U.S.
        SECURITIES AND EXCHANGE COMMISSION
 
 WASHINGTON,
        D. C. 20549
 
 FORM
        10-Q
 
 o QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 For
        the
        quarterly period ended June 30, 2006
 
 
 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 ofincorporation
                  or organization)
              (I.R.S.
                  EmployerIdentification
                  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 
        x No 
        o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one)
 
 Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filer  x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yeso
No
x
  State
        the
        number of shares outstanding of each of the issuer’s classes of common stock, as
        of the latest practicable date:
 
 2,945,240
        shares, common stock, $1.00 par value, as of July 25, 2006
  1
  Item.
                  1
              Financial
                  Statements
 
 HABERSHAM
        BANCORP AND SUBSIDIARIES
 CONDENSED
        CONSOLIDATED BALANCE SHEETS (unaudited)
 (dollars
        in thousands)
 
 ASSETS
              
              JUNE
                30,
                  2006
              
              DECEMBER
                31,
                  2005Cash
                  and due from banks
              
              $
              12,760
              
              $
              16,546Federal
                  funds sold
              
              
              10,307
              
              
              36,320Total
                  cash and cash equivalents
              
              
              23,067
              
              
              52,866Investment
                  securities available for sale (cost of $87,440 at June 30, 2006
                  and
                  $74,607 at December 31, 2005)
              
              
              84,236
              
              
              73,115Investment
                  securities held to maturity (estimated fair value of $3,452 at
                  June 30,
                  2006 and $3,514 at December 31, 2005)
              
              
              3,380
              
              
              3,388Other
                  investments
              
              
              3,365
              
              
              3,375Loans
                  held for sale
              
              
              3,001
              
              
              2,119Loans
              
              
              323,657
              
              
              320,718Less
                  allowance for loan losses
              
              
              (3,857
              )
              
              (3,945
              )Loans,
                  net
              
              
              319,800
              
              
              316,773Goodwill
              
              
              3,550
              
              
              3,550Other
                  assets
              
              
              25,771
              
              
              23,245TOTAL
                  ASSETS
              
              $
              466,170
              
              $
              478,431LIABILITIESNoninterest-bearing
                  deposits
              
              $
              54,608
              
              $
              92,698Interest-bearing
                  deposits
              
              
              313,438
              
              
              280,064Total
                  deposits
              
              
              368,046
              
              
              372,762Short-term
                  borrowings
              
              
              156
              
              
              776Federal
                  funds purchased and securities sold under repurchase
                  agreements
              
              
              4,162
              
              
              8,423Federal
                  Home Loan Bank Advances
              
              
              38,000
              
              
              42,300Other
                  liabilities
              
              
              4,081
              
              
              3,913TOTAL
                  LIABILITIES
              
              
              414,445
              
              
              428,174STOCKOLDERS’
                  EQUITYCommon
                  Stock, $1.00 par value, 10,000,000 shares authorized; 2,944,740
                  shares
                  issued at June 30, 2006 and 2,921,240 shares issued at December
                  31,
                  2005
              
              
              2,945
              
              
              2,921Additional
                  paid-in capital
              
              
              15,165
              
              
              14,723Retained
                  earnings
              
              
              35,612
              
              
              33,545Accumulated
                  other comprehensive(loss)income
              
              
              (1,997
              )
              
              (932
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              51,725
              
              
              50,257TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              466,170
              
              $
              478,431
 
 See
        notes
        to unaudited condensed consolidated financial statements.
  2
  HABERSHAM
        BANCORP AND SUBSIDIARIES
 CONDENSED
        CONSOLIDATED STATEMENTS OF EARNINGS
 (Uaudited)
        For the Three-Month and Six-Month Periods Ended June 30, 2006 and 2005
 (dollars
        in thousands, except per share amounts)
 Three
                  Months ended
              
              Six
                  Months ended2006
              
              2005
              
              2006
              
              2005INTEREST
                  INCOMELoan
                  interest and fees on loans
              
