**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, 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.
 Yesx
              Noo
 
 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
                  filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yeso
              Nox
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common stock, as
        of the latest practicable date:
 
 2,930,990
        shares, common stock, $1.00 par value, as of April 20, 2006
  
 1
  Item.
                  1
              Financial
                  Statements
 
 HABERSHAM
        BANCORP AND SUBSIDIARIES
 CONDENSED
        CONSOLIDATED BALANCE SHEETS (unaudited)
 (dollars
        in thousands)
 
 ASSETS
              
              MARCH
                  31, 2006
              
              DECEMBER
                  31, 2005Cash
                  and due from banks
              
              $
              10,857
              
              $
              16,546Federal
                  funds sold
              
              
              28,739
              
              
              36,320Total
                  cash and cash equivalents
              
              
              39,596
              
              
              52,866Investment
                  securities available for sale (cost of $80,003 at March 31, 2006
                  and
                  $74,607 at December 31, 2005)
              
              
              78,323
              
              
              73,115Investment
                  securities held to maturity (estimated fair value of $3,490 at
                  March 31,
                  2006 and $3,514 at December 31, 2005)
              
              
              3,384
              
              
              3,388Other
                  investments
              
              
              3,365
              
              
              3,375Loans
                  held for sale
              
              
              1,579
              
              
              2,119Loans
              
              
              318,475
              
              
              320,718Less
                  allowance for loan losses
              
              
              (3,940
              )
              
              (3,945
              )Loans,
                  net
              
              
              314,535
              
              
              316,773Goodwill
              
              
              3,550
              
              
              3,550Other
                  assets
              
              
              24,845
              
              
              23,245TOTAL
                  ASSETS
              
              $
              469,177
              
              $
              478,431LIABILITIESNoninterest-bearing
                  deposits
              
              $
              46,744
              
              $
              92,698Interest-bearing
                  deposits
              
              
              320,795
              
              
              280,064Total
                  deposits
              
              
              367,539
              
              
              372,762Short-term
                  borrowings
              
              
              86
              
              
              776Federal
                  funds purchased and securities sold under repurchase
                  agreements
              
              
              7,512
              
              
              8,423Federal
                  Home Loan Bank Advances
              
              
              38,000
              
              
              42,300Other
                  liabilities
              
              
              4,713
              
              
              3,913TOTAL
                  LIABILITIES
              
              
              417,850
              
              
              428,174STOCKOLDERS’
                  EQUITYCommon
                  Stock, $1.00 par value, 10,000,000 shares authorized; 2,930,240
                  shares
                  issued at March 31, 2006 and 2,921,240 shares issued at December
                  31,
                  2005
              
              
              2,930
              
              
              2,921Additional
                  paid-in capital
              
              
              14,886
              
              
              14,723Retained
                  earnings
              
              
              34,552
              
              
              33,545Accumulated
                  other comprehensive(loss)income
              
              
              (1,041
              )
              
              (932
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              51,327
              
              
              50,257TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              469,177
              
              $
              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 Periods Ended March 31, 2006 and 2005
 (dollars
        in thousands, except per share amounts)
 
 2006
              
              2005INTEREST
                  INCOMELoan
                  interest and fees on loans
              
              $
              6,885
              
              $
              4,692Taxable
                  investment securities
              
              
              649
              
              
              591Tax
                  exempt securities
              
              
              212
              
              
              193Federal
                  funds sold
              
              
              161
              
              
              49Other
              
              
              57
              
              
              38TOTAL
                  INTEREST INCOME
              
              
              7,964
              
              
              5,563INTEREST
                  EXPENSETime
                  deposits, $100,000 and over
              
              
              769
              
              
              385Other
                  deposits
              
              
              1,596
              
              
              931Short-term
                  and other borrowings, primarily FHLB advances
              
              
              519
              
              
              537TOTAL
                  INTEREST EXPENSE
              
              
              2,884
              
              
              1,853NET
                  INTEREST INCOME
              
              
              5,080
              
              
              3,710Provision
                  for loan losses
              
              
              -
              
              
              120NET
                  INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
              
              
              5,080
              
              
              3,590NONINTEREST
                  INCOMEMortgage
                  origination income
              
