HABERSHAM BANCORP - 10-Q Quarterly 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


ASSETS					SEPTEMBER 30,2003			DECEMBER 31,2002
	Cash and due from banks				$	9,929		$	13,832
	Federal funds sold					8,393			27,137
	Investment securities available for sale (cost of $70,949 at September 30, 2003 and $53,793 at December 31, 2002)					71,153			54,819
	Investment securities held to maturity (estimated fair value of $5,588 at September 30, 2003 and $7,211 at December 31, 2002)					5,275			6,889
	Other investments					1,652			2,389
	Loans held for sale					2,207			—
	Loans					269,852			307,346
		Less allowance for loan losses				(3,806	)		(3,533	)

				Loans, net		266,046			303,813

	Intangible assets					2,489			2,489
	Other assets					18,341			18,043

				TOTAL ASSETS	$	385,485		$	429,411

	LIABILITIES
	Noninterest-bearing deposits				$	41,982		$	47,967
	Interest-bearing deposits					248,935			288,559
	Short-term borrowings					143			932
	Federal funds purchased and securities sold under repurchase agreements					10,204			8,227
	Federal Home Loan Bank advances					30,000			30,000
	Other liabilities					2,347			2,982

			TOTAL LIABILITIES			333,611			378,667

SHAREHOLDERS’ EQUITY
Common Stock, $1.00 par value, 10,000,000 shares authorized; 2,848,483 shares issued at September 30, 2003 and 2,815,093 shares issued at December 31, 2002						2,848			2,815
Additional paid-in capital						13,968			13,721
Retained earnings						34,923			33,531
Accumulated other comprehensive income						135			677

			TOTAL SHAREHOLDERS’ EQUITY			51,874			50,744

			TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	385,485		$	429,411

HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three-Month Periods Ended September 30, 2003 and 2002
(dollars in thousands, except per share amounts)


				2003		2002
INTEREST INCOME
Loans				$	4,729	$	5,745
Investment securities					620		758
Federal funds sold					20		5
Other					26		93

	TOTAL INTEREST INCOME				5,395		6,601
INTEREST EXPENSE
Time deposits, $100,000 and over					529		835
Other deposits					939		1,476
Short-term and other borrowings, primarily FHLB advances					466		563

		TOTAL INTEREST EXPENSE			1,934		2,874
NET INTEREST INCOME					3,461		3,727
Provision for loan losses					263		239

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES					3,198		3,488
NONINTEREST INCOME
	Gain on sale of loans				244		94
	Loan fee income				72		85
	Service charges on deposits				201		186
	Other service charges and commissions				45		65
	Securities gains, net				2		4
	Other income				313		490

			Total other income		877		924
NONINTEREST EXPENSE
	Salary and employee benefits				1,869		1,709
	Occupancy				387		340
	Computer services				97		115
	General and administrative expense				1,220		884

			Total other expense		3,573		3,048
INCOME BEFORE INCOME TAXES					502		1,364
Income tax expense					125		428

INCOME FROM CONTINUING OPERATIONS					377		936
Income from discontinued operations, net of income taxes of $669					—		1,214

NET INCOME				$	377	$	2,150
Income from continuing operations per common share- basic				$	.13	$	.34
Income from discontinued operations per common share — basic					—		.43

NET INCOME PER COMMON SHARE — BASIC				$	.13	$	.77

Income from continuing operations per common share — diluted				$	.13	$	.33
Income from discontinued operations per common share — diluted					—		.42

NET INCOME PER COMMON SHARE — DILUTED				$	.13	$	.75

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING					2,842,682		2,784,813

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING					2,906,121		2,857,534

Dividends per share				$	.06	$	.06

HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Nine-Month Periods Ended September 30, 2003 and 2002
(dollars in thousands, except per share amounts)


				2003		2002
INTEREST INCOME
Loans				$	15,022	$	17,746
Investment securities					1,930		2,270
Federal funds sold					49		22
Other					110		330

