Habersham Bancorp (HABC) 10-Q 2010 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ___________________

Commission file number 0-13153

HABERSHAM BANCORP

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Yes o  No x

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

Yes o  No x

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

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

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

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

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

Yes o No x

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

 2,818,593 shares, common stock, $1.00 par value, as of November 2, 2010.

1

Item. 1   Financial Statements

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

ASSETS	SEPTEMBER 30, 2010 (unaudited)			DECEMBER 31, 2009 (audited)
Cash and due from banks	$	28,405		$	42,515
Federal funds sold		235			-
Total cash and cash equivalents		28,640			42,515
Investment securities available for sale		60,646			74,457
Investment securities held to maturity (estimated fair value of $534 at September 30, 2010 and $903 at December 31, 2009)		520			881
Other investments		2,596			2,596
Loans		239,277			276,995
Less allowance for loan losses		(5,817	)		(12,106	)
Loans, net		233,460			264,889
Premises and equipment, net		11,830			12,606
Bank properties held for sale		5,289			5,062
Accrued interest receivable		965			1,587
Other real estate		39,769			37,833
Cash surrender value of life insurance		10,395			10,283
Income tax receivable		-			1,925
Other assets		2,174			1,385
TOTAL ASSETS	$	396,284		$	456,019
LIABILITIES
Noninterest-bearing deposits	$	39,144		$	35,570
Money market and NOW accounts		72,860			91,687
Savings		38,724			38,308
Time deposits, $100,000 and over		98,317			104,309
Other time deposits		85,151			120,287
Total deposits		334,196			390,161
Short-term borrowings		119			539
Federal funds purchased and securities sold under repurchase agreements		11,671			6,317
Federal Home Loan Bank advances		38,000			38,000
Accrued interest payable		1,240			2,192
Other liabilities		1,340			1,735
TOTAL LIABILITIES		386,566			438,944
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock – 10,000,000 authorized
Series A: No par  value; 10,000 shares authorized; no shares issued and outstanding		-			-
Series B:  No par value;  4,000 shares authorized; 4,000 shares issued  and outstanding		3,963			3,963
Common Stock, $1.00 par value, 50,000,000 and 10,000,000 shares authorized in 2010 and 2009, respectively;  2,818,593 shares issued and outstanding		2,819			2,819
Additional paid-in capital		13,490			13,490
Retained deficit		(10,297	)		(3,822	)
Accumulated other comprehensive income (loss)		(257	)		625
TOTAL STOCKHOLDERS’ EQUITY		9,718			17,075
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	396,284		$	456,019

See notes to unaudited condensed consolidated financial statements.

2

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) For the Three- and Nine-Month Periods Ended September 30, 2010 and 2009

(dollars in thousands, except share and per share amounts)

	Three Months ended						Nine Months ended
	2010			2009			2010			2009
INTEREST INCOME
Loan, including fees	$	3,018		$	4,075		$	10,096		$	12,809
Taxable investment securities		492			894			1,798			2,860
Tax exempt investment securities		38			142			135			430
Federal funds sold		1			9			3			23
Other		20			15			53			24
TOTAL INTEREST INCOME		3,569			5,135			12,085			16,146
INTEREST EXPENSE
Time deposits, $100,000 and over		520			1,021			1,771			3,113
Other deposits		645			1,549			2,373			4,890
Short-term and other borrowings, primarily FHLB advances		250			417			872			1,363
TOTAL INTEREST EXPENSE		1,415			2,987			5,016			9,366
NET INTEREST INCOME		2,154			2,148			7,069			6,780
Provision for loan losses		749			7,400			5,440			10,480
NET INTEREST INCOME  (EXPENSE) AFTER PROVISION FOR LOAN LOSSES		1,405			(5,252	)		1,629			(3,700	)
NONINTEREST INCOME
Mortgage origination income		-			15			-			108
Service charges on deposits		215			294			726			794
Other service charges and commissions		63			62			187			183
Gain on sale of investment securities		511			55			1,182			369
Gain on sale and impairment of other investments, net		-			-			-			20
Other income		362			426			1,091			1,350
Total noninterest income		1,151			852			3,186			2,824
NONINTEREST EXPENSE
Salary and employee benefits		1,146			1,836			3,511			5,740
Occupancy		390			742			1,177			1,974
Other real estate expense		744			975			1,764			1,818
Computer services		153			190			473			508
Telephone		95			118			304			353
Leased equipment		117			122			358			367
Other		1,350			1,516			3,704			3,807
Total noninterest expense		3,995			5,499			11,291			14,567
LOSS BEFORE INCOME TAXES		(1,439	)		(9,899	)		(6,476	)		(15,443	)
Income tax benefit		-			3,930			-			6,219
NET LOSS		(1,439	)		(5,969	)		(6,476	)		(9,224	)
Preferred stock dividends		-			(60	)		-			(151	)
LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,439	)	$	(6,029	)	$	(6,476	)	$	(9,375	)
Net loss  per common share – Basic	$	(.51	)	$	(2.14	)	$	(2.30	)	$	(3.33	)
Net loss  per common share – Diluted	$	(.51	)	$	(2.14	)	$	(2.30	)	$	(3.33	)
Weighted average number of common shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593
Weighted average number of common and common equivalent shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593

See notes to unaudited condensed consolidated financial statements.

3

HABERSHAM BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited) For the Three- and Nine-Month Periods Ended September 30, 2010 and 2009

(dollars in thousands)

	Three Months ended						Nine Months ended
	2010			2009			2010			2009
NET LOSS	$	(1,439	)	$	(5,969	)	$	(6,476	)	$	(9,224	)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on investment securities available for sale arising during the period		(248	)		1,716			(154	)		1,506
Unrealized holding gains on derivative financial instruments classified as cash flow hedges, arising during the period		-			26			-			95
Reclassification adjustment for realized gains on  investment securities available for sale		(511	)		(55	)		(1,182	)		(369	)
Total other comprehensive loss, before tax		(759	)		1,687			(1,336	)		1,232
INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding (gains) losses on investment securities available for sale arising during the period		84			(583	)		52			(512	)
Unrealized holding gains on derivative financial instruments classified as cash flow hedges, arising during the period		-			(9	)		-			(32	)
Reclassification adjustment for realized gains on investment securities available for sale		174			19			402			125
Total income taxes related to other comprehensive loss		258			(573	)		454			(419	)
Total other comprehensive income (loss),  net of tax		(501	)		1,114			(882	)		813
Total comprehensive loss	$	(1,940	)	$	(4,855	)	$	(7,358	)	$	(8,411	)

See notes to unaudited condensed consolidated financial statements.

