HABERSHAM BANCORP - FORM 10-K - EX-13 - EXHIBIT 13.HTM

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - HABERSHAM BANCORP	ex31_1.htm
EX-23.1 - EXHIBIT 23.1 - HABERSHAM BANCORP	ex23_1.htm
EX-31.2 - EXHIBIT 31.2 - HABERSHAM BANCORP	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - HABERSHAM BANCORP	ex32_1.htm
10-K - HABERSHAM BANCORP 10-K 12-31-2009 - HABERSHAM BANCORP	form10k.htm

EXHIBIT 13.0

HABERSHAM BANCORP

AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2009, 2008 and 2007

(with Independent Accountants’ Report thereon)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders

Habersham Bancorp and Subsidiaries

Cornelia, Georgia

We have audited the accompanying consolidated balance sheets of Habersham Bancorp and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Habersham Bancorp and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Habersham Bancorp will continue as a going concern. As discussed in Note 3 to the financial statements, the quantitative measures established by regulation to ensure capital adequacy require the Company’s subsidiary, Habersham Bank (the “Bank”), to maintain minimum amounts and ratios 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). At December 31, 2009, the Habersham Bank’s total capital to risk-weighted assets and Tier I Capital to average assets ratios are below the required levels. In addition, the Bank has suffered recurring operating losses. The Bank has filed a capital plan with the Georgia Department of Banking and Finance outlining its plans for attaining the required levels of regulatory capital. To date, notification for the Georgia Department of Banking and Finance regarding acceptance or rejection of its capital plan has not been received. Failure to meet the capital requirements and interim capital targets included in the capital plan exposes the Bank to regulatory sanctions that may include restrictions on operations and growth, mandatory asset dispositions, and seizure of the institution. These matters raise substantial doubt about the ability of Habersham Bancorp to continue as a going concern. The ability of Habersham Bancorp to continue as a going concern is dependent on many factors, one of which is regulatory action, including acceptance of the Bank’s capital plan. Management’s plans in regard to these matters are described in Note 3. The accompanying financial statements do not include any adjustments that would be necessary should Habersham Bancorp be unable to continue as a going concern.

\s\Porter Keadle Moore, LLP

Atlanta, Georgia

March 29, 2010

Habersham Bancorp and Subsidiaries

Consolidated Balance Sheets

December 31, 2009 and 2008

Assets
	2009			2008
Cash and due from banks	$	42,515,145			13,639,940
Federal funds sold		-			620,036
Cash and cash equivalents		42,515,145			14,259,976
Investment securities available for sale		74,456,973			97,277,891
Investment securities held to maturity, estimated fair value of $902,617 and $1,052,829		881,416			1,025,435
Other investments		2,595,634			3,334,124
Loans, net of allowance for loan loss of $12,106,070 and $12,167,645		264,888,779			310,606,916
Premises and equipment, net		12,606,349			19,479,393
Bank property held for sale		5,061,866			-
Accrued interest receivable		1,587,377			2,221,546
Other real estate		37,833,328			27,336,874
Cash surrender value of life insurance		10,282,414			9,936,088
Income tax receivable		1,925,000			2,504,297
Other assets		1,385,071			6,886,725
Total assets	$	456,019,352			494,869,265
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing demand	$	35,569,757			29,664,234
Money market and NOW accounts		91,687,330			77,638,103
Savings		38,307,417			43,180,202
Time ($100,000 and over)		104,309,397			102,390,560
Other time		120,286,767			140,014,565
Total deposits		390,160,668			392,887,664
Short-term borrowings		539,541			760,468
Federal funds purchased and securities sold under repurchase agreements		6,316,735			16,383,982
Federal Home Loan Bank advances		38,000,000			38,000,000
Accrued interest payable		2,192,051			2,805,353
Other liabilities		1,735,124			2,033,785
Total liabilities		438,944,119			452,871,252
Commitments and contingencies
Stockholders’ equity:
Preferred stock – 10,000,000 shares authorized
Series A: No par value; 10,000 shares authorized: No shares issued and outstanding at December 31, 2009 and 3,000 shares issued and outstanding at December 31, 2008		-			2,977,762
Series B: No par value; 4,000 shares authorized; 4,000 shares issued and outstanding at December 31, 2009 and no shares issued and outstanding at December 31, 2008		3,962,910			-
Common stock, $1.00 par value; 10,000,000 shares authorized; 2,818,593 shares issued and outstanding		2,818,593			2,818,593
Additional paid-in capital		13,490,587			13,490,587
Retained (deficit) earnings		(3,821,546	)		22,517,920
Accumulated other comprehensive income		624,689			193,151
Total stockholders’ equity		17,075,233			41,998,013
Total liabilities and stockholders’ equity	$	456,019,352			494,869,265

See accompanying notes to consolidated financial statements and report of independent registered public accountants.

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Habersham Bancorp and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
Interest income:
Loans	$	16,169,359			21,416,324			31,670,690
Investments:
Taxable securities		3,599,818			3,559,252			3,086,017
Tax exempt securities		553,212			906,024			1,110,046
Other investments		36,156			157,440			236,914
Federal funds sold		27,726			95,542			271,871
Total interest income		20,386,271			26,134,582			36,375,538
Interest expense:
Time deposits, $100,000 and over		3,965,219			4,718,506			5,792,183
Other deposits		6,064,080			7,110,672			8,377,088
Federal funds purchased and securities sold under repurchase agreements		219,299			621,668			611,682
Short-term and other borrowings, primarily FHLB advances		1,499,377			1,884,968			2,097,304
Total interest expense		11,747,975			14,335,814			16,878,257
Net interest income		8,638,296			11,798,768			19,497,281
Provision for loan losses		13,476,000			16,020,862			675,225
Net interest (loss) income after provision for loan losses		(4,837,704	)		(4,222,094	)		18,822,056
Noninterest income:
Mortgage origination income		123,503			402,275			774,490
Service charges on deposit accounts		1,067,407			1,081,228			988,256
Other service charges and commissions		256,941			264,526			254,240
Securities gains (losses), net		513,468			362,769			4,900
Gain (loss) on sale and impairment of other investments, net		19,998			-			-
Gain on sale of subsidiary – Advantage Insurers, Inc.		297,476			-			-
Income from life insurance		346,326			397,477			190,084
Trust services fees		444,435			481,730			410,069
Other income		1,083,685			1,134,373			1,148,957
Total noninterest income		4,153,239			4,124,378			3,770,996
Noninterest expense:
Salaries and employee benefits		7,347,450			9,473,561			10,544,056
Goodwill impairment		-			3,549,780			-
Occupancy expenses		2,784,629			2,652,590			2,401,145
Losses on sales, write-downs and other expenses on other real estate		4,562,957			1,363,928			177,733
Loss (gain) on sales and disposals of premises and equipment, net		244,930			7,576			(7,545	)
Computer services		686,788			608,457			632,601
Telephone		498,735			493,476			453,464
Leased equipment expense		481,014			470,217			422,836
Other		5,056,555			3,970,687			4,008,985
Total noninterest expense		21,663,058			22,590,272			18,633,275
(Loss) earnings before income taxes		(22,347,523	)		(22,687,988	)		3,959,777
Income tax (expense) benefit		(3,780,711	)		7,838,667			(1,020,420	)
Net (loss) earnings		(26,128,234	)		(14,849,321	)		2,939,357
Preferred stock dividends		(211,232	)		-			-
(Loss) earnings available to common stockholders	$	(26,339,466	)		(14,849,321	)		2,939,357
(Loss) earnings per common share – basic and diluted	$	(9.34	)		(5.27	)		1.00
Weighted average number of common shares outstanding		2,818,593			2,818,593			2,942,292
Weighted average number of common and common equivalent shares outstanding		2,818,593			2,818,593			2,952,528

See accompanying notes to consolidated financial statements and report of independent registered public accountants.

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Habersham Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
Net (loss) earnings	$	(26,128,234	)		(14,849,321	)		2,939,357
Other comprehensive income:
Unrealized holding gains on investment securities available for sale arising during period		1,071,841			1,097,054			836,769
Unrealized holding gains (losses) on derivative financial instruments classified as cash flow hedges arising during the period		95,473			(62,356	)		(149,402	)
Reclassification adjustment for gains on investment securities available for sale included in operations		(513,468	)		(344,877	)		(4,900	)
Total other comprehensive income before tax		653,846			689,821			682,467
Income taxes related to other comprehensive income:
Unrealized holding gains on investment securities available for sale arising during period		(364,426	)		(372,998	)		(284,502	)
Unrealized holding (gains) losses on derivative financial instruments classified as cash flow hedges arising during the period		(32,461	)		21,201			50,797
Reclassification adjustment for gains (losses) on investment securities available for sale		174,579			117,258			1,666
Total income taxes related to other comprehensive income		(222,308	)		(234,539	)		(232,039	)
Total other comprehensive income, net of tax		431,538			455,282			450,428
Total comprehensive (loss) income	$	(25,696,696	)		(14,394,039	)		3,389,785

See accompanying notes to consolidated financial statements and report of independent registered public accountants.

