SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D. C. 20549
 
 FORM
10-Q
 
 x  QUARTERLY REPORT
UNDER SECTION 13 OR 15(D) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 For the
quarterly period ended September 30, 2008
 
 TRANSITION
REPORT UNDER 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
                      (I.R.S.
      Employerincorporation
      or organization)
                      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:       Common Stock, $1.00 par
value
 
 Securities
registered pursuant to Section 12(g) of the Exchange Act: None
 
 Indicate
by check mark whether the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act.
 Yes  £     No  T
 
 Indicate
by check mark if the registrant is not required to file reports under Section 13
or Section 15(d) of the Act.
 Yes  £     No  T
 
 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  £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Exchange Act Rule 12b-2:
 
 Large
      accelerated filer  £
                    Accelerated
      filer  £Non-accelerated
      filer  £
                    Smaller
      reporting company  T
 (do not
check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  £     No  T
 
 State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
 
 2,818,593
shares, common stock, $1.00 par value, as of November 12, 2008.
  
 1
  Item.1
                  Financial
      Statements
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (dollars
in thousands)
 
 ASSETS
                                                        
                                                        SEPTEMBER
                                                          30, 2008
                                                          (unaudited)
                                                        
                                                        
                                                        DECEMBER
                                                          31,2007
                                                          (audited)Cash
      and due from banks
                                                        
                                                        $
                                                        10,689
                                                        
                                                        
                                                        $
                                                        18,196Federal
      funds sold
                                                        
                                                        
                                                        4,345
                                                        
                                                        
                                                        
                                                        4,189Total
      cash and cash equivalents
                                                        
                                                        
                                                        15,034
                                                        
                                                        
                                                        
                                                        22,385Investment
      securities available for sale
                                                        
                                                        
                                                        89,987
                                                        
                                                        
                                                        
                                                        89,890Investment
      securities held to maturity (estimated fair value of $1,514 at September
      30, 2008 and $2,752 at December 31, 2007)
                                                        
                                                        
                                                        1,486
                                                        
                                                        
                                                        
                                                        2,689Other
      investments
                                                        
                                                        
                                                        3,334
                                                        
                                                        
                                                        
                                                        3,409Loans
      held for sale
                                                        
                                                        
                                                        1,002
                                                        
                                                        
                                                        
                                                        1,866Loans
                                                        
                                                        
                                                        336,133
                                                        
                                                        
                                                        
                                                        350,388Less
      allowance for loan losses
                                                        
                                                        
                                                        (7,684
                                                        )
                                                        
                                                        
                                                        (2,137
                                                        )Loans,
      net
                                                        
                                                        
                                                        328,449
                                                        
                                                        
                                                        
                                                        348,251Premises
      and equipment, net
                                                        
                                                        
                                                        18,749
                                                        
                                                        
                                                        
                                                        16,081Other
      real estate
                                                        
                                                        
                                                        20,082
                                                        
                                                        
                                                        
                                                        11,498Cash
      surrender value of life insurance
                                                        
                                                        
                                                        9,837
                                                        
                                                        
                                                        
                                                        9,539Goodwill
                                                        
                                                        
                                                        3,550
                                                        
                                                        
                                                        
                                                        3,550Accrued
      interest receivable
                                                        
                                                        
                                                        2,144
                                                        
                                                        
                                                        
                                                        2,752Income
      tax receivable
                                                        
                                                        
                                                        2,810
                                                        
                                                        
                                                        
                                                        332Other
      assets
                                                        
                                                        
                                                        3,651
                                                        
                                                        
                                                        
                                                        2,309TOTAL
      ASSETS
                                                        
                                                        $
                                                        500,115
                                                        
                                                        
                                                        $
                                                        514,551LIABILITIESNoninterest-bearing
      deposits
                                                        
                                                        $
                                                        39,112
                                                        
                                                        
                                                        $
                                                        29,741Money
      market and NOW accounts
                                                        
                                                        
                                                        76,322
                                                        
                                                        
                                                        
                                                        96,237Savings
                                                        
                                                        
                                                        45,885
                                                        
                                                        
                                                        
                                                        60,076Time
      deposits, $100,000 and over
                                                        
                                                        
                                                        95,376
                                                        
                                                        
                                                        
                                                        116,044Other
      time deposits
                                                        
                                                        
                                                        130,582
                                                        
                                                        
                                                        
                                                        88,169Total
      deposits
                                                        
                                                        
                                                        387,277
                                                        
                                                        
                                                        
                                                        390,267Short-term
      borrowings
                                                        
                                                        
                                                        768
                                                        
                                                        
                                                        
                                                        766Federal
      funds purchased and securities sold under repurchase
      agreements
                                                        
                                                        
                                                        21,738
                                                        
                                                        
                                                        
                                                        26,184Federal
      Home Loan Bank advances
                                                        
                                                        
                                                        38,000
                                                        
                                                        
                                                        
                                                        38,000Other
      liabilities
                                                        
                                                        
                                                        4,807
                                                        
                                                        
                                                        
                                                        5,152TOTAL
      LIABILITIES
                                                        
                                                        
                                                        452,590
                                                        
                                                        
                                                        
                                                        460,369STOCKHOLDERS’
      EQUITYCommon
      Stock, $1.00 par value, 10,000,000 shares authorized; 2,818,593 shares
      issued and outstanding at September 30, 2008 and December 31,
      2007
                                                        
                                                        
                                                        2,819
                                                        
                                                        
                                                        
                                                        2,819Additional
      paid-in capital
                                                        
                                                        
                                                        13,490
                                                        
                                                        
                                                        
                                                        13,490Retained
      earnings
                                                        
                                                        
                                                        32,759
                                                        
                                                        
                                                        
                                                        38,135Accumulated
      other comprehensive loss
                                                        
                                                        
                                                        (1,543
                                                        )
                                                        
                                                        
                                                        (262
                                                        )TOTAL
      STOCKHOLDERS’ EQUITY
                                                        
                                                        
                                                        47,525
                                                        
                                                        
                                                        
                                                        54,182TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                        
                                                        $
                                                        500,115
                                                        
                                                        
                                                        $
                                                        514,551
 See notes
to unaudited condensed consolidated financial statements.
  2
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Uaudited)
For the Three-Month and Nine-Month Periods Ended September 30, 2008 and
2007
 (dollars
in thousands, except per share amounts)
 
 Three Months ended
                                                                        
                                                                        
                                                                        Nine Months endedSeptember 30,
                                                                        
                                                                        
                                                                        September 30,2008
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        2007INCOMELoan
      interest and fees on loans
                                                                        
                                                                        $
                                                                        5,076
                                                                        
                                                                        
                                                                        $
                                                                        8,123
                                                                        
                                                                        
                                                                        $
                                                                        17,042
                                                                        
                                                                        
                                                                        $
                                                                        24,194Taxable
      investment securities
                                                                        
                                                                        
                                                                        916
                                                                        
                                                                        
                                                                        
                                                                        769
                                                                        
                                                                        
                                                                        
                                                                        2,626
                                                                        
                                                                        
                                                                        
                                                                        2,286Tax
      exempt securities
                                                                        
                                                                        
                                                                        192
                                                                        
                                                                        
                                                                        
                                                                        276
                                                                        
                                                                        
                                                                        
                                                                        745
                                                                        
                                                                        
                                                                        
                                                                        821Federal
      funds sold
                                                                        
                                                                        
                                                                        4
                                                                        
                                                                        
                                                                        
                                                                        68
                                                                        
                                                                        
                                                                        
                                                                        84
                                                                        
                                                                        
                                                                        
                                                                        211Other
                                                                        
                                                                        
                                                                        24
                                                                        
                                                                        
                                                                        
                                                                        59
                                                                        
                                                                        
                                                                        
                                                                        153
                                                                        
                                                                        
                                                                        
                                                                        173TOTAL
      INTEREST INCOME
                                                                        
                                                                        
                                                                        6,212
                                                                        
                                                                        
                                                                        
                                                                        9,295
                                                                        
                                                                        
                                                                        
                                                                        20,650
                                                                        
                                                                        
                                                                        
                                                                        27,685INTEREST
      EXPENSETime
      deposits, $100,000 and over
                                                                        
                                                                        
                                                                        1,018
                                                                        
                                                                        
                                                                        
                                                                        1,570
                                                                        
                                                                        
                                                                        
                                                                        3,658
                                                                        
                                                                        
                                                                        
                                                                        4,248Other
      deposits
                                                                        
                                                                        
                                                                        1,680
                                                                        
                                                                        
                                                                        
                                                                        2,118
                                                                        
                                                                        
                                                                        
                                                                        5,289
                                                                        
                                                                        
                                                                        
                                                                        6,238Short-term
      and other borrowings, primarily FHLB advances
                                                                        
                                                                        
                                                                        644
                                                                        
                                                                        
                                                                        
                                                                        708
                                                                        
                                                                        
                                                                        
                                                                        1,954
                                                                        
                                                                        
                                                                        
                                                                        2,009TOTAL
      INTEREST EXPENSE
                                                                        
                                                                        
                                                                        3,342
                                                                        
                                                                        
                                                                        
                                                                        4,396
                                                                        
                                                                        
                                                                        
                                                                        10,901
                                                                        
                                                                        
                                                                        
                                                                        12,495NET
      INTEREST INCOME
                                                                        
                                                                        
                                                                        2,870
                                                                        
                                                                        
                                                                        
                                                                        4,899
                                                                        
                                                                        
                                                                        
                                                                        9,749
                                                                        
                                                                        
                                                                        
                                                                        15,190Provision
      for loan losses
                                                                        
                                                                        
                                                                        6,293
                                                                        
                                                                        
                                                                        
