HABERSHAM BANCORP - FORM 10-Q - November 16, 2009

Attached files

file	filename
EX-32 - EXHIBIT 32 - HABERSHAM BANCORP	ex32.htm
EX-31.2 - EXHIBIT 31.2 - HABERSHAM BANCORP	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - HABERSHAM BANCORP	ex31_1.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ___________________

Commission file number 0-13153

HABERSHAM BANCORP

(Exact name of registrant as specified in its charter)

Georgia	58-1563165
(State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification Number)

282 Historic Highway 441 North, P. O. Box 1980, Cornelia, Georgia	30531
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Exchange Act: Common Stock, $1.00 par value

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports under Section 13 or Section 15(d) of the Act.

Yes o No x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Exchange Act Rule 12b-2:

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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

2,818,593 shares, common stock, $1.00 par value, as of November 13, 2009.

Item. 1 Financial Statements

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

ASSETS	SEPTEMBER 30, 2009 (unaudited)			DECEMBER 31, 2008 (audited)
Cash and due from banks	$	19,967		$	13,640
Federal funds sold		12,630			620
Total cash and cash equivalents		32,597			14,260

Investment securities available for sale		86,907			97,278
Investment securities held to maturity (estimated fair value of $1,040 at September 30, 2009 and $1,053 at December 31, 2008)		1,019			1,025
Other investments		2,598			3,334
Loans		295,646			322,775
Less allowance for loan losses		(10,378	)		(12,168	)
Loans, net		285,268			310,607

Premises and equipment, net		15,268			19,479
Bank properties held for sale		3,366			-
Other real estate owned		36,620			27,337
Cash surrender value of life insurance		10,195			9,936
Accrued interest receivable		2,013			2,222
Income tax receivable		-			2,504
Other assets		12,940			6,887
TOTAL ASSETS	$	488,791		$	494,869

LIABILITIES
Noninterest-bearing deposits	$	30,234		$	29,664
Money market and NOW accounts		78,432			77,638
Savings		40,280			43,180
Time deposits, $100,000 and over		119,656			102,391
Other time deposits		134,614			140,015
Total deposits		403,216			392,888

Short-term borrowings		400			760
Federal funds purchased and securities sold under repurchase agreements		8,134			16,384
Federal Home Loan Bank advances		38,000			38,000
Accrued interest payable		2,617			2,805
Other liabilities		2,003			2,034
TOTAL LIABILITIES		454,370			452,871

Commitments
STOCKHOLDERS’ EQUITY
Preferred stock - Series A; 10,000 shares authorized; 3,000 shares issued and outstanding at December 31, 2008: No shares issued and outstanding at September 30, 2009		-			2,978
Preferred stock - Series B: 4,000 shares authorized; no shares issued or outstanding at December 31, 2008: 4,000 shares issued and outstanding at September 30, 2009		3,963			-
Common Stock, $1.00 par value, 10,000,000 shares authorized; 2,818,593 shares issued and outstanding		2,819			2,819
Additional paid-in capital		13,490			13,490
Retained earnings		13,143			22,518
Accumulated other comprehensive income		1,006			193
TOTAL STOCKHOLDERS’ EQUITY		34,421			41,998
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	488,791		$	494,869

See notes to unaudited condensed consolidated financial statements.

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Uaudited) For the Three-Month and Nine-Month Periods Ended September 30, 2009 and 2008

(dollars in thousands, except per share amounts)

	Three Months ended						Nine Months ended
	September 30,						September 30,
	2009			2008			2009			2008
INTEREST INCOME
Loan interest and fees on loans	$	4,075		$	5,076		$	12,809		$	17,042
Taxable investment securities		894			916			2,860			2,626
Tax exempt securities		142			192			430			745
Federal funds sold		9			4			23			84
Other		15			24			24			153
TOTAL INTEREST INCOME		5,135			6,212			16,146			20,650
INTEREST EXPENSE
Time deposits, $100,000 and over		1,021			1,018			3,113			3,658
Other deposits		1,549			1,680			4,890			5,289
Short-term and other borrowings, primarily FHLB advances		417			659			1,363			1,984
TOTAL INTEREST EXPENSE		2,987			3,357			9,366			10,931
NET INTEREST INCOME		2,148			2,855			6,780			9,719
Provision for loan losses		7,400			6,293			10,480			7,370
NET INTEREST (LOSS) INCOME AFTER PROVISION FOR LOAN LOSSES		(5,252	)		(3,438	)		(3,700	)		2,349
NONINTEREST INCOME
Mortgage origination income		15			48			108			363
Service charges on deposits		294			288			794			786
Other service charges and commissions		62			67			183			207
Gain on sale of investment securities available for sale		55			27			369			316
Gain on sale and impairment of other investments, net		-			-			20			-
Other income		426			504			1,350			1,554
Total noninterest income		852			934			2,824			3,226
NONINTEREST EXPENSE
Salary and employee benefits		1,836			2,338			5,740			7,272
Occupancy		823			680			2,217			1,869
Other real estate expense		894			132			1,575			426
Computer services		190			164			508			432
Telephone		118			120			353			354
Leased equipment		122			119			367			353
General and administrative expense		1,516			1,021			3,807			2,980
Total noninterest expense		5,499			4,574			14,567			13,686
LOSS BEFORE INCOME TAXES		(9,899	)		(7,078	)		(15,443	)		(8,111	)
Income tax benefit		3,930			2,787			6,219			3,504
NET LOSS	$	(5,969	)	$	(4,291	)	$	(9,224	)	$	(4,607	)
Net loss per common share – Basic	$	(2.14	)	$	(1.52	)	$	(3.33	)	$	(1.63	)
Net loss per common share – Diluted	$	(2.14	)	$	(1.52	)	$	(3.33	)	$	(1.63	)
Weighted average number of common shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593
Weighted average number of common and common equivalent shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593
Dividends per share		-		$	.05			-		$	.25

See notes to unaudited condensed consolidated financial statements.

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited) For the Three- and Nine-Month Periods Ended September 30, 2009 and 2008

(dollars in thousands)

	Three Months ended						Nine Months ended
	September 30,						September 30,
	2009			2008			2009			2008

NET LOSS	$	(5,969	)	$	(4,291	)	$	(9,224	)	$	(4,607	)

OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on investment securities available for sale arising during the period		1,716			342			1,506			(1,602	)

Unrealized holding gains (losses) on derivative financial instruments classified as cash flow hedges, arising during the period		26			24			95			(23	)

Reclassification adjustment for realized gains on investment securities available for sale		(55	)		(27	)		(369	)		(316	)

Total other comprehensive income (loss), before tax		1,687			339			1,232			(1,941	)
INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME (LOSS):

Unrealized holding (gains) losses gains on investment securities available for sale arising during the period		(583	)		(116	)		(512	)		545

Unrealized holding (gains) losses on derivative financial instruments classified as cash flow hedges, arising during the period		(9	)		(8	)		(32	)		8

Reclassification adjustment for realized gains on investment securities available for sale		19			9			125			107

Total income taxes related to other comprehensive income (loss)		(573	)		(115	)		(419	)		660
Total other comprehensive income (loss), net of tax		1,114			224			813			(1,281	)
Total comprehensive loss	$	(4,855	)	$	(4,067	)	$	(8,411	)	$	(5,888	)

See notes to unaudited condensed consolidated financial statements.