              $
              7,092
              
              $
              5,104
              
              $
              13,977
              
              $
              9,796Taxable
                  investment securities
              
              
              718
              
              
              581
              
              
              1,367
              
              
              1,172Tax
                  exempt securities
              
              
              236
              
              
              199
              
              
              448
              
              
              392Federal
                  funds sold
              
              
              148
              
              
              68
              
              
              309
              
              
              117Other
              
              
              64
              
              
              41
              
              
              121
              
              
              79TOTAL
                  INTEREST INCOME
              
              
              8,258
              
              
              5,993
              
              
              16,222
              
              
              11,556INTEREST
                  EXPENSETime
                  deposits, $100,000 and over
              
              
              870
              
              
              473
              
              
              1,638
              
              
              858Other
                  deposits
              
              
              1,660
              
              
              966
              
              
              3,257
              
              
              1,897Short-term
                  and other borrowings, primarily FHLB advances
              
              
              521
              
              
              509
              
              
              1,040
              
              
              1,046TOTAL
                  INTEREST EXPENSE
              
              
              3,051
              
              
              1,948
              
              
              5,935
              
              
              3,801NET
                  INTEREST INCOME
              
              
              5,207
              
              
              4,045
              
              
              10,287
              
              
              7,755Provision
                  for loan losses
              
              
              -
              
              
              120
              
              
              -
              
              
              240NET
                  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
              
              
              5,207
              
              
              3,925
              
              
              10,287
              
              
              7,515NONINTEREST
                  INCOMEMortgage
                  origination income
              
              
              206
              
              
              152
              
              
              392
              
              
              384Service
                  charges on deposits
              
              
              233
              
              
              161
              
              
              407
              
              
              313Other
                  service charges and commissions
              
              
              66
              
              
              37
              
              
              133
              
              
              76Investment
                  securities (losses) gains, net
              
              
              (1
              )
              
              (13
              )
              
              (6
              )
              
              (30
              )Gain
                  on sale of premises and equipment
              
              
              18
              
              
              -
              
              
              18
              
              
              -Gain
                  on sale of land
              
              
              42
              
              
              -
              
              
              42
              
              
              -Other
                  income
              
              
              416
              
              
              397
              
              
              837
              
              
              798Total
                  noninterest income
              
              
              980
              
              
              734
              
              
              1,823
              
              
              1,541NONINTEREST
                  EXPENSESalary
                  and employee benefits
              
              
              2,435
              
              
              2,017
              
              
              4,729
              
              
              3,961Occupancy
              
              
              530
              
              
              475
              
              
              1,087
              
              
              939Computer
                  services
              
              
              128
              
              
              118
              
              
              282
              
              
              211General
                  and administrative expense
              
              
              1,154
              
              
              878
              
              
              2,228
              
              
              1,801Total
                  noninterest expense
              
              
              4,247
              
              
              3,488
              
              
              8,326
              
              
              6,912EARNINGS
                  BEFORE INCOME TAXES
              
              
              1,940
              
              
              1,171
              
              
              3,784
              
              
              2,144Income
                  tax expense
              
              
              615
              
              
              320
              
              
              1,188
              
              
              587NET
                  EARNINGS
              
              $
              1,325
              
              $
              851
              
              $
              2,596
              
              $
              1,557Net
                  earnings per common share - Basic
              
              $
              .45
              
              $
              .29
              
              $
              .89
              
              $
              .54Net
                  earnings per common share - Diluted
              
              $
              .44
              
              $
              .29
              
              $
              .87
              
              $
              .53Weighted
                  average number of common shares outstanding
              
              
              2,938,336
              
              
              2,901,692
              
              
              2,932,424
              
              
              2,901,319Weighted
                  average number of common and common equivalent shares
                  outstanding
              
              
              2,980,788
              
              
              2,939,111
              
              
              2,972,371
              
              
              2,935,675Dividends
                  per share
              
              $
              .09
              
              $
              .08
              
              $
              .18
              
              $
              .16
  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, 2006 and 2005
 (dollars
        in thousands)
  Three
                  Months ended
              
              Six
                  Months ended2006
              
              2005
              
              2006
              
              2005NET
                  EARNINGS
              
              $
              1,325
              
              $
              851
              
              $
              2,596
              
              $
              1,557OTHER
                  COMPREHENSIVE INCOME (LOSS):Unrealized
                  holding (losses) gains on investment securities available for sale
                  arising
                  during the period
              
              
              (1,489
              )
              
              647
              
              
              (1,718
              )
              
