SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-13153

HABERSHAM BANCORP

Registrant’s telephone number, including area code: (706) 778-1000

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity; as of the last business day of the registrant’s most recently completed second fiscal quarter.

1,679,136 Shares of Common Stock, $1.00 par value—$35,261,856 as of June 30, 2003 (based upon market value of $21.00/share as of that date).

Table of Contents

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of March 5 2004:

Common Stock, $1.00 par value—2,872,831 shares

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Company’s Annual Report to Shareholders for the year ended December 31, 2003 (the “Annual Report”) are incorporated by reference into Part II.

(2) Portions of the Company’s Proxy Statement relating to the 2004 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III.

PART I

Item 1. BUSINESS.

Business of the Company

     Habersham Bancorp (the “Company”), a Georgia corporation, was organized on March 9, 1984. Effective December 31, 1984, the Company acquired all of the outstanding shares of common stock of Habersham Bank (“Habersham Bank”). As a result of this transaction, the former shareholders of Habersham Bank became shareholders of the Company, and Habersham Bank became the wholly-owned subsidiary of the Company. Habersham Bank has one subsidiary, Advantage Insurers, Inc., a property, casualty and life insurance agency. Effective June 30, 1995, the Company acquired Security Bancorp, Inc. and its subsidiary bank, Security State Bank. The Company consolidated the charters of Security State Bank and Habersham Bank in 1999.

Business of the Bank

     Habersham Bank is a financial institution which was organized under the laws of the State of Georgia in 1904. Habersham Bank operates a full-service commercial banking business based in Habersham, White, Cherokee, Warren, and Gwinnett Counties, Georgia, providing such customary banking services as checking and savings accounts, various types of time deposits, safe deposit facilities and individual retirement accounts. It also makes secured and unsecured loans and provides other financial services to its customers. Habersham Bank has a full-time trust officer on staff and offers a full spectrum of trust services, including trust administration, asset management services, estate and will probate and administration, and other services in the area of personal trusts.

Business of BancMortgage Financial Corp.

     Prior to December 2002, the Company conducted mortgage banking operations through BancMortgage Financial Corp. (“BancMortgage”). BancMortgage was organized as a wholly-owned non-bank subsidiary of Habersham Bank in 1996. In December 2002, the Company sold BancMortgage to the existing management of BancMortgage. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

Business of Advantage Insurers, Inc.

     Advantage Insurers, Inc. was organized as a wholly-owned non-bank subsidiary of Habersham Bank in 1997. Advantage Insurers, Inc. is a full service insurance agency located in Cornelia, Georgia.

Competition

     The banking industry is highly competitive. During the past few years, legislation and regulatory changes, together with competition from unregulated entities, has resulted in the elimination of many traditional distinctions between commercial banks, thrift institutions and other providers of financial services. Consequently, competition among financial institutions of all types is virtually unlimited with respect to legal ability and authority to provide most financial services.

     Habersham Bank’s primary market area consists of Habersham, White, Cherokee, Warren, and Gwinnett Counties, Georgia. Habersham Bank competes principally for all types of loans, deposits and other financial services with other financial institutions located in its primary market area. To a lesser extent, Habersham Bank competes for loans with insurance companies, regulated small loan companies, credit unions, and certain governmental agencies.

     The Company and its non-bank subsidiaries also compete with numerous other companies and financial institutions engaged in similar lines of business, such as other bank holding companies, mortgage companies, mortgage servicers, leasing companies, insurance companies, companies providing data processing services, and companies providing bank consulting services.

Employees

     As of December 31, 2003, the Company had 146 full-time equivalent employees. Neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement. In the opinion of management, the Company and its subsidiaries enjoy satisfactory relations with their respective employees.

SUPERVISION & REGULATION

     Both the Company and Habersham Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.

The Company

     Because the Company owns all of the capital stock of the Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve. As a bank holding company located in Georgia, the Georgia Department of Banking and Finance also regulates and monitors all significant aspects of the Company’s operations.

     Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

	•		acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
	•		acquiring all or substantially all of the assets of any bank; or
	•		merging or consolidating with any other bank holding company.

     Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

     Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any other bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been incorporated for less than three years. Because the Bank has been incorporated for more than three years, this limitation does not apply to the Company or to the Bank.

     Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is refutably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

	•		the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or
	•		no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is registered under the Securities Exchange Act of 1934. The regulations also provide a procedure for challenging the rebuttable presumption of control.

     Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

•

Banking or managing or controlling banks; and

•

Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

     Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

	•		Factoring accounts receivable;
	•		Making, acquiring, brokering or servicing loans and usual related activities;
	•		Leasing personal or real property;
	•		Operating a non-bank depository institution, such as a savings association;
	•		Trust company functions;
	•		Financial and investment advisory activities;
	•		Conducting discount securities brokerage activities;
	•		Underwriting and dealing in government obligations and money market instruments;
	•		Providing specified management consulting and counseling activities;
	•		Performing selected data processing services and support services;
	•		Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
	•		Performing selected insurance underwriting activities.

     Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.

     In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:

	•		lending, trust and other banking activities;
	•		insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;
	•		providing financial, investment, or advisory services;
	•		issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

	•		underwriting, dealing in or making a market in securities;
	•		other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;
	•		foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
	•		merchant banking through securities or insurance affiliates; and
	•		insurance company portfolio investments.

     To qualify to become a financial holding company, the Bank and any other depository institution subsidiary of the Company must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, the Company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, the Company has not elected to become a financial holding company at this time.

     Support of Subsidiary Institutions. Under Federal Reserve policy, the Company is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. This support may be required at times when, without this Federal Reserve policy, the Company might not be inclined to provide it. In addition, any capital loans made by the Company to the Bank will be repaid only after its deposits and various other obligations are repaid in full. In the unlikely event of the Company’s bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

The Bank

     The Bank is subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.

     Because the Bank is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and reporting requirements of the FDIC and the Georgia Department of Banking and Finance. The FDIC and Georgia Department of Banking and Finance regularly examine the Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, the Bank’s deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

     Branching. Under current Georgia law, the Bank may open branch offices throughout Georgia with the prior approval of the Georgia Department of Banking and Finance. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Georgia. The Bank and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. Georgia law, with limited exceptions, currently permits branching across state lines through interstate mergers.

     Under the Federal Deposit Insurance Act, states may “opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their home state has also elected to opt-in. Consequently, until Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger.

     Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each of the other categories. At December 31, 2003, the Bank qualified for the well-capitalized category.

     Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

     An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

     FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions’ that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized” category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution’s primary federal regulator provides to the FDIC and information

that the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the institution’s capital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. This assessment rate is adjusted quarterly and is set at $1.54 per $100 of deposits for the first quarter of 2004.

     The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

     Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

     Other Regulations. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United States military.

     The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

	•		Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	•		Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	•		Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	•		Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
	•		Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
	•		Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
	•		rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

     In addition to the federal and state laws noted above, the Georgia Fair Lending Act (“GAFLA”) imposes restrictions and procedural requirements on most mortgage loans made in Georgia, including home equity loans and lines of credit. On August 5, 2003, the Office of the Comptroller of the Currency issued a formal opinion stating that the entirety of GAFLA is preempted by federal law for national banks and their operating subsidiaries. GAFLA contains a provision that preempts GAFLA as to state banks in the event that the Office of the Comptroller of the Currency preempts GAFLA as to national banks. Therefore, the Bank and any of its operating subsidiaries that may be engaged in mortgage lending will be exempt from the requirements of GAFLA.

The Bank’s deposit operations are subject to:

	•		the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
	•		the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Capital Adequacy

     The Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, and the FDIC, in the case of the Bank. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

     The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

     The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2003, the Bank’s ratio of total capital to risk-weighted assets was 17.26% and our ratio of Tier 1 Capital to risk-weighted assets was 16.03%.

     In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and implementing the Federal Reserve’s risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at

least 4%. At December 31, 2003, our leverage ratio was 12.34%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.

     Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

Payment of Dividends

     The Company is a legal entity separate and distinct from the Bank. The principal sources of the Bank’s cash flow, including cash flow to pay dividends to its shareholders, are dividends that the Bank pays to its sole shareholder, the Company. Statutory and regulatory limitations apply to the Bank’s payment of dividends. If, in the opinion of the federal banking regulator, the Bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. See “The Bank–Prompt Corrective Action.”

     The Georgia Department of Banking and Finance also regulates the Bank’s dividend payments and must approve dividend payments that would exceed 50% of the Bank’s net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.

     At December 31, 2003, the Bank could pay approximately $1,596,000 in dividends without prior regulatory approval.