4

HABERSHAM BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) For the Nine-Month Periods Ended September 30, 2010 and 2009

(dollars in thousands)

	2010			2009
CASH FLOWS PROVIDED BY (USED) BY OPERATING ACTIVITIES:	$	709		$	(997	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from maturity		7,138			10,218
Proceeds from sales and calls		103,343			24,338
Purchases		(97,185	)		(22,936	)
Investment securities held to maturity:
Proceeds from maturity		4			7
Proceeds from sales and calls		360			-
Other investments:
Proceeds from sale		-			758
Purchases		-			(2	)
Net change in loans		15,873			(5,412	)
Surrender of life insurance policies		3,129			-
Purchase of life insurance policies		(3,037	)		-
Proceeds from sale of loans		-			5,910
Purchases of premises and equipment		(17	)		(116	)
Proceeds from sales of premises & equipment		3			32
Capitalized completion costs of other real estate		(68	)		(741	)
Proceeds from sale of other real estate		7,300			4,725
Net cash provided by investing activities		36,843			16,781
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(55,965	)		10,329
Net change in short-term borrowings		(420	)		(360	)
Net change in federal funds purchased and securities sold under repurchase agreements		5,354			(8,250	)
Proceeds from FHLB advances		17,000			15,000
Repayment of FHLB advances		(17,000	)		(15,000	)
Proceeds from issuance of preferred stock		-			1,000
Stock issuance costs		(396	)		(15	)
Cash dividends paid		-			(151	)
Net cash provided by (used by) financing activities		(51,427	)		2,553
Change  in cash and cash equivalents		(13,875	)		18,337
CASH AND CASH EQUIVALENTS:  BEGINNING OF PERIOD		42,515			14,260
CASH AND CASH EQUIVALENTS:  END OF PERIOD	$	28,640		$	32,597
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Other real estate acquired through loan foreclosures	$	10,115		$	14,302
Change in components of other comprehensive income	$	(882	)	$	813
Reclassification of premises and equipment, net to bank properties held for sale	$	227		$	3,366

See notes to unaudited condensed consolidated financial statements.

5

HABERSHAM BANCORP AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

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

The condensed consolidated financial statements included herein should be read in conjunction with the Company's 2009 consolidated financial statements and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Certain reclassifications have been made to the 2009 financial statement presentation to correspond to the current period’s format.

Management performed an evaluation of subsequent events through the date upon which the Company’s financial statements were filed with the Securities and Exchange Commission.

2. Accounting Policies

Reference is made to the accounting policies of the Company described in the notes to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  The Company has consistently followed those policies in preparing this report.

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 elsewhere in this report, 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 submits regular reports to the DBF and the 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 the Bank’s progress with respect to various aspects of the Order.

6

Capital Adequacy

As of September 30, 2010, the Bank did not meet the requirements of an “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 September 30, 2010, the Bank’s Total Risk-based, Tier 1 Risk-based and Tier 1 Leverage capital ratios were 4.46%, 3.20% and 2.28%, respectively. As a result of these ratios it is 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 con ditions 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.

Management has prepared and submitted a Capital Restoration Plan that addresses the Bank’s commitment to increase its capital position to a level that would be equal to 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 million and $14.8 million for the years ended December 31, 2009 and 2008, respectively, and incurred a net loss of $6.5 million as a result of a $5.4 million provision for loan losses expense for the nine months ended September 30, 2010.  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 on non-performing and foreclosed assets could continue in the future and hinder the Company’s ability to improve net interest income.  While increased 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 the future, which will negatively impact the Company’s ability to generate net income during the year.

Liquidity

The Bank’s primary sources of liquidity are deposits, the scheduled repayment 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 earning 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.  Under the Order, the Bank is unable to accept, rollover, or renew any brokered deposits.  All existing brokered deposits have been paid out as they matured.  Based on current and expected li quidity needs and sources, management expects to be able to meet obligations at least through December 31, 2010.

7

4. Net Loss Per Share

Basic loss per share is computed by dividing net loss less dividends paid on preferred stock by the weighted average common shares outstanding.  Options on 74,000 and 172,750 shares were not included in the diluted loss per share computations for the three- and nine months ended September 30, 2010 and 2009, respectively, as they were antidilutive.

The reconciliation of the amounts used in the computation of loss per share for the three-month and nine-month periods ended September 30, 2010 and 2009 is shown below.

	Three Months			Three Months			Nine Months			Nine Months
	ended			ended			ended			ended
(dollars in thousands, except share and per share amounts)	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
Net loss	$	(1,439	)	$	(5,969	)	$	(6,476	)	$	(9,224	)
Less dividends on preferred stock		-			(60	)		-			(151	)
Net loss available to common shareholders	$	(1,439	)	$	(6,029	)	$	(6,476	)	$	(9,375	)
Weighted average common shares outstanding		2,818,593			2,818,593			2,818,593			2,818,593
Loss per share:
Basic	$	(.51	)	$	(2.14	)	$	(2.30	)	$	(3.33	)
Diluted	$	(.51	)	$	(2.14	)	$	(2.30	)	$	(3.33	)

8

5. Investment Securities Available for Sale

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

(dollars in thousands)
September 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	57,766		196		504		57,458
State and political subdivisions		3,060		17		80		2,997
Equity securities		209		-		18		191
Total	$	61,035		213		602		60,646
December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government-sponsored enterprises	$	16,311		60		290		16,081
Mortgage-backed securities		48,208		1,319		17		49,510
State and political subdivisions		8,782		87		189		8,680
Equity securities		209		-		23		186
Total	$	73,510		1,466		519		74,457

Proceeds from sales and calls of available for sale securities during the first nine months of 2010 and 2009 were approximately $103,343,000 and $24,338,000, respectively.   Gross gains of approximately $1,490,000 were recognized on those sales for the first nine months of 2010 and gross gains of approximately $377,000 were recognized on those sales for the first nine months of 2009.  Gross losses of approximately $309,000 were recognized on those sales for the first nine months of 2010 and gross losses of approximately $8,000 were recognized on those sales for the first nine months of 2009.

9

The following investments available for sale have unrealized losses at September 30, 2010 and December 31, 2009 for which an other than temporary impairment has not been recognized:

(dollars in thousands)			September 30, 2010						December 31, 2009
	No.		Estimated Fair Value		Unrealized Losses		No.		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
U.S. government-sponsored enterprises		-	$	-		-		14	$	11,531		289
Mortgage-backed securities		49		35,769		504		2		2,081		17
State and political subdivisions		-		-		-		8		2,773		147
Total (less than 12 months)		49		35,769		504		24		16,385		453
Unrealized loss for greater than 12 months:
U.S. government-sponsored enterprises		-		-		-		1		51		1
Mortgage-backed securities		-		-		-		-		-		-
State and political subdivisions		3		1,190		80		3		1,199		42
Equity securities		1		191		18		1		186		23
Total (more than 12 months)		4		1,381		98		5		1,436		66
Total		53	$	37,150		602		29	$	17,821		519

The fair value of the securities with an unrealized loss at September 30, 2010 and December 31, 2009 represented 98.40% and 97.26%, respectively, of their amortized costs, therefore, the impairment is not considered severe.  While the duration is dependent on the market, the existing unrealized loss could be shortened by the issuing agency calling the securities.  These unrealized losses are considered temporary because of the acceptable investment groups on each security and the repayment source of principal and interest are largely government backed.  The Company has the ability and intent to hold the securities for a time necessary to recover the amortized costs.

The amortized cost and estimated fair values of investment securities available for sale, exclusive of equity investments, at September 30, 2010 and 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.

