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 June 30, 2008.
 
 TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 For the
transition period from _____ to ___________________
 
 Commission
file number 0-13153
 
 HABERSHAM
BANCORP
 (Exact
name of registrant as specified in its charter)
 
 Georgia
              
              58-1563165(State
      or other jurisdiction of 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 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 August 8, 2008.
 
 1
  Item.
1   Financial Statements
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
 (dollars
in thousands)
 
 ASSETS
              
              JUNE30,
                2008
              
              
              DECEMBER 31,
                2007Cash
      and due from banks
              
              $
              14,586
              
              
              $
              18,196Federal
      funds sold
              
              
              -
              
              
              
              4,189Total
      cash and cash equivalents
              
              
              14,586
              
              
              
              22,385Investment
      securities available for sale
              
              
              91,258
              
              
              
              89,890Investment
      securities held to maturity (estimated fair value of $1,612 at June 30,
      2008 and $2,752 at December 31, 2007)
              
              
              1,578
              
              
              
              2,689Other
      investments
              
              
              3,334
              
              
              
              3,409Loans
      held for sale
              
              
              819
              
              
              
              1,866Loans
              
              
              339,126
              
              
              
              350,388Less
      allowance for loan losses
              
              
              (2,427
              )
              
              
              (2,137
              )Loans,
      net
              
              
              336,699
              
              
              
              348,251Premises
      and equipment, net
              
              
              17,744
              
              
              
              16,081Other
      real estate
              
              
              17,260
              
              
              
              11,498Cash
      surrender value of life insurance
              
              
              9,738
              
              
              
              9,539Goodwill
              
              
              3,550
              
              
              
              3,550Accrued
      interest receivable
              
              
              2,376
              
              
              
              2,752Other
      assets
              
              
              4,366
              
              
              
              2,309TOTAL
      ASSETS
              
              $
              503,308
              
              
              $
              514,219LIABILITIESNoninterest-bearing
      deposits
              
              $
              36,557
              
              
              $
              29,741Money
      market and NOW accounts
              
              
              82,876
              
              
              
              96,237Savings
              
              
              57,454
              
              
              
              60,076Time
      deposits, $100,000 and over
              
              
              93,421
              
              
              
              116,044Other
      time deposits
              
              
              101,636
              
              
              
              88,169Total
      deposits
              
              
              371,944
              
              
              
              390,267Short-term
      borrowings
              
              
              786
              
              
              
              766Federal
      funds purchased and securities sold under repurchase
      agreements
              
              
              35,732
              
              
              
              26,184Federal
      Home Loan Bank advances
              
              
              38,000
              
              
              
              38,000Other
      liabilities
              
              
              5,113
              
              
              
              4,820TOTAL
      LIABILITIES
              
              
              451,575
              
              
              
              460,037STOCKHOLDERS’
      EQUITYCommon
      Stock, $1.00 par value, 10,000,000 shares authorized; 2,818,593 shares
      issued and outstanding at June 30, 2008 and December 31,
    2007
              
              
              2,819
              
              
              
              2,819Additional
      paid-in capital
              
              
              13,490
              
              
              
              13,490Retained
      earnings
              
              
              37,191
              
              
              
              38,135Accumulated
      other comprehensive loss
              
              
              (1,767
              )
              
              
              (262
              )TOTAL
      STOCKHOLDERS’ EQUITY
              
              
              51,733
              
              
              
              54,182TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              503,308
              
              
              $
              514,219
 
 
 See notes
to unaudited condensed consolidated financial statements.
  2
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
For the Three- and Six-Month Periods Ended June 30, 2008 and 2007
 (dollars
in thousands, except per share amounts)
  Three Months ended
              
              
              Six Months ended2008
              
              
              2007
              
              
              2008
              
              
              2007INTEREST
      INCOMELoan
      interest and fees on loans
              
              $
              5,653
              
              
              $
              8,208
              
              
              $
              11,964
              
              
              $
              16,071Taxable
      investment securities
              
              
              853
              
              
              
              769
              
              
              
              1,711
              
              
              
              1,517Tax
      exempt securities
              
              
              266
              
              
              
              276
              
              
              
              553
              
              
              
              545Federal
      funds sold
              
              
              11
              
              
              
              44
              
              
              
              79
              
              
              
              143Other
              
              
              52
              
              
              
              54
              
              
              
              131
              
              
              
              113TOTAL
      INTEREST INCOME
              
              
              6,835
              
              
              
              9,351
              
              
              
              14,438
              
              
              
              18,389INTEREST
      EXPENSETime
      deposits, $100,000 and over
              
              
              1,170
              
              
              
              1,388
              
              
              
              2,620
              
              
              
              2,678Other
      deposits
              
              
              1,768
              
              
              
              2,074
              
              
              
              3,629
              
              
              
              4,120Short-term
      and other borrowings, primarily FHLB advances
              
              
              620
              
              
              
              657
              
              
              
              1,310
              
              
              
              1,300TOTAL
      INTEREST EXPENSE
              
              
              3,558
              
              
              
              4,119
              
              
              
              7,559
              
              
              
              8,098NET
      INTEREST INCOME
              
              
              3,277
              
              
              
              5,232
              
              
              
              6,879
              
              
              
              10,291Provision
      for loan losses
              
              
              654
              
              
              
              -
              
              
              
              1,077
              
              
              
              -NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
              
              
              2,623
              
              
              
              5,232
              
              
              
              5,802
              
              
              
              10,291NONINTEREST
      INCOMEMortgage
      origination income
              
              
              135
              
              
              
              237
              
              
              
              315
              
              
              
              398Service
      charges on deposits
              
              
              251
              
              
              
              235
              
              
              
              498
              
              
              
              467Other
      service charges and commissions
              
              
              70
              
              
              
              65
              
              
              
              140
              
              
              
              126Investment
      securities (losses) gains, net
              
              
              161
              
              
              
              -
              
              
              
              289
              
              
              
              5Other
      income
              
              
              517
              
              
              
              396
              
              
              
              1,049
              
              
              
              857Total
      noninterest income
              
              
              1,134
              
              
              
              933
              
              
              
              2,291
              
              
              
              1,853NONINTEREST
      EXPENSESalary
      and employee benefits
              
              
              2,553
              
              
              
              2,732
              
              
              
              4,934
              
              
              
              5,375Occupancy
              
              
              587
              
              
              
              616
              
              
              
              1,188
              
              
              
              1,204Other
      real estate expense
              
              
              162
              
              
              
              3
              
              
              
              294
              
              
              
              3Computer
      services
              
              
              123
              
              
              
              136
              
              
              
              268
              
              
              
              293Telephone
              
              
              115
              
              
              
              72
              
              
              
              234
              
              
              
              216Leased
      equipment
              
              
              115
              
              
              
              108
              
              
              
              235
              
              
              
              214General
      and administrative expense
              
              
              998
              
              
              
              1,028
              
              
              
              1,973
              
              
              
              1,976Total
      noninterest expense
              
              
              4,653
              
              
              