HABERSHAM BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) For the Nine-Month Periods Ended September 30, 2009 and 2008

(dollars in thousands)

	Nine Months
	Ended September 30,
	2009			2008

CASH FLOWS (USED BY) PROVIDED BY OPERATING ACTIVITIES:	$	(997	)	$	965

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from maturity		10,218			8,105
Proceeds from sales and calls		24,338			39,524
Purchases		(22,936	)		(49,439	)
Investment securities held to maturity:
Proceeds from maturity		7			1,192
Proceeds from calls		-			11
Other investments:
Proceeds from sale		758			75
Purchases		(2	)		-
Net decrease (increase) in loans		(5,412	)		3,588
Proceeds from sale of loans		5,910			-
Purchases of premises and equipment		(116	)		(3,516	)
Proceeds from sales of premises & equipment		32			-
Capitalized completion costs of other real estate		(741	)		(902	)
Proceeds from sale of other real estate		4,725			1,185
Net cash provided by (used by) investing activities		16,781			(177	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		10,329			(2,990	)
Net (decrease) increase in short-term borrowings		(360	)		2
Net decrease in federal funds purchased and securities sold under repurchase agreements		(8,250	)		(4,446	)
Proceeds from FHLB advances		15,000			7,000
Repayment of FHLB advances		(15,000	)		(7,000	)
Issuance of preferred stock		1,000			-
Preferred stock issuance costs		(15	)		-
Cash dividends paid		(151	)		(705	)
Net cash provided by (used by) financing activities		2,553			(8,139	)

Increase (decrease) in cash and cash equivalents		18,337			(7,351	)

CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD		14,260			22,385
CASH AND CASH EQUIVALENTS: END OF PERIOD	$	32,597		$	15,034
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Other real estate acquired through loan foreclosures	$	14,302		$	8,844
Change in components of other comprehensive income	$	813		$	(1,281	)
Reclassification of premises and equipment, net to bank properties held for sale	$	3,366		$	-

See notes to unaudited condensed consolidated financial statements.

HABERSHAM BANCORP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1.	Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited but reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the results of the interim periods reflected. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year.

The condensed consolidated financial statements included herein should be read in conjunction with the Company's 2008 consolidated financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Certain reclassifications have been made to the 2008 financial statement presentation to correspond to the current period’s format.

2.	Accounting Policies

Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The Company has consistently followed those policies in preparing this report. The following is an additional new significant policy.

Events or Transactions Subsequent to the Balance Sheet Date

Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) 855, Subsequent Events, applies to interim and annual financial periods ending after June 15, 2009. The statement established principles setting forth the period after the balance sheet date during which management shall evaluate events and transactions that may occur for potential recognition or disclosure in the financial statements. For the purposes of this accounting standard, the Company has evaluated subsequent events through November 16, 2009, the date financial statement were issued.

3.	Other Comprehensive Loss

Other comprehensive loss for the Company consists of items recorded directly in equity related to investment securities available for sale and derivative financial instruments accounting for as cash flow hedges. Investment securities classified as available for sale are carried at fair value with the related unrealized gain or loss, net of deferred income taxes included as a separate component of stockholders’ equity. At September 30, 2009, fair value of the available for sale investment securities increased approximately $1.1 million when compared to the fair value at December 31, 2008. The corresponding equity component of unrealized gain and loss on available for sale securities, net of tax, also increased approximately $750,000. These changes were the results of movements in the bond market as it responds to interest rate changes in the market. At September 30, 2009, fair value of the cash flow hedges increased approximately $95,000 when compared to the fair value at December 31, 2008. The corresponding equity component of unrealized holding gains on derivative financial instruments classified as cash flow hedges, net of tax, also increased approximately $63,000.

4.	Net Loss Per Share

Basic loss per share is computed by dividing net loss less dividends paid on preferred stock by the weighted average of common shares outstanding. Options on 172,750 and 230,750 shares were not included in the diluted loss per share computations for the three months ended September 30, 2009 and 2008, respectively, as they were antidilutive. Options on 172,750 and 230,750 shares were not included in the diluted loss per share computations for the nine month period ended September 30, 2009 and 2008, respectively, as they were antidilutive.

The reconciliation of the amounts used in the computation of loss per share for the three-month and nine-month periods ended September 30, 2009 and 2008 is shown below.

(dollars in thousands, except share and and per share amounts)	Three Months ended September 30, 2009			Three Months ended September 30, 2008			Nine Months ended September 30, 2009			Nine Months ended September 30, 2008

Net loss	$	(5,969	)	$	(4,291	)	$	(9,224	)	$	(4,607	)
Less dividends on preferred stock		(60	)		-			(151	)		-
Net loss available to common shareholders	$	(6,029	)	$	(4,291	)	$	(9,375	)	$	(4,607	)

Weighted average common shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593
Loss per share:
Basic	$	(2.14	)	$	(1.52	)	$	(3.33	)	$	(1.63	)
Diluted	$	(2.14	)	$	(1.52	)	$	(3.33	)	$	(1.63	)

5.	Investment Securities Available for Sale

Amortized cost, estimated fair values, and gross unrealized gains and losses of investment securities available for sale are as follows:

(dollars in thousands) September 30, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	23,993		218		47		24,164
Mortgage-backed securities		48,349		1,286		7		49,628
State and political subdivisions		12,831		234		137		12,928
Equity securities		209		-		22		187
Total	$	85,382		1,738		213		86,907

December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	26,698		451		16		27,133
Mortgage-backed securities		55,391		1,066		45		56,412
State and political subdivisions		14,592		31		1,075		13,548
Equity securities		209		-		24		185
Total	$	96,890		1,548		1,160		97,278

Proceeds from sales and calls of available for sale securities during the first nine months of 2009 and 2008 were $24,337,965 and $39,523,726, respectively. Gross gains of $376,812 were recognized on those sales for the first nine months of 2009 and gross gains of $328,499 were recognized on those sales for the first nine months of 2008. Gross losses of $7,750 were recognized on those sales for the first nine months of 2009 and gross losses of $12,527 were recognized on those sales for the first nine months of 2008.

