HABERSHAM BANCORP

AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2006, 2005 and 2004

(with Independent Accountants’ Report thereon)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders

Habersham Bancorp and Subsidiaries

We have audited the accompanying consolidated balance sheets of Habersham Bancorp and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. 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 that 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, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Atlanta, Georgia

March 6, 2007

HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2006 and 2005

Assets
	2006			2005
Cash and due from banks	$	26,119,137			16,546,422
Federal funds sold		64,398,671			36,320,000
Cash and cash equivalents		90,517,808			52,866,422
Investment securities available for sale		84,982,415			73,115,232
Investment securities held to maturity, estimated fair value of $3,367,941 and $3,514,273		3,289,322			3,387,449
Other investments		3,365,224			3,375,424
Loans held for sale		3,183,115			2,119,438
Loans, net of allowance for loan loss of $3,444,789 and $3,944,525		342,816,012			316,773,266
Premises and equipment, net		12,923,720			10,519,442
Accrued interest receivable		2,937,981			2,359,171
Other real estate		537,975			2,773,662
Goodwill, net		3,549,780			3,549,780
Other assets		7,634,932			7,591,498
Total assets	$	555,738,284			478,430,784
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing demand	$	47,286,172			92,697,588
Money market and NOW accounts		86,120,584			72,307,257
Savings		62,200,262			55,449,665
Time ($100,000 and over)		176,651,417			72,864,375
Other time		78,370,325			79,443,061
Total deposits		450,628,760			372,761,946
Short-term borrowings		778,778			775,442
Federal funds purchased and securities sold under repurchase agreements		5,873,955			8,423,323
Federal Home Loan Bank advances		38,000,000			42,300,000
Accrued interest payable		2,979,288			1,962,707
Other liabilities		1,913,382			1,950,234
Total liabilities		500,174,163			428,173,652
Commitments
Stockholders’ equity:
Common stock, $1.00 par value; 10,000,000 shares authorized; 2,968,593 and 2,921,240 shares issued and outstanding		2,968,593			2,921,240
Additional paid-in capital		15,530,587			14,723,175
Retained earnings		37,777,500			33,544,763
Accumulated other comprehensive income (loss)		(712,559	)		(932,046	)
Total stockholders’ equity		55,564,121			50,257,132
Total liabilities and stockholders’ equity	$	555,738,284			478,430,784

See accompanying notes to consolidated financial statements.

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HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Statements of Earnings

For the Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Interest income:
Loans	$	29,927,711			22,421,374			17,537,761
Investments:
Taxable securities		2,873,933			2,371,946			2,289,392
Tax exempt securities		982,884			807,397			751,363
Other investments		233,392			158,061			126,255
Federal funds sold		442,118			177,491			38,648
Total interest income		34,460,038			25,936,269			20,743,419
Interest expense:
Time deposits, $100,000 and over		3,949,260			2,091,969			1,607,854
Other deposits		7,116,569			4,291,317			3,143,765
Federal funds purchased and securities sold under repurchase agreements		213,262			235,025			107,458
Short-term and other borrowings, primarily FHLB advances		1,938,568			1,982,027			1,932,428
Total interest expense		13,217,659			8,600,338			6,791,505
Net interest income		21,242,379			17,335,931			13,951,914
Provision for loan losses		-			330,000			482,500
Net interest income after provision for loan losses		21,242,379			17,005,931			13,469,414
Noninterest income:
Mortgage origination income		785,147			981,045			1,002,166
Service charges on deposit accounts		902,238			701,881			709,695
Other service charges and commissions		265,653			260,893			282,367
Securities (losses) gains, net		(13,216	)		(5,654	)		51,816
Gain on sale of other investments		-			-			198,641
Gain on sale of premises and equipment		83,555			14,000			879,453
Income from Company-owned life insurance		172,116			181,775			167,361
Trust services fees		314,139			238,124			200,338
Other income		1,146,118			1,075,769			938,665
Total noninterest income		3,655,750			3,447,833			4,430,502
Noninterest expense:
Salaries and employee benefits		9,779,789			8,478,019			8,265,631
Occupancy expenses		2,209,495			1,930,771			1,835,487
Computer services		553,849			459,544			429,415
Telephone		444,214			408,838			408,036
Other		4,206,208			3,714,149			3,838,315
Total noninterest expense		17,193,555			14,991,321			14,776,884
Earnings before income taxes		7,704,574			5,462,443			3,123,032
Income tax expense		2,411,665			1,648,972			779,759
Net earnings	$	5,292,909			3,813,471			2,343,273
Earnings per common share - basic	$	1.80			1.31			.81
Earnings per common share - diluted	$	1.77			1.30			.80
Weighted average number of common shares outstanding		2,942,737			2,903,788			2,889,004
Weighted average number of common and common equivalent shares outstanding		2,983,048			2,938,698			2,939,951

See accompanying notes to consolidated financial statements.