              4,695
              
              
              
              9,126
              
              
              
              9,281(LOSS)
      EARNINGS BEFORE INCOME TAXES
              
              
              (896
              )
              
              
              1,470
              
              
              
              (1,033
              )
              
              
              2,863Income
      tax benefit (expense)
              
              
              521
              
              
              
              (436
              )
              
              
              717
              
              
              
              (844
              )NET
      (LOSS) EARNINGS
              
              $
              (375
              )
              
              $
              1,034
              
              
              $
              (316
              )
              
              $
              2,019Net
      (loss) earnings per common share – Basic
              
              $
              (.13
              )
              
              $
              .35
              
              
              $
              (.11
              )
              
              $
              .68Net
      (loss) earnings per common share – Diluted
              
              $
              (.13
              )
              
              $
              .35
              
              
              $
              (.11
              )
              
              $
              .68Weighted
      average number of common shares outstanding
              
              
              2,818,593
              
              
              
              2,968,593
              
              
              
              2,818,593
              
              
              
              2,968,593Weighted
      average number of common and common equivalent shares
      outstanding
              
              
              2,818,593
              
              
              
              2,982,724
              
              
              
              2,818,593
              
              
              
              2,989,065Dividends
      per share
              
              $
              .10
              
              
              $
              .10
              
              
              $
              .20
              
              
              $
              .20
   See notes
to unaudited condensed consolidated financial statements.
  3
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited)
For the Three- and Six-Month Periods Ended June 30, 2008 and 2007
 (dollars
in thousands)
 
 Three
      Months ended
              
              
              Six
      Months ended2008
              
              
              2007
              
              
              2008
              
              
              2007NET
      (LOSS) EARNINGS
              
              $
              (375
              )
              
              $
              1,034
              
              
              $
              (316
              )
              
              $
              2,019OTHER
      COMPREHENSIVE INCOME (LOSS):Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
              
              
              (2,503
              )
              
              
              (1,730
              )
              
              
              (1,943
              )
              
              
              (1,426
              )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow  hedges, arising during the period
              
              
              73
              
              
              
              55
              
              
              
              (48
              )
              
              
              5Reclassification
      adjustment for (gains) losses on  investment securities
      available for sale
              
              
              (161
              )
              
              
              -
              
              
              
              (289
              )
              
              
              (5
              )Total
      other comprehensive income (loss), before tax
              
              
              (2,591
              )
              
              
              (1,675
              )
              
              
              (2,280
              )
              
              
              (1,426
              )INCOME
      TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
              
              
              851
              
              
              
              588
              
              
              
              661
              
              
              
              485Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
              
              
              (25
              )
              
              
              (19
              )
              
              
              16
              
              
              
              (2
              )Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
              
              
              55
              
              
              
              -
              
              
              
              98
              
              
              
              2Total
      income taxes related to other comprehensive income (loss)
              
              
              881
              
              
              
              569
              
              
              
              775
              
              
              
              485Total
      other comprehensive (loss) income, net of tax
              
              
              (1,710
              )
              
              
              (1,106
              )
              
              
              (1,505
              )
              
              
              (941
              )Total
      comprehensive (loss) income
              
              $
              (2,085
              )
              
              $
              (72
              )
              
              $
              (1,821
              )
              
              $
              1,078
 
 
 See notes
to unaudited condensed consolidated financial statements.
  4
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
For the Six-Month Periods Ended June 30, 2008 and 2007
 (dollars
in thousands)
 
 2008
              
              
              2007CASH
      FLOWS PROVIDED BY OPERATING ACTIVITIES:
              
              $
              1,218
              
              
              $
              417CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      securities available for sale:Proceeds
      from maturity
              
              
              6,538
              
              
              
              2,820Proceeds
      from sales and calls
              
              
              35,519
              
              
              
              2,786Purchases
              
              
              (45,448
              )
              
              
              (7,061
              )Investment
      securities held to maturity:Proceeds
      from maturity
              
              
              8
              
              
              
              304Proceeds
      from call
              
              
              1,103
              
              
              
              -Other
      investments:Proceeds
      from sale
              
              
              75
              
              
              
              -Purchases
              
              
              -
              
              
              
              (44
              )Net
      decrease (increase) in loans
              
              
              4,378
              
              
              
              (13,756
              )Purchases
      of premises and equipment
              
              
              (2,237
              )
              
              
              (3,106
              )Capitalized
      expenditures for other real estate
              
              
              (731
              )
              
              
              -Proceeds
      from sale of other real estate
              
              
              1,097
              
              
              
              40Net
      cash provided by (used by) investing activities
              
              
              302
              
              
              
              (18,017
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      decrease in deposits
              
              
              (18,322
              )
              
              
              (70,822
              )Net
      increase in short-term borrowings
              
              
              19
              
              
              
              28Net
      increase in federal funds purchased and securities sold under repurchase
      agreements
              
              
              9,548
              
              
              
              10,925Proceeds
      from FHLB advances
              
              
              7,000
              
              
              
              -Repayment
      of FHLB advances
              
              
              (7,000
              )
              
              
              -Cash
      dividends paid
              
              
              (564
              )
              
              
              (594
              )Net
      cash used by financing activities
              
              
              (9,319
              )
              
              
              (60,463
              )Decrease
      in cash and cash equivalents
              
              
              (7,799
              )
              
              
              (78,063
              )CASH
      AND CASH EQUIVALENTS:  BEGINNING OF PERIOD
              
              
              22,385
              
              
              
              90,518CASH
      AND CASH EQUIVALENTS:  END OF PERIOD
              
              $
              14,586
              
              
              $
              12,455SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Other
      real estate acquired through loan foreclosures
              
              $
              6,096
              
              
              $
              728Change
      in components of other comprehensive income
              
              
              (1,505
              )
              
              
              (941
              )
 
 
 See notes
to unaudited condensed consolidated financial statements.
  5
  HABERSHAM
BANCORP AND SUBSIDIARIES
 Notes to
Unaudited Condensed Consolidated Financial Statements
 
 1.
              Basis
      of Presentation
 
 The
condensed consolidated financial statements contained in this report are
unaudited but reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods reflected.  Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to applicable
rules and regulations of the Securities and Exchange Commission.  The
results of operations for the interim periods reported herein are not
necessarily indicative of results to be expected for the full year.
 
 The
condensed consolidated financial statements included herein should be read in
conjunction with the Company's 2007 consolidated financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007.
 
 2.
              Accounting
      Policies
 
 Reference
is made to the accounting policies of the Company described in the notes to the
consolidated financial statements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.  The Company
has consistently followed those policies in preparing this report.
 