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Habersham Bancorp and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2009, 2008 and 2007

	Preferred Stock Series A			Preferred Stock Series B		Common Stock			Additional Paid-in Capital			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2006	$	-			-		2,968,593			15,530,587			37,777,500			(712,559	)		55,564,121
Net earnings		-			-		-			-			2,939,357			-			2,939,357
Change in other comprehensive income, net of tax		-			-		-			-			-			450,428			450,428
Common stock repurchase - 150,000 shares		-			-		(150,000	)		(2,040,000	)		-			-			(2,190,000	)
Cash dividends, $.90 per share		-			-		-			-			(2,581,731	)		-			(2,581,731	)
Balance, December 31, 2007		-			-		2,818,593			13,490,587			38,135,126			(262,131	)		54,182,175
Net loss		-			-		-			-			(14,849,321	)		-			(14,849,321	)
Change in other comprehensive income, net of tax		-			-		-			-			-			455,282			455,282
Cumulative effect of change in accounting principle due to adoption of EITF 06-10		-			-		-			-			(63,237	)		-			(63,237	)
Issuance of preferred stock , net of issuance costs of $22,238		2,977,762			-		-			-			-			-			2,977,762
Cash dividends, $.25 per share		-			-		-			-			(704,648	)		-			(704,648	)
Balance, December 31, 2008		2,977,762			-		2,818,593			13,490,587			22,517,920			193,151			41,998,013
Net loss		-			-		-			-			(26,128,234	)		-			(26,128,234	)
Change in other comprehensive income, net of tax		-			-		-			-			-			431,538			431,538
Issuance of preferred stock, net of issuance costs of $14,852		-			985,148		-			-			-			-			985,148
Exchange of Series A preferred stock for Series B preferred stock		(2,977,762	)		2,977,762		-			-			-			-			-
Cash dividends on preferred stock		-			-		-			-			(211,232	)		-			(211,232	)
Balance, December 31, 2009	$	-			3,962,910		2,818,593			13,490,587			(3,821,546	)		624,689			17,075,233

See accompanying notes to consolidated financial statements and report of independent registered public accountants.

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Habersham Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
Cash flows from operating activities:
Net (loss) earnings	$	(26,128,234	)		(14,849,321	)		2,939,357
Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities:
Provision for loan losses		13,476,000			16,020,862			675,225
Write downs of other real estate		1,711,355			451,616			142,000
Goodwill impairment		-			3,549,780			-
Income from life insurance		(346,326	)		(397,477	)		(190,084	)
Depreciation expense		1,090,689			1,110,407			1,170,791
Loss (gain) on sales and disposals of premises and equipment, net		244,930			7,576			(7,545	)
Net amortization of premium/discount in investment securities		354,744			140,531			80,651
Securities (gains) losses, net		(513,468	)		(362,769	)		(4,900	)
Gain on sale of subsidiary – Advantage Insurers, Inc		(297,476	)		-			-
Gain on sale of other investments		(119,998	)		-			-
Write off of other investment		100,000			-			-
Losses (gains) on sale of other real estate		2,069,187			175,167			(82,556	)
Net gain on sale of loans held for sale		(123,503	)		(147,027	)		(774,490	)
Proceeds from sales of loans held for sale		6,200,920			20,886,277			35,732,752
Increase in loans held for sale		(6,077,417	)		(18,873,400	)		(33,640,997	)
Net loss on sale of loans		59,697			-			-
Amortization of intangible assets		62,065			62,064			62,064
Deferred income tax (benefit) expense		6,065,404			(4,850,715	)		301,978
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		634,169			530,627			185,808
(Increase) decrease in other assets		(190,993	)		(2,590,491	)		(466,156	)
Increase (decrease) in accrued interest payable		(613,302	)		(498,041	)		324,106
Increase (decrease) in other liabilities		(269,096	)		453,823			(396,657	)
Net cash (used in) provided by operating activities		(2,610,653	)		819,489			6,051,347
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from maturities		14,084,812			9,265,767			6,555,706
Proceeds from sales and calls		42,936,095			46,279,585			4,136,400
Purchases		(33,483,193	)		(61,976,570	)		(14,843,351	)
Investment securities held to maturity:
Proceeds from maturities		144,320			431,192			599,800
Proceeds from calls		-			1,250,415			-
Other investments:
Proceeds from sales		758,488			74,800			-
Purchases		-			-			(43,700	)
Net decrease (increase) in loans		9,900,365			3,770,333			(17,310,848	)
Proceeds from sale of subsidiary – Advantage Insurers, Inc., net of cash sold of $404,000		296,406			-			-
Purchases of premises and equipment		(123,270	)		(4,515,783	)		(4,364,275	)
Proceeds from sales of premises and equipment		587,975			-			43,156
Capitalized completion costs of other real estate		(755,597	)		(1,759,558	)		(435,179	)
Purchase of life insurance		-			-			(4,501,753	)
Redemption of life insurance		-			-			200,056
Proceeds from sales of other real estate		8,760,676			3,146,904			616,231
Net cash (used in) provided by investing activities		43,107,077			(4,032,915	)		(29,347,757	)

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Habersham Bancorp and Subsidiaries

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
Cash flows from financing activities:
Net (decrease) increase in deposits	$	(2,726,997	)		2,621,026			(60,362,122	)
Net decrease in short-term borrowings		(220,927	)		(6,140	)		(12,170	)
Proceeds from FHLB advances		15,000,000			7,000,000			4,000,000
Repayment of FHLB advances		(15,000,000	)		(7,000,000	)		(4,000,000	)
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements		(10,067,247	)		(9,799,825	)		20,309,852
Payment of cash dividends		(211,232	)		(704,648	)		(2,581,731	)
Common stock repurchase		-			-			(2,190,000	)
Proceeds from issuance of preferred stock		1,000,000			3,000,000			-
Preferred stock issuance costs		(14,852	)		(22,238	)		-
Net cash used in financing activities		(12,241,255	)		(4,911,825	)		(44,836,171	)
Change in cash and cash equivalents		28,255,169			(8,125,251	)		(68,132,581	)
Cash and cash equivalents at beginning of the year		14,259,976			22,385,227			90,517,808
Cash and cash equivalents at end of year	$	42,515,145			14,259,976			22,385,227
Supplemental disclosures of cash flow information:
Cash paid (refunds) during the year for:
Interest	$	12,361,277			14,786,087			16,522,798
Income taxes	$	(2,778,582	)		-			1,261,000
Supplemental disclosures of noncash investing and financing activities:
Other real estate acquired through loan foreclosures	$	22,282,074			17,852,732			11,200,792
Exchange of Series A preferred stock for Series B preferred stock	$	2,977,762			-			-

See accompanying notes to consolidated financial statements and report of independent registered public accountants.

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Habersham Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(1)	Organization and Basis of Presentation

The consolidated financial statements of Habersham Bancorp and subsidiaries (the “Company”) include the financial statements of Habersham Bancorp and its wholly owned subsidiaries: Habersham Bank (the “Bank”) and The Advantage Group, Inc. The Bank owned 100% of Advantage Insurers, Inc., which was sold on December 30, 2009. All intercompany accounts and transactions have been eliminated in consolidation

The Company’s continuing primary business is the operation of banks in rural and suburban communities in Habersham, White, Cherokee, Warren, 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and valuation allowances associated with deferred tax assets. In connection with the determination of the allowance for loan losses, and the valuation of other real estate, management obtains independent appraisals for significant properties. A substantial portion of the Company’s loans is secured by real estate in Habersham, White, and Cherokee Counties and the metropolitan Atlanta area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio is susceptible to changes in real estate market conditions in these areas. Valuation allowances associated with deferred tax assets are based on estimates of future taxable income.

Subsequent Events

Management performed an evaluation of subsequent events through the date upon which the Company's annual report on Form 10-K was filed with the Securities and Exchange Commission.

Interest Rate Risk

The Company’s assets and liabilities are generally monetary in nature and interest rates have an impact on the Company’s performance. The Company manages the effect of interest rates on its performance by striving to match maturities and interest sensitivity between loans, investment securities, deposits and other borrowings. On a limited basis, the Company utilized derivative instruments to minimize fluctuation in earnings that are caused by interest rate volatility. However, a significant change in interest rates could have an effect on the Company’s results of operations.

