U.S.
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 March 31, 2005
 
 
 o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
transition period from _____ to _____
 
 Commission
file number 0-13153
 
 
 HABERSHAM
      BANCORP
 (Exact
name of registrant as specified in its charter)
 
 Georgia
    
    58-1563165(State
      or other jurisdiction of
    
    (I.R.S.
      Employerincorporation
      or organization)
    
    Identification
      No.)
 
 Highway
      441 N. P.O. Box 1980, Cornelia, Georgia
    
    30531(Address
      of principal executive offices)
    
    (Zip
      code)
 
 
 (706)
      778-1000
 (Issuer’s
telephone number, including area code)
 
  
 (Former
name, former address and former fiscal year,
 if
changed since last report)
 
 Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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  xNoo
 
  Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
 Yes  oNox
 
 State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
 
 2,901,692
shares, common stock, $1.00 par value, as of April 30, 2005
  1
  Item. 1
Financial Statements
 
 HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
 (dollars
in thousands)
 
 ASSETS
    
    MARCH
      31, 2005
    
    DECEMBER
      31, 2004Cash
      and due from banks
    
    $
    9,666
    
    $
    9,559Federal
      funds sold
    
    
    10,468
    
    
    -Total
      cash and cash equivalents
    
    
    20,134
    
    
    9,559Investment
      securities available for sale (cost of $73,188 at March 31, 2005 and
      $70,366 at December 31, 2004)
    
    
    72,251
    
    
    70,313Investment
      securities held to maturity (estimated fair value of $4,035 at March 31,
      2005 and $4,371 at December 31, 2004)
    
    
    3,827
    
    
    4,111Other
      investments
    
    
    3,092
    
    
    2,469Loans
      held for sale
    
    
    1,210
    
    
    1,062Loans
    
    
    273,882
    
    
    280,772Less
      allowance for loan losses
    
    
    (3,759
    )
    
    (3,635
    )Loans,
      net
    
    
    270,123
    
    
    277,137Goodwill
    
    
    2,489
    
    
    2,489Other
      assets
    
    
    22,210
    
    
    18,793TOTAL
      ASSETS
    
    $
    395,336
    
    $
    385,933LIABILITIESNoninterest-bearing
      deposits
    
    $
    49,349
    
    $
    44,316Interest-bearing
      deposits
    
    
    249,148
    
    
    248,641Total
      deposits
    
    
    298,497
    
    
    292,957Short-term
      borrowings
    
    
    795
    
    
    786Federal
      funds purchased and securities sold under repurchase
      agreements
    
    
    8,637
    
    
    4,835Federal
      Home Loan Bank Advances
    
    
    36,000
    
    
    36,000Other
      liabilities
    
    
    3,395
    
    
    3,349TOTAL
      LIABILITIES
    
    
    347,324
    
    
    337,927STOCKOLDERS’
      EQUITYCommon
      Stock, $1.00 par value, 10,000,000 shares authorized; 2,901,692 shares
      issued at March 31, 2005 and 2,900,192 shares issued at December 31, 2004
    
    
    2,901
    
    
    2,900Additional
      paid-in capital
    
    
    14,577
    
    
    14,561Retained
      earnings
    
    
    31,135
    
    
    30,661Accumulated
      other comprehensive (loss) income
    
    
    (601
    )
    
    (116
    )TOTAL
      STOCKHOLDERS’ EQUITY
    
    
    48,012
    
    
    48,006TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    $
    395,336
    
    $
    385,933
 
 See notes
to unaudited condensed consolidated financial statements.
  2
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
 (Uaudited)
For the Three-Month Periods Ended March 31, 2005 and 2004
 (dollars
in thousands, except per share amounts)
 
 **2005**
    
    **2004**INTEREST
      INCOMELoan
      interest and fees on loans
    
    $
    4,692
    
    $
    4,235Taxable
      investment securities
    
    
    591
    
    
    601Tax
      exempt securities
    
    
    193
    
    
    188Federal
      funds sold
    
    
    49
    
    
    4Other
    
    
    38
    
    
    32TOTAL
      INTEREST INCOME
    
    
    5,563
    
    
    5,060INTEREST
      EXPENSETime
      deposits, $100,000 and over
    
    
    385
    
    
    417Other
      deposits
    
    
    931
    
    
    803Short-term
      and other borrowings, primarily FHLB advances
    
    
    537
    
    
    447TOTAL
      INTEREST EXPENSE
    
    
    1,853
    
    
    1,667NET
      INTEREST INCOME
    
    
    3,710
    
    
    3,393Provision
      for loan losses
    
    
    120
    
    
    162NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    3,590
    
    
    3,231NONINTEREST
      INCOMEMortgage
      origination income
    
    
    232
    
    
    185Service
      charges on deposits
    
    
    152
    
    
    171Other
      service charges and commissions
    
    
    39
    
    
    43Investment
      securities (losses) gains, net
    
    
    (17
    )
    