Restrictions on Transactions with Affiliates

     The Company and the Bank are subject to the provisions of Sections 23A and 23B of the Federal Reserve Act and Regulation W issued thereunder. Section 23A places limits on the amount of:

	•		a bank’s loans or extensions of credit to affiliates;
	•		a bank’s investment in affiliates;
	•		assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
	•		loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
	•		a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

     The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

     The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

     The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Privacy

     Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

Consumer Credit Reporting

     On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA). Most of the amendments to the FCRA (the FCRA Amendments) will become effective in late 2004, depending on implementing regulations to be issued by the Federal Trade Commission and the federal bank regulatory agencies.

     The FCRA Amendments include, among other things:

	•		new requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;
	•		for entities that furnish information to consumer reporting agencies (which would include the Bank), new requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and
	•		a new requirement for mortgage lenders to disclose credit scores to consumers.

     The FCRA Amendments also will prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the “opt-out”), subject to certain exceptions. While the FCRA Amendments will limit the Company’s ability to share information with its affiliates for marketing purposes, the actual impact of these limitations will depend on the extent to which our customers elect to prohibit the use of their personal information for marketing purposes. We have no basis at this time to predict the volume of consumer “opt-outs.”

     Prior to the effective date of the FCRA Amendments, the Company and its subsidiaries will implement policies and procedures to comply with the new rules.

Anti-Terrorism Legislation

     The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the President on October 26, 2001, imposed new requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism. Most of these requirements and limitations took effect in 2002. Additional “know your customer” rules became effective in June 2003, requiring the Bank to establish a customer identification program under Section 326 of the USA PATRIOT Act. The Company and its subsidiaries implemented procedures and policies to comply with those rules prior to the effective date of each of the rules.

Proposed Legislation and Regulatory Action

     New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Polices

     Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Item 2. PROPERTIES

     The Company’s principal office is located at Habersham Bank’s Central Habersham office, 282 Historic Highway 441, Cornelia, Georgia. The telephone number of that office is (706) 778-1000.

     Habersham Bank’s North Habersham (main) office is located at 1151 Washington Street, Clarkesville, Georgia. The telephone number of that office is (706)

778-1000. Habersham Bank also has six full-service branch offices. Its Central Habersham office is located at 282 Historic Highway 441, Cornelia, Georgia; its South Habersham office is located at 186 441 By-Pass, Baldwin, Georgia; its Cleveland Office is located at 575 South Main Street, Cleveland, Georgia; its Canton Office is located at 1925 Marietta Highway, Canton, Georgia; its Waleska Office is located at 7265 Reinhardt College Parkway, Waleska, Georgia; its Warrenton Office is located at 217 East Main Street, Warrenton, Georgia; and its Braselton Office is located at 6322 Grand Hickory Drive, Braselton, Georgia. Each office has a 24-hour teller machine. Habersham Bank owns its office properties without encumbrance, with the exception of the Warrenton Office which is leased on a month to month basis.

     Advantage Insurers, Inc.’s principal office is located at 282 Historic Highway 441, Cornelia, Georgia, and the telephone number of that office is (706) 778-2277.

Item 3. LEGAL PROCEEDINGS

     The Company is not a party to, nor is any of its property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to its business, and no such proceedings are known to be contemplated by governmental authorities.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common stock of Habersham Bancorp is traded on the Nasdaq Stock Market (“Nasdaq”) under the symbol HABC. At December 31, 2003, Habersham Bancorp had approximately 541 shareholders of record. The following table sets forth the high and low sale prices, and the cash dividends paid on the Company’s common stock on a quarterly basis for the past two fiscal years and the first quarter of 2004 to date.

     The approval of the Georgia Department of Banking and Finance is required if dividends declared by the Bank to the Company in any year will exceed 50% of the net income of the Bank for the previous calendar year. As of December 31, 2003 the Bank could declare dividends to the Company up to approximately $1,596,000 without regulatory approval. See “Item 1 – Business – Supervision and Regulation – Payment of Dividends” for additional information regarding regulatory restrictions on our ability to pay dividends.

Item 6. SELECTED FINANCIAL DATA

Balance sheet amounts have not been adjusted to reflect discontinued operations.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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”) and prior to December 2002, owned all of the outstanding stock of BancMortgage Financial Corp (“BancMortgage”). The Advantage Group, Inc., a non-bank subsidiary providing marketing and advertising services, ceased operation September 30, 2001. Advantage Insurers, which began operations on March 31, 1997, 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.

     During the year ended December 31, 2002, the Company sold BancMortgage to the existing management of BancMortgage resulting in a loss of $110,064. The Company’s consolidated financial statements have been reclassified to reflect the operations of BancMortgage as discontinued. Management’s discussion and analysis, which follows, relates primarily to Habersham Bank.