Reclassifications

Certain 2008 and 2007 amounts have been reclassified to conform with the 2009 presentation. These reclassifications had no effect on the operations, financial condition or cash flows of the company.

(2)	Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of the more significant accounting policies:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Federal funds are generally sold for one-day periods.

Investment Securities

The Company classifies its investment securities in two categories: available for sale or held to maturity.

Investment securities classified as available for sale are carried at fair value. The related unrealized gain or loss, net of deferred income taxes, is included as a separate component of stockholders’ equity. Gains and losses from dispositions are based on the net proceeds and the adjusted carrying amounts of the securities sold, using the specific identification method.

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Investment securities classified as held to maturity are stated at cost, adjusted for amortization of premiums, and accretion of discounts. The Company has the intent and ability to hold these investment securities to maturity.

Purchase premiums and discounts on investment securities are amortized and accreted to interest income using the level yield method on the outstanding principal balances, taking into consideration prepayment assumptions.

Management evaluates investment securities for other-than-temporary impairment on an annual basis. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related. The decline in value attributed to non-credit related factors is recognized in other comprehensive income and or new cost basis in the security is established.

Other Investments

At December 31, 2009 and 2008, other investments are primarily comprised of stock of the Federal Home Loan Bank of Atlanta.

Investment in stock of a Federal Home Loan Bank is required of every federally insured institution that utilizes its services. Federal Home Loan Bank stock is considered restricted stock. The Federal Home Loan Bank stock is reported in the consolidated financial statements at cost. Dividend income is recognized when earned.

Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or market determined on an aggregate basis. Market values are determined on the basis of relevant delivery prices in the secondary mortgage market. There were no loans held for sale at December 31, 2009 or 2008.

Loans

Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses.

Interest on loans is generally recorded over the terms of the loans using the simple interest method on the unpaid principal balance. 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 where the future collection of principal is probable.

Loan origination fees and certain direct origination costs are deferred and capitalized, respectively, and recognized over the life of the loan as an adjustment of the yield on the related loan based on the interest method.

Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Loans that are determined to be impaired require a valuation allowance equivalent to the amount of the impairment. The valuation allowance is established through the provision for loan losses.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. Cash receipts on impaired loans, which are accruing interest, are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied to reduce the principal amount of such loans until the required principal payments have been brought current and, if the future collection of principal is probable, are recognized as interest income thereafter.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level estimated to be adequate to provide for probable losses in the loan portfolio. Management follows a consistent procedural discipline and accounts for loan loss contingencies. The following is a description of how each portion of the allowance for loan losses is determined.

For the purposes of determining the required allowance for loan losses and resulting periodic provisions, the Company segregates the loan portfolio into broad segments, such as: commercial real estate, residential real estate, construction, commercial business, and consumer loans. The Company provides for a general allowance for losses inherent in the portfolio by the above categories. The general allowance for losses on problem loans in these categories 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 trends and conditions. General loss percentages for the problem loans are determined based upon loss percentages by loan classification as well as historical loss experience. Specific allowances are provided in the event that the specific collateral analysis on each problem loan indicates that the probable loss upon liquidation of collateral would be in excess of the general percentage allocation. For the remainder of the portfolio, general allowances for losses are calculated based on estimates of inherent losses which are likely to exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above.

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Loss percentages used for the general allocation portion of the portfolio are generally based on historical loss factors adjusted where necessary for qualitative factors. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors such as: trends in delinquencies and nonaccruals; migration trends in the portfolio; trends in volume, terms, and portfolio mix; changes in lending policies and procedures; evaluations of the risk identification process; changes in the outlook for local and regional economic conditions; concentrations of credit; and peer group comparisons.

Management uses an external loan review company to challenge and corroborate the loan grading system and provide additional analysis in determining the adequacy of the allowance for loan losses and the future provisions for estimated loan losses.

Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.

Management believes 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.

Other Real Estate

Other real estate includes real estate acquired through foreclosure. Other real estate is carried at the lower of its recorded amount at the date of foreclosure or estimated fair value less costs to sell based on independent appraisals. Any excess of carrying value of the related loan over the fair value of the real estate at date of foreclosure is charged against the allowance for loan losses. Fair value is principally based on independent appraisals performed by local credentialed appraisers. Any expense incurred in connection with holding such real estate or resulting from any writedowns subsequent to foreclosure is included in other noninterest expense.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using primarily the straight-line method over the estimated useful lives of the assets. Useful lives for depreciation are three years for computer software and automobiles; primarily 40 years for buildings; ten years for furniture, fixtures, and equipment; and the lease term or the life of the property, whichever is shorter, for leasehold improvements.

Premises and Equipment Held for Sale

Bank property held for sale is stated at the lower of cost less accumulated depreciation or market value. Upon reclassification from premises and equipment, depreciation expense ceases. Any expense incurred in connection with holding bank property is included in other noninterest expense.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price for bank acquisitions over the fair value of the net assets acquired. Goodwill is tested annually for impairment unless events or circumstances arise that would indicate the need for more frequent testing. The impairment tests are performed at the reporting level which in the Company’s case is effectively the entire entity. During the fourth quarter of 2008, the Company engaged an independent business valuation firm to perform an assessment of the Company’s goodwill. The assessment concluded that the Company had an impairment of its goodwill. The fair value was determined based on two different approaches, the market approach and the income approach. Based on the assessment, the Company concluded that all of the goodwill was impaired and a non-cash impairment charge of $3,549,780 was recorded to operations during the fourth quarter of 2008.

Derivative Instruments and Hedging Activities

The fair value of derivatives is recognized in the financial statements as assets or liabilities. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivative instrument at inception. The change in fair value of instruments used as fair value hedges is accounted for as income of the period simultaneous with accounting for the fair value change of the item being hedged. The change in fair value of the effective portion of cash flow hedges is accounted for in comprehensive income rather than income. The change in fair value of derivative instruments that do not qualify as a hedge is accounted for in the income of the period of the change.

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The Company’s interest rate swaps matured during 2009. The Company does not hold any other derivative instrument at December 31, 2009.

Income Taxes

Income taxes are accounted for under the asset and liability method. Provisions for income taxes are based upon amounts reported in the statements of operations (after exclusion of nontaxable income such as interest on state and municipal securities) and include deferred taxes on temporary differences between financial statement and tax bases of assets and liabilities measured using enacted tax rates expected to apply to taxable income in the year in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Comprehensive Income

Other comprehensive income for the Company consists of changes in the fair value of investment securities available for sale and of cash flow hedges net of tax effect recorded directly in equity.

Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-16 (“ASU 2009-16”), Accounting for Transfers of Financial Assets. ASU No. 2009-16 formally incorporates into the FASB Codification amendments to Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, made by SFAS No. 166 Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, primarily to (1) eliminate the concept of a qualifying special- purpose entity, (2) limit the circumstances under which a financial asset should be derecognized when the entire financial asset has not been transferred to a non-consolidated entity, (3) requires additional disclosures concerning a transferor’s continuing involvement with transferred financial assets, and (4) requires that all servicing assets and liabilities be initially measured at fair value. This guidance is effective as of the start of the first annual reporting period beginning after November 15, 2009, for interim periods within the first annual reporting period, and for all subsequent annual and interim reporting periods. ASU No. 2009-16 is not expected to have a material impact on the Company’s results of operations, financial position or disclosures; however, the Company will need to review future loan participation agreements and other transfers of financial assets for compliance with the new standard.

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No 2009-17 (ASU 2009-17”), Improvements to Financial Reporting by Enterprises Involved with Variable interest Entities. ASU No. 2009-17 formally incorporates into the FASB Codification amendments to FASB Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities, made by SFAS No. 167, Amendments to FASH Interpretation No. 46(R), to require that a comprehensive qualitative analysis be performed to determine whether a holder of variable interests in a variable interest entity also has a controlling financial interest in that entity. In addition, the amendments require that the same type of analysis be applied to entities that were previously designated as qualified special-purpose entities. This ASU is effective as of the start of the first annual reporting period beginning after November 15, 2009, for interim periods within the first annual reporting period, and for all subsequent annual and interim reporting periods. ASU No. 2009—17 is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In January 2010, the FASB Accounting Standards Update No. 2010-01, Accounting for Distribution to Shareholders with Components of Stock and Cash (“ASU No. 2010-01”). ASU No. 2010-01 provides guidance on the accounting for distributions offering shareholders the choice of receiving cash or stock. Under such guidance, the stock portion of the distribution is not considered to be a stock dividend and for purposes of calculating EPS, it is deemed a new share issuance not requiring retroactive restatement. This guidance is effective for the first reporting period, including interim periods, ending after December 15, 2009. It is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In January 2010, the FASB Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). ASU No. 2010-06 amends FASB Accounting Standards Codification topic 820-10-50, Fair Value Measurements and Disclosures, to require additional information to be disclosed principally regarding Level 3 measurements and transfers to and from Level 1 and Level 2. In addition, enhanced disclosure is required concerning inputs and valuation techniques used to determine Level 2 and Level 3 measurements. This guidance is generally effective for interim and annual reporting periods beginning after December 15, 2009; however, requirements to disclose separately purchases, sales, issuances and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010 (and for interim periods within such years). ASU No. 2010-06 is not expected to have a material impact on the Company’s results of operations or financial position, and will have a minimal impact on its disclosures.

