UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_____________




FORM
10-Q





Quarterly
Report Pursuant to Section 13 or 15(d) of the


Securities
Exchange Act of 1934





For the
Quarterly Period Ended March 31, 2009 – Commission File Number
000-25422


_____________











PAB
BANKSHARES, INC.


(A
Georgia Corporation)


IRS
Employer Identification Number: 58-1473302





3250
North Valdosta Road, Valdosta, Georgia 31602


Telephone
Number: (229) 241-2775








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 T No £





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 (§229.405 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
£   No
£





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 “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.


Large
accelerated filer £ Accelerated
filer T
Non-accelerated filer £ 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 £ No T





The
number of shares outstanding of the registrant’s common stock at April 30, 2009
was 9,324,407 shares.













TABLE OF
CONTENTS





PagePART I
                      FINANCIAL INFORMATIONItem
      1.
                      Consolidated
      Financial Statements (Unaudited)Statements of Condition
                      1Statements of Income (Loss)
                      2Statements of Comprehensive Income (Loss)
                      3Statements of Stockholders’ Equity
                      4Statements of Cash Flows
                      5Notes to Consolidated Financial Statements
                      7Item
      2.
                      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      17Item
      3.
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      36Item
      4.
                      Controls and Procedures
                      38PART II
                      OTHER INFORMATIONItem
      1.
                      Legal Proceedings
                      38Item
      1A.
                      Risk Factors
                      38Item
      2.
                      Unregistered Sales of Equity Securities and Use of
      Proceeds
                      39Item
      3.
                      Defaults Upon Senior Securities
                      39Item
      4.
                      Submission of Matters to a Vote of Security
      Holders
                      39Item
      5.
                      Other Information
                      39Item
      6.
                      Exhibits
                      39SIGNATURES
                      
                      39





i
 Table of Contents





PART
I.  FINANCIAL INFORMATION





PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CONDITION


AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008


March 31,
      2009
                              
                              
                              December 31,
      2008(Unaudited)ASSETSCash
      and due from banks
                              
                              $
                              12,623,459
                              
                              
                              $
                              18,104,521Interest-bearing
      deposits in other banks
                              
                              
                              130,854,113
                              
                              
                              
                              118,244,771Federal
      funds sold
                              
                              
                              55,950
                              
                              
                              
                              1,054,719Investment
      securities
                              
                              
                              187,484,731
                              
                              
                              
                              185,773,315Loans
                              
                              
                              940,278,920
                              
                              
                              
                              956,687,391Allowance
      for loan losses
                              
                              
                              (20,403,002
                              )
                              
                              
                              (19,373,625
                              )Net
      loans
                              
                              
                              919,875,918
                              
                              
                              
                              937,313,766Premises
      and equipment, net
                              
                              
                              19,682,727
                              
                              
                              
                              19,984,288Goodwill
                              
                              
                              5,984,604
                              
                              
                              
                              5,984,604Cash
      value of bank-owned life insurance policies
                              
                              
                              12,407,038
                              
                              
                              
                              12,302,586Foreclosed
      assets
                              
                              
                              31,488,540
                              
                              
                              
                              25,268,901Other
      assets
                              
                              
                              26,610,662
                              
                              
                              
                              26,071,460Total
      assets
                              
                              $
                              1,347,067,742
                              
                              
                              $
                              1,350,102,931LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
                              
                              $
                              111,471,652
                              
                              
                              $
                              91,114,337Interest-bearing
      demand and savings
                              
                              
                              250,324,871
                              
                              
                              
                              252,122,046Time
                              
                              
                              743,501,714
                              
                              
                              
                              780,466,875Total
      deposits
                              
                              
                              1,105,298,237
                              
                              
                              
                              1,123,703,258Federal
      funds purchased and securities sold under agreements to
      repurchase
                              
                              
                              8,990,832
                              
                              
                              
                              8,954,253Advances
      from the Federal Home Loan Bank of Atlanta
                              
                              
                              105,601,722
                              
                              
                              
                              109,703,917Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
                              
                              
                              10,310,000
                              
                              
                              
                              10,310,000Other
      borrowings
                              
                              
                              20,000,000
                              
                              
                              
                              -Other
      liabilities
                              
                              
                              6,173,364
                              
                              
                              
                              5,830,761Total
      liabilities
                              
                              
                              1,256,374,155
                              
                              
                              
                              1,258,502,189Stockholders'
      equity:Preferred
      stock, no par value; 1,500,000 shares authorized; no shares
      issued
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, no par value; 98,500,000 shares authorized;9,324,407 and 9,324,407
      shares issued and outstanding
                              
                              
                              1,217,065
                              
                              
                              
                              1,217,065Additional
      paid-in capital
                              
                              
                              24,309,689
                              
                              
                              
                              24,225,407Retained
      earnings
                              
                              
                              62,172,314
                              
                              
                              
                              62,467,000Accumulated
      other comprehensive income
                              
                              
                              2,994,519
                              
                              
                              
                              3,691,270Total
      stockholders' equity
                              
                              
                              90,693,587
                              
                              
                              
                              91,600,742Total
      liabilities and stockholders' equity
                              
                              $
                              1,347,067,742
                              
                              
                              $
                              1,350,102,931





See
accompanying notes to consolidated financial statements.





1
 Table of Contents





PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


Three
      Months Ended March 31,2009
                          
                          
                          2008Interest
      income:Interest
      and fees on loans
                          
                          $
                          13,949,385
                          
                          
                          $
                          16,656,796Interest
      and dividends on investment securities:Taxable
                          
                          
                          1,890,426
                          
                          
                          
                          1,993,051Nontaxable
                          
                          
                          230,157
                          
                          
                          
                          327,583Other
      interest income
                          
                          
                          80,691
                          
                          
                          
                          53,046Total
      interest income
                          
                          
                          16,150,659
                          
                          
                          
                          19,030,476Interest
      expense:Interest
      on deposits
                          
                          
                          7,660,956
                          
                          
                          
                          8,417,362Interest
      on Federal Home Loan Bank advances
                          
                          
                          1,077,245
                          
                          
                          
                          930,299Interest
      on other borrowings
                          
                          
                          220,251
                          
                          
                          
                          337,373Total
      interest expense
                          
                          
                          8,958,452
                          
                          
                          
                          9,685,034Net
      interest income
                          
                          
                          7,192,207
                          
                          
                          
                          9,345,442Provision
      for loan losses
                          
                          
                          1,750,000
                          
                          
                          
                          1,200,000Net
      interest income after provision for loan losses
                          
                          
                          5,442,207
                          
                          
                          
                          8,145,442Other
      income:Service
      charges on deposit accounts
                          
                          
                          816,028
                          
                          
                          
                          904,905Other
      fee income
                          
                          
                          437,532
                          
                          
                          
                          447,683Securities
      transactions, net
                          
                          
                          16,590
                          
                          
                          
                          183,384Gain
      (loss) on sale and write-down of other assets
                          
                          
                          (127,355
                          )
                          
                          
                          (66,038
                          )Gain
      (loss) on derivative instruments
                          
                          
                          782,086
                          
                          
                          
                          -Other
      noninterest income
                          
                          
                          180,881
                          
                          
                          
                          173,295Total
      other income
                          
                          
                          2,105,762
                          
                          
                          
                          1,643,229Other
      expenses:Salaries
      and employee benefits
                          
                          
                          4,639,771
                          
                          
                          
                          5,012,102Occupancy
      expense of premises
                          
                          
                          608,134
                          
                          
                          
                          599,050Furniture
      and equipment expense
                          
                          
                          504,340
                          
                          
                          
                          524,515Other
      noninterest expense
                          
                          
                          2,373,576
                          
                          
                          
                          1,693,616Total
      other expenses
                          
                          
                          8,125,821
                          
                          
                          
                          7,829,283Income
      (loss) before income tax expense
                          
                          
                          (577,852
                          )
                          
                          
                          1,959,388Income
      tax expense (benefit)
                          
                          
                          (283,166
                          )
                          
                          
                          661,915Net
      income (loss)
                          
                          $
                          (294,686
                          )
                          
                          $
                          1,297,473Earnings
      (loss) per common share:Basic
                          
                          $
                          (0.03
                          )
                          
                          $
                          0.14Diluted
                          
                          $
                          (0.03
                          )
                          
                          $
                          0.14





See
accompanying notes to consolidated financial statements.