              (254
              )Unrealized
                  holding gains (losses) on derivative financial instruments classified
                  as
                  cash flow hedges, arising during the period
              
              
              39
              
              
              (90
              )
              
              98
              
              
              59Reclassification
                  adjustment for (gains) losses on investment securities available
                  for
                  sale
              
              
              1
              
              
              13
              
              
              6
              
              
              30Total
                  other comprehensive income (loss), before tax
              
              
              (1,449
              )
              
              570
              
              
              (1,614
              )
              
              (165
              )INCOME
                  TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
                  holding (losses) gains on investment securities available for sale
                  arising
                  during the period
              
              
              506
              
              
              (220
              )
              
              584
              
              
              86Unrealized
                  holding gains (losses) on derivative financial instruments classified
                  as
                  cash flow hedges, arising during the period
              
              
              (13
              )
              
              30
              
              
              (33
              )
              
              (20
              )Reclassification
                  adjustment for (gains) losses on investment securities available
                  for
                  sale
              
              
              -
              
              
              (4
              )
              
              (2
              )
              
              (10
              )Total
                  income taxes related to other comprehensive income (loss)
              
              
              493
              
              
              (194
              )
              
              549
              
              
              56Total
                  other comprehensive (loss) income, net of tax
              
              
              (956
              )
              
              376
              
              
              (1,065
              )
              
              (109
              )Total
                  comprehensive (loss) income
              
              $
              369
              
              $
              1,227
              
              $
              1,531
              
              $
              1,448
 
 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, 2006 and 2005
 (dollars
        in thousands)
 
 2006
              
              2005CASH
                  FLOWS PROVIDED BY OPERATING ACTIVITIES:
              
              $
              1,977
              
              $
              852CASH
                  FLOWS FROM INVESTING ACTIVITIES:Investment
                  securities available for sale:Proceeds
                  from maturity
              
              
              3,474
              
              
              5,230Proceeds
                  from sale and call
              
              
              1,008
              
              
              1,471Purchases
              
              
              (17,417
              )
              
              (11,948
              )Investment
                  securities held to maturity:Proceeds
                  from maturity
              
              
              19
              
              
              118Proceeds
                  from call
              
              
              -
              
              
              275Other
                  investments:Proceeds
                  from sale
              
              
              328
              
              
              450Purchases
              
              
              (318
              )
              
              (938
              )Net
                  (increase) decrease in loans
              
              
              (3,881
              )
              
              (6,452
              )Purchases
                  of premises and equipment
              
              
              (1,447
              )
              
              (289
              )Proceeds
                  from sale of premises and equipment
              
              
              193
              
              
              -Net
                  additions of other real estate
              
              
              3
              
              
              -Proceeds
                  from sale of other real estate
              
              
              222
              
              
              386Net
                  cash (used by) provided by investing activities
              
              
              (17,816
              )
              
              (11,697
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Net
                  increase (decrease) in deposits
              
              
              (4,716
              )
              
              19,019Net
                  increase (decrease) in short-term borrowings
              
              
              (619
              )
              
              (189
              )Net
                  (decrease) increase in federal funds purchased and securities sold
                  under
                  repurchase agreements
              
              
              (4,262
              )
              
              3,279Proceeds
                  from FHLB advances
              
              
              3,000
              
              
              7,000Repayment
                  of FHLB advances
              
              
              (7,300
              )
              
              (10,000
              )Issuance
                  of common stock
              
              
              465
              
              
              18Cash
                  dividends paid
              
              
              (528
              )
              
              (464
              )Net
                  cash (used by) provided by financing activities
              
              
              (13,960
              )
              
              18,663Decrease
                  (increase) in cash and cash equivalents
              
              
              (29,799
              )
              
              7,818CASH
                  AND CASH EQUIVALENTS: BEGINNING OF PERIOD
              
              
              52,866
              
              
              9,559CASH
                  AND CASH EQUIVALENTS: END OF PERIOD
              
              $
              23,067
              
              $
              17,377SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Other
                  real estate acquired through loan foreclosures
              
              $
              854
              
              $
              2,525Loans
                  granted to facilitate the sale of other real estate
              
              
              -
              
              
              500Change
                  in components of other comprehensive income
              
              
              (1,065
              )
              
              (109
              )
 
 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 2005 consolidated financial statements and
        notes
        thereto, included in the Company's Annual Report on Form 10-K for the fiscal
        year ended December 31, 2005.
 