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Other accounting standards that have been issued or proposed by the FASB and other standard setting entities that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

(3)	Regulatory Oversight, Capital Adequacy, Operating Losses, Liquidity and Management’s Plans

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. However, due to the Company’s financial results, the substantial uncertainty throughout the U.S. banking industry and other matters discussed below, a substantial doubt exists regarding the Company’s ability to continue as a going concern. Management’s plans in addressing the issues that raise substantial doubt regarding the Company’s ability to continue as a going concern are as follows:

Regulatory Oversight

As described in Note 19, Regulatory Matters, the Bank is currently operating under heightened regulatory scrutiny and has entered into a Cease and Desist Order (the “Order”) with the Georgia Department of Banking and Finance (the “DBF”).

The Bank has submitted reports to the DBF and Federal Deposit Insurance Corporation (the “FDIC”) as required per the Order. All aspects of the Order have been adhered to or a plan is in place to reach compliance in a reasonable time frame. The Bank has formed a Liquidity Committee as well as a Capital Sub-Committee that monitors these aspects of the Order.

Capital Adequacy

As of December 31, 2009, the Bank did not meet the requirements of a “adequately capitalized” institution under the capital adequacy guidelines and the regulatory framework for prompt corrective action. To be categorized as “adequately capitalized” the Bank must maintain minimum Total Risk - based, Tier 1 Risk-based and Tier 1 Leverage capital ratios of 8%, 4% and 4% respectively. At December 31, 2009, the Bank’s Total Risk-based, Tier 1 Risk-based and Tier 1 Leverage capital ratios were 5.69%, 4.41% and 3.08%, respectively, and as a result it became classified as “significantly undercapitalized”. In light of the requirement to improve the capital ratios of the Bank, management is pursuing a number of strategic alternatives. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. Failure to adequately address the regulatory concerns may result in further severe actions by the banking regulators. If current adverse market factors continue for a prolonged period of time, new further severe adverse market factors emerge, and/or the Bank is unable to successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position.

A Capital Restoration Plan has been written that addresses the Bank’s commitment to increase its capital position to a Tier 1 level that would be equal or exceed required capital standards. The Plan includes the following: balance sheet shrinkage, sale of other real estate, the Capital Sub-Committee offering potential solutions, including several means of raising capital, potential closure and sale of existing branches and other asset reduction options. The Plan also provides projections for capital levels through 2011.

Operating Losses

The Company incurred net losses of $26.1 and $14.8 million for the years ended December 31, 2009 and 2008, respectively. Management has made efforts to reduce expenses, including a reduction in workforce, salary reductions, termination of the Senior Executive Retirement Plan, cessation of director fees, branch closures and other general cost-cutting measures and continues to examine areas where further reductions in cost are possible.

Interest reversals on non-performing loans and increases to non-performing and foreclosed assets could continue in 2010 and hinder the Company’s ability to improve net interest income. While excess liquidity brings comfort to depositors and aids in deposit retention, the Bank earns approximately 25 basis points on the liquidity but pays more on the deposits generating the liquidity causing a negative spread. Also, increases to the provision for loan losses and further write-down or loss on the sale of other real estate could continue in 2010, which will negatively impact the Company’s ability to generate net income during the year.

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Liquidity

The Bank’s primary sources of liquidity are deposits, the scheduled repayments on loans, and interest and maturities of investments. The majority of the Bank’s securities have been classified as available for sale, which means they are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive loss. If necessary, the Bank has the ability to sell these investment securities to manage interest sensitivity gap or liquidity. Cash and due from banks and federal funds sold may also be utilized to meet liquidity needs. Due to the Bank’s undercapitalized status, the Bank is unable to accept, rollover, or renew any brokered deposits. As the existing brokered deposits mature over the next year, it will create a minor strain on liquidity; therefore management has initiated several actions to help alleviate this pressure. Based on current and expected liquidity needs and sources, management expects to be able to meet obligations at least through December 31, 2010.

(4)	Cumulative Effect of Change in Accounting Principle

A liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement is booked if the Company has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee. The Company has post retirement benefits with several of its executives and directors. Refer to Note 20 – “Employee Benefit and Stock Option Plans.” Since the Company has agreed to maintain life insurance policies in place during the retirement years of these individuals, the Company must record a liability for the present value of the future costs to maintain the policies in force (mortality costs.) Companies are allowed to record the effects of adopting the collateral assignment split-dollar life insurance arrangement as a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. On January 1, 2008, the Company recorded a liability and a cumulative-effect adjustment to retained earnings in the amount of $63,237, net of tax. Additional increases in the liability will be charged to earnings in the year incurred. During the year ended December 31, 2009, the SERP agreements were terminated. See Note 20 for further discussion regarding the SERP agreements.

(5)	Reserve Requirements

At December 31, 2009 and 2008, the Federal Reserve Bank required that the Bank maintain average reserve balances of $257,000 and $1,058,000, respectively.

(6)	Net (Loss) Earnings 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 91,500, 174,750 and 201,625 shares were not included in the diluted loss per share computations for the years ended December 31, 2009, 2008 and 2007, respectively, as they were antidilutive.

The reconciliation of the amounts used in the computation of loss per share for the years ended December 31, 2009, 2008 and 2007 is shown below.

	2009			2008			2007

Net (loss) earnings	$	(26,128,234	)		(14,849,321	)		2,939,357
Less dividends on preferred stock		(211,232	)		-			-
Net (loss) earnings available to common shareholders	$	(26,339,466	)		(14,849,321	)		2,939,357

Weighted average common shares outstanding		2,818,593			2,818,593			2,942,292
(Loss) earnings per share:
Basic	$	(9.34	)		(5.27	)		1.00
Diluted	$	(9.34	)		(5.27	)		1.00

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(7)	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:

December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	16,310,655		59,477		290,026		16,080,106
Mortgage-backed securities		48,208,190		1,318,987		17,126		49,510,051
State and political subdivisions		8,782,519		87,256		188,879		8,680,896
Equity securities		209,110		-		23,190		185,920
Total	$	73,510,474		1,465,720		519,221		74,456,973

December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	26,698,164		450,650		16,018		27,132,796
Mortgage-backed securities		55,390,658		1,066,636		45,143		56,412,151
State and political subdivisions		14,591,833		30,802		1,075,052		13,547,583
Equity securities		209,110		-		23,749		185,361
Total	$	96,889,765		1,548,088		1,159,962		97,277,891

Proceeds from sales and calls of available for sale securities during 2009, 2008 and 2007 were $42,936,095, $46,279,585 and $4,136,400, respectively. Gross gains of $601,382, $373,313 and $4,900 were recognized on those sales for 2009, 2008 and 2007, respectively. Gross losses of $87,914 and $28,436 were recognized on those sales for 2009 and 2008, respectively. There were no losses recognized in 2007.

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

	2009				2008
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
U.S. government-sponsored enterprises	$	11,530,468		289,081		858,685		14,391
Mortgage-backed securities		2,080,811		17,126		2,621,883		12,534
State and political subdivisions		2,773,138		146,860		9,974,570		860,452
		16,384,417		453,067		13,455,138		887,377
Unrealized loss for greater than 12 months:
U.S. government-sponsored enterprises		51,027		945		60,555		1,627
Mortgage-backed securities		-		-		4,599,716		32,609
State and political subdivisions		1,199,412		42,020		1,519,588		214,600
Equity securities		185,920		23,189		185,361		23,749
		1,436,359		66,154		6,365,220		272,585
	$	17,820,776		519,221		19,820,358		1,159,962

At December 31, 2009, there were 14 U.S. government-sponsored enterprise securities, 2 mortgage-backed securities, and 8 state and political subdivision securities with an unrealized loss for less than 12 months and one U.S. government-sponsored enterprise security, 3 state and political subdivision securities and one equity security with an unrealized loss for more than 12 months. The total fair value of the securities with an unrealized loss at December 31, 2009 represented 97.26% 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. The Company has the ability and intent to hold the securities for a time necessary to recover the amortized costs.

