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, 2009





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 incorporation or organization
            (I.R.S.
      Employer Identification Number)282 Historic Highway 441 North, P. O. Box 1980,
      Cornelia, Georgia
            30531(Address
      of principal executive offices)
            (Zip
      Code)








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





Securities
registered pursuant to Section 12(b) of the Exchange
Act:             Common Stock, $1.00 par
value





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





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


Yes o  No x





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


Yes o  No x





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


Yes x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yeso   No
o





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


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





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


Yes o  No x





State the
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 13, 2009.







1


Item.
1   Financial Statements





HABERSHAM
BANCORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(dollars
in thousands)





ASSETS
            
            SEPTEMBER
      30,
              2009
              (unaudited)
            
            
            DECEMBER
      31,
              2008
              (audited)Cash
      and due from banks
            
            $
            19,967
            
            
            $
            13,640Federal
      funds sold
            
            
            12,630
            
            
            
            620Total
      cash and cash equivalents
            
            
            32,597
            
            
            
            14,260Investment
      securities available for sale
            
            
            86,907
            
            
            
            97,278Investment
      securities held to maturity (estimated fair value of $1,040 at September
      30,  2009 and $1,053 at December 31, 2008)
            
            
            1,019
            
            
            
            1,025Other
      investments
            
            
            2,598
            
            
            
            3,334Loans
            
            
            295,646
            
            
            
            322,775Less
      allowance for loan losses
            
            
            (10,378
            )
            
            
            (12,168
            )Loans,
      net
            
            
            285,268
            
            
            
            310,607Premises
      and equipment, net
            
            
            15,268
            
            
            
            19,479Bank
      properties held for sale
            
            
            3,366
            
            
            
            -Other
      real estate owned
            
            
            36,620
            
            
            
            27,337Cash
      surrender value of life insurance
            
            
            10,195
            
            
            
            9,936Accrued
      interest receivable
            
            
            2,013
            
            
            
            2,222Income
      tax receivable
            
            
            -
            
            
            
            2,504Other
      assets
            
            
            12,940
            
            
            
            6,887TOTAL
      ASSETS
            
            $
            488,791
            
            
            $
            494,869LIABILITIESNoninterest-bearing
      deposits
            
            $
            30,234
            
            
            $
            29,664Money
      market and NOW accounts
            
            
            78,432
            
            
            
            77,638Savings
            
            
            40,280
            
            
            
            43,180Time
      deposits, $100,000 and over
            
            
            119,656
            
            
            
            102,391Other
      time deposits
            
            
            134,614
            
            
            
            140,015Total
      deposits
            
            
            403,216
            
            
            
            392,888Short-term
      borrowings
            
            
            400
            
            
            
            760Federal
      funds purchased and securities sold under repurchase
      agreements
            
            
            8,134
            
            
            
            16,384Federal
      Home Loan Bank advances
            
            
            38,000
            
            
            
            38,000Accrued
      interest payable
            
            
            2,617
            
            
            
            2,805Other
      liabilities
            
            
            2,003
            
            
            
            2,034TOTAL
      LIABILITIES
            
            
            454,370
            
            
            
            452,871CommitmentsSTOCKHOLDERS’
      EQUITYPreferred
      stock - Series A; 10,000 shares authorized; 3,000 shares issued and
      outstanding at December 31, 2008: No shares issued and outstanding at
      September 30, 2009
            
            
            -
            
            
            
            2,978Preferred
      stock - Series B:   4,000 shares authorized; no shares
      issued or outstanding at December 31, 2008: 4,000 shares issued and
      outstanding at September 30, 2009
            
            
            3,963
            
            
            
            -Common
      Stock, $1.00 par value, 10,000,000 shares authorized; 2,818,593 shares
      issued and outstanding
            
            
            2,819
            
            
            
            2,819Additional
      paid-in capital
            
            
            13,490
            
            
            
            13,490Retained
      earnings
            
            
            13,143
            
            
            
            22,518Accumulated
      other comprehensive income
            
            
            1,006
            
            
            
            193TOTAL
      STOCKHOLDERS’ EQUITY
            
            
            34,421
            
            
            
            41,998TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            488,791
            
            
            $
            494,869





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, 2009 and
2008


(dollars
in thousands, except per share amounts)





Three Months ended
            
            
            Nine Months endedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008INTEREST
      INCOMELoan
      interest and fees on loans
            
            $
            4,075
            
            
            $
            5,076
            
            
            $
            12,809
            
            
            $
            17,042Taxable
      investment securities
            
            
            894
            
            
            
            916
            
            
            
            2,860
            
            
            
            2,626Tax
      exempt securities
            
            
            142
            
            
            
            192
            
            
            
            430
            
            
            
            745Federal
      funds sold
            
            
            9
            
            
            
            4
            
            
            
            23
            
            
            
            84Other
            
            
            15
            
            
            
            24
            
            
            
            24
            
            
            
            153TOTAL
      INTEREST INCOME
            
            
            5,135
            
            
            
            6,212
            
            
            
            16,146
            
            
            
            20,650INTEREST
      EXPENSETime
      deposits, $100,000 and over
            
            
            1,021
            
            
            
            1,018
            
            
            
            3,113
            
            
            
            3,658Other
      deposits
            
            
            1,549
            
            
            
            1,680
            
            
            
            4,890
            
            
            
            5,289Short-term
      and other borrowings, primarily FHLB advances
            
            
            417
            
            
            
            659
            
            
            
            1,363
            
            
            
            1,984TOTAL
      INTEREST EXPENSE
            
            
            2,987
            
            
            
            3,357
            
            
            
            9,366
            
            
            
            10,931NET
      INTEREST INCOME
            
            
            2,148
            
            
            
            2,855
            
            
            
            6,780
            
            
            
            9,719Provision
      for loan losses
            
            
            7,400
            
            
            
            6,293
            
            
            
            10,480
            
            
            
            7,370NET
      INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            (5,252
            )
            
            
            (3,438
            )
            
            
            (3,700
            )
            
            
            2,349NONINTEREST
      INCOMEMortgage
      origination income
            
            
            15
            
            
            
            48
            
            
            
            108
            
            
            
            363Service
      charges on deposits
            
            
            294
            
            
            
            288
            
            
            
            794
            
            
            
            786Other
      service charges and commissions
            
            
            62
            
            
            
            67
            
            
            
            183
            
            
            
            207Gain
      on sale of investment securities available for sale
            
            
            55
            
            
            
            27
            
            
            
            369
            
            
            
            316Gain
      on sale and impairment of other investments, net
            
            
            -
            
            
            
            -
            
            
            
            20
            
            
            
            -Other
      income
            
            
            426
            
            
            
            504
            
            
            
            1,350
            
            
            
            1,554Total
      noninterest income
            
            
            852
            
            
            
            934
            
            
            
            2,824
            
            
            
            3,226NONINTEREST
      EXPENSESalary
      and employee benefits
            
            
            1,836
            
            
            
            2,338
            
            
            
            5,740
            
            
            
            7,272Occupancy
            
            
            823
            
            
            
            680
            
            
            
            2,217
            
            
            
            1,869Other
      real estate expense
            
            
            894
            
            
            
            132
            
            
            
            1,575
            
            
            
            426Computer
      services
            
            
            190
            
            
            
            164
            
            
            
            508
            
            
            
            432Telephone
            
            
            118
            
            
            
            120
            
            
            
            353
            
            
            
            354Leased
      equipment
            
            
            122
            
            
            
            119
            
            
            
            367
            
            
            
            353General
      and administrative expense
            
            
            1,516
            
            
            
            1,021
            
            
            
            3,807
            
            
            
            2,980Total
      noninterest expense
            
            
            5,499
            
            
            
            4,574
            
            
            
            14,567
            
            
            
            13,686LOSS
      BEFORE INCOME TAXES
            
            
            (9,899
            )
            
            
            (7,078
            )
            
            
            (15,443
            )
            
            
            (8,111
            )Income
      tax benefit
            
            
            3,930
            
            
            
            2,787
            
            
            
            6,219
            
            
            
            3,504NET
      LOSS
            
            $
            (5,969
            )
            
            $
            (4,291
            )
            
            $
            (9,224
            )
            
            $
            (4,607
            )Net
      loss per common share – Basic
            
            $
            (2.14
            )
            
            $
            (1.52
            )
            
            $
            (3.33
            )
            
            $
            (1.63
            )Net
      loss per common share – Diluted
            
            $
            (2.14
            )
            
            $
            (1.52
            )
            
            $
            (3.33
            )
            
            $
            (1.63
            )Weighted
      average number of common shares outstanding
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593Weighted
      average number of common and common equivalent shares
      outstanding
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593Dividends
      per share
            
            
            -
            
            
            $
            .05
            
            
            
            -
            
            
            $
            .25





See notes
to unaudited condensed consolidated financial statements.