2
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


Three
      Months Ended March 31,2009
                          
                          
                          2008Net
      income (loss)
                          
                          $
                          (294,686
                          )
                          
                          $
                          1,297,473Other
      comprehensive income (loss):Unrealized
      gains (losses) on cash flow hedges during the period, net of tax (benefit)
      of ($261,711) and $426,929
                          
                          
                          (508,027
                          )
                          
                          
                          792,868Reclassification
      adjustment for gains on cash flow hedge Included in net income, net of tax
      of $207,472 and $0
                          
                          
                          (402,739
                          )
                          
                          
                          -Unrealized
      holding gains on securities available for sale arising during the period,
      net of tax of $115,892and $749,081
                          
                          
                          224,964
                          
                          
                          
                          1,391,152Reclassification
      adjustment for gains on securities available for sale included in net
      income, net of tax of $5,641 and $64,184
                          
                          
                          (10,949
                          )
                          
                          
                          (119,200
                          )(696,751
                          )
                          
                          
                          2,064,820Comprehensive
      income (loss)
                          
                          $
                          (991,437
                          )
                          
                          $
                          3,362,293





See
accompanying notes to consolidated financial statements.





3
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


THREE
MONTHS ENDED MARCH 31, 2009 (Unaudited) AND YEAR ENDED DECEMBER 31,
2008


Common Stock
                                                  
                                                  
                                                  Additional
      Paid-in
                                                  
                                                  
                                                  Retained
                                                  
                                                  
                                                  Accumulated
      Other ComprehensiveShares
                                                  
                                                  
                                                  Par Value
                                                  
                                                  
                                                  Capital
                                                  
                                                  
                                                  Earnings
                                                  
                                                  
                                                  Income
                                                  
                                                  
                                                  TotalBalance,
      December 31, 2007
                                                  
                                                  
                                                  9,223,217
                                                  
                                                  
                                                  $
                                                  1,217,065
                                                  
                                                  
                                                  $
                                                  22,792,940
                                                  
                                                  
                                                  $
                                                  72,822,852
                                                  
                                                  
                                                  $
                                                  843,115
                                                  
                                                  
                                                  $
                                                  97,675,972Net
      loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (5,911,265
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (5,911,265
                                                  )Other
      comprehensive income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,848,155
                                                  
                                                  
                                                  
                                                  2,848,155Cash
      dividends declared,$0.24 per share
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,195,622
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,195,622
                                                  )2%
      stock dividend declared
                                                  
                                                  
                                                  183,739
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,248,965
                                                  
                                                  
                                                  
                                                  (2,248,965
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Stock
      acquired and cancelled under stock repurchase plan
                                                  
                                                  
                                                  (86,065
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,162,521
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,162,521
                                                  )Stock-based
      compensation
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  310,043
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  310,043Stock
      options exercised
                                                  
                                                  
                                                  3,516
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  35,980
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  35,980Balance,
      December 31, 2008
                                                  
                                                  
                                                  9,324,407
                                                  
                                                  
                                                  
                                                  1,217,065
                                                  
                                                  
                                                  
                                                  24,225,407
                                                  
                                                  
                                                  
                                                  62,467,000
                                                  
                                                  
                                                  
                                                  3,691,270
                                                  
                                                  
                                                  
                                                  91,600,742Net
      loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (294,686
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (294,686
                                                  )Other
      comprehensive loss
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (696,751
                                                  )
                                                  
                                                  
                                                  (696,751
                                                  )Stock-based
      compensation
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  84,282
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  84,282Balance,
      March 31, 2009
                                                  
                                                  
                                                  9,324,407
                                                  
                                                  
                                                  $
                                                  1,217,065
                                                  
                                                  
                                                  $
                                                  24,309,689
                                                  
                                                  
                                                  $
                                                  62,172,314
                                                  
                                                  
                                                  $
                                                  2,994,519
                                                  
                                                  
                                                  $
                                                  90,693,587





See
accompanying notes to consolidated financial statements.





4
 Table of Contents




PAB BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)


Three
      Months Ended March 31,2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                          
                          $
                          (294,686
                          )
                          
                          $
                          1,297,473Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
                          
                          
                          370,181
                          
                          
                          
                          404,688Provision
      for loan losses
                          
                          
                          1,750,000
                          
                          
                          
                          1,200,000Net
      realized gain on securities transactions
                          
                          
                          (16,590
                          )
                          
                          
                          (183,384
                          )Loss
      on disposal of assets
                          
                          
                          127,355
                          
                          
                          
                          66,038Gain
      on derivative instruments
                          
                          
                          (782,086
                          )
                          
                          
                          -Stock-based
      compensation expense
                          
                          
                          84,282
                          
                          
                          
                          89,583Increase
      in cash value of bank-owned life insurance
                          
                          
                          (104,452
                          )
                          
                          
                          (105,245
                          )Decrease
      in deferred compensation accrual
                          
                          
                          (51,190
                          )
                          
                          
                          (42,082
                          )Net
      change in taxes receivable and taxes payable
                          
                          
                          (42,499
                          )
                          
                          
                          666,915Decrease
      in interest receivable
                          
                          
                          310,823
                          
                          
                          
                          1,457,991Decrease
      in interest payable
                          
                          
                          (96,860
                          )
                          
                          
                          (132,624
                          )Net
      increase in prepaid expenses and other assets
                          
                          
                          (1,074,419
                          )
                          
                          
                          (1,035,974
                          )Net
      increase (decrease) in accrued expenses and other
    liabilities
                          
                          
                          490,653
                          
                          
                          
                          (1,253,065
                          )Net
      cash provided by operating activities
                          
                          
                          670,512
                          
                          
                          
                          2,430,314CASH
      FLOWS FROM INVESTING ACTIVITIESIncrease
      in interest-bearing deposits in other banks
                          
                          
                          (12,609,342
                          )
                          
                          
                          (325,441
                          )(Increase)
      decrease in federal funds sold
                          
                          
                          998,769
                          
                          
                          
                          (14,906,630
                          )Purchase
      of debt securities
                          
                          
                          (32,174,781
                          )
                          
                          
                          (20,336,097
                          )Proceeds
      from sales of debt securities
                          
                          
                          22,326,382
                          
                          
                          
                          17,567,701Proceeds
      from calls of debt securities
                          
                          
                          3,712,000
                          
                          
                          
                          16,042,927Proceeds
      from maturities and paydowns of debt securities
                          
                          
                          5,076,712
                          
                          
                          
                          3,590,661Purchase
      of equity investments
                          
                          
                          (278,454
                          )
                          
                          
                          (938,184
                          )Net
      (increase) decrease in loans
                          
                          
                          7,731,894
                          
                          
                          
                          (15,858,872
                          )Purchase
      of premises and equipment
                          
                          
                          (333,011
                          )
                          
                          
                          (119,317
                          )Proceeds
      from disposal of assets
                          
                          
                          1,868,894
                          
                          
                          
                          1,127,543Net
      cash used in investing activities
                          
                          
                          (3,680,937
                          )
                          
                          
                          (14,155,709
                          )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      decrease in deposits
                          
                          
                          (18,405,021
                          )
                          
                          
                          (8,045,268
                          )Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
                          
                          
                          36,579
                          
                          
                          
                          (3,185,042
                          )Advances
      from the Federal Home Loan Bank
                          
                          
                          -
                          
                          
                          
                          25,000,000Payments
      on Federal Home Loan Bank advances
                          
                          
                          (4,102,195
                          )
                          
                          
                          (7,153,374
                          )Dividends
      paid
                          
                          
                          -
                          
                          
                          
                          (1,337,367
                          )Proceeds
      from other borrowings
                          
                          
                          20,000,000
                          
                          
                          
                          -Purchase
      of cash flow hedge derivative instruments
                          
                          
                          -
                          
                          
                          
                          (456,000
                          )Acquisition
      of stock under stock repurchase plans
                          
                          
                          -
                          
                          
                          
                          (933,364
                          )Net
      cash provided by (used in) financing activities
                          
                          
                          (2,470,637
                          )
                          
                          
                          3,889,585





5
 Table of Contents




PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008 (Continued)


(Unaudited)


Three
      Months Ended March 31,2009
                          
                          
                          2008Net
      decrease in cash and due from banks
                          
                          $
                          (5,481,062
                          )
                          
                          $
                          (7,835,810
                          )Cash
      and due from banks at beginning of period
                          
                          
                          18,104,521
                          
                          
                          
                          29,451,700Cash
      and due from banks at end of period
                          
                          $
                          12,623,459
                          
                          
                          $
                          21,615,890SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid (received) during the period for:Interest
                          
                          $
                          9,055,312
                          
                          
                          $
                          9,817,658Taxes
                          
                          $
                          (240,667
                          )
                          
                          $
                          -NONCASH
      INVESTING AND FINANCING TRANSACTIONSIncrease
      in unrealized gains on securities available for sale
                          
                          $
                          324,266
                          
                          
                          $
                          1,956,849Increase
      (decrease) in unrealized gain on cash flow hedges
                          
                          $
                          (1,379,949
                          )
                          
                          $
                          1,219,797Transfer
      of loans to foreclosed assets
                          
                          $
                          7,955,954
                          
                          
                          $
                          2,049,707





See
accompanying notes to consolidated financial statements.