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The amortized cost and estimated fair values of investment securities available for sale, exclusive of equity investments, at December 31, 2009, 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.

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	131,754		132,324
Due after one year through five years		1,696,151		1,710,650
Due after five years through ten years		6,218,054		6,374,757
Due after ten years		65,255,405		66,053,322
Total	$	73,301,364		74,271,053

Investment securities available for sale with carrying values of approximately $40,021,000 and $76,782,000 were pledged as collateral at December 31, 2009 and 2008, respectively, for Federal Home Loan Bank advances, public deposits, and other deposits, as required by law.

(8)	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:

December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	17,461		841		-		18,302
State and political subdivisions		863,955		20,360		-		884,315
Total	$	881,416		21,201		-		902,617

December 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	26,835		890		84		27,641
State and political subdivisions		998,600		26,588		-		1,025,188
Total	$	1,025,435		27,478		84		1,052,829

Proceeds from calls of held to maturity securities during 2008 were $1,250,415. There were no calls of securities held to maturity in 2009 or 2007. Gross gains of $18,477 and gross losses of $585 were recognized on the calls in 2008.

The amortized cost and estimated fair values of securities held to maturity at December 31, 2009, 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.

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	345,000		347,667
Due after one year through five years		408,579		414,317
Due after five years through ten years		123,857		136,592
Due after ten years		3,980		4,041
Total	$	881,416		902,617

There were no investment securities held to maturity pledged as collateral at December 31, 2009. Investment securities held to maturity with carrying values of approximately $999,000 were pledged as collateral at December 31, 2008 for public deposits and other deposits, as required by law.

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(9)

Loans

Loans at December 31, 2009 and 2008 are summarized as follows:

	2009		2008
Real estate:
Construction	$	107,717,807		148,110,567
Other		143,282,759		142,862,216
Commercial, financial and agricultural		13,763,667		16,808,412
Consumer installment		12,246,338		15,049,635
		277,010,571		322,830,830
Less:
Unamortized loan origination fees, net		7,793		34,888
Unearned credit life premiums		7,929		21,381
Allowance for loan losses		12,106,070		12,167,645
Total	$	264,888,779		310,606,916

Changes in the allowance for loan losses are as follows:

	2009			2008			2007
Balance, January 1	$	12,167,645			2,136,848			3,444,789
Provision for loan losses		13,476,000			16,020,862			675,225
Loans charged off		(13,889,808	)		(6,045,113	)		(2,116,001	)
Recoveries		352,233			55,048			132,835
Balance, December 31	$	12,106,070			12,167,645			2,136,848

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the original terms of the loan agreement. The Company measures impairment of a loan on a loan-by-loan basis for commercial real estate, commercial business, and agricultural loans. Residential mortgages, installment, and other consumer loans are considered smaller balance, homogenous loans which are not evaluated individually for impairment. Amounts of impaired loans that are not probable of collection are charged off immediately. Impaired loans and related amounts included in the allowance for loan losses at December 31, 2009 and 2008 are as follows:

	2009				2008
	Balance		Allowance Amount		Balance		Allowance Amount
Impaired loans with a related allowance	$	29,874,000		8,189,000		33,198,000		9,375,000
Impaired loans without a related allowance		41,939,000		-		22,857,000		-

The average amount of impaired loans and the related interest income recognized during 2009, 2008 and 2007 was as follows:

	2009		2008		2007
Average impaired loans	$	52,123,000		25,492,000		6,152,000
Interest income recognized on nonaccrual loans		735,000		349,000		593,000

Habersham Bank held concentrations of loans to customers, which totaled 100% or more of Tier 1 capital by the following classifications at December 31, 2009 with comparative amounts disclosed for 2008, as follows:

	2009		2008
Real estate lessors (amortized non-owner occupied)	$	65,004,166		69,291,195
Land and subdivision development		52,061,855		77,725,875
Raw land		27,883,898		24,860,081
Non-residential building construction (non-owner occupied)		22,964,330		11,907,466

	$	167,914,249		183,784,617

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Nonperforming loans consist of nonaccrual loans, accruing loans 90 days past due and restructured loans. The following summarizes nonperforming loans at December 31, 2009 and 2008:

	2009		2008
Nonaccrual loans	$	71,812,703		56,055,277
Accruing loans 90 days past due		-		802,267
Restructured loans		728,345		-

Total nonperforming loans	$	72,541,048		56,857,544

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

	Number of loans		2009		Number of loans		2008
Real estate – construction & development loans		50	$	59,863,354		50	$	52,442,846
Real estate – residential loans		23		4,966,478		11		313,004
Real estate – commercial		8		6,548,962		4		2,689,491
Commercial loans		3		216,829		4		459,389
Consumer loans		11		217,080		23		150,547
Total nonaccrual loans		95	$	71,812,703		92	$	56,055,277

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of its lending activities to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making these commitments as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. At December 31, 2009 and 2008, the Company had outstanding loan commitments approximating $33,946,000 and $64,825,000, respectively, and standby letters of credit approximating $1,570,000 and $1,761,000, respectively. The amount of collateral obtained, if deemed necessary, for these financial instruments by the Company, upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held, if any, varies but may include inventory, equipment, real estate, or other property. The accounting loss the Company would incur if any party to the financial instrument failed completely to perform according to the terms of the contract and the collateral proved to be of no value is equal to the face amount of the financial instrument.

(10)	Premises and Equipment

Premises and equipment are summarized as follows:

	2009		2008
Land	$	2,946,649		5,121,361
Buildings		13,217,358		17,171,787
Leasehold improvements		-		148,637
Furniture and equipment		7,275,562		7,771,007
Total		23,439,569		30,212,792
Less accumulated depreciation		10,833,220		10,733,399
Premises and equipment, net	$	12,606,349		19,479,393

The Company has entered into operating lease agreements for property. Approximate minimum rentals under such leases are as follows:

2010	$	597,491
2011		422,696
2012		130,964
2013		27,973
	$	1,179,124

Rental and lease expense was $620,593 in 2009, $730,117 in 2008 and $530,297 in 2007.

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(11)	Bank Property Held for Sale

Bank property held for sale is summarized as follows:

	2009
Land	$	1,988,712
Buildings		3,001,917
Furniture and equipment		71,237
Total	$	5,061,866

The Company is actively marketing the properties for sale.

(12)	Other Real Estate

The following summarizes other real estate at December 31, 2009 and 2008:

	2009				2008
	Number of Properties		Carrying Amount		Number of Properties		Carrying Amount

Residential properties – spec houses		33	$	12,412,239		41	$	15,714,994
Commercial properties		13		5,116,878		2		673,250
Land and vacant lots		223		19,461,935		207		10,785,430
Mobile homes and lots		1		51,590		-		-
Residential construction properties		2		790,686		1		163,200
		272	$	37,833,328		251	$	27,336,874

The following is a summary of the changes in other real estate for the years ended December 31, 2009 and 2008:

	2009						2008
	Number of Properties			Carrying Amount			Number of Properties			Carrying Amount
Balance at the beginning of the year		251		$	27,336,874			64		$	11,498,271
Foreclosed properties		56			22,282,074			201			17,852,732
Capitalized completion costs		-			755,597			-			1,759,558
Sales of properties		(35	)		(10,829,862	)		(14	)		(3,322,071	)
Write-downs		-			(1,711,355	)		-			(451,616	)
Balance at the end of the year		272		$	37,833,328			251		$	27,336,874

Carrying values for foreclosed properties are based on independent appraisals performed by local credentialed appraisers at the date of foreclosure adjusted for estimated disposal costs and quick sale concessions, which is management’s best estimate of fair value. While management uses available information to record foreclosed properties at fair value, future write-downs may be necessary based on changes in economic conditions and other factors.

(13)	Deposits and Short-Term Borrowings

At December 31, 2009, the scheduled maturities of time deposits are as follows:

2010	$	188,633,417
2011		24,891,671
2012		4,147,626
2013		6,454,416
2014		469,034
Total	$	224,596,164

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Short-term borrowings of $539,541 and $760,468 at December 31, 2009 and 2008, respectively, consist of a U.S. Treasury, tax and loan deposit note.

At December 31, 2009 and 2008, the Bank held approximately $10.0 million and $30.1 million, respectively, in certificates of deposit obtained through the efforts of third party brokers. The daily average balance of such deposits totaled approximately $22.5 million and $21.2 million in 2009 and 2008, respectively. The weighted average cost during 2009 was 4.76% while the weighted average cost at December 31, 2009 was 4.01%. The weighted average cost during 2008 was 3.98% and the weighted average cost at December 31 2008 was 2.97%. The deposits at December 31, 2009 have maturity dates ranging from January 2010 to August 2010.