3


HABERSHAM
BANCORP AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(Unaudited)
For the Three- and Nine-Month Periods Ended September 30, 2009 and
2008


(dollars
in thousands)





Three
      Months ended
            
            
            Nine
      Months endedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008NET
      LOSS
            
            $
            (5,969
            )
            
            $
            (4,291
            )
            
            $
            (9,224
            )
            
            $
            (4,607
            )OTHER
      COMPREHENSIVE INCOME (LOSS):Unrealized
      holding gains (losses) on investment securities available for sale arising
      during the period
            
            
            1,716
            
            
            
            342
            
            
            
            1,506
            
            
            
            (1,602
            )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
            
            
            26
            
            
            
            24
            
            
            
            95
            
            
            
            (23
            )Reclassification
      adjustment for realized gains on  investment securities
      available for sale
            
            
            (55
            )
            
            
            (27
            )
            
            
            (369
            )
            
            
            (316
            )Total
      other comprehensive income (loss), before tax
            
            
            1,687
            
            
            
            339
            
            
            
            1,232
            
            
            
            (1,941
            )INCOME
      TAXES RELATED TO OTHER COMPREHENSIVE INCOME (LOSS):Unrealized
      holding (gains) losses gains on investment securities available for sale
      arising during the period
            
            
            (583
            )
            
            
            (116
            )
            
            
            (512
            )
            
            
            545Unrealized
      holding (gains) losses on derivative financial instruments classified as
      cash flow hedges, arising during the period
            
            
            (9
            )
            
            
            (8
            )
            
            
            (32
            )
            
            
            8Reclassification
      adjustment for realized gains on investment securities available for
      sale
            
            
            19
            
            
            
            9
            
            
            
            125
            
            
            
            107Total
      income taxes related to other comprehensive
      income   (loss)
            
            
            (573
            )
            
            
            (115
            )
            
            
            (419
            )
            
            
            660Total
      other comprehensive income  (loss), net of tax
            
            
            1,114
            
            
            
            224
            
            
            
            813
            
            
            
            (1,281
            )Total
      comprehensive loss
            
            $
            (4,855
            )
            
            $
            (4,067
            )
            
            $
            (8,411
            )
            
            $
            (5,888
            )





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, 2009 and 2008


(dollars
in thousands)




Nine
      MonthsEnded
      September 30,2009
            
            
            2008CASH
      FLOWS (USED BY) PROVIDED BY OPERATING ACTIVITIES:
            
            $
            (997
            )
            
            $
            965CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      securities available for sale:Proceeds
      from maturity
            
            
            10,218
            
            
            
            8,105Proceeds
      from sales and calls
            
            
            24,338
            
            
            
            39,524Purchases
            
            
            (22,936
            )
            
            
            (49,439
            )Investment
      securities held to maturity:Proceeds
      from maturity
            
            
            7
            
            
            
            1,192Proceeds
      from calls
            
            
            -
            
            
            
            11Other
      investments:Proceeds
      from sale
            
            
            758
            
            
            
            75Purchases
            
            
            (2
            )
            
            
            -Net
      decrease (increase) in loans
            
            
            (5,412
            )
            
            
            3,588Proceeds
      from sale of loans
            
            
            5,910
            
            
            
            -Purchases
      of premises and equipment
            
            
            (116
            )
            
            
            (3,516
            )Proceeds
      from sales of premises & equipment
            
            
            32
            
            
            
            -Capitalized
      completion costs of other real estate
            
            
            (741
            )
            
            
            (902
            )Proceeds
      from sale of other real estate
            
            
            4,725
            
            
            
            1,185Net
      cash provided by (used by) investing activities
            
            
            16,781
            
            
            
            (177
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase (decrease) in deposits
            
            
            10,329
            
            
            
            (2,990
            )Net
      (decrease) increase in short-term borrowings
            
            
            (360
            )
            
            
            2Net
      decrease in federal funds purchased and securities sold under repurchase
      agreements
            
            
            (8,250
            )
            
            
            (4,446
            )Proceeds
      from FHLB advances
            
            
            15,000
            
            
            
            7,000Repayment
      of FHLB advances
            
            
            (15,000
            )
            
            
            (7,000
            )Issuance
      of preferred stock
            
            
            1,000
            
            
            
            -Preferred
      stock issuance costs
            
            
            (15
            )
            
            
            -Cash
      dividends paid
            
            
            (151
            )
            
            
            (705
            )Net
      cash provided by (used by) financing activities
            
            
            2,553
            
            
            
            (8,139
            )Increase
      (decrease) in cash and cash equivalents
            
            
            18,337
            
            
            
            (7,351
            )CASH
      AND CASH EQUIVALENTS:  BEGINNING OF PERIOD
            
            
            14,260
            
            
            
            22,385CASH
      AND CASH EQUIVALENTS:  END OF PERIOD
            
            $
            32,597
            
            
            $
            15,034SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Other
      real estate acquired through loan foreclosures
            
            $
            14,302
            
            
            $
            8,844Change
      in components of other comprehensive income
            
            $
            813
            
            
            $
            (1,281
            )Reclassification
      of  premises and equipment, net to bank properties held for
      sale
            
            $
            3,366
            
            
            $
            -





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 2008 consolidated financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.





Certain
reclassifications have been made to the 2008 financial statement presentation to
correspond to the current period’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, 2008.  The Company
has consistently followed those policies in preparing this
report.  The following is an additional new significant
policy.





Events or
Transactions Subsequent to the Balance Sheet Date





Financial
Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) 855,
Subsequent
Events,  applies to interim and annual financial periods
ending  after June 15, 2009.  The statement established
principles setting forth the period after the balance sheet date during which
management shall evaluate events and transactions that may occur for potential
recognition or disclosure in the financial statements.  For the
purposes of this accounting standard, the Company has evaluated subsequent
events through November 16, 2009, the date financial statement were
issued.





3.
            Other Comprehensive
      Loss





Other
comprehensive loss for the Company consists of items recorded directly in equity
related to investment securities available for sale and derivative financial
instruments accounting for as 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, 2009, fair value
of the available for sale investment securities increased approximately $1.1
million when compared to the fair value at December 31, 2008.  The
corresponding equity component of unrealized gain and loss on available for sale
securities, net of tax, also increased approximately $750,000.  These
changes were the results of movements in the bond market as it responds to
interest rate changes in the market.  At September 30, 2009, fair
value of the cash flow hedges increased approximately $95,000 when compared to
the fair value at December 31, 2008.  The corresponding equity
component of unrealized holding gains on derivative financial instruments
classified as cash flow hedges, net of tax, also increased approximately
$63,000.


6


4.
            Net
      Loss Per Share





Basic
loss per share is computed by dividing net loss less dividends paid on preferred
stock by the weighted average of common shares outstanding.  Options
on 172,750 and 230,750 shares were not included in the diluted loss per share
computations for the three months ended September 30, 2009 and 2008,
respectively, as they were antidilutive. Options on 172,750 and 230,750 shares
were not included in the diluted loss per share computations for the nine month
period ended September 30, 2009 and 2008, respectively, as they were
antidilutive.





The
reconciliation of the amounts used in the computation of loss per share for the
three-month and nine-month periods ended September 30, 2009 and 2008 is shown
below.