 3.
              Other Comprehensive
      Income
 
 Other
comprehensive income for the Company consists of items recorded directly in
equity under Statement of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity Securities” in addition
to the net of tax fair value of cash flow hedges.  Investment
securities classified as available for sale are carried at fair value with the
related unrealized gain or loss, net of deferred income taxes included as a
separate component of stockholders’ equity.  At June 30, 2008, fair
value of the available for sale investment securities decreased approximately
$2,232,000 when compared to the fair value at December 31, 2007.  The
corresponding equity component of unrealized gain and loss on available for sale
securities, net of tax, also decreased approximately
$1,473,000.  These changes were the results of movements in the bond
market as it responds to interest rate changes in the market.  At June
30, 2008, fair value of the cash flow hedges decreased approximately $48,000
when compared to the fair value at December 31, 2007.  The
corresponding equity component of unrealized holding losses on derivative
financial instruments classified as cash flow hedges, net of tax, also increased
approximately $32,000.
  6
  4.
              Net
      Earnings Per Share
 
 Basic net
earnings per share is based on the weighted average number of common shares
outstanding during the period.  Diluted net earnings per share
includes the effect of potential common shares outstanding during the
period.  The average market price during the period is used to compute
equivalent shares.
 
 The
reconciliation of the amounts used in the computation of both basic net earnings
per share and diluted net earnings per share for the three- and six-month
periods ended June 30, 2007, is shown below.  Presentation for the
periods ended June 30, 2008 are not included due to the inclusion of potential
common stock outstanding during these periods being anit-dilutive.
 
 Three
      Months ended
              
              
              Six
      Months endedJune 30, 2007
              
              
              June 30, 2007Net
      earnings
              
              $
              1,034,329
              
              
              $
              2,018,784Weighted
      average common shares outstanding
              
              
              2,968,593
              
              
              
              2,968,593Shares
      issued from assumed exercise of common stock equivalents
              
              
              14,131
              
              
              
              20,472Weighted
      average number of common and  common equivalent shares
      outstanding
              
              
              2,982,724
              
              
              
              2,989,065Earnings
      per share:Basic
              
              $
              .35
              
              
              $
              .68Diluted
              
              $
              .35
              
              
              $
              .68
 
 5.
              Change
      in Accounting Principle
 
 Effective
January 1, 2008, the Company adopted Emerging Issues Task Force Issue
No.  06-04, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.(“EITF 06-04”). EITF 06-04 requires a company to
recognize a liability for the postretirement benefit related to an endorsement
split-dollar life insurance arrangement if the employer has agreed to maintain a
life insurance policy during the employee’s retirement or provide the employee
with a death benefit based on the substantive agreement with the
employee.  The company has post retirement benefits with several of
its executives and directors.  Refer to Note 16 – “Employee Benefit
and Stock Option Plans” in the Company’s consolidated financial statements
included in Form 10-K for the year ended December 31, 2007.  Since the
Company has agreed to maintain life insurance policies in place during the
retirement years of these individuals, the Company must record a liability for
the present value of the future costs to maintain the policies in force
(mortality costs.) EITF 06-04 allows companies to record the effects of adopting
the EITF as a change in accounting principle through a cumulative-effect
adjustment to retained earnings as of the beginning of the year of
adoption.  The Company recorded a liability and a cumulative-effect
adjustment to retained earnings in the amount of $63,237, net of
tax.  Future increases in the liability will be charged to earnings in
the year incurred.  For the three and six months periods ended June
30, 2008, $4,446 and $8,892, respectively, has been recorded to expense for the
increase in the liability for future mortality costs.
 
 6.
              Fair
      Value
  Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement No.157, Fair Value Measurements
(“SFAS No. 157”), which provides a framework for measuring fair value under
generally accepted accounting principles.  SFAS No. 157 applies to all
financial instruments that are being measured and reported on a fair value
basis.
  The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures.  Securities available-for-sale and derivatives classified
as cash flow hedges (interest rate swaps) are recorded at fair value on a
recurring basis.  Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as
loans held for sale and certain other assets.   These
nonrecurring fair value adjustments typically involve application of the lower
of cost or market accounting or write-downs of individual
assets.
  7
  Fair Value
Hierarchy
  Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
value.  These levels are:
  Level
      1 –
              Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.
 Level
      2 –
              Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments in markets that are not
      active, and model-based valuation techniques for which all significant
      assumptions are observable in the
market.
 Level
      3 –
              Valuation
      is generated from model-based techniques that use at least one significant
      assumption not observable in the market. These unobservable assumptions
      reflect estimates of assumptions that market participants would use in
      pricing the asset or liability.  Valuation techniques include
      use of option pricing models, discounted cash flow models and similar
      techniques.
  Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
  Securities Available for
Sale
  Securities
available for sale are recorded at fair value on a recurring
basis.  Fair value measurement is based upon quoted prices, if
available.  If quoted prices are not available, fair values are
measured using independent pricing models or other model-based valuation
techniques such as the present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as
credit loss assumptions.  Level 1 securities include those traded on
an active exchange, such as the New York Stock Exchange and U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
market funds.  Level 2 securities include mortgage-backed securities
issued by government sponsored enterprises and municipal
bonds.  Securities classified as Level 3 include asset-backed
securities in less liquid markets.
  Loans Held for
Sale
  Loans
held for sale are recorded at the lower of cost or market value.  The
fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics.  As
such, the Company classifies loans held for sale subject to nonrecurring fair
value adjustments as Level 2.
  Loans
  The
Company does not record loans at fair value on a recurring
basis.  However, from time to time, a loan is considered impaired and
an allowance for loan losses is established.  Loans for which it is
probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired.  Once a loan in identified as individually impaired,
management measures impairment in accordance with SFAS 114, Accounting by Creditors for
Impairment of a Loans, (“SFAS 114”).  The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows.  Those impaired loans not requiring an
allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans.  At June 30,
2008, only a small portion of the impaired loans were evaluated based on the
fair value of the collateral.  In accordance with SFAS 157, impaired
loans where an allowance is established based on the fair value of collateral
require classification in the fair value hierarchy.  When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the impaired loan
as nonrecurring Level 3.
  8
  Other Real
Estate
  Other
real estate properties are adjusted to fair value upon transfer of the loans to
other real estate.  Subsequently, other real estate assets are carried
at the lower of carrying value or fair value.  Fair value is based
upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral.  When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company records the other real estate as nonrecurring Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market prices, the Company records the other real
estate asset as nonrecurring Level 3.
  Goodwill and Other
Intangible Assets
  Goodwill
and identified intangible assets are subject to impairment testing.  A
current market valuation model is used to analyze the carrying value of goodwill
for impairment. This valuation method estimates the fair value of the Bank based
on the price that would be received to sell the Bank as a whole in an orderly
transaction between market participants at the measurement date.  This
valuation method requires a significant degree of management
judgment.  In the event the valuation value for the Bank is less than
the carrying value of goodwill, the asset amount is recorded at fair value as
determined by the valuation model.  As such, the Company classifies
goodwill and other intangible assets subjected to nonrecurring fair value
adjustments as Level 3.
  Derivative Financial
Instruments – Interest Rate Swaps
  To a
limited extent, the Company uses interest rate swaps to manage its interest rate
risk.  The valuation of these instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative.  This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses
observable market-based input, including interest rate curves and implied
volatilities.  The fair value of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed
cash receipts and the discounted expected variable cash payments.  The
variable cash payments are based on an expectation of future interest rates
(forward curves) derived from observable market interest rate
curves.
  Although
the Company has determined that the majority of the input used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of June 30,
2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives.  As a result, the Company has
determined that its derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy.
  Assets Recorded at Fair
Value on a Recurring Basis
   The
table below presents the recorded amount of assets measured at fair value on a
recurring basis as of June 30,  2008.
  Balance
      atJune 30, 2008(In
      Thousands)
              
              Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Investment
      securities available for sale
              
              $
              91,258
              
              
              
              1,922
              
              
              
              89,336
              
              
              
              -Interest
      rate swap
              
              
              (81
              )
              
              
              -
              
              
              
              (81
              )
              
              
              -Total
      assets at fair value
              
              $
              91,177
              
              
              
              1,922
              
              
              
              89,255
              
              
              
              -
  9
  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  June 30, 2008.
  Balance
      at June 30, 2008(In
      Thousands)
              
              Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Other
      real estate
              
              $
              17,260
              
              
              
              -
              
              
              
              17,260
              
              
              
              -Loans
              
              
              12,358
              
              
              
              -
              
              
              
              12,358
              
              
              
              -$
              29,618
              
              
              
              -
              
              
              
              29,618
              
              
              
              -
 
 7.
              Nonperforming
      Assets
 
 Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due,
restructured loans and other real estate owned.  Accrual of interest
is discontinued when either principal or interest becomes 90 days past due,
(unless the loan is both well secured and in the process of collection) or when
in management’s opinion, reasonable doubt exists as to the full collection of
interest or principal.  Income on such loans is then recognized only
to the extent that cash is received and 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.
    June 30,
      2008
              
              
              December 31,
      2007Accruing
      loans 90 days past due
              
              $
              396,000
              
              
              $
              41,594Nonaccrual
      loans
              
              
              31,705,238
              
              
              
              18,326,924Other
      real estate
              
              
              17,259,565
              
              
              
              11,498,271Restructured
      loans
              
              
              395,273
              
              
              
              -Total nonperforming
      assets
              
              $
              49,756,076
              
              
              $
              29,866,789
  8.
              Recent
      Accounting Pronouncements
  Disclosures
about Derivative Instruments and Hedging Activities
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 is an
amendment to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.  The objective of SFAS No.
161 is to expand the disclosure requirements of SFAS No. 133 with the intent to
improve the financial reporting of how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for under SFAS No. 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows.  The statement is effective for
financial statements issued for fiscal years beginning after November 15,
2008.  The Company does not anticipate the new accounting principle to
have a material effect on its financial position or results of
operation.
  10
  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 operations 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 second quarter loss of $375,000 or $.13 per diluted share, a
decrease of 136.27% when compared to second quarter earnings of 1.0 million or
$.35 per diluted share in 2007.  The year-to-date loss for the
six-month period ended June 30, 2008, was $316,000 or $.11 per diluted share, a
decrease of 115.65% when compared to year-to-date earnings of $2.0 million or
$.68 per diluted share, for the same period in 2007.
 
 The
Company’s primary source of income is interest income from loans and investment
securities. Its profitability depends largely on net interest income, which is
the difference between the interest received on interest-earning assets and the
interest paid on deposits, borrowings, and other interest-bearing
liabilities.
 
 Interest
income for the second quarters of 2008 and 2007 was approximately $6.8 million
and $9.4 million  respectively, representing a decrease of
approximately 26.91% when comparing the second quarter of 2008 to the same
period of 2007.  Interest income for the six-month periods of 2008 and
2007 was approximately $14.4 million and $18.4 million, respectively,
representing a decrease of approximately 21.49% when comparing the 2008 period
to the 2007 period.  The decreases resulted from the effect
of  the falling prime interest rate on our outstanding variable rate
loans, decreases in average loan balances and increases in the number and
balances of loans in nonaccrual status.
 
 Interest
expense for the second quarters of 2008 and 2007 was approximately $3.6 million
and $4.1 million  respectively, representing a decrease of
approximately 13.62% when comparing the second quarter of 2008 to the same
period of 2007.   Interest expense for the six-month periods of
2008 and 2007 was approximately $7.6 million and $8.1 million, respectively,
representing a decrease of approximately 6.66% when comparing the 2008 period to
the 2007 period.  These decreases resulted from declining rates paid
on deposit and borrowing balances for the three month and six month periods
ended June 30, 2008 when compared to the same periods in 2007.
 
 Net
interest income before provision for loan loss for the second quarter of 2008
and the six-month period ended June 30, 2008 decreased approximately $2.0
million or 37.37%, and $3.4 million or 33.16%, respectively, when compared to
the same periods in 2007 as a result of the items discussed above.
 
 In
response to past due activity within the loan portfolios, Habersham Bank
recorded provisions to its allowance for loan losses during the second quarter
and first six months of 2008 of approximately, $654,000 and $1.1 million,
respectively.   For the second quarter and six-month period of
2007, no provisions for loan losses were made.
 
 The net
interest margin for the second quarter and first six months of 2008 was 3.09%
and 3.21%, respectively compared to 4.75% and 4.70% for the same periods in
2007.  Two factors which impact the net interest margin are average
interest bearing assets, which decreased approximately $5.2 million, and average
interest-bearing liabilities, which increased approximately $25.9
million when comparing first six months of 2008 to first six months of
2007.
  11
  Total
assets decreased approximately $10.9 million or 2.12% from $514.2 million at
December 31, 2007 to $503.3 million at June 30, 2008.   Decreases
in the loan portfolios and cash and cash equivalent balances of approximately
$12.6 million and $7.8 million, respectively, were offset by increases in other
real estate, premises and equipment, net, and other assets of approximately $5.8
million, $1.7 million and $1.9 million, respectively.
 
 Total
liabilities (deposits, borrowings and other liabilities) at June 30, 2008
decreased approximately $8.5 million or 1.84% from $460.0 million at December
31, 2007 to $451.6 million at June 20, 2008.  Other borrowings,
noninterest bearing deposit balances and other liabilities increased
approximately $9.6 million, $6.8 million and $.2 million, respectively, and were
offset by decreases in interest bearing account balances of approximately $25.1
million.
 