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HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Net earnings	$	5,292,909			3,813,471			2,343,273
Other comprehensive income (loss):
Unrealized holding gains (losses) on investment securities available for sale arising during period		283,072			(1,445,125	)		(249,116	)
Unrealized holding gains (losses) on derivative financial instruments classified as cash flow hedges arising during the period		36,269			202,982			(122,966	)
Reclassification adjustment for (gains) losses on investment securities available for sale		13,216			5,654			(51,816	)
Total other comprehensive income (loss) before tax		332,557			(1,236,489	)		(423,898	)
Income taxes related to other comprehensive income:
Unrealized holding gains (losses) on investment securities available for sale arising during period		(96,244	)		491,343			84,699
Unrealized holding gains (losses) on derivative financial instruments classified as cash flow hedges arising during the period		(12,332	)		(69,014	)		41,809
Reclassification adjustment for (gains) losses on investment securities available for sale		(4,494	)		(1,923	)		17,617
Total income taxes related to other comprehensive income (loss)		(113,070	)		420,406			144,125
Total other comprehensive income (loss), net of tax		219,487			(816,083	)		(279,773	)
Total comprehensive income	$	5,512,396			2,997,388			2,063,500

See accompanying notes to consolidated financial statements.

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HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2006, 2005 and 2004

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2003	$	2,869,278		14,176,580		32,019,682			163,810			49,229,350
Net earnings		-		-		2,343,273			-			2,343,273
Change in other comprehensive income, net of tax		-		-		-			(279,773	)		(279,773	)
Cash dividends, $1.28 per share		-		-		(3,701,878	)		-			(3,701,878	)
Tax benefit from options exercised		-		50,449		-			-			50,449
Issuance of common stock upon exercise of stock options		30,914		333,459		-			-			364,373
Balance, December 31, 2004		2,900,192		14,560,488		30,661,077			(115,963	)		48,005,794
Net earnings		-		-		3,813,471			-			3,813,471
Change in other comprehensive income, net of tax		-		-		-			(816,083	)		(816,083	)
Cash dividends, $.32 per share		-		-		(929,785	)		-			(929,785	)
Tax benefit from options exercised		-		15,534		-			-			15,534
Issuance of common stock upon exercise of stock options		21,048		147,153		-			-			168,201
Balance, December 31, 2005		2,921,240		14,723,175		33,544,763			(932,046	)		50,257,132
Net earnings		-		-		5,292,909			-			5,292,909
Change in other comprehensive income, net of tax		-		-		-			219,487			219,487
Cash dividends, $.36 per share		-		-		(1,060,172	)		-			(1,060,172	)
Tax benefit from options exercised		-		84,280		-			-			84,280
Issuance of common stock upon exercise of stock options		47,353		723,132		-			-			770,485
Balance, December 31, 2006	$	2,968,593		15,530,587		37,777,500			(712,559	)		55,564,121

See accompanying notes to consolidated financial statements.

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HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Cash flows from operating activities:
Net earnings	$	5,292,909			3,813,471			2,343,273
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			330,000			482,500
Provision for losses on other real estate owned		16,500			-			30,000
Depreciation expense		1,052,771			959,014			921,222
Loss (gain) on sale of premises and equipment		( 83,555	)		7,343			(879,453	)
Net amortization (accretion) of premium/discount in investment securities		133,912			366,709			494,191
Securities (gain) loss, net		13,216			5,654			(51,816	)
Gain on sale of other investments		-			-			(198,641	)
(Gain) loss on sale of other real estate		(15,454	)		38,570			53,415
Net gain on sale of loans		(785,147	)		(981,045	)		(1,002,184	)
Proceeds from sales of loans		33,611,309			40,366,137			39,701,998
Increase in loans held for sale		(33,889,839	)		(40,442,830	)		(38,239,614	)
Amortization of intangible assets		62,064			25,860			-
Deferred income tax (benefit) expense		189,186			(5,123	)		69,939
Changes in assets and liabilities, net of effects of purchase acquisition in 2005:
(Increase) decrease in accrued interest receivable		(578,810	)		(664,333	)		189,530
(Increase) decrease in other assets		(371,485	)		(974,290	)		1,256,151
Increase (decrease) in accrued interest payable		1,016,581			269,952			(234,157	)
Increase in other liabilities		27,769			263,202			324,061
Net cash provided by operating activities		5,691,927			3,378,291			5,260,415
Cash flows from investing activities, net of effects of purchase acquisition in 2005:
Payment for purchase of LB&T, net of cash acquired $4,631,073		-			800,889			-
Investment securities available for sale:
Proceeds from maturities		6,767,710			10,347,256			12,101,837
Proceeds from sales and calls		2,013,278			5,188,280			12,179,914
Purchases		(20,512,685	)		(16,872,305	)		(22,484,240	)
Investment securities held to maturity:
Proceeds from maturities		31,801			144,396			607,000
Proceeds from calls		80,000			596,708			100,000
Other investments:
Proceeds from sales		553,500			450,000			500,641
Purchases		(543,300	)		(1,356,290	)		(1,119,100	)
Net increase in loans		(27,098,118	)		(27,876,679	)		(16,112,040	)
Purchases of premises and equipment		(3,592,734	)		(1,451,263	)		(1,058,993	)
Proceeds from sales of premises and equipment		219,240			15,622			952,442
Net additions of other real estate		-			(906	)		(120,063	)
Proceeds from sale of other real estate		3,309,672			1,012,650			1,691,589
Net cash used in investing activities	$	(38,771,636	)		(29,001,642	)		(12,761,013	)