	TOTAL INTEREST INCOME				17,111		20,368
INTEREST EXPENSE
Time deposits, $100,000 and over					1,784		2,625
Other deposits					3,128		4,959
Short-term and other borrowings, primarily FHLB advances					1,399		1,702

		TOTAL INTEREST EXPENSE			6,311		9,286
NET INTEREST INCOME					10,800		11,082
Provision for loan losses					787		888

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES					10,013		10,194
NONINTEREST INCOME
	Gain on sale of loans				684		163
	Loan fee income				318		242
	Service charges on deposits				619		527
	Other service charges and commissions				144		190
	Securities gains, net				12		843
	Other income				1,105		1,216

			Total other income		2,882		3,181
NONINTEREST EXPENSE
	Salary and employee benefits				5,522		5,067
	Occupancy				1,121		964
	Computer services				295		340
	General and administrative expense				3,359		3,086

			Total other expense		10,297		9,457
INCOME BEFORE INCOME TAXES					2,598		3,918
Income tax expense					695		957

INCOME FROM CONTINUING OPERATIONS					1,903		2,961
Income from discontinued operations, net of income taxes of $1,220					—		1,893

NET INCOME				$	1,903	$	4,854

Income from continuing operations per common share- basic				$	.67	$	1.08
Income from discontinued operations per common share — basic					—		.69

NET INCOME PER COMMON SHARE — BASIC				$	.67	$	1.77

Income from continuing operations per common share — diluted				$	.66	$	1.05
Income from discontinued operations per common share — diluted					—		.67

NET INCOME PER COMMON SHARE — DILUTED				$	.66	$	1.72

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING					2,832,024		2,734,464

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING					2,884,284		2,807,805

Dividends per share				$	.18	$	.18

HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Nine-Month Periods Ended SEPTEMBER 30, 2003 and 2002
(dollars in thousands)


CASH FLOWS FROM OPERATING ACTIVITIES:				2003			2002
	Net income			$	1,903		$	4,854
		Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Provision for loan losses		787			888
			Depreciation		558			452
			Securities gains, net		(12	)		(843	)
			(Gain)loss on sale of other real estate		78			(3	)
			Gain on sale of other investments		(60	)		(277	)
			Gain on sale of loans		(684	)		(163	)
			Amortization of intangible assets		—			4
			Equity in loss of investee		—			45
			Deferred income tax benefit		(36	)		(28	)
			Proceeds from sale of loans held for sale		39,417			—
			Origination of loans held for sale		(40,940	)		—
			Net cash used by discontinued operations		—			(9,168	)
	Changes in assets and liabilities:
			Decrease in interest receivable		253			467
			Decrease (increase) in other assets		244			(3,348	)
			Decrease in interest payable		(694	)		(1,117	)
			Increase in other liabilities		59			749

	Net cash provided by (used in) operating activities				873			(7,488	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Investment securities available for sale:
			Proceeds from maturity		19,116			8,554
			Proceeds from sale and call		5,241			10,934
			Purchases		(41,505	)		(19,896	)
	Investment securities held to maturity:
			Proceeds from maturity		1,005			1,171
			Proceeds from call		614			—
	Other investments:
			Proceeds from sale		797			3,234
			Purchases		—			(2,815	)
	Proceeds from sale of CB Financial				—			3,308
	Loans:
			Proceeds from sale		—			29,348
			Net decrease (increase) in loans		35,622			(6,238	)
	Purchases of premises and equipment				(1,744	)		(1,152	)
	Proceeds from sale of premises & equipment				—			204
	Proceeds from sale of other real estate				2,061			4,342
	Net additions of other real estate				(75	)		(10	)
	Dividends received from other investment				—			62
	Net cash used in discontinued operations				—			(651	)

Net cash provided by investing activities					21,132			30,395

HABERSHAM BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED
(Unaudited) For the Nine-Month Periods Ended September 30, 2003 and 2002
(dollars in thousands)


CASH FLOWS FROM FINANCING ACTIVITIES:				2003			2002
		Net decrease in deposits			(45,609	)		(2,394	)
		Net (decrease) increase in short-term borrowings			(789	)		522
		Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements			1,977			(8,276	)
		Repayment of notes payable			—			(2,690	)
		Issuance of common stock			280			1,140
		Cash dividends paid			(511	)		(493	)
		Net cash used by discontinued operations			—			(7,298	)