              
              186
              
              
              232Service
                  charges on deposits
              
              
              174
              
              
              152Other
                  service charges and commissions
              
              
              67
              
              
              63Investment
                  securities (losses) gains, net
              
              
              (5
              )
              
              (17
              )Other
                  income
              
              
              421
              
              
              377Total
                  noninterest income
              
              
              843
              
              
              807NONINTEREST
                  EXPENSESalary
                  and employee benefits
              
              
              2,294
              
              
              1,944Occupancy
              
              
              557
              
              
              464Computer
                  services
              
              
              154
              
              
              93General
                  and administrative expense
              
              
              1,074
              
              
              923Total
                  noninterest expense
              
              
              4,079
              
              
              3,424EARNINGS
                  BEFORE INCOME TAXES
              
              
              1,844
              
              
              973Income
                  tax expense
              
              
              573
              
              
              267NET
                  EARNINGS
              
              $
              1,271
              
              $
              706NET
                  EARNINGS PER COMMON SHARE - BASIC
              
              $
              .43
              
              $
              .24NET
                  EARNINGS PER COMMON SHARE - DILUTED
              
              $
              .43
              
              $
              .24WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              2,926,446
              
              
              2,900,942WEIGHTED
                  AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
                  OUTSTANDING
              
              
              2,963,888
              
              
              2,932,234Dividends
                  per share
              
              $
              .09
              
              $
              .08
 
 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, 2006 and 2005
 (dollars
        in thousands)
 
 2006
              
              2005NET
                  EARNINGS
              
              $
              1,271
              
              $
              706OTHER
                  COMPREHENSIVE INCOME (LOSS):Unrealized
                  holding (losses) gains on investment securities available for sale
                  arising
                  during the period
              
              
              (229
              )
              
              (901
              )Unrealized
                  holding gains (losses) on derivative financial instruments classified
                  as
                  cash flow hedges, arising during the period
              
              
              59
              
              
              149Reclassification
                  adjustment for (gains) losses on investment securities available
                  for
                  sale
              
              
              5
              
              
              17Total
                  other comprehensive income (loss), before tax
              
              
              (165
              )
              
              (735
              )INCOME
                  TAXES RELATED TO OTHER COMPREHENSIVE INCOME:Unrealized
                  holding (losses) gains on investment securities available for sale
                  arising
                  during the period
              
              
              78
              
              
              306Unrealized
                  holding gains (losses) on derivative financial instruments classified
                  as
                  cash flow hedges, arising during the period
              
              
              (20
              )
              
              (50
              )Reclassification
                  adjustment for (gains) losses on investment securities available
                  for
                  sale
              
              
              (2
              )
              
              (6
              )Total
                  income taxes related to other comprehensive income (loss)
              
              
              56
              
              
              250Total
                  other comprehensive (loss) income, net of tax
              
              
              (109
              )
              
              (485
              )Total
                  comprehensive (loss) income
              
              $
              1,162
              
              $
              221
 
 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, 2006 and 2005
 (dollars
        in thousands)
 
 2006
              
              2005CASH
                  FLOWS PROVIDED BY OPERATING ACTIVITIES:
              
              $
              2,522
              
              $
              205CASH
                  FLOWS FROM INVESTING ACTIVITIES:Investment
                  securities available for sale:Proceeds
                  from maturity
              
              
              1,505
              
              
              1,982Proceeds
                  from sale and call
              
              
              815
              
              
              468Purchases
              
              
              (7,802
              )
              
              (5,371
              )Investment
                  securities held to maturity:Proceeds
                  from maturity
              
              
              7
              
              
              11Proceeds
                  from call
              
              
              -
              
              
              275Other
                  investments:Proceeds
                  from sale
              
              
              194
              
              
              -Purchases
              
              
              (183
              )
              
              (623
              )Net
                  (increase) decrease in loans
              
              
              2,099
              
              
              4,366Purchases
                  of premises and equipment
              
              
              (1,236
              )
              
              (185
              )Proceeds
                  from sale of other real estate
              
              
              24
              
              
              310Net
                  cash (used by) provided by investing activities
              
              
              (4,577
              )
              
              1,233CASH
                  FLOWS FROM FINANCING ACTIVITIES:Net
                  increase (decrease) in deposits
              