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HABERSHAM BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
Cash flows from financing activities, net of effects of purchase acquisition in 2005:
Net increase in deposits	$	77,866,814			59,814,489			13,357,253
Net (decrease) increase in short-term borrowings		3,336			(10,594	)		207,581
Proceeds from FHLB advances		8,000,000			16,300,000			11,000,000
Repayment of FHLB advances		(12,300,000	)		(10,000,000	)		(5,000,000	)
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		(2,549,368	)		3,588,692			(7,549,145	)
Payment of cash dividends		(1,060,172	)		(929,785	)		(3,701,878	)
Issuance of common stock upon exercise of stock options		770,485			168,201			364,373
Net cash provided by financing activities		70,731,095			68,931,003			8,678,184
Increase in cash and cash equivalents		37,651,386			43,307,652			1,177,586
Cash and cash equivalents at beginning of the year		52,866,422			9,558,770			8,381,184
Cash and cash equivalents at end of year	$	90,517,808			52,866,422			9,558,770
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	12,201,078			8,276,805			7,025,662
Income taxes	$	2,403,000			1,430,000			447,000
Supplemental disclosures of noncash investing activities:
Other real estate acquired through loan foreclosures	$	1,055,372			3,026,470			684,500
Loans granted to facilitate the sale of other real estate	$	-			500,260			369,028

On July 25, 2005, the Company purchased all of the capital stock of Liberty Bank and Trust (Toccoa, Georgia) for $3,830,184, including certain acquisition costs of $194,184.

In conjunction with the acquisition, assets were acquired and liabilities were assumed as follows:

Fair value of assets acquired	$	23,891,175
Liabilities		20,060,991
	$	3,830,184

See accompanying notes to consolidated financial statements.

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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 owns 100% of Advantage Insurers, Inc. 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, Gwinnett, Stephens and Forsyth 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 and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. 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 collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in real estate market conditions in these areas.

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. However, a significant change in interest rates could have an effect on the Company’s results of operations.

Reclassifications

Certain 2005 and 2004 amounts have been reclassified to conform with the 2006 presentation.

(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 into one of 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.

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.

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A decline in the fair value of any security below cost that is deemed other than temporary is charged to income, resulting in the establishment of a new cost basis for the security.

Other Investments

At December 31, 2006 and 2005, 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, as defined in Statement of Financial Accounting Standards (SFAS) No. 115; accordingly, the provisions of SFAS No. 115 are not applicable to this investment. 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. At December 31, 2006 and 2005, there were no valuation allowances relating to mortgage loans held for sale.

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 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 in accordance with SFAS No. 5, Accounting for 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 probably 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.

-9-

Loss percentages used for this 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 which do not lend themselves to exact mathematical calculations, 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.

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

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. 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. 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.

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 Bank’s case is effectively the entire entity. There were no goodwill impairment losses in the financial statements.

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 earnings (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.

Earnings Per Share

Basic earnings per share is computed by dividing net earnings by weighted average shares outstanding. Diluted earnings per share is computed by dividing net earnings by weighted average shares outstanding plus common share equivalents resulting from dilutive stock options, determined using the treasury stock method. Options on 50,500, 54,500 and 66,500 shares were not included in the diluted earnings per share computation for 2006, 2005 and 2004, respectively, as they were antidilutive.

Comprehensive Income

Other comprehensive income for the Company consists of items recorded directly in equity under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and the net of tax effect of changes in the fair value of cash flow hedges.

-10-

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Share-based payments (“SFAS No. 123(R)”). SFAS No. 123(R) requires all share-based payments, including stock options, to be recognized in the financial statements based on their fair value at the grant date. As the Company had no vesting of previously awarded share-based compensation that occurred during 2006 and there were no stock option grants during 2006, the implementation of SFAS No. 123(R) had no effect on the operations, financial condition or cash flow of the Company for the year ended December 31, 2006.

Prior to 2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, compensation cost was measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method included in SFAS No. 123, the Company’s net earnings and earnings per share for 2005 and 2004 would have been reduced to the proforma amounts indicated below:

	2005			2004
Net earnings	$	3,813,471			2,343,273
Deduct:
Total stock-based compensation expense determined under fair value based method, net of related tax effect		(1,271,404	)		(948,565	)
Proforma net earnings	$	2,542,067			1,394,708
Net earnings per common share - basic:
As reported	$	1.31			.81
Proforma	$	.88			.48
Net earnings per common share - diluted:
As reported	$	1.30			.80
Proforma	$	.87			.47

Recent Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (“FIN 48”). This interpretation clarifies that management is expected to evaluate an income tax position taken or expected to be taken for likelihood of realization before recording any amounts for such position in the financial statement. FIN 48 also requires expanded disclosure with respect to income tax positions taken that are not certain to be realized. This interpretation is effective for fiscal years beginning after December 15, 2006, and will require management to evaluate every open tax position that exists in every jurisdiction on the date of initial adoption. The Company has not fully completed an assessment of the impact but believes that no material adjustment to the Company’s tax accounts will be necessary.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. However, the application of this Statement may change how fair value is determined. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The financial statement impact is not expected to be material to the Company’s financial position, results of operations or disclosures.