			Net cash used by financing activities		(44,652	)		(19,489	)

(Decrease) increase in cash and cash equivalents					(22,647	)		3,418
CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD					40,969			16,550

CASH AND CASH EQUIVALENTS: END OF PERIOD				$	18,322		$	19,968

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
	Interest			$	7,005		$	10,403
	Income taxes				650			2,490
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Other real estate acquired through loan foreclosures				$	1,496		$	1,957
Loans granted to facilitate the sale of other real estate					138			—
Unrealized (loss) gain on investment securities available for sale, net of tax effect					(542	)		378

HABERSHAM BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements

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 2002 consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

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, 2002. The Company has consistently followed those policies in preparing this report.

“Other comprehensive income” refers to revenues, expenses, gains, and losses that are included in comprehensive income but excluded from earnings under current accounting standards. Currently, other comprehensive income for the Company consists of items previously recorded directly in equity under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Comprehensive income (loss) for the nine months ended September 30, 2003 and 2002 was $1,361,000 and $5,232,000, respectively, and for the three months ended September 30, 2003 and 2002 was $(538,000) and $2,572,000, respectively.

In the normal course of business, as part of its former mortgage banking operations, the Company extended interest rate lock commitments to borrowers who applied for loan funding and met certain credit and underwriting criteria. Such commitments were typically for short terms. Such commitments to originate fixed-rate mortgage loans for resale and forward commitments to sell mortgage-backed securities were the Company’s only derivative instruments.

The Company’s objective in entering into forward commitments to sell mortgage-backed securities was to mitigate the interest rate risk associated with mortgage loans held for sale and commitments to originate fixed-rate mortgage loans for resale.

Subsequent to the sale of BancMortgage in December of 2002, the Company has no significant derivative instruments.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure - an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS No. 148 also amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in the interim financial information. The Company adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost determined under SFAS No. 123 did not differ from the compensation cost determined under APB Opinion No. 25 for the three and nine months ended September 30, 2003 and 2002, as all stock options granted are vested on the date of grant and there were no options granted during the first nine months of 2003 or 2002.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a significant effect on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a significant effect on the Company’s consolidated financial statements.

SFAS No. 131 requires that certain disclosures be made by public business enterprises to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Prior to the sale of BancMortgage, the Company’s principal segments were banking and mortgage banking. Subsequently, the Company operates primarily in one segment.

Item. 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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”), an insurance subsidiary that does not comprise a significant portion of the Company’s financial position, results of operations or cash flows. Prior to December 2002, Habersham Bank also owned all of the outstanding stock of BancMortgage Financial Corp (“BancMortgage”).

BancMortgage was organized in 1996 as a full-service mortgage and construction lending company located in the northern Atlanta metropolitan area. During December 2002, the Company sold BancMortgage to the existing management of BancMortgage resulting in a loss of $110,064. The Company’s consolidated income statement and statement of cash flows for the three and nine months ended September 30, 2002 have been reclassified to reflect the operations of BancMortgage as discontinued. Management’s discussion and analysis, which follows, therefore, relates primarily to Habersham Bank.

The Company’s continuing primary business is the operation of banks in rural and suburban communities in Habersham, White, Cherokee, and Warren counties in Georgia. The Company’s primary source of revenue is providing loans to businesses and individuals in its market area.

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. Facts 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) 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.

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company.

These policies are described in note 2 to the consolidated financial statements which were presented in the Company’s 2002 annual report on Form 10-K. Of these policies, management believes that the accounting for the allowance for loan losses is the most critical. Please see “Asset Quality” for a further discussion of the Company’s methodology in determining the allowance.

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 is an element considered for all types of 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.

Losses on loans result from a broad range of causes, from borrower-specific problems to industry issues to the impact of the economic environment. The identification of the factors that lead to default or non-performance under a loan agreement and the estimation of loss in these situations is very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact in the estimate of losses. As described further below, 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.