 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, 2005. 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, 2006, fair value of the available
        for sale investment securities decreased approximately $1,712,000 when compared
        to the fair value at December 31, 2005. The corresponding equity component
        of
        unrealized gain and loss on available for sale securities, net of tax, also
        decreased approximately $1,130,000. These changes were the results of movements
        in the bond market as it responds to interest rate changes in the market.
        At
        June 30, 2006, fair value of the cash flow hedges increased approximately
        $99,000 when compared to the fair value at December 31, 2005. The corresponding
        equity component of unrealized holding gains on derivative financial instruments
        classified as cash flow hedges, net of tax, also increased approximately
        $65,000.
 
 4.
              Stock-Based
                  Compensation Plans
 
 Habersham
        Bancorp adopted the FASB’s SFAS No. 123(R), *Share-Based
        Payment* ,
        which
        revised and amended SFAS No. 123. SFAS No. 123(R) requires an entity to
        recognize as compensation expense the grant-date fair value of stock options
        and
        other equity-based compensation granted to employees within the statement
        of
        earnings using a fair-value-based method, eliminating the intrinsic value
        method
        of accounting previously permissible under Accounting Principles Board Opinion
        No. 25, *Accounting
        for Stock Issued to Employees* (APB No.
        25) and related interpretations. No compensation expense was recorded within
        the
        statement of earnings during the first six months of 2006, because the Company
        did not grant any stock options and all previous grants were fully
        vested.
 
 Prior
        to
        January 1, 2006, Habersham Bancorp applied APB Opinion No. 25, Accounting
        for
        Stock Issued to Employees, and related interpretations in accounting for
        its
        stock options plans.
  6
  5.
              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, 2006 and 2005, is as follows:
 
 
 Three
                  Months ended
                June
                  30,
              
              Six
                  Months ended
                June
                  30,2006
              
              2005
              
              2006
              
              2005Net
                  earnings
              
              $
              1,325,275
              
              $
              851,374
              
              $
              2,596,499
              
              $
              1,557,450Weighted
                  average common shares outstanding
              
              
              2,938,336
              
              
              2,901,692
              
              
              2,932,424
              
              
              2,901,319Shares
                  issued from assumed exercise of common stock equivalents
              
              
              42,452
              
              
              37,419
              
              
              39,947
              
              
              34,356Weighted
                  average number of common and common equivalent shares
                  outstanding
              
              
              2,980,788
              
              
              2,939,111
              
              
              2,972,371
              
              
              2,935,675Earnings
                  per share:Basic
              
              $
              .45
              
              $
              .29
              
              $
              .89
              
              $
              0.54Diluted
              
              $
              .44
              
              $
              .29
              
              $
              .87
              
              $
              0.53
  6.
              Commitment
 
 The
        Company entered into a construction contract during the first quarter of
        2006 to
        build its Cumming, Georgia branch building. The construction cost of this
        4,898
        square foot building is estimated to be approximately $1.5 million and is
        expected to be completed during the fourth quarter of 2006.
  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. 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 and
        Stephens 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 six months of 2006 increased to $2.6 million, or $.87
        per
        diluted share, from $1.6 million, or $.53 per diluted share, for the same
        period
        in 2005 and were the result of increases in average balances in the loan
        portfolios of Habersham Bank and the impact of increases in loan yields moving
        in response to prime rate increases. Approximately 72.57% of the loan portfolio
        is in a variable rate product. The average balances in the loan portfolios
        for
        the six-month period ended June 30, 2006 increased approximately $43.1 million,
        or 15.65% when compared to the average balances for the six-month period
        ended
        June 30, 2005.
 
 Revenue
        growth of 37.78% and noninterest expense growth of 20.46% during the first
        six
        months of 2006 when compared to the first six months of 2005 resulted in
        an
        improved overhead efficiency ratio.
 