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.

-11-

(3) Business Combination

On July 25, 2005, the Company consummated an agreement to acquire all of the outstanding shares of Liberty Bank & Trust (“Liberty”) for $3.6 million in cash plus certain acquisition costs totaling $194,000. Additionally, the purchase price could include approximately $789,000 of contingent cash consideration that will be released from escrow only upon the lapse of the expiration period and resolution of the contingencies. The cash proceeds to consummate the purchase were obtained from cash dividends paid to the Company by its bank subsidiary, Habersham Bank. Liberty was a commercial bank based in Toccoa, (Stephens County), Georgia and had total assets of $23.2 million, including total loans of $15 million and total investments of $3.3 million. Additionally, Liberty had $20 million in deposits. The Company accounted for the transaction using the purchase method and accordingly, the purchase price was allocated to assets and liabilities acquired based upon their fair values at the date of the acquisition. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $1.1 million, none of which will be deductible for income tax purposes. Operations of Liberty are included in the consolidated statements of earnings since its acquisition.

(4) Reserve Requirements

At December 31, 2006 and 2005, the Federal Reserve Bank required that the Bank maintain average reserve balances of $1,737,000 and $799,000, respectively.

(5) Investment Securities Available for Sale

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

December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	31,049,720		9,505		385,376		30,673,849
Mortgage-backed securities		32,115,158		27,293		951,369		31,191,082
State and political subdivisions		22,804,347		226,646		93,547		22,937,446
Equity securities		209,109		-		29,071		180,038
Total	$	86,178,334		263,444		1,459,363		84,982,415

December 31, 2005		Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
U.S. government-sponsored enterprises	$	22,916,184	-	473,209	22,442,975
Mortgage-backed securities		35,499,494	23,613	1,157,411	34,365,696
State and political subdivisions		15,837,581	281,638	121,868	15,997,351
Equity securities		354,181	-	44,971	309,210
Total	$	74,607,440	305,251	1,797,459	73,115,232

Proceeds from sales and calls of available for sale securities during 2006, 2005 and 2004 were $2,013,278, $5,188,280 and $12,179,914, respectively.

Gross gains of $9,881, $35,802 and $77,669 were recognized on those sales for 2006, 2005 and 2004, respectively. Gross losses of $23,097, $50,737 and $25,853 were recognized on those sales for 2006, 2005 and 2004, respectively.

The following investments available for sale have an unrealized loss at December 31, 2006 and 2005 for which an other than temporary impairment has not been recognized:

	2006				2005
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
U.S. government-sponsored enterprises	$	6,901,880		42,746		11,529,119		201,907
Mortgage-backed securities		2,755,736		37,684		11,821,579		250,936
State and political subdivisions		4,330,457		44,412		5,677,754		93,448
	$	13,988,073		124,842		29,028,452		546,291
Unrealized loss for greater than 12 months:
U.S. government-sponsored enterprises	$	20,572,302		342,629		10,907,828		271,302
Mortgage-backed securities		26,367,202		913,685		20,849,590		906,475
State and political subdivisions		3,259,021		49,136		942,928		28,420
Equity securities		180,038		29,071		309,210		44,971
		50,378,563		1,334,521		33,009,556		1,251,168
	$	64,366,636		1,459,363		62,038,008		1,797,459

-12-

At December 31, 2006, there were 12 U.S. government-sponsored enterprises, 11 mortgage-backed securities, and 12 state and political subdivision securities with an unrealized loss for less than 12 months and 42 U.S. government-sponsored enterprises, 73 mortgage-backed securities, and 13 state and political subdivision securities and one equity investment with an unrealized loss for more than 12 months. The total fair value of the securities with an unrealized loss at December 31, 2006 represented 97.81% 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 amortized cost and estimated fair values of investment securities available for sale, exclusive of equity investments, at December 31, 2006, 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	$	1,409,885		1,408,963
Due after one year through five years		9,902,281		9,813,527
Due after five years through ten years		20,268,656		20,054,664
Due after ten years		54,388,403		53,525,223
Total	$	85,969,225		84,802,377

Investment securities available for sale with carrying values of approximately $65,505,000 and $63,842,000 were pledged as collateral at December 31, 2006 and 2005, respectively, for Federal Home Loan Bank advances, public deposits, and other deposits, as required by law.

(6) Investment Securities Held to Maturity

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

December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	68,124		1,822		-		69,946
State and political subdivisions		3,221,198		80,639		3,842		3,297,995
Total	$	3,289,322		82,461		3,842		3,367,941

December 31, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	100,164		4,249		-		104,413
State and political subdivisions		3,287,285		122,575		-		3,409,860
Total	$	3,387,449		126,824		-		3,514,273

-13-

Proceeds from calls of investment securities held to maturity during 2006, 2005 and 2004 were $80,000, $596,708 and $100,000, respectively. Gross gains of $9,281 were recognized on those calls for 2005. There were no gains or losses on maturities or calls in 2006.