The allowance for loan losses methodology is based on a loan classification system. For purposes of determining the required allowance for loan losses and resulting periodic provisions, the Company identifies the problem loans in its portfolio and segregates the remainder of the loan portfolio into broad segments, such as commercial, commercial real estate, residential mortgage and consumer. The Company provides for a general allowance for losses inherent in the portfolio for each of the above categories. The general allowance is calculated based on estimates of inherent losses which probably exist as of the evaluation date. Loss percentages used for non-problem loans in this portion of the portfolio are based on historical loss factors. The general allowance for losses on problem loans is based on a review and evaluation of these loans, taking into consideration financial condition and strengths of the borrower, related collateral, cash flows available for debt repayment, and known and expected economic conditions. General loss percentages for the problem loans are determined based upon historical loss experience and regulatory requirements.

For loans considered impaired, specific allowances are provided in the event that the specific collateral analysis on each problem loan indicates that the liquidation of the collateral would not result in repayment of these loans if the loan is collateral dependent or if the present value of expected future cash flows on the loan are less than the balance. In addition to these allocated reserves, the Company has established an unallocated reserve of approximately $215,000 at September 30, 2003 and $222,000 at December 31, 2002. The basis for the unallocated reserve is due to a number of qualitative factors, such as concentrations of credit and changes in the outlook for local and regional economic conditions.

Certain economic factors could have a material impact on the loan loss allowance calculation and its adequacy. The depth and duration of any economic recession would have an impact on the credit risk associated with the loan portfolio. Another factor that can impact the calculation is a consideration for concentrations in collateral which secure the loan portfolio. The Company’s loan portfolio is secured primarily by commercial and residential real estate and such loans secured by real estate comprise approximately 87.64% of the total loan portfolio. While there is a risk that the appraised value of the real estate securing the loans in the portfolio could decrease in value during an economic recession, approximately 44.18% of the real estate securing the loan portfolio is 1-4 family residential properties which are not generally as affected by the down turns in the economy.

The Company will from time to time make unsecured loans. The risk to the Company is greater for unsecured loans as the ultimate repayment of the loan is only dependent on the borrowers ability to pay. The balance of unsecured loans at September 30, 2003 and December 31, 2002 was $8.3 million and $8.8 million, respectively.

The Company is not aware of any large loan relationships that if defaulted would have a significant impact on the allowance for loan losses.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, the financial condition of borrowers and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Refer to the section entitled “Asset Quality” for an additional discussion of the key assumptions and methods used in determining the allowance for loan losses.

The Company’s total assets decreased $44 million, to $385 million at September 30, 2003 from $429 million at December 31, 2002. The decrease was primarily due to decreases in federal funds sold and the Company’s loan portfolio of approximately $19 million and $37 million, respectively, offset by increases in investment securities and in loans held for sale of approximately $14 million and $2 million, respectively. Corresponding reductions occurred in the deposit portfolio of approximately $46 million comprised primarily of national market certificates of deposit of $15.8 million and certificates of deposits over $100,000 of approximately $40.1 million, respectively. In view of the sale of BancMortgage in December 2002, the Company does not currently require these certificates of deposit as a funding source. Other certificates of deposit balances are declining due to the low interest rates currently available in the market. Loans held for sale increased approximately $2 million during the first nine months of 2003, as the Company began operations of a mortgage department.

Total net loans at Habersham Bank decreased $37 million, to $266 million at September 30, 2003 from $304 million at December 31, 2002. The decrease was primarily the result of a decrease in the real estate loan portfolio of approximately $48 million and by decreases of approximately $1 million in other loan portfolios offset by increases in the commercial loan portfolio of approximately $11 million. The decrease in the real estate loan portfolio was primarily due to the run-off of approximately $46.4 million in construction loans originated through BancMortgage. These loans are expected to continue to run-off as construction is completed. In addition, other real estate loans are being refinanced in response to favorable interest rates being offered on mortgage loans.