                                                                        80
                                                                        
                                                                        
                                                                        
                                                                        7,370
                                                                        
                                                                        
                                                                        
                                                                        80NET
      INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES
                                                                        
                                                                        
                                                                        (3,423
                                                                        )
                                                                        
                                                                        
                                                                        4,819
                                                                        
                                                                        
                                                                        
                                                                        2,379
                                                                        
                                                                        
                                                                        
                                                                        15,110NONINTEREST
      INCOMEMortgage
      origination income
                                                                        
                                                                        
                                                                        48
                                                                        
                                                                        
                                                                        
                                                                        207
                                                                        
                                                                        
                                                                        
                                                                        363
                                                                        
                                                                        
                                                                        
                                                                        605Service
      charges on deposits
                                                                        
                                                                        
                                                                        288
                                                                        
                                                                        
                                                                        
                                                                        245
                                                                        
                                                                        
                                                                        
                                                                        786
                                                                        
                                                                        
                                                                        
                                                                        712Other
      service charges and commissions
                                                                        
                                                                        
                                                                        67
                                                                        
                                                                        
                                                                        
                                                                        65
                                                                        
                                                                        
                                                                        
                                                                        207
                                                                        
                                                                        
                                                                        
                                                                        190Investment
      securities (losses) gains, net
                                                                        
                                                                        
                                                                        27
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        316
                                                                        
                                                                        
                                                                        
                                                                        5Gain
      on sale of premises and equipment
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2Other
      income
                                                                        
                                                                        
                                                                        504
                                                                        
                                                                        
                                                                        
                                                                        412
                                                                        
                                                                        
                                                                        
                                                                        1,554
                                                                        
                                                                        
                                                                        
                                                                        1,269Total
      noninterest income
                                                                        
                                                                        
                                                                        934
                                                                        
                                                                        
                                                                        
                                                                        931
                                                                        
                                                                        
                                                                        
                                                                        3,226
                                                                        
                                                                        
                                                                        
                                                                        2,783NONINTEREST
      EXPENSESalary
      and employee benefits
                                                                        
                                                                        
                                                                        2,338
                                                                        
                                                                        
                                                                        
                                                                        2,541
                                                                        
                                                                        
                                                                        
                                                                        7,272
                                                                        
                                                                        
                                                                        
                                                                        7,915Occupancy
                                                                        
                                                                        
                                                                        680
                                                                        
                                                                        
                                                                        
                                                                        609
                                                                        
                                                                        
                                                                        
                                                                        1,869
                                                                        
                                                                        
                                                                        
                                                                        1,813Other
      real estate expense
                                                                        
                                                                        
                                                                        132
                                                                        
                                                                        
                                                                        
                                                                        5
                                                                        
                                                                        
                                                                        
                                                                        426
                                                                        
                                                                        
                                                                        
                                                                        9Computer
      services
                                                                        
                                                                        
                                                                        164
                                                                        
                                                                        
                                                                        
                                                                        157
                                                                        
                                                                        
                                                                        
                                                                        432
                                                                        
                                                                        
                                                                        
                                                                        450Telephone
                                                                        
                                                                        
                                                                        120
                                                                        
                                                                        
                                                                        
                                                                        115
                                                                        
                                                                        
                                                                        
                                                                        354
                                                                        
                                                                        
                                                                        
                                                                        332Leased
      equipment
                                                                        
                                                                        
                                                                        119
                                                                        
                                                                        
                                                                        
                                                                        100
                                                                        
                                                                        
                                                                        
                                                                        353
                                                                        
                                                                        
                                                                        
                                                                        314General
      and administrative expense
                                                                        
                                                                        
                                                                        1,036
                                                                        
                                                                        
                                                                        
                                                                        1,037
                                                                        
                                                                        
                                                                        
                                                                        3,010
                                                                        
                                                                        
                                                                        
                                                                        3,011Total
      noninterest expense
                                                                        
                                                                        
                                                                        4,589
                                                                        
                                                                        
                                                                        
                                                                        4,564
                                                                        
                                                                        
                                                                        
                                                                        13,716
                                                                        
                                                                        
                                                                        
                                                                        13,844(LOSS)
      EARNINGS BEFORE INCOME TAXES
                                                                        
                                                                        
                                                                        (7,078
                                                                        )
                                                                        
                                                                        
                                                                        1,186
                                                                        
                                                                        
                                                                        
                                                                        (8,111
                                                                        )
                                                                        
                                                                        
                                                                        4,049Income
      tax benefit (expense)
                                                                        
                                                                        
                                                                        2,787
                                                                        
                                                                        
                                                                        
                                                                        (331
                                                                        )
                                                                        
                                                                        
                                                                        3,504
                                                                        
                                                                        
                                                                        
                                                                        (1,175
                                                                        )NET
      (LOSS) EARNINGS
                                                                        
                                                                        $
                                                                        (4,291
                                                                        )
                                                                        
                                                                        $
                                                                        855
                                                                        
                                                                        
                                                                        $
                                                                        (4,607
                                                                        )
                                                                        
                                                                        $
                                                                        2,874Net
      (loss) earnings per common share – Basic
                                                                        
                                                                        $
                                                                        (1.52
                                                                        )
                                                                        
                                                                        $
                                                                        .29
                                                                        
                                                                        
                                                                        $
                                                                        (1.63
                                                                        )
                                                                        
                                                                        $
                                                                        .97Net
      (loss) earnings per common share – Diluted
                                                                        
                                                                        $
                                                                        (1.52
                                                                        )
                                                                        
                                                                        $
                                                                        .29
                                                                        
                                                                        
                                                                        $
                                                                        (1.63
                                                                        )
                                                                        
                                                                        $
                                                                        .96Weighted
      average number of common shares outstanding
                                                                        
                                                                        
                                                                        2,818,593
                                                                        
                                                                        
                                                                        
                                                                        2,968,593
                                                                        
                                                                        
                                                                        
                                                                        2,818,593
                                                                        
                                                                        
                                                                        
                                                                        2,968,593Weighted
      average number of common and common equivalent shares
      outstanding
                                                                        
                                                                        
                                                                        2,818,593
                                                                        
                                                                        
                                                                        
                                                                        2,968,593
                                                                        
                                                                        
                                                                        
                                                                        2,818,593
                                                                        
                                                                        
                                                                        
                                                                        2,982,240Dividends
      per share
                                                                        
                                                                        $
                                                                        .05
                                                                        
                                                                        
                                                                        $
                                                                        .10
                                                                        
                                                                        
                                                                        $
                                                                        .25
                                                                        
                                                                        
                                                                        $
                                                                        .30
 See notes
to unaudited condensed consolidated financial statements.
  3
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited)
For the Three- and Nine-Month Periods Ended September 30, 2008 and
2007
 (dollars
in thousands)
 
 Three
      Months ended
                          
                          
                          Nine
      Months endedSeptember
      30,
                          
                          
                          September
      30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007NET
      (LOSS) EARNINGS
                          
                          $
                          (4,291
                          )
                          
                          $
                          855
                          
                          
                          $
                          (4,607
                          )
                          
                          $
                          2,874OTHER
      COMPREHENSIVE INCOME (LOSS):Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
                          
                          
                          342
                          
                          
                          
                          1,263
                          
                          
                          
                          (1,602
                          )
                          
                          
                          (163
                          )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
                          
                          
                          24
                          
                          
                          
                          (80
                          )
                          
                          
                          (23
                          )
                          
                          
                          (75
                          )Reclassification
      adjustment for (gains) losses on  investment securities
      available for sale
                          
                          
                          (27
                          )
                          
                          
                          -
                          
                          
                          
                          (316
                          )
                          
                          
                          (5
                          )Total
      other comprehensive income (loss), before tax
                          
                          
                          339
                          
                          
                          
                          1,183
                          
                          
                          
                          (1,941
                          )
                          
                          
                          (243
                          )INCOME
      TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
                          
                          
                          (116
                          )
                          
                          
                          (429
                          )
                          
                          
                          545
                          
                          
                          
                          56Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
                          
                          
                          (8
                          )
                          
                          
                          27
                          
                          
                          
                          8
                          
                          
                          
                          25Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
                          
                          
                          9
                          
                          
                          
                          -
                          
                          
                          
                          107
                          
                          
                          
                          2Total
      income taxes related to other comprehensive income(loss)
                          
                          
                          (115
                          )
                          
                          
                          (402
                          )
                          
                          
                          660
                          
                          
                          
                          83Total
      other comprehensive (loss) income, net of tax
                          
                          
                          224
                          
                          
                          
                          781
                          
                          
                          
                          (1,281
                          )
                          
                          
                          (160
                          )Total
      comprehensive (loss) income
                          
                          $
                          (4,067
                          )
                          
                          $
                          1,636
                          
                          
                          $
                          (5,888
                          )
                          
                          $
                          2,714
 See notes
to unaudited condensed consolidated financial statements.
  4
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
For the Nine-Month Periods Ended September 30, 2008 and 2007
 (dollars
in thousands)
  Nine
      Months
                          Ended
      September 30,2008
                        
                        
                        2007CASH
      FLOWS PROVIDED BY OPERATING ACTIVITIES
                        
                        $
                        965
                        
                        
                        $
                        4,019CASH
      FLOWS FROM INVESTING ACTIVITIES,Investment
      securities available for sale:Proceeds
      from maturity
                        
                        
                        8,105
                        
                        
                        
                        5,232Proceeds
      from sales and calls
                        
                        
                        39,524
                        
                        
                        
                        2,787Purchases
                        
                        
                        (49,439
                        )
                        
                        
                        (11,518
                        )Investment
      securities held to maturity:Proceeds
      from maturity
                        