The amortized cost and estimated fair values of securities held to maturity at December 31, 2006, 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	$	490,021		486,607
Due after one year through five years		1,164,418		1,186,053
Due after five years through ten years		1,229,621		1,274,818
Due after ten years		405,262		420,463
Total	$	3,289,322		3,367,941

Investment securities held to maturity with carrying values of approximately $1,680,000 and $3,107,000 were pledged as collateral at December 31, 2006 and 2005, respectively, for public deposits and other deposits, as required by law.

(7) Loans

Loans at December 31, 2006 and 2005 are summarized as follows:

	2006		2005
Real estate:
Construction	$	152,752,981		120,872,011
Other		161,190,348		169,649,663
Commercial, financial and agricultural		15,901,820		16,551,300
Consumer installment		16,503,399		13,775,048
		346,348,548		320,848,022
Less:
Unamortized loan origination fees, net		71,254		113,738
Unearned credit life premiums		16,493		16,493
Allowance for loan losses		3,444,789		3,944,525
Total	$	342,816,012		316,773,266

Changes in the allowance for loan losses are as follows:

	2006			2005			2004
Balance, January 1	$	3,944,525			3,634,643			3,643,102
Provision for loan losses		-			330,000			482,500
Loans charged off		(702,626	)		(444,351	)		(812,192	)
Recoveries		202,890			209,154			321,233
Allowance from purchase acquisition		-			215,079			-
Balance, December 31	$	3,444,789			3,944,525			3,634,643

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, 2006 and 2005 are as follows:

-14-

	2006				2005
	Balance		Allowance Amount		Balance		Allowance Amount
Impaired loans with a related allowance	$	344,930		52,000		162,609		35,300
Impaired loans without a related allowance		157,303		-		200,394		-

The average amount of impaired loans during 2006, 2005 and 2004 was $530,258, $1,014,810 and $1,569,496, respectively. The interest income recognized on such loans was $10,058 in 2006, $37,569 in 2005 and $169,648 in 2004, which approximated the amount of interest received on the cash basis.

As of December 31, 2006 and 2005, Habersham Bank’s loans to customers for agribusiness purposes in the poultry industry were approximately $4.0 million and $4.4 million, respectively. Habersham Bank held a concentration in commercial loans for the travel accommodation industry, which totaled approximately $13.2 million and $14.8 million at December 31, 2006 and 2005, respectively.

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, 2006 and 2005, the Company had outstanding loan commitments approximating $103,796,000 and $78,272,000, respectively, and standby letters of credit approximating $5,881,000 and $7,959,000, 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.

(8) Premises and Equipment

Premises and equipment are summarized as follows:

	2006		2005
Land	$	2,545,691		1,672,677
Buildings		10,464,309		10,235,771
Leasehold improvements		150,310		-
Construction in progress		1,420,585		98,133
Furniture and equipment		7,397,361		6,822,951
Total		21,978,256		18,829,532
Less accumulated depreciation		9,054,536		8,310,090
Premises and equipment, net	$	12,923,720		10,519,442

-15-

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

2007	$	504,748
2008		502,612
2009		459,802
2010		363,622
2011		242,970
Thereafter		10,554
	$	2,084,308

Rental expense was $460,625 in 2006, $362,138 in 2005 and $220,071 in 2004.

(9) Deposits and Borrowings

At December 31, 2006, the scheduled maturities of time deposits are as follows:

2007	$	212,219,658
2008		15,434,097
2009		6,564,136
2010		17,771,446
2011 and thereafter		3,032,405
Total	$	255,021,742

Short-term borrowings of $778,778 and $775,442 at December 31, 2006 and 2005, respectively, consist of a U.S. Treasury, tax and loan deposit note.

(10) 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:

	2006			2005
Balance at year-end	$	5,873,955			8,423,323
Maximum outstanding during the year		13,083,955			13,444,600
Average outstanding during the year		6,395,038			8,265,132
Weighted average interest rate during the year		2.45	%		1.23	%
Weighted average interest rate at end of year		4.04	%		1.25	%

At December 31, 2006 and 2005, the Company had available repurchase agreement line of credit commitments with a regional bank totaling $5,860,000 and $2,736,000, respectively. No amounts were outstanding under that commitment at December 31, 2006 and 2005.All securities sold under repurchase agreements are held by independent trustees. The Company also had available repurchase agreement line of credit commitments with another regional bank totaling $133,500 and $180,000 at December 31, 2006 and 2005, respectively. No amounts were outstanding under that commitment at December 31, 2006 and 2005. Securities sold under repurchase agreements at December 31, 2006 and 2005 are collateralized by investment securities with aggregate carrying values of approximately $9,314,000 and $11,248,000, respectively.

The Company did not have any federal funds purchased at December 31, 2006 and 2005. At December 31, 2006 and 2005, the Company had unused lines for overnight borrowings through Federal Funds purchased of $30,000,000.

-16-

(11) FHLB Advances

At December 31, 2006, the Company had available line of credit commitments with the Federal Home Loan Bank (FHLB) totaling $38,195,000 of which $38,000,000 was advanced and $195,000 was available.