The following investments available for sale have an unrealized loss at September 30, 2009 and December 31, 2008 for which an other than temporary impairment has not been recognized:

(dollars in thousands)			September 30, 2009						December 31, 2008
	No.		Estimated Fair Value		Unrealized Losses		No.		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
U.S. government-sponsored enterprises		9	$	7,958		46		1	$	859		14
Mortgage-backed securities		7		2,250		7		15		2,622		13
State and political subdivisions		10		2,138		127		32		9,974		860
		26		12,346		180		48		13,455		887
Unrealized loss for greater than 12 months:
U.S. government-sponsored enterprises		-		-		-		1		60		2
Mortgage-backed securities		1		53		1		14		4,600		33
State and political subdivisions		3		1,331		10		5		1,520		214
Equity securities		1		187		22		1		185		24
		5		1,571		33		21		6,365		273
		31	$	13,917		213		69	$	19,820		1,160

The total fair value of the securities with an unrealized loss at September 30, 2009 and December 31, 2008 represented 98.49% and 94.15%, respectively, of their amortized cost; therefore, the impairment is not considered severe. While the duration is dependent on the market, the existing unrealized loss could be shortened by the issuing agency calling the securities. These unrealized losses are considered temporary because of acceptable investment groups on each security and the repayment source of principal and interest are largely government backed.

The amortized cost and estimated fair values of investment securities available for sale, exclusive of equity investments, at September 30, 2009 and December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Callable securities and mortgage-backed securities are included in the year of their contractual maturity date.

(dollars in thousands)	September 30, 2009		September 30, 2009		December 31, 2008		December 31, 2008
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	218		219		84		84
Due after one year through five years		1,424		1,423		2,324		2,325
Due after five years through ten years		8,680		8,889		16,584		16,809
Due after ten years		74,851		76,189		77,689		77,875
Total	$	85,173		86,720		96,681		97,093

Investment securities available for sale with carrying values of approximately $46,327,000 and $76,782,000 were pledged as collateral at September 30, 2009 and December 31, 2008, respectively, for Federal Home Loan Bank advances, public deposits, and other deposits, as required by law.

6.	Investment Securities Held to Maturity

Amortized cost, estimated fair values, and gross unrealized gains and losses of investment securities held to maturity are as follows:

(dollars in thousands) September 30, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	20		1		-		21
State and political subdivisions		999		20		-		1,019
Total	$	1,019		21		-		1,040

December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	27		1		-		28
State and political subdivisions		998		27		-		1,025
Total	$	1,025		28		-		1,053

There were no calls of held to maturity securities during the first nine months of 2009. Proceeds from calls of held to maturity securities during the first nine months of 2008 were $1,232,523. Gross gains of $18,477 were recognized on the calls in the first nine months of 2008. There were no gross losses recognized on the calls in the first nine months of 2008.

The amortized cost and estimated fair values of securities held to maturity at September 30, 2009 and December 31, 2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Callable securities and mortgage-backed securities are included in the year of their contractual maturity date.

(dollars in thousands)	September 30, 2009		September 30, 2009		December 31, 2008		December 31, 2008
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	135		135		135		137
Due after one year through five years		556		562		562		569
Due after five years through ten years		324		339		324		342
Due after ten years		4		4		4		5
Total	$	1,019		1,040		1,025		1,053

Investment securities held to maturity with carrying values of approximately $545,000 and $999,000 were pledged as collateral at September 30, 2009 and December 31, 2008, respectively, for public deposits and other deposits, as required by law.

7.	Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, accruing loans 90 days past due, other real estate owned and restructured loans. 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 when in management’s opinion, reasonable doubt exists as to the full collection of interest or principal. Income on such loans is then recognized only to the extent that cash is received and when the future collection of principal is probable. Our Other Real Estate Owned (“OREO”) policies and procedures provide that a foreclosure appraisal be obtained which provides a fair market value and a disposition (quick sale) value. The disposition value is the valuation used to place the property into OREO. Any difference between the disposition value and the loan balance is recommended for charge-off. When the property is transferred to OREO, the property is listed with a realtor to begin sales efforts. Restructured loans consist of loans which have had concessions granted for economic or legal reasons related to the debtor’s financial difficulties which would not otherwise be considered. Concessions may include a modification of the loan terms, such as a reduction of the stated interest rate, principal or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk.

The following summarizes nonperforming assets:

(dollars in thousands)	September 30, 2009		December 31, 2008
Accruing loans 90 days past due	$	1,911	$	802
Nonaccrual loans		52,502		56,055
Other real estate		36,620		27,337
Restructured loans		691		-
Total nonperforming assets	$	91,724	$	84,194

8.	Bank Properties Held for Sale

Two of Habersham Bank’s offices (Braselton and Hickory Flat) are scheduled to close in December 2009 as a part of the Bank’s strategy to consolidate locations and reduce staffing needs. In addition, the bank plans to sell an eight acre portion of the land at the Flowery Branch office. As such, these properties have been reclassed from premises and equipment, net, to bank properties held for sale. The properties are being actively marketed for sale and the Hickory Flat property is currently under contract and is expected to close in December 2009.

9.	Regulatory Matters

On June 24, 2009, Habersham Bank (the “Bank”), the subsidiary bank of Habersham Bancorp (the “Company”), entered into an Order to Cease and Desist (the “Order”) with the Georgia Department of Banking and Finance (the “Department”). The Regional director of the Federal Deposit Insurance Corporation (the “FDIC”) has acknowledged the Order. The Order became effective 10 days after issuance.

Under the terms of the Order, the Bank will prepare and submit written plans and/or reports to the regulators that address the following items: maintaining sufficient capital at the Bank; improving the Bank’s liquidity position and funds management practices; reducing adversely classified items; reviewing and revising as necessary the Bank’s allowance for loan and lease losses policy; continuing to improve loan underwriting, loan administration, and portfolio management; reducing concentrations of credit; and revising and implementing a profitability plan and comprehensive budget to improve and sustain the Bank’s earnings. While the Order remains in place, the Bank may not pay cash dividends or bonuses without the prior written consent of the regulators.

The Company’s management and Board intend to fully comply with the requirements of the Order.

10.	Preferred Stock

On June 25, 2009, the Company amended its Amended and Restated Articles of Incorporation to authorize 4,000 shares of Series B Convertible Redeemable Preferred Stock, no par value (the “Series B Preferred Stock"). The terms of the Series B Preferred Stock were established by the Company’s Board of Directors.