    31Gain
      on sale of other investments
    
    
    -
    
    
    18Other
      income
    
    
    401
    
    
    350Total
      noninterest income
    
    
    807
    
    
    798NONINTEREST
      EXPENSESalary
      and employee benefits
    
    
    1,944
    
    
    2,054Occupancy
    
    
    464
    
    
    434Computer
      services
    
    
    93
    
    
    100General
      and administrative expense
    
    
    923
    
    
    1,018Total
      noninterest expense
    
    
    3,424
    
    
    3,606EARNINGS
      BEFORE INCOME TAXES
    
    
    973
    
    
    423Income
      tax expense
    
    
    267
    
    
    64NET
      EARNINGS
    
    
    706
    
    
    359NET
      EARNINGS PER COMMON SHARE - BASIC
    
    $
    .24
    
    $
    .13NET
      EARNINGS PER COMMON SHARE - DILUTED
    
    $
    .24
    
    $
    .12WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    
    
    2,900,942
    
    
    2,872,234WEIGHTED
      AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
      OUTSTANDING
    
    
    2,932,234
    
    
    2,939,885Dividends
      per share
    
    $
    .08
    
    $
    .07
 
 See notes
to unaudited condensed consolidated financial statements.
  3
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Unaudited)
For the Three-Month Periods Ended March 31, 2005 and 2004
 (dollars
in thousands)
  2005
    
    2004NET
      EARNINGS
    
    $
    706
    
    $
    359OTHER
      COMPREHENSIVE INCOME (LOSS), NET OF TAX:Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
    
    
    (901
    )
    
    812Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
    
    
    149
    
    
    -Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
    
    
    17
    
    
    (31
    )Total
      other comprehensive income (loss), before tax
    
    
    (735
    )
    
    781INCOME
      TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
      holding (losses) gains on investment securities available for sale arising
      during the period
    
    
    306
    
    
    (276
    )Unrealized
      holding gains (losses) on derivative financial instruments classified as
      cash flow hedges, arising during the period
    
    
    (50
    )
    
    -Reclassification
      adjustment for (gains) losses on investment securities available for
      sale
    
    
    (6
    )
    
    10Total
      income taxes related to other comprehensive income (loss)
    
    
    250
    
    
    (266
    )Total
      other comprehensive (loss) income, net of tax
    
    
    (485
    )
    
    515Total
      comprehensive (loss) income
    
    $
    221
    
    $
    874
 
 See notes
to unaudited condensed consolidated financial statements.
  4
  HABERSHAM
BANCORP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
For the Three-Month Periods Ended March 31, 2005 and 2004
 (dollars
in thousands)
 
 **2005**
    
    **2004**CASH
      FLOWS PROVIDED BY OPERATING ACTIVITIES:
    
    $
    205
    
    $
    2,025CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      securities available for sale:Proceeds
      from maturity
    
    
    1,982
    
    
    2,716Proceeds
      from sale and call
    
    
    468
    
    
    5,368Purchases
    
    
    (5,371
    )
    
    (5,127
    )Investment
      securities held to maturity:Proceeds
      from maturity
    
    
    11
    
    
    110Proceeds
      from call
    
    
    275
    
    
    -Other
      investments:Proceeds
      from sale
    
    
    -
    
    
    45Purchases
    
    
    (623
    )
    
    -Net
      (increase) decrease in loans
    
    
    4,366
    
    
    5,965Purchases
      of premises and equipment
    
    
    (185
    )
    
    (233
    )Proceeds
      from sale of other real estate
    
    
    310
    
    
    186Net
      cash provided by investing activities
    
    
    1,233
    
    
    9,030CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase (decrease)in deposits
    
    
    5,540
    
    
    (1,735
    )Net
      increase (decrease) in short-term borrowings
    
    
    9
    
    
    (6
    )Net
      (decrease) increase in federal funds purchased and securities sold under
      repurchase agreements
    