Advances outstanding at December 31, 2006 consisted of:

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		5.61	%	May 21, 2009	Floating	No call provision
August 26, 2004		3,000,000		5.60	%	August 26, 2009	Floating	No call provision
May 17, 2005		4,000,000		4.18	%	May 19, 2008	Fixed	No call provision
May 22, 2006		3,000,000		5.46	%	May 22, 2008	Fixed	No call provision
September 13, 2006		5,000,000		5.36	%	September 14, 2009	Floating	No call provision
	$	38,000,000

At December 31, 2006, the Company has pledged against FHLB advances, certain investment securities, all stock of the FHLB, cash totaling $12,332,000 and certain qualifying first mortgage loans with an outstanding balance of $27,671,000.

Advances outstanding at December 31, 2005 consisted of:

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		4.60	%	May 21, 2009	Floating	No call provision
August 26, 2004		3,000,000		4.62	%	August 26, 2009	Floating	No call provision
May 17, 2005		4,000,000		4.18	%	May 19, 2008	Fixed	No call provision
May 19, 2005		3,000,000		3.87	%	May 19, 2010	Fixed	Callable each year
August 4, 2005		4,300,000		4.44	%	August 4, 2006	Floating	No call provision
August 8, 2005		5,000,000		4.32	%	August 8, 2006	Fixed	No call provision
	$	42,300,000

At December 31, 2005, the Company has pledged against FHLB advances, certain investment securities, all stock of the FHLB, cash totaling $300,000 and certain qualifying first mortgage loans with an outstanding balance of $24,478,000.

(12) 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 in the 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.

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.

-17-

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.

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 Federal Home Loan Bank (“FHLB”) borrowings. Each FHLB loan amount is $3 million with a quarterly adjustable rates set at 23 basis points above the three-month LIBOR. 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 matures 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 matures on August 26, 2009.

The swaps are being accounted for as cash flow hedges at December 31, 2006 and 2005. The fair values are included in other comprehensive income, net of taxes. At December 31, 2006 and 2005, Habersham Bank recorded an asset of approximately $116,000 and $80,000 to reflect the fair value of the swaps, respectively. No hedge ineffectiveness from these cash flow hedges was recognized in the consolidated statement of earnings.

(13) Income Taxes

Income tax expense (benefit) relating to continuing operations for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006		2005			2004
Current:
Federal	$	1,943,753		1,493,741			709,820
State		278,726		160,354			-
Total current		2,222,479		1,654,095			709,820
Deferred:
Federal		160,719		(4,589	)		46,183
State		28,467		(534	)		23,756
Total deferred		189,186		(5,123	)		69,939
Total	$	2,411,665		1,648,972			779,759

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

	2006			2005			2004
Income tax on earnings before income taxes at statutory rate	$	2,619,555			1,857,231			1,061,831
Differences resulting from:
Tax-exempt income		(338,217	)		(278,379	)		(260,947	)
Earnings on cash surrender value of life insurance		(58,519	)		(61,804	)		(56,903	)
State income tax, net of Federal tax effect		202,747			105,481			15,679
Other		(13,901	)		26,443			20,099
	$	2,411,665			1,648,972			779,759

-18-

At December 31, 2006 and 2005, the significant components of the Company’s net deferred tax assets and liabilities are as follows:

	2006			2005
Deferred tax assets:
Allowance for loan losses	$	1,307,642			1,497,342
Other real estate		81,434			108,039
Deferred compensation		409,593			400,273
Furniture, fixtures and equipment due to difference in depreciation methods		23,106			4,450
Unearned credit life premiums		6,261			6,261
Unrealized loss on investment securities available for sale		406,612			507,351
Loan discount		53,939			83,840
Other		196			13,889
		2,288,783			2,621,445
Deferred tax liabilities:
Unrealized gain on derivative		(39,536	)		(27,205	)
Core deposit intangible		(202,219	)		(225,779	)
Deferred loan fees		(27,048	)		(43,175	)
Unearned safe deposit box income		(9,824	)		-
Prepaid expenses		(126,413	)		(139,287	)
		(405,040	)		(435,446	)
Net deferred tax asset	$	1,883,743			2,185,999

The net deferred tax asset is included in other assets in the consolidated balance sheets.

(14) Stockholders’ Equity

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, 2006 and 2005, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2006, the most recent notifications from both the Federal Deposit Insurance Corporation and the Federal Reserve Bank of Atlanta categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s capital categories.

-19-

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2006 and 2005 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, 2006:
Total Capital (to Risk-Weighted Assets):
Company	$	55,610		14.03	%		31,720		8.00	%		N/A		N/A
Bank	$	51,915		13.19	%		31,477		8.00	%		39,346		10.00	%
Tier I Capital (to Risk-Weighted Assets):
Company	$	52,165		13.16	%		15,860		4.00	%		N/A		N/A
Bank	$	48,470		12.32	%		15,738		4.00	%		23,608		6.00	%
Tier I Capital (to Average Assets):
Company	$	52,165		10.83	%		19,260		4.00	%		N/A		N/A
Bank	$	48,470		10.14	%		19,115		4.00	%		23,893		5.00	%
As of December 31, 2005:
Total Capital (to Risk-Weighted Assets):
Company	$	50,988		14.29	%		28,536		8.00	%		N/A		N/A
Bank	$	47,720		13.49	%		28,302		8.00	%		35,377		10.00	%
Tier I Capital (to Risk-Weighted Assets):
Company	$	47,043		13.19	%		14,268		4.00	%		N/A		N/A
Bank	$	43,775		12.37	%		14,151		4.00	%		21,226		6.00	%
Tier I Capital (to Average Assets):
Company	$	47,043		10.30	%		18,271		4.00	%		N/A		N/A
Bank	$	43,775		9.69	%		18,079		4.00	%		22,599		5.00	%