 Forward
Looking Statements
 
 Certain
statements contained in this Quarterly Report on Form 10-Q and the exhibits
hereto which are not statements of historical fact constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
(the “Act”).  In addition, certain statements in future filings by the
Company with the Securities and Exchange Commission, in press releases, and in
oral and written statements made by or with the approval of the Company which
are not statements of historical fact constitute forward-looking statements
within the meaning of the Act.  Examples of forward-looking statements
include, but are not limited to:  (1) projections of revenues,
income or loss, earnings or loss per share, the payment or non-payment of
dividends, capital structure and other financial items; (2) statements of
plans and objectives of the Company or its management or Board of Directors,
including those relating to products or services; (3) statements of future
economic performance; and (4) statements of assumptions underlying such
statements.  Words such as “believes,” “anticipates,” “expects,”
“intends,” “targeted,” and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
 
 Forward-looking
statements involve risks and uncertainties which may cause actual results to
differ materially from those in such statements.  Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:  (1) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (2) the effects of and changes in trade, monetary
and fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; (3) inflation, interest rate,
market and monetary fluctuations; (4) the timely development of and
acceptance of new products and services and perceived overall value of these
products and services by users; (5) changes in consumer spending, borrowing
and saving habits; (6) risks involved in making and integrating
acquisitions and expanding into new geographic markets; (7) the ability to
increase market share and control expenses; (8) the effect of changes in
laws and regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which the Company and its subsidiaries must
comply; (9) the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as the Financial Accounting
Standards Board; (10) changes in the Company’s organization, compensation
and benefit plans; (11) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; and (12) the success of
the Company at managing the risks involved in the foregoing.
 
 Such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.
 
 Material
Changes in Financial Condition
 
 The
Company’s total assets decreased $10.9 million, or 2.12%, to $503.3 million at
June 30, 2008 from $514.2 million at December 31, 2007.
 
 Cash and
cash equivalents
 Cash and
cash equivalents (including federal funds sold balances) decreased approximately
$7.8 million resulted from customer’s activity within their deposit accounts
during the six month period ended June 30, 2008.
  12
  Investment
securities
 During
the first six months of 2008, purchases of investment securities available for
sale totaled approximately $45.4 million, offset by maturities, calls and sales
of approximately $42.1 million.   The purchases consisted of
approximately $25.2 million in U.S. government-sponsored enterprise bonds, $18.4
million in mortgage backed securities and $1.8 million in municipal
bonds.  Calls in the investment securities held for maturity portfolio
totaled approximately $1.1 million during the first six months of
2008.  The calls and sales within the investment securities portfolio
generated net gains of approximately $289,000.  The unrealized loss on
the investment securities available for sale portfolio increased approximately
$2.2 million during the six-month period ending June 30, 2008.
 
 Loans
 The total
loan portfolio balances and loans held for sale balances decreased approximately
$11.3 million and $1.0 million, respectively, when comparing balances at June
30, 2008 to December 31, 2007.   The decrease in the loan
portfolio balances resulted from foreclosures and payout of approximately $6.1
million and $5.2 million, respectively.   Decreases in the loan
portfolio occurring within the real estate construction portfolio, commercial
lending portfolio, loans secured by farm land, and consumer lending portfolio
totaling approximately $24.5 million, $2.0 million, $1.8 million and $.1
million, respectively, were offset by increases in the 1-4 family residential
properties lending portfolio and in commercial real estate totaling
approximately $12.6 million and $4.5 million, respectively.
 
 Other
real estate and premises & equipment
 Other
real estate increases of approximately $5.8 million resulted from foreclosures
of properties during the first six-month period of 2008.  See a more
detailed discussion in “Asset Quality”.  Premises and equipment
increased approximately $1.7 million primarily as a result of the ongoing
construction of the Flowery Branch office, which is expected to be completed
this year.
 
 Deposits
 Total
deposits decreased approximately $18.3 million when comparing balances at June
30, 2008 to December 31, 2007 balances, with decreases occurring in NOW and
money market, time deposit, and savings account balances of approximately $13.4
million, $9.1 million, and $2.6 million, respectively, offset by increases in
noninterest bearing deposit balances of approximately $6.8 million.
 
 Borrowings
 Total
borrowings increased approximately $9.6 million when comparing June 30, 2008
balances to December 31, 2007 with increases occurring primarily in federal
funds purchased and securities sold under repurchase agreements.
 
 Material
Changes in Results of Operations
 
 Net
interest income is the largest single source of income for the
Company.  Management strives to attain a level of earning asset growth
while providing a net yield on earning assets that will cover overhead and other
costs and provide a reasonable return to our stockholders.  Net
interest income is affected by interest income from loans, investment securities
and federal funds sold offset by interest paid on deposits and
borrowings.  The following table compares the weighted average tax
equivalent yields for loans, investment securities and federal funds sold and
the weighted average rates paid for deposits and borrowings for the second
quarters and the first six months of 2008 and 2007.
 
 Three
      Months endedJune 30
              
              
              Six
      Months endedJune 302008
              
              
              2007
              
              
              2008
              
              
              2007INTEREST
      YIELDS EARNED:Loans
              
              
              6.67
              %
              
              
              9.25
              %
              
              
              7.03
              %
              
              
              9.17
              %Investment
      securities
              
              
              5.18
              %
              
              
              5.28
              %
              
              
              5.29
              %
              
              
              5.26
              %Federal
      funds sold
              
              
              2.26
              %
              
              
              5.18
              %
              
              
              3.11
              %
              
              
              4.96
              %INTEREST
      RATES PAID:Deposits
              
              
              3.46
              %
              
              
              4.15
              %
              
              
              3.61
              %
              
              
              4.11
              %Borrowings
              
              
              3.67
              %
              
              
              5.07
              %
              
              
              4.04
              %
              
              
              4.98
              %
  13
  Total
interest income for the second quarter of 2008 decreased approximately $2.5
million or 26.91% when compared to the second quarter of 2007.  Total
interest income for the six-month period ending June 30, 2008 decreased
approximately $4.0 million or 21.49% when compared to the six-month period
ending June 30, 2007. The decrease in interest income is the result of the
following: 1) Approximately $256.2 million or 72.11% 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 also decreased approximately $12.3 million or 3.49% due to maturities,
payouts and foreclosures when comparing the six-month periods ending June 30,
2008 and 2007.  3)  Nonaccrual loans increased approximately
$13.4 million when compared to December 31, 2007.  Interest income is
reduced as the number and balances of loans in nonaccrual status
increase.  See a more detailed discussion in “Asset
Quality”.
 
 Total
interest expense for the second quarter of 2008 decreased approximately $561,000
or 13.62% when compared to the second quarter of 2007.  Average
balances in interest bearing accounts increased approximately $5.5 million when
comparing the second quarter of 2008 to the second quarter of
2007.  During the same period, the average interest rate paid on
deposits decreased approximately .69%.   Rates on savings and
money market accounts, interest bearing demand deposits, and time deposits
decreased approximately 1.31%, .87% and .44%,
respectively.   Average balances in other borrowings increased
approximately $15.8 million when comparing the second quarter of 2008 to the
second quarter of 2007 with a decrease in the average rate paid on borrowings of
approximately 1.40%.
 
 Total
interest expense for the first six months of 2008 decreased approximately
$539,000 or 6.66% when compared to the first six months of
2007.   Average balances in interest bearing accounts increased
approximately $13.6 million when comparing the first six months of 2008 and
2007.  During the same period, the average interest rate paid on
deposits decreased approximately .50%.   Rates on savings and
money market accounts, interest bearing demand deposits and time deposits
decreased approximately 1.29%, .72% and .24%, respectively.  Average
balances in other borrowings increased approximately $12.4 million when
comparing the first six months of 2008 to the first six months of 2007 with a
decrease in the average rate paid on borrowings of approximately
..94%.
 