    
    3,802
    
    
    (4,204
    )Issuance
      of common stock
    
    
    18
    
    
    77Cash
      dividends paid
    
    
    (232
    )
    
    (201
    )Net
      cash provided by (used in) financing activities
    
    
    9,137
    
    
    (6,069
    )Increase
      (decrease) in cash and cash equivalents
    
    
    10,575
    
    
    (4,986
    )CASH
      AND CASH EQUIVALENTS: BEGINNING OF PERIOD
    
    
    9,559
    
    
    8,381CASH
      AND CASH EQUIVALENTS: END OF PERIOD
    
    $
    20,134
    
    $
    13,367SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Other
      real estate acquired through loan foreclosures
    
    $
    2,528
    
    $
    611Change
      in components of other comprehensive income
    
    
    (485
    )
    
    515
 
 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 2004 consolidated financial statements and notes
thereto, included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.
 
 
 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, 2004. 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 March 31, 2005, fair value of the
available for sale investment securities decreased approximately $884,000 when
compared to the fair value at December 31, 2004. The corresponding equity
component of unrealized gain and loss on available for sale securities, net of
tax, also decreased approximately $584,000. These changes were the results of
movements in the bond market as it responds to interest rate changes in the
market. At March 31, 2005, fair value of the cash flow hedges increased
approximately $149,000 when compared to the fair value at December 31, 2004. The
corresponding equity component of unrealized holding gains on derivative
financial instruments classified as cash flow hedges, net of tax, also increased
approximately $99,000.
  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-month periods ended
March 31, 2005 and 2004, is as follows:
 
 Three
      Months endedMarch
      31,2005
    
    2004Net
      earnings
    
    $
    706,076
    
    $
    359,052Weighted
      average common shares outstanding
    
    
    2,900,942
    
    
    2,872,234Shares
      issued from assumed exercise of common stock equivalents
    
    
    31,292
    
    
    67,651Weighted
      average number of common and common equivalent shares
      outstanding
    
    
    2,932,234
    
    
    2,939,885Basic
    
    $
    .24
    
    $
    .13Diluted
    
    $
    .24
    
    $
    .12
   5.
    Stock
      Option Plans
 
 On April
16, 2005, at the annual meeting, the shareholders approved adoption of the
Habersham Bancorp 2005 Stock Option Plan (the “Stock Option Plan”). The Board of
Directors has reserved 400,000 shares of common stock for issuance under awards
that may be made to eligible officers and employees of the Company and its
affiliates. Stock options granted under this plan may be incentive stock options
or nonqualified stock options. The exercise price on incentive stock options
granted under the Stock Option Plan may not be less than the fair market value
of the common stock on the date of the grant. The term of an incentive stock
option generally may not exceed ten years from the date of grant.
 
 On April
16, 2005, at the annual meeting, the shareholders approved adoption of the
Habersham Bancorp Outside Directors Stock Option Plan (the “Directors Plan”). The Board
of Directors had previously adopted a stock options plan, also named the
Habersham Bancorp Outside Directors Stock Option Plan, with an effective date of
January 21, 1995. The 1995 Plan expired on January 20, 2005. The Directors Plan
is meant to supersede in its entirety the 1995 Directors Plan. The Board of
Directors has reserved 350,000 shares of common stock for issuance under awards
made to directors of the Company and its affiliates who are not employed by the
Company or any of its affiliates. The options will be exercisable at a price
equal to the fair market value of the Company’s common stock as of the date of
grant. All options granted under the Directors Plan will be immediately vested
but may not be exercised until six months following the date of grant. Each
option remains exercisable until the earlier of: (1) the fifth anniversary of
the date on which it was granted; (2) the date the optionee ceases to be a
director of either the Company or any affiliate, except as a result of death; or
(3) the first anniversary of the optionee’s date of death.
  7
  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. The Advantage Group, Inc., a
non-bank subsidiary providing marketing and advertising services, ceased
operation September 30, 2001. 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. The Advantage
Group, Inc. and Advantage Insurers do not comprise a significant portion of the
financial position, results of operations, or cash flows of the Company 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, and Gwinnett
counties in Georgia. The Company’s primary source of revenue is providing loans
to businesses and individuals in its market area.
 