                        
                        1,192
                        
                        
                        
                        593Proceeds
      from calls
                        
                        
                        11
                        
                        
                        
                        -Other
      investments:Proceeds
      from sale
                        
                        
                        75
                        
                        
                        
                        -Purchases
                        
                        
                        -
                        
                        
                        
                        (44
                        )Net
      (increase) decrease in loans
                        
                        
                        3,588
                        
                        
                        
                        (14,568
                        )Purchases
      of premises and equipment
                        
                        
                        (3,516
                        )
                        
                        
                        (3,527
                        )Proceeds
      from sale of premises and equipment
                        
                        
                        -
                        
                        
                        
                        31Net
      additions of other real estate
                        
                        
                        (902
                        )
                        
                        
                        (18
                        )Proceeds
      from sale of other real estate
                        
                        
                        1,185
                        
                        
                        
                        261Net
      cash (used by) provided by investing activities
                        
                        
                        (177
                        )
                        
                        
                        (20,771
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES,Net
      increase (decrease) in deposits
                        
                        
                        (2,990
                        )
                        
                        
                        (59,567
                        )Net
      increase (decrease) in short-term borrowings
                        
                        
                        2
                        
                        
                        
                        12Net
      (decrease) increase in federal funds purchased and securities sold under
      repurchase agreements
                        
                        
                        (4,446
                        )
                        
                        
                        6,829Proceeds
      from FHLB advances
                        
                        
                        7,000
                        
                        
                        
                        -Repayment
      of FHLB advances
                        
                        
                        (7,000
                        )
                        
                        
                        -Cash
      dividends paid
                        
                        
                        (705
                        )
                        
                        
                        (891
                        )Net
      cash (used by) provided by financing activities
                        
                        
                        (8,139
                        )
                        
                        
                        (53,617
                        )Decrease
      (increase) in cash and cash equivalents
                        
                        
                        (7,351
                        )
                        
                        
                        (70,369
                        )CASH
      AND CASH EQUIVALENTS:  BEGINNING OF PERIOD
                        
                        
                        22,385
                        
                        
                        
                        90,518CASH
      AND CASH EQUIVALENTS:  END OF PERIOD
                        
                        $
                        15,034
                        
                        
                        $
                        20,149SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Other
      real estate acquired through loan foreclosures
                        
                        $
                        8,844
                        
                        
                        $
                        6,034Change
      in components of other comprehensive income
                        
                        $
                        (1,281
                        )
                        
                        $
                        (160
                        )
 See notes
to unaudited condensed consolidated financial statements.
  5
  HABERSHAM
BANCORP AND SUBSIDIARIES
 Notes to
Unaudited Condensed Consolidated Financial Statements
 
 1.
                  Basis
      of Presentation
 
 The
condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods reflected.  Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to applicable
rules and regulations of the Securities and Exchange Commission.  The
results of operations for the interim periods reported herein are not
necessarily indicative of results to be expected for the full year.
 
 The
condensed consolidated financial statements included herein should be read in
conjunction with the Company's 2007 consolidated financial statements and notes thereto,
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
 
 Certain
reclassifications have been made to the 2007 financial statement presentation to
correspond to the current year’s format.
 
 2.
                  Accounting
      Policies
 
 Reference
is made to the accounting policies of the Company described in the notes to the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.  The Company
has consistently followed those policies in preparing this report.
 
 3.
                  Other
      Comprehensive Income
 
 Other
comprehensive income for the Company consists of items recorded directly in
equity under Statement of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” in addition
to the net of tax fair value of cash flow hedges.  Investment
securities classified as available for sale are carried at fair value with the
related unrealized gain or loss, net of deferred income taxes included as a
separate component of stockholders’ equity.  At September 30, 2008,
fair value of the available for sale investment securities decreased
approximately $1,918,000 when compared to the fair value at December 31,
2007.  The corresponding equity component of unrealized gain and loss
on available for sale securities, net of tax, also decreased approximately
$1,266,000.  These changes were the results of movements in the bond
market as it responds to interest rate changes in the market.  At
September 30, 2008, fair value of the cash flow hedges decreased approximately
$23,000 when compared to the fair value at December 31, 2007.  The
corresponding equity component of unrealized holding gains on derivative
financial instruments classified as cash flow hedges, net of tax, also decreased
approximately $15,000.
  6
  4.
                  Net
      Earnings Per Share
 
 Basic net
earnings per share is based on the weighted average number of common shares
outstanding during the period.  Diluted net earnings per share
includes the effect of potential common shares outstanding during the
period.  The average market price during the period is used to compute
equivalent shares.
 
 The
reconciliation of the amounts used in the computation of both basic net earnings
per share and diluted net earnings per share for the three- and nine-month
periods ended September 30, 2007 is shown below.  Presentation for the
periods ending September 30, 2008 are not included due to the inclusion of
potential common stock outstanding during these periods being
anti-dilutive.
 
 Three
      Months ended
                                        
                                        
                                        Nine
      Months endedSeptember
      30, 2007
                                        
                                        
                                        September
      30, 2007Net
      earnings
                                        
                                        $
                                        854,776
                                        
                                        
                                        $
                                        2,873,560Weighted
      average common shares outstanding
                                        
                                        
                                        2,968,593
                                        
                                        
                                        
                                        2,968,593Shares
      issued from assumed exercise of common stock equivalents
                                        
                                        
                                        -
                                        
                                        
                                        
                                        13,647Weighted
      average number of common andcommon
      equivalent shares outstanding
                                        
                                        
                                        2,968,593
                                        
                                        
                                        
                                        2,982,240Earnings
      per share:Basic
                                        
                                        $
                                        .29
                                        
                                        
                                        $
                                        .97Diluted
                                        
                                        $
                                        .29
                                        
                                        
                                        $
                                        .96
 
 5.
                  Change
      in Accounting Principle
 
 Effective
January 1, 2008, the Company adopted Emerging Issues Task Force Issue No. 06-04,
Accounting for  Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. (“EITF 06-04”). EITF 06-04 requires a company to recognize
a liability for the postretirement benefit related to an endorsement
split-dollar life insurance arrangement if the employer has agreed to maintain a
life insurance policy during the employee’s retirement or provide the employee
with a death benefit based on the substantive agreement with the
employee.  The company has post retirement benefits with several of
its executives and directors.  Refer to Note 16 – “Employee Benefit
and Stock Option Plans” in the Company’s consolidated financial statements
included in Form 10-K for the year ended December 31, 2007.  Since the
Company has agreed to maintain life insurance policies in place during the
retirement years of these individuals, the Company must record a liability for
the present value of the future costs to maintain the policies in force
(mortality costs.)  EITF 06-04 allows companies to record the effects
of adopting the EITF as a change in accounting principle through a
cumulative-effect adjustment to retained earnings as of the beginning of the
year of adoption.  The Company recorded a liability and a
cumulative-effect adjustment to retained earnings in the amount of $63,237, net
of tax. Future increases in the liability will be charged to earnings in the
year incurred.  For the three and nine month periods ended September
30, 2008, $4,446 and $13,338, respectively, has been recorded  to
expense for the increase in the liability for future mortality
costs.
  7
 
 6.
                  Fair
      Value
 
 Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement No.157, Fair Value Measurements
(“SFAS No. 157”), which provides a framework for measuring fair value under
generally accepted accounting principles.  SFAS No. 157 applies to all
financial instruments that are being measured and reported on a fair value
basis.
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities andto determine fair value
disclosures.  Securities available-for-sale and derivatives classified
as cash flow hedges (interest rate swaps) are recorded at fair value on a
recurring basis.  Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as
loans held for sale and certain other assets.These nonrecurring fair value
adjustments typically involve application of the lower of cost or market
accounting or write-downs of individual assets.
 
 Fair
Value Hierarchy
 
 Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
value.  These levels are:
 
 Level
      1 –
                  Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.
 Level
      2 –
                  Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments in markets that are not
      active, and model-based valuation  techniques for which all
      significant assumptions are observable in the
  market.
 Level
      3 –
                  Valuation
      is generated from model-based techniques that use at least one significant
      assumption not observable in the market. These unobservable assumptions
      reflect estimates of assumptions  that market participants would
      use in pricing the asset or liability.  Valuation techniques
      include  use of option pricing models, discounted cash flow
      models and similar techniques.
 
 Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
 
 Securities Available for
Sale
 
 Securities
available for sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing models or other model-based valuation
techniques such as the present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities include those traded on
an active exchange, such as the New York Stock Exchange and U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
market funds.  Level 2 securities include mortgage-backed securities
issued by government sponsored enterprises and municipal
bonds.  Securities classified as Level 3 include asset-backed
securities in less liquid markets.
 
 Loans Held for
Sale
 
 Loans
held for sale are recorded at the lower of cost or market value.  The
fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics.  As
such, the Company classifies loans held for sale subject to nonrecurring fair
value adjustments as Level 2.
 
 Loans
 
 The
Company does not record loans at fair value on a recurring
basis.  However, from time to time, a loan is considered impaired and
an allowance for loan losses is established.  Loans for which it is
probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired.  Once a loan in identified as individually impaired,
management measures impairment in accordance with SFAS 114,  Accounting by Creditors for
Impairment of a Loans, (“SFAS 114”).  The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows.  Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans.  At
September 30, 2008, only a small portion of the impaired loans were evaluated
based on the fair value of the collateral.  In accordance with SFAS
157, impaired loans where an allowance is established based on the fair value of
collateral require classification in the fair value hierarchy.  When
the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the impaired loan as nonrecurring
Level 2.  When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
impaired loan as nonrecurring Level 3.
  8
  Other Real
Estate
 
 Other
real estate properties are adjusted to fair value upon transfer of the loans to
other real estate.  Subsequently, other real estate assets are carried
at the lower of carrying value or fair value.  Fair value is based
upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral.  When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the other real estate as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market prices, the Company records the other real
estate asset as nonrecurring Level 3.
 