 Total
        assets decreased approximately $12.2 million, or 2.56%, during the first
        six
        months of 2006. Growth in the loan portfolios of Habersham Bank of approximately
        $3.9 million, or 1.25%, increases in the investment securities portfolios
        of
        approximately $11.1 million, or 13.90%, and increases in other assets of
        approximately $2.6 million, or 10.87%, were offset by decreases in federal
        funds
        sold and in cash and due from banks of approximately $26.0 million, or 22.88%,
        and $3.8 million, or 71.63%, respectively.
 
 Net
        interest income improved by 32.65% for the first six months of 2006 when
        compared to the first six months of 2005 as result of the volume and yield
        increases in loans and investments securities, offset by increases in average
        deposit and borrowing balances and rates paid, described in “Material Changes in
        Results of Operations” below.
 
 Personnel
        costs, occupancy costs and other operating expenses increased approximately
        19.39%, 15.76% and 24.75%, respectively, for the first six months of 2006
        over
        the first six months of 2005 as a result of the expansion into the Stephens
        County market with the opening of two new offices located in Toccoa, Georgia
        and
        Eastanollee, Georgia  during
        the third quarter of 2005.
 
 **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.
  8
  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 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.
  **Material
        Changes in Financial Condition**
 
 The
        Company’s total assets decreased $12.2 million, or 2.56%, to $466.2 million at
        June 30, 2006 from $478.4 million at December 31, 2005. During this period,
        growth in the loan portfolios of Habersham Bank of approximately $3.9 million,
        or 1.25%, increases in the investment securities portfolios (net of unrealized
        loss on available for sale securities of approximately $1.7 million) of
        approximately $11.1 million, or 13.90%, increases in premises and equipment
        of
        approximately $.8 million, or 7.50%, and increases in other real estate owned
        of
        approximately $.6 million, or 22.53%, were offset by decreases in the balances
        in federal funds sold and in cash and due from banks of approximately $26.0
        million, or 71.63%, and $3.8 million, or 22.88%, respectively. Borrowing
        and
        deposit balances decreased approximately $9.2 million, or 17.83%, and $4.7
        million, or 1.27%, respectively, from December 31, 2005 to June 30, 2006.
        .
 
 During
        the first six months of 2006, purchases of investment securities available
        for
        sale totaled approximately $17.4 million, offset by maturities and calls
        of
        approximately $4.4 million. The purchases consisted of $8.0 million in Treasury
        and Agency bonds, $3.2 million in Mortgage Backed Securities and in $6.2
        million
        in municipal bonds.
 
 The
        total
        loan portfolio was impacted during the first six months of 2006 by the payout
        of
        two commercial loans totaling approximately $6 million. This decrease was
        offset
        by growth in the real estate secured portfolio, commercial loan portfolio
        and
        consumer loan portfolio and in loans held for sale of approximately $3.5
        million, $3.4 million, $3.1 million and $.8 million, respectively. At June
        30,
        2006, 90.80% of the total loan portfolio consisted of loans secured by
        commercial or residential real estate.
 
 Other
        real estate owned increased approximately $625,000 during the first six months
        of 2006 as a result of the foreclosure of seven real estate secured loans
        totaling approximately $854,000 during the first six months of 2006 offset
        by
        sales and write downs of approximately $212,500 and $16,500, respectively.
 
 The
        decrease in total deposits of approximately $4.7 million resulted from the
        loss
        of a large temporary demand deposit of $39 million present at December 31,
        2005.
        Increases in the interest bearing deposit portfolios totaling approximately
        $33.4 million have somewhat offset this loss. Increases in the NOW and IMM
        accounts, certificate of deposit and savings accounts portfolios totaled
        approximately $14.9 million, $11.7 million and $6.8 million respectively,
        at
        June 30, 2006.
  9
  During
        the first six months of 2006, repo sweep borrowings, FHLB advances and Treasury
        Tax & Loan account balances decreased by approximately $4.3 million, $4.3
        million and $620,000, respectively.
 