(dollars
      in thousands, except share and and per share amounts)
            
            Three
      Months
              ended
              September 30, 2009
            
            
            Three
      Months
              ended
              September 30, 2008
            
            
            Nine
      Months
              ended
              September 30, 2009
            
            
            Nine
      Months
              ended
              September 30, 2008Net
      loss
            
            $
            (5,969
            )
            
            $
            (4,291
            )
            
            $
            (9,224
            )
            
            $
            (4,607
            )Less
      dividends on preferred stock
            
            
            (60
            )
            
            
            -
            
            
            
            (151
            )
            
            
            -Net
      loss available to common shareholders
            
            $
            (6,029
            )
            
            $
            (4,291
            )
            
            $
            (9,375
            )
            
            $
            (4,607
            )Weighted
      average common shares outstanding
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593
            
            
            
            2,818,593Loss
      per share:Basic
            
            $
            (2.14
            )
            
            $
            (1.52
            )
            
            $
            (3.33
            )
            
            $
            (1.63
            )Diluted
            
            $
            (2.14
            )
            
            $
            (1.52
            )
            
            $
            (3.33
            )
            
            $
            (1.63
            )


7


5.
            Investment
      Securities Available for Sale





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





(dollars
      in thousands)
              
              September 30, 2009
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueU.S.
      government-sponsored enterprises
            
            $
            23,993
            
            
            
            218
            
            
            
            47
            
            
            
            24,164Mortgage-backed
      securities
            
            
            48,349
            
            
            
            1,286
            
            
            
            7
            
            
            
            49,628State
      and political subdivisions
            
            
            12,831
            
            
            
            234
            
            
            
            137
            
            
            
            12,928Equity
      securities
            
            
            209
            
            
            
            -
            
            
            
            22
            
            
            
            187Total
            
            $
            85,382
            
            
            
            1,738
            
            
            
            213
            
            
            
            86,907





December 31, 2008
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueU.S.
      government-sponsored enterprises
            
            $
            26,698
            
            
            
            451
            
            
            
            16
            
            
            
            27,133Mortgage-backed
      securities
            
            
            55,391
            
            
            
            1,066
            
            
            
            45
            
            
            
            56,412State
      and political subdivisions
            
            
            14,592
            
            
            
            31
            
            
            
            1,075
            
            
            
            13,548Equity
      securities
            
            
            209
            
            
            
            -
            
            
            
            24
            
            
            
            185Total
            
            $
            96,890
            
            
            
            1,548
            
            
            
            1,160
            
            
            
            97,278





Proceeds
from sales and calls of available for sale securities during the first nine
months of 2009 and 2008 were $24,337,965 and $39,523,726,
respectively.   Gross gains of $376,812 were recognized on those
sales for the first nine months of 2009 and gross gains of $328,499 were
recognized on those sales for the first nine months of 2008.  Gross
losses of $7,750 were recognized on those sales for the first nine months of
2009 and gross losses of $12,527 were recognized on those sales for the first
nine months of 2008.


8


The
following investments available for sale have an unrealized loss at September
30, 2009 and December 31, 2008 for which an other than temporary impairment has
not been recognized:





(dollars
      in thousands)
            
            
            
            
            September
      30, 2009
            
            
            
            
            
            December
      31, 2008No.
            
            
            Estimated
      Fair Value
            
            
            Unrealized
      Losses
            
            
            No.
            
            
            Estimated
      Fair Value
            
            
            Unrealized
      LossesUnrealized
      loss for less than 12 months:U.S.
      government-sponsored enterprises
            
            
            9
            
            
            $
            7,958
            
            
            
            46
            
            
            
            1
            
            
            $
            859
            
            
            
            14Mortgage-backed
      securities
            
            
            7
            
            
            
            2,250
            
            
            
            7
            
            
            
            15
            
            
            
            2,622
            
            
            
            13State
      and political subdivisions
            
            
            10
            
            
            
            2,138
            
            
            
            127
            
            
            
            32
            
            
            
            9,974
            
            
            
            86026
            
            
            
            12,346
            
            
            
            180
            
            
            
            48
            
            
            
            13,455
            
            
            
            887Unrealized
      loss for greater than 12 months:U.S.
      government-sponsored enterprises
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            60
            
            
            
            2Mortgage-backed
      securities
            
            
            1
            
            
            
            53
            
            
            
            1
            
            
            
            14
            
            
            
            4,600
            
            
            
            33State
      and political subdivisions
            
            
            3
            
            
            
            1,331
            
            
            
            10
            
            
            
            5
            
            
            
            1,520
            
            
            
            214Equity
      securities
            
            
            1
            
            
            
            187
            
            
            
            22
            
            
            
            1
            
            
            
            185
            
            
            
            245
            
            
            
            1,571
            
            
            
            33
            
            
            
            21
            
            
            
            6,365
            
            
            
            27331
            
            
            $
            13,917
            
            
            
            213
            
            
            
            69
            
            
            $
            19,820
            
            
            
            1,160





The total
fair value of the securities with an unrealized loss at September 30, 2009 and
December 31, 2008 represented 98.49% and 94.15%, respectively, of their
amortized cost; therefore, the impairment is not considered severe. While the
duration is dependent on the market, the existing unrealized loss could be
shortened by the issuing agency calling the securities.  These
unrealized losses are considered temporary because of acceptable investment
groups on each security and the repayment source of principal and interest are
largely government backed.


9


The
amortized cost and estimated fair values of investment securities available for
sale, exclusive of equity investments, at September 30, 2009 and
December 31, 2008, by contractual maturity, are shown
below.  Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Callable securities and mortgage-backed
securities are included in the year of their contractual maturity
date.




(dollars
      in thousands)
            
            September
      30, 2009
            
            
            September
      30, 2009
            
            
            December
      31, 2008
            
            
            December
      31, 2008Amortized
              Cost
            
            
            Estimated
              Fair Value
            
            
            Amortized
              Cost
            
            
            Estimated
              Fair ValueDue
      in one year or less
            
            $
            218
            
            
            
            219
            
            
            
            84
            
            
            
            84Due
      after one year through five years
            
            
            1,424
            
            
            
            1,423
            
            
            
            2,324
            
            
            
            2,325Due
      after five years through ten years
            
            
            8,680
            
            
            
            8,889
            
            
            
            16,584
            
            
            
            16,809Due
      after ten years
            
            
            74,851
            
            
            
            76,189
            
            
            
            77,689
            
            
            
            77,875Total
            
            $
            85,173
            
            
            
            86,720
            
            
            
            96,681
            
            
            
            97,093





Investment
securities available for sale with carrying values of approximately $46,327,000
and $76,782,000 were pledged as collateral at September 30, 2009 and
December 31, 2008, respectively, for Federal Home Loan Bank advances,
public deposits, and other deposits, as required by law.





6.
            Investment
      Securities Held to Maturity





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





(dollars
      in thousands)
              
              September 30, 2009
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueMortgage-backed
      securities
            
            $
            20
            
            
            
            1
            
            
            
            -
            
            
            
            21State
      and political subdivisions
            
            
            999
            
            
            
            20
            
            
            
            -
            
            
            
            1,019Total
            
            $
            1,019
            
            
            
            21
            
            
            
            -
            
            
            
            1,040





December 31, 2008
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair ValueMortgage-backed
      securities
            
            $
            27
            
            
            
            1
            
            
            
            -
            
            
            
            28State
      and political subdivisions
            
            
            998
            
            
            
            27
            
            
            
            -
            
            
            
            1,025Total
            
            $
            1,025
            
            
            
            28
            
            
            
            -
            
            
            
            1,053





There
were no calls of held to maturity securities during the first nine months of
2009.  Proceeds from calls of held to maturity securities during the
first nine months of 2008 were $1,232,523.   Gross gains of
$18,477 were recognized on the calls in the first nine months of 2008. There
were no gross losses recognized on the calls in the first nine months of
2008.


10


The
amortized cost and estimated fair values of securities held to maturity at
September 30, 2009 and December 31, 2008, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Callable securities and mortgage-backed securities are
included in the year of their contractual maturity date.