 
 Executive
Summary
 
 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.
 Earnings
for the first quarter of 2005 were primarily impacted by increases on loan
yields moving in response to prime rate increases. Revenue growth of 8.74% and a
reduction in noninterest expenses during the first quarter of 2005 when compared
to first quarter 2004 resulted in an improved overhead efficiency ratio.
 
 Total
assets increased approximately $9 million during the first quarter of 2005.
Increases in the total deposit portfolio, primarily in noninterest bearing
deposits, and in other borrowings of approximately $6 million and $4 million,
respectively, combined with decreases in the loan portfolio resulted in excess
cash held in federal funds sold at the end of the first quarter of 2005. The
decreases in the loan portfolio occurred toward the end of March and did not
significantly impact interest income for the first quarter. The interest rate
margin improved for the first quarter of 2005 when compared to the first quarter
of 2004 as result of the items discussed above.
 
 Decreases
in personnel costs and other operating expenses of approximately 5.05% for the
first quarter of 2005 over the first quarter of 2004 were the result of expense
control measures for 2005.
  8
  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; (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.
 losses.
Management has implemented a process that has been applied consistently to
systematically consider the many variables that impact the estimation of the
allowance for loan losses.
 
 
 Material
Changes in Financial Condition
 
 The
Company’s total assets increased $9 million, to $395 million at March 31, 2005
from $386 million at December 31, 2004.
 
 Increases
in federal funds sold, investment securities and other investments, and other
real estate of approximately $10 million, $2.3 million and $2.2 million,
respectively, were offset by decreases in the loan portfolio of approximately
$6.9 million. These increases were funded by increases in the deposit portfolio
and in short-term borrowings of approximately $5.5 million and $3.8 million,
respectively.
  9
  During
the first quarter of 2005, decreases in the real estate and consumer loan
portfolios totaled approximately $9.4 million and $500,000, respectively, offset
by increases in the commercial loan portfolio of approximately $3 million. The
decrease in the real estate portfolio primarily resulted from pay-offs of
several large loans and the foreclosure of one loan secured by commercial real
estate for approximately $2.5 million.
 
 Purchases
of investment securities during the first quarter of 2005 totaled approximately
$5.4 million, offset by maturities and calls of approximately $2.7 million.
Other investments increased approximately $600,000 with the purchase of stock in
Peach State Bank and Trust, a de novo bank located Gainesville, GA.
 
 The
increase in other real estate primarily was the result of the foreclosure of a
commercial real estate loan of approximately $2.5 million during the first
quarter of 2005 offset by sales of approximately $310,000.
 
 The
deposit portfolio increase of approximately $5.5 million occurred primarily in
the non-interest bearing deposit portfolio for approximately $5 million of the
increase with the remainder occurring in the NOW and money market deposit
accounts.
 
 Borrowings
increased approximately $3.8 million during the first quarter of 2005 primarily
in the repurchase sweep portfolio.
 
 
 Material
Changes in Results of Operations
 
 Total
interest income for the first quarter of 2005 increased $503,000 or 9.94% when
compared to the first quarter of 2004 primarily due to increases in loan
interest and fees on loans. This increase is primarily the result of the average
loan portfolio for the first quarter of 2005 increasing approximately $19
million or 7.45% when compared to average loan portfolio for the first quarter
of 2004. The average yield on loans increased during the first quarter of 2005
to 6.82% compared to an average yield of 6.51% for the first quarter of 2004.
Interest income from federal funds sold increased approximately $45,000 for the
first quarter of 2005 when compared to the first quarter of 2004 primarily due
to increases in the average balances of approximately $5 million. Average yields
on federal funds sold increased to 2.33% for the first quarter of 2005 when
compared to .91% for the first quarter of 2004.
 
 Total
interest expense for the first quarter of 2005 increased $186,000 or 11.16%,
when compared to the first quarter of 2004. Two factors impact interest expense:
average balances of deposit and borrowing portfolios and average rates paid on
each. Average deposit balances increased approximately $24.5 million when
comparing first quarter of 2005 to first quarter 2004. The increase of $24.5
million includes approximately $5.4 million in non-interest bearing balances in
regular demand deposit accounts. The average rate paid on the deposit portfolios
for the first quarter of 2005 increased to 2.08% from 2.04% when compared to
first quarter of 2004. Average borrowing balances increased approximately $3.2
million when comparing first quarter of 2005 to first quarter of 2004. Average
interest rates paid on borrowings was 4.83% for the first quarter of 2005
compared to 4.55% for the first quarter of 2004.
  10
  Net
interest income increased approximately $317,000 or 9.34%, for the first quarter
of 2005 as compared to the first quarter of 2004 as a result of the items
discussed above.
 
