
    3,643,102
    
    
    100.0
    %
    $
    3,533,309
    
    
    100.0
    %
    $
    3,601,877
    
    
    100.0
    %
    $
    3,189,187
    
    
    100.0
    %
 
 The
Company's provision for loan losses is intended to create an adequate allowance
for losses in the loan portfolio at the end of each reporting period. The
provision for loan losses was $482,500 in 2004 as compared to $950,000 in 2003.
A decrease in the provision for loan losses expense was determined to be
appropriate due to the decrease in the loan portfolio balances in real estate
secured loans. Net charge-offs for 2004 totaled approximately $491,000 compared
to $840,000 for 2003.
 
 Management
is not aware of any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention that have not been disclosed which 1) represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources, or
2) represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
  
  The
following table summarizes, for each of the years in the five year period ended
December 31, 2004, selected information related to the allowance for loan
losses.
 
 **2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Balance
      of allowance for loanlosses
      at beginning of period
    
    $
    3,643,102
    
    $
    3,533,309
    
    $
    3,601,877
    
    $
    3,189,187
    
    $
    2,983,153Charge-offs:Commercial,
      financial and agricultural
    
    
    (145,422
    )
    
    (329,905
    )
    
    (372,583
    )
    
    (481,978
    )
    
    (266,960
    )Real
      estate
    
    
    (427,365
    )
    
    (137,861
    )
    
    (470,433
    )
    
    (283,163
    )
    
    (151,517
    )Installment
      loans to individuals
    
    
    (228,331
    )
    
    (660,230
    )
    
    (670,977
    )
    
    (444,584
    )
    
    (324,084
    )Other
    
    
    (11,074
    )
    
    (20,279
    )
    
    (33,729
    )
    
    (47,415
    )
    
    (43,377
    )Total
      charge-offs
    
    
    (812,192
    )
    
    (1,148,275
    )
    
    (1,547,722
    )
    
    (1,257,140
    )
    
    (785,938
    )Recoveries:Commercial,
      financial and agricultural
    
    
    56,558
    
    
    130,864
    
    
    25,759
    
    
    63,451
    
    
    -Real
      estate
    
    
    143,308
    
    
    45,581
    
    
    25,244
    
    
    24,720
    
    
    965Installment
      loans to individuals
    
    
    114,624
    
    
    125,179
    
    
    112,017
    
    
    105,671
    
    
    32,052Other
    
    
    6,743
    
    
    6,444
    
    
    9,134
    
    
    12,988
    
    
    3,955Total
      recoveries
    
    
    321,233
    
    
    308,068
    
    
    172,154
    
    
    206,830
    
    
    36,972Net
      charge-offs
    
    
    (490,959
    )
    
    (840,207
    )
    
    (1,375,568
    )
    
    (1,050,310
    )
    
    (748,966
    )Provision
      for loan losses
    
    
    482,500
    
    
    950,000
    
    
    1,307,000
    
    
    1,463,000
    
    
    955,000Balance
      of allowance for loanlosses
      at end of period
    
    $
    3,634,643
    
    $
    3,643,102
    
    $
    3,533,309
    
    $
    3,601,877
    
    $
    3,189,187Average
      amount of loans
    
    $
    268,041,043
    
    $
    282,142,667
    
    $
    306,940,750
    
    $
    333,320,432
    
    $
    346,749,588Ratio
      of net charge-offs duringthe
      period to average loansoutstanding
      during the period
    
    
    .18
    %
    
    .30
    %
    
    .45
    %
    
    .32
    %
    
    .22
    %Ratio
      of allowance tototal
      year-end loans
    
    
    1.29
    %
    
    1.37
    %
    
    1.15
    %
    
    1.11
    %
    
    .83
    %
 
 During
2004, charge-offs of real estate secured loans, consumer loans and commercial
loans which totaled approximately $427,000, $239,000 and $145,000, were offset
by recoveries of $143,000, $121,000 and $57,000, respectively. The number and
the average balance of charge-offs during 2004 and 2003 by category follows:
 
 2004
    
    2003Category
    
    Number
    
    Average
      Charge-off
    
    Number
    
    Average
      Charge-offReal
      estate
    
    
    15
    
    $
    28,466
    
    
    11
    
    $
    12,545Consumer
    
    
    55
    
    
    4,345
    
    
    143
    
    
    4,762Commercial
    
    
    10
    
    
    14,500
    
    
    11
    
    
    30,000
  During
2003, charge-offs of consumer loans, commercial loans and real estate secured
loans which totaled approximately $681,000, $330,000 and $138,000, were offset
by recoveries of $132,000, $131,000 and $45,000, respectively.
 
 The
risk associated with loans varies with the creditworthiness of the borrower, the
type of loan (consumer, commercial or real estate) and its maturity. Cash flows
adequate to support a repayment schedule is an element considered for all types
of loans. Real estate loans are impacted by market conditions regarding the
value of the underlying property used as collateral. Commercial loans are also
impacted by the management of the business as well as economic conditions.
 
 Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions, the
financial condition of borrowers and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
  
  **LOANS**
 
 The
amount of loans outstanding at December 31 for each of the last five years is
set forth in the following table according to type of loan and is net of
unamortized loan origination fees and unamortized discount on SBA loans sold.
The Company had no foreign loans at December 31 in any of the last five
years.
 
 **2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Commercial,
      financialand
      agricultural
    
    $
    16,673,310
    
    $
    14,651,171
    
    $
    17,070,602
    
    $
    23,921,875
    
    $
    25,566,931Real
      estate - construction
    
    
    79,683,839
    
    
    50,134,674
    
    
    106,759,853
    
    
    119,663,535
    
    
    113,201,531Real
      estate - mortgage
    
    
    170,504,085
    
    
    184,348,892
    
    
    162,281,200
    
    
    156,022,201
    
    
    218,040,964Installment
      loans to individuals
    
    
    13,927,123
    
    
    16,355,654
    
    
    21,294,151
    
    
    25,531,911
    
    
    25,287,734Total
    
    $
    280,788,357
    
    $
    265,490,391
    
    $
    307,405,806
    
    $
    325,139,522
    
    $
    382,097,160
 
 Loans
increased approximately $15.3 million or 5.76% at December 31, 2004 as compared
to December 31, 2003. Increases in real estate construction and commercial
lending totaling approximately $31.5 million were offset by maturity and payoffs
of real estate mortgages and consumer loans.
 