 **Material
        Changes in Results of Operations**
 Total
          interest income for the second quarter of 2006 increased $2.3 million or
          37.79%
          when compared to the second quarter of 2005 primarily due to increases
          in loan
          interest and fees on loans. Total interest income for the first six months
          of
          2006 increased $4.7 million, or 40.38% when compared to the first six months
          of
          2005. This increase is primarily the result of the average loan portfolio
          for
          the second quarter and the first six months of 2006 increasing approximately
          $43.5 million or 15.68% and $43.1 million or 15.65%, respectively when
          compared
          to the average loan portfolio for the second quarter and first six months
          of
          2005. The average yield on loans increased during the second quarter and
          first
          six months of 2006 to 8.84% and 8.76% compared to an average yield of 7.35%
          and
          7.09% for the second quarter and first six months of 2005. Increases in
          the
          average balance of the investment securities portfolio for the second quarter
          and first six month of 2006 totaled approximately $7.3 million and $7.4
          million
          or 9.04% and 9.73%, respectively, when compared to the second quarter and
          first
          six months of 2005. Yields on investment securities increased to 5.16%
          for the
          second quarter of 2006 when compared to 4.56% for the second quarter of
          2005 and
          increased to 4.62% for the first six months of 2006 when compared to 4.10%
          for
          the first six months of 2005. Interest income from federal funds sold increased
          approximately $81,000 and $192,000 for the second quarter and first six
          months
          of 2006, respectively, when compared to the second quarter and first six
          months
          of 2005 primarily due to increases in the average balances in the second
          quarter
          and first six months of 2006 of approximately $2.0 million and $4.1 million,
          respectively, when compared to the second quarter and first six months
          of 2005.
          Average yields on federal funds sold increased to 5.09% and 4.74%, respectively,
          for the second quarter and the first six months of 2006 when compared to
          2.79%
          and 2.60% for the second quarter and the first six months of 2005.
 Total
          interest expense for the second quarter of 2006 increased $1,103,000 or
          56.62%,
          when compared to the second quarter of 2005. Total interest expense for
          the
          first six months of 2006 increased $2,134,000 or 56.14% when compared to
          the
          first six months of 2005. Two factors impact interest expense: average
          balances
          of deposit and borrowing portfolios and average rates paid on each. Average
          interest bearing deposit balances increased when comparing the second quarter
          and the first six months of 2006 to the second quarter and the first six
          months
          of 2005 approximately $60,884,000 and $51,081,000, respectively. The average
          noninterest bearing deposits also increased $1,880,000 million for the
          first six
          months of 2006 when compared to the first six months of 2005. The average
          rate
          paid on the deposit portfolios for the second quarter increased to 3.25%
          from
          2.30% when compared to the second quarter of 2005 and for the first six
          months
          of 2006 increased to 3.22% from 2.18% when compared to the first six months
          of
          2005. Average borrowing balances when comparing the second quarter and
          the first
          six months of 2006 to the same periods in 2005, increased approximately
          $1,032,000 and $1,827,000, respectively. Average interest rates paid on
          borrowings was 4.64% for the second quarter of 2006 compared to 4.63% for
          the
          second quarter of 2005. Average interest rates paid on borrowings was 4.51%
          for
          the first six months of 2006 compared to 4.73% for the first six months
          of 2005.
 Net
        interest income increased approximately $1,162,000 or 28.73% for the second
        quarter of 2006 as compared to the second quarter of 2005 and increased
        approximately $2,532,000 or 32.65% for the first six months of 2006 as compared
        to the first six months of 2005, as a result of the items discussed
        above.
  The
          net
          interest margin of the Company, net interest income divided by average
          earning
          assets, was 5.06% for the second quarter of 2006 compared to 4.50% for
          the
          second quarter of 2005, and was 4.94% for the first six months of 2006
          compared
          to 4.29% for the first six months of 2005.
  Noninterest
        income increased $246,000 or 33.51% for the second quarter of 2006 over the
        same
        period in 2005 and increased $282,000 or 18.30% for the first six months
        of 2006
        over the same period in 2005. Increases in service charges on deposits of
        approximately $72,000 for the second quarter of 2006 and $94,000 for the
        first
        six months of 2006 resulted from increased in deposit balances from internal
        growth and the addition of deposit accounts resulting from the acquisition
        of
        Liberty Bank and Trust (“LB&T”) during the third quarter of 2005, when
        compared to the same periods in 2005. Increases occurred in other service
        charges and commissions of approximately $29,000 for the second quarter of
        2006
        and $57,000 for the first six months of 2006 when compared to the same periods
        in 2005 for the same reasons noted above. Increases in other income for the
        second quarter and the six month period of 2006 totaled approximately $19,000
        and approximately $39,000, respectively, when compared to the same periods
        in
        2005. These increases primarily occurred as a result of increased activity
        in
        trust fees, master money income and data processing income. Habersham Bank
        began
        providing data processing services to another institution during the second
        quarter of 2005.
 Noninterest
          expense increased $759,000 or 21.76% for the three months ended June 30,
          2006
          over the same period in 2005. Noninterest expense increased $1,414,000
          or 20.46%
          for the first six months of 2006 over the same period in 2005. The addition
          of
          the Toccoa and Eastanollee offices during the third quarter of 2005 resulted
          in
          increased salary and employee benefits, occupancy expense and computer
          expense
          when comparing the second quarter and the first six months of 2006 to the
          same
          periods in 2005. The general and administrative expense increased $276,000
          for
          the second quarter of 2006 and of $427,000 for the six month period ended
          June
          30, 2006 when compared to the same periods in 2005. The increases for the
          second
          quarter comparison occurred primarily in outside services, office supplies
          and
          equipment, advertising and marketing expenses, and intangible expenses
          of
          approximately $180,000, $44,000, $37,000 and $15,000, respectively. The
          increases for the six month period comparison occurred primarily in outside
          services, advertising and marketing expenses, office supplies and equipment,
          and
          intangible expenses of approximately $239,000, $91,000, $66,000 and $31,000,
          respectively. Outside services include FDIC insurance, legal and professional
          services, insurance, director fees and State of Georgia Department of Banking
          fees.
  10
  Income
        tax expense for the three months ended June 30, 2006 and 2005 was $615,000
        and
        $320,000, respectively. Income tax expense for the first six months ended
        June
        30, 2006 and 2005 was $1,188,000 and $587,000, respectively. The effective
        tax
        rate for the second quarter of 2006 and 2005 was 31.70% and 27.33%,
        respectively. The effective tax rate for the six months ended June 30, 2006
        and
        2005 was 31.40% and 27.38%, respectively. Tax-exempt income on investment
        securities in municipal bonds was 11.82% of pre-tax income for the first
        six
        months of 2006 when compared to 18.27% for the first six months of 2005.
 