Investment securities available for sale and held to maturity increased $15 million during the first nine months of 2003 primarily due to purchases of approximately $42 million offset by maturities and calls of approximately $27 million. Other investments decreased $737,000 from $2.4 million at December 31, 2002 to $1.7 million at September 30, 2003 due to the redemption of FHLB stock during the first quarter of 2003 of $637,000 and the sale of an investment in Forsyth Bancshares, Inc. common stock of $100,000.

Total liabilities decreased $45.1 million, to $333.6 million at September 30, 2003 from $378.7 million at December 31, 2002. Decreases in the deposit portfolio were primarily due to the redemption of certificates of deposit.

Total interest income for the third quarter of 2003 and for the first nine months of 2003 decreased $1,206,000 or 18.27% and $3,257,000 or 15.99%, respectively, when compared to the third quarter of 2002 and the first nine months of 2002. These decreases were due to decreases in the loan portfolio of Habersham Bank. Average loan balances decreased $19.7 million or 6.42% during the first nine months of 2003 compared to the first nine months of 2002. Loan yields decreased by 77 basis points to 6.92% for the first nine months of 2003 compared to 7.69% for the first nine months of 2003. Average investment securities balances increased $5.7 million or 9.85% during the first nine months of 2003 compared to the first nine months of 2002. Yields on investment securities decreased by 118 basis points to 4.04% for the first nine months of 2003 compared to 5.22% for the first nine months of 2002.

Total interest expense for the third quarter of 2003 decreased $940,000 or 32.71%, when compared to the third quarter of 2002. Total interest expense for the first nine months of 2003 decreased $2,975,000 or 32.04% when compared to the first

nine months of 2002. The decrease in interest expense was primarily due to redemptions of certificates of deposit with higher rates as well as a declining interest rate environment during 2003. Average interest bearing deposits for the first nine months of 2003 decreased approximately $41.3 million or 13.71% when compared to the first nine months of 2002. Average certificates of deposit decreased approximately $45.8 million offset by increases in average savings accounts and average NOW and money market accounts of approximately $1.3 million and $3.2 million, respectively.

Average rates on interest-bearing deposits decreased by 79 basis points to 2.52% during the first nine months of 2003 compared to 3.31% for the first nine months of 2002. Average rates for NOW and other deposit accounts and certificates of deposit decreased to .16% and 2.37%, respectively, during the first nine months of 2003 compared to .19% and 3.12%, respectively, during the first nine months of 2002.

Interest expense on short-term and other borrowings for the third quarter of 2003 decreased $97,000 or 17.23% when compared to the third quarter of 2002 and decreased $303,000 or 17.80% for the first nine months of 2003 when compared to the first nine months of 2002 primarily due to a decrease in average borrowings of approximately $13.7 million or 25.71% when comparing the first nine months of 2003 with the first nine months of 2002. Average rates on borrowings increased by 5 basis points to 4.71% for the first nine months of 2003 compared to 4.66% for the first nine months of 2002 primarily due to the repayment of federal funds purchased, repurchase agreements, and a National Bank of Commerce loan which had lower rates leaving Federal Home Loan Bank advances which has a higher rate.

Net interest income decreased approximately $266,000 or 7.14%, for the third quarter of 2003 as compared to the third quarter of 2002 and remained relatively constant as compared to the first nine months of 2002 as a result of the items discussed above.

The net interest margin of the Company, net interest income divided by average earning-assets, was 3.95% for the first nine months of 2003 compared to 5.13% for the first nine months of 2002. The decrease in the net interest margin resulted primarily from decreases in the average rates earned in the securities portfolio.

Noninterest income decreased $47,000 or 5.09% for the third quarter of 2003 over the same period in 2002. Noninterest income decreased $299,000 or 9.40% for the first nine months of 2003 over the same period in 2002. During the third quarter of 2003, decreases in other income of approximately $177,000 were offset by increases in gain on sale of loans and service charges on deposits of approximately $150,000 and $15,000, respectively. The decrease in the first nine months of 2003 is primarily due to the decrease in securities gain and in gain on sale of CB Financial Corp. common stock of approximately $831,000 and $277,000, respectively, offset by increases in gain on sale of loans and in service charges on deposits of approximately $521,000 and $92,000, respectively. The securities gain for the first nine months of 2002 consisted primarily of the gain on the sale of Habersham Bancorp’s investment in FLAG common stock. The gain on sale of other investments consisted of the gain on sale of Habersham Bancorp’s investment in CB Financial Corp. common stock. The increase in gain on sale of loans for the three and nine month periods was primarily the result of increased activity in the mortgage operations of the Company.