 Net
interest income before provision for loan losses decreased approximately $2.0
million or 37.37% for the second quarter of 2008 and decreased approximately
$3.4 million or 33.16% for the first six months of 2008 when compared to the
same periods in 2007 as a result of the items discussed above.
 
 The net
interest margin of the Company, net interest income divided by average earning
assets, was 3.09% for the second quarter of 2008 compared to 4.75% for the
second quarter of 2007, and was 3.21% for the first six months of 2008 compared
to 4.70% for the first six months of 2007.
 
 Noninterest
income increased $201,000 or 21.54% for the second quarter of 2008 over the same
period in 2007 and increased $438,000 or 23.64% for the first six months of 2008
over the same period in 2007.  Increases occurring in net gains
realized on calls and sales within the investment securities portfolio, in other
income and in service charges totaled approximately $161,000, $121,000 and
$21,000, respectively, during the second quarter of 2008. These
increases were offset by decreases within the mortgage origination fee income of
approximately $102,000. Increases
in the cash surrender value of life insurance, in trust fees, in gains in sale
of other real estate, and in mastermoney card income totaling approximately
$55,000, $31,000, $19,000 and $12,000, respectively, are reflected in the
increase in other income.
 
 For the
first six months of 2008, increases in net gains realized on calls and sales
within the investment securities portfolio, in other income and in service
charges totaled approximately $284,000, $192,000 and $45,000, respectively, when
compared to the first six months of 2007.  These increases were offset
by decreases within the mortgage origination income totaling approximately
$83,000.  The increase in other income is the result of increases in
cash surrender value of life insurance, trust fees, gains in sale of other real
estate, and mastermoney card income totaling approximately $107,000, $62,000,
$24,000 and $22,000, respectively, offset by a decrease in data processing
income of approximately $26,000.
  14
  Noninterest
expense decreased $42,000 or .89% for the second quarter of 2008 over the same
period in 2007 with decreases in salary and employee benefits, general and
administrative expense, occupancy expense and computer services of approximately
$179,000, $30,000, $29,000 and $13,000, respectively. The decrease in salary and
employee benefits resulted from decreases in overtime expense, commission
expense and accruals for incentive compensation.  Tighter expense
control measures have resulted in decreases in general and administrative
expense, occupancy and computer services when comparing first quarter of 2008 to
the same period in 2007. The decrease in general and administrative expenses
consists primarily of decreases in office supplies and advertising and marketing
expense of approximately $29,000 and $16,000, respectively, offset by increases
in various other miscellaneous expense and outside services totaling
approximately $9,000, and $13,000,  respectively.  Outside
services include FDIC insurance, legal and professional services, insurance,
director fees and State of Georgia Department of Banking fees. These
decreases were offset by increases in other real estate expense, telephone
expense, and leased equipment expense of approximately $159,000, $43,000 and
$7,000, respectively.   Additional expenses were incurred in the
increasing number of foreclosed properties in other real
estate.  Additional expenses for telephone and leased equipment
resulted from the installations and upgrade charges associated with the new
office in Flowery Branch.
 
 Noninterest
expense decreased $155,000 or 1.67% for the first six months of 2008 over the
same period in 2007 with decreases in salary and employee benefits, occupancy
expense, computer services and general and administrative expense of
approximately $441,000, $16,000, $25,000 and $3,000, respectively. The decrease
in salary and employee benefits resulted from decreases in overtime expense,
commission expense and in the accrual for incentive
compensation.  Tighter expense control measures have resulted in
decreases in occupancy, computer services and general and administrative
expenses when comparing the first six months of 2008 to the same period in
2007.  The decrease in general and administrative expenses consists
primarily of decreases in office supplies and advertising and marketing expenses
of approximately $53,000 and $49,000, respectively, offset by increases in
various other miscellaneous expense and outside services totaling approximately
$39,000 and $60,000,  respectively.  Outside services
include FDIC insurance, legal and professional services, insurance, director
fees and State of Georgia Department of Banking fees. These decreases were
offset by increases in other real estate expense, leased equipment expense and
telephone expense of approximately $291,000, $21,000 and $18,000,
respectively.  Increases in other real estate, telephone expense and
leased equipment expense for the first six months of 2008 occurred for the same
reasons as noted above for the three month period ended June 30,
2008.
 
 An income
tax benefit of approximately $521,000 was recorded for the three months ended
June 30, 2008 compared to an income tax expense of approximately $436,000 for
the three months ended June 30, 2007.  An income tax benefit of
approximately $717,000 was recorded for the first six months of 2008 compared to
an income tax expense of approximately $844,000 for the first six months of
2007.  The effective tax rate for the second quarter of 2008 and 2007
was 58.15% and 29.65%, respectively. The effective tax rate for the six months
ended June 30, 2008 and 2007 was 69.40% and 29.48%,
respectively.  Tax-exempt income of approximately $387,000 was 43.15%
of pre-tax income for the second quarter of 2008 when compared to 23.24% of
pre-tax income for the second quarter of 2007.  Tax exempt income of
approximately $794,000 was 76.81% of pre-tax income for the first six months of
2008 when compared to 23.33% of pre-tax income for the first six months of
2007.
 
 Asset
Quality
 
 The
allowance for loan losses represents a reserve for probable losses in the loan
portfolio.  The adequacy of the allowance for loan losses is evaluated
monthly based on a review of all significant loans, with particular emphasis on
impaired, nonaccruing, past due and other loans that management believes require
special attention.  The determination of the allowance for loan losses
is subjective and based on consideration of a number of factors and
assumptions.
 
 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.
  15
  For loans
considered impaired, specific allowances are provided in the event that the
specific collateral analysis on each problem loan indicates that the liquidation
of the collateral would not result in repayment of these loans if the loan is
collateral dependent or if the present value of expected future cash flows on
the loan are less than the balance.  In addition to these allocated
allowances, at any point in time, the Company may have an unallocated component
of the allowance.  Unallocated portions of the allowance are due to a
number of quantitative and qualitative factors, such as improvement in the
condition of impaired loans and credit concentrations.  All nonaccrual
loans are considered impaired.
 
 The risk
associated with lending varies with the creditworthiness of the borrower, the
type of loan (consumer, commercial, or real estate) and its
maturity.  Cash flows adequate to support a repayment schedule are an
element considered for all loans.  Real estate loans are impacted by
market conditions regarding the value of the underlying property used as
collateral.  Commercial loans are also impacted by the management of
the business as well as economic conditions. The Company also makes unsecured
loans from time to time. The risk to the Company is greater for unsecured loans
as the ultimate repayment of the loan is only dependent on the borrower’s
ability to pay.  The balance of unsecured loans at June 30, 2008 was
$13.6 million.
 
 At June
30, 2008 and December 31, 2007, the ratio of the allowance for loan losses to
total loans was .72% and .61%, respectively.   For the second
quarter and first six months of 2008,  provision for loan losses
expense totaled approximately $654,000 and $1,077,000, respectively, and no
provision for loan losses was charged to expense for the second quarter and
first six months of 2007.
 