(dollars
      in thousands)
            
            September 30,
      2009
            
            
            September 30,
      2009
            
            
            December 31,
      2008
            
            
            December 31,
      2008Amortized
              Cost
            
            
            Estimated
              Fair Value
            
            
            Amortized
              Cost
            
            
            Estimated
              Fair ValueDue
      in one year or less
            
            $
            135
            
            
            
            135
            
            
            
            135
            
            
            
            137Due
      after one year through five years
            
            
            556
            
            
            
            562
            
            
            
            562
            
            
            
            569Due
      after five years through ten years
            
            
            324
            
            
            
            339
            
            
            
            324
            
            
            
            342Due
      after ten years
            
            
            4
            
            
            
            4
            
            
            
            4
            
            
            
            5Total
            
            $
            1,019
            
            
            
            1,040
            
            
            
            1,025
            
            
            
            1,053





Investment
securities held to maturity with carrying values of approximately $545,000 and
$999,000 were pledged as collateral at September 30, 2009 and December 31,
2008,  respectively, for public deposits and other deposits, as
required by law.





7.
            Nonperforming
      Assets





Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due, otherreal estate owned and
restructured loans. 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.  Any difference 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. Restructured loans consist of loans which have had concessions granted
for economic or legal reasons related to the debtor’s financial difficulties
which would not otherwise be considered.  Concessions may include a
modification of the loan terms, such as a reduction of the stated interest rate,
principal or accrued interest or an extension of the maturity date at a stated
interest rate lower than the current market rate for new debt with similar
risk.





The
following summarizes nonperforming assets:





(dollars
      in thousands)
            
            September 30, 2009
            
            
            December 31, 2008Accruing
      loans 90 days past due
            
            $
            1,911
            
            
            $
            802Nonaccrual
      loans
            
            
            52,502
            
            
            
            56,055Other
      real estate
            
            
            36,620
            
            
            
            27,337Restructured
      loans
            
            
            691
            
            
            
            -Total
      nonperforming assets
            
            $
            91,724
            
            
            $
            84,194





11


8.
            Bank
      Properties Held for Sale





Two of
Habersham Bank’s offices (Braselton and Hickory Flat) are scheduled to close in
December 2009 as a part of the Bank’s strategy to consolidate locations and
reduce staffing needs.  In addition, the bank plans to sell an eight
acre portion of the land at the Flowery Branch office.  As such, these
properties have been reclassed from premises and equipment, net,  to
bank properties held for sale.    The properties are being
actively marketed for sale and the Hickory Flat property is currently under
contract and is expected to close in December 2009.





9.
            Regulatory
      Matters





On June
24, 2009, Habersham Bank (the “Bank”), the subsidiary bank of Habersham Bancorp
(the “Company”), entered into an Order to Cease and Desist (the “Order”) with
the Georgia Department of Banking and Finance (the “Department”).  The
Regional director of the Federal Deposit Insurance Corporation (the “FDIC”) has
acknowledged the Order.  The Order became effective 10 days after
issuance.





Under the
terms of the Order, the Bank will prepare and submit written plans and/or
reports to the regulators that address the following items: maintaining
sufficient capital at the Bank; improving the Bank’s liquidity position and
funds management practices; reducing adversely classified items; reviewing and
revising as necessary the Bank’s allowance for loan and lease losses policy;
continuing to improve loan underwriting, loan administration, and portfolio
management; reducing concentrations of credit; and revising and implementing a
profitability plan and comprehensive budget to improve and sustain the Bank’s
earnings.  While the Order remains in place, the Bank may not pay cash
dividends or bonuses without the prior written consent of the
regulators.





The
Company’s management and Board intend to fully comply with the requirements of
the Order.




10.
            Preferred
      Stock





On June
25, 2009, the Company amended its Amended and Restated Articles of Incorporation
to authorize 4,000 shares of Series B Convertible Redeemable Preferred Stock, no
par value (the “Series B Preferred Stock").  The terms of the Series B
Preferred Stock were established by the Company’s  Board of
Directors.





The
Series B Preferred Stock is nonvoting except as permitted, by
law;  will receive a 6% per annum non-cumulative dividend, payable
quarterly; has a liquidation preference of $1,000 per share and may be redeemed
by the Company at any time, subject to any required regulatory or third party
approvals.  The Series B Preferred Stock is convertible into
common stock at the holder’s option beginning three years after issuance at a
conversion price of $4.00 per share, subject to standard anti-dilution
provisions and the following limitations on conversion:  (i) the
holder will not be entitled to convert the shares to the extent the conversion
would result in the holder’s beneficial ownership of more than 4.99% of the
shares of common stock that would be outstanding immediately following
conversion unless the holder obtains such prior regulatory approval as may be
required for its resulting beneficial ownership of the common stock or an
opinion of counsel that such approval is not required; and (ii) the holder
will not be entitled to convert to the extent it would result in the issuance of
more shares than the Company would be allowed to issue upon conversion under
Nasdaq Stock Market rules (20% or more of the outstanding shares, calculated as
of the original issuance date of the Series B Preferred Stock) unless the
Company obtains either prior shareholder approval of the issuance under
applicable Nasdaq rules or an opinion of counsel that such approval is not
required.





The
Company’s Board of Directors approved the issuance of 4,000 shares of Series B
Preferred Stock in the following  transactions.  On June 25,
2009, the Company issued 1,000 shares of Series B Preferred Stock to two
investors for aggregate cash proceeds of $1 million. Additionally, on June 25,
2009, the Company issued 3,000 shares of Series B Preferred Stock to Fieldale
Farms Corporation (“Fieldale”) in exchange for the 3,000 shares of Series A
Non-Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) held by
Fieldale and the cancellation of the parties’ respective rights and obligations
under the Series A Preferred Stock Subscription Agreement, for no additional
consideration.   As a result, there were no shares of Series A
Preferred Stock outstanding and 4,000 shares of Series B Preferred Stock
outstanding at June 30, 2009.


12


The
Company did not pay any underwriting or placement fees or commissions with
respect to the sale, and it relied on the exemption from registration provided
by Rule 506 under the Securities Act of 1933, as amended, for the offer and sale
of the securities.





11.
            Fair
      Value Measurements and Disclosures





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





Fair Value
Hierarchy





Under
FASB ASC 820, Fair Value
Measurements and Disclosures, the Company groups assets and liabilities
at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine
fair value.  These levels are:





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


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


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





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





Cash and Cash
Equivalents





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





Investment Securities
Available for Sale





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





Investment Securities Held
to Maturity





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





Other
Investments





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


13


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
a specific allocation is established within the allowance for loan
losses.





Loans for
which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered
impaired.  Once a loan is identified as individually impaired,
management measures impairment in accordance with FASB ASC
310,   Receivables -  Loan
Impairment.   The fair value of impaired loans is
estimated using one of three methods, including collateral value, market value
of similar debt, and discounted cash flows.  Those impaired loans not
requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such
loans.  In accordance with FASB ASC 310, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the impaired loan as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
as nonrecurring Level 3.





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





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





Other Real Estate
Owned





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.





Cash Surrender Value of Life
Insurance





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





Derivative
Instruments





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





Deposits





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


14


Federal Funds Purchased and
Retail Repurchase Agreements





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





FHLB
Advances





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





Commitments to Extend Credit
and Standby Letter of Credit





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





Assets Recorded at Fair
Value on a Recurring Basis





The
tables below present the recorded amount of assets (liabilities) measured at
fair value on a recurring basis as of September 30, 2009 and December 31,
2008.





September
      30, 2009(dollars
      in thousands)
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Investment
      securities available for sale
            
            $
            85,907
            
            
            
            -
            
            
            
            85,907
            
            
            
            -





December
      31, 2008(dollars
      in thousands)
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Investment
      securities available for sale
            
            $
            97,277
            
            
            
            8,411
            
            
            
            88,866
            
            
            
            -Interest
      rate swap
            
            
            (95
            )
            
            
            -
            
            
            
            (95
            )
            
            
            -Total
      net assets at fair value
            
            $
            97,182
            
            
            
            8,411
            
            
            
            88,771
            
            
            
            -





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, 2009 and December 31,
2008.