The Department of Banking and Finance requires prior approval for a bank to pay dividends in excess of 50% of the preceding year’s earnings. Based on this limitation, the amount of cash dividends available from the Bank for payment in 2007 is approximately $3,080,000, subject to maintenance of the minimum capital requirements. As a result of this restriction, at December 31, 2006, approximately $48,789,000 of the parent company’s investment in the Bank is restricted as to dividend payments from the Bank to the parent company.

(15) 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 $196,760 in 2006, $149,489 in 2005 and $145,927 in 2004.

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, 2006 and 2005, the cash surrender values of the life insurance policies totaled $5,046,830 and $4,874,714, respectively, and are included in other assets in the balance sheet.

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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 five 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, 2006 and 2005.

The following table summarizes information about stock options outstanding at December 31, 2006:

Number Outstanding and Exercisable at December 31, 2006	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price
67,500	2.48	$	17.82
71,250	4.40		20.60
109,000	5.38		22.95
50,500	2.00		24.49
298,250	3.92		21.49

A summary of the status of the Company’s stock option plans and changes during 2006, 2005 and 2004 is presented below:

	2006					2005					2004
	Shares			Weighted Avg. Exercise Price		Shares			Weighted Avg. Exercise Price		Shares			Weighted Avg. Exercise Price
Outstanding at beginning of the year		367,750		$	20.98		314,500		$	19.41		262,953		$	18.21
Granted		-			-		117,750			22.95		97,500			20.60
Exercised		(63,000	)		18.27		(26,500	)		11.10		(36,453	)		14.19
Terminated		(6,500	)		23.54		(38,000	)		21.02		(9,500	)		18.53
Outstanding and exercisable at end of year		298,250			21.49		367,750			20.98		314,500			19.41

The total intrinsic value of options exercised in 2006, 2005 and 2004 was $361,157, $311,228 and $432,357, respectively. The intrinsic value of exercisable options at December 31, 2006 was $773,850 based on market price of $24.00.

The estimated fair value of options granted during 2005 and 2004 was $13.05 and $11.77 respectively, per share. The fair value of options granted under the Company’s fixed stock option plans during 2005 and 2004, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: expected dividend yield of 3.20% and 3.36% in 2005 and 2004, respectively; expected volatility of 85% in 2005 and 88% in 2004; weighted average risk-free interest rate of 4.25% and 3.75% in 2005 and 2004, respectively; and an expected weighted average life of five years in 2005 and 2004.

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(16) Other Expenses

Items comprising other expenses for the years ended December 31, 2006, 2005 and 2004 are as follows:

	2006		2005		2004
Outside services	$	1,089,565		977,933		1,078,463
Advertising and public relations		678,622		598,857		640,151
Office supplies		514,175		438,765		454,593
Other		1,923,846		1,698,594		1,665,108
Total	$	4,206,208		3,714,149		3,838,315

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

(17) Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

	2006				2005
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	90,517,808		90,517,808		52,866,422		52,866,422
Investment securities available for sale		84,982,415		84,982,415		73,115,232		73,115,232
Investment securities held to maturity		3,289,322		3,367,941		3,387,449		3,514,273
Other investments		3,365,224		3,365,224		3,375,424		3,375,424
Loans held for sale		3,183,115		3,196,032		2,119,438		2,127,819
Loans, net		342,816,012		340,071,367		316,773,266		314,701,278
Interest rate swaps		116,285		116,285		80,016		80,016
Liabilities:
Deposits	$	450,628,760		452,735,267		372,761,946		373,117,355
Short-term borrowings		778,778		778,778		775,442		775,442
Federal funds purchased and securities sold under repurchase agreements		5,873,955		5,873,955		8,423,323		8,423,323
FHLB advances		38,000,000		38,410,681		42,300,000		42,941,953

The carrying amounts of cash and cash equivalents, interest-bearing demand and savings accounts, short-term borrowings, and federal funds purchased and securities sold under repurchase agreements are a reasonable estimate of their fair value due to the short-term nature or short term to maturity of these financial instruments. The fair value of investment securities available for sale and investment securities held to maturity is based on quoted market prices and dealer quotes. Fair values of mortgage loans held for sale are determined based on relevant delivery prices in the secondary mortgage market. The fair value of other loans, time deposits, and FHLB advances is estimated by discounting the future cash flows using interest rates currently charged/paid by the Bank for such financial instruments with similar credit risks and maturities.

The fair value of Federal Home Loan Bank stock approximates carrying value. Other insignificant investments have been reflected above with fair values equaling carrying values.

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.

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As required by SFAS No. 107, demand deposits are shown at their carrying value. No value has been ascribed to core deposits, which generally bear a low rate of interest or no interest and do not fluctuate in response to changes in interest rates.