10

(dollars in thousands)	September 30, 2010		September 30, 2010		December 31, 2009		December 31, 2009
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	2		2		132		132
Due after one year through five years		-		-		1,696		1,711
Due after five years through ten years		914		918		6,218		6,375
Due after ten years		59,910		59,535		65,255		66,053
Total	$	60,826		60,455		73,301		74,271

Investment securities available for sale with carrying values of approximately $42,223,000 and $40,021,000 were pledged as collateral at September 30, 2010 and December 31, 2009, respectively, for Federal Home Loan Bank advances, public deposits, and other deposits, as required by law.

6. Investment Securities Held to Maturity

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

(dollars in thousands)
September 30, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	1		-		-		1
State and political subdivisions		519		14		-		533
Total	$	520		14		-		534
December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	17		1		-		18
State and political subdivisions		864		21		-		885
Total	$	881		22		-		903

Proceeds from sales of held to maturity securities during the first nine months of 2010 totaled approximately $360,000. There were no calls of held to maturity securities during the first nine months of 2009.  Gross gains of approximately $2,000 were recognized on the sales in the first nine months of 2010. There were no gross gains or losses on the calls in the first nine months of 2009.

11

The amortized cost and estimated fair values of securities held to maturity at September 30, 2010 and 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.

(dollars in thousands)	September 30, 2010		September 30, 2010		December 31, 2009		December 31, 2009
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	-		-		345		348
Due after one year through five years		474		483		408		414
Due after five years through ten years		46		51		124		137
Due after ten years		-		-		4		4
Total	$	520		534		881		903

Investment securities held to maturity with carrying values of approximately $473,000 were pledged as collateral for public deposits and other deposits, as required by law at September 30, 2010.   There were no investment securities held to maturity pledged as collateral for public deposits and other deposits, as required by law at December 31, 2009.

7. Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, accruing loans 90 days past due, otherreal estate owned and restructured loans. Accrual of interest is discontinued when either principal or interest becomes 90 days past due, (unless the loan is  both well secured and in the process of collection), or when in management’s opinion, reasonable doubt exists as to the full collection of interest or principal.  Income on such loans is then recognized only to the extent that cash is received and when the future collection of principal is probable.  Our Other Real Estate Owned (“OREO”) policies and procedures provide that a foreclosure appraisal be obtained which provides a fair market value and a disposition (quick sale) value.  0;The disposition value is the valuation used to place the property into OREO.  Any difference between the disposition value and the loan balance is recommended for charge-off.  When the property is transferred to OREO, the property is usually listed with a realtor to begin sales    efforts.  Restructured loans consist of loans which have had concessions granted for economic or legal reasons related to the debtor’s financial difficulties which would not otherwise be considered.  Concessions may include a modification of the loan terms, such as a reduction of the stated interest rate, principal or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk.

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The following summarizes nonperforming assets:

(dollars in thousands)	September 30, 2010		December 31, 2009
Accruing loans 90 days past due	$	32	$	-
Nonaccrual loans		60,286		71,813
Other real estate		39,769		37,833
Restructured loans		1,043		728
Total nonperforming assets	$	101,130	$	110,374

8.  Bank Properties Held for Sale

As a result of a decision to consolidate locations and reduce staffing needs, the Cumming Office in Forsyth County was closed at the end of the first quarter of 2010.  As such, the property has been reclassified from premises and equipment, net, to bank properties held for sale. The Braselton Office had been reclassified to bank properties held for sale in the prior year.  In addition, the Bank plans to sell an eight acre portion of the land at the Flowery Branch office.  These properties are being actively marketed for sale.

9. Regulatory Matters

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

Under the terms of the Order, the Bank is required to 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.

During the FDIC’s most recent examination of the Bank, the FDIC indicated that the Bank was not in compliance with six provisions of the Order.  Management is working on a plan to reach compliance in a reasonable time frame. See Note 3 for further details.

10. Preferred Stock

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

The Series B Preferred Stock is nonvoting except as permitted- by law; will receive a 6% per annum non- cumulative dividend, payable quarterly; has a liquidation preference of $1,000 per share and may be redeemed by the Company at any time, subject to any required regulatory or third party approvals.  The Series B Preferred Stock is convertible into common stock at the holder’s option beginning three years after issuance at a conversion price of $4.00 per share, subject to standard anti-dilution provisions and the following limitations on conversion:  (i) the holder will not be entitled to convert the shares to the extent the conversion would result in the holder’s beneficial ownership of more than 4.99% of the shares of common stock that would be outstanding immediately following conversion unless the hol der 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.

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The Company’s Board of Directors approved the issuance of 4,000 shares of Series B Preferred Stock in the following  transactions.  On June 25, 2009, the Company issued 1,000 shares of Series B Preferred Stock to two investors for aggregate cash proceeds of $1 million. Additionally, on June 25, 2009, the Company issued 3,000 shares of Series B Preferred Stock to Fieldale Farms Corporation (“Fieldale”) in exchange for the 3,000 shares of Series A Non-Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) held by Fieldale and the cancellation of the parties’ respective rights and obligations under the Series A Preferred Stock Subscription Agreement, for no additional consideration.  As a result, there were no shares of Series A Preferred Stock outstanding and 4,00 0 shares of Series B Preferred Stock outstanding at September 30, 2010.

11. Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and    to determine fair value disclosures.  Securities available-for-sale and interest rate swap derivatives are recorded at fair value on a recurring basis.  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 municipal bonds.  Securi ties classified as Level 3 include asset-backed securities in less liquid markets.

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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 approximates fair value.

Loans

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

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures an impairment 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 Compa ny records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

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

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

Other Real Estate

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

Cash Surrender Value of Life Insurance

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

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.

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Federal Funds Purchased and Securities Sold Under Repurchase Agreements

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

FHLB Advances

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

Commitments to Extend Credit and Standby Letter of Credit

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

Assets Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009.

	September 30, 2010
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale	$	60,646		11,592		49,054		-

	December 31, 2009
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Investment securities available for sale	$	74,457		8,465		65,992		-

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2010 and December 31, 2009.

	September 30, 2010
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Other real estate	$	39,769		-		9,198		30,571
Loans		30,063		-		30,063		-
Total	$	69,832		-		39,261		30,571

	December 31, 2009
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Other real estate	$	37,833		-		1,907		35,926
Loans		26,088		-		26,088		-
Total	$	63,921		-		27,995		35,926

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The carrying amount and estimated fair values of the Company’s assets and liabilities which are required to be either disclosed or recorded at fair value at September 30, 2010 and December 31, 2009 are presented below:

	September 30, 2010				December 31, 2009
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	$	28,640		28,640		42,515		42,515
Investment securities available for sale		60,646		60,646		74,457		74,457
Investment securities held to maturity		520		534		881		903
Other investments		2,596		2,596		2,596		2,596
Loans, net		233,460		233,233		264,889		264,891
Cash surrender value of  life insurance		10,395		10,395		10,283		10,283
Liabilities:
Deposits	$	334,196		334,977		390,161		392,792
Short-term borrowings		119		119		539		539
Federal funds purchased and securities sold under repurchase agreements		11,671		11,671		6,317		6,317
FHLB advances		38,000		38,328		38,000		38,869

Limitations

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

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

12. Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-01, Accounting for Distributions 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 earnings per share 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.  The update is not expected to have a material impact on the Company’s results of o perations, financial position or disclosures.