The Series B Preferred Stock is nonvoting except as permitted, by law; will receive a 6% per annum non-cumulative dividend, payable quarterly; has a liquidation preference of $1,000 per share and may be redeemed by the Company at any time, subject to any required regulatory or third party approvals. The Series B Preferred Stock is convertible into common stock at the holder’s option beginning three years after issuance at a conversion price of $4.00 per share, subject to standard anti-dilution provisions and the following limitations on conversion: (i) the holder will not be entitled to convert the shares to the extent the conversion would result in the holder’s beneficial ownership of more than 4.99% of the shares of common stock that would be outstanding immediately following conversion unless the holder obtains such prior regulatory approval as may be required for its resulting beneficial ownership of the common stock or an opinion of counsel that such approval is not required; and (ii) the holder will not be entitled to convert to the extent it would result in the issuance of more shares than the Company would be allowed to issue upon conversion under Nasdaq Stock Market rules (20% or more of the outstanding shares, calculated as of the original issuance date of the Series B Preferred Stock) unless the Company obtains either prior shareholder approval of the issuance under applicable Nasdaq rules or an opinion of counsel that such approval is not required.

The Company’s Board of Directors approved the issuance of 4,000 shares of Series B Preferred Stock in the following transactions. On June 25, 2009, the Company issued 1,000 shares of Series B Preferred Stock to two investors for aggregate cash proceeds of $1 million. Additionally, on June 25, 2009, the Company issued 3,000 shares of Series B Preferred Stock to Fieldale Farms Corporation (“Fieldale”) in exchange for the 3,000 shares of Series A Non-Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) held by Fieldale and the cancellation of the parties’ respective rights and obligations under the Series A Preferred Stock Subscription Agreement, for no additional consideration. As a result, there were no shares of Series A Preferred Stock outstanding and 4,000 shares of Series B Preferred Stock outstanding at June 30, 2009.

The Company did not pay any underwriting or placement fees or commissions with respect to the sale, and it relied on the exemption from registration provided by Rule 506 under the Securities Act of 1933, as amended, for the offer and sale of the securities.

11.	Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and interest rate swap derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and foreclosed real estate. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

Under FASB ASC 820, Fair Value Measurements and Disclosures, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 –

Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 –

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 –

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities which are either recorded or disclosed at fair value.

Cash and Cash Equivalents

For disclosure purposes for cash, due form banks and Federal funds sold, the carrying amount is a reasonable estimate of fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Investment Securities Held to Maturity

For disclosure purposed the fair value of investment securities held to maturity is based on quoted market prices and dealer quotes.

Other Investments

For disclosure purposes the carrying value of other investments approximates fair value.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for loan losses.

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with FASB ASC 310, Receivables - Loan Impairment. The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with FASB ASC 310, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

For disclosure purposes, the fair value of fixed rate loans which are not considered impaired, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

Loans held for sale are recorded at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subject to nonrecurring fair value adjustments as Level 2.

Other Real Estate Owned

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate. Subsequently, other real estate assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market prices, the Company records the other real estate asset as nonrecurring Level 3.

Cash Surrender Value of Life Insurance

For disclosure purposes the carrying value of the cash surrender value of life insurance reasonable approximates its fair value.

Derivative Instruments

For derivative instruments, fair value is estimated as the amount that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Deposits

For disclosure purposes, the fair value of demand deposits, savings accounts, NOW accounts and money market deposits is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

Federal Funds Purchased and Retail Repurchase Agreements

For disclosure purposes the carrying amount for Federal funds purchased and retail repurchase agreements is a reasonable estimate of fair value due to the short-term nature of these financial instruments.

FHLB Advances

For disclosure purposes the fair value of the FHLB fixed rate borrowing is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.

Commitments to Extend Credit and Standby Letter of Credit

Because commitments to extend credit and standby letters of credit are made using variable rates and have short maturities, the carrying value and the fair value are immaterial for disclosure.

Assets Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets (liabilities) measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008.

	September 30, 2009
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale	$	85,907		-		85,907		-

	December 31, 2008
(dollars in thousands)	Total			Level 1		Level 2			Level 3
Investment securities available for sale	$	97,277			8,411		88,866			-
Interest rate swap		(95	)		-		(95	)		-
Total net assets at fair value	$	97,182			8,411		88,771			-

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2009 and December 31, 2008.

	September 30, 2009
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Other real estate owned	$	36,620		-		36,620		-
Loans		58,800		-		58,800		-
Total	$	95,420		-		95,420		-

	December 31, 2008
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Other real estate owned	$	27,337		-		27,337		-
Loans		58,660		-		58,660		-
Total	$	85,997		-		85,997		-

The carrying amount and estimated fair values of the Company’s assets and liabilities which are required to be either disclosed or recorded at fair value at September 30, 2009 and December 31, 2008 are presented below:

	September 30, 2009				December 31, 2008
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	32,597		32,597		14,260		14,260
Investment securities available for sale		86,907		86,907		97,278		97,278
Investment securities held to maturity		1,019		1,040		1,025		1,053
Other investments		2,598		2,598		3,334		3,334
Loans, net		285,268		285,360		310,607		311,010
Cash surrender value of life insurance		10,195		10,195		9,936		9,936
Liabilities:
Deposits	$	403,216		405,612		392,888		396,813
Short-term borrowings		400		400		760		760
Federal funds purchased and securities sold under repurchase agreements		8,134		8,134		16,384		16,384
FHLB advances		38,000		38,963		38,000		39,280
Interest rate swaps		-		-		95		95

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

12. Recent Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 – Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards Codification TM (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases ofthe Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for the Company’s financial statements beginning in the interim period ended September 30, 2009.

Following this Statement, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB does not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Statement 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Upon becoming effective, all of the content of the Codification carries the same level of authority, effectively superseding Statement 162. In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, this Statement replaces Statement 162 to indicate this change to the GAAP hierarchy. The adoption of the Codification and ASU 2009-01 did not have any effect on the Company’s results of operations or financial position. All references to accounting literature included in the notes to the financial statements have been changed to reference the appropriate sections of the Codification.

In June 2009, the FASB issued Accounting Standards Update No. 2009-02 (“ASU 2009-02”), Omnibus Update – Amendments to Various Topics for Technical Corrections. The adoption of ASU 2009-02 did not have a material effect on the Company’s results of operations, financial position or disclosures.

In August 2009, the FASB issued Accounting Standards Update No. 2009-03 (“ASU 2009-03”), SEC Update – Amendments to Various Topics Containing SEC Staff Accounting Bulletins. ASU 2009-03 represents technical corrections to various topics containing SEC Staff Accounting Bulletins to update cross-references to Codification text. This ASU did not have a material effect on the Company’s results of operations, financial position or disclosures.

In August 2009, the FASB issued Accounting Standards Update No. 2009-04 (“ASU 2009-04”), Accounting for Redeemable Equity Instruments – Amendment to Section 480-10-S99. ASU 2009-04 represents an update to Section 480-10-S99, Distinguishing Liabilities from Equity, per Emerging Issues Task Force (“EITF”) Topic D-98, Classification and Measurement of Redeemable Securities. ASU 2009-04 did not have a material effect on the Company’s results of operations, financial position or disclosures.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

1.)