EXECUTIVE SUMMARY

     The Company’s continuing primary business is the operation of banks in rural and suburban communities in Habersham, White, Cherokee, Warren, and Gwinnett counties in Georgia. Its primary source of income is interest income from loans and investment securities. During 2003 interest rates remained at historically low levels and management expects interest rates to remain at these levels throughout most of the coming year. Management will continue to focus on maintaining a profitable net interest margin in 2004.

     2003 was a year of transition for Habersham Bancorp. One of the expected results of the sale of BancMortgage on December 5, 2003, was a decrease in total assets of Habersham Bank as approximately $57.8 million of residential home construction and acquisition and development loans which originated from BancMortgage matured or paid-off. The loss of these assets was offset by the redemption at maturity of over $21.4 million in nationally brokered certificates of deposit which are not considered core deposits of the Bank. Cash available has been reinvested in longer term investment securities available for sale.

     Net income was also impacted by the sale of BancMortgage. Interest income and interest expense trended downward over 2003, as the loans originated from BancMortgage matured and paid-out and as the nationally brokered certificates of deposits were redeemed. Additional expense was incurred for the staffing of Habersham Mortgage, a new division of Habersham Bank, and a new branch office in Braselton.

     Management has developed a strategy for asset growth and expansion of its financial services through branching into selective growth markets in North Georgia. Habersham Bank began this expansion program of its traditional banking business with the completion of a branch office in Braselton, Georgia. Braselton is the home of Chateau Elan, a winery and golf community, and an area of rapid growth of residential properties. Additionally, Habersham Bank purchased an existing branch location from a regional bank in the Hickory Flat area of eastern Cherokee County. The Hickory Flat location is scheduled to open for operation in March 2004 and is to replace the Waleska Office which is scheduled to close during the first quarter of 2004. Cherokee County is considered one of the fastest growing communities in Georgia.

     The following discussion sets forth the major factors that affect the Company’s results of operations and financial condition. These comments should be read in conjunction with the consolidated financial statements and related notes.

     This discussion contains forward-looking statements involving risks and uncertainties. Results may differ significantly from that discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, risks involving the potential adverse effect of unexpected changes in interest rates and the current interest rate environment, loan losses and the adequacy of the Company’s loan loss allowance, changes in regulation and legislation, and competition.

CRITICAL ACCOUNTING ESTIMATES

     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 are presented elsewhere in this annual report. Of these policies, management believes that the accounting for the allowance for loan losses is the most critical. This is because of the subjective nature of the estimates used in establishing the allowance and the effect these estimates have on the Company’s earnings. Because the allowance is replenished by means of a provision for loan losses that is charged as an expense against net income, the estimation of the allowance affects the Company’s earnings directly. 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, under “Allowance for Loan 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.

     Certain economic factors could have a material impact on the loan loss allowance determination 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 determination 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 with such loans comprising approximately 88.3% of the total loan portfolio. While there is a risk that the value of the real estate securing the loans in the portfolio could decrease during an economic recession, the majority of the real estate securing the loan portfolio is 1 – 4 family residential properties which are generally not as affected by downturns in the economy. The Company also has concentrations in mortgages for agribusiness purposes in the poultry industry and in commercial loans for the travel accommodation industry. See “Nonperforming Assets and Past Due Loans.”

     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 December 31, 2003 was $8.2 million which does not pose a significant risk to the Company.

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

     Refer to the section entitled “Allowance for Loan Losses” for an additional discussion of the key assumptions and methods used in determining the allowance for loan losses, as well as inherent risks in estimating the allowance.

RESULTS OF OPERATIONS

     Habersham Bancorp’s net income was $2,317,962, $5,830,451, and $5,342,791, for the years ended December 31, 2003, 2002, and 2001, respectively, with related diluted earnings per common and common equivalent share of $.80, $2.07, and $1.96, respectively, representing a decrease of 61.35% from 2003 to 2002 and an increase of 5.61% from 2001 to 2002.

     Net income represents a return on average equity of 4.49%, 12.24%, and 12.80% for 2003, 2002, and 2001, respectively.

     The decrease in income from continuing operations for the year ended December 31, 2003, when compared to the year ended December 31, 2002, was primarily due to additional salary and other expenses associated with the establishment of a new mortgage lending division, (Habersham Mortgage), during the first quarter of 2003 and the building and staffing of a new branch located in Braselton, Georgia during the fourth quarter of 2003. Also, contributing to the decrease in income from continuing operations was a decrease in gains on the sale of investment securities and other investments. These decreases were offset somewhat by an increase in the net interest margin for the year ended December 31, 2003 to 3.95% when compared to 3.91% for the year ended December 31, 2002.