 **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
        June 30, 2006 was $6.6 million which does not pose a significant risk to
        the
        Company.
  No
        provision for loan losses was charged to expense for the second quarter and
        the
        first six months of 2006 compared to $120,000 for the quarter and $240,000
        for
        the first six months of 2005. The net charge-offs the first six months of
        2006
        totaled $87,501 compared to net charge-offs of $38,990 for the first six
        months
        of 2005. During the first six months of 2006, charge-offs of real estate,
        commercial and consumer loans totaled $43,276, $53,492 and $97,326,
        respectively, offset by recoveries of real estate, commercial and consumer
        loans
        of $2,109, $11,255 and $93,229, respectively. At June 30, 2006 and December
        31,
        2005, the ratio of the allowance for loan losses to total loans was 1.19%
        and
        1.23%, 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:
 
 June
                  30, 2006
              
              December
                  31, 2005Accruing
                  loans 90 days past due
              
              $
              96,305
              
              $
              799,128Non-accrual
                  loans
              
              
              477,593
              
              
              363,003Other
                  real estate
              
              
              3,398,485
              
              
              2,773,662Restructured
                  loans
              
              
              54,062
              
              
              130,613Total
                  non-performing assets
              
              $
              4,026,445
              
              $
              4,066,406
 
 Nonperforming
        assets decreased approximately $40,000 or .98% from December 31, 2005 to
        June
        30, 2006.
 
 Loans
        classified as 90 days past due decreased $702,823 or 87.95% from December
        31,
        2005 to June 30, 2006. The decrease is the net result of the following
        changes:
 
 Balance
                  at December 31, 2005
              
              $
              799,128New
                  loans classified to 90 days past due status
              
              
              198,50090
                  days past due loans charged-off
              
              
              (21,803
              )Payments
                  received
              
              
              (879,520
              )Balance
                  at June 30, 2006
              
              $
              96,305The
                  following summarizes accruing loans 90 days past due:Commercial
                  loans
              
              $
              78,392Consumer
                  loans
              
              
              17,913Total
                  accruing loans 90 days past due
              
              $
              96,305
  11
  Impaired
        loans consist of loans on non-accrual status. The increase is the net result
        of
        the following changes:
 