A valuation technique that uses:

The quoted price of the identical liability when traded as an asset

Quoted prices for similar liabilities or similar liabilities when traded as assets.

2.)

Another valuation technique that is consistent with the principles of ASC Topic 820. Two examples would be an income approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

The amendments in ASU 2009-5 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-5 is effective for the Company in the fourth quarter of 2009. Because the Company does not currently have any liabilities that are recorded at fair value, the adoption of this guidance will not have any impact on results of operations, financial position or disclosures.

In September 2009, the FASB issued Accounting Standards Update No. 2009-06 (“ASU 2009-06”), Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. ASU 2009-06 provides additional implementation guidance on accounting for uncertainty in income taxes by addressing 1.) whether income taxes paid by an entity are attributable to the entity or its owners, 2.) what constitutes a tax position for a pass-through entity or a tax-exempt not-for-profit entity, and 3.) how accounting for uncertainty in income taxes should be applied when a group of related entities comprise both taxable and nontaxable entities. ASU 2009-06 also eliminates certain disclosure requirements for nonpublic entities. The guidance and disclosure amendments included in ASU 2009-06 were effective for the Company in the third quarter of 2009 and had no impact on results of operations, financial position or disclosures.

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

HABERSHAM BANCORP AND SUBSIDIARIES

Organization

Habersham Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank ("Habersham Bank") and The Advantage Group, Inc. Habersham Bank owns all of the outstanding stock of Advantage Insurers, Inc. (“Advantage Insurers”). Advantage Insurers offers a full line of property, casualty and life insurance products. Advantage Insurers does not comprise a significant portion of the financial position, results of operations, or cash flows of the Company and as a result, management’s discussion and analysis, which follows relates primarily to Habersham Bank.

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

Executive Summary

Habersham Bancorp reported a third quarter loss of $6 million or $2.14 per diluted share, a 40.50% greater loss than the third quarter loss of $4.3 million or $1.52 per diluted share in 2008. Year-to-date loss for the nine-month period ended September 30, 2009, was $9.2 million or $3.33 per diluted share, a 103.49% greater loss than the year-to-date loss of $4.6 million of $1.63 per diluted share for the same period in 2008.

The Company’s primary source of income is interest income from loans and investment securities. Its profitability depends largely on net interest income, which is the difference between the interest received on interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities.

Interest income for the third quarter of 2009 and 2008 was approximately $5.1 million and $6.2 million respectively, representing a decrease of approximately 17.34% when comparing the third quarter of 2009 to the same period of 2008. Interest income for the nine-month periods of 2009 and 2008 was approximately $16.1 million and $20.7 million, respectively, representing a decrease of approximately 21.81% when comparing the 2009 period to the 2008 period. The decreases resulted from the effect of the low prime interest rate on our outstanding variable rate loans, decreases in average loan balances and increases in the number and balances of loans in nonaccrual status.

Interest expense for the third quarter of 2009 and 2008 was approximately $3.0 million and $3.3 million respectively, representing a decrease of approximately 11.02% when comparing the third quarter of 2009 to the same period of 2008. Interest expense for the nine-month periods of 2009 and 2008 was approximately $9.4 million and $10.9 million, respectively, representing a decrease of approximately 14.32% when comparing the 2009 period to the 2008 period. These decreases resulted from declining rates paid on deposit and borrowing balances for the three-month and nine-month periods ended September 30, 2009 when compared to the same periods in 2008.

Net interest income before provision for loan loss for the third quarter of 2009 and the nine-month period ended September 30, 2009 decreased approximately $707,000 or 24.76%, and $2.9 million or 30.24%, respectively, when compared to the same periods in 2008 as a result of the items discussed above.

Declines in the U.S. economy and our local real estate markets contributed to our increasing provisions for loan losses. As delinquencies and foreclosures increased, Habersham Bank recorded provisions to its allowance for loan losses during the third quarter and first nine months of 2009 of approximately $7.4 million and $10.5 million, compared to provisions recorded during the third quarter and the first nine months of 2008 of approximately $6.3 million and $7.4 million, respectively.

The net interest margin for the third quarter and first nine months of 2009 was 2.17% and 2.22%, respectively, compared to 2.80% and 3.08% for the same periods in 2008. Two factors which impact the net interest margin are average interest bearing assets, which decreased approximately $18.3 million and average interest-bearing liabilities, which increased approximately $19 million, when comparing the first nine months of 2009 to the first nine months of 2008.

The Company’s total assets decreased $6.1 million, or 1.23%, to $488.8 million at September 30, 2009 from $494.9 at December 31, 2008. Decreases in the loan portfolios (net of allowance for loan losses), investment securities and premises and equipment, net of approximately $25.3 million, $11.1 million and $3.7 million, respectively, were offset by increases in cash and cash equivalent balances, other real estate, other assets and bank properties held for sale of approximately $18.3 million, $9.3 million, $3.6 million and $2.8 million, respectively.

Total liabilities (deposits, borrowings and other liabilities) at September 30, 2009 increased approximately $1.3 million or .29% from $452.9 million at December 31, 2008 to $454.2 million at September 30, 2009. Other borrowings and other liabilities decreased approximately $8.6 million and $384,000, respectively, and were offset by increases in interest bearing and noninterest bearing account balances of approximately $9.7 million and $570,000, respectively.

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q and the exhibits hereto which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the “Act”). In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (2) statements of plans and objectives of the Company or its management or Board of Directors, including those relating to products or services; (3) statements of future economic performance; and (4) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) the strength of the U.S. economy in general and the strength of the local economies in which operations are conducted; (2) the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (3) inflation, interest rate, market and monetary fluctuations; (4) the timely development of and acceptance of new products and services and perceived overall value of these products and services by users; (5) changes in consumer spending, borrowing and saving habits; (6) risks involved in making and integrating acquisitions and expanding into new geographic markets; (7) the ability to increase market share and control expenses; (8) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply; (9) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board; (10) changes in the Company’s organization, compensation and benefit plans; (11) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (12) the success of the Company at managing the risks involved in the foregoing.

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Material Changes in Financial Condition

The Company’s total assets decreased $6.1 million, or 1.23% to $488.8 million at September 30, 2009 from $494.9 at December 31, 2008.

Cash and cash equivalents

Cash and due from bank increased approximately $6.3 million or 46.39%, resulting from customer activity within deposit accounts during the nine month period ended September 30, 2009. Federal funds sold balances increased significantly by approximately $12 million (approximately 19 times the starting balance) during this period.