              
              (5,223
              )
              
              5,540Net
                  increase (decrease) in short-term borrowings
              
              
              (689
              )
              
              9Net
                  (decrease) increase in federal funds purchased and securities sold
                  under
                  repurchase agreements
              
              
              (911
              )
              
              3,802Repayment
                  of FHLB advances
              
              
              (4,300
              )
              
              -Issuance
                  of common stock
              
              
              172
              
              
              18Cash
                  dividends paid
              
              
              (264
              )
              
              (232
              )Net
                  cash (used by) provided by financing activities
              
              
              (11,215
              )
              
              9,137Decrease
                  (increase) in cash and cash equivalents
              
              
              (13,270
              )
              
              10,575CASH
                  AND CASH EQUIVALENTS: BEGINNING OF PERIOD
              
              
              52,866
              
              
              9,559CASH
                  AND CASH EQUIVALENTS: END OF PERIOD
              
              $
              39,596
              
              $
              20,134SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Other
                  real estate acquired through loan foreclosures
              
              $
              140
              
              $
              2,528Change
                  in components of other comprehensive income
              
              
              (109
              )
              
              (485
              )
 
 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 March 31, 2006, fair value of the
        available for sale investment securities decreased approximately $224,000
        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 $148,000. These changes were the results
        of
        movements in the bond market as it responds to interest rate changes in the
        market. At March 31, 2006, fair value of the cash flow hedges increased
        approximately $59,000 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 $39,000.
 
 
 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 quarter of 2006, because the Company
        did
        not grant any stock options and all previous grants were fully
        vested.
  6
  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.
 
 
 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-month periods
        ended
        March 31, 2006 and 2005, is as follows:
 
 Three
                  Months ended
                March
                  31,2006
              
              2005Net
                  earnings
              
              $
              1,271,224
              
              $
              706,076Weighted
                  average common shares outstanding
              
              
              2,926,446
              
              
              2,900,942Shares
                  issued from assumed exercise of common stock equivalents
              
              
              37,442
              
              
              31,292Weighted
                  average number of common and common equivalent shares
                  outstanding
              
              
              2,963,888
              
              
              2,932,234Earnings
                  per share:Basic
              
              $
              .43
              
              $
              .24Diluted
              
              $
              .43
              
              $
              .24
 
 
 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.
        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, 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 quarter of 2006 were primarily impacted by an improving net
        interest margin, growth in the average loan and investment securities
        portfolios, and increases in the average Federal Funds Sold balances. The
        average loan portfolio balance for first quarter of 2006 was approximately
        $320.3 million compared to approximately $274.8 million for the first quarter
        of
        2005. The average security portfolio balance for the first quarter of 2006
        was
        approximately $81.6 million compared to $75.1 million for the first quarter
        of
        2005. The average balance invested in federal funds sold was approximately
        $14.4
        million for the first quarter of 2006 compared to $8.4 million for the first
        quarter of 2005. Revenue growth of 38.26% and a continuing emphasis on expense
        control measures resulted in an improving efficiency ratio for the first
        quarter
        of 2006 when compared to the first quarter of 2005.
 
 Habersham
        Bank’s expansion efforts resulted in two new offices, one in the Toccoa market
        area and another in the Eastanollee market area. Expansion into Cumming,
        Georgia
        located in Forsyth County has begun with the construction of a new facility
        to
        be completed this year.
 
 During
        the first quarter of 2006, total assets decreased approximately $9 million
        or
        1.93% from $478 million at December 31, 2005 to $469 million at March 31,
        2006.
        The decrease is a result of the following: decreases in Cash and Federal
        Funds
        sold of approximately $13.3 million and repayments in the loan portfolios
        of
        Habersham Bank of approximately $2.2 million, offset by increases in investment
        securities of approximately $5.2 million and increases in other assets of
        approximately $1.6 million.
 
 Deposit
        balances at December 31, 2005 included approximately $39 million in an interest
        bearing deposit account from a single depositor which remained in Habersham
        Bank’s deposit portfolio for several days after year-end. The deposit portfolio
        at March 31, 2006 reflected an increase of approximately $34 million net
        of the
        movement of this $39 million.
  8
  Increases
        in personnel and employee costs and other operating expenses for the first
        quarter of 2006 over the first quarter of 2005 were the result of staffing
        and
        operating the new offices in Toccoa and Eastanollee.
 