September
      30, 2009(dollars
      in thousands)
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Other
      real estate owned
            
            $
            36,620
            
            
            
            -
            
            
            
            36,620
            
            
            
            -Loans
            
            
            58,800
            
            
            
            -
            
            
            
            58,800
            
            
            
            -Total
            
            $
            95,420
            
            
            
            -
            
            
            
            95,420
            
            
            
            -





December
      31, 2008(dollars
      in thousands)
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Other
      real estate owned
            
            $
            27,337
            
            
            
            -
            
            
            
            27,337
            
            
            
            -Loans
            
            
            58,660
            
            
            
            -
            
            
            
            58,660
            
            
            
            -Total
            
            $
            85,997
            
            
            
            -
            
            
            
            85,997
            
            
            
            -


15


The
carrying amount and estimated fair values of the Company’s assets and
liabilities which are required to be either disclosed or recorded at fair value
at September 30, 2009 and December 31, 2008 are presented below:





September
      30, 2009
            
            
            December
      31, 2008(dollars in
      thousands)
            
            Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueAssets:Cash
      and cash equivalents
            
            $
            32,597
            
            
            
            32,597
            
            
            
            14,260
            
            
            
            14,260Investment
      securities available for sale
            
            
            86,907
            
            
            
            86,907
            
            
            
            97,278
            
            
            
            97,278Investment
      securities held to maturity
            
            
            1,019
            
            
            
            1,040
            
            
            
            1,025
            
            
            
            1,053Other
      investments
            
            
            2,598
            
            
            
            2,598
            
            
            
            3,334
            
            
            
            3,334Loans,
      net
            
            
            285,268
            
            
            
            285,360
            
            
            
            310,607
            
            
            
            311,010Cash
      surrender value of  life insurance
            
            
            10,195
            
            
            
            10,195
            
            
            
            9,936
            
            
            
            9,936Liabilities:Deposits
            
            $
            403,216
            
            
            
            405,612
            
            
            
            392,888
            
            
            
            396,813Short-term
      borrowings
            
            
            400
            
            
            
            400
            
            
            
            760
            
            
            
            760Federal
      funds purchased and securities sold under repurchase
      agreements
            
            
            8,134
            
            
            
            8,134
            
            
            
            16,384
            
            
            
            16,384FHLB
      advances
            
            
            38,000
            
            
            
            38,963
            
            
            
            38,000
            
            
            
            39,280Interest
      rate swaps
            
            
            -
            
            
            
            -
            
            
            
            95
            
            
            
            95




Limitations





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





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





12.  Recent
Accounting Pronouncements





In June
2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”),
Topic 105 – Generally Accepted
Accounting Principles amendments based on Statement of Financial Accounting
Standards No. 168 – The FASB Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles.  ASU 2009-01 amends the FASB
Accounting Standards Codification for the issuance of FASB Statement No. 168
(“SFAS 168”), The FASB
Accounting Standards CodificationTMand the Hierarchy of Generally
Accepted Accounting Principles.  ASU 2009-1 includes SFAS 168
in its entirety, including the accounting standards update instructions
contained in Appendix B of the Statement.  The FASB Accounting
Standards Codification TM
(“Codification”) became the source of authoritative U.S. generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities.  Rules and interpretive releases ofthe
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this Statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards.  All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This Statement is effective for the Company’s
financial statements beginning in the interim period ended September 30,
2009.




16




Following
this Statement, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force
Abstracts.  Instead, it will issue Accounting Standards
Updates.  The FASB does not consider Accounting Standards Updates as
authoritative in their own right.  Accounting Standards Updates serve
only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the
Codification.  FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles, which became effective on November 13, 2008,
identified the sources of accounting principles and the framework for selecting
the principles used in preparing the financial statements of nongovernmental
entities that are presented in conformity with GAAP.  Statement 162
arranged these sources of GAAP in a hierarchy for users to apply
accordingly.  Upon becoming effective, all of the content of the
Codification carries the same level of authority, effectively superseding
Statement 162. In other words, the GAAP hierarchy has been modified to include
only two levels of GAAP: authoritative and non-authoritative.  As a
result, this Statement replaces Statement 162 to indicate this change to the
GAAP hierarchy.  The adoption of the Codification and ASU 2009-01 did
not have any effect on the Company’s results of operations or financial
position.  All references to accounting literature included in the
notes to the financial statements have been changed to reference the appropriate
sections of the Codification.




In
June 2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU
2009-02”), Omnibus Update –
Amendments to Various Topics for Technical Corrections.  The
adoption of ASU 2009-02 did not have a material effect on the
Company’s  results of operations, financial position or
disclosures.




In
August 2009, the FASB issued Accounting Standards Update No. 2009-03 (“ASU
2009-03”), SEC Update –
Amendments to Various Topics Containing SEC Staff Accounting
Bulletins.  ASU 2009-03 represents technical corrections to
various topics containing SEC Staff Accounting Bulletins to update
cross-references to Codification text.  This ASU did not have a
material effect on the Company’s results of operations, financial position or
disclosures.




In
August 2009, the FASB issued Accounting Standards Update No. 2009-04 (“ASU
2009-04”), Accounting for
Redeemable Equity Instruments – Amendment to Section
480-10-S99.  ASU 2009-04 represents an update to Section
480-10-S99, Distinguishing
Liabilities from Equity, per Emerging Issues Task Force (“EITF”) Topic
D-98, Classification and
Measurement of Redeemable Securities.  ASU 2009-04 did not have
a material effect on the Company’s results of operations, financial position or
disclosures.




In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”),
Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value.  ASU 2009-05 applies to all entities that measure
liabilities at fair value within the scope of ASC Topic 820.  ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
techniques:




1.)
            A
      valuation technique that uses:


a.
            The
      quoted price of the identical liability when traded as an
      asset


b.
            Quoted
      prices for similar liabilities or similar liabilities when traded as
      assets.


2.)
            Another
      valuation technique that is consistent with the principles of ASC Topic
      820.  Two examples would be an income approach, such as a
      technique that is based on the amount at the measurement date that the
      reporting entity would pay to transfer the identical liability or would
      receive to enter into the identical
liability.




The
amendments in ASU 2009-5 also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability.  It also clarifies that both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required are Level 1 fair value measurements.  The guidance provided
in ASU 2009-5 is effective for the Company in the fourth quarter of
2009.  Because the Company does not currently have any liabilities
that are recorded at fair value, the adoption of this guidance will not have any
impact on results of operations, financial position or
disclosures.


17


In
September 2009, the FASB issued Accounting Standards Update No. 2009-06 (“ASU
2009-06”), Income Taxes (Topic
740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities.  ASU 2009-06
provides additional implementation guidance on accounting for uncertainty in
income taxes by addressing 1.) whether income taxes paid by an entity are
attributable to the entity or its owners, 2.) what constitutes a tax position
for a pass-through entity or a tax-exempt not-for-profit entity, and 3.) how
accounting for uncertainty in income taxes should be applied when a group of
related entities comprise both taxable and nontaxable entities.  ASU
2009-06 also eliminates certain disclosure requirements for nonpublic
entities.  The guidance and disclosure amendments included in ASU
2009-06 were effective for the Company in the third quarter of 2009 and had no
impact on results of operations, financial position or disclosures.




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 $6 million or $2.14 per diluted share,
a 40.50% greater loss than the third quarter loss of $4.3 million or $1.52 per
diluted share in 2008.  Year-to-date loss for the nine-month period
ended September 30, 2009, was $9.2 million or $3.33 per diluted share, a 103.49%
greater loss than the year-to-date loss of $4.6 million of $1.63 per diluted
share for the same period in 2008.





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





Interest
income for the third quarter of 2009 and 2008 was approximately $5.1 million and
$6.2 million respectively, representing a decrease of approximately 17.34% when
comparing the third quarter of 2009 to the same period of
2008.  Interest income for the nine-month periods of 2009 and 2008 was
approximately $16.1 million and $20.7 million, respectively, representing a
decrease of approximately 21.81% when comparing the 2009 period to the 2008
period.  The decreases resulted from the effect of the low 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 2009 and 2008 was approximately $3.0 million
and $3.3 million respectively, representing a decrease of approximately 11.02%
when comparing the third quarter of 2009 to the same period of
2008.   Interest expense for the nine-month periods of 2009 and
2008 was approximately $9.4 million and $10.9 million, respectively,
representing a decrease of approximately 14.32% when comparing the 2009 period
to the 2008 period.  These decreases resulted from declining rates
paid on deposit and borrowing balances for the three-month and nine-month
periods ended September 30, 2009 when compared to the same periods in
2008.