6
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PABBANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)







NOTE
1.  NATURE OF BUSINESS





PAB
Bankshares, Inc. (the “Company”) is a bank holding company whose business is
conducted primarily by its wholly-owned commercial bank subsidiary, The Park
Avenue Bank (the “Bank”).  The Bank is a state-chartered, member bank
of the Federal Reserve System that was founded in 1956 in Valdosta, Lowndes
County, Georgia.  Through the Bank, the Company offers a broad range
of commercial and consumer banking products and services to customers located
primarily in the local market areas listed below.  The Company and the
Bank are subject to the regulations of certain federal and state agencies and
are periodically examined by those regulatory agencies.





Banking Locations
                              Number of OfficesSouth
      Georgia Market:Valdosta,
      Lowndes County
                              3
                              
                              (including
      the main office)Lake
      Park, Lowndes County
                              1Adel,
      Cook County
                              1Bainbridge,
      Decatur County
                              3Cairo,
      Grady County
                              1Statesboro,
      Bulloch County
                              2Baxley,
      Appling County
                              1Hazlehurst,
      Jeff Davis County
                              1North
      Georgia Market:McDonough,
      Henry County
                              1Stockbridge,
      Henry County
                              1Oakwood,
      Hall County
                              1Athens,
      Oconee County
                              1Cumming,
      Forsyth County
                              1
                              
                              (loan
      production office)Florida
      Market:Ocala,
      Marion County
                              1St.
      Augustine, St. Johns County
                              1
                              
                              (loan
      production
office)








The
Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business
trust.  This non-operating subsidiary was created in 2006 for the sole
purpose of issuing trust preferred securities and investing the proceeds in
subordinated debt issued by the Company.  The Company follows
Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (Revised
December 2003), Consolidation
of Variable Interest Entities.  This interpretation addresses
consolidation by business entities of variable interest entities and when such
entities are subject to consolidation under the provisions of this
interpretation.  The Company has determined that the provisions of
FASB Interpretation No. 46R require deconsolidation of PAB Bankshares Capital
Trust II.








NOTE
2.  BASIS OF PRESENTATION





The
accompanying consolidated financial information of the Company is unaudited;
however, such information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of
operations.  The results of operations for the three months ended
March 31, 2009 are not necessarily indicative of the results that may be
expected for the full year.  These statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008.





7
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)







NOTE
2.  BASIS OF PRESENTATION (Continued)





The
consolidated financial statements include the accounts of the Company and its
subsidiaries.  Significant intercompany transactions and balances are
eliminated in consolidation.





In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the balance sheet date and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan losses,
the valuation of goodwill, the valuation of foreclosed assets and deferred
taxes.





In May
2008, the Company declared a 2% stock dividend on the Company’s common stock,
payable on July 15, 2008 to holders of record on June 30, 2008.  The
weighted average number of shares and all other share and per share data
included in this Report has been restated for all periods presented to reflect
this stock dividend.








NOTE
3.  EARNINGS (LOSS) PER COMMON SHARE





Basic
earnings (loss) per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the
year.  Diluted earnings (loss) per share are computed by dividing net
income by the sum of the weighted average number of shares of common stock
outstanding and dilutive potential common shares.  Potential common
shares consist of stock options.





The
components used to calculate basic and diluted earnings (loss) per share for the
three months ended March 31, 2009 and 2008 follow.





Three
      Months Ended March 31,2009
                  
                  
                  2008Basic
      earnings (loss) per share:Net
      income (loss)
                  
                  $
                  (294,686
                  )
                  
                  $
                  1,297,473Weighted
      average common shares outstanding
                  
                  
                  9,324,407
                  
                  
                  
                  9,364,691Earnings
      (loss) per common share
                  
                  $
                  (0.03
                  )
                  
                  $
                  0.14Diluted
      earnings (loss) per share:Net
      income (loss)
                  
                  $
                  (294,686
                  )
                  
                  $
                  1,297,473Weighted
      average common shares outstanding
                  
                  
                  9,324,407
                  
                  
                  
                  9,364,691Effect
      of dilutive stock options
                  
                  
                  -
                  
                  
                  
                  58,915Weighted
      average diluted common shares outstanding
                  
                  
                  9,324,407
                  
                  
                  
                  9,423,606Earnings
      (loss) per common share
                  
                  $
                  (0.03
                  )
                  
                  $
                  0.14





8
 Table of Contents





PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
4.  DERIVATIVE FINANCIAL INSTRUMENTS





Accounting
Policy for Derivative Instruments and Hedging Activities





Statement
of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS
161), amends and expands the disclosure requirements of FASB Statement No.
133  (SFAS 133) with the intent to provide users of financial
statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about the fair value of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative instruments.





As
required by SFAS 133, the Company records all derivatives on the balance sheet
at fair value.  The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company
has elected to designate a derivative in a hedging relationship and apply hedge
accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualifying as a
hedge of the exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives designated and qualifying as a
hedge of the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk in a fair value hedge or the earnings effect of the hedged forecasted
transactions in a cash flow hedge.  The Company may enter into
derivative contracts that are intended to economically hedge certain of its
risks, even though hedge accounting does not apply or the Company elects not to
apply hedge accounting under SFAS 133.





Risk
Management Objective of Using Derivatives





The
Company is exposed to certain risks arising from both its business operations
and economic conditions.  The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. The Company manages economic risks, including
interest rate, liquidity, and credit risk, primarily by managing the amount,
sources, and duration of its assets and liabilities and through the use of
derivative financial instruments.  Specifically, the Company enters
into derivative financial instruments to manage exposures that arise from
business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest
rates.  The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally
related to certain variable rate loan assets and variable rate
borrowings.





9
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
4.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)





Fair
Values of Derivative Instruments on the Balance Sheet





The table
below presents the fair value of the Company’s derivative financial instruments
as well as their classification on the Statement of Condition as of March 31,
2009 and December 31, 2008.





Asset
      Derivatives
                
                Liability
      DerivativesAs of March 31, 2009
                
                As of December 31,
2008
                
                As of March 31, 2009
                
                As of December 31,
2008Balance Sheet Location
                
                Fair Value
                
                Balance Sheet Location
                
                Fair Value
                
                Balance Sheet Location
                
                Fair Value
                
                Balance Sheet Location
                
                Fair ValueDerivatives
      designated as hedging instruments under SFAS 133:Interest
      Rate Products
                Other
      Assets
                
                $
                1,638,747
                
                Other
      Assets
                
                $
                3,992,797
                
                Other
      Liabilities
                
                -
                
                Other
      Liabilities
                
                -Total
      derivatives designated as hedging instruments under SFAS
    133
                
                $
                1,638,747
                
                
                
                $
                3,992,797
                
                
                
                
                -
                
                
                
                
                -Derivatives
      not designated as hedging instruments under SFAS 133:Interest
      Rate Products
                Other
      Assets
                
                $
                1,556,350
                
                Other
      Assets
                
                
                -
                
                Other
      Liabilities
                
                
                -
                
                Other
      Liabilities
                
                
                -Total
      derivatives not
      designated as hedging instruments under SFAS 133
                
                $
                1,556,350
                
                
                
                
                -
                
                
                
                
                -
                
                
                
                
                -








Cash
Flow Hedges of Interest Rate Risk





The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate collars, caps, and floors as part of its interest rate risk management
strategy.  Interest rate floors designated as cash flow hedges involve
the receipt of variable-rate amounts from a counterparty if interest rates fall
below the strike rate on the contract in exchange for an up front
premium.  Interest rate collars designated as cash flow hedges involve
the receipt of variable-rate amounts from a counterparty if interest rates fall
below the strike rate on the purchased floor and the payment of variable-rate
amounts if interest rates rise above the cap rate on the sold cap. For hedges of
the Company’s variable-rate borrowings, an interest rate cap is designated as
cash flow hedge to protect the company against interest rate movements above the
strike rate of the cap in exchange for an upfront premium.  As of
March 31, 2009, the Company had one interest rate cap, one interest rate floor,
and one interest rate collar with an aggregate notional amount of $100 million
that were designated as cash flow hedges of interest rate risk.





10
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
4.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)





During
the first quarter of 2009, such derivatives were used to hedge the variable cash
inflows associated with existing pools of prime-based floating-rate loans, as
well as variable cash outflows associated with the Company’s floating rate
deposit accounts.  The effective portion of changes in the fair value
of derivatives designated and that qualify as cash flow hedges is recorded in
accumulated other comprehensive income and is subsequently reclassified into
earnings in the period that the hedged forecasted transaction affects earnings.
The ineffective portion of the change in fair value of the derivatives is
recognized directly in earnings as a component of other non-interest expense.
During the three months ended March 31, 2009 and 2008, the Company recognized a
gain of $616 and $0, respectively, for hedge ineffectiveness attributable to a
mismatch between the floor notional and the aggregate principal amount of the
designated loan pools. In addition, one of the Company’s $25 million interest
rate collars failed to qualify for hedge accounting due to the paydown of the
designated loan pools; accordingly, the changes in fair value of the collar
during the three months ended March 31, 2009 of $89,200 has been recognized
directly in earnings as a gain. The fair value of this collar at March 31, 2009
and its change in fair value during the three months ended March 31, 2009 are
disclosed under the sections entitled “Derivatives Not Designated as Hedging
Instruments under SFAS 133” throughout this footnote.





Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest income or expense as interest payments are
received/made on the Company’s variable-rate assets/liabilities. During the next
twelve months, the Company estimates that $1,531,784 will be reclassified as an
increase to interest income and $92,499 will be reclassified as an increase to
interest expense.  During the three months ended March 31, 2009, the
Company accelerated the reclassification of amounts in other comprehensive
income to earnings as a result of a portion of the hedged forecasted
transactions related to one of the Company’s certain failed interest rate
collar’s becoming probable not to occur.  The accelerated amount was a
gain of $692,270.





Non-designated
Hedges





The
Company does not use derivatives for trading or speculative
purposes.  Derivatives not designated as hedges are used to manage the
Company’s exposure to interest rate movements and other identified risks but do
not meet the strict hedge accounting requirements of SFAS 133. Changes in the
fair value of derivatives not designated in hedging relationships are recorded
directly in earnings.  As of March 31, 2009, the Company had one
outstanding derivative with a $25 million notional amount that failed to qualify
for hedge accounting during the period ended March 31, 2009 and is, therefore,
no longer designated as a hedge in a qualifying hedging
relationship.  All changes in fair value during the period and any
future changes in fair value will be recorded directly in
earnings.  On April 23, 2009, the Company terminated two derivative
instruments, including the derivative instrument that failed to qualify for
hedge accounting treatment.





11
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
4.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)





Effect
of Derivative Instruments on the Income Statement





The
tables below present the effect of the Company’s derivative financial
instruments on the Income Statement for the three months ended March 31, 2009
and 2008.





Derivatives in SFAS 133 Cash Flow Hedging
      Relationships
                                          
                                          Amount
      of Gain or (Loss) Recognized in OCI on Derivative (Effective
      Portion)
                                          
                                          Location of Gain or (Loss) Reclassified from
      Accumulated OCI into Income (Effective Portion)
                                          
                                          Amount
      of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
      Portion)
                                          
                                          Location of Gain or (Loss) Recognized in Income on
      Derivative (Ineffective Portion and Amount Excluded from Effectiveness
      Testing)
                                          
                                          Amount
      of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
      and Amount Excluded from Effectiveness Testing)Three
      Months Ended March 31,
                                          
                                          
                                          Three
      Months Ended March 31,
                                          
                                          
                                          Three
      Months Ended March 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Interest
      Rate Products
                                          
                                          $
                                          14,166
                                          
                                          
                                          $
                                          1,887,797
                                          
                                          Interest
      income
                                          
                                          $
                                          1,478,092
                                          
                                          
                                          $
                                          210,445
                                          
                                          Other
      income
                                          
                                          $
                                          616
                                          
                                          
                                          
                                          -Total
                                          
                                          $
                                          14,166
                                          
                                          
                                          $
                                          1,887,797
                                          
                                          
                                          
                                          $
                                          898,496
                                          
                                          
                                          $
                                          210,445
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -











Amount
      of Gain or (Loss) Recognized in Income on DerivativeDerivatives Not Designated as Hedging Instruments
      Under SFAS 133
                                    
                                    Location of Gain or (Loss) Recognized in Income on
      Derivative
                                    
                                    Three
      Months Ended March 31,2009
                                    
                                    
                                    2008Interest
      Rate Products
                                    
                                    Other
      income
                                    
                                    $
                                    89,200
                                    
                                    
                                    
                                    -Total
                                    
                                    
                                    
                                    $
                                    89,200
                                    
                                    
                                    
                                    -





12
 Table of Contents





PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
5.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION





At March
31, 2009, the Company had two fixed stock option plans under which it has
granted options to its employees and directors to purchase common stock at the
fair market value on the date of the grant.  Both plans provide for
“incentive stock options” and “non-qualified stock options”.  The
incentive stock options are intended to qualify under Section 422 of the
Internal Revenue Code for favorable tax treatment.





Under the
1994 Employee Stock Option Plan, the Board of Directors could grant up to
400,000 stock options to employees of the Company as part of an incentive plan
to attract and retain key personnel in the Company.  The 1994 Employee
Stock Option Plan expired in 2004.  At March 31, 2009, there were
47,787 options outstanding that were granted under the 1994 Employee Stock
Option Plan.





Under the
1999 Stock Option Plan (as amended), the Board of Directors can grant up to
1,428,000 stock options to directors, employees, consultants and advisors of the
Company.  At March 31, 2009, there were 621,585 shares available for
grant and there were 651,778 options outstanding that were granted under the
1999 Stock Option Plan.





Prior to
January 1, 2006, the Company accounted for its stock option plans under the
recognition and measurement provision of Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for
Stock Issued to Employees,and related Interpretations, as permitted by
FASB No. 123, Accounting for
Stock-Based Compensation.  Effective January 1, 2006, the
Company adopted FASB No. 123R, Share-Based Payment,
utilizing the “modified prospective” method as described in FASB No.
123R.  In the “modified prospective” method, compensation cost is
recognized for all stock-based payments granted after the effective date and for
all unvested awards granted prior to the effective date.  In
accordance with FASB No. 123R, prior period amounts were not restated. FASB No.
123R also requires the tax benefits associated with these stock-based payments
to be classified as financing activities in the Consolidated Statements of Cash
Flows, rather than as operating cash flows as required under previous
regulations.





At March
31, 2009, there was approximately $719,000 of unrecognized compensation cost
related to stock-based payments, which is expected to be recognized over a
weighted-average period of 3.30 years.








NOTE
6.  FAIR VALUE MEASUREMENTS





Fair
Value Measurements


On
January 1, 2008, the Company adopted FASB No. 157, Fair Value
Measurements.  FASB No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  FASB No. 157 applies to reported balances that are
required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.





FASB No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement.  Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability.  As a basis for considering market
participant assumptions in fair value measurements, FASB No. 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).





13
 Table of Contents





PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
6.  FAIR VALUE MEASUREMENTS (Continued)





Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.





Assets
Measured at Fair Value on a Recurring Basis


The
following is a description of the valuation methodologies used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments
pursuant to the valuation hierarchy.





Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. Level 1 securities include
highly liquid government bonds, mortgage products and exchange traded equities.
If quoted market prices are not available, then fair values are estimated by
using pricing models, quoted prices of securities with similar characteristics
or discounted cash flows. Level 2 securities include U.S. agency securities,
mortgage-backed agency securities, obligations of states and political
subdivisions and certain corporate, asset backed and other securities. In
certain cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy.





As
discussed in Note 4, the Company uses floor and collar derivative contracts to
manage its interest rate risk.   The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves and implied volatilities.  The fair values of interest
rate options are determined using the market standard methodology of discounting
the future expected cash receipts that would occur if variable interest rates
fell below the strike rate of the floors or rise above the strike price of the
collar.  The variable interest rates used in the calculation of
projected receipts on the floor (cap) are based on an expectation of future
interest rates derived from observable market interest rate curves and
volatilities.  To comply with the provisions of FASB No. 157, the
Company incorporates credit valuation adjustments to appropriately reflect both
its own nonperformance risk and the respective counterparty’s nonperformance
risk in the fair value measurements.  In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as
collateral postings, thresholds, mutual puts, and guarantees.





Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of March 31,
2009, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.  The Company does not have any fair value
measurements using significant unobservable inputs (Level 3) as of March 31,
2009.





14
 Table of Contents





PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








NOTE
6.  FAIR VALUE MEASUREMENTS (Continued)





The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of March 31, 2009, aggregated by the level in the fair value
hierarchy within which those measurements fall.





Quoted Prices in Active Markets for Identical
      Assets
                  (Level 1)
                
                
                Significant Other Observable
      Inputs
                  (Level 2)
                
                
                Significant Unobservable
Inputs
                  (Level 3)
                
                
                TotalAssetsInvestment
      securities available-for-sale
                
                $
                582,941
                
                
                $
                186,901,790
                
                
                $
                -
                
                
                $
                187,484,731Derivative
      financial instruments
                
                
                -
                
                
                
                3,195,097
                
                
                
                -
                
                
                $
                3,195,097Total
      fair value of assets on a recurring basis
                
                $
                582,941
                
                
                $
                190,096,887
                
                
                $
                -
                
                
                $
                190,679,828








Assets
Measured at Fair Value on a Nonrecurring Basis


The
following is a description of the valuation methodologies used for instruments
measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.