Investment securities

Activity within the investment securities available for sale portfolio during the first nine months of 2009 consisted of:

(dollars in thousands)	U.S. government-sponsored enterprises			Mortgage backed securities			Municipal bonds			Equity securities		Total

December 31, 2008	$	27,133			56,412			13,548			185		97,278

Purchased		8,204			14,732			-			-		22,936
Calls & sales		(10,882	)		(11,704	)		(1,752	)		-		(24,338	)
Gain on sale of investment securities available for sale		75			290			4			-		369
Payments / Maturities		(35	)		(10,183	)		-			-		(10,218	)
Accret / Amort		(67	)		(177	)		(13	)		-		(257	)
Unrealized Gain/Loss		(264	)		258			1,141			2		1,137
September 30, 2009	$	24,164			49,628			12,928			187		86,907

The calls and sales within the investment securities portfolio generated net gains of approximately $369,000. The unrealized gain on the investment securities available for sale portfolio increased approximately $1.5 million during the nine-month period ending September 30, 2009.

Calls and maturities in the investment securities held to maturity portfolio totaled approximately $7,000 during the first nine months of 2009.

Loans

The total loan portfolio balances decreased approximately $27.1 million, or 8.16%, when comparing balances at September 30, 2009 to December 31, 2008. The decrease in the loan portfolio balances resulted from foreclosures, sale of loans and payouts of approximately $14.3 million, $5.9 million and $6.9 million, respectively. Decreases in the loan portfolio occurred within the real estate construction portfolio, the consumer portfolio, the non-residential properties, 1-4 family residential properties and commercial lending portfolios totaled approximately $21.1 million, $2.1 million, $1.9 million, $1.6 million and $411,000, respectively.

Other real estate and premises & equipment

Other real estate increases of approximately $9.3 million, of 33.96%, resulted from foreclosures of properties during the first nine months of 2009. See a more detailed discussion in “Asset Quality”. Premises and equipment decreased approximately $4.2 million, primarily as a result of the reclassification of two bank offices that are scheduled to close in December 2009 totaling approximately $2.8 million and the listing of eight acres for $523,000 to bank properties held for sale. In addition, premises and equipment was reduced by depreciation expense and a write off of the Eastanollee Office leasehold improvements totaling approximately $848,000 and $114,000, respectively.

Deposits

Total deposits increased approximately $10.3 million, or 2.56%, when comparing balances at September 30, 2009 to December 31, 2008 balances, with increases in time deposit account balances, in the NOW and Money Market account balances and in noninterest-bearing account balances of approximately $11.9 million, $794,000 and $570,000, respectively, being offset by decreases in savings account balances of approximately $2.9 million.

Borrowings

Total borrowings decreased approximately $8.6 million, or 16.61%, when comparing September 30, 2009 balances to December 31, 2008. This reduction is the result primarily of the payoff of a $5 million line of credit in addition to a reduction in repo sweep account balances.

Material Changes in Results of Operations

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 stockholders. Net interest income is affected by interest income from loans, investment securities and federal funds sold offset by interest paid on deposits and borrowings. The following table compares the weighted average tax equivalent yields for loans, investment securities and federal funds sold and the weighted average rates for deposits and borrowings for the third quarters and the first nine months of 2009 and 2008.

	Three Months ended September 30						Nine Months ended September 30
	2009			2008			2009			2008
INTEREST YIELDS EARNED:
Loans		5.38	%		6.08	%		5.44	%		6.72	%
Investment securities		4.75	%		5.05	%		4.78	%		5.21	%
Federal funds sold		.22	%		1.85	%		.26	%		3.00	%

INTEREST RATES PAID:
Deposits		2.68	%		3.17	%		2.81	%		3.46	%
Borrowings		3.44	%		3.67	%		3.58	%		3.91	%

Total interest income for the third quarter of 2009 decreased approximately $1.1 million or 17.34%, when compared to the third quarter of 2008. Total interest income for the first nine months of 2009 deceased approximately $4.5 million, or 21.81%, when compared to the same period in 2008. The decrease in interest income is the result of the following: 1). Approximately $220.8 million or 72.26% of the loan portfolio is a variable rate loan product which may reprice daily, monthly, quarterly or annually. As the prime rate decreases, as it has in the periods in question, the loan yields decrease accordingly. 2). Average loan balances decreased approximately $23.8 million or 7.03% due to maturities, payouts and foreclosures when comparing the nine-month periods ending September 30, 2009 and 2008. 3). Approximately $52.5 million or 17.76% of the loan portfolio is in nonaccrual status at September 30, 2009. Average nonaccrual loan balances for the nine month period ended September 30, 2009 increased approximately $28.6 million, or 126.44%, when compared to the average balances for the same period in 2008. Interest income is reduced as the number and balances of loans in nonaccrual status increase. See a more detailed discussion in “Asset Quality”.

Total interest expense for the third quarter of 2009 decreased approximately $370,000 or 11.02% when compared to the third quarter of 2008. Average balances in interest bearing accounts increased approximately $41.5 million when comparing the third quarter of 2009 to the third quarter of 2008. During the same period, the average interest rate paid on deposits decreased approximately .49%. Rates paid on time deposits, savings and money market accounts and interest bearing demand deposits during the third quarter of 2009 decreased approximately .85%, .55% and .37%, respectively, when compared to the same period in 2008. Average balances in other borrowings deceased approximately $21.5 million when comparing the third quarter of 2009 to the same period in 2008. Rates paid on borrowings during the third quarter of 2009 decreased approximately .23% when compared to the same period in 2008.

Total interest expense for the first nine months of 2009 decreased approximately $1.6 million or 14.32% when compared to the first nine months of 2008. Average balances in interest bearing accounts increased approximately $34.6 million when comparing the first nine months of 2009 to the same period in 2008. During the same period, the average interest rate paid on deposits decreased approximately .65%. Rates paid on time deposits, savings and money market accounts and interest bearing demand deposits during the first nine months of 2009 decreased approximately .97%, 1.17% and .59%, respectively, when compared to the same period in 2008. Average balances in other borrowings deceased approximately $15.6 million when comparing the first nine months of 2009 to the same period in 2008. Rates paid on borrowings during the first nine months of 2009 decreased approximately .33% when compared to the same period.

Net interest income before provision for loan losses decreased approximately $707,000 or 24.76% for the third quarter of 2009 and decreased approximately $2.9 million or 30.24% for the first nine months of 2009 when compared to the same periods in 2008 as a result of the items discussed above.

The net interest margin of the Company, net interest income divided by average earning assets, was 2.17% for the third quarter of 2009 compared to 2.80% for the third quarter of 2008, and was 2.22% for the first nine months of 2009 compared to 3.08% for the first nine months of 2008.