In January 2010, the FASB issued Accounting Standards Update No. 2010-04, Technical Corrections to SEC Paragraphs (“ASU No. 2010-04”).  The update is not expected to have an impact on the Company’s results of operations, financial position or disclosures.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”).  ASU No. 2010-06 amends FASB ASC 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 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).  The update 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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In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (“ASU No. 2010-09”).  ASU No. 2010-09 amends FASB ASC Subtopic 855-10, Subsequent Events, to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements.  This change alleviates potential conflicts between ASC Subtopic 855-10 and the SEC’s requirements.  The update 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.

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset ("ASU No. 2010-18).  ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset such as acquired loans that have evidence of credit deterioration upon acquisition that are accounted for under the guidance in ASC 310-30.  ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring or remain in the pool after modification.   ASU No. 2010-18 clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring.  An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change.  The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.  ASU 2010-18 is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ("ASU 2010-20"). ASU 2010-20 amends existing disclosure guidance to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. ASU 2010-20 is effective for fiscal and interim periods ending after December 15, 2010. The Company will review the requirements under the standard to determine what impacts, if any, the adoption of the standard would have on our consolidated financial statements.

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

HABERSHAM BANCORP AND SUBSIDIARIES

Organization

Habersham Bancorp (the “Company”) owns all of the outstanding stock of Habersham Bank ("Habersham Bank") and an inactive subsidiary, The Advantage Group, Inc.  The Company’s continuing primary business is the operation of banks in rural and suburban communities in Habersham, White, Cherokee, Warren, Stephens, and Hall counties in Georgia.  The Company’s primary source of revenue is providing loans to businesses and individuals in its market area.

Executive Summary

Habersham Bancorp reported a third quarter loss of $1.4 million, or $.51 per diluted share,  in 2010 when compared to third quarter loss of $­­­­­­­­­­­­­­­­6.0 million, or $2.14 per diluted share, in 2009.  The year-to-date loss for the nine-month period ended September 30, 2010, was $6.5 million, or $2.30 per diluted share, when compared to the loss of $9.4 million or $3.33 per diluted share, for the same period in 2009.

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

Interest income for the third quarters of 2010 and 2009 was approximately $3.6 million and $5.1 million, respectively, representing a decrease of approximately 30.50% when comparing the third quarter of 2010 to the same period of 2009.  Interest income for the nine-month periods ended September 30, 2010 and 2009 was approximately $12.1 million and $16.1 million, respectively, representing a decrease of approximately 25.15% when comparing the 2010 period to the same period in 2009.  The decreases resulted from the effect of decreases in average loan balances and increases in the number and balances of loans in nonaccrual status.

Interest expense for the third quarters of 2010 and 2009 was approximately $1.4 million and $3.0 million, respectively, representing a decrease of approximately 52.63% when comparing the third quarter of 2010 to the same period of 2009.  Interest expense for the nine-month periods ended September 30, 2010 and 2009 was approximately $5.0 million and $9.4 million, respectively, representing a decrease of approximately 46.44% when comparing the 2010 period to the 2009 period.  These decreases resulted from declining balances in the deposit portfolios, in addition to declining rates paid on deposit and borrowing balances for the three-month period and nine-month periods ended September 30, 2010, when compared to the same periods in 2009.

Net interest income before provision for loan loss for the third quarter of 2010 and the nine-month period ended September 30, 2010 increased approximately $6,000 or .28% and $289,000 or 4.26%, respectively, when compared to the same periods in 2009 as a result of the items discussed above.

The Bank recorded provisions to its allowance for loan losses during the third quarter and first nine months of 2010 of approximately $749,000 and $7.4 million, respectively.   During the third quarter and first nine months of 2009, Habersham Bank recorded provisions to its allowance for loan losses of approximately $5.4 million and $10.5 million, respectively.  The decrease in the total net loan portfolio resulted in a lower provision for the 2010 periods as compared to the 2009 periods.

The net interest margin for the third quarter and first nine months of 2010 was 2.83% and 2.93%, respectively, compared to 2.17% and 2.22% for the same periods in 2009.  Two factors which impact the net interest margin are average interest bearing assets, which decreased approximately $97.9 million and average interest-bearing liabilities, which decreased approximately $61.5 million, when comparing the first nine months of 2010 to the first nine months of 2009.  Also, average rates paid on deposit balances and borrowings decreased upon renewal during the third quarter and first nine months of 2010 approximately .77% and .89%, respectively.

Total assets decreased approximately $59.7 million or 13.09% from $456.0 million at December 31, 2009 to $396.3 million at September 30, 2010.   Decreases in total net loan portfolio, investment securities portfolio, cash and cash equivalents and other assets totaling approximately $31.4 million, $14.2 million, $13.9 million and $2.2 million, respectively, were offset by an increase in other real estate of approximately $1.9 million.

Total liabilities (deposits, borrowings and other liabilities) at September 30, 2010 decreased approximately $52.2 million, or 11.90%, from $438.9 million at December 31, 2009 to $386.7 million at September 30, 2010.   Decreases in time deposits, interest bearing deposits (money market and NOW accounts), and other liabilities totaling approximately $41.1 million, $18.4 million, and $1.3 million, respectively, were offset by increases in other borrowings and in noninterest bearing deposits totaling approximately $4.9 million and $3.6 million, respectively.

Forward Looking Statements

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

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

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

Material Changes in Financial Condition

Total Assets

The Company’s total assets decreased $59.7 million, or 13.09% to $396.3 million at September 30, 2010 from $456.0 at December 31, 2009 primarily as a result of decreases in total net loan portfolio, investment securities portfolio, cash and cash equivalents and other assets totaling approximately $31.4 million, $14.2 million, $13.9 million and $2.2 million, respectively, offset by an increase in other real estate of approximately $1.9 million.

Cash and cash equivalents

Cash and due from banks decreased approximately $14.1 million or 33.19%, resulting from customer activity within deposit accounts during the nine month period ended September 30, 2010.  Federal fund sold balances increased by approximately $235,000 during this period.

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Investment securities

Activity within the investment securities available for sale portfolio during the first nine months of 2010 consisted of:

(dollars in thousands)	U.S. government-sponsored enterprises			Mortgage backed securities			Municipal bonds			Equity securities		Unrealized Gain / Loss			Total
December 31, 2009	$	16,311			48,208			8,782			209		947			74,457
Purchased		3,085			94,100			-			-		-			97,185
Calls & sales		(19,519	)		(78,379	)		(5,442	)		-		-			(103,340	)
Gain / loss		197			1,264			(279	)		-		-			1,182
Payments / maturities		(54	)		(7,084	)		-			-		-			(7,138	)
Accret / amort		(20	)		(343	)		(1	)		-		-			(364	)
Change in unrealized gain/loss		-			-			-			-		(1,336	)		(1,336	)
September 30, 2010	$	-			57,766			3,060			209		(389	)		60,646

The calls and sales within the investment securities portfolio generated net gains of approximately $1,182,000 during the first nine months of 2010.  The unrealized gain on investment securities available for sale portfolio decreased approximately $1,336,000 during the first nine months of 2010.