 Net
charge-offs for the first six months of 2008 totaled $786,931 compared to net
charge-offs of $358,864 for the first six months of 2007 as detailed
below:
 
 No.
              
              June 30, 2008
              
              No.
              
              June 30, 2007Charge-offs:Commercial
              2
              
              $
              53,005
              
              1
              
              $
              46,177Real
      Estate
              15
              
              
              695,252
              
              9
              
              
              253,624Consumer
              29
              
              
              68,680
              
              37
              
              
              86,632Total
      Charge-offs
              46
              
              
              816,937
              
              47
              
              
              386,433Recoveries:Commercial
              
              
              
              919
              
              
              
              
              850Real
      Estate
              
              
              
              325
              
              
              
              
              150Consumer
              
              
              
              28,762
              
              
              
              
              26,569Total
      Recoveries
              
              
              
              30,006
              
              
              
              
              27,569Net
      Charge-offs
              
              
              $
              786,931
              
              
              
              $
              358,864
 
 Nonperforming
assets consist of nonaccrual loans, accruing loans 90 days past due,
restructured loans and other real estate owned. The following summarizes
nonperforming assets:
 
 June 30, 2008
              
              
              December 31, 2007Accruing
      loans 90 days past due
              
              $
              396,000
              
              
              $
              41,594Nonaccrual
      loans
              
              
              31,705,238
              
              
              
              18,326,924Other
      real estate
              
              
              17,259,565
              
              
              
              11,498,271Restructured
      loans
              
              
              395,273
              
              
              
              -Total
      nonperforming assets
              
              $
              49,756,076
              
              
              $
              29,866,789
  16
  Nonperforming
assets increased $19,889,287 or 66.59% from December 31, 2007 to June 30,
2008.  See the discussion that follows within this section for a
description of the assets that comprised this increase.
 
 
 Loans
classified as 90 days past due increased $354,406 or 852.06% from December 31,
2007 to June 30, 2008.  The increase is the net result of the
following changes:
 
 Balance
      at December 31, 2007
              
              $
              41,594New
      loans classified to 90 days past due status
              
              
              473,283Payments
      received
              
              
              (113,641
              )Charge-offs
              
              
              (5,236
              )Balance
      at June 30,  2008
              
              $
              396,000The
      following summarizes accruing loans 90 days past due:Real
      estate secured – construction
              
              $
              396,000Residential
      loan
              
              
              -Consumer
      loan
              
              
              -Total
      accruing loans 90 days past due
              
              $
              396,000
 
 Impaired
loans consist of loans on nonaccrual status.  The increase is the net
result of the following changes:
 
 Balance
      at December 31, 2007
              
              $
              18,326,924Loans
      reclassified to nonaccrual status in 2008
              
              
              25,066,254Payments
      received on nonaccrual loans during 2008
              
              
              (4,773,584
              )Nonaccrual
      loans charged-off during 2008
              
              
              (778,415
              )Nonaccrual
      loans reclassified to other real estate
              
              
              (6,096,326
              )Nonaccrual
      loans reclassified to accrual status in 2008
              
              
              (39,615
              )Balance
      at June 30, 2008
              
              $
              31,705,238
 
 Additions
to loans on nonaccrual status consisted of the following:
  June 30, 2008Real
      Estate – construction & development loans
              
              $
              24,293,902Real
      Estate – residential loans
              
              
              706,922Commercial
      loans
              
              
              27,655Consumer
      loans
              
              
              37,775Total
      nonaccrual loans
              
              $
              25,066,254
 
 Payments
received on nonaccrual loans include payoffs totaling $4,138,411
and  the restructuring of loans totaling approximately
$378,418.
 
 The
following summarizes nonaccrual loans at June 30, 2008 and December 31,
2007:
 Number
      of Properties
              
              June
      30,
                2008
              
              Number
      of Properties
              
              December
      31, 2007Real
      Estate – construction & development loans
              22
              
              $
              31,070,784
              
              36
              
              $
              18,146,355Real
      Estate – residential loans
              8
              
              
              630,807
              
              4
              
              
              145,108Commercial
      loans
              -
              
              
              -
              
              1
              
              
              25,350Consumer
      loans
              3
              
              
              3,647
              
              1
              
              
              10,111Total
      nonaccrual loans
              33
              
              $
              31,705,238
              
              42
              
              $
              18,326,924
  17
  Other
real estate at June 30, 2008 increased approximately $5.8 million or 50.11% when
compared to December 31, 2007. The following summarizes other real estate at
June 30, 2008 and December 31, 2007:
 
 Number
      of Properties
              
              June
      30,2008
              
              Number
      of Properties
              
              December
      31,2007Residential
      construction properties
              33
              
              $
              11,405,082
              
              22
              
              $
              6,324,444Vacant
      lots
              70
              
              
              5,214,983
              
              39
              
              
              4,500,483Commercial
      properties
              2
              
              
              639,500
              
              2
              
              
              639,500Residential
      properties
              -
              
              
              -
              
              1
              
              
              33,844Total
      other real estate
              105
              
              $
              17,259,565
              
              64
              
              $
              11,498,271
 
 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 $18.8 million at June 30, 2008.
 
 Goodwill
 
 Habersham
Bancorp reviews its goodwill for impairment annually or more frequently if
circumstances indicate that Goodwill
has been impaired.  During the last two quarters, Habersham Bancorp’s
stock price has traded below its per-share book value and fallen below tangible
book value for a short period of time.  Management believes that the
low stock price is more indicative of uncertainty about the economic cycle
rather than the value of Habersham Bancorp’s underlying
business.  Although Habersham Bancorp has not performed a complete
goodwill impairment assessment, Management does not believe that goodwill is
impaired.  The current economic environment has temporarily resulted
in lower earnings and higher credit losses.  Management believes that
the value of Habersham Bancorp’s business remains intact and that earnings will
return to past levels when the credit cycle recovers.  Habersham
Bancorp will complete a full goodwill impairment assessment during the fourth
quarter.
 
 Liquidity
and Capital Resources
 
 Liquidity
management involves the matching of the cash flow requirements of customers,
either depositors withdrawing funds or borrowers needing loans, and the ability
of the Company to meet those requirements.
 
 The
Company's liquidity program is designed and intended to provide guidance in
funding the credit and investment activities of the Company while at the same
time ensuring that the deposit obligations of the Company are met on a timely
basis.  In order to permit active and timely management of assets and
liabilities, these accounts are monitored regularly in regard to volume, mix,
and maturity.
 
 The
Company’s liquidity position depends primarily upon the liquidity of its assets
relative to its need to respond to short-term demand for funds caused by
withdrawals from deposit accounts and loan funding
commitments.  Primary sources of liquidity are scheduled repayments on
the Company’s loans and interest on and maturities of its investment
securities.  Sales of investment securities available for sale
represent another source of liquidity to the Company.  The Company may
also utilize its cash and due from banks and federal funds sold to meet
liquidity requirements as needed.
 