 Loans
decreased approximately $41.9 million or 13.63% in 2003 as compared to 2002.
Decreases in the real estate construction portfolio, primarily due to the
maturity and payoffs of construction loans in the Atlanta area that had been
originated by BMFC, were offset by new residential mortgages and commercial real
estate. Decreases also occurred in the commercial, financial and agricultural
portfolio and in the consumer lending portfolio due to interest rate and
economic pressures.
 
 The
following table sets forth the maturities and sensitivities to changes in
interest rates of loans at December 31, 2004.
 LOAN
      MATURITY:
    
    **DUE
      IN ONE YEAR**
    
    ******DUE
      AFTER**ONE
      THROUGH******FIVE
      YEARS**
    
    **DUE
      AFTER FIVE YEARS**
    
    **TOTAL**Commercial,
      financial and agricultural
    
    $
    12,942,660
    
    $
    3,680,756
    
    $
    49,894
    
    $
    16,673,310Real
      estate - construction
    
    
    78,303,434
    
    
    1,380,405
    
    
    -
    
    
    79,683,839Real
      estate - mortgage
    
    
    122,678,679
    
    
    47,110,075
    
    
    715,331
    
    
    170,504,085Installment
      loans to individuals
    
    
    5,431,841
    
    
    8,495,282
    
    
    -
    
    
    13,927,123TOTAL
    
    $
    219,356,614
    
    $
    60,666,518
    
    $
    765,225
    
    $
    280,788,357LOAN
      INTEREST RATE SENSITIVITY:Loans
      with:Predetermined
      interest rates
    
    $
    42,165,305
    
    $
    60,581,826
    
    $
    765,225
    
    $
    103,512,356Floating
      or adjustable interest rates
    
    
    177,191,309
    
    
    84,692
    
    
    -
    
    
    177,276,001TOTAL
    
    $
    219,356,614
    
    $
    60,666,518
    
    $
    765,225
    
    $
    280,788,357
 
  **NONPERFORMING
ASSETS AND PAST DUE LOANS**
 
 Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due,
restructured loans, and other real estate owned.
 
 The
following table sets forth the totals of nonperforming assets, selected ratios,
and accruing loans past due 90 days or more at December 31 for each of the last
five years.
 
 **NONPERFORMING
      ASSETS:**
    
    **2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Accruing
      loans 90 days past due
    
    $
    381,670
    
    $
    503,954
    
    $
    2,178,898
    
    $
    3,031,122
    
    $
    1,814,820Nonaccrual
    
    
    3,252,464
    
    
    2,299,796
    
    
    2,115,485
    
    
    2,097,964
    
    
    789,341Restructured
      loans
    
    
    119,031
    
    
    26,217
    
    
    492,064
    
    
    689,510
    
    
    709,787Other
      real estate owned
    
    
    1,289,880
    
    
    2,634,673
    
    
    3,197,020
    
    
    4,685,704
    
    
    1,579,245Total
      nonperforming assets
    
    $
    5,043,045
    
    $
    5,464,640
    
    $
    7,983,467
    
    $
    10,504,300
    
    $
    4,893,193**RATIOS:**Nonperforming
      loans (excludingrestructured
      loans) to total loans
    
    
    1.29
    %
    
    1.06
    %
    
    1.40
    %
    
    1.58
    %
    
    .68
    %Nonperforming
      assets to total loans plus other real estate owned
    
    
    1.79
    %
    
    2.04
    %
    
    2.57
    %
    
    3.18
    %
    
    1.28
    %Allowance
      to nonperforming loans
    
    
    96.84
    %
    
    128.73
    %
    
    73.82
    %
    
    61.90
    %
    
    96.24
    %
 
 Nonperforming
assets decreased approximately $422,000 or 7.72% from December 31, 2003 to
December 31, 2004. The decrease was primarily due to decreases in other real
estate owned and accruing loans 90 days past due of approximately $1,345,000 and
$122,000, respectively, offset by increases in nonaccrual and restructured loans
of approximately $953,000 and $93,000, respectively.
 
 Most
of the classifications of nonperforming assets decreased at December 31, 2003
compared to December 31, 2002 with the exception of nonaccrual loans. Accruing
loans over 90 days past due at December 31, 2002 consisted primarily of twenty
loans collateralized with residential properties which were moved into the other
real estate or collected. At December 31, 2003, accruing loans 90 days past due
consisted of five real estate secured loans of approximately $263,000 with the
remainder in consumer and commercial loans of approximately $126,000 and
$114,000, respectively.
 
 The
Company had impaired loans of $3,252,464 and $2,299,796 at December 31, 2004 and
2003, respectively. Impaired loans consist of loans on nonaccrual status. The
increase is the net result of the following changes:
 
 Balance
      at December 31, 2003
    
    $
    2,299,796Loans
      reclassified to non-accrual status
    
    
    3,571,859Payments
      received on non-accrual loans
    
    
    (576,573
    )Nonaccrual
      loans charged-off
    
    
    (493,111
    )Nonaccrual
      loans reclassified to other real estate
    
    
    (706,735
    )Nonaccrual
      loans reclassified to repossession
    
    
    (5,000
    )Nonaccrual
      loan reclassified back to accrual status
    
    
    (837,772
    )Balance
      at December 31, 2004
    
    $
    3,252,464
 
 The
increase in loans on nonaccrual status during 2004 was primarily due to the
movement of one loan collateralized by multi-family residential property of
approximately $2,471,000 to nonaccrual status during December 2004. Other
additions to loans on nonaccrual status consisted of loans secured by
residential properties, consumer loans and commercial loans totaling
approximately $939,000, $132,000 and $29,000, respectively.
  
  The
increase in loans on nonaccrual status during 2003 was primarily due to the
movement of approximately $1,633,000 of loans collateralized by 1-4 family
residential properties to nonaccrual status during 2003.
 
 Restructured
loans increased during 2004 due to the restructuring of two loans secured by
residential real estate of approximately $119,000, offset by one loan of
approximately $26,000 which was paid off.
 
 Restructured
loans decreased during 2003 due to the reclassification of one note of
approximately $492,000 and one note of approximately $26,000 classified as a
restructured loan.
 