Noninterest expense increased $525,000 or 17.22% for the third quarter of 2003 over the same period in 2002. Noninterest expense increased $840,000 or 8.88% for the first nine months of 2003 over the same period in 2002. These increases were due to increases in salary and employee benefits and occupancy expenses. Salary and

employee benefits increased primarily due to annual salary adjustments and additional recruiting expenses relating to staffing the new office in Braselton, Georgia, scheduled to open during the fourth quarter of 2003. Occupancy expenses increased approximately $47,000 and $157,000 for the third quarter and the first nine month period of 2003, respectively, over the same periods in 2002 due in part to the addition of two offices in Braselton and Gainesville, Georgia. General and administrative expense increased approximately $336,000 for the third quarter of 2003 due in part to increases in appraisal, processing, and recording expenses relating to the operation of Habersham Bank’s mortgage division and servicing fee expense incurred for mortgage servicing, and a fraud loss of approximately $149,000, $77,000, and $32,000, respectively. General and administrative expense increased approximately $273,0000 for the first nine month period of 2003, respectively, over the same periods in 2002 due in part to increases in appraisal, processing, and recording expenses relating to the operation of Habersham Bank’s Mortgage division and servicing fee expense for mortgage servicing of approximately $356,000 and $315,000, respectively. These increases in expense were offset somewhat by decreases occurring in other real estate losses, advertising expenses and outside services expenses, or approximately $192,000, $128,000 and $99,000, respectively.

Income tax expense for the three months ended September 30, 2003 and 2002 was $125,000 and $428,000, respectively. Income tax expense for the nine months ended September 30, 2003 and 2002 was $695,000 and $957,000, respectively. The effective tax rate for the nine months ended September 30, 2003 and 2002 was 26.75% and 24.43%, respectively. The increase in the effective tax rate in 2003 was due to a decrease in tax-exempt income.

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. See “Critical Accounting Policies” for a discussion of management’s methodology in determining the allowance.

A provision for loan losses in the amount of $263,000 was charged to expense for the quarter ended September 30, 2003 compared to $239,000 for the quarter ended September 30, 2002. A provision for loan losses in the amount of $787,000 was charged to expense for the first nine months of 2003 compared to $888,000 for the first nine months of 2002. Net charge-offs for the first nine months of 2003 totaled approximately $514,000 compared to $989,000 for the nine months ended September 30, 2002. At September 30, 2003 and December 31, 2002, the ratio of allowance for loan losses to total loans, including loans held for sale, was 1.40% and 1.15%, respectively.

Nonperforming assets consist of nonaccrual loans, accruing loans 90 days past due, restructured loans and other real estate owned. Nonperforming assets decreased approximately $1,556,000 or 19.49% from December 31, 2002 to September 30, 2003. The decrease for the first nine months of 2003 was primarily due to decreases in all categories of nonperforming assets.

Decreases occurring in accruing loans 90 days past due and restructured loans from December 31, 2002 to September 30, 2003 totaled approximately $649,000 and $85,000, respectively.

The Company had impaired loans of $1,990,000 and $2,115,000 at September 30, 2003 and December 31, 2002, respectively. Impaired loans consist of loans on nonaccrual status. The interest income recognized on such loans for the nine month periods ended September 30, 2003 and 2002 was not material.

The Company’s other real estate totaled $2,501,000 and $3,197,000 at September 30, 2003 and December 31, 2002, respectively. The decrease was due primarily to Sales of foreclosed properties of approximately $2,198,000 offset by foreclosures of mortgage loans secured by residential property of approximately $1,496,000 and additions of costs to complete construction of approximately $74,000.