     The increase in income from continuing operations for the year ended December 31, 2002, when compared to the year ended December 31, 2001, was primarily the result of improvement in the Company’s net interest margin which increased from 3.38% for the year ended December 31, 2001 to 3.91% for the year ended December 31, 2002. In addition, the Company recognized gains on sale of investment securities available for sale of $851,000 for the year ended December 31, 2002 compared to $191,000 for the year ended December 31, 2001. The Company also sold its investment in CB Financial Corp. common stock during 2002 resulting in a gain of $277,182.

NET INTEREST INCOME

     Net interest income is the largest single source of income for the Company. Management strives to attain a level of earning asset growth while providing a net yield on earning assets that will cover overhead and other costs and provide a reasonable return to our shareholders.

     Net interest income for 2003 decreased approximately $590,000 when compared to 2002 and increased approximately $894,000 when compared to 2001.

     Fluctuations occurring in interest rates and balances in the loan, securities, and deposit portfolios directly impact net interest income. Other borrowings are also impacted by rate movements and balances. Net interest income is impacted by interest income from loans, investment securities, and federal funds sold offset by interest paid on deposits and borrowings.

     During 2003, interest income decreased approximately $4.0 million when compared to 2002 as a result of average loan balances in 2003 decreasing approximately $24.8 million when compared to 2002 in addition to the average loan rates in 2003 decreasing approximately .79% when compared to 2002. The decrease in the loan portfolio is primarily the result of payoffs of real estate construction loans. Interest income on investment securities decreased approximately $499,000 when compared to 2002 primarily due to decreases in the interest yield of approximately 1.17%.

     Interest income on investment securities was also impacted by the declining interest rate environment. The weighted average yield on investment securities was 4.05%, 5.22%, and 5.29%, for the years ended December 31, 2003, 2002, and 2001, respectively. Average yields on federal funds sold were 1.50%, 1.39%, and 3.22%, for the years ended December 31, 2003, 2002, and 2001, respectively.

     Interest expense for 2003 decreased approximately $3.9 million when compared to 2002 as a result of average deposit balances in 2003 decreasing approximately $43.4 million when compared to 2002 in addition to the average deposit rate in 2003 decreasing approximately .84% when compared to 2002. The decrease in the deposit portfolio is primarily the result of the redemption of national market certificates of deposit during the year.

     Interest income decreased approximately $7.5 million or 21.8% in 2002 when compared to 2001 primarily due to decreases in interest rates which significantly impacted the earnings on the Company’s loan portfolio. The average yield on the Company’s loan portfolio decreased significantly from 9.15% in 2001 to 7.62% in 2002. Additionally during 2002, the Company’s loan portfolio decreased approximately $17.7 million due to the sale of construction loans of approximately $31.7 million and decreases in the commercial and consumer portfolios of approximately $11 million offset by new residential and construction loans of approximately $25.0 million.

     The decrease in interest expense of approximately $8.4 million or 41.0% in 2002 when compared to 2001 was primarily due to a continued declining interest rate environment and decreases in average balances of time deposits and borrowings. The average portfolio of time deposits decreased approximately $23.8 million and average borrowings decreased approximately $16.2 million during 2002. The weighted average interest rate paid on deposits in 2002 decreased significantly from 5.32% for the year ended December 31, 2001 to 3.29% for the year ended December 31, 2002 as time deposits repriced at lower rates. The average interest rate paid for borrowings decreased 59 basis points from 5.29% in 2001 to 4.70% in 2002.

     The net interest margin of the Company was 3.95% in 2003, 3.91% in 2002, and 3.38% in 2001. The net interest margin of the Company was maintained during 2003 due to close management of yields earned on loans and investment securities and on rates paid for deposits and borrowings.

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID

     Average loan balances declined approximately $24.8 million or 8.08% in 2003 from 2002 primarily as a result of the maturity and payoffs of real estate construction and mortgage loans of approximately $40.6 million offset by new commercial loans of approximately $15.8 million.