Loans

The total loan portfolio balances decreased approximately $37.7 million, or 13.62%, when comparing balances at September 30, 2010 to December 31, 2009.

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The following table presents a summary of the loan portfolio, by collateral type, as of September 30, 2010 and December 31, 2009.

Summary of Loans By Category
	September 30, 2010					December 31, 2009
			Percent of Loans					Percent of Loans
Secured by real estate:
1-4 family residential	$	33,578		14	%	$	43,702		16	%
Commercial real estate and multi-family		78,204		33	%		71,832		26	%
Construction		82,597		34	%		107,718		39	%
Home equity line of credit		26,011		11	%		27,749		10	%
Total real estate		220,390		92	%		251,001		91	%
Other loans:
Commercial		9,561		4	%		13,763		5	%
Loans to individuals		9,326		4	%		12,231		4	%
Total other loans		18,887		8	%		25,994		9	%
Total loans	$	239,277		100	%	$	276,995		100	%

The decrease in the loan portfolio balances resulted from payouts, net charge-offs, and foreclosures of approximately $15.9 million, $11.7 million and $10.1 million, respectively.  Decreases within the various lending portfolios consisting of the of real estate construction, 1-4 family residential properties, commercial lending and consumer totaling approximately $11.9 million, $4.2 million and $2.9 million, respectively, were  partially offset by an increase in the commercial real estate portfolio of approximately $6.4 million.

Other real estate and premises & equipment

Other real estate balances increased approximately $1.9 million during the first nine months of 2010.  This increase was the result of foreclosures totaling approximately $10.1 million offset partially by sales of ORE properties totaling approximately $7.3 million, losses on those sales of $605,000 and ORE write down expense of $341,000.  -  See a more detailed discussion in “Asset Quality”.

Deposits

Total deposits decreased approximately $56.0 million when comparing balances at September 30, 2010 to December 31, 2009 balances.  Decreases in time deposits, interest bearing deposits (money market and NOW accounts), and other liabilities totaling approximately $41.1 million, $18.4 million, and $1.3 million, respectively, were partially offset by increases in other borrowings and in noninterest bearing deposits totaling approximately $4.9 million and $3.6 million, respectively.

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Balances and percentages within the major deposit categories are as follows:

	September 30, 2010
(In thousands)	Core Retail Deposits		National Market Deposits		Brokered Deposits		Total Deposits
Noninterest-bearing demand deposits	$	39,144		-		-		39,144
Interest-bearing demand deposits		72,860		-		-		72,860
Savings deposits		38,724		-		-		38,724
Certificates of deposit $100,000 and over		57,816		40,501		-		98,317
Other time deposits		78,102		7,049		-		85,151
	$	286,646		47,550		-		334,196

	December 31, 2009
(In thousands)	Core Retail Deposits		National Market Deposits		Brokered Deposits		Total Deposits
Noninterest-bearing demand deposits	$	35,570	$	-	$	-	$	35,570
Interest-bearing demand deposits		91,687		-		-		91,687
Savings deposits		38,308		-		-		38,308
Certificates of deposit $100,000 and over		82,853		21,456		-		104,309
Other time deposits		92,863		17,362		10,062		120,287
	$	341,281	$	38,818	$	10,062	$	390,161

Borrowings

Total borrowings increased approximately $4.9 million, or 10.99%, when comparing September 30, 2010 balances to December 31, 2009.  This increase resulted primarily from activity with the repo sweep account balances.

Material Changes in Results of Operations

Net interest income is the largest single source of income for the Company.  Management strives to attain a level of earning assets to provide a net yield on earning assets that will cover overhead and other costs and provide a reasonable return to our stockholders.  Net interest income is affected by interest income from loans, investment securities and federal funds sold offset by interest paid on deposits and borrowings.  The following table compares the weighted average tax equivalent yields for loans, investment securities and federal funds sold and the weighted average rates paid for deposits and borrowings for the third quarters and the first nine months of 2010 and 2009.

	Three Months ended September 30						Nine Months ended September 30
	2010			2009			2010			2009
INTEREST YIELDS EARNED:
Loans		4.90	%		5.38	%		5.24	%		5.44	%
Investment securities		3.62	%		4.75	%		3.95	%		4.78	%
Federal funds sold		.25	%		.22	%		.24	%		.26	%
INTEREST RATES PAID:
Deposits		1.54	%		2.68	%		1.74	%		2.81	%
Borrowings		1.97	%		3.44	%		2.35	%		3.58	%

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Interest

Total interest income for the third quarter of 2010 decreased approximately $1.6 million, or 30.50%, when compared to the third quarter of 2009.  Total interest income for the nine-month period ending September 30, 2010 decreased  approximately $4.1 million, or 25.15%, when compared to the nine-month period ending September 30, 2009.

The decrease in interest income is the result of the following:

Approximately $181.5 million, or 73.04%, of the loan portfolio is a variable rate loan product which may reprice daily, monthly, quarterly or annually.  As the prime rate remains at a low level, as it has in the periods in question, the loan yields remain low.  Average loan balances decreased approximately $56.7 million, or 17.97%, due to maturities, payouts, charge-offs and foreclosures when comparing the first nine months of 2010 and 2009.  Approximately $60.3 million, or 25.20%, of  the loan portfolio is in nonaccrual status at September 30, 2010.   Average nonaccrual loan balances for the first nine months of 2010 increased approximately $8.9 million, or 17.45%, when compared to the average balances for the same period in 2009.  Interest income is reduced as the number a nd balances of loans in nonaccrual status increases.  See a more detailed discussion in “Asset Quality”.

Total interest expense for the third quarter of 2010 decreased approximately $1.6 million, or 52.63%, when compared to the third quarter of 2009.  Average balances in interest bearing accounts decreased approximately $78.8 million when comparing the third quarter of 2010 to the third quarter of 2009.  During the same period, the average interest rate paid on deposits decreased approximately 1.14%.  Rates on time deposits, savings and money market accounts, and interest bearing demand deposits decreased approximately 1.30%, .42% and .34%, respectively.  Average balances in other borrowings increased approximately $2.4 million when comparing third quarter of 2010 to the third quarter of 2009 with a decrease in the average rate paid on borrowings of approximately 1.47% as FHLB advances renewed with sub stantially lower rates.

Total interest expense for the first nine months of 2010 decreased approximately $4.3 million, or 46.44%, when compared to the first nine months of 2009.  Average balances in interest bearing accounts decreased approximately $60.1 million when comparing the first nine months of 2010 to the first nine months of 2009.  During the same period, the average interest rate paid on deposits decreased approximately 1.07%.  Rates on time deposits, savings and money market accounts, and interest bearing demand deposits decreased approximately 1.22%, .48% and .30%, respectively.  Average balances in other borrowings decreased approximately $1.4 million when comparing the first nine months of 2010 to the first nine months of 2009 with a decrease in the average rate paid on borrowings of approximately 1.23% as FH LB advances renewed with substantially lower rates.

Net interest income before provision for loan losses increased approximately $6,000, or .28%, for the third quarter of 2010 and increased  approximately $289,000 or 4.26% for the first nine months of 2010 when compared to the same periods in 2009 as a result of the items discussed above.