Noninterest income decreased $82,000 or 8.78% for the third quarter of 2009 over the same period in 2008 and decreased $402,000 or 12.46% for the first nine months of 2009 over the same period in 2008. Decreases occurring in other income and in mortgage origination income totaled approximately $78,000 and $33,000, respectively, during the third quarter of 2009. These decreases were offset by increases in service charges and in net gains realized on calls and sales within the investment securities portfolio totaling approximately $1,000 and $28,000, respectively.Decreases in the cash surrender value of life insurance, in trust fees and in miscellaneous income totaling approximately $18,000, $14,000 and $12,000, respectively, are reflected in the decrease in other income.

For the first nine months of 2009, decreases in mortgage origination income, in other income and in service charges totaled approximately $255,000, $184,000 and $16,000, respectively, when compared to the first nine months of 2008. These decreases were offset by increases in net gains realized on calls and sales within the investment securities portfolio totaling approximately $53,000. The decreases in other income resulted from decreases in trust fee income, in profit from other real estate, insurance income, in the income from cash surrender value of life insurance and in commissions on investment sales totaling approximately $42,000, $24,000, $20,000, $18,000 and $18,000, respectively.

Noninterest expense increased $925,000 or 20.22% for the third quarter of 2009 over the same period in 2008. Increases in other real estate expenses, general and administrative expense, occupancy expense and various other expenses (computer services, telephone and leased equipment expense) totaling approximately $762,000, $495,000, $143,000 and $27,000, respectively, were offset by decreases in salary and employee benefits of approximately $502,000. Other real estate expense includes costs to maintain an increasing number of foreclosed properties. The increase in general and administrative expense consists primarily of increases in outside services totaling approximately $580,000 offset by decreases in marketing expenses, office supplies and other expenses totaling approximately $75,000, $16,000 and $7,000, respectively. Outside services includes FDIC insurance, legal and professional services, insurance, director fees and State of Georgia Department of Banking fees. FDIC expense increased approximately $364,000 for the third quarter ended September 30, 2009. Additionally, legal fees increased approximately $221,000 during the third quarter of 2009 when compared to the same period in 2008. Tighter expense control measures have resulted in decreases in other general and administrative expenses when comparing the third quarter of 2009 to the third quarter 2008.

Noninterest expense increased $881,000 or 6.44% for the first nine months of 2009 over the same period in 2008. Increases in other real estate expenses, general and administrative expense, occupancy expense and various other expenses (computer services, telephone and leased equipment expense) totaling approximately $1.1 million, $827,000, $348,000 and $89,000, respectively, were offset by decreases in salary and employee benefits of approximately $1.5 million. Other real estate expense includes costs to maintain an increasing number of foreclosed properties. The increase in general and administrative expense consists primarily of increases in outside services totaling approximately $1.2 million offset by decreases in marketing expenses, other various expenses and office supplies totaling approximately $191,000, $133,00 and $38,000, respectively. Outside services includes FDIC insurance, legal and professional services, insurance, director fees and State of Georgia Department of Banking fees. FDIC expense increased approximately $749,000 for the first nine months of 2009 when compared to the same period in 2008. Additionally, legal fees increased approximately $441,000 during the first nine months of 2009 when compared to the same period in 2008. Tighter expense control measures have resulted in decreases in other general and administrative expenses when comparing the first nine months of 2009 to the first nine months of 2008. The decrease in salary and employee benefits resulted from efforts to decrease salary expense through reduction in staff and hours worked.

An income tax benefit of approximately $3.9 million was recorded for the three months ended September 30, 2009 compared to an income tax benefit of approximately $2.8 million for the three months ended September 30, 2008. An income tax benefit of approximately $6.2 million was recorded for the first nine months of 2009 compared to an income tax benefit of approximately $3.5 million for the first nine months of 2008. The effective tax rate for the third quarter of 2009 and 2008 was 39.70% and 39.37%, respectively. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 40.27% and 43.20%, respectively. Tax-exempt income of approximately $247,000 was 2.49% of pre-tax loss for the third quarter of 2009 when compared to 4.46% of pre-tax loss for the third quarter of 2008. Tax-exempt income of approximately $768,000 million was 4.97% of pre-tax loss for the first nine months of 2009 when compared to 13.68% of pre-tax loss for the first nine months of 2008.

Asset Quality

The allowance for loan losses represents a reserve for probable losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with particular emphasis on impaired, nonaccruing, 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.

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 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 are likely to exist as of the evaluation date. Loss percentages used for non-problem loans in the portfolio are based on historical loss factors. Specific allowance allocations for losses on problem loans are 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.

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, at any point in time, the Company may have an unallocated component of the allowance. Unallocated portions of the allowance are due to a number of quantitative and qualitative factors, such as improvement in the condition of impaired loans and credit concentrations. All nonaccrual loans are considered impaired.

The risk associated with lending varies with the creditworthiness of the borrower, the type of loan (consumer, commercial, or real estate) and its maturity. Cash flows adequate to support a repayment schedule are an element considered for all loans. Real estate loans are impacted by market conditions regarding the value of the underlying property used as collateral. Commercial loans are impacted by the management of the business as well as economic conditions. The Company also makes unsecured loans from time to time. The risk to the Company is greater for unsecured loans as the ultimate repayment of the loan is only dependent on the borrower’s ability to pay. The balance of unsecured loans at September 30, 2009 was approximately $14.9 million.

At September 30, 2009 and December 31, 2008, the ratio of the allowance for loan losses to total loans was 3.51% and 3.77%, respectively. For the third quarter and first nine months of 2009, provision for loan losses expense totaled approximately $7.4 million and $10.5 million, respectively, and for the third quarter and first nine months of 2008 provision for loan losses expense totaled approximately $6.3 million and $7.4 million, respectively.

Net charge-offs for the first nine months of 2009 totaled approximately $12.3 million compared to net charge-offs of $1.8 million for the first nine months of 2008 as detailed below:

(dollars in thousands)	No.		September 30, 2009		No.		September 30, 2008
Charge-offs:
Commercial		16	$	874		5	$	80
Real Estate		63		11,019		17		1,608
Consumer		66		493		53		181
Total Charge-offs		145		12,386		75		1,869

Recoveries:
Commercial				4				5
Real Estate				66				-
Consumer				46				41
Total Recoveries				116				46

Net Charge-offs			$	12,270			$	1,823

Nonperforming assets consist of nonaccrual loans, accruing loans 90 days past due, restructured loans and other real estate owned. The following summarizes nonperforming assets:

(dollars in thousands)	September 30, 2009		December 31, 2008
Accruing loans 90 days past due	$	1,911	$	802
Nonaccrual loans		52,502		56,055
Other real estate		36,620		27,337
Restructured loans		691		-
Total nonperforming assets	$	91,724	$	84,194

Nonperforming assets increased approximately $7.5 million or 8.94% from December 31, 2008 to September 30, 2009. See the discussion that follows within this section for a description of the assets that comprised this increase.