 
 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 branch expansion and 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.
  9
  Material
        Changes in Financial Condition
 
 The
        Company’s total assets decreased $9 million, to $469 million at March 31, 2006
        from $478 million at December 31, 2005. Decreases in federal funds sold,
        cash
        and due from banks, and in net loans of approximately $7.6 million, $5.7
        million
        and $2.2 million, respectively, were offset by increases in investment
        securities and in premises & equipment of approximately $5.2 million and
        $969,000, respectively. Deposits and borrowings decreased approximately $5.2
        million and $5.9 million, respectively.
 
 During
        the first quarter of 2006, approximately $6.0 million in loan balances of
        two
        customers paid out. This decrease in the loan portfolio was offset by new
        loan
        growth of approximately $3.8 million. At March 31, 2006, 90.82% of the loan
        portfolio consisted of loans secured by commercial and residential real
        estate.
 
 Purchases
        of investment securities available for sale during the first quarter of 2006
        totaled approximately $7.8 million, offset by maturities and calls of
        approximately $2.3 million. The purchases consisted of $5.2 million in
        Treasuries and Agency bonds, $1.1 million in Mortgage Backed Securities and
        $1.5
        million in municipal bonds.
 
 Other
        real estate increased approximately $99,000 as a result of the foreclosure
        of
        two residential properties of approximately $139,700 during the first quarter
        of
        2006 offset by sales and write downs of approximately $24,200 and $16,500,
        respectively.
 
 The
        decrease in total deposits of approximately $5.2 million resulted from the
        loss
        of a large temporary deposit of $39 million present at December 31, 2005
        and
        decreases in the noninterest bearing deposit portfolio of approximately $6.9
        million, partially offset by increases in the NOW and Money Market, savings,
        and
        time deposit portfolios of approximately $19.9 million, $12.9 million and
        $7.9
        million, respectively.
 
 Borrowings
        decreased approximately $5.9 million during the first quarter of 2006 primarily
        with the repayment of $4.3 million in FHLB advances.
 
 
 Material
        Changes in Results of Operations
  Total
        interest income for the first quarter of 2006 increased $2.4 million or 43.16%
        when compared to the first quarter of 2005 primarily as the result of an
        increase of approximately $45.8 million in average loan balances for the
        first
        quarter of 2006 compared to first quarter of 2005 and the impact of increases
        in
        loan yields moving in response to prime rate increases.  The
        average yield on loans increased during the first quarter of 2006 to 8.59%
        compared to an average yield of 6.82% for the first quarter of 2005. The
        average
        balances in federal funds sold for the first quarter of 2006 increased
        approximately $5.9 million when compared to average balances for first quarter
        2005 and the corresponding yields on federal funds sold increased from 2.33%
        at
        March 31, 2005 to 4.47% at March 31, 2006. The average balances in the
        investment securities portfolio increased approximately $6.6 million for
        the
        first quarter of 2006 when compared to the first quarter of 2005 and the
        corresponding yields increased from 4.23% at March 31, 2005 to 4.50% at March
        31, 2006. The increase in other interest income resulted primarily from
        increased dividends received from the Federal Home Loan Bank (“FHLB”) and
        interest earned on cash balances held at FHLB.
  10
  Total
        interest expense for the first quarter of 2006 increased approximately $1.0
        million or 55.64% when compared to the first quarter of 2005. Average balances
        in the interest bearing deposit portfolios increased approximately $42.4
        million
        or 16.76% when compared to first quarter of 2005. The average interest rate
        paid
        on deposit accounts was approximately 3.20% for the first quarter of 2006
        compared to 2.08% for the first quarter of 2005. The average balances in
        the
        noninterest bearing deposit portfolio also increased approximately $14.8
        million
        or 32.24% when compared to first quarter of 2005. The percentages of average
        noninterest bearing deposits to the total average deposit portfolio for the
        first quarters of 2006 and 2005 were 17.09% and 15.39%, respectively. Average
        borrowing balances increased approximately $2.6 million when comparing first
        quarter of 2006 to first quarter of 2005. The average interest rates paid
        on
        borrowings for the first quarter of 2006 and 2005 were 4.40% and 4.83%,
        respectively. The decrease in the interest rate resulted from the repayment
        of a
        FHLB advance of $10 million with a fixed rate of 6.72% during May
        2005.
 