Net
interest income before provision for loan loss for the third quarter of 2009 and
the nine-month period ended September 30, 2009 decreased approximately $707,000
or 24.76%, and $2.9 million or 30.24%, respectively, when compared to the same
periods in 2008 as a result of the items discussed above.


18


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 2009 of
approximately $7.4 million and $10.5 million, compared to provisions recorded
during the third quarter and the first nine months of 2008 of approximately $6.3
million and $7.4 million, respectively.





The net
interest margin for the third quarter and first nine months of 2009 was 2.17%
and 2.22%, respectively, compared to 2.80% and 3.08% for the same periods in
2008.  Two factors which impact the net interest margin are average
interest bearing assets, which decreased approximately $18.3 million and average
interest-bearing liabilities, which increased approximately $19 million, when
comparing the first nine months of 2009 to the first nine months of
2008.





The
Company’s total assets decreased $6.1 million, or 1.23%, to $488.8 million at
September 30, 2009 from $494.9 at December 31, 2008.  Decreases in the
loan portfolios (net of allowance for loan losses), investment securities and
premises and equipment, net of approximately $25.3 million, $11.1 million and
$3.7 million, respectively, were offset by increases in cash and cash equivalent
balances, other real estate, other assets and bank properties held for sale of
approximately $18.3 million, $9.3 million, $3.6 million and $2.8 million,
respectively.




Total
liabilities (deposits, borrowings and other liabilities) at September 30, 2009
increased approximately $1.3 million or .29% from $452.9 million at December 31,
2008 to $454.2 million at September 30, 2009.   Other borrowings
and other liabilities decreased approximately $8.6 million and $384,000,
respectively, and were offset by increases in interest bearing and noninterest
bearing account balances of approximately $9.7 million and $570,000,
respectively.





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.


19


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 $6.1 million, or 1.23% to $488.8 million
at September 30, 2009 from $494.9 at December 31, 2008.





Cash and
cash equivalents


Cash and
due from bank increased approximately $6.3 million or 46.39%, resulting from
customer activity within deposit accounts during the nine month period ended
September 30, 2009.  Federal funds sold balances increased
significantly by approximately $12 million (approximately 19 times the starting
balance) during this period.





Investment
securities


Activity
within the investment securities available for sale portfolio during the first
nine months of 2009 consisted of:





(dollars
      in thousands)
            
            U.S.
      government-sponsored enterprises
            
            
            Mortgage
      backed securities
            
            
            Municipal
      bonds
            
            
            Equity
              securities
            
            
            TotalDecember
      31, 2008
            
            $
            27,133
            
            
            
            56,412
            
            
            
            13,548
            
            
            
            185
            
            
            
            97,278Purchased
            
            
            8,204
            
            
            
            14,732
            
            
            
            -
            
            
            
            -
            
            
            
            22,936Calls
      & sales
            
            
            (10,882
            )
            
            
            (11,704
            )
            
            
            (1,752
            )
            
            
            -
            
            
            
            (24,338
            )Gain
      on sale of investment securities available for sale
            
            
            75
            
            
            
            290
            
            
            
            4
            
            
            
            -
            
            
            
            369Payments
      / Maturities
            
            
            (35
            )
            
            
            (10,183
            )
            
            
            -
            
            
            
            -
            
            
            
            (10,218
            )Accret
      / Amort
            
            
            (67
            )
            
            
            (177
            )
            
            
            (13
            )
            
            
            -
            
            
            
            (257
            )Unrealized
      Gain/Loss
            
            
            (264
            )
            
            
            258
            
            
            
            1,141
            
            
            
            2
            
            
            
            1,137September
      30, 2009
            
            $
            24,164
            
            
            
            49,628
            
            
            
            12,928
            
            
            
            187
            
            
            
            86,907





The calls
and sales within the investment securities portfolio generated net gains of
approximately $369,000.  The unrealized gain on the investment
securities available for sale portfolio increased approximately $1.5 million
during the nine-month period ending September 30, 2009.





Calls and
maturities in the investment securities held to maturity portfolio totaled
approximately $7,000 during the first nine months of 2009.





Loans


The total
loan portfolio balances decreased approximately $27.1 million, or
8.16%,  when comparing balances at September 30, 2009 to December 31,
2008.   The decrease in the loan portfolio balances resulted from
foreclosures, sale of loans and payouts of approximately $14.3 million, $5.9
million and $6.9 million, respectively.   Decreases in the loan
portfolio occurred within the real estate construction portfolio, the consumer
portfolio, the non-residential properties, 1-4 family residential properties and
commercial lending portfolios totaled approximately $21.1 million, $2.1 million,
$1.9 million, $1.6 million and $411,000, respectively.


20


Other
real estate and premises & equipment


Other
real estate increases of approximately $9.3 million, of 33.96%, resulted from
foreclosures of properties during the first nine months of 2009.  See
a more detailed discussion in “Asset Quality”.  Premises and equipment
decreased approximately $4.2 million, primarily as a result of the
reclassification of two bank offices that are scheduled to close in December
2009 totaling approximately $2.8 million and the listing of eight acres for
$523,000 to bank properties held for sale.  In addition, premises and
equipment was reduced by depreciation expense and a write off of the Eastanollee
Office leasehold improvements totaling approximately $848,000 and $114,000,
respectively.





Deposits


Total
deposits increased approximately $10.3 million, or 2.56%, when comparing
balances at September 30, 2009 to December 31, 2008  balances, with
increases in time deposit account balances, in the NOW and Money Market account
balances and in noninterest-bearing account balances of approximately $11.9
million, $794,000 and $570,000, respectively, being offset by decreases in
savings account balances of approximately $2.9 million.





Borrowings


Total
borrowings decreased approximately $8.6 million, or 16.61%, when comparing
September 30, 2009 balances to December 31, 2008.  This reduction is
the result primarily of the payoff of a $5 million line of credit in addition to
a reduction in repo sweep account balances.





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 2009 and 2008.





Three
      Months endedSeptember
    30
            
            
            Nine
      Months endedSeptember
    302009
            
            
            2008
            
            
            2009
            
            
            2008INTEREST
      YIELDS EARNED:Loans
            
            
            5.38
            %
            
            
            6.08
            %
            
            
            5.44
            %
            
            
            6.72
            %Investment
      securities
            
            
            4.75
            %
            
            
            5.05
            %
            
            
            4.78
            %
            
            
            5.21
            %Federal
      funds sold
            
            
            .22
            %
            
            
            1.85
            %
            
            
            .26
            %
            
            
            3.00
            %INTEREST
      RATES PAID:Deposits
            
            
            2.68
            %
            
            
            3.17
            %
            
            
            2.81
            %
            
            
            3.46
            %Borrowings
            
            
            3.44
            %
            
            
            3.67
            %
            
            
            3.58
            %
            
            
            3.91
            %





Total
interest income for the third quarter of 2009 decreased approximately $1.1
million or 17.34%, when compared to the third quarter of 2008.  Total
interest income for the first nine months of 2009 deceased approximately $4.5
million, or 21.81%, when compared to the same period in 2008.  The
decrease in interest income is the result of the following: 1). Approximately
$220.8 million or 72.26% 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 in question, the loan yields decrease
accordingly.  2). Average loan balances decreased approximately $23.8
million or 7.03% due to maturities, payouts and foreclosures when comparing the
nine-month periods ending September 30, 2009 and 2008.  3).
Approximately $52.5 million or 17.76% of the loan portfolio is in nonaccrual
status at September 30, 2009.  Average nonaccrual loan balances for
the nine month period ended September 30, 2009 increased approximately $28.6
million, or 126.44%,  when compared to the average balances for the
same period in 2008.  Interest income is reduced as the number and
balances of loans in nonaccrual status increase.  See a more detailed
discussion in “Asset Quality”.