     Average balances of investment securities increased approximately $10.6 million or 18.72% in 2003 over 2002 as a result of investing the excess cash from loan maturities and payoffs in investment securities. Available for sale mortgage backed and treasury securities purchases totaled approximately $51.5 million offset by proceeds from maturities, sales, and calls of approximately $32.2 million during 2003. Held to maturity investment securities and other stock investments decreased due to the calls and maturities of approximately $1.3 million and $.8 million,

respectively. Average federal funds sold increased approximately $444,000 or 13.91% in 2003 over 2002.

     The average balance of deposits, excluding noninterest-bearing deposits, for 2003 decreased by approximately $43.4 million or 14.52% from 2002 and decreased approximately $21.8 million or 6.80% from 2001. The decrease in average deposits for 2003 is primarily due to the redemption at maturity of national market certificates of deposit of approximately $48.5 million offset by increases in money market and savings accounts of approximately $3.7 million and $1.4 million, respectively.

     The following table sets forth the consolidated average balance sheets for the Company, average rates earned on interest-earning assets, average rates paid on interest-bearing liabilities, interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities, and net interest margin. This information is presented for the years ended December 31, 2003, 2002, and 2001.

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID, CONTINUED

CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE YIELDS EARNED AND RATES PAID, CONTINUED

(1)		Interest earnings on nonaccrual loans are included in the foregoing analysis to the extent that such interest earnings had been recorded during 2003, 2002, and 2001.
(2)		Average yields for available for sale securities are computed using the historical cost balances. Such yields do not give effect to changes in fair value that are reflected as a component of shareholders’ equity.

     The following table sets forth a summary of the changes in interest income and interest expense resulting from changes in volume and rates for the periods indicated:

(1)

The changes in interest income and/or expense not due solely to rate or volume have been allocated to the rate component.

NONINTEREST INCOME AND NONINTEREST EXPENSE

     Noninterest income in 2003 decreased slightly over 2002. Increases in gain on sale of loans of $615,000 resulted from the creation of Habersham Mortgage, a division of Habersham Bank, which began operation in 2003. During 2002, Habersham Bancorp sold its investments in common stock of FLAG Financial Corp, CB Financial Corp, and Greater Rome for gains of $838,000, $277,000, and $50,000, respectively, in order to focus primarily on enhancing financial services offered at Habersham Bank. This resulted in lower gains on investment securities for 2003.

     Noninterest income in 2002 increased $854,000 or 27.48% when compared to 2001. Noninterest income in 2002 when compared to 2001 increased primarily due to an increase in gains on sales of investment securities available for sale of $660,000 in 2002 compared to 2001. Income from trust services also increased in 2002 to $562,000 from $366,000 in 2001 due to growth in the trust department operations in 2002.

     Noninterest expense in 2003 increased approximately $1,254,000 or 9.81% as compared to 2002. The increase in salaries and employee benefits is due to additional costs associated with the creation of Habersham Mortgage, a division of Habersham Bank and staffing requirements for our new location in Braselton. Occupancy expenses increased due to increased depreciation expense associated with purchases of new mainframe computer hardware and software during the fourth quarter of 2002, in addition to depreciation expense on purchases of

new teller machines and software and replacement of personal computers at all locations during 2003.

     Noninterest expense in 2002 increased by approximately $497,000 or 4.05% as compared to 2001. The increase for 2002 was primarily due to increases of $278,000 in salaries and employee benefits and $281,000 in marketing expenses offset by a decrease of approximately $87,000 in outside services expense. Salaries and employee benefits increased primarily as a result of annual salary adjustments and additional staffing requirements. Outside services expense consists of FDIC insurance, legal and professional services, insurance, director fees, and Georgia Department of Banking and Finance fees.

INCOME TAX EXPENSE

     The effective tax rate for the Company decreased during 2003 to 23.87% compared to the effective tax rate during 2002 of 24.43%. The effective tax rate for the year ended December 31, 2001 was 25.48%. Higher tax-exempt income as a percentage of pre-tax income each year is the primary cause for these fluctuations.

ALLOWANCE FOR LOAN LOSSES

     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 Estimates.”

     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 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 allowances, the Company has established an unallocated allowance of approximately $289,000 at December 31, 2003. The basis for the unallocated allowance is due to a number of qualitative factors, such as concentrations of credit and changes in the outlook for local and regional economic conditions. Management believes its allowance for loan losses is adequate to absorb losses on loans outstanding at December 31, 2003.