The net interest margin of the Company, net interest income divided by average earning assets, was 2.83% for the third quarter of 2010 compared to 2.17% for the third quarter of 2009, and was 2.93% for the first nine months of 2010 compared to 2.22% for the first nine months of 2009.

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Noninterest income

The following table sets forth the categories of noninterest income for the third quarter and the first nine months of 2010 and 2009:

	September 30,							September 30,
(dollars in thousands)	Three Months ended				Increase/			Nine Months ended				Increase/
	2010		2009		(Decrease)			2010		2009		(Decrease)
Mortgage origination income	$	-		15		(15	)		-		108		(108	)
Service charges on deposits		215		294		(79	)		726		794		(68	)
Other service charges and commissions		63		62		1			187		183		4
Net gain on sale of investment securities available for sale		511		55		456			1,182		369		813
Gain on sale and impairment of other investments, net		-		-		-			-		20		(20	)
Income from life insurance		77		81		(4	)		205		259		(54	)
Trust service fees		106		105		1			337		331		6
Other income		179		240		(61	)		549		760		(211	)
Total noninterest income	$	1,151		852		299			3,186		2,824		362

Noninterest income increased approximately $299,000, or 35.09%, for the third quarter of 2010 over the same period in 2009.  The increase primarily resulted from net gains realized on calls and sales within the investment securities portfolio partially offset by decreases in mortgage origination income, service charges, life insurance income and other income.  Mortgage origination income ceased in 2010 as the mortgage division was closed.  The decrease in service charges on deposits is a result of the decrease in deposit accounts.   Income from life insurance decreased as a result of an adjustment related to the surrender and 1035 exchange of life insurance policies. In other income, the sale of Advantage Insurers at December 30, 2009 resulted in the loss of income of approximately $108,000 whe n comparing the third quarter of 2010 to the same period in 2009.

Noninterest income increased approximately $362,000, or 12.82%, for the first nine months of 2010 over the same period in 2009.  The increase primarily resulted from net gains realized on calls and sales within the investment securities portfolio partially offset by decreases in mortgage origination income, service charges, life insurance income and in other income.  Mortgage origination income ceased in 2010 as the mortgage division was closed. The decrease in service charges on deposits is a result of the decrease in deposits accounts.  Income from life insurance decreased as a result of an adjustment related to the surrender and 1035 exchange of life insurance policies. In other income, the sale of Advantage Insurers at December 30, 2009 resulted in the loss of income of approximately $362,000 when compari ng the first nine months of 2010 to the same period in 2009.

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Noninterest expense

The following table sets forth the categories of noninterest expense for the third quarter and the first nine months of 2010 and 2009:

	September 30,							September 30,
(dollars in thousands)	Three Months ended				Increase/			Nine Months ended				Increase/
	2010		2009		(Decrease)			2010		2009		(Decrease)
Salaries and employee benefits	$	1,146		1,836		(690	)		3,511		5,740		(2,229	)
Occupancy expenses		390		742		(352	)		1,177		1,974		(797	)
Other real estate expense		744		975		(231	)		1,764		1,818		(54	)
Computer services		153		190		(37	)		473		508		(35	)
Telephone		95		118		(23	)		304		353		(49	)
Leased equipment expense		117		122		(5	)		358		367		(9	)
Other expense		1,350		1516		(166	)		3,704		3,807		(103	)
Total noninterest expense	$	3,995		5,499		(1,504	)		11,291		14,567		(3,276	)

Noninterest expense decreased $1.5 million, or 27.35%, for the third quarter of 2010 over the same period in 2009 primarily as a result of reduction of salary and employee benefits and occupancy expenses of approximately $690,000 and $352,000, respectively.  The decrease in salary and employee benefits and occupancy expense reflect staff reductions and the elimination of occupancy expense resulting from the closing of three branch offices.  Other real estate expense includes costs to maintain foreclosed properties.  The decrease of approximately $166,000 in other expense consists of decreases in outside services, other expenses, marketing expenses and office supplies of approximately $59,000, $49,000, $30,000 and $28,000, respectively. Outside services includes FDIC insurance, legal and professional services, insurance, director fees and State of Georgia Department of Banking fees.  Increases in FDIC insurance expense  and insurance expense of  approximately $63,000 and $42,000 for the third quarter of 2010 when compared to the third quarter of 2009 were offset by decreases in director fees and legal and professional expenses of approximately $84,000 and $80,000, respectively.  Payment of director fees has been discontinued and tighter expense control measures have resulted in decreases in other miscellaneous expense when comparing the third quarter of 2010 to the third quarter of 2009.

Noninterest expense decreased $3.3 million, or 22.49%, for the first nine months of 2010 over the same period in 2009 primarily as a result of reduction of salary and employee benefits and occupancy expenses of approximately $2.2 million and $797,000, respectively.  The decrease in salary and employee benefits and occupancy expense reflect staff reductions and the elimination of occupancy expense resulting from the closing of three branch offices.  Other real estate expense includes costs to maintain foreclosed properties.   The decrease of approximately $103,000 in other expense consists of an increase in outside services of approximately $305,000 offset by decreases in other miscellaneous expenses, marketing expenses and office supplies of approximately $220,000, $120,000 and $68,000, respectively. 0;  Outside services includes FDIC insurance, legal and professional services, insurance, director fees and State of Georgia Department of Banking fees.  Increases in FDIC insurance and other insurance expense of approximately $585,000 and $33,000, respectively, were offset by decreases in director fees  and legal and professional expenses of approximately $252,000 and $61,000  for the first nine months of 2010 when compared to the first nine months of 2009.  In their regular board meeting on September 19, 2009, the Boards of Directors of the Company and the Bank voted unanimously to suspend director fee payments effective immediately.  No date or time frame was established for recommencement of payments.

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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.  A valuation allowance of 100% was established based on the “more likely than not” threshold for the Company’s net deferred income tax assets as of December 31, 2009.  No income tax benefit was recorded for the three- and nine-months ended September 30, 2010 as realization of any benefit continues to be largely dependent upon future taxable income.  The effective tax rate for the three- and nine-months ended September 30, 2010 and 2009 is not meaningful due to the valuation allowance recorded on the Company’s deferred ta x assets and the losses incurred in both periods.

Asset Quality

The allowance for loan losses represents a reserve for probable losses in the loan portfolio.  The adequacy of the allowance for loan losses is evaluated monthly based on a review of all significant loans, with particular emphasis on impaired, nonaccruing, past due and other loans that management believes require special attention.  The determination of the allowance for loan losses is subjective and based on consideration of a number of factors and assumptions.

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

For loans considered impaired, specific allowances are provided in the event that the specific collateral analysis on each problem loan indicates that the liquidation of the collateral would not result in repayment of these loans if the loan is collateral dependent or if the present values of expected future cash flows on the loan are less than the balance.  In addition to these allocated allowances, at any point in time, the Company may have an unallocated component of the allowance.  Unallocated portions of the allowance are due to a number of quantitative and qualitative factors, such as changes in the condition of impaired loans and credit concentrations.  All nonaccrual loans are considered impaired.