 Goodwill and Other
Intangible Assets
 
 Goodwill
and identified intangible assets are subject to impairment testing.  A
current market valuation model is used to analyze the carrying value of goodwill
for impairment. This valuation method estimates the fair value of the Bank based
on the price that would be received to sell the Bank as a whole in an orderly
transaction between market participants at the measurement date.  This
valuation method requires a significant degree of management
judgment.  In the event the valuation value for the Bank is less than
the carrying value of goodwill, the asset amount is recorded at fair value as
determined by the valuation model.  As such, the Company classifies
goodwill and other intangible assets subjected to nonrecurring fair value
adjustments as Level 3.
 
 Derivative Financial
Instruments – Interest Rate Swaps
 
 To a
limited extent, the Company uses interest rate swaps to manage its interest rate
risk.  The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative.  This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses
observable market-based input, including interest rate curves and implied
volatilities.  The fair value of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed
cash receipts and the discounted expected variable cash payments.  The
variable cash payments are based on an expectation of future interest rates
(forward curves) derived from observable market interest rate
curves.
 
 Although
the Company has determined that the majority of the input used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of September
30, 2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives.  As a result, the Company has
determined that its derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy.
  9
  Assets Recorded at Fair
Value on a Recurring Basis
 
 The table
below presents the recorded amount of assets measured at fair value on a
recurring basis as of September 30, 2008.
 
 Balance
      atSeptember 30, 2008(In
      Thousands)
                        
                        Total
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Investment
      securities  available for sale
                        
                        $
                        89,987
                        
                        
                        
                        999
                        
                        
                        
                        88,988
                        
                        
                        
                        -Interest
      rate swap
                        
                        
                        (56
                        )
                        
                        
                        -
                        
                        
                        
                        (56
                        )
                        
                        
                        -Total
      assets at fair value
                        
                        $
                        89,931
                        
                        
                        
                        999
                        
                        
                        
                        88,932
                        
                        
                        
                        -
 
 Assets Recorded at Fair
Value on a Nonrecurring Basis
 
 The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles.  These include assets that are measured at the
lower of cost or market that were recognized at fair value below cost at the end
of the period.  Assets measured at fair value on a nonrecurring basis
are included in the table below as of September 30, 2008.
 
 Balance
      atSeptember 30, 2008(In
      Thousands)
                        
                        Total
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Other
      real estate
                        
                        $
                        20,082
                        
                        
                        
                        -
                        
                        
                        
                        20,082
                        
                        
                        
                        -Loans
                        
                        
                        27,310
                        
                        
                        
                        -
                        
                        
                        
                        27,310
                        
                        
                        
                        -$
                        47,392
                        
                        
                        
                        -
                        
                        
                        
                        47,392
                        
                        
                        
                        -
  10
  7.
                  Nonperforming
      Assets
 
 Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due and other
real estate owned. Accrual of interest is discontinued when either principal or
interest becomes 90 days past due, (unless the loan is  both well
secured and in the process of collection), or when in management’s opinion,
reasonable doubt exists as to  the full collection of interest or
principal.  Income on such loans is then recognized only to the extent
that cash is  received and when the future collection of principal is
probable.  Our Other Real Estate Owned (“OREO”)
policies  and 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.  Anydifference between the disposition value and
the loan balance is recommended for charge-off.  When the property
is  transferred to OREO, the property is listed with a realtor to
begin sales efforts.
  The
following summarizes nonperforming assets:
 
 September 30, 2008
                          
                          
                          December 31, 2007Accruing
      loans 90 days past due
                          
                          $
                          254,650
                          
                          
                          $
                          41,594Nonaccrual
      loans
                          
                          
                          35,778,687
                          
                          
                          
                          18,326,924Other
      real estate
                          
                          
                          20,082,020
                          
                          
                          
                          11,498,271Total
      nonperforming assets
                          
                          $
                          56,115,357
                          
                          
                          $
                          29,866,789
   8.
                  Recent
      Accounting Pronouncements and Industry
Events
 
 Disclosures
about Derivative Instruments and Hedging Activities
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 is an
amendment to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.  The objective of SFAS No.
161 is to expand the disclosure requirements of SFAS No. 133 with the intent to
improve the financial reporting of how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows.  The statement is effective for
financial statements issued for fiscal years beginning after November 15,
2008.  The Company does not anticipate the new accounting principle to
have a material effect on its financial position or results of
operation.
 
 In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  The current GAAP hierarchy, as set
forth in the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles, has been
criticized because (1) it is directed to the auditor rather than the
entity, (2) it is complex, and (3) it ranks FASB Statements of
Financial Accounting Concepts, which are subject to the same level of due
process as FASB Statements of Financial Accounting Standards, below industry
practices that are widely recognized as generally accepted but that are not
subject to due process.  The FASB believes that the GAAP hierarchy should
be directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP.  Accordingly, the FASB concluded
that the GAAP hierarchy should reside in the accounting literature established
by the FASB and is issuing this Statement to achieve that result.  The
Company does not anticipate the new accounting principle to have a material
effect on its financial position or results of operation.
  11
  In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active.  This
FASB Staff Position clarifies the application of SFAS No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP FAS 157-3 provides
guidance on (1) how an entity's own assumption should be considered when
measuring fair value when relevant observable inputs do not exist, (2) how
available observable inputs in a market that is not active should be considered
when measuring fair value and (3) how the use of market quotes should be
considered when assessing the relevance of observable and unobservable inputs
available to measure fair value.  This FASB Staff Position is effective
immediately.  The Company does not anticipate the new accounting principle
to have a material effect on its financial position or results of
operation.
 
 On
October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 ("EESA"), which creates  the Troubled Asset Relief Program
("TARP") and provides the U.S. Secretary of the Treasury with broad
authority  to implement certain actions to help restore stability and
liquidity to U.S. markets. The Capital Purchase Program the "CPP") was announced
by the U.S. Treasury on October 14, 2008 as part of TARP.  Pursuant to the
CPP, the U.S. Treasury will purchase up to $250 billion of senior preferred
shares on standardized terms from qualifying financial institutions. The purpose
of the CPP is to encourage U.S. financial institutions to build capital to
increase the flow of financing to U.S. businesses and consumers and to support
the U.S. economy.  The CPP is voluntary and requires a participating
institution to comply with a number of restrictions and provisions, including
standards for executive compensation and corporate governance and limitations on
share repurchases and the declaration and payment of dividends on common shares.
 The CPP allows qualifying financial institutions to issue senior preferred
shares to the U.S. Treasury in aggregate amounts between 1 percent and 3 percent
of the institution's risk weighted assets ("Senior Preferred Shares").The Senior
Preferred Shares will qualify as Tier 1 capital and rank senior to our common
stock.  The Senior Preferred Shares will pay a cumulative dividend rate of
5 percent per annum for the first five years and will reset to a rate of 9
percent per annum after year five.  The Senior Preferred Shares will be
non-voting, other than class voting rights on matters that could adversely
affect the shares.  The Senior Preferred Shares will be callable at par
after three years.  Prior to the end of three years, the Senior Preferred
Shares may be redeemed with the proceeds from a qualifying equity offering of
any Tier 1 perpetual preferred or common stock.  U.S. Treasury may also
transfer the Senior Preferred Shares to a third party at any time.  In
conjunction with the purchase of Senior Preferred Shares, Treasury will receive
warrants to purchase common stock with an aggregate market price equal to 15
percent of the Senior Preferred Shares.  The exercise price on the warrants
will be the market price of the participating institution's common stock at the
time of issuance, calculated on a 20-trading day trailing average.
 Companies participating in the CPP must adopt the U.S. Treasury's
standards for executive compensation and corporate governance.  The extent
to which the Company may ultimately participate in the program has not yet been
determined.
  12
  Item.2
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 
 Organization
 
 Habersham
Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank
("Habersham Bank") and The Advantage Group, Inc.  Habersham Bank owns
all of the outstanding stock of Advantage Insurers, Inc. (“Advantage
Insurers”).  Advantage Insurers offers a full line of property,
casualty and life insurance products.  Advantage Insurers does not
comprise a significant portion of the financial position, results of operations,
or cash flows of the Company and as a result, management’s discussion and
analysis, which follows relates primarily to Habersham Bank.
 
 The
Company’s continuing primary business is the operation of banks in rural and
suburban communities in Habersham, White, Cherokee, Warren, Gwinnett, Stephens,
Forsyth and Hall counties in Georgia.  The Company’s primary source of
revenue is providing loans to businesses and individuals in its market
area.
 
 Executive
Summary
 
 Habersham
Bancorp reported a third quarter loss of $4.2 million or $1.52 per diluted
share, a decrease of 601.87% when compared to third quarter earnings of $855,000
or $.29 per diluted share in 2007.  Year-to-date loss for the
nine-month period ended September 30, 2008, was $4.6 million or $1.63 per
diluted share, a decrease of 260.30%, when compared to year-to-date earnings of
$2.9 million or $.96 per diluted share for the same period in 2007.
 
 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
income for the third quarter of 2008 and 2007 was approximately $6.2 million and
$9.3 million respectively, representing a decrease of approximately 33.17% when
comparing the third quarter of 2008 to the same period of
2007.  Interest income for the nine-month periods of 2008 and 2007 was
approximately $20.7 million and $27.7 million, respectively, representing a
decrease of approximately 25.41% when comparing the 2008 period to the 2007
period.  The decreases resulted from the effect of the falling prime
interest rate on our outstanding variable rate loans, decreases in average loan
balances and increases in the number and balances of loans in nonaccrual
status.
 