     The allowance for loan losses allocation is based on subjective judgment and estimates and, therefore, is not necessarily indicative of the specific amounts or loan categories in which charge-offs may ultimately occur. The allocation of the allowance for loan losses by loan category at December 31, 2003, 2002, 2001, 2000, and 1999 is as follows:

     The Company’s provision for loan losses is intended to create an adequate allowance for losses in the loan portfolio at the end of each reporting period. The provision for loan losses was $950,000 in 2003 as compared to $1,307,000 in 2002. Decreases in the loan portfolio due to the maturity and repayments of construction loans originated by BancMortgage resulted in the decrease in the provision.

     Management is not aware of any loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed which 1) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or 2) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

     The following table summarizes, for each of the years in the five year period ended December 31, 2003, selected information related to the allowance for loan losses.

     Net charge-offs amounted to $840,207 in 2003. There were 11 commercial loans charged-off with an average balance of $29,991. Real estate secured loans charged-off totaled 11 with an average balance of $47,200. Installment loans charge-offs totaled 143 with an average charge-off balance of $4,800. Commercial loan recoveries totaled 8 loans for an average amount of $16,000, real estate secured loans recoveries totaled 7 loans for an average amount of $5,000, and installment loan recoveries totaled 104 loans for an average of $1,000.

     The risk associated with loans 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.

     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.

LOANS

     The amount of loans outstanding at December 31 for each of the last five years is set forth in the following table according to type of loan and is net of unamortized loan origination fees and unamortized discount on SBA loans sold. The Company had no foreign loans at December 31 in any of the last five years.

     Loans decreased approximately $41.9 million or 13.63% in 2003 as compared to 2002. Decreases in the real estate construction portfolio, primarily due to the maturity and payoffs of construction loans in the Atlanta area that had been originated by BancMortgage Financial Corp, were offset by new residential mortgages and commercial real estate. Decreases also occurred in the commercial, financial, and agricultural portfolio and in the consumer lending portfolio due to interest rate and economic pressures.

     The decrease in loans in 2002 resulted primarily from decreases in the commercial and consumer loan portfolios of approximately $6.8 million and $4.2 million, respectively, in addition to the sale of residential mortgages and construction loans of approximately $31.5 million offset by new residential mortgage and construction loans of approximately $24.9 million.

     The following table sets forth the maturities and sensitivities to changes in interest rates of loans at December 31, 2003.

NONPERFORMING ASSETS AND PAST DUE LOANS

     Nonperforming assets consist of nonaccrual loans, accruing loans 90 days past due, restructured loans, and other real estate owned.

     The following table sets forth the totals of nonperforming assets, selected ratios, and accruing loans past due 90 days or more at December 31 for each of the last five years.

     Most of the classifications of nonperforming assets had decreased at December 31, 2003 over December 31, 2002 with the exception of nonaccrual loans. Accruing loans over 90 days at December 31, 2002 consisted primarily of twenty loans collateralized with residential properties which were moved into the other real estate or collected. At December 31, 2003, accruing loans 90 days past due consisted of five real estate secured loans of approximately $263,000 with the remainder in consumer and commercial loans of approximately $126,000 and $114,000, respectively.

     The increase in loans on nonaccrual status during 2003 was primarily due to the movement of approximately $1,633,000 of loans collateralized by 1-4 family residential properties to nonaccrual status during 2003.

     Restructured loans decreased during 2003 due to the reclassification of one note of approximately $492,000 and one note of approximately $26,000 classified as a restructured loan.

     During 2003, additions to other real estate of approximately $1.7 million were offset by sales of other real estate of approximately $2.2 million. At December 31, 2003, other real estate consisted of three properties of approximately $1.6 million which are secured by commercial real estate and thirteen properties of approximately $1 million which are secured by residential properties.

     Accrual of interest is discontinued when either principal or interest becomes 90 days past due unless the loan is both well secured and in the process of collection, or in management’s opinion, when reasonable doubt exists as to the full collection of interest or principal. Interest income that would have been recorded on these nonaccrual and restructured loans in accordance with their original terms totaled $217,088, $298,461, and $353,847 in 2003, 2002, and 2001, respectively, compared with interest income recognized of $113,450, $91,914, and $145,584, respectively.

     At December 31, 2003, the Company had no significant loans which management designated as potential problem loans which have not been disclosed above as nonaccrual or past due loans.