Liquidity management involves the matching of the cash flow requirements of customers, either depositors withdrawing funds or borrowers needing loans, and the ability of the Company to meet those requirements.

The Company’s liquidity program is designed and intended to provide guidance in funding the credit and investment activities of the Company while at the same time ensuring that the deposit obligations of the Company are met on a timely basis. In order to permit active and timely management of assets and liabilities, these accounts are monitored regularly in regard to volume, mix, and maturity.

The Company’s liquidity position depends primarily upon the liquidity of its assets relative to its need to respond to short-term demand for funds caused by withdrawals from deposit accounts and loan funding commitments. Primary sources of liquidity are scheduled repayments on the Company’s loans and interest on and maturities of its investment securities. Sales of investment securities available for sale represent another source of liquidity to the Company. The Company may also utilize its cash and due from banks and federal funds sold to meet liquidity requirements as needed.

The Company also has the ability, on a short-term basis, to purchase federal funds from other financial institutions up to $25,000,000. At September 30, 2003, the Company had purchased none of the available federal funds. Presently, the Company has made arrangements with commercial banks for short-term advances up to $18,000,000 under a repurchase agreement line of credit of which none was advanced at September 30, 2003, in addition to a total available line of $230,833,000 which is available to the Company, subject to available collateral, from the Federal Home Loan Bank of which approximately $30,000,000 was advanced at September 30, 2003.

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 September 30, 2003 and 2002 were 37.25% and 24.51%, respectively.

At September 30, 2003, 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 September 30, 2003 follow:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of its lending activities to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The Company’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making theses commitments as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case by case basis. At September 30, 2003, the Company had outstanding loan commitments approximating $45,078,000 and standby letters of credit approximating $1,750,000. The amount of collateral obtained, if deemed necessary, for these financial instruments by the Company, upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held, if any, varies but may include inventory, equipment, real estate, or other property. The accounting loss the Company would incur if any party of the financial instrument failed completely to perform according to the term of the contract and the collateral proved to be of no value is equal to the face amount of the financial instrument.

The Company’s commitments are funded through internal funding sources of scheduled repayments of loans and sales and maturities of investment securities available for sale or external funding sources through acceptance of deposits from customers or borrowing from other financial institutions.

The following table is a summary of the Company’s commitments to extend credit, commitments under contractual leases, as well as the Company’s contractual obligations, consisting of deposits, FHLB advances and borrowed funds by contractual maturity date.


		Due In		Due In		Due In		Due In		Due In
		One Year		Two Years		Three Years		Four Years		Five Years
Commitments on lines of credit		$	45,078,000	$	—	$	—	$	—	$	—
Standby letters of credit			1,750,000		—		—		—		—
Commitments under lease agreements			118,202		102,864		84,298		12,372		—
Deposits			243,699,370		17,263,855		18,690,541		8,273,596		2,981,794
FHLB advances			—		10,000,000		—		—		—
Short-term borrowings			143,081		—		—		—		—
Securities sold under repurchase agreements			10,204,368		—		—		—		—

	Total commitments and contractual obligations	$	300,993,021	$	27,366,719	$	18,774,839	$	8,285,968	$	2,981,794

Although management regularly monitors the balance of outstanding commitments to fund loans to ensure funding availability should the need arise, management believes that the risk of all customers fully drawing on all these lines of credit at the same time is remote.

The objective of asset and liability management is to manage and measure the level and volatility of earnings and capital by controlling interest rate risk. To accomplish this objective, management makes use of interest rate and income simulation models to perform current and dynamic projections of interest income and equity, as well as more traditional asset and liability management methods.

The Company’s historical performance in various economic climates is considered by management in making long-term asset and liability decisions for the Company.