 Interest
expense for the third quarter of 2008 and 2007 was approximately $3.3 million
and $4.4 million respectively, representing a decrease of approximately 23.98%
when comparing the third quarter of 2008 to the same period of 2007.Interest
expense for the nine-month periods of 2008 and 2007 was approximately $10.9
million and $12.5 million, respectively, representing a decrease of
approximately 12.76% when comparing the 2008 period to the 2007
period.  These decreases resulted from declining rates paid on deposit
and borrowing balances for the three-month and nine-month periods ended
September 30, 2008 when compared to the same periods in 2007.
 
 Net
interest income before provision for loan loss for the third quarter of 2008 and
the nine-month period ended September 30, 2008 decreased approximately $2.0
million or 41.42%, and $5.4 million or 35.82%, respectively, when compared to
the same periods in 2007 as a result of the items discussed above.
 
 Declines
in the U.S. economy and our local real estate markets contributed to our
increasing provisions for loan losses.  As delinquencies and
foreclosures increased, Habersham Bank recorded provisions to its allowance for
loan losses during the third quarter and first nine months of 2008 of
approximately $6.3 million and $7.4 million, respectively.For the third quarter
and nine-month period of 2007, Habersham Bank recorded a provision to its
allowance for loan losses of approximately $80,000.
  13
  The net
interest margin for the third quarter and first nine months of 2008 was 2.80%
and 3.08%, respectively compared to 4.35% and 4.58% for the same periods in
2007.  Two factors which impact the net interest margin are average
interest bearing assets, which decreased approximately $11.8 million and average
interest-bearing liabilities, which increased approximately $19.7 million, when
comparing the first nine months of 2008 to the first nine months of
2007.
 
 The
Company’s total assets decreased $14.4 million, or 2.80%, to $500.1 million at
September 30, 2008 from $514.5 at December 31, 2007.
 
 Decreases
in the loan portfolios (net of allowance for loan losses), cash and cash
equivalent balances and investment securities of approximately $20.7 million,
$7.4 million and $1.1 million, respectively, were offset by increases in other
real estate, other assets, and premises and equipment, net, of approximately
$8.6 million, $3.5  million and $2.7 million,
respectively.
 
 Total
liabilities (deposits, borrowings and other liabilities) at September 30, 2008
decreased approximately $7.7 million or 1.67% from $460.3 million at December
31, 2007 to $452.6 million at September 30, 2008. Interest bearing account
balances and other borrowings decreased approximately $12.4 million and $4.1
million, respectively, and were offset by increases in noninterest bearing
account balances of approximately $9.4 million.
  14
  Forward
Looking Statements
 
 Certain
statements contained in this Quarterly Report on Form 10-Q and the exhibits
hereto which are not statements of historical fact constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
(the “Act”).  In addition, certain statements in future filings by the
Company with the Securities and Exchange Commission, in press releases, and in
oral and written statements made by or with the approval of the Company which
are not statements of historical fact constitute forward-looking statements
within the meaning of the Act.  Examples of forward-looking statements
include, but are not limited to:  (1) projections of revenues,
income or loss, earnings or loss per share, the payment or non-payment of
dividends, capital structure and other financial items; (2) statements of
plans and objectives of the Company or its management or Board of Directors,
including those relating to products or services; (3) statements of future
economic performance; and (4) statements of assumptions underlying such
statements.  Words such as “believes,” “anticipates,” “expects,”
“intends,” “targeted,” and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
 
 Forward-looking
statements involve risks and uncertainties which may cause actual results to
differ materially from those in such statements.  Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:  (1) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (2) the effects of and changes in trade, monetary
and fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; (3) inflation, interest rate,
market and monetary fluctuations; (4) the timely development of and
acceptance of new products and services and perceived overall value of these
products and services by users; (5) changes in consumer spending, borrowing
and saving habits; (6) risks involved in making and integrating
acquisitions and expanding into new geographic markets; (7) the ability to
increase market share and control expenses; (8) the effect of changes in
laws and regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which the Company and its subsidiaries must
comply; (9) the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as the Financial Accounting
Standards Board; (10) changes in the Company’s organization, compensation
and benefit plans; (11) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; and (12) the success of
the Company at managing the risks involved in the foregoing.
 
 Such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.
 
 Material
Changes in Financial Condition
 
 The
Company’s total assets decreased $14.4 million, or 2.80%, to $500.1 million at
September 30, 2008 from $514.5 million at December 31, 2007.
 
 Cash and
cash equivalents
 Cash and
due from banks decreased approximately $7.5 million resulting from customer’s
activity within their deposit accounts during the nine month period ended
September 30, 2008. Federal funds sold balances increased slightly during this
period by approximately $156,000.
 
 Investment
securities
 During
the first nine months of 2008, purchases of investment securities available for
sale totaled approximately $49.4 million, offset by maturities, calls and sales
of approximately $47.6 million.The purchases consisted of approximately $25.4
million in U.S. government-sponsored enterprise bonds, $22.2 million in mortgage
backed securities and $1.8 million in municipal bonds.  Calls and
maturities in the investment securities held for maturity portfolio totaled
approximately $1.2 million during the first nine months of 2008.  The
calls and sales within the investment securities portfolio generated net gains
of approximately $316,000.  The unrealized loss on the investment
securities available for sale portfolio increased approximately $1.9 million
during the nine-month period ending September 30, 2008.
  15
  Loans
 The total
loan portfolio balances and loans held for sale balances decreased approximately
$14.3 million and $864,000, respectively, when comparing balances at September
30, 2008 to December 31, 2007. The decrease in the loan portfolio balances
resulted from foreclosures and payout of approximately $8.8 million and $5.5
million, respectively.Decreases in the loan portfolio occurring within the real
estate construction portfolio, commercial lending portfolio and loans secured by
farm land totaling approximately $16.7 million, $4.2 million, $1.9 million
respectively, were offset by increases in the commercial real estate, 1-4 family
residential properties, other  and consumer lending portfolios
totaling approximately $5.7 million, $1.9 million, $679,000, and $224,000,
respectively.
 
 Other
real estate and premises & equipment
 Other
real estate increases of approximately $8.6 million resulted from foreclosures
of properties during the first nine-month period of 2008.  See a more
detailed discussion in “Asset Quality”.  Premises and equipment
increased approximately $2.7 million primarily as a result of the ongoing
construction of the Flowery Branch office, which is expected to be completed and
in operation during the fourth quarter of 2008.
 
 Deposits
 Total
deposits decreased approximately $3.0 million when comparing balances at
September 30,  2008 to December 31, 2007 balances, with decreases
occurring in NOW and money market, and savings account balances of approximately
$20.0  million and $14.2 million, respectively, offset by increases in
time deposits and  noninterest bearing deposit balances of
approximately $21.7 million and $9.4 million.
 
 Borrowings
 Total
borrowings decreased approximately $4.4 million when comparing September 30,
2008 balances to December 31, 2007 with increases occurring primarily in federal
funds purchased and securities sold under repurchase agreements.
 
 Material
Changes in Results of Operations
 
 Net
interest income is the largest single source of income for the
Company.  Management strives to attain a level of earning asset growth
while providing a net yield on earning assets that will cover overhead and other
costs and provide a reasonable return to our stockholders.  Net
interest income is affected by interest income from loans, investment securities
and federal funds sold offset by interest paid on deposits and
borrowings.  The following table compares the weighted average tax
equivalent yields for loans, investment securities and federal funds sold and
the weighted average rates for deposits and borrowings for the third quarters
and the first nine months of 2008 and 2007.
 
 Three
      Months ended
                        September 30
                      
                      
                      Nine
      Months ended
                        September 302008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007INTEREST
      YIELDS EARNED:Loans
                      
                      
                      6.08
                      %
                      
                      
                      8.91
                      %
                      
                      
                      6.72
                      %
                      
                      
                      9.08
                      %Investment
      securities
                      
                      
                      5.05
                      %
                      
                      
                      5.35
                      %
                      
                      
                      5.21
                      %
                      
                      
                      5.29
                      %Federal
      funds sold
                      
                      
                      1.85
                      %
                      
                      
                      4.81
                      %
                      
                      
                      3.00
                      %
                      
                      
                      4.91
                      %INTEREST
      RATES PAID:Deposits
                      
                      
                      3.17
                      %
                      
                      
                      4.23
                      %
                      
                      
                      3.46
                      %
                      
                      
                      4.15
                      %Borrowings
                      
                      
                      3.67
                      %
                      
                      
                      5.13
                      %
                      
                      
                      3.91
                      %
                      
                      
                      5.03
                      %
  16
  Total
interest income for the third quarter of 2008 decreased approximately $3.1
million or 33.17%, when compared to the third quarter of 2007.Total interest
income for the first nine months of 2008 decreased approximately $7.0 million or
25.41% when compared to the same period in 2007.The decrease in interest income
is the result of the following:  1) Approximately $259.0 million or
73.92% of the loan portfolio is a variable rate loan product which may reprice
daily, monthly, quarterly or annually.  As the prime rate decreases,
as it has in the periods being discussed, the loan yields decrease
accordingly.  2) Average loan balances also decreased approximately
$15.9 million or 4.47% due to maturities, payouts and foreclosures when
comparing the nine-month periods ending September 30, 2008 and
2007.  3)  Nonaccrual loans increased approximately $17.5
million when compared to December 31, 2007.  Interest income is
reduced as the number and balances of loans in nonaccrual status
increase.  See a more detailed discussion in “Asset
Quality”.
 