The risk associated with lending varies with the creditworthiness of the borrower, the type of loan (consumer, commercial, or real estate) and its maturity.  Cash flows adequate to support a repayment schedule are an element considered for all loans.  Real estate loans are impacted by market conditions regarding the value of the underlying property used as collateral.  Commercial loans are also impacted by the management of the business as well as economic conditions. The Company also makes unsecured loans from time to time. The risk to the Company is greater for unsecured loans as the ultimate repayment of the loan is only dependent on the borrower’s ability to pay.  The balance of unsecured loans at September 30, 2010 was $9.2 million as compared to $12.6 million at December 31, 2009.

We allocate the allowance for loan losses to specific categories of loans in our portfolio. See the tables below for the allocation of loan losses and for a history of charge-offs by loan category, which may or may not be indicative of future charge-offs by category.

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Allocation of the Allowance for Loan Losses

	September 30, 2010					December 31, 2009
(In thousands)	Amount		% of Loans in Category			Amount		% of Loans in Category
Commercial, financial and agricultural	$	521		3.50	%	$	460		4.78	%
Real estate – construction		1,999		34.20	%		1,236		15.17	%
Real estate		2,788		58.37	%		10,122		75.59	%
Consumer		509		3.93	%		285		4.46	%
Unallocated		-		-			3		-
Total	$	5,817		100.00	%	$	12,106		100.00	%

At September 30, 2010 and December 31, 2009, the ratio of the allowance for loan losses to total loans was 2.43% and 4.37%, respectively.   For the third quarters of 2010 and 2009, provision for loan losses expense totaled approximately $749,000 and $7.4 million, respectively.  For the first nine months of 2010 and 2009, provision for loan losses expense totaled approximately $5.4 million and $10.5 million, respectively.  The decrease in the total net loan portfolio resulted in a lower provision for the 2010 periods as compared to the 2009 periods.

Net charge-offs for the first nine months of 2010 totaled approximately $11.7 million compared to net charge-offs of $12.3 million for the first nine months of 2009 as detailed below:

(dollars in thousands)	No.		September 30, 2010		No.		September 30, 2009
Charge-offs:
Commercial		10	$	442		16	$	874
Real Estate		58		11,306		63		11,019
Consumer		43		357		66		493
Total Charge-offs		111		12,105		145		12,386
Recoveries:
Commercial				42				4
Real Estate				210				66
Consumer				123				46
Total Recoveries				375				116
Net Charge-offs			$	11,730			$	12,270

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

(dollars in thousands)	September 30, 2010		December 31, 2009
Accruing loans 90 days past due	$	32	$	-
Nonaccrual loans		60,286		71,813
Other real estate		39,769		37,833
Restructured loans		1,043		728
Total nonperforming assets	$	101,130	$	110,374

Nonperforming assets decreased approximately $9.2 million or 8.38% from December 31, 2009 to September 30, 2010.   See the discussion that follows within this section for a description of the assets that comprised this decrease.

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Loans classified as 90 days past due and still accruing totaled approximately $32,000 at September 30, 2010.   The increase is the net result of the following changes:

(dollars in thousands)
Balance at December 31, 2009	$	-
New loans classified to 90 days past due status		2,582
Payments received		(1,484	)
To non-accrual		(1,066	)
Forbearance & modification agreements		-
Balance at September 30, 2010	$	32

The following summarizes accruing loans 90 days past due at September 30, 2010 and December 31, 2009:

(dollars in thousands)	September 30,  2010		December 31, 2009
Real estate secured construction loans	$	-	$	-
Residential loans		32		-
Non-farm non-residential		-		-
Commercial loans		-		-
	$	32	$	-

Impaired loans consist of loans on nonaccrual status.

The following summarizes nonaccrual loans at September 30, 2010 and December 31, 2009:

(dollars in thousands)	Number of Loans		September 30, 2010		Number of Loans		December 31, 2009
Real Estate – construction & development loans		39	$	45,124		50	$	59,863
Real Estate – residential loans		28		5,601		23		4,967
Real Estate – commercial		12		9,118		8		6,549
Commercial loans		5		312		3		217
Consumer loans		14		131		11		217
Total nonaccrual loans		98	$	60,286		95	$	71,813

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The decrease is the net result of the following changes:

(dollars in thousands)
Balance at December 31, 2009	$	71,813
Loans reclassified to nonaccrual status in 2010		15,018
Advances		553
Payments received on nonaccrual loans during 2010		(4,996	)
Nonaccrual loans charged-off during 2010		(11,832	)
Nonaccrual loans reclassified to other real estate		(10,059	)
Nonaccrual loans reclassified to repossessions		-
Nonaccrual loans reclassified to accrual status in 2010		(211	)
Balance at September 30, 2010	$	60,286

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

Additions of loans on nonaccrual status consisted of the following:

(dollars in thousands)	September 30, 2010
Real Estate – construction & development loans	$	4,967
Real Estate – residential loans		2,666
Real Estate – commercial		6,737
Commercial loans		459
Consumer loans		189
Total  nonaccrual loans	$	15,018

Other real estate at September 30, 2010 increased approximately $1.9 million or 5.12% when compared to December 31, 2009. The following summarizes other real estate at September 30, 2010 and December 31, 2009:

(dollars in thousands)	Number of Properties		September 30,  2010		Number of Properties		December 31, 2009
Residential properties – spec houses		28	$	9,808		33	$	12,412
Commercial properties		10		3,707		13		5,117
Vacant lots		394		24,490		223		19,462
Mobile home and lot		2		78		1		51
Residential construction properties		6		1,686		2		791
Total other real estate		440	$	39,769		272	$	37,833

30

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

(dollars in thousands)
Balance at December 31, 2009	$	37,833
Foreclosed property		10,115
Additions to complete		68
Losses on sales		(605	)
Write down		(341	)
Sales of other real estate		(7,301	)
Balance at  September 30, 2010	$	39,769

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

The following summarizes restructured loans at September 30, 2010 and December 31, 2009:

(dollars in thousands)	September 30, 2010		December 31, 2009
Residential loans – 1-4 Family	$	857	$	478
Real Estate – unimproved land		-		96
Commercial loans		57		80
Consumer loans		129		74
Total	$	1,043	$	728

Liquidity and Capital Resources

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

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

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

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

31

At September 30, 2010 and December 31, 2009, the Company had additional line of credit commitments, subject to available collateral, available as shown below:

	September 30, 2010		December 31, 2009
(dollars in thousands)	Total Available		Total Available
Federal discount window	$	5,273	$	8,672

The Company has approximately $11.7 million outstanding in commercial sweep accounts at September 30, 2010.   In addition, the Company has a total available line of $38.0 million, subject to available collateral, from the Federal Home Loan Bank.  The Company had $38.0 million in advances on this line at September 30, 2010.