     Habersham Bank held a concentration in mortgages for agribusiness purposes in the poultry industry which totaled approximately $5.7 million and $6 million at December 31, 2003 and 2002, or approximately 2.18% and 1.97% of total net loans at December 31, 2003 and 2002, respectively. These mortgages for agribusiness purposes are primarily secured by real estate consisting of residences, poultry houses, and equipment. None of the mortgages are considered individually significant. Habersham Bank held a concentration in commercial loans for the travel accommodation industry which total approximately $19.7 million at December 31, 2003, or approximately 7.41% of total net loans. These loans are primarily secured by commercial real estate.

INVESTMENT SECURITIES

     The Company has classified its investment securities as available for sale and held to maturity. The classification of certain investment securities as available for sale is consistent with the Company’s investment philosophy of maintaining flexibility to manage the securities portfolio. At December 31, 2003 approximately $72.8 million of investment securities were classified as available for sale. Approximately $164,000 of net unrealized gain, net of income taxes, was included in shareholders’ equity related to available for sale investment securities.

     The following table sets forth the carrying amounts of investment securities at December 31, 2003, 2002, and 2001.

     The following table sets forth the maturities of debt investment securities at carrying value at December 31, 2003 and the related weighted yields of such securities on a tax equivalent basis (assuming a 34% tax rate).

     No securities were held which represent a combined total for one issuer which is in excess of 10% of the Company’s shareholders’ equity at December 31, 2003.

DERIVATIVE INSTRUMENTS

     The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative effect loss of $162,000 on January 1, 2001 to reflect the fair value of forward commitments to sell mortgage-backed securities held by BancMortgage. The provisions of SFAS No. 133 allowed for a one time transfer of investment securities previously classified as held to maturity to available for sale upon adoption. As a result, the Company transferred approximately $999,000 of investment securities previously classified as held to maturity to its available for sale portfolio on January 1, 2001.

     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.

     At December 31, 2003, other than a minimal amount of interest rate lock commitments to originate mortgage loans for resale, the Company did not have any derivative instruments.

DEPOSITS

     Average deposits decreased approximately $40.0 million and decreased approximately $14.2 million during 2003 and 2002, respectively.

     The following table sets forth the average amount of deposits and average rate paid on such deposits for each category which exceeds 10% of average total deposits for the years ended December 31, 2003, 2002, and 2001.

     At December 31, 2003, time certificates of deposit of $100,000 or more totaled $63,730,583. The maturities of all time certificates of deposit over $100,000 are as follows:

BORROWINGS

     Borrowings increased approximately $3.8 million during 2003 compared to 2002 primarily due to the purchase of federal funds at year-end of approximately $4.2 million. Other short-term borrowings, the treasury note and securities sold under repurchase agreements, decreased approximately $354,000 and $32,000, respectively.

     At December 31, 2003, the Company has a Daily Rate Credit line and a Warehouse line of credit with the Federal Home Loan Bank totaling $230,833,000 of which $30,000,000 was advanced and $200,833,000 was available. Both of these lines of credit are specific collateral agreements. The Daily Rate Credit line is secured by qualifying first mortgage loans, commercial loans, and pledged securities. The Warehouse line of credit is secured by qualifying first mortgage loans. The advances outstanding at December 31, 2003 and 2002 consist of three fixed rate advances of $10,000,000 each that bear interest at 6.72%, 6.02%, and 4.93% and mature in 2005, 2010, and 2011 (callable each year), respectively.

     At December 31, 2003, the Company had available repurchase agreement line of credit commitments with Compass Bank totaling $22,950,000 of which none was advanced. The Company also had available repurchase agreement line of credit commitments with the National Bank of Commerce totaling $1,901,000 at December 31, 2003 of which none was advanced.

CAPITAL RESOURCES

     The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimal capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulations to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth below in the table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company meets all capital adequacy requirements to which it is subject.

     As of December 31, 2003, the most recent notifications from both the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s categories.

     The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2003 follow (in thousands):

     While management believes that the current level of capital is sufficient for the current and foreseeable needs of the Company, capital needs are continually evaluated by management.

     Cash dividends were paid at a rate of $.06 per share in March, June, and September of 2003, with a special dividend of $1.00 paid in December of 2003. The special dividend was paid in celebration of Habersham Bank’s 100th anniversary coming in 2004 and in light of the favorable tax treatment of dividend income under recent tax law changes.

     Cash dividends were paid at a rate of $.06 per share in each of March, June, September, and December for 2002.

     Management is not aware of any required regulatory changes or any recommendation by any regulatory authority which will have a material effect on the Company’s liquidity, capital or results of operations.

INTEREST RATE SENSITIVITY

     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 an 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.

INTEREST RATE SENSITIVITY ANALYSIS