(14)	Federal Funds Purchased and Securities Sold Under Repurchase Agreements

Certain information related to the Company’s securities sold under repurchase agreements is summarized as follows:

	2009			2008
Balance at year-end	$	6,316,735			16,383,982
Maximum outstanding during the year		21,933,798			42,720,547
Average outstanding during the year		10,427,552			24,175,635
Weighted average interest rate during the year		2.10	%		3.57	%
Weighted average interest rate at end of year		1.06	%		3.79	%

All securities sold under repurchase agreements are held by independent trustees. Securities sold under repurchase agreements at December 31, 2009 and 2008 are collateralized by investment securities with aggregate carrying values of approximately $11,214,000 and $19,264,000, respectively.

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

	2009		2008
	Total Available		Total Available
Federal discount window	$	8,672,000		24,630,000
Federal funds line		-		10,000,000
Retail repurchase agreement		-		921,000
Retail repurchase agreement (subject to available securities)		-		3,950,000

At December 31, 2009, the Company has pledged against the Federal Discount Window, certain investment securities totaling approximately $401,000 and certain qualifying loans with an outstanding balance of approximately $16,343,000. At December 31, 2008, the Company has pledged against the Federal Discount Window, certain investment securities totaling approximately $696,000 and certain qualifying loans with an outstanding balance of approximately $22,985,000.

At December 31, 2008, the Company had pledged certain investment securities for the Federal Funds line and the retail repurchase agreements. No amounts were outstanding on the above commitments at December 31, 2009 or 2008.

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(15)	FHLB Advances

At December 31, 2009, the Company had available line of credit commitments with the Federal Home Loan Bank (“FHLB”) totaling approximately $38,060,000, of which the following was outstanding:

Advance date	Amount		Interest Rate			Maturity Date	Rate	Call Feature
March 30, 2000	$	10,000,000		6.02	%	March 30, 2010	Fixed	Callable each year
January 12, 2001		10,000,000		4.93	%	January 12, 2011	Fixed	Callable each year
May 22, 2008		3,000,000		3.26	%	May 22, 2013	Fixed	Callable each year
May 19, 2009		4,000,000		.80	%	May 19, 2010	Fixed	No call provision
May 21, 2009		3,000,000		.83	%	May 21, 2010	Fixed	No call provision
August 26, 2009		1,000,000		1.50	%	August 26, 2011	Fixed	No call provision
August 26, 2009		1,000,000		2.12	%	August 27, 2012	Fixed	No call provision
August 26, 2009		1,000,000		2.59	%	August 26, 2013	Fixed	No call provision
September 14, 2009		1,500,000		1.37	%	September 14, 2011	Fixed	No call provision
September 14, 2009		1,500,000		2.02	%	September 14, 2012	Fixed	No call provision
September 16, 2009		2,000,000		2.61	%	September 16, 2013	Fixed	No call provision

	$	38,000,000

At December 31, 2009, the Company has pledged against FHLB advances, certain investment securities and all stock of the FHLB totaling approximately $21,321,000 and $2,596,000, respectively, and certain qualifying mortgage loans with an outstanding balance of approximately $57,483,000.

At December 31, 2008, the Company had available line of credit commitments with the FHLB totaling approximately $38,211,000, of which the following was outstanding:

Advance date	Amount		Interest Rate			Maturity Date	Rate	Call Feature
March 30, 2000	$	10,000,000		6.02	%	March 30, 2010	Fixed	Callable each year
January 12, 2001		10,000,000		4.93	%	January 12, 2011	Fixed	Callable each year
May 21, 2004		3,000,000		2.40	%	May 21, 2009	Floating	No call provision
August 26, 2004		3,000,000		2.40	%	August 26, 2009	Floating	No call provision
May 19, 2008		4,000,000		2.91	%	May 19, 2009	Fixed	No call provision
May 22, 2008		3,000,000		3.26	%	May 22, 2013	Fixed	No call provision
September 13, 2006		5,000,000		2.00	%	September 14, 2009	Floating	No call provision
	$	38,000,000

At December 31, 2008, the Company has pledged against FHLB advances, certain investment securities, all stock of the FHLB totaling approximately $2,634,000, cash totaling $1,955,000 and certain qualifying mortgage loans with an outstanding balance of approximately $49,493,000.

(16)	Derivative Instruments and Hedging Activities

The Company maintains an overall interest rate risk-management strategy that incorporates the limited use of derivative instruments to minimize fluctuations in earnings that are caused by interest rate volatility. The goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in fair value. The effect of this unrealized appreciation or depreciation will generally be offset by earnings or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.

Derivative instruments that are used as part of the Company’s interest rate risk-management strategy include interest rate swap contracts. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date.

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically.

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The Company’s derivative activities are monitored by its asset/liability management function as part of that group’s oversight of asset/liability and treasury functions. This group is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the overall interest-rate risk management.

During 2004, Habersham Bank entered into two interest rate swap agreements with a regional bank to partially offset the interest rate risk associated with variable rate FHLB borrowings. Each FHLB loan amount is $3 million with quarterly adjustable rates set at 23 basis points above the three-month LIBOR. The three-month LIBOR rate at December 31, 2008 was 1.42%. The first swap contract was entered into during the second quarter of 2004 and is for a 4.5% fixed rate on a $3 million notional amount. The swap matured on May 21, 2009. The second swap contract was entered into during the third quarter of 2004 and is for a 4.05% fixed rate on a $3 million notional amount. The swap matured on August 26, 2009.

The swaps were being accounted for as cash flow hedges. The fair values were included in other comprehensive income, net of taxes. Habersham Bank recorded liabilities at December 2008 of approximately $95,000 to reflect the fair value of the swaps. The swaps matured in 2009. The Company does not hold any derivative instruments at December 31, 2009.

The hedges were designed to be highly effective as all terms of the swaps are matched to the FHLB advances. The Company utilized the long-haul methodology to measure the effectiveness of the hedges. Because of the matching terms of the advances and the interest rate swaps, with the exception of the prepayment ability, the hedges continued to be highly effective as long as the FHLB advances continued to be outstanding. On a quarterly basis, the Company ensured the debt remained outstanding and that the credit risk of the swap counterparty had not diminished. If the debt was outstanding and there was no change in the credit risk of the swap counterparty, the hedge was deemed to remain effective. Changes in the fair value of the swaps were recorded on the balance sheet and accounted for in accumulated other comprehensive income, net of tax. If the debt had no longer been outstanding, or there was a credit risk problem (default) with the swap counterparty, the hedge would be deemed ineffective and the fair value of the swaps would have been reclassified from accumulated other comprehensive income to current earnings. No hedge ineffectiveness from these cash flow hedges was recognized in the consolidated statement of operations for the years ending December 31, 2009, 2008 and 2007.

(17)	Income Taxes

Generally accepted accounting principles require that companies assess whether valuation allowances should be established against their deferred tax assets based on all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, experience with tax attributes expiring unused and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified.

A valuation allowance of 100% was established based on the “more likely than not” threshold for the Company’s net deferred income tax asset as of December 31, 2009. The result was a charge to income tax provision in the amount of $12,723,678 as of December 31, 2009. The Company’s ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryforward period provided for in the tax law for each applicable tax jurisdiction. The Company considered the following possible sources of taxable income when assessing the possible realization of deferred tax assets: future reversals of existing taxable temporary differences; future taxable income exclusive of reversing temporary differences and carryforwards; taxable income in prior carryback years; and tax planning strategies.

As of December 31, 2009, the Company has net operating loss carryforwards totaling approximately $11,678,000 and $16,230,000 for federal and state purposes, respectively, that will begin to expire in 2029 unless previously utilized.