Loan
impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows
using the loan's existing rate, or the fair value of collateral if the loan is
collateral dependent. A portion of the allowance for loan losses is allocated to
impaired loans if the value of such loans is deemed to be less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported as a component of the provision for loan
losses. Loan losses are charged against the allowance when management believes
the uncollectibility of a loan is confirmed.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the loan impairment 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 loan impairment as nonrecurring
Level 3.





Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed 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 foreclosed
assets 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 foreclosed asset as nonrecurring Level 3.





15
 Table of Contents





PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)









NOTE
6.  FAIR VALUE MEASUREMENTS (Continued)





The table
below presents the Company’s assets and liabilities for which a nonrecurring
change in fair value has been recorded during the year ended March 31, 2009,
aggregated by the level in the fair value hierarchy within which those
measurements fall.





Carrying value at March 31,
      2009Quoted Prices in Active Markets for Identical
      Assets
                                  (Level 1)
                                
                                
                                Significant Other Observable
      Inputs
                                  (Level 2)
                                
                                
                                Significant Unobservable
Inputs
                                  (Level 3)
                                
                                
                                Total
                                
                                
                                Total gains (losses) for the Quarter Ended March
      31, 2009Impaired
      loans
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                56,016,044
                                
                                
                                $
                                56,016,044
                                
                                
                                $
                                -Foreclosed
      assets
                                
                                
                                -
                                
                                
                                
                                466,634
                                
                                
                                
                                31,021,906
                                
                                
                                
                                31,488,540
                                
                                
                                
                                (123,364
                                )Total
      fair value of assets on a nonrecurring basis
                                
                                $
                                -
                                
                                
                                $
                                466,634
                                
                                
                                $
                                87,037,950
                                
                                
                                $
                                87,504,584
                                
                                
                                $
                                (123,364
                                )





Fair
Value Option


In
February 2007, the FASB issued FASB No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115.  FASB No. 159 allows companies to report selected financial
assets and liabilities at fair value.  The changes in fair value are
recognized in earnings and the assets and liabilities measured under this
methodology are required to be displayed separately on the balance
sheet.  While FASB No. 159 became effective for the Company beginning
January 1, 2008, the Company has not elected the fair value option that is
offered by this statement.








NOTE
7.  SUBSEQUENT EVENT





On May 1,
2009, the Office of the Comptroller of the Currency closed Silverton Bank, N.A.
and the FDIC was named as receiver.  At March 31, 2009 the Company
held 474 shares of Silverton Bank, N.A. common stock, with a net book value of
$260,800.  Due to the events on May 1, 2009, the Company will record a
loss on this investment of $260,800 during the second quarter of
2009.





16
 Table of Contents








CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS





Certain
statements set forth in this Report or incorporated herein by reference,
including, without limitation, matters discussed in Item 2 “Management's Discussion and Analysis
of Financial Condition and Results of Operation” beginning on this page,
are “forward-looking statements” within the meaning of the federal securities
laws, including, without limitation, statements regarding our outlook on
earnings, asset quality and adequacy of loan loss reserves, and are based upon
management’s beliefs as well as assumptions made based on data currently
available to management.  In this Report, the terms “PAB”, “the
Company”, “we”, “us” or “our” refer to PAB Bankshares, Inc.  When
words like “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”,
“expect”, “estimate”, “could”, “should”, “will”, and similar expressions are
used, you should consider them as identifying forward-looking
statements.  These forward-looking statements are not guarantees of
future performance, and a variety of factors could cause our actual results to
differ materially from the anticipated or expected results expressed in these
forward-looking statements.  Many of these factors are beyond our
ability to control or predict, and readers are cautioned not to put undue
reliance on such forward-looking statements.  The following list,
which is not intended to be an all-encompassing list of risks and uncertainties
affecting us, summarizes several factors that could cause our actual results to
differ materially from those anticipated or expected in these forward-looking
statements: (1) competitive pressures among depository and other financial
institutions may increase significantly; (2) changes in the interest rate
environment may reduce margins or the volumes or values of loans made by us; (3)
general economic conditions (both generally and in our markets) may be less
favorable than expected, resulting in, among other things, a deterioration in
credit quality, a reduction in demand for credit and/or a decline in real estate
values; (4) continued weakness in the real estate market has adversely affected
us and may continue to adversely affect us; (5) legislative or regulatory
changes, including changes in accounting standards and compliance requirements,
may adversely affect the businesses in which we are engaged; (6) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than we can; (7) our ability to attract
and retain key personnel can be affected by the increased competition for
experienced employees in the banking industry; (8) adverse changes may occur in
the bond and equity markets; (9) our ability to raise capital to protect against
further deterioration in our loan portfolio may be limited due to unfavorable
conditions in the equity markets; (10) war or terrorist activities may cause
further deterioration in the economy or cause instability in credit markets;
(11) restrictions or conditions imposed by our regulators on our operations may
make it more difficult for us to achieve our goals; (12) economic, governmental
or other factors may prevent the projected population, residential and
commercial growth in the markets in which we operate; and (13) the risk factors
discussed from time to time in the Company’s periodic reports filed with the
Securities and Exchange Commission (the “SEC”), including but not limited to,
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008.  We undertake no obligation to, and we do not intend to, update
or revise these statements following the date of this filing, whether as a
result of new information, future events or otherwise, except as may be required
by law.








ITEM
      2.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
      OPERATION





The
following discussion and analysis of the consolidated financial condition and
results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes included in this Report as
well as the Consolidated Financial Statements, related Notes, and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008, and is qualified in its entirety by the foregoing and other more
detailed financial information appearing elsewhere.  Historical
results of operations and the percentage relationships among any amounts
included, and any trends which may appear to be inferred, should not be taken as
being necessarily indicative of trends in operations or results of operations
for any future periods.





Our
operating subsidiary, The Park Avenue Bank, is a $1.3 billion community bank
with 18 branches and two loan production offices in Georgia and
Florida.  We have offices in both smaller, rural communities as well
as larger, metropolitan areas.  We provide traditional banking
products and services to commercial and individual customers in our
markets.  Competition, regulation, credit risk, and interest rate risk
are the primary factors that we must manage in order to be
successful.





17
 Table of Contents





We
generally group our offices into three geographic regions for discussion
purposes due to the varying demographics of each market.  Our offices
in Lowndes, Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties are
collectively referred to as our “South Georgia” market.  Our offices
in Henry, Hall, Oconee, and Forsyth counties are collectively referred to as our
“North Georgia” market.  Our offices in Marion and St. Johns counties
are collectively referred to as our “Florida” market.  In addition,
our corporate assets, correspondent bank account balances, investment portfolio,
out-of-market participation loans, insider loans and insider deposits,
borrowings, etc. are reported at the corporate level, in what we refer to as the
“Treasury”.  In January 2009, we closed our branch and loan production
office in Snellville, Georgia and our branch in Jacksonville, Florida due to the
economic downturn and disappointing results from these markets.





The
tables below provide summary demographic data on each of our
markets.








Market/ County
                  
                  Number of Offices
                  
                  
                  Total Loans1
                  
                  
                  Total Deposits1
                  
                  
                  Market Share (%)2
                  
                  
                  Market Share Rank2South
      GeorgiaLowndes
                  
                  
                  4
                  
                  
                  $
                  250,259
                  
                  
                  $
                  283,414
                  
                  
                  
                  19.4
                  
                  
                  
                  2Cook
                  
                  
                  1
                  
                  
                  
                  12,288
                  
                  
                  
                  50,591
                  
                  
                  
                  26.2
                  
                  
                  
                  2Decatur
                  
                  
                  3
                  
                  
                  
                  45,495
                  
                  
                  
                  118,656
                  
                  
                  
                  32.2
                  
                  
                  
                  1Grady
                  
                  
                  1
                  
                  
                  
                  11,940
                  
                  
                  
                  25,880
                  
                  
                  
                  6.7
                  
                  
                  
                  5Appling
                  
                  
                  1
                  
                  
                  
                  15,483
                  
                  
                  
                  40,649
                  
                  
                  
                  16.0
                  
                  
                  
                  4Jeff
      Davis
                  
                  
                  1
                  
                  
                  
                  10,406
                  
                  
                  
                  53,900
                  
                  
                  
                  28.0
                  
                  
                  
                  2Bulloch
                  
                  
                  2
                  
                  
                  
                  35,880
                  
                  
                  
                  61,580
                  
                  
                  
                  4.6
                  
                  
                  
                  613
                  
                  
                  $
                  381,751
                  
                  
                  $
                  634,670North
      GeorgiaHenry
                  
                  
                  2
                  
                  
                  $
                  231,627
                  
                  
                  $
                  71,549
                  
                  
                  
                  3.5
                  
                  
                  