 The
Company also has the ability, on a short-term basis, to purchase federal funds
from other financial institutions up to $30 million.  At June 30,
2008, the Company had federal funds purchased totaling $3.5
million.  Presently, the Company has made arrangements with commercial
banks for short-term advances under a repurchase agreement line of credit of
which none was advanced at June 30, 2008. The Company entered into a repurchase
agreement for a long term advance of $5.0 million during the first quarter of
2008.  The Company has approximately $27.2 million outstanding in
commercial sweep accounts at June 30, 2008.  In addition, the Company
has a total available line of $38.0 million, subject to available collateral,
from the Federal Home Loan Bank.  The Company has $38.0 million in
advances on this line at June 30, 2008.
  18
  Habersham
Bank's liquidity policy requires that the ratio of cash and certain short-term
investments to net withdrawable deposit accounts be at least 20%.  The
Bank’s liquidity ratios at June 30, 2008 and June 30, 2007 were 30.72% and
17.10%, respectively.
 
 At June
30, 2008 Habersham Bancorp and Habersham Bank were required to have minimum Tier
1 and total capital ratios of 4% and 8%, respectively.  Additionally,
the Company and the Bank are required to maintain a leverage ratio (Tier 1
capital to average assets) of at least 4%.  The Company’s and the
Bank’s ratios at June 30, 2008 follow:
 
 Habersham
              
              HabershamBank
              
              BancorpTier
      1
              11.71%
              
              12.64%Total
      Capital
              12.33%
              
              13.26%Leverage
              9.12%
              
              9.87%
 
 
 Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.
 
 As of
June 30, 2008 there were no substantial changes in the composition of the
Company’s market-sensitive assets and liabilities or their related market values
from that reported as of December 31, 2007.  The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company’s audited consolidated financial statements, related notes and
management’s discussion and analysis of financial condition and results of
operations for the year ended December 31, 2007 included in the Company’s 2007
Annual Report on Form 10K.
 
 
 Item
4.  Controls and Procedures
 
 As of the
end of the period covered by this report, the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, reviewed and
evaluated the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to Exchange Act Rule
13a-15.  Based upon that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company, (including its consolidated subsidiaries)
that is required to be included in the Company’s periodic filings with the
Securities and Exchange Commission.
 
 There
have not been any changes in the Company’s internal control over financial
reporting or, to the Company’s knowledge, in other factors, during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  19
  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 discussed below, as well as those included in Part I. “Item
1.A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007, all of which could materially affect its business,
financial condition or future results.  The risks described below and
in the Annual Report of Form 10-K are not the only risks facing the
Company.  Additional risks and uncertainties not currently known to
management or that management currently deems to be immaterial also may
materially adversely affect the Company’s business, financial condition and/or
operating results.
 
 Weakness
in the economy and in the real estate market, including specific weakness within
our geographic footprint, has adversely affected us and may continue to
adversely affect us.
 
 If the
strength of the U.S. economy in general and the strength of the local economies
in which we conduct operations decline, or continue to decline, this could
result in, among other things, a deterioration in credit quality or a reduced
demand for credit, including a resultant adverse effect on our loan portfolio
and allowance for loan and lease losses. Declines in the U.S. economy and our
local real estate markets contributed to our increasing provisions for loan
losses during 2008, and may result in additional loan losses and loss provisions
for the remainder of 2008 and 2009.   These factors could result
in loan loss provisions in excess of charge-offs, delinquencies and/or greater
charge-offs in future periods, which may adversely affect our financial
condition and results of operations.
 
 In
addition, deterioration of the U.S. economy may adversely impact our traditional
banking business. Economic declines may be accompanied by a decrease in demand
for consumer or commercial credit and declining real estate and other asset
values. Declining real estate and other asset values may reduce the ability of
borrowers to use such equity to support borrowings. Delinquencies, foreclosures
and losses generally increase during economic slowdowns or recessions.
Additionally, our servicing costs, collection costs and credit losses may also
increase in periods of economic slowdown or recessions. The impact of recent
events relating to subprime mortgages resulting in a substantial housing
recession has not been limited to those directly involved in the real estate
construction industry (such as builders and developers). Rather, it has impacted
a number of related businesses such as building materials suppliers, equipment
leasing firms, and real estate attorneys, among others. All of these affected
businesses have banking relationships, and when their businesses suffer from
recession, the banking relationship suffers as well.
  The
impact of the current economic downturn on the performance of other financial
institutions in our geographic  area, actions taken by our competitors
to address the current economic downturn, and the public perception of and
confidence in the economy generally, and the banking industry
specifically, could negatively impact our performance and
operations.
  All
financial institutions are subject to the same risks resulting from a weakening
economy such as increased charge-offs and levels of past due loans and
nonperforming assets. As troubled institutions in our market area continue to
dispose of problem assets, the already excess inventory of residential homes and
lots will continue to negatively impact home values and increase the time it
takes us or our borrowers to sell existing inventory. The perception that
troubled banking institutions (and smaller banking institutions that are not “in
trouble”) are risky institutions for purposes of regulatory compliance or
safeguarding deposits may cause depositors nonetheless to move their funds to
larger institutions. If our depositors should move their funds based on events
happening at other financial institutions, our operating results would
suffer.
  20
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
 
 Issuer
Purchases of Equity Securities
 The
Company did not repurchase any of its shares of common stock during the period
covered by this report.
 
 Item
3.  Defaults upon senior securities.
 None
 
 Item
4.  Submission of matters to a vote of security holders.
 (a)
              The
      regular annual meeting of the shareholders of the Company was held on
      April 19, 2008.
  (b)
              The
      business conducted at the meeting included the election of the Board of
      Directors.  The Directors elected at the meeting were: Edward D.
      Ariail, Thomas A. Arrendale, III, Ben F. Cheek, III, Michael C. Martin,
      Michael L. Owen, James A. Stapleton, Jr., David D. Stovall, and Calvin R.
      Wilbanks.
 
 At the
registrant’s Annual Meeting of Shareholders on April 19, 2008, the shareholders
elected directors to serve for a term of one year or until their successors are
duly qualified and elected.  The following table sets forth the number
of votes cast and withheld with respect to each nominated
director.  There were no broker non-votes or abstentions.
 
 Name
              Votes
      For
              Votes
      WithheldEdward
      D. Ariail
              2,297,725
              133,129Thomas
      A. Arrendale, III
              2,416,126
              14,728Ben
      F. Cheek, III
              2,417,583
              13,271Michael
      C. Martin
              2,417,555
              13,299Michael
      L. Owen
              2,297,825
              133,029James
      A. Stapleton, Jr.
              2,418,383
              12,471David
      D. Stovall
              2,304,991
              125,943Calvin
      R. Wilbanks
              2,417,555
              13,299
 
 
 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.
  21
  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
      August 14, 2008
              /s/ Annette
      BanksChief
      Financial Officer(for
      the Registrant and as the Registrant’s principal financial and accounting
      officer)
   22