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Income tax benefit (expense) for the years ended December 31, 2009, 2008 and 2007 are as follows:

	2009			2008		2007
Current:
Federal	$	1,925,000			2,235,459		(718,442	)
State		359,693			752,493		-
Total current		2,284,693			2,987,952		(718,442	)
Deferred:
Federal		5,962,460			4,344,687		(270,476	)
State		695,814			506,028		(31,502	)
Total deferred		6,658,274			4,850,715		(301,978	)
Change in valuation allowance		(12,723,678	)		-		-
Total	$	(3,780,711	)		7,838,667		(1,020,420	)

The provision for income taxes is different than that computed by applying the Federal statutory rate of 34% to earnings before income taxes as indicated by the following:

	2009			2008			2007
Income benefit (tax) on earnings before income taxes at statutory rate	$	7,598,158			7,713,916			(1,346,324	)
Differences resulting from:
Goodwill impairment		-			(1,206,925	)		-
Tax-exempt income		223,920			339,547			394,833
Earnings on cash surrender value of life insurance		117,751			135,142			62,281
Nondeductible interest expense		(38,758	)		(46,081	)		(64,088	)
State income tax, net of Federal tax effect		936,980			830,624			(20,791	)
Change in valuation allowance		(12,723,678	)		-			-
Other		104,916			72,444			(46,331	)
	$	(3,780,711	)		7,838,667			(1,020,420	)

At December 31, 2009 and 2008, the significant components of the Company’s net deferred tax assets and liabilities are as follows:

	2009			2008
Deferred tax assets:
Allowance for loan losses	$	4,595,102			4,619,048
Nonaccrual loans		256,807			115,613
Net operating loss carryforwards		4,613,197			-
State tax credits		307,188			99,692
Other real estate		3,037,966			1,052,100
Deferred compensation		312,922			440,158
Furniture, fixtures and equipment due to difference in depreciation methods		42,857			90,376
Unrealized loss on derivatives		-			32,461
Other		25,124			37,871
Gross deferred tax assets		13,191,163			6,487,319
Valuation allowance		(12,723,678	)		-
Net deferred tax assets		467,485			6,487,319

Deferred tax liabilities:
Unrealized gain on investment securities available for sale		(321,810	)		(131,963	)
Core deposit intangible		(131,541	)		(155,100	)
Deferred loan fees		(2,958	)		(13,244	)
Prepaid expenses		(332,986	)		(221,110	)
		(789,295	)		(521,417	)
Net deferred tax asset (liability)	$	(321,810	)		5,965,902

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The net deferred tax asset (liability) is included in other assets or other liabilities in the consolidated balance sheets.

(18)	Preferred Stock

On December 29, 2008, the Company amended its Amended and Restated Articles of Incorporation to authorize the issuance of up to 10,000,000 shares of Preferred Stock. The individual terms of the issuances are established by the Company’s Board of Directors.

The Company approved the issuance of up to 10,000 shares of Series A Non-cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) to Fieldale Farms, Inc. (“Fieldale”), a Georgia based poultry company. The Company’s Chairman of the Board of Directors is affiliated with Fieldale. The Series A 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 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. On December 31, 2008, the Company issued 3,000 shares of the Series A Preferred Stock for aggregate cash proceeds of $3 million. The Company incurred $22,238 in issuance costs associated with the preferred stock offering.

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 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 (including the Company’s Chairman of the Board) 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 in exchange for the 3,000 shares of 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 December 31, 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.

(19)	Regulatory Matters

On June 24, 2009, the Bank entered into an Order to Cease and Desist (the “Order”) with the DBF. The Regional Director of the FDIC 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.

- 23 -

The Company’s management and Board intend to fully comply with the requirements of the Order. Failure to adhere to the Order may result in further severe actions by the regulators.

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum 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 consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classifications under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) 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, 2009 that the Company and the Bank did not meet all capital adequacy requirements to which they are subject. Management believes, as of December 31, 2008 that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2009, the most recent notifications from both the FDIC and the Federal Reserve Bank of Atlanta categorized the Bank as undercapitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. Management believes that the classifications have subsequently changed to significantly undercapitalized as of December 31, 2009 due to adjustments to the regulatory capital ratios made subsequent to submission of the preliminary capital ratios.

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are as follows (dollars in thousands):

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009:
Total Capital (to Risk-Weighted Assets):
Company	$	20,314		6.15	%		26,417		8	%		N/A		N/A
Bank	$	18,794		5.69	%		26,406		8	%		33,007		10	%
Tier I Capital (to Risk-Weighted Assets):
Company	$	16,088		4.87	%		13,209		4	%		N/A		N/A
Bank	$	14,570		4.41	%		13,203		4	%		19,804		6	%
Tier I Capital (to Average Assets):
Company	$	16,088		3.39	%		18,981		4	%		N/A		N/A
Bank	$	14,570		3.08	%		18,912		4	%		23,640		5	%
As of December 31, 2008:
Total Capital (to Risk-Weighted Assets):
Company	$	44,428		11.60	%		30,643		8	%		N/A		N/A
Bank	$	40,320		10.61	%		30,408		8	%		38,010		10	%
Tier I Capital (to Risk-Weighted Assets):
Company	$	39,591		10.34	%		15,321		4	%		N/A		N/A
Bank	$	35,483		9.33	%		15,204		4	%		22,806		6	%
Tier I Capital (to Average Assets):
Company	$	39,591		7.94	%		19,943		4	%		N/A		N/A
Bank	$	35,483		7.14	%		19,872		4	%		24,840		5	%

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(20)	Employee Benefit and Stock Option Plans

The Company has a contributory profit sharing plan under Internal Revenue Code Section 401(k) – (the 401(k) Plan). The 401(k) Plan covers substantially all employees. Employees may contribute up to 15% of their annual salaries not to exceed the amount allowed by the IRS. At its discretion, the Company may make matching contributions in an amount not to exceed 100% of each participant’s first 3% of compensation contributed. The Company’s contributions to the plan totaled $38,858 in 2009, $180,844 in 2008 and $220,162 in 2007.

During 1998, the Bank’s board of directors approved the Director’s Retirement Plan (the Plan), a noncontributory retirement plan. Amounts earned on the life insurance policies purchased by the Bank over the rate, as defined in the Plan, to be retained for the benefit of the Bank are to be deferred and paid to the directors upon retirement. As of December 31, 2009 and 2008, the cash surrender values of the life insurance policies totaled $5,441,484 and $5,227,186, respectively, and are included in cash surrender values of life insurance in the balance sheet.

During 2006, the Bank’s board of directors approved a Senior Executive Retirement Plan (“SERP”) for five of the Bank’s key employees to be funded by the purchase of bank-owned life insurance. The SERP, a noncontributory retirement plan, provides amounts earned on the life insurance policies purchased by the Bank over the rate, as defined in the Plan, to be retained for the benefit of the Bank are to be deferred and paid to the employees upon retirement. During 2007, the Bank purchased the life insurance policies under this SERP which became effective January 1, 2008. As of December 31, 2009 and 2008, the cash surrender values of the life insurance policies totaled $4,840,930 and $4,708,902, respectively, and are included in cash surrender values of life insurance in the balance sheet. For the year ended December 31, 2008, $17,784 was recorded to expense for the increase in the liability for future mortality costs. During the year ended December 31, 2009, the SERP agreements were terminated and the liability accrued was reversed upon the termination.

The Company has an Incentive Stock Option Plan that provides that officers and certain employees of the Company may be granted options to purchase shares of common stock of the Company at an amount equal to the fair market value of the stock at the date of grant. The options, which may be exercised immediately, expire ten years from the date of grant.

The Company’s Outside Directors Stock Option Plan provides that outside directors of Habersham Bancorp and its subsidiaries may be granted options to purchase shares of common stock of the Company at an amount equal to the fair market value of the stock at the date of grant. The options are fully vested on the date of grant, exercisable six months from the date of grant, and expire ten years from the date of grant. Shares reserved for future grants under this plan are approximately 203,675 at December 31, 2009 and 2008.

The following table summarizes information about stock options outstanding at December 31, 2009:

Number Outstanding and Exercisable at December 31, 2009		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price

	91,500		3.8	$	22.95

A summary of the status of the Company’s stock option plans and changes during 2009, 2008 and 2007 is presented below:

	2009					2008					2007
	Shares			Weighted Avg. Exercise Price		Shares			Weighted Avg. Exercise Price		Shares			Weighted Avg. Exercise Price
Outstanding at beginning of the year		174,750		$	21.99		230,750		$	22.56		298,250		$	21.49
Terminated and expired		(83,250	)		20.94		(56,000	)		24.34		(67,500	)		17.82
Outstanding and exercisable at end of year		91,500		$	22.95		174,750		$	21.99		230,750		$	22.56

There were no options granted or exercised during 2009, 2008 and 2007. There was no intrinsic value of exercisable options at December 31, 2009 and 2008 based on a market price of $.75 and $2.40, respectively.

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(21)	Other Expenses

Items comprising other expenses for the years ended December 31, 2009, 2008 and 2007 are as follows:

	2009		2008		2007
Legal and other outside services	$	2,922,489		1,326,610		1,198,210
Advertising and public relations		333,767		599,926		721,683
Office supplies		411,310		486,689		535,841
Other		1,388,989		1,557,462		1,553,251
Total	$	5,056,555		3,970,687		4,008,985

Outside services include charges for FDIC insurance, legal and professional services, insurance, director fees, and State of Georgia Department of Banking fees.

(22)	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. 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

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 from 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 state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Investment Securities Held to Maturity

For disclosure purposes, 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 approximate fair value.