 The net
interest margin of the Company, net interest income divided by average
earning-assets, was 4.13% for the first quarter of 2005 compared to 3.96% for
the first quarter of 2004.
 
 Noninterest
income increased $9,000 or 1.13% for the first quarter of 2005 over the same
period in 2004. The mortgage origination income increase was primarily due to an
increase in the average volume of activity in the mortgage held for sale
portfolio when comparing first quarter of 2005 to first quarter 2004. Increases
in other income occurred in the cash surrender value for key man insurance,
Master Money Card income and safe deposit box rent of approximately $28,000,
$11,000 and $11,000, respectively. Decreases occurring in service charges on
deposits and other service charges of approximately $19,000 and $4,000 resulted
from lower average balances in NSF checks presented for payment and in overdraft
balances when comparing first quarter 2005 to first quarter 2004.
 
 Noninterest
expense decreased $182,000 or 5.05% for the first quarter of 2005 over the same
period in 2004. These decreases were primarily due to decreases in salary and
employee benefits and general and administrative expenses of approximately
$110,000 and $95,000, respectively, due to a decrease in the total number of
employees. Expense control has been a major focus during the first quarter of
2005 resulting in lower general and administrative costs.
 
 Income
tax expense for the three months ended March 31, 2005 and 2004
was $267,000
and $64,000, respectively. The effective tax rate for the first quarter of 2005
and 2004 was 27.44% and 15.13%, respectively. Tax-exempt income on investment
securities in municipal bonds was 19.87% of pre-tax income for the first quarter
of 2005 when compared to 44.40% for the first quarter of 2004.
 
 
 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
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention. The determination of the allowance for loan
losses is subjective and based on consideration of a number of factors and
assumptions. As such, the accounting policy followed in the determination of the
allowance is considered a critical accounting policy.
 
 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
March 31, 2005 was $8.4 million which does not pose a significant risk to the
Company.
  11
  A
provision for loan losses in the amount of $120,000 was charged to expense for
the quarter ended March 31, 2005 compared to $162,000 for the quarter ended
March 31, 2004. A decrease in the provision for loan losses expense was
determined to be appropriate due to the decrease in the loan portfolio balances
in real estate secured loans. The net recoveries for the first quarter of 2005
totaled approximately $3,919 compared to net charge-offs of $238,000 for the
first quarter of 2004. During the first quarter of 2005, charge-offs of
commercial and consumer loans totaled approximately $6,314, and $41,201,
respectively, offset by recoveries of consumer, commercial, and real estate
secured loans of $33,138, $13,348, and $4,949, respectively. At March 31, 2005
and December 31, 2004, the ratio of the allowance for loan losses to total loans
was 1.37% and 1.29%, respectively.
 
 Nonperforming
assets consist of non-accrual loans, accruing loans 90 days past due,
restructured loans and other real estate owned. The following summarizes
non-performing assets:
 
 March
      31, 2005
    December
      31, 2004Accruing
      loans 90 days past due
    
    $
    540,612
    
    $
    381,670Non-accrual
      loans
    
    
    651,159
    
    
    3,252,464Other
      real estate
    
    
    3,483,590
    
    
    1,289,880Restructured
      loans
    
    
    137,806
    
    
    119,031Total
      non-performing assets
    
    $
    4,813,167
    
    $
    5,043,045
 
 Nonperforming
assets decreased approximately $230,000 or 4.56% from December 31, 2004 to March
31, 2005.
 
 New loans
classified as 90 days past due totaled $536,856 were offset by charge-offs of
$14,302 and payments or payoffs of $363,612. Loans past due 90 days consist of
nine loans secured by real estate, three commercial loans and twelve consumer
loans of approximately $476,000, $30,000 and $35,000, respectively.
 