 The
Company’s other real estate totaled $1.3 million and $2.6 million at December
31, 2004 and 2003, respectively. The decrease was primarily due to the sale of
thirteen properties totaling approximately $2.1 million, offset by foreclosure
of six mortgages secured by residential property of approximately $684,501 and
additional expenses to complete construction of $112,508. At December 31, 2004,
a reserve for other real estate totaling $30,000 was established. Our Other Real
Estate Owned (“OREO”) procedures provide that a foreclosure appraisal be
obtained which provides a fair market value and a disposition (quick sale)
value. The disposition value is the valuation used to place the property into
OREO. Any difference between the disposition value and the loan balance is
recommended for charge-off. Once the property is in OREO, the property is listed
with a realtor to begin sales efforts.
 
 During
2003, additions to other real estate of approximately $1.7 million were offset
by sales of other real estate of approximately $2.2 million. At December 31,
2003, other real estate consisted of three properties of approximately $1.6
million which are secured by commercial real estate and thirteen properties of
approximately $1 million which are secured by residential
properties.
 
 Accrual
of interest is discontinued when either principal or interest becomes 90 days
past due unless the loan is both well secured and in the process of collection,
or in management's opinion, when reasonable doubt exists as to the full
collection of interest or principal. Interest income that would have been
recorded on these nonaccrual and restructured loans in accordance with their
original terms totaled $271,446, $217,088 and $298,461 in 2004, 2003 and 2002,
respectively, compared with interest income recognized of $169,648, $113,450 and
$91,914, respectively.
 
 At
December 31, 2004, the Company had no significant loans which management
designated as potential problem loans which have not been disclosed above as
nonaccrual or past due loans.
 
 Habersham
Bank held a concentration in mortgages for agribusiness purposes in the poultry
industry which totaled approximately $5.9 million and $5.7 million at December
31, 2004 and 2003, or approximately 2.13% and 2.18% of total net loans at
December 31, 2004 and 2003, respectively. These mortgages for agribusiness
purposes are primarily secured by real estate consisting of residences, poultry
houses, and equipment. None of the mortgages are considered individually
significant. Habersham Bank held a concentration in commercial loans for the
travel accommodation industry which total approximately $22 million and $19.7
million, or approximately 7.94% and 7.52% of total net loans at December 31,
2004 and 2003, respectively. These loans are primarily secured by commercial
real estate.
  
  **INVESTMENT
SECURITIES**
 
 The
Company has classified its investment securities as available for sale and held
to maturity. The classification of certain investment securities as available
for sale is consistent with the Company's investment philosophy of maintaining
flexibility to manage the securities portfolio. At December 31, 2004
approximately $70.3 million of investment securities were classified as
available for sale. Approximately $34,805 of net unrealized loss, net of income
taxes, was included in shareholders' equity related to available for sale
investment securities.
 
 The
following table sets forth the carrying amounts of investment securities at
December 31, 2004, 2003, and 2002.
 
 **2004**
    
    **2003**
    
    **2002**Investment
      securities available for sale:U.S.
      Treasury
    
    $
    14,621,301
    
    $
    14,667,221
    
    $
    514,608U.S.
      Government agencies
    
    
    41,005,664
    
    
    45,272,660
    
    
    41,589,860State
      & political subdivisions
    
    
    14,017,690
    
    
    12,194,882
    
    
    12,011,458Other
      investments
    
    
    668,830
    
    
    677,868
    
    
    702,974Total
    
    $
    70,313,485
    
    $
    72,812,631
    
    $
    54,818,900Investment
      securities held to maturity:U.S.
      Government agencies
    
    $
    144,900
    
    $
    193,008
    
    $
    248,840State
      & political subdivisions
    
    
    3,966,141
    
    
    4,666,705
    
    
    6,640,464Total
    
    $
    4,111,041
    
    $
    4,859,713
    
    $
    6,889,304
 
 The
following table sets forth the maturities of debt investment securities at
carrying value at December 31, 2004 and the related weighted yields.
 
 **MATURING
      IN****ONE
      YEAR OR LESS**
    
    **1-5
      YEARS**
    
    **5-10
      YEARS**
    
    **AFTER
      10 YEARS**Investment
      securities available for sale:Carrying
      value:U.S.
      Treasury
    
    $
    -
    
    $
    1,734,694
    
    $
    8,626,960
    
    $
    4,259,647U.S.
      Government agencies
    
    
    -
    
    
    691,628
    
    
    4,809,525
    
    
    35,504,511State
      & political subdivisions
    
    
    100,084
    
    
    1,615,888
    
    
    3,927,505
    
    
    8,374,213Weighted
      average yields:U.S.
      Treasury
    
    
    -
    %
    
    3.32
    %
    
    3.30
    %
    
    3.96
    %U.S.
      Government agencies
    
    
    -
    %
    
    3.50
    %
    
    3.69
    %
    
    4.44
    %State
      & political subdivisions
    
    
    4.40
    %
    
    4.07
    %
    
    4.63
    %
    
    4.40
    %Investment
      securities held to maturity:Carrying
      value:U.S.
      Government agencies
    
    $
    -
    
    $
    51,006
    
    $
    73,363
    
    $
    20,531State
      & political subdivisions
    
    
    375,294
    
    
    1,312,893
    
    
    1,059,391
    
    
    1,218,563Weighted
      average yields:U.S.
      Government agencies
    
    
    -
    %
    
    6.25
    %
    
    8.35
    %
    
    5.90
    %State
      & political subdivisions
    
    
    4.87
    %
    
    4.62
    %
    
    4.66
    %
    
    4.97
    %
  
  No
securities were held which represent a combined total for one issuer which is in
excess of 10% of the Company's shareholders’ equity at December 31, 2004.
 
 
 **DERIVATIVE
INSTRUMENTS**
 
 At
December 31, 2003, other than a minimal amount of interest rate lock commitments
to originate mortgage loans for resale, the Company did not have any derivative
instruments.
 
 During
2004, Habersham Bank entered into two interest rate swap agreements with Compass
Bank to partially offset the interest rate risk associated with variable rate
Federal Home Loan Bank (“FHLB”) borrowings. Each FHLB loan amount is $3 million
with a quarterly adjustable rate set at 23 basis points above the three month
LIBOR. The first swap contract was entered into during the second quarter and is
for a 4.5% fixed rate on a $3 million notional amount. The swap matures on May
21, 2009. The second swap contract was entered into during the third quarter of
2004 and is for a 4.05% fixed rate on a $3 million notional amount. The swap
matures on August 26, 2009.
 