                  8Hall
                  
                  
                  1
                  
                  
                  
                  92,755
                  
                  
                  
                  27,734
                  
                  
                  
                  1.0
                  
                  
                  
                  14Oconee
                  
                  
                  1
                  
                  
                  
                  47,684
                  
                  
                  
                  14,856
                  
                  
                  
                  1.8
                  
                  
                  
                  8Forsyth
                  
                  
                  1
                  
                  
                  
                  57,323
                  
                  
                  
                  13,761
                  
                  
                  
                  -
                  
                  
                  
                  -5
                  
                  
                  $
                  429,389
                  
                  
                  $
                  127,900FloridaMarion
                  
                  
                  1
                  
                  
                  $
                  31,474
                  
                  
                  $
                  162,614
                  
                  
                  
                  3.4
                  
                  
                  
                  7St.
      Johns
                  
                  
                  1
                  
                  
                  
                  70,336
                  
                  
                  
                  4,114
                  
                  
                  
                  -
                  
                  
                  
                  -2
                  
                  
                  $
                  101,810
                  
                  
                  $
                  166,728





____________________


1
            Dollar
      amounts are presented in thousands as of March 31,
      2009.  Amounts exclude $27.3 million in loans and $176.0 million
      in deposits assigned to the “Treasury” that are not allocated to any
      particular market (i.e. participation loans, employee and director
      accounts, brokered deposits, official checks,
  etc.).


2
            Based
      on the FDIC/OTS Summary of Deposits report as of June 30,
      2008.





18
 Table of Contents




Market/County
                
                Total
      Population1
                
                
                Population
      Growth (%)2
                
                
                Employment
      Growth (%)3
                
                
                Unemployment
      Rate (%)4
                
                
                Median
      2008 Household Income ($)5Selected
      Georgia Counties:South
      Georgia:Appling
                
                
                18,038
                
                
                
                3.6
                
                
                
                0.0
                
                
                
                8.5
                
                
                
                36,331Bulloch
                
                
                67,761
                
                
                
                21.0
                
                
                
                0.3
                
                
                
                7.0
                
                
                
                36,805Cook
                
                
                16,608
                
                
                
                5.3
                
                
                
                (2.1
                )
                
                
                10.7
                
                
                
                33,143Decatur
                
                
                28,823
                
                
                
                2.1
                
                
                
                (1.4
                )
                
                
                9.6
                
                
                
                35,282Grady
                
                
                25,115
                
                
                
                6.2
                
                
                
                (3.7
                )
                
                
                7.1
                
                
                
                34,959Jeff
      Davis
                
                
                13,486
                
                
                
                6.3
                
                
                
                (3.3
                )
                
                
                12.5
                
                
                
                32,660Lowndes
                
                
                104,583
                
                
                
                13.5
                
                
                
                (0.9
                )
                
                
                6.8
                
                
                
                41,368North
      Georgia:Forsyth
                
                
                168,060
                
                
                
                70.8
                
                
                
                0.0
                
                
                
                5.8
                
                
                
                95,141Hall
                
                
                184,814
                
                
                
                32.7
                
                
                
                0.5
                
                
                
                6.5
                
                
                
                57,026Henry
                
                
                191,502
                
                
                
                60.5
                
                
                
                0.0
                
                
                
                7.1
                
                
                
                73,113Oconee
                
                
                32,221
                
                
                
                22.9
                
                
                
                0.8
                
                
                
                4.5
                
                
                
                67,570State
      of Georgia
                
                
                9,685,744
                
                
                
                18.3
                
                
                
                (0.2
                )
                
                
                7.3
                
                
                
                56,752Selected
      Florida Counties:Marion
                
                
                329,628
                
                
                
                27.3
                
                
                
                (0.5
                )
                
                
                9.6
                
                
                
                39,870St.
      Johns
                
                
                181,540
                
                
                
                47.4
                
                
                
                (0.3
                )
                
                
                6.3
                
                
                
                66,135State
      of Florida
                
                
                18,328,340
                
                
                
                14.7
                
                
                
                (0.6
                )
                
                
                7.4
                
                
                
                50,509National
      Total
                
                
                304,059,724
                
                
                
                8.0
                
                
                
                (0.5
                )
                
                
                6.6
                
                
                
                54,749











______


1
            Estimated
      July 1, 2008 poulation provided by the U.S. Census
  Bureau.


2
            Estimated
      percentage population change from 2000 to 2008 provided by the U.S. Census
      Bureau.


3
            Total
      employment growth (not seasonally adjusted) for the Fourth Quarter 2008
      year-to-date percentage change from the prior year’s year-to-date data
      provided by the Bureau of Labor Statistics Household
    Survey.


4
            Unemployment
      rate (not seasonally adjusted) for the Fourth Quarter 2008 provided by the
      Bureau of Labor Statistics.


5
            Based
      on actual 2008 market demographics provided by SNL
    Financial.





19
 Table of Contents





FINANCIAL
CONDITION





During
the three months ended March 31, 2009, our total assets decreased $3.0 million,
or 0.9% on an annualized basis, to $1.35 billion.  Our loan portfolio
decreased $16.4 million, or 7.0% on an annualized basis, to $940.3 million at
March 31, 2009 from $956.7 million at December 31, 2008.  Total
deposits decreased $18.4 million, or 6.6% on an annualized basis, to $1.105
billion at March 31, 2009 from $1.124 billion at December 31,
2008.  The decrease in total deposits is primarily the result of a
$46.4 million decrease in brokered deposits and a $1.8 million decrease in
interest-bearing demand and savings accounts, offset by a $20.3 million increase
in noninterest-bearing deposits and a $9.5 million increase in retail in-market
time deposits.  During the first quarter of 2009, the Bank issued $20
million of unsecured debt under the FDIC’s Temporary Liquidity Guarantee
Program.





The
following table summarizes our loan and deposit portfolios classified by type
and market as of March 31, 2009.





As of March  31,
    2009
                  
                  South
      Georgia
                  
                  
                  North
      Georgia
                  
                  
                  Florida
                  
                  
                  Treasury
                  
                  
                  Total(Dollars
      in Thousands)LoansCommercial
      and financial
                  
                  $
                  32,108
                  
                  
                  $
                  48,402
                  
                  
                  $
                  2,007
                  
                  
                  $
                  17
                  
                  
                  $
                  82,534Agricultural
      (including loans secured by farmland)
                  
                  
                  33,826
                  
                  
                  
                  4,510
                  
                  
                  
                  6,335
                  
                  
                  
                  -
                  
                  
                  
                  44,671Real
      estate – construction and development
                  
                  
                  75,844
                  
                  
                  
                  177,219
                  
                  
                  
                  58,851
                  
                  
                  
                  2,949
                  
                  
                  
                  314,863Real
      estate - commercial
                  
                  
                  91,912
                  
                  
                  
                  150,562
                  
                  
                  
                  25,294
                  
                  
                  
                  6,570
                  
                  
                  
                  274,338Real
      estate - residential
                  
                  
                  135,321
                  
                  
                  
                  42,399
                  
                  
                  
                  9,361
                  
                  
                  
                  4,307
                  
                  
                  
                  191,388Installment
      loans to individuals and other loans
                  
                  
                  12,564
                  
                  
                  
                  6,470
                  
                  
                  
                  171
                  
                  
                  
                  13,535
                  
                  
                  
                  32,740381,575
                  
                  
                  
                  429,562
                  
                  
                  
                  102,019
                  
                  
                  
                  27,378
                  
                  
                  
                  940,534Deferred
      loan fees and unearned interest, net
                  
                  
                  175
                  
                  
                  
                  (173
                  )
                  
                  
                  (208
                  )
                  
                  
                  (49
                  )
                  
                  
                  (255
                  )381,750
                  
                  
                  
                  429,389
                  
                  
                  
                  101,811
                  
                  
                  
                  27,329
                  
                  
                  
                  940,279Allowance
      for loan losses
                  
                  
                  (5,191
                  )
                  
                  
                  (10,463
                  )
                  
                  
                  (3,595
                  )
                  
                  
                  (1,154
                  )
                  
                  
                  (20,403
                  )Net
      loans
                  
                  $
                  376,559
                  
                  
                  $
                  418,926
                  
                  
                  $
                  98,216
                  
                  
                  $
                  26,175
                  
                  
                  $
                  919,876Percentage
      of total
                  
                  
                  40.9
                  %
                  
                  
                  45.5
                  %
                  
                  
                  10.7
                  %
                  
                  
                  2.9
                  %
                  
                  
                  100.0
                  %DepositsNoninterest-bearing
      demand
                  
                  $
                  73,408
                  
                  
                  $
                  17,585
                  
                  
                  $
                  6,263
                  
                  
                  $
                  14,216
                  
                  
                  $
                  111,472Interest-bearing
      demand and savings
                  
                  
                  199,479
                  
                  
                  