 Balance
                  at December 31, 2005
              
              $
              363,003Loans
                  reclassified to non-accrual status in 2006
              
              
              885,844Payments
                  received on non-accrual loans during 2006
              
              
              (133,546
              )Non-accrual
                  loans charged-off during 2006
              
              
              (51,088
              )Non-accrual
                  loans reclassified to other real estate
              
              
              (518,500
              )Non-accrual
                  loans reclassified to accrual status in 2006
              
              
              (68,120
              )Balance
                  at June 30, 2006
              
              $
              477,593
 
 Additions
        to loans on non-accrual status consisted of nine real estate secured loans
        totaling approximately $755,409 and four commercial loans totaling approximately
        $112,773 and five consumer loans totaling approximately $17,636. The interest
        income recognized on such loans for the six-month periods ended June 30,
        2006
        and 2005 was not material.
 
 At
        June
        30, 2006, the Company’s other real estate owned consisted of the
        following:
 
 Multi-family
                  residential
              
              $
              2,470,498Commercial
                  Properties
              
              
              498,528Poultry
                  farm
              
              
              158,0001-4
                  Family Residential Properties
              
              
              186,259Lot
              
              
              85,200Total
              
              $
              3,398,485
 
 The
        increase in other real estate owned during the first six months of 2006 was
        the
        result of the foreclosure of four residential properties totaling approximately
        $229,604, one poultry farm for approximately $158,000, one commercial building
        for approximately $399,500 and one vacant lot for approximately $67,200.
        These
        additions to other real estate were offset by sales and write-downs of
        approximately $212,500 and $16,500, respectively.
 
 The
        multi-family residential property has an appraised value of $2.6 million
        and is
        being actively marketed. As a result of marketing efforts, a contract to
        sell
        has been signed. The poultry farm was sold during July 2006. The remaining
        commercial building has been listed and marketing efforts are under way.
 
 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.
 
 **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.
 12
  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 $30,000,000. At June 30, 2006, the
        Company had no federal funds purchased. 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, 2006. The
        Company has approximately $4.2 million outstanding in commercial sweep accounts
        at June 30, 2006. In addition, the Company has a total available line of
        $42.6
        million, subject to available collateral, from the Federal Home Loan Bank.
        The
        Company has $38 million in advances on this line at June 30, 2006.
 
 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, 2006 and 2005 were 24.66% and 24.12%, respectively.
 
 At
        June
        30, 2006 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,
        2006 follow:
 
 Habersham
                Bank
              
              Habersham
                BancorpTier
                  1
              
              
              12.95
              %
              
              13.85
              %Total
                  Capital
              
              
              14.04
              %
              
              14.93
              %Leverage
              
              
              10.08
              %
              
              10.78
              %
 
 Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk.
 
 As
        of
        June 30, 2006, 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, 2005. 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, 2005 included in the Company’s 2005 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.
  13
  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 in Part I. “Item 1.A. Risk Factors” in the
        Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which
        could materially affect its business, financial condition or future results.
        The
        risks described 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.
 
 
 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 second quarter of 2006.
 
 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
                ProgramsApril
                  1 through
                April
                  30, 2006
              
              0
              
              0
              
              0
              
              0May
                  1 through
                May
                  31, 2006
              
              0
              
              0
              
              0
              
              0June
                  1 through
                June
                  30, 2006
              
              0
              
              0
              
              0
              
              0Total
              
              0
              
              0
              
              0
              
              0
 
 
 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
  14
  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 29, 2006.
  (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 29, 2006, 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
              2,512,191
              86,370Thomas
                  A. Arrendale, III
              2,590,730
              7,831Ben
                  F. Cheek, III
              2,593,530
              5,031Michael
                  C. Martin
              2,590,730
              7,831Michael
                  L. Owen
              2,509,301
              89,260James
                  A. Stapleton, Jr.
              2,590,730
              7,831David
                  D. Stovall
              2,512,191
              86,270Calvin
                  R. Wilbanks
              2,590,730
              7,831
 
 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.
  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
                  August 11, 2006
              /S/
                  Annette BanksChief
                  Financial Officer(for
                  the Registrant and as theRegistrant’s
                  principal financial andaccounting
                  officer)






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