 Net
        interest income increased approximately $1.4 million or 36.93%, for the first
        quarter of 2006 as compared to the first quarter 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 4.87% for the first quarter of 2006 compared to 4.13%
        for
        the first quarter of 2005.
 
 Noninterest
        income increased $36,000 or 4.46% for the first quarter of 2006 over the
        same
        period in 2005. The mortgage origination income decrease of $46,000 was
        primarily due to a decrease in the average volume of activity in the mortgage
        held for sale portfolio when comparing first quarter of 2006 to first quarter
        2005. Increases in service charges on deposits of $22,000 and other service
        charges of $28,000 resulted from increased deposit balances from internal
        growth
        and the addition of deposit accounts resulting from the acquisition of Liberty
        Bank and Trust. Increases in other income of $44,000 primarily occurred as
        a
        result of increased activity in trust fees, master money card income and
        data
        processing income. Habersham Bank began providing data processing services
        to
        another institution during the second quarter of 2005.
 
 Noninterest
        expense increased $655,000 or 19.13% for the first quarter of 2006 over the
        same
        period in 2005, with increases in salary and employee benefits, occupancy,
        and
        computer services of approximately $350,000, $93,000 and $61,000, respectively.
        Increases in salary and employee benefits resulted from additional staffing
        requirements related to the addition of the Toccoa and Eastanollee offices.
        Occupancy and computer service expense also increased when comparing the
        first
        quarter of 2006 to the first quarter of 2005 due to the addition of these
        two
        new offices. The general and administrative expenses increase of $151,000
        consists primarily of additional advertising and marketing expense, office
        supplies, outside services and other expenses of approximately $46,000, $42,000,
        $17,000 and $46,000, respectively. Outside services include FDIC insurance,
        legal and professional services, insurance, director fees and State of Georgia
        Department of Banking fees.
 
 Income
        tax expense for the three months ended March 31, 2006 and 2005 was $573,000
        and $267,000, respectively. The effective tax rate for the first quarter
        of 2006
        and 2005 was 31.07% and 27.44%, respectively. Tax-exempt income on investment
        securities in municipal bonds was 11.50% of pre-tax income for the first
        quarter
        of 2006 when compared to 19.84% of pre-tax income for the first quarter of
        2005.
  11
 
 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, 2006 was $6.3 million, which does not pose a significant risk to
        the
        Company.
 
 No
        provision for loan losses was charged to expense for the quarter ended March
        31,
        2006 compared to $120,000 for the quarter ended March 31, 2005. Net charge
        off-offs for the first quarter of 2006 totaled approximately $4,674 compared
        to
        net charge-offs of $3,919 for the first quarter of 2005. During the first
        quarter of 2006 charge-offs of consumer, real estate secured and commercial
        loans totaling approximately $36,065, $28,083 and $671, respectively, were
        offset by recoveries of consumer, commercial and real estate secured loans
        totaling $50,096, $8,865 and $1,184, respectively. At March 31, 2006 and
        December 31, 2005, the ratio of the allowance for loan losses to total loans
        was
        1.24% 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:
 March
                  31, 2006
              
              December
                  31, 2005Accruing
                  loans 90 days past due
              
              $
              102,195
              
              $
              799,128Non-accrual
                  loans
              
              
              512,153
              
              
              363,003Other
                  real estate
              
              
              2,872,662
              
              
              2,773,662Restructured
                  loans
              
              
              132,145
              
              
              130,613Total
                  non-performing assets
              
              $
              3,619,155
              
              $
              4,066,406
 
 Nonperforming
        assets decreased $447,251 or 11.00% from December 31, 2005 to March 31,
        2006.
 