 At
December 31, 2004, the swaps are being accounted for as cash flow hedges and the
fair values are included in other comprehensive income, net of taxes. At
December 31, 2004, Habersham Bank recorded a liability for approximately
$123,000 to reflect the fair value of the swaps. No hedge ineffectiveness from
these cash flow hedges was recognized in the consolidated statement of earnings.
 
 Refer
to Note 13 of the consolidated financial statements for a more complete
description of the use of derivatives and hedging activities.
 
 
 **DEPOSITS**
 
 Average
deposits decreased approximately $10.9 million and $40 million during 2004 and
2003, respectively.
 
 The
following table sets forth the average amount of deposits and average rate paid
on such deposits for each category which exceeds 10% of average total deposits
for the years ended December 31, 2004, 2003 and 2002.
 
 2004
    
    2003
    
    2002AVG.
      AMT
    
    
    
    AVG.
      AMT
    
    
    
    AVG.
      AMTOUTSTANDING
    
    AVG
      RATE
    
    OUTSTANDING
    
    AVG
      RATE
    
    OUTSTANDING
    
    AVG
      RATEInterest-bearing
      demand deposits
    
    $
    64,767,791
    
    
    .66
    %
    $
    57,534,840
    
    
    .62
    %
    $
    53,770,339
    
    
    .92
    %Saving
      deposits
    
    
    10,079,223
    
    
    .24
    %
    
    9,298,757
    
    
    .45
    %
    
    7,947,215
    
    
    .80
    %Noninterest-bearing
      demand deposits
    
    
    43,795,027
    
    
    n/a
    
    
    39,691,635
    
    
    n/a
    
    
    36,264,247
    
    
    n/aTime
      deposits
    
    
    165,829,698
    
    
    2.59
    %
    
    188,858,305
    
    
    3.10
    %
    
    237,423,845
    
    
    3.90
    %Total
      average deposits
    
    $
    284,471,739
    
    
    
    
    $
    295,383,537
    
    
    
    
    $
    335,405,646
 
 At
December 31, 2004, time certificates of deposit of $100,000 or more totaled
$67,878,559. The maturities of all time certificates of deposit over $100,000
are as follows:
 
 3
      months or less
    
    $
    10,550,419Over
      3 but less than 6 months
    
    
    22,233,435Over
      6 but not more than 12 months
    
    
    15,256,871Over
      1 year but not more than 5 years
    
    
    19,837,834TOTAL
    
    $
    67,878,559
 
 
  **BORROWINGS**
 
 Total
borrowings decreased approximately $1.3 million during 2004 compared to 2003
primarily due to decreases in securities sold under repurchase agreements of
approximately $7.5 million offset by increases in Federal Home Loan Bank
advances of $6 million.
 
 At
December 31, 2004, the Company has a Daily Rate Credit line and a Warehouse line
of credit with the Federal Home Loan Bank (“FHLB”) totaling $230,833,000 of
which $36,000,000 was advanced and $194,833,000 was available. Both of these
lines of credit have specific collateral agreements. The Daily Rate Credit line
is secured by qualifying first mortgage loans, commercial loans, and pledged
securities. The Warehouse line of credit is secured by qualifying first mortgage
loans. Habersham Bank has both fixed rate advances and variable rate credit
advances at December 31, 2004. The fixed rate advances outstanding at December
31, 2004 and 2003 consist of three fixed rate advances of $10,000,000 each that
bear interest at 6.72%, 6.02% and 4.93% and mature in 2005, 2010 and 2011
(callable each year), respectively. During 2004, Habersham Bank entered into two
$3 million variable rate credit advances with quarterly adjustable rates set at
23 basis points above the three month LIBOR with maturity dates of May and
August of 2009.
 
 At
December 31, 2004, the Company had available repurchase agreement line of credit
commitments with Compass Bank totaling $10,085,000 of which none was advanced.
The Company also had available repurchase agreement line of credit commitments
with the National Bank of Commerce totaling $1,667,000 at December 31, 2004 of
which none was advanced.
 
 
 **CAPITAL
RESOURCES**
 
 The
Company is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimal capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company’s
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
 
 Quantitative
measures established by regulations to ensure capital adequacy require the
Company to maintain minimum amounts and ratios (set forth below in the table) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2004, that the Company meets all capital
adequacy requirements to which it is subject.
 
 As
of December 31, 2004, the most recent notifications from both the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank’s categories.
  
  The
Company’s and the Bank’s actual capital amounts and ratios as of December 31,
2004 follow (in thousands):
 
 ****
    
    **TO
      BE WELL CAPITALIZED UNDER****ACTUAL**
    
    **FOR
      CAPITAL ADEQUACY PURPOSES**
    
    **PROMPT
      CORRECTIVE ACTION PROVISIONS****AMOUNT**
    
    **RATIO**
    
    **AMOUNT**
    
    **RATIO**
    
    **AMOUNT**
    
    **RATIO**As
      of December 31, 2004Total
      Capital (to risk-weighted assets):Company
    
    $
    49,214
    
    
    15.91
    %
    $
    24,749
    
    
    8
    %
    
    N/A
    
    
    N/AHabersham
      Bank
    
    
    46,840
    
    
    15.24
    %
    
    24,580
    
    
    8
    %
    $
    30,725
    
    
    10
    %Tier
      I Capital (to risk-weighted assets):Company
    
    $
    45,579
    
    
    14.73
    %
    $
    12,374
    
    
    4
    %
    
    N/A
    
    
    N/AHabersham
      Bank
    
    
    43,205
    
    
    14.06
    %
    
    12,290
    
    
    4
    %
    $
    18,435
    
    
    6
    %Tier
      I Capital (to average assets):Company
    
    $
    45,579
    
    
    11.62
    %
    $
    15,689
    
    
    4
    %
    
    N/A
    
    
    N/AHabersham
      Bank
    
    
    43,205
    
    
    11.08
    %
    
    15,591
    
    
    4
    %
    $
    19,488
    
    
    5
    %
 
 While
management believes that the current level of capital is sufficient for the
current and foreseeable needs of the Company, capital needs are continually
evaluated by management.
 