 Impaired
loans consist of loans on non-accrual status. The decrease is the net result of
the following changes:
 
 Balance
      at December 31, 2004
    
    $
    3,252,464Loans
      reclassified to non-accrual status in 2005
    
    
    105,968Payments
      received on non-accrual loans during 2005
    
    
    (21,658
    )Non-accrual
      loans charged-off during 2005
    
    
    (16,119
    )Non-accrual
      loans reclassified to other real estate
    
    
    (2,526,476
    )Non-accrual
      loans reclassified to accrual status in 2005
    
    
    (143,020
    )Balance
      at March 31, 2005
    
    $
    651,159
 
 Additions
to loans on non-accrual status consisted of three real estate secured loans
totaling approximately $95,000 and one commercial loan of approximately $11,000.
The interest income recognized on such loans for the three-month periods ended
March 31, 2005 and 2004 was not material.
 
 The
Company’s other real estate consists of nine properties totaling $3,483,590 at
March 31, 2005 and eleven properties totaling $1,289,880 at December 31, 2004.
The increase was primarily due to the foreclosure of one commercial loan
collateralized by a multi-family residential property totaling approximately
$2,470,498 and one loan collateralized by residential real estate totaling
$55,000 during the first quarter of 2005 offset by the sale of four properties
totaling $309,572. The multi-family residential property has an appraised value
of $2.6 million and is being actively marketed.
 
 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 sale efforts.
  12
  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 $25,000,000. At March 31, 2005, the
Company had no federal funds purchased. Presently, the Company has made
arrangements with commercial banks for short-term advances up to $9,140,000
under a repurchase agreement line of credit of which none was advanced at March
31, 2005. The Company has approximately $ 8.6 million outstanding in commercial
sweep accounts at March 31, 2005. In addition, the Company has a total available
line of $230,833,000, subject to available collateral, from the Federal Home
Loan Bank. The Company has $36 million in advances on this line at March 31,
2005.
 
 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 March 31, 2005 and 2004 were 27.89% and 35.95%,
respectively.
 
 At March
31, 2005 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 March 31,
2005 follow:
 
 Habersham
    
    HabershamBank
    
    BancorpTier
      1
    
    
    13.96%
    
    
    14.80%Total
      Capital
    
    
    15.18%
    
    
    16.01%Leverage
    
    
    10.96%
    
    
    11.65%
 
 
 Item
3.  Quantitative
and Qualitative Disclosures About Market Risk.
 
 As of
March 31, 2005, 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, 2004. 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, 2004 included in the Company’s 2004 Annual Report on
Form 10K.
  13
  Item
4. CONTROLS
AND PROCEDURES
 
 As of the
end of the period covered by this report, the Company’s management, including
the Company’s 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 could significantly affect those
internal controls subsequent to the date management carried out its evaluation,
and there have been no corrective actions with respect to significant
deficiencies or material weaknesses.
 
 
 PART II
 
 OTHER
INFORMATION
 
 Item
1.  Legal
proceedings.
 None
 
 Item
2.  Changes
in securities, use of proceeds and issuer purchases of equity securities.
 
 Issuer
Purchases of Equity Securities
  The
following table sets forth information regarding the Company's purchases of its
common stock on a monthly basis during the first quarter of 2005.
 
 Period
    
    Total
      Number of Shares Purchased
    
    Average
      Price Paid Per Share
    
    Total
      Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
      or Programs1
    
    Maximum
      Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be
      Purchased Under the Plans or ProgramsJanuary
      1 through January 31, 2005
    
    0
    
    0
    
    0
    
    0February
      1 through February 28, 2005
    
    0
    
    0
    
    0
    
    0March
      1 through March 31, 2005
    
    0
    
    0
    
    0
    
    0Total
    
    0
    
    0
    
    0
    
    0
  14
  The
Company does not have a publicly announced stock repurchase plan and did not
otherwise repurchase any of its shares of common stock during the period covered
by this report. The Company did not terminate an existing stock repurchase plan
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.
 None
 
 Item
5.  Other
information.
 None
  Item
6.  Exhibits
 
 (a) The
registrant submits herewith as exhibits to this report on Form 10-Q the exhibits
required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the
Securities Exchange Act of 1934.
 
 10.1* Habersham
Bancorp 2005 Stock Option Plan (incorporated by reference to Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A for its 2005 Annual
Meeting of Shareholders).
  10.2 Habersham
Bancorp Outside Directors Stock Option Plan (incorporated by reference to
Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A for
its 2005 Annual Meeting of Shareholders).
  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.
  *Indicates
a management compensatory plan or agreement.
  15
  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
      May 16, 2005
    /S/
      Annette BanksChief
      Financial Officer(for
      the Registrant and as theRegistrant’s
      principal financial andaccounting
      officer)
  16