Loans classified as 90 days past due increased $1.1 million or 138.28% from December 31, 2008 to September 30, 2009. The increase is the net result of the following changes:

(dollars in thousands)
Balance at December 31, 2008	$	802
New loans classified to 90 days past due status		2,037
Payments received		(151	)
Charged-off		(5	)
Forbearance & modification agreements		(772	)
Balance at September 30, 2009	$	1,911

The following summarizes accruing loans 90 days past due at September 30, 2009 and December 31, 2008:

(dollars in thousands)	September 30, 2009		December 31, 2008

Real estate secured construction loans	$	1,357	$	25
Residential loans		554		772
Consumer loans		-		5
Balance at September 30, 2009	$	1,911	$	802

Impaired loans consist of loans on nonaccrual status. The decrease is the net result of the following changes:

(dollars in thousands)
Balance at December 31, 2008	$	56,055
Loans reclassified to nonaccrual status in 2009		30,326
Advances		489
Payments received on nonaccrual loans during 2009		(11,832	)
Nonaccrual loans charged-off during 2009		(10,297	)
Nonaccrual loans reclassified to other real estate		(11,439	)
Nonaccrual loans reclassified to repossessions		(108	)
Nonaccrual loans reclassified to accrual status in 2009		(692	)
Balance at September 30, 2009	$	52,502

Nonaccrual loans may be reclassified to accrual status upon interest and payments being brought current.

Additions to loans on nonaccrual status consisted of the following:

(dollars in thousands)	Number		September 30, 2009
Real Estate – construction & development loans		36	$	22,722
Real Estate – residential loans		23		1,684
Real Estate – commercial		8		5,104
Commercial loans		12		513
Consumer loans		31		303
Total additions to nonaccrual loans		110	$	30,326

The following summarizes nonaccrual loans at September 30, 2009 and December 31, 2008:

(dollars in thousands)	Number of Properties		September 30, 2009		Number of Properties		December 31, 2008
Real Estate – construction & development loans		45	$	45,066		50	$	52,443
Real Estate – residential loans		9		380		11		313
Real Estate – commercial		8		6,952		4		2,689
Commercial loans		2		41		4		459
Consumer loans		10		63		23		151
Total nonaccrual loans		74	$	52,502		92	$	56,055

Other real estate at September 30, 2009 increased approximately $9.3 million or 33.96% when compared to December 31, 2008. The following summarizes other real estate at September 30, 2009 and December 31, 2008:

(dollars in thousands)	Number of Properties		September 30, 2009		Number of Properties		December 31, 2008
Residential properties – spec houses		39	$	14,533		41	$	15,715
Commercial properties		9		2,171		2		673
Vacant lots		216		19,019		207		10,786
Mobile home and lot		1		52		-		-
Residential construction properties		2		845		1		163
Total other real estate		267	$	36,620		251	$	27,337

The increase in other real estate is the net result of the following changes:

(dollars in thousands)
Balance at December 31, 2008	$	27,337
Foreclosed property		14,302
Additions to complete		741
Sales of other real estate		(5,760	)
Balance at September 30, 2009	$	36,620

Our Other Real Estate Owned (“OREO”) procedures provide that a foreclosure appraisal be obtained which provides a fair market value and a disposition (quick sale) value. The disposition value is the valuation used to place the property into OREO. Any difference between the disposition value and the loan balance is recommended for charge-off. Once the property is in OREO, the property is listed with a realtor to begin sales efforts. The appraised value for the other real estate properties was approximately $44.7 million at September 30, 2009.

The following summarizes restructured loans at September 30, 2009 and December 31, 2008:

(dollars in thousands)	September 30, 2009		December 31, 2008

Real estate secured construction loans	$	-	$	-
Residential loans		572		-
Commercial loans		85
Consumer loans		34		-
Total	$	691	$	-

Liquidity and Capital Resources

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

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

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

Scheduled amortization and prepayments of loans, maturities and calls of investment securities and funds from operations provide a daily source of liquidity. In addition, the Company may and does seek outside sources of funds.

At September 30, 2009 and December 31, 2008, the Company had additional line of credit commitments, subject to available collateral, available as shown below:

	September 30, 2009		December 31, 2008
(dollars in thousands)	Total Available		Total Available
Federal discount window	$	8,109		24,630
Federal funds line		-		10,000
Retail repurchase agreement		-		921
Retail repurchase agreement		-		3,950

The Company has approximately $8.1 million outstanding in commercial sweep accounts at September 30, 2009. In addition, the Company has a total available line of $38.0 million, subject to available collateral, from the Federal Home Loan Bank. The Company had $38.0 million in advances on this line at September 30, 2009.

Also, liquidity as a percent of deposits and total liabilities, with a target of 10%, is recommended to be calculated and monitored daily. Based on these guidelines, the Bank’s liquidity ratios as a percent of deposits and total liabilities follow:

	September 30, 2009			December 31, 2008
Liquidity as a percent of deposits		20.02	%		16.70	%
Liquidity as a percent of total liabilities		17.95	%		14.72	%

FDIC and Federal Reserve Board regulations require minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum leverage ratio (Tier 1 capital to average assets) of at least 4%. Under the Order, however, the Bank is required to maintain a total capital ratio of at least 10% and a leverage ratio of at least 8%. Because it is subject to an Order requiring it to maintain specified minimum capital ratios, the Bank cannot be classified as “well capitalized.”

The Company’s and the Bank’s ratios at September 30, 2009 follow:

	Habersham	Habersham
	Bank	Bancorp
Tier 1	6.67%	7.04%
Total Capital	7.94%	8.32%
Leverage	4.73%	4.97%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2009, 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, 2008. 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, 2008 included in the Company’s 2008 Annual Report on Form 10K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, (including its consolidated subsidiaries) that is required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

There have not been any changes in the Company’s internal control over financial reporting or, to the Company’s knowledge, in other factors, during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal proceedings.

None

Item 1.A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors included in Part I. “Item 1.A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and in Part II. “Item 1.A. Risk Factors” in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009, all of which could materially affect its business, financial condition or future results. The risks described below in the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon senior securities.

None

Item 4. Submission of matters to a vote of security holders.

None

Item 5. Other information.

None

Item 6. Exhibits

(a) The registrant submits herewith as exhibits to this report on Form 10-Q the exhibits required by Item 601 of Regulation S-K, subject to Rule 12b-32 under the Securities Exchange Act of 1934.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HABERSHAM BANCORP

(Registrant)

Date November 16, 2009	/s/ Annette Banks
	Chief Financial Officer
	(for the Registrant and as the
	Registrant’s principal financial and
	accounting officer)

Attached files

HABERSHAM BANCORP Reports

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