 Cash
dividends were paid at a rate of $.07 per share in March, June, September and
December of 2004, with a special dividend of $1.00 per share paid in May of
2004. The special dividend was paid in celebration of Habersham Bank’s 100th
anniversary.
 
 Cash
dividends were paid at a rate of $.06 per share in March, June and September of
2003, with a special dividend of $1.00 per share paid in December of 2003. The
special dividend was paid in celebration of Habersham Bank’s impending 100th
anniversary and in light of the favorable tax treatment of dividend income under
recent tax law changes.
 
 Management
is not aware of any required regulatory changes or any recommendation by any
regulatory authority which will have a material effect on the Company's
liquidity, capital or results of operations.
 
 The
approval of the Georgia Department of Banking and Finance is required if
dividends declared by the Bank to the Company in any year will exceed 50% of the
net earnings of the Bank for the previous calendar year. As of December 31,
2004, the Bank could declare dividends to the Company up to approximately
$1,572,000 without regulatory approval.
 
 
 **INTEREST
RATE SENSITIVITY**
 
 The
objective of asset and liability management is to manage and measure the level
and volatility of earnings and capital by controlling interest rate risk. To
accomplish this objective, management makes use of interest rate and income
simulation models to perform current and dynamic projections of interest income
and equity, as well as more traditional asset and liability management methods.
 
 The
Company’s historical performance in various economic climates is considered by
management in making long-term asset and liability decisions for the
Company.
  
  The
relative interest rate sensitivity of the Company’s assets and liabilities
indicates the extent to which the Company’s net interest income may be affected
by interest rate movements. The Company’s ability to reprice assets and
liabilities in the same dollar amounts and at the same time minimizes interest
rate risks. One method of measuring the impact of interest rate changes on net
interest income is to measure, in a number of time frames, the interest
sensitivity gap by subtracting interest sensitive liabilities from interest
sensitive assets, as reflected in the following table. Such an interest
sensitivity gap represents the risk, or opportunity, in repricing. If more
assets than liabilities are repriced at a given time in a rising rate
environment, net interest income improves; in a declining rate environment, net
interest income deteriorates. Conversely, if more liabilities than assets are
repriced while interest rates are rising, net interest income deteriorates; if
interest rates are falling, net interest income improves.
 
 **INTEREST
RATE SENSITIVITY ANALYSIS**
 
 **INTEREST-EARNING
      ASSETS:**
    
    ****DUE
      IN**THREE MONTHS**
    
    ******DUE
      AFTER**THREE THROUGH**SIX
      MONTHS**
    
    ******DUE
      AFTER**SIX THROUGH** TWELVE
      MONTHS**
    
    ******DUE
      AFTER**ONE THROUGH**FIVE
      YEARS**
    
    ****DUE
      AFTER**FIVE YEARS**
    
    **TOTAL**Investment
      securities
    
    $
    375,390
    
    $
    136,532
    
    $
    13,552
    
    $
    5,901,257
    
    $
    67,997,795
    
    $
    74,424,526Loans
    
    
    180,643,451
    
    
    13,722,212
    
    
    24,990,951
    
    
    60,666,518
    
    
    765,225
    
    
    280,788,357Total
      interest-earning assets
    
    
    181,018,841
    
    
    13,858,744
    
    
    25,004,503
    
    
    66,567,775
    
    
    68,763,020
    
    
    355,212,883**INTEREST-BEARING
      LIABILITIES:**Deposits:Money
      market and NOW
    
    
    66,381,857
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    66,381,857Savings
    
    
    10,516,549
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    10,516,549Certificates
      of deposit
    
    
    25,204,618
    
    
    57,558,006
    
    
    34,641,970
    
    
    54,307,217
    
    
    30,601
    
    
    171,742,412Borrowings
    
    
    5,620,667
    
    
    10,000,000
    
    
    -
    
    
    6,000,000
    
    
    20,000,000
    
    
    41,620,667Total
      interest-bearing liabilities
    
    
    107,723,691
    
    
    67,558,006
    
    
    34,641,970
    
    
    60,307,217
    
    
    20,030,601
    
    
    290,261,485Excess
      (deficiency) of interest-earning assets
      over
      interest- bearing liabilities
    
    $
    73,295,150
    
    $
    (53,699,262
    )
    $
    (9,637,467
    )
    $
    6,260,558
    
    $
    48,732,419
    
    $
    64,951,398Cumulative
      gap
    
    $
    73,295,150
    
    $
    19,595,888
    
    $
    9,958,421
    
    $
    16,218,979
    
    $
    64,951,398Ratio
      of cumulative gap tototal
      cumulative earning- assets
    
    
    40.49
    %
    
    10.06
    %
    
    4.53
    %
    
    5.66
    %
    
    18.29
    %Ratio
      of interest-earningassets
      to interest-bearing liabilities
    
    
    168.04
    %
    
    111.18
    %
    
    104.74
    %
    
    106.00
    %
    
    122.38
    %
 The
Company’s strategy is to maintain a ratio of interest sensitive assets to
interest sensitive liabilities in the range of 80% to 120% at the less-than
one-year-time frame. At December 31, 2004, the Company was able to meet such
objective. The interest rate sensitivity analysis has a positive one-year gap of
approximately $9.9 million (excess of interest-earning assets to
interest-bearing liabilities repricing within one year). The Company’s
experience has shown that NOW, money market, and savings deposits of
approximately $76.9 million are less sensitive to short term rate movements.
  **MARKET
RISK**
 
 Market
risk reflects the risk of economic loss resulting from adverse changes in market
prices and interest rates. The risk of loss can be reflected in either
diminished current market values or reduced potential net interest income in
future periods.
  
  Market
risk arises primarily from interest rate risk inherent in the Company’s lending
and deposit taking activities. The structure of the Company’s loan and deposit
portfolios is such that a significant decline in the prime rate may adversely
impact net market values and interest income. Management seeks to manage this
risk through the use of its investment securities portfolio. The composition and
size of the investment portfolio is managed so as to reduce the interest rate
risk in the deposit and loan portfolios while at the same time maximizing the
yield generated from the portfolio. The Company is also subject to equity risk
as a result of changes in market values of its equity securities.
 