The relative interest rate sensitivity of the Company’s assets and liabilities indicates the extent to which the Company’s net interest income may be affected by interest rate movements. The Company’s ability to reprice assets and liabilities in the same dollar amounts and at the same time minimizes interest rate risks. One method of measuring the impact of interest rate changes on net interest income is to measure, in a number of time frames, the interest sensitivity gap, by subtracting interest sensitive liabilities from interest sensitive assets, as reflected in the following table. Such interest sensitivity gap represents the risk, or opportunity, in repricing. If more assets than liabilities are repriced at a given time in a rising rate environment, net interest income improves; in a declining rate environment, net interest income deteriorates. Conversely, if more liabilities than assets are repriced while interest rates are rising, net interest income deteriorates; if interest rates are falling, net interest income improves.

The interest rate sensitivity analysis, calculated as of September 30, 2003, below has a three month positive gap of approximately $37.5 million (interest-bearing assets exceeding interest-bearing liabilities repricing within three months).


			DUE IN			DUE AFTER			DUE AFTER			DUE AFTER			DUE AFTER
			THREE			THREE THROUGH			SIX THROUGH			ONE THROUGH			FIVE
(Dollars in Thousands)			MONTHS			SIX MONTHS			TWELVE MONTHS			FIVE YEARS			YEARS			TOTAL
INTEREST-EARNING ASSETS:
	Fed funds sold		$	8,393		$	—		$	—		$	—		$	—		$	8,393
	Investment securities			541			201			510			8,909			66,267			76,428
	Loans			152,379			18,352			35,666			61,903			1,552			269,852

		Total interest-earning assets		161,313			18,553			36,176			70,812			67,819			354,673
INTEREST-BEARING LIABILITIES:
	Deposits
		Money Market and NOW		60,753			—			—			—			—			60,753
		Savings		9,268			—			—			—			—			9,268
		Certificates of deposit		43,386			38,382			49,928			47,194			24			178,914
	Borrowings			10,347			—			—			10,000			20,000			40,347

		Total interest-bearing liabilities		123,754			38,382			49,928			57,194			20,024			289,282
Excess(deficiency) of interest-earning assets over(to) interest-bearing liabilities			$	37,559		$	(19,829	)	$	(13,752	)	$	13,618		$	47,795		$	65,391

Cumulative gap			$	37,559		$	17,730		$	3,978		$	17,596		$	65,391
Ratio of cumulative gap to total cumulative interest-earning assets				23.28	%		9.86	%		1.84	%		6.13	%		18.44	%
Ratio of cumulative interest-earning assets to cumulative interest-bearing liabilities				130.35	%		110.93	%		101.88	%		106.53	%		122.60	%

Management strives to maintain the ratio of cumulative interest-earning assets to cumulative interest-bearing liabilities within a range of 80% to 120% at the less than one-year time frame.

At September 30, 2003, the Company was outside the range of 80% to 120% for the “Less Than 3 Months” categories primarily due to the rate of real estate construction loan repayments over the rate of national market certificates of deposit redemptions which creates an excess of cash available for investment held in federal funds sold. Management is taking steps to increase interest-earning assets, primarily through quality loans and investment securities.

As of September 30, 2003, 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, 2002. 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, 2002 included in the Company’s 2002 Annual Report on Form 10K.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. 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 been no significant changes in the Company’s internal controls or, to the Company’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

(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.

(b) Form 8-K filed on October 29, 2003, reporting earnings for the third quarter of 2003 under Item 9 pursuant to instructions contained in Item 12 and SEC Release Nos. 33-8176 and 34-47226.


Exhibit No.		Document

11.1		Computation of Earnings Per Share.
31.1		Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Act”)
31.2		Certification of Chief Financial Officer filed pursuant to Section 302 of the Act.
32.1		Certification of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Act.

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.


		x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____


Georgia		58-1563165

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Highway 441 N. P.O. Box 1980, Cornelia, Georgia		30531

(Address of principal executive offices)		(Zip code)


	Habersham			Habersham
	Bank			Bancorp

Tier 1		15.78	%		16.90	%
Total Capital		17.03	%		18.14	%
Leverage		11.79	%		12.61	%


	HABERSHAM BANCORP (Registrant)

Date November 14, 2003		/s/ Annette Banks

		Chief Financial Officer (for the Registrant and as the Registrant’s principal financial and accounting officer)