Also, liquidity as a percent of deposits and total liabilities is monitored daily.   The Bank’s liquidity ratios as a percent of deposits and total liabilities follow:

	September 30, 2010	December 31, 2009
Liquidity as a percent of deposits	14.42%	22.38%
Liquidity as a percent of total liabilities	12.46 %	20.04%

FDIC and Federal Reserve Board regulations require minimum Tier 1 and total capital ratios of 4% and 8%, respectively, and a minimum leverage ratio (Tier 1 capital to average assets) of at least 4%.  “Well capitalized” status is represented by Tier 1, total and leverage ratios of at least 6%, 10% and 5%, respectively, although an institution that is subject to an order requiring it to maintain specified minimum capital ratios cannot be classified as “well capitalized” even if it increases its capital ratios to the necessary levels.  Under our current regulatory order, the Bank is required to maintain a total capital ratio of at least 10% and a Tier 1 capital  ratio of at least 8%.  The Company’s and the Bank’s capital ratios at September 30, 2010 and December 31, 2009 follow:

September 30, 2010

	Habersham	Habersham
	Bank	Bancorp
Tier 1 Leverage	2.28%	2.38%
Tier 1 Risk-based Capital	3.20%	3.33%
Total Risk-based Capital	4.46%	4.59%

December 31, 2009

	Habersham	Habersham
	Bank	Bancorp
Tier 1 Leverage	3.08%	3.39%
Tier 1 Risk-based Capital	4.41%	4.87%
Total Risk-based Capital	5.69%	6.15%

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We are currently classified as "significantly undercapitalized" for regulatory capital purposes.  As a result, we are subject to enhanced regulatory supervision, both under the Order and under FDIC regulations.  For example, we must obtain regulatory approval to add or replace directors or executive officers; obtain prior regulatory approval for new business lines, acquisitions, branch purchases and other significant transactions; submit a capital restoration plan for regulatory review; and comply with regulatory limitations on the amount of severance or “golden parachute” payments we are permitted to make.  See Note 3 to our Condensed Consolidated Financial Statements appearing in Item 1 of this Report and the “Supervision and Regulation—Regulatory Order” and “Risk Factors —We are subject to heightened regulatory scrutiny and the Bank is currently under a Cease and Desist Order that imposes additional requirements and restrictions on our business” sections of our Annual Report on Form 10-K for additional information about the Order.

To address our capital issues, we are currently conducting an intrastate offering of Units to raise a minimum of $5.0 million and a maximum of $25.0 million in proceeds. Each Unit is offered for $1.30 and consists of one share of our common stock and one warrant to purchase an additional share of our common stock at the exercise price of $1.95 for a period of five years from the date of issuance of the warrant.  If the entire offering is placed, the expected net proceeds to the Company after fees and expenses are estimated to be $22,700,000. Only residents of the State of Georgia may participate in the offering.  The common stock and warrants being offered will not be registered under the Securities Act of 1933, as amended, and the common stock and warrants may not be offered or sold in the United States absent registr ation or an applicable exemption from the registration requirements. The offering is only being made pursuant to a prospectus. A registration statement relating to the shares of common stock and warrants issued in the offering (and the shares of common stock issuable upon exercise of the warrants) has been filed with the Georgia Securities Commissioner and has been declared effective. This statement is neither an offer to sell nor a solicitation of an offer to buy any of our shares of common stock or warrants. No offer, solicitation or sale will be made in any jurisdiction in which such offer, solicitation or sale is unlawful.

We are also pursuing other strategic initiatives designed to improve our capital position, including but not limited to consideration of potential business combinations, continued sales of loans and other real estate owned, generation of operating income, and seeking additional sources of capital.  If these strategies are not successful, however, and if we are unable to otherwise meet minimum regulatory capital standards, our financial performance could be adversely affected and we could become subject to further regulatory restrictions on our operations or ultimately receivership of the Bank.

Regulatory Reform Legislation

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Reform Act”) was signed into law.   The Dodd-Frank Reform Act represents a significant overhaul of many aspects of the regulation of the financial services industry, although many of its provisions (e.g., the interchange and trust preferred capital limitations) apply to companies that are significantly larger than the Company.   The Dodd-Frank Reform Act directs applicable regulatory authorities to promulgate regulations implementing its provisions, and its effect on the Company and on the financial services industry as a whole will be clarified as those regulations are issued.    Compliance with these new laws and regulations may result in additional costs and may otherwise adverse ly impact our results of operations, financial condition or liquidity.

Major elements of the Dodd-Frank Reform Act include:

• A permanent increase in deposit insurance coverage to $250,000 per account, permanent unlimited deposit insurance on noninterest-bearing transaction accounts, and an increase in the minimum Deposit Insurance Fund reserve requirement from 1.15% to 1.35% by September 30, 2020, with assessments to be based on assets as opposed to deposits.  Institutions such as ours with less than $10 billion in assets will be exempt from increased premiums required to support the increase in the reserve requirement, but could be subject to increased premiums for other reasons.  The Dodd-Frank Reform Act also grants to the FDIC greater authority to build up excess reserves when the DIF has otherwise met its targets.

• New disclosure and other requirements relating to executive compensation and corporate governance.

33

• Amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations.

• The establishment of the Financial Stability Oversight Council, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices.

• The development of regulations to limit debit card interchange fees.

• The future elimination of trust preferred securities as a permitted element of Tier 1 capital.

• The creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund.

• The development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants.

• Enhanced supervision of credit rating agencies through the Office of Credit Ratings within the SEC.

• Increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

• The establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2010, there were no substantial changes in the composition of the Company’s market-sensitive assets and liabilities or their related market values from that reported as of December 31, 2009.  The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2009 included in the Company’s 2009 Annual Report on Form 10K.

Item 4.  Controls and Procedures

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

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

PART II

OTHER INFORMATION

Item 1.  Legal proceedings.

None

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Item 1.A. Risk Factors.

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

The Bank is “significantly undercapitalized,” and although we are taking a variety of actions to improve our regulatory capital ratios, those actions may not ultimately enable us to meet the capital requirements of our regulators or otherwise support our operations.

The Bank’s current capital category under Federal Reserve Board guidelines is “significantly undercapitalized,” with total and Tier 1 risk-based capital ratios of 4.46% and 3.20%, respectively, and a Tier 1 leverage ratio of 2.28%.  The Bank is required to attain at least a 10% total capital ratio and an 8% Tier 1 capital ratio under the terms of a regulatory order with the FDIC and the Georgia Department of Banking and Finance.  As is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” we are pursuing a variety of strategic alternatives that are designed to improve our capital position.  These strategies may be unsuccessful, however, and we may be unable to raise sufficient capital or take other actions that would ultimately result in an improved capital position for the Company or the Bank.  Failure to raise sufficient capital or otherwise improve our regulatory capital ratios may result in further regulatory restrictions on our operations and adversely affect our ability to implement our strategy, which could in turn decrease significantly or even eliminate (through receivership of the Bank or otherwise) the value of our equity securities.

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

The Company did not repurchase any of its shares of common stock during the period covered by this report.

Item 3.  Defaults upon senior securities.

None

Item 4.  [Removed and Reserved]

Item 5.  Other information.

None

Item 6.  Exhibits

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

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

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

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

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SIGNATURES

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

HABERSHAM BANCORP

(Registrant)

Date November 2, 2010	/s/ Annette Banks
	Chief Financial Officer
	(for the Registrant and as the Registrant’s principal financial and accounting officer)

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