                  26,609
                  
                  
                  
                  23,504
                  
                  
                  
                  733
                  
                  
                  
                  250,325Retail
      time less than $100,000
                  
                  
                  188,001
                  
                  
                  
                  48,866
                  
                  
                  
                  93,691
                  
                  
                  
                  296
                  
                  
                  
                  330,854Retail
      time greater than or equal to $100,000
                  
                  
                  126,799
                  
                  
                  
                  28,491
                  
                  
                  
                  43,270
                  
                  
                  
                  208
                  
                  
                  
                  198,768Retail
      time placed in CDARs program
                  
                  
                  46,983
                  
                  
                  
                  6,349
                  
                  
                  
                  -
                  
                  
                  
                  380
                  
                  
                  
                  53,712Brokered
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  160,167
                  
                  
                  
                  160,167Total
      deposits
                  
                  $
                  634,670
                  
                  
                  $
                  127,900
                  
                  
                  $
                  166,728
                  
                  
                  $
                  176,000
                  
                  
                  $
                  1,105,298Percentage
      of total
                  
                  
                  57.4
                  %
                  
                  
                  11.6
                  %
                  
                  
                  15.1
                  %
                  
                  
                  15.9
                  %
                  
                  
                  100.0
                  %





In
addition to the geographic concentrations noted in the tables above, we had
approximately $76.1 million in loans secured by real estate in Florida to
customers of our South Georgia, North Georgia and Treasury offices.





20
 Table of Contents








Since the
second half of 2007, finished housing inventories and the supply of vacant
developed lots have continued to increase in several of our markets in the
Atlanta MSA as the number of home sales, new building permits and housing starts
have decreased.  The table below summarizes, from data available to
the Company, the inventory supply trends for housing and vacant developed lots
for select counties on the south side of the Atlanta MSA where we have a
significant presence in residential real estate construction and development
loans and other real estate owned.  These statistics are based on
estimated absorption rates using actual house sales compared to the number of
houses for sale and housing starts and/or building permits compared to the
number of vacant developed lots available.  The actual absorption
periods may differ from these estimates given changes in the future volume of
home sales and housing starts.








For the Quarter Ended
                        
                        Mar-09
                        
                        
                        Dec-08
                        
                        
                        Sep-08
                        
                        
                        Jun-08
                        
                        
                        Mar-08
                        
                        
                        Mar-07
                        
                        
                        Mar-06Housing Inventory:
                        
                        (Number
      of Months Supply)Henry
      County
                        
                        
                        12.7
                        
                        
                        
                        14.0
                        
                        
                        
                        13.8
                        
                        
                        
                        13.1
                        
                        
                        
                        12.6
                        
                        
                        
                        9.3
                        
                        
                        
                        8.6Clayton
      County
                        
                        
                        16.7
                        
                        
                        
                        15.1
                        
                        
                        
                        11.5
                        
                        
                        
                        9.9
                        
                        
                        
                        9.3
                        
                        
                        
                        12.5
                        
                        
                        
                        7.7Newton
      County
                        
                        
                        12.9
                        
                        
                        
                        14.5
                        
                        
                        
                        15.3
                        
                        
                        
                        13.9
                        
                        
                        
                        12.3
                        
                        
                        
                        7.9
                        
                        
                        
                        9.0South
      Fulton County
                        
                        
                        9.7
                        
                        
                        
                        9.5
                        
                        
                        
                        9.3
                        
                        
                        
                        9.2
                        
                        
                        
                        9.1
                        
                        
                        
                        7.5
                        
                        
                        
                        8.2Vacant Developed Lots
      Inventory:Henry
      County
                        
                        
                        348.8
                        
                        
                        
                        291.0
                        
                        
                        
                        207.0
                        
                        
                        
                        153.0
                        
                        
                        
                        113.0
                        
                        
                        
                        37.0
                        
                        
                        
                        25.0Clayton
      County
                        
                        
                        273.9
                        
                        
                        
                        169.0
                        
                        
                        
                        122.0
                        
                        
                        
                        91.0
                        
                        
                        
                        62.0
                        
                        
                        
                        29.0
                        
                        
                        
                        29.0Newton
      County
                        
                        
                        399.9
                        
                        
                        
                        326.0
                        
                        
                        
                        210.0
                        
                        
                        
                        142.0
                        
                        
                        
                        93.0
                        
                        
                        
                        29.0
                        
                        
                        
                        22.0South
      Fulton County
                        
                        
                        161.7
                        
                        
                        
                        126.0
                        
                        
                        
                        96.0
                        
                        
                        
                        83.0
                        
                        
                        
                        67.0
                        
                        
                        
                        26.0
                        
                        
                        
                        20.0





21
 Table of Contents





The table
below summarizes our loan portfolio by loan type as of the end of each of the
last five quarters.





As of Quarter End
                                  
                                  Mar-09
                                  
                                  
                                  Dec-08
                                  
                                  
                                  Sep-08
                                  
                                  
                                  Jun-08
                                  
                                  
                                  Mar-08(Dollars
      In Thousands)Commercial
      and financial
                                  
                                  $
                                  82,534
                                  
                                  
                                  $
                                  87,530
                                  
                                  
                                  $
                                  91,401
                                  
                                  
                                  $
                                  82,087
                                  
                                  
                                  $
                                  83,343Agricultural
      (including loans secured by farmland)
                                  
                                  
                                  44,671
                                  
                                  
                                  
                                  48,647
                                  
                                  
                                  
                                  49,227
                                  
                                  
                                  
                                  46,891
                                  
                                  
                                  
                                  42,573Real
      estate – construction and development
                                  
                                  
                                  314,863
                                  
                                  
                                  
                                  315,786
                                  
                                  
                                  
                                  332,901
                                  
                                  
                                  
                                  344,393
                                  
                                  
                                  
                                  363,392Real
      estate - commercial
                                  
                                  
                                  274,338
                                  
                                  
                                  
                                  276,645
                                  
                                  
                                  
                                  281,781
                                  
                                  
                                  
                                  275,962
                                  
                                  
                                  
                                  241,165Real
      estate - residential
                                  
                                  
                                  191,388
                                  
                                  
                                  
                                  196,306
                                  
                                  
                                  
                                  195,439
                                  
                                  
                                  
                                  181,169
                                  
                                  
                                  
                                  179,091Installment
      loans to individuals and other loans
                                  
                                  
                                  32,740
                                  
                                  
                                  
                                  32,084
                                  
                                  
                                  
                                  32,075
                                  
                                  
                                  
                                  33,237
                                  
                                  
                                  
                                  25,704940,534
                                  
                                  
                                  
                                  956,998
                                  
                                  
                                  
                                  982,824
                                  
                                  
                                  
                                  963,739
                                  
                                  
                                  
                                  935,268Deferred loan fees and
      unearned interest, net
                                  
                                  
                                  (255
                                  )
                                  
                                  
                                  (310
                                  )
                                  
                                  
                                  (253
                                  )
                                  
                                  
                                  (239
                                  )
                                  
                                  
                                  (341
                                  )Total
      loans
                                  
                                  
                                  940,279
                                  
                                  
                                  
                                  956,688
                                  
                                  
                                  
                                  982,571
                                  
                                  
                                  
                                  963,500
                                  
                                  
                                  
                                  934,927Allowance
      for loan losses
                                  
                                  
                                  (20,403
                                  )
                                  
                                  
                                  (19,374
                                  )
                                  
                                  
                                  (20,240
                                  )
                                  
                                  
                                  (14,303
                                  )
                                  
                                  
                                  (13,875
                                  )Net
      loans
                                  
                                  $
                                  919,876
                                  
                                  
                                  $
                                  937,314
                                  
                                  
                                  $
                                  962,331
                                  
                                  
                                  $
                                  949,197
                                  
                                  
                                  $
                                  921,052








The
percentage of loans outstanding by loan type at the indicated dates is presented
in the following table:





As of Quarter End
                                  
                                  Mar-09
                                  
                                  
                                  Dec-08
                                  
                                  
                                  Sep-08
                                  
                                  
                                  Jun-08
                                  
                                  
                                  Mar-08Commercial
      and financial
                                  
                                  
                                  8.78
                                  %
                                  
                                  
                                  9.15
                                  %
                                  
                                  
                                  9.30
                                  %
                                  
                                  
                                  8.52
                                  %
                                  
                                  
                                  8.91
                                  %Agricultural
      (including loans secured by farmland)
                                  
                                  
                                  4.75
                                  %
                                  
                                  
                                  5.08
                                  %
                                  
                                  
                                  5.01
                                  %
                                  
                                  
                                  4.87
                                  %
                                  
                                  
                                  4.55
                                  %Real
      estate – construction and development
                                  