 The
table below presents in tabular form the contractual balances and the estimated
fair value of the Company’s balance sheet fixed rate financial instruments and
their expected maturity dates as of December 31, 2004. Variable rate financial
instruments are presented at their next rate change date. The expected maturity
categories take into consideration historical prepayments experience as well as
management’s expectations based on the interest rate environment as of December
31, 2004.
  **MARKET
RISK INFORMATION (in thousands)**
 **Principal/Notional
      Amount Maturing in:****2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**
    
    **Thereafter**
    
    **Total**
    
    **Fair
      Value****Rate-sensitive
      assets:**Fixed
      interest rate loans
    
    $
    42,165
    
    $
    40,804
    
    $
    12,335
    
    $
    5,241
    
    $
    2,202
    
    $
    765
    
    $
    103,512
    
    $
    103,299Average
      interest rate
    
    
    6.41
    %
    
    6.37
    %
    
    6.96
    %
    
    7.00
    %
    
    6.30
    %
    
    8.50
    %
    
    6.50
    %Variable
      interest rate loans
    
    
    177,191
    
    
    -
    
    
    85
    
    
    -
    
    
    -
    
    
    -
    
    
    177,276
    
    
    177,276Average
      interest rate
    
    
    5.92
    %
    
    -
    %
    
    5.92
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    5.92
    %Fixed
      interest rate securities
    
    
    475
    
    
    310
    
    
    1,442
    
    
    1,811
    
    
    1,844
    
    
    66,836
    
    
    72,718
    
    
    72,976Average
      interest rate
    
    
    4.77
    %
    
    3.93
    %
    
    3.99
    %
    
    4.02
    %
    
    3.74
    %
    
    4.24
    %
    
    4.22
    %Variable
      interest rate securities
    
    
    50
    
    
    -
    
    
    -
    
    
    495
    
    
    -
    
    
    493
    
    
    1,038
    
    
    1,039Average
      interest rate
    
    
    3.53
    %
    
    -
    %
    
    -
    %
    
    4.03
    %
    
    -
    %
    
    4.00
    %
    
    3.99
    %**Rate-sensitive
      liabilities**:Savings
      and interest-bearing deposits
    
    
    76,898
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    76,898
    
    
    76,898Average
      interest rate
    
    
    .41
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    .41
    %Fixed
      interest rate time deposits
    
    
    117,387
    
    
    26,740
    
    
    14,234
    
    
    12,064
    
    
    1,286
    
    
    31
    
    
    171,742
    
    
    172,642Average
      interest rate
    
    
    2.26
    %
    
    3.90
    %
    
    3.28
    %
    
    3.65
    %
    
    4.17
    %
    
    2.84
    %
    
    2.71
    %Fixed
      interest rate Borrowings
    
    
    10,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    20,000
    
    
    30,000
    
    
    31,834Average
      interest rate
    
    
    6.72
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    5.48
    %
    
    5.89
    %Variable
      interest rate borrowings
    
    
    5,621
    
    
    -
    
    
    -
    
    
    -
    
    
    6,000
    
    
    -
    
    
    11,621
    
    
    11,743Average
      interest rate
    
    
    1.06
    %
    
    -
    %
    
    -
    %
    
    -
    %
    
    2.59
    %
    
    -
    %
    
    1.85
    %
 Equity
securities of $750,000 are subject to changes in market values.
 
 
 **INFLATION**
 
 The
Company's assets and liabilities are generally monetary in nature. Therefore,
interest rates have a greater impact on the Company's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or magnitude as the prices of goods and services. See
“Interest Rate Sensitivity” above.
  
  **LIQUIDITY**
 
 Liquidity
management involves the matching of the cash flow requirements of customers,
either depositors withdrawing funds or borrowers needing loans, and the ability
of the Company to meet those requirements.
 
 The
Company's liquidity program is designed and intended to provide guidance in
funding the credit and investment activities of the Company while at the same
time ensuring that the deposit obligations of the Company are met on a timely
basis. In order to permit active and timely management of assets and
liabilities, these accounts are monitored regularly in regard to volume, mix,
and maturity.
 
 Scheduled
amortization and prepayments of loans, maturities and calls of investment
securities and funds from operations provide a daily source of liquidity. In
addition, the Company may and does seek outside sources of funds.
 
 The
Company has the ability, on a short-term basis, to purchase federal funds from
other financial institutions up to $30,000,000. At December 31, 2004, federal
funds purchased from other financial institutions total $547,000. The Company
can borrow funds from the FHLB, subject to eligible collateral of loans. At
December 31, 2004, our maximum borrowing capacity from the FHLB was $230,833,000
and the Company had outstanding borrowings of $36,000,000 leaving available
unused borrowing capacity of $194,833,000. In addition, the Company has made
arrangements with commercial banks for short-term advances up to $11,752,000
under repurchase agreement lines of credit of which none was advanced at
December 31, 2004.
 
 Loan
repayments and maturing investment securities are a relatively predictable
source of funds. However, deposit flows, calls of investment securities and
prepayment of loans are strongly influenced by interest rates, general and local
economic conditions, and competition in the marketplace. These factors reduce
the predictability of the timing of these sources of funds.
 
 Habersham
Bank's liquidity policy requires a minimum ratio of 20% of cash and certain
short-term investments to net withdrawable deposit accounts. The Bank’s
liquidity ratios at December 31, 2004 and 2003 were 28.30% and 33.50%,
respectively.
 
 
 **OFF-BALANCE
SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS**
 
 The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of its lending activities to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. The Company’s exposure to credit losses in the event
of nonperformance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the contractual
amounts of those instruments. The Company uses the same credit policies in
making these commitments as it does for on-balance-sheet instruments and
evaluates each customer’s creditworthiness on a case by case basis. At December
31, 2004, the Company had outstanding loan commitments approximating $57,125,000
and standby letters of credit approximating $8,522,000. The amount of collateral
obtained, if deemed necessary, for these financial instruments by the Company,
upon extension of credit, is based on management’s credit evaluation of the
customer. Collateral held, if any, varies but may include inventory, equipment,
real estate, or other property. The accounting loss the Company would incur if
any party to the financial instrument failed completely to perform according to
the term of the contract and the collateral proved to be of no value is equal to
the face amount of the financial instrument.
  
  The
Company’s commitments are funded through internal funding sources of scheduled
repayments of loans and sales and maturities of investment securities available
for sale or external funding sources through acceptance of deposits from
customers or borrowing from other financial institutions.
 