21


Total
interest expense for the third quarter of 2009 decreased approximately $370,000
or 11.02% when compared to the third quarter of 2008.  Average
balances in interest bearing accounts increased approximately $41.5 million when
comparing the third quarter of 2009 to the third quarter of
2008.  During the same period, the average interest rate paid on
deposits decreased approximately .49%.  Rates paid on time deposits,
savings and money market accounts and interest bearing demand deposits during
the third quarter of 2009 decreased approximately .85%, .55% and .37%,
respectively, when compared to the same period in
2008.    Average balances in other borrowings deceased
approximately $21.5 million when comparing the third quarter of 2009 to the same
period in 2008.  Rates paid on borrowings during the third quarter of
2009 decreased approximately .23% when compared to the same period in
2008.





Total
interest expense for the first nine months of 2009 decreased approximately $1.6
million or 14.32% when compared to the first nine months of
2008.  Average balances in interest bearing accounts increased
approximately $34.6 million when comparing the first nine months of 2009 to the
same period in 2008.  During the same period, the average interest
rate paid on deposits decreased approximately .65%.   Rates paid
on time deposits, savings and money market accounts and interest bearing demand
deposits during the first nine months of 2009 decreased approximately .97%,
1.17% and .59%, respectively, when compared to the same period in
2008.    Average balances in other borrowings deceased
approximately $15.6 million when comparing the first nine months of 2009 to the
same period in 2008.  Rates paid on borrowings during the first nine
months of 2009 decreased approximately .33% when compared to the same
period.





Net
interest income before provision for loan losses decreased approximately
$707,000 or 24.76% for the third quarter of 2009 and decreased approximately
$2.9 million or 30.24% for the first nine months of 2009 when compared to the
same periods in 2008 as a result of the items discussed above.





The net
interest margin of the Company, net interest income divided by average earning
assets, was 2.17% for the third quarter of 2009 compared to 2.80% for the third
quarter of 2008, and was 2.22% for the first nine months of 2009 compared to
3.08% for the first nine months of 2008.





Noninterest
income decreased $82,000 or 8.78% for the third quarter of 2009 over the same
period in 2008 and decreased $402,000 or 12.46% for the first nine months of
2009 over the same period in 2008.  Decreases occurring in other
income and in mortgage origination income totaled approximately $78,000 and
$33,000, respectively, during the third quarter of 2009.  These
decreases were offset by increases in service charges and in net gains realized
on calls and sales within the investment securities portfolio totaling
approximately $1,000 and $28,000, respectively. Decreases
in the cash surrender value of life insurance, in trust fees and in
miscellaneous income totaling approximately $18,000, $14,000 and $12,000,
respectively, are reflected in the decrease in other income.





For the
first nine months of 2009, decreases in mortgage origination income, in other
income and in service charges totaled approximately $255,000, $184,000 and
$16,000, respectively, when compared to the first nine months of
2008.  These decreases were offset by increases in net gains realized
on calls and sales within the investment securities portfolio totaling
approximately $53,000.  The decreases in other income resulted from
decreases in trust fee income, in profit from other real estate, insurance
income, in the income from cash surrender value of life insurance and in
commissions on investment sales totaling approximately $42,000, $24,000,
$20,000, $18,000 and $18,000, respectively.





Noninterest
expense increased $925,000 or 20.22% for the third quarter of 2009 over the same
period in 2008.  Increases in other real estate expenses, general and
administrative expense, occupancy expense and various other expenses (computer
services, telephone and leased equipment expense)  totaling
approximately $762,000, $495,000, $143,000 and $27,000, respectively, were
offset by decreases in salary and employee benefits of approximately
$502,000.  Other real estate expense includes costs to maintain an
increasing number of foreclosed properties. The increase in general and
administrative expense consists primarily of increases in outside services
totaling approximately $580,000 offset by decreases in marketing expenses,
office supplies and other expenses totaling approximately $75,000, $16,000 and
$7,000, respectively.  Outside services includes FDIC insurance, legal
and professional services, insurance, director fees and State of Georgia
Department of Banking fees.  FDIC expense increased approximately
$364,000 for the third quarter ended September 30,
2009.  Additionally, legal fees increased approximately $221,000
during the third quarter of 2009 when compared to the same period in
2008.  Tighter expense control measures have resulted in decreases in
other general and administrative expenses when comparing the third quarter of
2009 to the third quarter 2008.


22


Noninterest
expense increased $881,000 or 6.44% for the first nine months of 2009 over the
same period in 2008.  Increases in other real estate expenses, general
and administrative expense, occupancy expense and various other expenses
(computer services, telephone and leased equipment expense)  totaling
approximately $1.1 million, $827,000, $348,000 and $89,000, respectively, were
offset by decreases in salary and employee benefits of approximately $1.5
million.  Other real estate expense includes costs to maintain an
increasing number of foreclosed properties. The increase in general and
administrative expense consists primarily of increases in outside services
totaling approximately $1.2 million offset by decreases in marketing expenses,
other various expenses and  office supplies totaling approximately
$191,000, $133,00 and $38,000,  respectively.  Outside
services includes FDIC insurance, legal and professional services, insurance,
director fees and State of Georgia Department of Banking
fees.    FDIC expense increased approximately $749,000 for
the first nine months of 2009 when compared to the same period in
2008.    Additionally, legal fees increased approximately
$441,000 during the first nine months of 2009 when compared to the same period
in 2008.  Tighter expense control measures have resulted in decreases
in other general and administrative expenses when comparing the first nine
months of 2009 to the first nine months of 2008.  The decrease in
salary and employee benefits resulted from efforts to decrease salary expense
through reduction in staff and hours worked.





An income
tax benefit of approximately $3.9 million was recorded for the three months
ended September 30, 2009 compared to an income tax benefit of approximately $2.8
million for the three months ended September 30, 2008.  An income tax
benefit of approximately $6.2 million was recorded for the first nine months of
2009 compared to an income tax benefit of approximately $3.5 million for the
first nine months of 2008.  The effective tax rate for the third
quarter of 2009 and 2008 was 39.70% and 39.37%, respectively.  The
effective tax rate for the nine months ended September 30, 2009 and 2008 was
40.27% and 43.20%, respectively.  Tax-exempt income of approximately
$247,000 was 2.49% of pre-tax loss for the third quarter of 2009 when compared
to 4.46% of pre-tax loss for the third quarter of 2008.  Tax-exempt
income of approximately $768,000 million was 4.97% of pre-tax loss for the first
nine months of 2009 when compared to 13.68% of pre-tax loss for the first nine
months of 2008.





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.





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.


23


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 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, 2009 was
approximately $14.9 million.





At
September 30, 2009 and December 31, 2008, the ratio of the allowance for loan
losses to total loans was 3.51% and 3.77%, respectively.   For
the third quarter and first nine months of 2009, provision for loan losses
expense totaled approximately $7.4 million and $10.5 million, respectively, and
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.





Net
charge-offs for the first nine months of 2009 totaled approximately $12.3
million compared to net charge-offs of $1.8 million for the first nine months of
2008 as detailed below:




(dollars
      in thousands)
            
            No.
            
            
            September 30, 2009
            
            
            No.
            
            
            September 30, 2008Charge-offs:Commercial
            
            
            16
            
            
            $
            874
            
            
            
            5
            
            
            $
            80Real
      Estate
            
            
            63
            
            
            
            11,019
            
            
            
            17
            
            
            
            1,608Consumer
            
            
            66
            
            
            
            493
            
            
            
            53
            
            
            
            181Total
      Charge-offs
            
            
            145
            
            
            
            12,386
            
            
            
            75
            
            
            
            1,869Recoveries:Commercial
            
            
            
            
            
            
            4
            
            
            
            
            
            
            
            5Real
      Estate
            
            
            
            
            
            
            66
            
            
            
            
            
            
            
            -Consumer
            
            
            
            
            
            
            46
            
            
            
            
            
            
            
            41Total
      Recoveries
            
            
            
            
            
            
            116
            
            
            
            
            
            
            
            46Net
      Charge-offs
            
            
            
            
            
            $
            12,270
            
            
            
            
            
            
            $
            1,823





Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due,
restructured loans  and other real estate owned. The following
summarizes nonperforming assets:





(dollars
      in thousands)
            
            September 30, 2009
            
            
            December 31, 2008Accruing
      loans 90 days past due
            
            $
            1,911
            
            
            $
            802Nonaccrual
      loans
            
            
            52,502
            
            
            
            56,055Other
      real estate
            
            
            36,620
            
            
            
            27,337Restructured
      loans
            
            
            691
            
            
            
            -Total
      nonperforming assets
            
            $
            91,724
            
            
            $
            84,194





Nonperforming
assets increased approximately $7.5 million or 8.94% from December 31, 2008 to
September 30, 2009.  See the discussion that follows within this
section for a description of the assets that comprised this
increase.