The carrying values and fair values of commitments to extend credit and standby letters of credit are not significant.

The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2006 and 2005. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

(18) 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 2006 of loans to executive officers, directors, and principal stockholders is as follows:

Balance, January 1	$	14,078,674
Amounts advanced		8,685,700
Repayments		(14,706,971	)
Balance, December 31	$	8,057,403

Deposits from related parties totaled approximately $88,834,000 and $47,658,000 at December 31, 2006 and 2005, respectively. At December 31, 2006, the Bank had one significant deposit relationship (balance greater than 5% of total deposits) with a total deposit balance of $80,043,000.

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

The parent company only condensed financial statements are presented below:

CONDENSED BALANCE SHEETS

Assets
	December 31
	2006		2005
Cash	$	746,161		439,968
Investment in subsidiaries, primarily banks		51,868,864		46,988,993
Other investments		599,990		599,990
Equipment, net		107,637		109,224
Other assets		2,315,373		2,217,708
Total assets	$	55,638,025		50,355,883

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Liabilities and Stockholders’ Equity
Accounts payable	$	73,904		98,751
Stockholders’ equity:
Common stock		2,968,593		2,921,240
Additional paid-in capital		15,530,587		14,723,175
Retained earnings		37,777,500		33,544,763
Accumulated other comprehensive income (loss)		(712,559	)	(932,046	)
Total stockholders’ equity		55,564,121		50,257,132
Total liabilities and stockholders’ equity	$	55,638,025		50,355,883

CONDENSED STATEMENTS OF EARNINGS

For the Years Ended December 31, 2006, 2005 and 2004

	2006		2005			2004
Income:
Dividends from bank	$	1,500,000		7,500,000			2,300,000
Management fees from subsidiaries		668,666		668,666			668,666
Other income		10,000		29,695			4,500
Total income		2,178,666		8,198,361			2,973,166
Expenses:
General and administrative		2,070,585		1,766,390			1,957,040
Earnings before income taxes and equity in undistributed earnings of subsidiaries		108,081		6,431,971			1,016,126
Income tax benefit		524,445		402,314			482,856
Earnings before equity in undistributed earnings of subsidiaries		632,526		6,834,285			1,498,982
(Distributions in excess of earnings) equity in undistributed earnings of subsidiaries		4,660,383		(3,020,814	)		844,291
Net earnings	$	5,292,909		3,813,471			2,343,273

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CONDENSED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2006, 2005 and 2004

	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	5,292,909			3,813,471			2,343,273
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		47,289			31,977			46,032
Gain on sale of equipment		(10,000	)		-			(4,500	)
(Increase) decrease in other assets		(97,665	)		(142,525	)		(79,083	)
(Decrease) increase in other liabilities		59,433			(65,683	)		4,995
Distributions in excess of earnings (equity in undistributed earnings) of subsidiaries		(4,660,383	)		3,020,814			(844,291	)
Net cash provided by operating activities		631,583			6,658,054			1,466,426
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Liberty Bank & Trust, net of cash acquired of $4,631,073		-			(563,111	)		-
Contributions to bank subsidiary		-			(4,631,073	)		-
Purchase of other investment		-			(599,990	)		-
Proceeds from other investment		-			-			33,032
Purchase of equipment		(45,703	)		(93,353	)		(916	)
Proceeds from sale of equipment		10,000			-			11,033
Net cash (used in) provided by investing activities		(35,703	)		(5,887,527	)		43,149
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends		(1,060,172	)		(929,785	)		(3,701,878	)
Proceeds from issuance of common stock upon exercise of stock options		770,485			168,201			364,373
Net cash used in financing activities		(289,687	)		(761,584	)		(3,337,505	)
(Decrease) increase in cash		306,193			8,943			(1,827,930	)
Cash at beginning of year		439,968			431,025			2,258,955
Cash at end of year	$	746,161			439,968			431,025

(20) Quarterly Financial Data (Unaudited)

The supplemental quarterly financial data for the years ended December 31, 2006 and 2005 is summarized as follows:

	Quarter Ended
	March 31 2006		June 30 2006		September 30 2006		December 31 2006
Interest income	$	7,963,941		8,258,056		9,122,968		9,115,073
Interest expense		2,884,292		3,051,091		3,471,205		3,811,071
Net interest income		5,079,649		5,206,965		5,651,764		5,304,001
Provision for loan losses		-		-		-		-
Net earnings		1,271,224		1,325,275		1,532,890		1,163,520
Net earnings per share - basic		.43		.45		.52		.39
Net earnings per share - diluted		.43		.44		.51		.39
	March 31 2005		June 30 2005		September 30 2005		December 31 2005
Interest income	$	5,562,893		5,993,048		6,902,595		7,477,733
Interest expense		1,852,779		1,947,664		2,248,835		2,551,060
Net interest income		3,710,114		4,045,384		4,653,760		4,926,673
Provision for loan losses		120,000		120,000		90,000		-
Net earnings		706,076		851,374		1,176,956		1,079,065
Net earnings per share - basic		.24		.29		.41		.37
Net earnings per share - diluted		.24		.29		.40		.37

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