 Total
interest expense for the third quarter of 2008 decreased approximately $1.1
million or 23.98% when compared to the third quarter of 2007.  Average
balances in interest bearing accounts decreased approximately $7.8 million when
comparing the third quarter of 2008 to the third quarter of
2007.  During the same period, the average interest rate paid on
deposits decreased approximately 1.06%.Rates on savings and money market
accounts, interest bearing demand deposits, and time deposits decreased
approximately 2.26%, .91% and .86%, respectively.Average balances in other
borrowings increased approximately $14.8 million when comparing the third
quarter of 2008 to the third quarter of 2007 with a decrease in the average rate
paid on borrowings of approximately 1.46%.
 
 Total
interest expense for the first nine months of 2008 decreased approximately $1.6
million or 12.76% when compared to the first nine months of 2007.Average
balances in interest bearing accounts increased approximately $6.4 million when
comparing the first nine months of 2008 and 2007.  During the same
period, the average interest rate paid on deposits decreased approximately .69%.
Rates on savings and money market accounts, interest bearing demand deposits and
time deposits decreased approximately 1.59%, .79% and .45%,
respectively.  Average balances in other borrowings increased
approximately $13.2 million when comparing the first nine months of 2008 to the
first nine months of 2007 with a decrease in the average rate paid on borrowings
of approximately 1.12%.
 
 Net
interest income before provision for loan losses decreased approximately $2.0
million or 41.42% for the third quarter of 2008 and decreased approximately $5.4
million or 35.82% for the first nine months of 2008 when compared to the same
periods in 2007 as a result of the items discussed above.
 
 The net
interest margin of the Company, net interest income divided by average earning
assets, was 2.80% for the third quarter of 2008 compared to 4.35% for the third
quarter of 2007, and was 3.08% for the first nine months of 2008 compared to
4.58% for the first nine months of 2007.
 
 Noninterest
income increased $3,000 or .32% for the third quarter of 2008 over the same
period in 2007 and increased $443,000 or 15.92% for the first nine months of
2008 over the same period in 2007.  Increases occurring in other
income, in service charges and in net gains realized on calls and sales within
the investment securities portfolio totaled approximately $92,000, $45,000 and
$27,000, respectively, during the third quarter of 2008. These increases were
offset by decreases within the mortgage origination fee income of approximately
$159,000. Increases in the cash surrender value of life insurance, mastermoney
card income, in trust fees and in gains in sale of other real estate totaling
approximately $53,000, $15,000, $14,000 and $9,000, respectively, are reflected
in the increase in other income.
 
 For the
first nine months of 2008, increases in net gains realized on calls and sales
within the investment securities portfolio, in other income and in service
charges totaled approximately $311,000, $283,000 and $91,000, respectively, when
compared to the first nine months of 2007.  These increases were
offset by decreases within the mortgage origination income totaling
approximately $242,000.  The increase in other income resulted
from  increases in cash surrender value of life insurance, trust fees,
mastermoney card income and gains in sale of other real estate totaling
approximately $161,000, $76,000, $36,000 and $23,000, respectively, offset by a
decrease in data processing income of approximately $34,000.
  17
  The
income from cash surrender value of life insurance increased due to the purchase
of policies at the end of 2007. Trust fee
income increased due to an increase in the volume of services performed in 2008
compared to 2007.  Mastermoney card income increased due to an
increase volume of debit card transactions in 2008 compared to
2007.  The data processing income decrease since the bank ceased
providing these services in late 2007.
 
 Noninterest
expense increased $25,000 or .55% for the third quarter of 2008 over the same
period in 2007. Increases
in other real estate expenses, occupancy expenses, leased equipment expense,
computer services and telephone expense totaling approximately $127,000,
$71,000, $19,000, $7,000 and $5,000, respectively, were offset by decreases in
salary and employee benefits and in general and administrative expense totaling
approximately $203,000 and $1,000.  Other real estate expense includes
costs to maintain an increasing number of foreclosed properties.Increases in
occupancy, leased equipment and telephone relate to installation and upgrade
charges for the Flowery Branch Office in Hall County.  The decrease in
salary and employee benefits resulted from decreases in overtime expense,
commission expense and accruals for incentive compensation.  Tighter
expense control measures have resulted in decreases in general and
administrative expense when comparing third quarter of 2008 to third quarter
2007.
 
 The
decrease in general and administrative expenses consists primarily of decreases
in  various other miscellaneous expenses and advertising and marketing
expenses of approximately $30,000  and $17,000, respectively, offset
by increases in outside services and office supplies totaling approximately
$42,000 and $4,000,  respectively.  Outside services include
FDIC insurance, legal and professional services, insurance, director fees and
State of Georgia Department of Banking fees.
 
 Noninterest
expense decreased $128,000 or .92% for the first nine months of 2008 over the
same period in 2007 with decreases in salary and employee
benefits,  computer services and general and administrative expense of
approximately $643,000, $18,000 and $1,000, respectively. The decrease in salary
and employee benefits resulted from decreases in overtime expense, commission
expense and in the accrual for incentive compensation.  Tighter
expense control measures have resulted in decreases in computer services and
general and administrative expenses when comparing the first nine months of 2008
to the same period in 2007.
 
 The
decrease in general and administrative expenses consists primarily of decreases
in advertising and marketing expenses and office supplies of approximately
$70,000 and $44,000, respectively, offset by increases in outside services and
various other miscellaneous expense totaling approximately $102,000 and $11,000,
respectively.  Outside services include FDIC insurance, legal and
professional services, insurance, director fees and State of Georgia Department
of Banking fees.
 
 An income
tax benefit of approximately $2.8 million was recorded for the three months
ended September 30, 2008 compared to an income tax expense of approximately
$331,000 for the three months ended September 30, 2007.  An income tax
benefit of approximately $3.5 million was recorded for the first nine months of
2008 compared to an income tax expense of approximately $1.2 million for the
first nine months of 2007.  The effective tax rate for the third
quarter of 2008 and 2007 was 39.37% and 27.91%, respectively.  The
effective tax rate for the nine months ended September 30, 2008 and 2007 was
43.20% and 29.02%, respectively.  Tax-exempt income of approximately
$316,000 was 4.46% of pre-tax loss for the third quarter of 2008 when compared
to 12.94% of pre-tax income for the third quarter of 2007.  Tax exempt
income of approximately $1.1 million was 13.68% of pre-tax loss for the first
nine months of 2008 when compared to 20.29% of pre-tax income for the first nine
months of 2007.
 
 Asset
Quality
 
 The
allowance for loan losses represents a reserve for probable losses in the loan
portfolio.  The adequacy of the allowance for loan losses is evaluated
monthly based on a review of all significant loans, with particular emphasis on
impaired, nonaccruing, past due and other loans that management believes require
special attention.  The determination of the allowance for loan losses
is subjective and based on consideration of a number of factors and
assumptions.
  18
  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 are
likely to exist as of the evaluation date.  Loss percentages used for
non-problem loans in the portfolio are based on historical loss
factors.  Specific allowance allocations for losses on problem loans
are 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.
 
 For loans
considered impaired, specific allowances are provided in the event that the
specific collateral analysis on each problem loan indicates that the liquidation
of the collateral would not result in repayment of these loans if the loan is
collateral dependent or if the present value of expected future cash flows on
the loan are less than the balance.  In addition to these allocated
allowances, at any point in time, the Company may have an unallocated component
of the allowance.  Unallocated portions of the allowance are due to a
number of quantitative and qualitative factors, such as improvement in the
condition of impaired loans and credit concentrations.  All nonaccrual
loans are considered impaired.
 
 The risk
associated with lending 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 are an
element considered for all 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. The Company also makes unsecured
loans from time to time. 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 September 30, 2008
was approximately $14.9 million.
 
 At
September 30, 2008 and December 31, 2007, the ratio of the allowance for loan
losses to total loans was 2.29% and .61%, respectively.For the third quarter and
first nine months of 2008, provision for loan losses expense totaled
approximately $6.3 million and $7.4 million, respectively, and for the third
quarter and first nine months of 2007 provision for loan losses expense totaled
approximately $80,000.
 
 Net
charge-offs for the first nine months of 2008 totaled approximately $1.8 million
compared to net charge-offs of $688,000 for the first nine months of 2007 as
detailed below:
 
 No.
                            
                            
                            September 30, 2008
                            
                            
                            No.
                            
                            
                            September 30, 2007Charge-offs:Commercial
                            
                            
                            5
                            
                            
                            $
                            80,247
                            
                            
                            
                            2
                            
                            
                            $
                            50,282Real
      Estate
                            
                            
                            17
                            
                            
                            
                            1,607,786
                            
                            
                            
                            18
                            
                            
                            
                            529,399Consumer
                            
                            
                            53
                            
                            
                            
                            181,517
                            
                            
                            
                            62
                            
                            
                            
                            190,550Total
      Charge-offs
                            
                            
                            75
                            
                            
                            
                            1,869,550
                            
                            
                            
                            82
                            
                            
                            
                            770,231Recoveries:Commercial
                            
                            
                            
                            
                            
                            
                            5,052
                            
                            
                            
                            
                            
                            
                            
                            1,150Real
      Estate
                            
                            
                            
                            
                            
                            
                            325
                            
                            
                            
                            
                            
                            
                            
                            20,150Consumer
                            
                            
                            
                            
                            
                            
                            41,176
                            
                            
                            
                            
                            
                            
                            
                            61,375Total
      Recoveries
                            
                            
                            
                            
                            
                            
                            46,553
                            
                            
                            
                            
                            
                            
                            
                            82,675Net
      Charge-offs
                            
                            
                            
                            
                            
                            $
                            1,822,997
                            
                            
                            
                            
                            
                            
                            $
                            687,556
  19
  Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due and other
real estate owned. The following summarizes nonperforming assets:
 
 September
                            30, 2008
                          
                          
                          December
                            31, 2007Accruing
      loans 90 days past due
                          
                          $
                          254,650
                          
                          
                          $
                          41,594Nonaccrual
      loans
                          
                          
                          35,778,687
                          
                          
                          
                          18,326,924Other
      real estate
                          
                          
                          20,082,020
                          
                          
                          
                          11,498,271Total
      nonperforming assets
                          
                          $
                          56,115,357
                          
                          
                          $
                          29,866,789
 
 Nonperforming
assets increased approximately $26.2 million or 87.89% from December 31, 2007 to
September 30, 2008.  See the discussion that follows within this
section for a description of the assets that comprised this
increase.
 