 Loans
        classified as 90 days past due decreased $696,933 or 87.21% from December
        31,
        2005 to March 31, 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
              
              
              102,19590
                  days past due loans charged-off
              
              
              (21,803
              )Payments
                  received
              
              
              (777,325
              )Balance
                  at March 31, 2006
              
              $
              102,195
  The
          following summarizes accruing loans 90 days past due:
 Real
                  estate secured loans
              
              $
              100,494Consumer
                  loans
              
              
              1,701Total
                  accruing loans 90 days past due
              
              $
              102,195
  12
  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
              
              
              473,080Payments
                  received on non-accrual loans during 2006
              
              
              (100,663
              )Non-accrual
                  loans charged-off during 2006
              
              
              (36,147
              )Non-accrual
                  loans reclassified to other real estate
              
              
              (119,000
              )Non-accrual
                  loans reclassified to accrual status in 2006
              
              
              (68,120
              )Balance
                  at March 31, 2006
              
              $
              512,153
 
 Additions
        to loans on non-accrual status consisted of three real estate secured loans
        totaling $465,706 and three consumer loans totaling $7,374. The interest
        income
        recognized on such loans for the three-month periods ended March 31, 2006
        and
        2005 was not material.
 
 The
        Company’s other real estate consists of eight properties totaling $2.9 million
        at March 31, 2006 and eight properties totaling $2.8 million at December
        31,
        2005.
 
 The
        increase in other real estate was the result of the foreclosure of two
        residential properties of approximately $139,700 during the first quarter
        of
        2006 offset by sales and write downs of approximately $24,200 and $16,500,
        respectively.
 
  At
        March
        31, 2006, the Company’s other real estate consisted of the
        following:
 
 Multi-family
                  residential
              
              
              2,470,498Commercial
                  Properties
              
              
              99,0281-4
                  Family residential Properties
              
              
              285,136Lot
              
              
              18,000Total
              
              $
              2,872,662
 
 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 letter of intent
        to
        purchase is currently being negotiated and is expected to be finalized in
        mid-May.
 
 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.
  13
  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 $30.0 million. At March 31, 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 March 31, 2006. The
        Company has approximately $7.5 million outstanding in commercial sweep accounts
        at March 31, 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 $38.0 million in advances on this line at March 31,
        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 March 31, 2006 and 2005 were 26.84% and 27.89%,
        respectively.
 
 At
        March
        31, 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 March 31, 2006
        follow:
 
 Habersham
                Bank
              
              Habersham
                BancorpTier
                  1
              
              
              12.76
              %
              
              13.60
              %Total
                  Capital
              
              
              13.88
              %
              
              14.72
              %Leverage
              
              
              9.79
              %
              
              10.41
              %
 
 
 Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk.
 
 As
        of
        March 31, 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 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.
  14
  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
                  1A.
              Risk
                  Factors.
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in Part I, “Item 1A. 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 on Form 10-K are not the only risks
        facing
        the Company. Additional risks and uncertainties not currently known to
        management or that it currently deems to be immaterial also may materially
        adversely affect the Company’s business, financial condition and/or operating
        results.
 
 Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
 
 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 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 ProgramsJanuary
                  1 through January 31, 2006
              
              0
              
              0
              
              0
              
              0February
                  1 through February 28, 2006
              
              0
              
              0
              
              0
              
              0March
                  1 through March 31, 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.
  15
  Item
                  3.
              Defaults
                  upon senior securities.
 None
 
 Item
                  4.
              Submission
                  of matters to a vote of security
                  holders.
 None
 
 Item
                  5.
              Other
                  information.
 None
 
 Item
                  6.
              Exhibits
 
 (a) The
        registrant submits herewith as exhibits to this report on Form 10-Q the exhibits
        required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the
        Securities Exchange Act of 1934.
 
 
 31.1 Certification
        of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of
        2002.
 
 31.2 Certification
        of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
        Act of
        2002.
 
 32 Certification
        of Chief Executive Officer and Chief Financial Officer Pursuant to Section
        906
        of the Sarbanes-Oxley Act of 2002.
 
 
 
 SIGNATURES
 
 In
        accordance with the requirements of the Exchange Act, the registrant has
        caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 HABERSHAM
                  BANCORP(Registrant)Date
                  May 13, 2006
              
              /S/
                  Annette BanksChief
                  Financial Officer(for
                  the Registrant and as the Registrant's principal financial and
                  accounting
                  officer)




16