24


Loans
classified as 90 days past due increased $1.1 million or 138.28% from December
31, 2008 to September 30, 2009.  The increase is the net result of the
following changes:





(dollars
      in thousands)Balance
      at December 31, 2008
            
            $
            802New
      loans classified to 90 days past due status
            
            
            2,037Payments
      received
            
            
            (151
            )Charged-off
            
            
            (5
            )Forbearance
      & modification agreements
            
            
            (772
            )Balance
      at September 30, 2009
            
            $
            1,911





The
following summarizes accruing loans 90 days past due at September 30, 2009 and
December 31, 2008:





(dollars
      in thousands)
            
            September
      30, 2009
            
            
            December
      31, 2008Real
      estate secured construction loans
            
            $
            1,357
            
            
            $
            25Residential
      loans
            
            
            554
            
            
            
            772Consumer
      loans
            
            
            -
            
            
            
            5Balance
      at September 30, 2009
            
            $
            1,911
            
            
            $
            802





Impaired
loans consist of loans on nonaccrual status.  The decrease is the net
result of the following changes:





(dollars
      in thousands)Balance
      at December 31, 2008
            
            $
            56,055Loans
      reclassified to nonaccrual status in 2009
            
            
            30,326Advances
            
            
            489Payments
      received on nonaccrual loans during 2009
            
            
            (11,832
            )Nonaccrual
      loans charged-off during 2009
            
            
            (10,297
            )Nonaccrual
      loans reclassified to other real estate
            
            
            (11,439
            )Nonaccrual
      loans reclassified to repossessions
            
            
            (108
            )Nonaccrual
      loans reclassified to accrual status in 2009
            
            
            (692
            )Balance
      at September 30, 2009
            
            $
            52,502





Nonaccrual
loans may be reclassified to accrual status upon interest and payments being
brought current.





Additions
to loans on nonaccrual status consisted of the following:





(dollars
      in thousands)
            
            Number
            
            
            September 30, 2009Real
      Estate – construction & development loans
            
            
            36
            
            
            $
            22,722Real
      Estate – residential loans
            
            
            23
            
            
            
            1,684Real
      Estate – commercial
            
            
            8
            
            
            
            5,104Commercial
      loans
            
            
            12
            
            
            
            513Consumer
      loans
            
            
            31
            
            
            
            303Total
      additions to nonaccrual loans
            
            
            110
            
            
            $
            30,326


25


The
following summarizes nonaccrual loans at September 30, 2009 and December 31,
2008:





(dollars
      in thousands)
            
            Number
      of Properties
            
            
            September
      30,
              2009
            
            
            Number
      of Properties
            
            
            December
      31,
              2008Real
      Estate – construction & development loans
            
            
            45
            
            
            $
            45,066
            
            
            
            50
            
            
            $
            52,443Real
      Estate – residential loans
            
            
            9
            
            
            
            380
            
            
            
            11
            
            
            
            313Real
      Estate – commercial
            
            
            8
            
            
            
            6,952
            
            
            
            4
            
            
            
            2,689Commercial
      loans
            
            
            2
            
            
            
            41
            
            
            
            4
            
            
            
            459Consumer
      loans
            
            
            10
            
            
            
            63
            
            
            
            23
            
            
            
            151Total
      nonaccrual loans
            
            
            74
            
            
            $
            52,502
            
            
            
            92
            
            
            $
            56,055





Other
real estate at September 30, 2009 increased approximately $9.3 million or 33.96%
when compared to December 31, 2008. The following summarizes other real estate
at September 30, 2009 and December 31, 2008:





(dollars
      in thousands)
            
            Number
      of Properties
            
            
            September
      30,
              2009
            
            
            Number
      of Properties
            
            
            December
      31,
              2008Residential
      properties – spec houses
            
            
            39
            
            
            $
            14,533
            
            
            
            41
            
            
            $
            15,715Commercial
      properties
            
            
            9
            
            
            
            2,171
            
            
            
            2
            
            
            
            673Vacant
      lots
            
            
            216
            
            
            
            19,019
            
            
            
            207
            
            
            
            10,786Mobile
      home and lot
            
            
            1
            
            
            
            52
            
            
            
            -
            
            
            
            -Residential
      construction properties
            
            
            2
            
            
            
            845
            
            
            
            1
            
            
            
            163Total
      other real estate
            
            
            267
            
            
            $
            36,620
            
            
            
            251
            
            
            $
            27,337





The
increase in other real estate is the net result of the following
changes:





(dollars
      in thousands)Balance
      at December 31, 2008
            
            $
            27,337Foreclosed
      property
            
            
            14,302Additions
      to complete
            
            
            741Sales
      of other real estate
            
            
            (5,760
            )Balance  at
      September 30, 2009
            
            $
            36,620





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 $44.7 million at September 30, 2009.





The
following summarizes restructured loans at September 30, 2009 and December 31,
2008:





(dollars
      in thousands)
            
            September
      30, 2009
            
            
            December
      31, 2008Real
      estate secured construction loans
            
            $
            -
            
            
            $
            -Residential
      loans
            
            
            572
            
            
            
            -Commercial
      loans
            
            
            85Consumer
      loans
            
            
            34
            
            
            
            -Total
            
            $
            691
            
            
            $
            -


26


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.





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





At
September 30, 2009 and December 31, 2008, the Company had additional line of
credit commitments, subject to available collateral, available as shown
below:





September
      30, 2009
            
            
            December
      31, 2008(dollars
      in thousands)
            
            Total Available
            
            
            Total AvailableFederal
      discount window
            
            $
            8,109
            
            
            
            24,630Federal
      funds line
            
            
            -
            
            
            
            10,000Retail
      repurchase agreement
            
            
            -
            
            
            
            921Retail
      repurchase agreement
            
            
            -
            
            
            
            3,950





The
Company has approximately $8.1 million outstanding in commercial sweep accounts
at September 30, 2009.   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, 2009.





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, 2009
            
            
            December 31, 2008Liquidity
      as a percent of deposits
            
            
            20.02
            %
            
            
            16.70
            %Liquidity
      as a percent of total liabilities
            
            
            17.95
            %
            
            
            14.72
            %





FDIC and
Federal Reserve Board regulations require minimum Tier 1 and total capital
ratios of 4% and 8%, respectively, and a minimum leverage ratio (Tier 1 capital
to average assets) of at least 4%.  Under the Order, however, the Bank
is required to maintain a total capital ratio of at least 10% and a leverage
ratio of at least 8%.  Because it is subject to an Order requiring it
to maintain specified minimum capital ratios, the Bank cannot be classified as
“well capitalized.”


27


The
Company’s and the Bank’s ratios at September 30, 2009 follow:





Habersham
            HabershamBank
            BancorpTier
      1
            6.67%
            7.04%Total
      Capital
            7.94%
            8.32%Leverage
            4.73%
            4.97%





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.





As of
September 30, 2009, 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, 2008.  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, 2008 included in the Company’s 2008
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 1.A.
Risk Factors.





In
addition to the other information set forth in this report, you should carefully
consider the factors 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, 2008 and in
Part II. “Item 1.A. Risk Factors” in the Company’s Quarterly Reports on Form
10-Q for the quarters ended March 31, 2009 and June 30, 2009, all of which could
materially affect its business, financial condition or future
results.  The risks described below  in the Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q 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.


28


Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





None





Item
3.  Defaults upon senior securities.





None





Item
4.  Submission of matters to a vote of security holders.





None





Item
5.  Other information.





None





Item
6.  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 the Sarbanes-Oxley Act of 2002.





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





32      Certification of Chief
Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.





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 16, 2009
            /s/ Annette BanksChief
      Financial Officer(for
      the Registrant and as theRegistrant’s
      principal financial andaccounting
      officer)







29