 Loans
classified as 90 days past due increased $213,056 or 512.23% from December 31,
2007 to September 30, 2008.  The increase is the net result of the
following changes:
 
 Balance
      at December 31, 2007
                            
                            $
                            41,594New
      loans classified to 90 days past due status
                            
                            
                            727,933Payments
      received
                            
                            
                            (509,641
                            )Charged-off
                            
                            
                            (5,236
                            )Balance
      at September 30,  2008
                            
                            $
                            254,650The
      following summarizes accruing loans 90 days past dueat
      September 31, 2008:Real
      estate secured construction loans
                            
                            $
                            -Residential
      loans
                            
                            
                            227,729Consumer
      loans
                            
                            
                            26,921Total
      accruing loans 90 days past due
                            
                            $
                            254,650
 
 Impaired
loans consist of loans on nonaccrual status.  The increase is the net
result of the following changes:
 
 Balance
      at December 31, 2007
                        
                        $
                        18,326,924Loans
      reclassified to nonaccrual status in 2008
                        
                        
                        37,590,903Payments
      received on nonaccrual loans during 2008
                        
                        
                        (4,795,875
                        )Nonaccrual
      loans charged-off during 2008
                        
                        
                        (1,801,331
                        )Nonaccrual
      loans reclassified to other real estate
                        
                        
                        (8,843,608
                        )Nonaccrual
      loans reclassified to accrual status in 2008
                        
                        
                        (4,698,326
                        )Balance
      at September 30, 2008
                        
                        $
                        35,778,687
 
 Nonaccrual
loans may be reclassified to accrual status upon interest and payments being
brought current.  Nonaccrual loans reclassified to accrual status
consisted of one construction and development loan, one loan secured by
residential real estate and two consumer loans totaling approximately $4.8
million, $26,000 and $14,000, respectively.
  20
  Additions
to loans on nonaccrual status consisted of the following:
 
 September 30, 2008Real
      Estate – construction & development loans
                          
                          $
                          33,788,469Real
      Estate – residential loans
                          
                          
                          945,571Real
      Estate – commercial
                          
                          
                          2,474,485Commercial
      loans
                          
                          
                          56,897Consumer
      loans
                          
                          
                          325,481Total
      nonaccrual loans
                          
                          $
                          37,590,903
 
 Payments
received on nonaccrual loans include ten payoffs, restructuring of two loans and
regular payments totaled approximately $4,297,289, $378,418 and $120,168,
respectively.
 
 The
following summarizes nonaccrual loans at September 30, 2008 and December 31,
2007:
 
 Number
                          
                          
                          September
                            30,2008
                          
                          
                          Number
                          
                          
                          December
      31, 2007Real
      Estate – construction & development loans
                          
                          
                          32
                          
                          
                          $
                          32,687,849
                          
                          
                          
                          36
                          
                          
                          $
                          18,146,355Real
      Estate – residential loans
                          
                          
                          13
                          
                          
                          
                          407,988
                          
                          
                          
                          4
                          
                          
                          
                          145,108Real
      Estate – commercial
                          
                          
                          1
                          
                          
                          
                          2,474,485
                          
                          
                          
                          -
                          
                          
                          
                          -Commercial
      loans
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1
                          
                          
                          
                          25,350Consumer
      loans
                          
                          
                          7
                          
                          
                          
                          208,365
                          
                          
                          
                          1
                          
                          
                          
                          10,111Total
      nonaccrual loans
                          
                          
                          53
                          
                          
                          $
                          35,778,687
                          
                          
                          
                          42
                          
                          
                          $
                          18,326,924
 
 Other
real estate at September 30, 2008 increased approximately $8.6 million or 74.65%
when compared to December 31, 2007. The following summarizes other real estate
at September 30, 2008 and December 31, 2007:
 
 Number
      of Properties
                      
                      
                      September
      30,2008
                      
                      
                      Number
      of Properties
                      
                      
                      December
      31,2007Residential
      construction properties
                      
                      
                      35
                      
                      
                      $
                      12,329,537
                      
                      
                      
                      22
                      
                      
                      $
                      6,324,444Vacant
      lots
                      
                      
                      204
                      
                      
                      
                      6,814,983
                      
                      
                      
                      39
                      
                      
                      
                      4,500,483Commercial
      properties
                      
                      
                      3
                      
                      
                      
                      937,500
                      
                      
                      
                      2
                      
                      
                      
                      639,500Residential
      properties
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      33,844Total
      other real estate
                      
                      
                      242
                      
                      
                      $
                      20,082,020
                      
                      
                      
                      64
                      
                      
                      $
                      11,498,271
 
 The
increase in other real estate is the net result of the following
changes:
 
 Balance
      at December 31, 2007
                          
                          $
                          11,498,271Foreclosed
      property
                          
                          
                          8,843,608Additions
      to complete
                          
                          
                          901,610Sales
      of other real estate
                          
                          
                          (1,161,469
                          )Balance
      at September 30, 2008
                          
                          $
                          20,082,020
 
 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.The
appraised value for the other real estate properties was approximately $22.9
million at September 30, 2008.
  21
  Goodwill
 
 Habersham
Bancorp reviews its goodwill for impairment annually or more frequently if
circumstances indicate that goodwill may be impaired.  During the last
two quarters, Habersham Bancorp’s stock price has traded below its per share
book value and fallen below tangible book value for a short period of
time.  Management believes that the low stock price is more indicative
of uncertainty about the economic cycle rather than the value of Habersham
Bancorp’s underlying business.  Although Habersham Bancorp has not
performed a complete goodwill impairment assessment, management does not believe
goodwill is impaired.  The current economic environment has
temporarily resulted in lower earnings and higher credit
losses.  Management believes the value of Habersham Bancorp’s business
remains intact and that earnings will return to past levels when the credit
cycle recovers.  Habersham Bancorp will complete a full goodwill
impairment assessment during the fourth quarter.
 
 Liquidity
and Capital Resources
 
 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.
 
 The
Company’s liquidity position depends primarily upon the liquidity of its assets
relative to its need to respond to short-term demand for funds caused by
withdrawals from deposit accounts and loan funding
commitments.  Primary sources of liquidity are scheduled repayments on
the Company’s loans and interest on and maturities of its investment
securities.  Sales of investment securities available for sale
represent another source of liquidity to the Company.  The Company may
also utilize its cash and due from banks and federal funds sold to meet
liquidity requirements as needed.
 
 The
Company also has the ability, on a short-term basis, to purchase federal funds
from another financial institution up to $10 million.  At September
30, 2008, the Company had no federal funds purchased.Presently, the Company has
made arrangements with commercial banks for short-term advances under repurchase
agreement lines of credit of which none was advanced at September 30,
2008.  The Company entered into a repurchase agreement for a long term
advance of $5.0 million during the first quarter of 2008.  The Company
has approximately $16.7 million outstanding in commercial sweep accounts at
September 30, 2008.  In addition, the Company has a total available
line of $38.0 million, subject to available collateral, from the Federal Home
Loan Bank.  The Company had $38.0 million in advances on this line at
September 30, 2008.
 
 Habersham
Bank's liquidity policy requires that the ratio of cash and certain short-term
investments to net withdrawable deposit accounts be at least 20%.  The
Bank’s liquidity ratios at September 30, 2008 and 2007 were 29.66% and 20.40%,
respectively.
 