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Loans and Mortgage Loans Held for Sale

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. 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. 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.

Bank Properties Held for Sale

Bank properties held for sale are recorded at the lower of cost or market value. As such, the Company classifies bank properties held for sale as Level 2.

Other Real Estate

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 price, 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 reasonably approximates its fair value.

Derivative Instruments and Hedging Activities

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 Securities Sold Under Repurchase Agreements

For disclosure purposes, the carrying amount for Federal funds purchased and securities sold under 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 borrowings is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements.

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Commitments to Extend Credit and Standby Letters 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 table below presents the recorded amount of assets (liabilities) measured at fair value on a recurring basis as of December 31, 2009 and 2008.

	2009
	Total		Level 1		Level 2		Level 3
Investment securities available for sale	$	74,456,973		8,464,792		65,992,181		-

		2008
Investment securities available for sale		$	97,277,891				8,411,357				88,866,534				-

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 December 31, 2009 and 2008.

	2009
	Total		Level 1		Level 2		Level 3
Other real estate	$	37,833,328		-		1,907,075		35,926,253
Loans		26,087,743		-		26,087,743		-
	$	63,921,071		-		27,994,818		35,926,253

	2008
Other real estate	$	27,336,874	-	27,336,874	-
Loans		24,501,415	-	24,501,415	-
	$	51,838,289	-	51,838,289	-

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 December 31, 2009 and 2008 are as follows:

	2009				2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	42,515,145		42,515,145		14,259,976		14,259,976
Investment securities available for sale		74,456,973		74,456,973		97,277,891		97,277,891
Investment securities held to maturity		881,416		902,617		1,025,435		1,052,829
Other investments		2,595,634		2,595,634		3,334,124		3,334,124
Loans, net		264,888,779		264,890,502		310,606,916		311,010,207
Cash surrender value of life insurance		10,282,414		10,282,414		9,936,088		9,936,088
Liabilities:
Deposits	$	390,160,668		392,791,771		392,887,664		396,813,058
Short-term borrowings		539,541		539,541		760,468		760,468
Federal funds purchased and securities sold under repurchase agreements		6,316,735		6,316,735		16,383,982		16,383,982
FHLB advances		38,000,000		38,869,313		38,000,000		39,280,490
Interest rate swaps		-		-		95,473		95,473

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.

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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.

(23)	Related Party Transactions

In the ordinary course of business, the Company extends loans to its directors, executive officers, and principal stockholders and their affiliates at terms and rates comparable to those prevailing at the time for comparable transactions with other customers. In the opinion of management, these loans do not involve more than the normal credit risk nor present other unfavorable features. An analysis of the activity during 2009 of loans to executive officers, directors, and principal stockholders is as follows:

Balance, January 1	$	11,006,331
Amounts advanced		10,887,374
Repayments		(11,209,500	)
Change in related parties		(4,320,627	)

Balance, December 31	$	6,363,578

Deposits from related parties totaled approximately $13,221,000 and $13,404,000 at December 31, 2009 and 2008, respectively.

Habersham Bank began construction of a new branch in Flowery Branch, Georgia during 2007 and was completed in 2008. The lowest bid in a competitive bid process for the design and construction of the new branch was submitted by Lusk Construction, Inc., of which one of the Company’s directors is president. The design and construction costs paid to Lusk Construction during 2008 and 2007 totaled approximately $3,405,000 and $645,000, respectively. As a result of the bidding process, management believes the terms of the construction contract were no less favorable to the Company than could be obtained from an independent third party.

In addition, the Company issued preferred stock to the Company’s Chairman of the Board and to an entity with which he is affiliated. See Note 18 for the terms of the issuance and exchange of preferred stock.

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(24)	Condensed Financial Statements of Habersham Bancorp (Parent Only)

The parent company only condensed financial statements are presented below:

CONDENSED BALANCE SHEETS

December 31, 2009 and 2008

Assets
	2009			2008
Cash	$	1,379,568			1,352,342
Investment in subsidiaries		15,556,832			37,890,470
Other investments		-			599,990
Equipment, net		16,327			34,228
Other assets		122,506			2,283,550
Total assets	$	17,075,233			42,160,580
Liabilities and Stockholders’ Equity
Liabilities consisting of accounts payable	$	-			162,567
Stockholders’ equity:
Preferred stock		3,962,910			2,977,762
Common stock		2,818,593			2,818,593
Additional paid-in capital		13,490,587			13,490,587
Retained (deficit) earnings		(3,821,546	)		22,517,920
Accumulated other comprehensive income		624,689			193,151
Total stockholders’ equity		17,075,233			41,998,013
Total liabilities and stockholders’ equity	$	17,075,233			42,160,580

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CONDENSED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
Income:
Dividends from bank	$	-			2,100,000			5,300,000
Management fees from subsidiaries		1,512,000			672,000			672,000
Other income		124,793			605			5,306
Total income		1,636,793			2,772,605			5,977,306
Expenses:
General and administrative		1,834,236			2,286,450			2,296,202
(Loss) earnings before income taxes and distributions in excess of earnings of subsidiaries		(197,443	)		486,155			3,681,104
Income tax benefit		334,387			635,290			608,353
Earnings before distributions in excess of earnings of subsidiaries		136,944			1,121,445			4,289,457
Equity in undistributed loss of subsidiaries		(26,265,178	)		(15,970,766	)		(1,350,100	)
Net (loss) earnings	$	(26,128,234	)		(14,849,321	)		2,939,357

CONDENSED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2009, 2008 and 2007

	2009			2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings	$	(26,128,234	)		(14,849,321	)		2,939,357
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation		17,901			43,045			47,708
Gain on sale of equipment		(7,495	)		-			(5,306	)
Gain on sale of investment		(119,998	)		-			-
Decrease (Increase) in other assets		2,161,042			137,047			(105,224	)
(Decrease) Increase in other liabilities		(162,567	)		36,587			52,076
Equity in undistributed loss of subsidiaries		26,265,178			15,970,766			1,350,100
Net cash provided by operating activities		2,025,827			1,338,124			4,278,711
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital infusion to Habersham Bank		(3,500,000	)		(2,500,000	)		-
Purchase of equipment		-			(1,192	)		(45,705	)
Proceeds from sale of equipment		7,495			-			34,860
Proceeds from sale of investment		719,988			-			-
Net cash used in investing activities		(2,772,517	)		(2,501,192	)		(10,845	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock		1,000,000			3,000,000			-
Preferred stock issuance costs		(14,852	)		(22,238	)		-
Payment of cash dividends		(211,232	)		(704,648	)		(2,581,731	)
Common stock repurchase		-			-			(2,190,000	)
Net cash provided by (used in) financing activities		773,916			2,273,114			(4,771,731	)
Increase (decrease) in cash		27,226			1,110,046			(503,865	)
Cash at beginning of year		1,352,342			242,296			746,161
Cash at end of year	$	1,379,568			1,352,342			242,296

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(25)	Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data for the years ended December 31, 2009 and 2008 is summarized as follows:

	Quarter Ended
	March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009
Interest income	$	5,687,221			5,323,790			5,135,460			4,239,800
Interest expense		3,217,344			3,161,999			2,987,200			2,381,432
Net interest income		2,469,877			2,161,791			2,148,260			1,858,368
Provision for loan losses		1,780,000			1,300,000			7,400,000			2,996,000
Securities gains (losses), net		58,068			256,122			54,871			144,407
Net loss		(1,655,191	)		(1,599,898	)		(5,968,847	)		(16,904,298	)
Net loss per share – basic		(.60	)		(.58	)		(2.14	)		(6.02	)
Net loss per share – diluted		(.60	)		(.58	)		(2.14	)		(6.02	)

	Quarter Ended
	March 31, 2008		June 30, 2008			September 30, 2008			December 31, 2008
Interest income	$	7,603,340		6,834,602			6,211,641			5,484,999
Interest expense		4,007,158		3,565,705			3,357,434			3,405,517
Net interest income		3,596,182		3,268,897			2,854,207			2,079,482
Securities gains (losses), net		127,112		161,489			27,370			46,798
Provision for loan losses		423,000		654,000			6,293,000			8,650,862
Net earnings (loss)		58,942		(375,160	)		(4,291,332	)		(10,241,771	)
Net earnings (loss) per share – basic		.02		(.13	)		(1.52	)		(3.63	)
Net earnings (loss) per share – diluted		.02		(.13	)		(1.52	)		(3.63	)

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HABERSHAM BANCORP - FORM 10-K - EX-13 - EXHIBIT 13.HTM - March 29, 2010

Attached files

HABERSHAM BANCORP Reports