 The
following table is a summary of the Company’s commitments to extend credit,
commitments under contractual leases as well as the Company’s contractual
obligations, consisting of deposits, FHLB advances and borrowed funds by
contractual maturity date.
  **2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**Commitments
      to fund loans held for sale
    
    $
    2,860,101
    
    
    -
    
    
    -
    
    
    -
    
    
    -Commitments
      on lines of credit
    
    
    54,264
      899
    
    
    -
    
    
    -
    
    
    -
    
    
    -Standby
      letters of credit
    
    
    8,522,309
    
    
    -
    
    
    -
    
    
    -
    
    
    -Commitments
      under lease agreements
    
    
    292,545
    
    
    284,329
    
    
    259,597
    
    
    240,481
    
    
    191,549Deposits
    
    
    238,602,239
    
    
    26,740,549
    
    
    14,234,179
    
    
    12,063,789
    
    
    1,316,465FHLB
      advances
    
    
    10,000,000
    
    
    -
    
    
    -
    
    
    -
    
    
    6,000,000Short-term
      borrowings
    
    
    786,036
    
    
    -
    
    
    -
    
    
    -
    
    
    -Federal
      funds purchased and securities sold
      under
      repurchased agreements
    
    
    4,834,631
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      commitments and contractual obligations
    
    $
    320,162,760
    
    $
    27,024,878
    
    $
    14,493,776
    
    $
    12,304,270
    
    $
    7,508,014
 Although
management regularly monitors the balance of outstanding commitments to fund
loans to ensure funding availability should the need arise, management believes
that the risk of all customers fully drawing on all these lines of credit at the
same time is remote.
 
 
 Item
7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 See
“Market Risk” under Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
 
 
 Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The
consolidated balance sheets of the Company and subsidiaries as of December 31,
2004 and 2003, the related consolidated statements of earnings, changes in
stockholders’ equity, comprehensive income, and cash flows and notes to the
consolidated financial statements for each of the years in the three year period
ended December 31, 2004, the report issued thereon by the Company’s independent
auditors and quarterly financial data (unaudited) are incorporated herein by
reference to the Company’s 2004 Annual Report to Shareholders and are attached
as Exhibit 13 hereto.
 
 Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
  
  Item
9A. CONTROLS AND PROCEDURES
 
 As
of the end of the period covered by this report, the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer,
reviewed and evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company, (including its consolidated subsidiaries) that is
required to be included in the Company’s periodic filings with the Securities
and Exchange Commission. There have been no significant changes in the Company’s
internal controls or, to management’s knowledge, in other factors that could
significantly affect those internal controls during the last fiscal quarter of
2004, and there have been no corrective actions with respect to significant
deficiencies or material weaknesses.
 
 Item
9B. OTHER INFORMATION
 
 None.
 
 PART
III
 
 Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
 The
Company has a Code of Ethics that applies to its senior management, including
its Chief Executive Officer, Chief Financial Officer and Comptroller. See
Exhibit 14 hereto.
 
 Additional
information concerning the Company's directors and executive officers appears in
the Proxy Statement under the headings "Election of Directors-Nominees,”
-“Compliance with Section 16(a) of the Exchange Act” and "Executive Officers"
and is incorporated by reference herein.
 
 Item
l1. EXECUTIVE COMPENSATION
 
 Additional
information concerning the compensation of the Company's management appears in
the Proxy Statement under the headings "Executive Compensation" and “Election of
Directors - Compensation of Directors” and is incorporated by reference
herein.
  
  Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER Matters
 
 The
following table provides information regarding compensation plans under which
equity securities of the Company are authorized for issuance. All data is
presented as of December 31, 2004.
 
 **Equity
      Compensation Plan Table**(a)
    (b)
    (c)Plan
      category
    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
    Weighted-average
      exercise price of outstanding options, warrants and rights
    Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
    314,500
    $19.41
    396,549Equity
      compensation plans not approved by security holders
    0
    0
    0Total
    314,500
    $19.41
    396,549
  Additional
information concerning beneficial owners of more than 5% of the Company's stock
and information concerning the stock owned by the Company's management appears
in the Proxy Statement under the heading "Ownership of Stock" and is
incorporated by reference herein.
 
 
 Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 Information
concerning certain relationships and related transactions appears in the Proxy
Statement under the heading "Certain Transactions" and is incorporated by
reference herein.
 
 
 Item
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Information
concerning principal accountant fees and services appears in the Proxy Statement
under the heading “Audit Committee Matters - Audit Fees” and is incorporated
herein by reference.
 
 
 PART
IV
 
 Item
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
 
 (a)
    See
      Item 8 for a list of the financial statements filed as a part of this
      report. No financial statement schedules are applicable as the required
      information is included in the financial statements in Item
    8.
  
  The
registrant submits herewith as exhibits to this report on Form 10-K the exhibits
required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the
Securities Exchange Act of 1934.

Exhibit
      No.
    Document


3.1
    Amended
      and restated Articles of Incorporation of Habersham Bancorp, as amended by
      amendment dated April 16, 1988 (1) and further amended by amendment dated
      April 15, 2000 (2)

3.2
    By-laws
      of Habersham Bancorp, as amended by resolutions dated January 29,
      2000

10.1*
    Habersham
      Bancorp Savings Investment Plan, as amended and restated March 17, 1990,
      and the related Trust Agreements, as amended March 17, 1990.
      (3)

10.2
    Form
      of Director Supplemental Retirement Plan Agreement and Split Dollar
      Endorsement, with summary of terms specific to each director.

10.3*
    Habersham
      Bancorp Outside Directors Stock Option Plan (4), as amended January 17,
      2004. (5)

10.3(a)*
    Form
      of option agreement under Habersham Bancorp Outside Directors Stock Option
      Plan.

10.4*
    Habersham
      Bancorp 1996 Incentive Stock Option Plan, as amended by the First
      Amendment thereto dated January 29, 2000.
(6)

10.4(a)*
    Form
      of incentive stock option agreement under Habersham Bancorp 1996 Incentive
      Stock Option Plan.

10.4(b)*
    Form
      of non-qualified stock option agreement under Habersham Bancorp 1996
      Incentive Stock Option Plan.

10.5*
    Form
      of Split Dollar Agreement and Collateral Assignment dated January 1, 1991,
      with summary of terms applicable to Mr. Ariail and Mr. Stovall.