 Also,
liquidity as a percent of deposits and total liabilities, with a target of 10%,
is recommended to be calculated and monitored daily.Based on these guidelines,
the Bank’s liquidity ratios as a percent of deposits and total liabilities
follow:
 
 September 
    30, 2008
                        
                        
                        December 
31, 2007Liquidity
      as a percent of deposits
                        
                        
                        9.08
                        %
                        
                        
                        13.65
                        %Liquidity
      as a percent of total liabilities
                        
                        
                        7.76
                        %
                        
                        
                        11.53
                        %
  To
improve the liquidity ratios, Habersham Bank obtained approximately a $21
million line at the Federal Discount Window during October,
2008.
  22
  At
September 30, 2008, Habersham Bancorp and Habersham Bank were required to have
minimum Tier 1 and total capital ratios of 4% and 8%,
respectively.  Additionally, the Company and the Bank are required to
maintain a leverage ratio (Tier 1 capital to average assets) of at least
4%.  The Company’s and the Bank’s ratios at September 30, 2008
follow:
 
 Habersham
                            
                            
                            HabershamBank
                            
                            
                            BancorpTier
      1
                            
                            
                            10.38
                            %
                            
                            
                            11.29
                            %Total
      Capital
                            
                            
                            11.64
                            %
                            
                            
                            12.54
                            %Leverage
                            
                            
                            8.27
                            %
                            
                            
                            9.03
                            %
  On
October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 ("EESA"), which creates the Troubled Asset Relief Program ("TARP") and
provides the U.S. Secretary of the Treasury with broad authority to implement
certain actions to help restore stability and liquidity to U.S. markets. The
Capital Purchase Program the ("CPP") was announced by the U.S. Treasury on
October 14, 2008 as part of TARP. Pursuant to the CPP, the U.S. Treasury will
purchase up to $250 billion of senior preferred shares on standardized terms
from qualifying financial institutions. The purpose of the CPP is to encourage
U.S. financial institutions to build capital to increase the flow of financing
to U.S. businesses and consumers and to support the U.S. economy. The CPP is
voluntary and requires a participating institution to comply with a number of
restrictions and provisions, including standards for executive compensation and
corporate governance and limitations on share repurchases and the declaration
and payment of dividends on common shares. The CPP allows qualifying financial
institutions to issue senior preferred shares to the U.S. Treasury in aggregate
amounts between 1 percent and 3 percent of the institution's risk weighted
assets ("Senior Preferred Shares"). The Senior Preferred Shares will qualify as
Tier 1 capital and rank senior to our common stock. The Senior Preferred Shares
will pay a cumulative dividend rate of 5 percent per annum for the first five
years and will reset to a rate of 9 percent per annum after year five. The
Senior Preferred Shares will be non-voting, other than class voting rights on
matters that could adversely affect the shares. The Senior Preferred Shares will
be callable at par after three years. Prior to the end of three years, the
Senior Preferred Shares may be redeemed with the proceeds from a qualifying
equity offering of any Tier 1 perpetual preferred or common stock. U.S. Treasury
may also transfer the Senior Preferred Shares to a third party at any time. In
conjunction with the purchase of Senior Preferred Shares, Treasury will receive
warrants to purchase common stock with an aggregate market price equal to 15
percent of the Senior Preferred Shares. The exercise price on the warrants will
be the market price of the participating institution's common stock at the time
of issuance, calculated on a 20-trading day trailing average. Companies
participating in the CPP must adopt the U.S. Treasury's standards for executive
compensation and corporate governance. In order to participate, the Treasury
would need to approve the Company’s participation and the Company’s shareholders
would need to approve an amendment to the Company’s articles of incorporation
authorizing the Board of Directors to issue preferred stock on such terms as it
may determine. The minimum subscription amount available to a participating
institution is 1% of risk-weighted assets. The maximum subscription amount is
the lesser of $25 billion or 3% of risk-weighted assets. For the Company, the
minimum amount would be approximately $4 million and the maximum amount would be
approximately $11 million. The Company plans to use any capital it may receive
under the CPP to fund prudent, diversified loan growth in its markets and to
strengthen its capital position.
 
 The
extent to which the Company may ultimately participate in the program has not
yet been determined.
  Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market
Risk.
 
 As of
September 30, 2008 there were no substantial changes in the composition of the
Company’s market-sensitive assets and liabilities or their related market values
from that reported as of December 31, 2007.  The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company’s audited consolidated financial statements, related notes and
management’s discussion and analysis of financial condition and results of
operations for the year ended December 31, 2007 included in the Company’s 2007
Annual Report on Form 10K.
 
 Item
      4.
                  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 not been any changes in the Company’s internal control over financial
reporting or, to the Company’s knowledge, in other factors, during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
 
 
 PART
II
 
 OTHER
INFORMATION
 
 Item
      1.
                  Legal
      proceedings.
 None
 
 Item
      1A.
                  Risk
      Factors.
 
 In
addition to the other information set forth in this report, you should carefully
consider the factors discussed below, as well as those included in Part I. “Item
1.A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007, all of which could materially affect its business,
financial condition or future results.  The risks described below and
in the Annual Report of Form 10-K are not the only risks facing the
Company.  Additional risks and uncertainties not currently known to
management or that management currently deems to be immaterial also may
materially adversely affect the Company’s business, financial condition and/or
operating results.
  23
  Weakness
in the economy and in the real estate market, including specific weakness within
our geographic footprint, has adversely affected us and may continue to
adversely affect us
 
 Declines
in the U.S. economy and our local real estate markets contributed to our
increasing provisions for loan losses during 2008, and may result in additional
loan losses and loss provisions for the remainder of 2008 and 2009.These factors
could result in further increases in loan loss provisions,, delinquencies and/or
charge-offs in future periods, which may adversely affect our financial
condition and results of operations.  If the strength of the U.S.
economy in general and the strength of the local economies in which we conduct
operations continue to decline, this could result in, among other things,
further deterioration in credit quality or a reduced demand for credit,
including a resultant adverse effect on our loan portfolio and allowance for
loan and lease losses.
 
 In
addition, deterioration of the U.S. economy may adversely impact our banking
business more generally.  Economic declines may be accompanied by a
decrease in demand for consumer or commercial credit and declining real estate
and other asset values. Declining real estate and other asset values may reduce
the ability of borrowers to use such equity to support borrowings.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Additionally, our servicing costs, collection costs and
credit losses may also increase in periods of economic slowdown or
recessions.  Effects of the current real estate slowdown have not been
limited to those directly involved in the real estate construction industry
(such as builders and developers). Rather, it has impacted a number of related
businesses such as building materials suppliers, equipment leasing firms, and
real estate attorneys, among others. All of these affected businesses have
banking relationships, and when their businesses suffer from recession, the
banking relationship suffers as well.
 
 We
are subject to liquidity risk in our operations.
 
 Liquidity
risk in the possibility of being unable to meet our obligations as they come
due, capitalize on growth opportunities as they arise, or pay regular dividends
because of an inability to liquidate assets or obtain adequate funding on a
timely basis, at a reasonable cost and within acceptable risk
tolerances.  Liquidity is required to fund various obligations,
including credit obligation to borrowers, mortgage originations, withdrawals by
depositors, repayment of debt, dividends to shareholders, operating expenses and
capital expenditures.  Liquidity is derived primarily from retail
deposit growth and retention, principal and interest payments on loans and
investment securities, net cash provided from operation and access to other
funding sources.  Our access to funding sources in amounts adequate to
finance our activities could be impaired by factors that affect us specifically
or the financial services industry in general.  Factors that could
detrimentally affect our access to liquidity sources include a decrease in the
level of our business activity due to a market downturn or adverse regulatory
action against us.  Our ability to borrow could also be impaired by
factors that are not specific to us, such as a severe disruption in the
financial markets or negative views and expectations about the prospects for the
financial services industry as a whole, given the recent turmoil faced by
banking organizations in the domestic and worldwide credit markets.
 
 Our
ability to raise capital could be limited, could affect our liquidity and could
be dilutive to existing shareholders.
 
 Current
capital markets conditions are such that traditional sources of capital may not
be available to us on reasonable terms if we need to raise such
capital.  In such a case, there is no guarantee that we will be able
to borrow funds or successfully raise additional capital at all or on terms that
are favorable or otherwise not dilutive to existing shareholders.
 
 The
impact of the current economic downturn on the performance of other financial
institutions in our geographic  area, actions taken by our competitors
to address the current economic downturn, and the public perception of and
confidence in the economy generally, and the banking industry
specifically, could negatively impact our performance and
operations.
  24
  All
financial institutions are subject to the same risks resulting from a weakening
economy such as increased charge-offs and levels of past due loans and
nonperforming assets. As troubled institutions in our market area continue to
dispose of problem assets, the already excess inventory of residential homes and
lots will continue to negatively impact home values and increase the time it
takes us or our borrowers to sell existing inventory. The perception that
troubled banking institutions (and smaller banking institutions that are not “in
trouble”) are risky institutions for purposes of regulatory compliance or
safeguarding deposits may cause depositors nonetheless to move their funds to
larger institutions. If our depositors should move their funds based on events
happening at other financial institutions, our operating results would
suffer.
 
 Volatility
in the capital and credit markets, together with the current real estate
slowdown, have resulted in significant pressure on the financial services
industry.
 
 We have
experienced a higher level of foreclosures and losses upon foreclosure during
recent periods than we have historically.  If current volatility and
market conditions continue or worsen, our business, financial condition and
results of operations could be materially adversely affected.  We may
therefore experience further increases in loan losses, deterioration of capital
or limitations on our access to funding or capital.
 
 The Emergency
Economic Stabilization Act of 2008 (“EESA”) may not stabilize the financial
services industry.
 
 The EESA,
which was signed into law on October 3, 2008, is intended to alleviate the
financial crises affecting the U.S. banking system.  A number of
programs are being developed and implemented under EESA.  The EESA may
not have the intended effect, however, and as a result, the condition of the
financial services industry could decline instead of improve.  The
failure of the EESA to improve the condition of the U.S. banking system could
significantly adversely affect our access to funding or capital, the trading
price of our stock, and other elements of our business, financial condition, and
results of operations.
 
 Item2
                  Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 Issuer
Purchases of Equity Securities
 The
Company did not repurchase any of its shares of common stock during the period
covered by this report.
 
 Item3.
                  Defaults
      upon senior securities.
 
   Item4.
                  Submission
      of matters to a vote of security
holders.
 
   Item5.
                  Other
      information.
    Item6.
                  Exhibits
 
 (a) The
registrant submits herewith as exhibits to this report on Form 10-Q the exhibits
required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the
Securities Exchange Act of 1934.
 
 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
theSarbanes-Oxley Act of 2002.
 
 31.2 Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
 
 32 Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
  25
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 HABERSHAM
BANCORP
 (Registrant)
 
 
 Date
      November 14, 2008
                      
                      /S/ Annette BanksChief
      Financial Officer(for
      the Registrant and as theRegistrant’s
      principal financial andaccounting
      officer)
   26