13.0
    Financial
      statements and notes thereto contained in the Habersham Bancorp 2004
      Annual Report and quarterly financial data (unaudited).

14.0
    Code
      of Ethics. (8)

21.0
    Subsidiaries
      of Habersham Bancorp. (8)

23.1
    Consent
      of Porter Keadle Moore, LLP

23.2
    Consent
      of KPMG LLP

31.1
    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.

31.2
    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.

32.1
    Certification
      Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.

99.0
    Report
      of Independent Registered Public Accounting
Firm.
(1)Incorporated
herein by reference to exhibit 3(a) in Amendment No. 1 to Registrant's
Registration Statement on Form S-4 (Regis. No. 33-57915).

(2)Incorporated
herein by reference to exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 (File No. 0-13153).

(3)Incorporated
herein by reference to exhibit of same number in the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1989 (File No.
0-13153).

(4)Incorporated
herein by reference to exhibit of same number in the Registrant's Annual Report
on Form 10-KSB for the year ended December 31,1994 (File No. 0-13153).

(5)Incorporated
by reference to Appendix B to the Registrant’s 2004 Proxy Statement for its
Annual Meeting of Shareholders filed on Schedule 14A (File No.
0-13153).

(6)Incorporated
herein by reference to exhibit of same number in the Registrant’s Annual Report
on Form 10-KSB for the year ended December 31, 1995 (File No.
0-13153).

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

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



*
Indicates the Registrant’s plans, management contracts and compensatory
arrangements.
 
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 HABERSHAM BANCORP (Registrant)/s/ David D.
      Stovall
    Date: March
      30, 2005By:  Director, President andChief Executive Officer
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant in the capacities
and on the dates indicated.
 
 Signature
    
    Title
    
    Date/s/
      Thomas A. Arrendale, III
    
    Chairman
      of the Board and Director
    
    March
      30, 2005/s/
      David D. Stovall
    
    Director,
      President and Chief Executive Officer *
    
    March
      30, 2005/s/
      Edward D. Ariail
    
    Director,
      Vice President andCorporate
      Secretary
    
    March
      30, 2005/s/
      Michael C. Martin
    
    Director
    
    March
      30, 2005/s/
      James A. Stapleton, Jr.
    
    Director
    
    March
      30, 2005/s/
      Calvin R. Wilbanks
    
    Director
    
    March
      30, 2005/s/
      Michael L. Owen
    
    Director
    
    March
      30, 2005/s/
      Annette Banks
    
    Vice
      President and Chief Financial Officer **
    
    March
      30, 2005
  *
Principal executive officer.
 **
Principal financial and accounting officer.
  
 
 EXHIBIT
INDEX
 Exhibit
No.  Document
 
 3.1
    Amended
      and restated Articles of Incorporation of Habersham Bancorp, as amended by
      amendment dated
      April 16, 1998 (1) and as further amended by amendment dated April 15,
      2000. (2)
  3.2
    By-laws of Habersham Bancorp, as amended by resolutions
      dated January 29,2000
 
 10.1*
    Habersham
      Bancorp Savings Investment Plan, as amended and restated March 17, 1990,
      and the related
      Trust Agreements, as amended March 17, 1990. (3)
  10.2*
    Form of Director Supplemental Retirement Plan Agreement
      and Split Dollar Endorsement, with summary of terms specific to each
      director.
 
 10.3*
    Habersham
      Bancorp Outside Directors Stock Plan (4), as amended January 17, 2004.
      (5)
 
 10.3(a)*
    Form of option agreement under Habersham Bancorp
      Outside Directors Stock Option Plan.
 
 10.4*
    Habersham
      Bancorp 1996 Incentive Stock Option Plan, (6) as amended by the First
      Amendment thereto dated January 29, 2000.
(7)
 
 10.4(a)*
    Form of incentive stock option agreement under
      Habersham Bancorp 1996 Incentive Stock Option Plan.
 
 10.4(b)*
    Form of non-qualified stock option agreement under
      Habersham Bancorp 1996 Incentive Stock Option
Plan.
 
 10.5*
    Form of Split Dollar Agreement and Collateral Assignment
      dated January 1,1991, with summary of terms applicable to Mr. Ariail and
      Mr. Stovall.
 
 13.0
    Financial statements and notes thereto contained in the
      Habersham Bancorp 2004 Annual Report and quarterly financial data.
 
 14.0
    Code
      of Ethics. (8)
 
 21.0
    Subsidiaries
      of Habersham Bancorp (8)
 
 23.1
    Consent of Porter Keadle Moore, LLP
 
 23.2
    Consent of KPMG LLP
 
 31.1
    Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
 
 31.2
    Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
 
 32.1
    Certification Pursuant to 18 U.S.C. Section 1350 as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
 
 99.0
    Report
      of Independent Registered Public Accounting
Firm
  
  (1)
    Incorporated
      herein by reference to exhibit 3(a) in Amendment No. 1 to Registrant's
      Registration Statement on Form S-4 (Regis. No. 33-57915).
 
 (2)
    Incorporated
      herein by reference to exhibit 3.1 to Registrant’s Quarterly Report on
      Form 10-Q for the quarter ended March 31, 2000 (File No.
      0-13153).
 
 (3)
    Incorporated
      herein by reference to exhibit of same number in the Registrant's Annual
      Report on Form 10-K for the year ended December 31, 1989 (File No.
      0-13153).
 
 (4)
    Incorporated
      herein by reference to exhibit of same number in the Registrant's Annual
      Report on Form 10-KSB for the year ended December 31,1994 (File No.
      0-13153).
 
 (5)
    Incorporated
      by reference to Appendix B to the Registrant’s 2004 Proxy Statement for
      its Annual Meeting of Shareholders filed on Schedule 14A (File No.
      0-13153).
 
 (6)
    Incorporated
      herein by reference to exhibit of same number in the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31, 1995 (File No.
      0-13153).
  (7)
    Incorporated
      herein by reference to Appendix A to the Registrant’s 2000 Proxy Statement
      for its Annual Meeting of Shareholders filed on Schedule 14A (File No.
      0-13153).
 
 (8)
    Incorporated
      herein by reference to exhibit of same number in the Registrant’s Annual
      Report on Form 10-K for the year ended December 31, 2003 (File No.
      0-13153).
  *
Indicates the Registrant’s plans, management contracts and compensatory
arrangements.