                                  
                                  33.49
                                  %
                                  
                                  
                                  33.01
                                  %
                                  
                                  
                                  33.88
                                  %
                                  
                                  
                                  35.74
                                  %
                                  
                                  
                                  38.87
                                  %Real
      estate - commercial
                                  
                                  
                                  29.18
                                  %
                                  
                                  
                                  28.92
                                  %
                                  
                                  
                                  28.68
                                  %
                                  
                                  
                                  28.64
                                  %
                                  
                                  
                                  25.80
                                  %Real
      estate - residential
                                  
                                  
                                  20.35
                                  %
                                  
                                  
                                  20.52
                                  %
                                  
                                  
                                  19.89
                                  %
                                  
                                  
                                  18.80
                                  %
                                  
                                  
                                  19.16
                                  %Installment
      loans to individuals and other loans
                                  
                                  
                                  3.48
                                  %
                                  
                                  
                                  3.35
                                  %
                                  
                                  
                                  3.27
                                  %
                                  
                                  
                                  3.45
                                  %
                                  
                                  
                                  2.75
                                  %100.03
                                  %
                                  
                                  
                                  100.03
                                  %
                                  
                                  
                                  100.03
                                  %
                                  
                                  
                                  100.02
                                  %
                                  
                                  
                                  100.04
                                  %Deferred
      loan fees and unearned interest, net
                                  
                                  
                                  -0.03
                                  %
                                  
                                  
                                  -0.03
                                  %
                                  
                                  
                                  -0.03
                                  %
                                  
                                  
                                  -0.02
                                  %
                                  
                                  
                                  -0.04
                                  %Total
      loans
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %Allowance
      for loan losses
                                  
                                  
                                  -2.17
                                  %
                                  
                                  
                                  -2.03
                                  %
                                  
                                  
                                  -2.06
                                  %
                                  
                                  
                                  -1.48
                                  %
                                  
                                  
                                  -1.48
                                  %Net
      loans
                                  
                                  
                                  97.83
                                  %
                                  
                                  
                                  97.97
                                  %
                                  
                                  
                                  97.94
                                  %
                                  
                                  
                                  98.52
                                  %
                                  
                                  
                                  98.52
                                  %








At March
31, 2009, the loan portfolio was $940.3 million compared to $956.7 million at
December 31, 2008, a decrease of $16.4 million, or 1.7%.  Since
December 31, 2004, the composition of the loan portfolio has shifted as
commercial real estate mortgages decreased from 36.9% of our portfolio in 2004
to 29.2% at March 31, 2009, and construction and land development loans
increased from 25.8% of our portfolio to 33.5% of our portfolio during that same
time.  However, it should be noted that construction and land
development loans have decreased from 38.3% of our portfolio at December 31,
2007.  This increase in construction and land development lending is
largely the result of our decision in 2000 to expand into our North Georgia
markets.  Of the $314.9 million in construction and development loans
outstanding at March 31, 2009, $177.2 million, or 56.3%, were originated in our
North Georgia offices.





22
 Table of Contents





Below is
a table showing the collateral distribution of our construction and development
and commercial real estate loan portfolios at the indicated dates.





March 31,
      2009
                                                              
                                                              
                                                              December 31,
      2008
                                                              
                                                              
                                                              March 31,
      2008$ Amount
                                                              
                                                              
                                                              % to Total
                                                              
                                                              
                                                              $ Amount
                                                              
                                                              
                                                              % to Total
                                                              
                                                              
                                                              $ Amount
                                                              
                                                              
                                                              % to Total(Dollars
      in Thousands)Construction and
    development:Acquisition
      and development:1-4
      family residential
                                                              
                                                              $
                                                              129,628
                                                              
                                                              
                                                              
                                                              41.2
                                                              %
                                                              
                                                              $
                                                              129,412
                                                              
                                                              
                                                              
                                                              41.0
                                                              %
                                                              
                                                              $
                                                              141,354
                                                              
                                                              
                                                              
                                                              38.9
                                                              %Commercial
      and multi-family
                                                              
                                                              
                                                              95,669
                                                              
                                                              
                                                              
                                                              30.4
                                                              %
                                                              
                                                              
                                                              95,934
                                                              
                                                              
                                                              
                                                              30.4
                                                              %
                                                              
                                                              
                                                              106,894
                                                              
                                                              
                                                              
                                                              29.4
                                                              %ConstructionResidential:1-4
      family residential spec
                                                              
                                                              
                                                              17,019
                                                              
                                                              
                                                              
                                                              5.4
                                                              %
                                                              
                                                              
                                                              19,182
                                                              
                                                              
                                                              
                                                              6.1
                                                              %
                                                              
                                                              
                                                              41,590
                                                              
                                                              
                                                              
                                                              11.4
                                                              %1-4
      family residential pre-sold
                                                              
                                                              
                                                              112
                                                              
                                                              
                                                              
                                                              0.1
                                                              %
                                                              
                                                              
                                                              112
                                                              
                                                              
                                                              
                                                              0.1
                                                              %
                                                              
                                                              
                                                              1,281
                                                              
                                                              
                                                              
                                                              0.4
                                                              %1-4
      family residential other
                                                              
                                                              
                                                              21,356
                                                              
                                                              
                                                              
                                                              6.8
                                                              %
                                                              
                                                              
                                                              23,423
                                                              
                                                              
                                                              
                                                              7.4
                                                              %
                                                              
                                                              
                                                              26,095
                                                              
                                                              
                                                              
                                                              7.2
                                                              %Commercial:Commercial
      owner-occupied
                                                              
                                                              
                                                              2,297
                                                              
                                                              
                                                              
                                                              0.7
                                                              %
                                                              
                                                              
                                                              3,340
                                                              
                                                              
                                                              
                                                              1.0
                                                              %
                                                              
                                                              
                                                              6,496
                                                              
                                                              
                                                              
                                                              1.8
                                                              %Commercial
      not owner-occupied
                                                              
                                                              
                                                              35,689
                                                              
                                                              
                                                              
                                                              11.3
                                                              %
                                                              
                                                              
                                                              27,038
                                                              
                                                              
                                                              
                                                              8.5
                                                              %
                                                              
                                                              
                                                              19,069
                                                              
                                                              
                                                              
                                                              5.2
                                                              %Other:Hotel/motel
                                                              
                                                              
                                                              8,554
                                                              
                                                              
                                                              
                                                              2.7
                                                              %
                                                              
                                                              
                                                              7,949
                                                              
                                                              
                                                              
                                                              2.5
                                                              %
                                                              
                                                              
                                                              10,389
                                                              
                                                              
                                                              
                                                              2.9
                                                              %Multi-family
      properties
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              8,282
                                                              
                                                              
                                                              
                                                              2.3
                                                              %Special
      purpose property
                                                              
                                                              
                                                              3,319
                                                              
                                                              
                                                              
                                                              1.0
                                                              %
                                                              
                                                              
                                                              6,538
                                                              
                                                              
                                                              
                                                              2.1
                                                              %
                                                              
                                                              
                                                              1,942
                                                              
                                                              
                                                              
                                                              0.5
                                                              %Other
                                                              
                                                              
                                                              1,220
                                                              
                                                              
                                                              
                                                              0.4
                                                              %
                                                              
                                                              
                                                              2,858
                                                              
                                                              
                                                              
                                                              0.9
                                                              %
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              0.0
                                                              %Total
      construction and development loans
                                                              
                                                              $
                                                              314,863
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              315,786
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              363,392
                                                              
                                                              
                                                              
                                                              100.0
                                                              %Percentage
      of total loans
                                                              
                                                              
                                                              33.5
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              33.0
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              38.9
                                                              %








March 31,
      2009
                                                      
                                                      
                                                      December 31,
      2008
                                                      
                                                      
                                                      March 31,
      2008$ Amount
                                                      
                                                      
                                                      % to Total
                                                      
                                                      
                                                      $ Amount
                                                      
                                                      
                                                      % to Total
                                                      
                                                      
                                                      $ Amount
                                                      
                                                      
                                                      % to TotalCommercial real estate:Owner-occupied:Office
                                                      
                                                      $
                                                      42,075
                                                      
                                                      
                                                      
                                                      15.3
                                                      %
                                                      
                                                      $
                                                      41,617
                                                      
                                                      
                                                      
                                                      15.0
                                                      %
                                                      
                                                      $
                                                      33,017
                                                      
                                                      
                                                      
                                                      13.7
                                                      %Retail
                                                      
                                                      
                                                      19,581
                                                      
                                                      
                                                      
                                                      7.1
                                                      %
                                                      
                                                      
                                                      21,062
                                                      
                                                      
                                                      
                                                      7.6
                                                      %
                                                      
                                                      
                                                      21,478
                                                      
                                                      
                                                      
                                                      8.9
                                                      %Other
                                                      
                                                      
                                                      40,546
                                                      
                                                      
                                                      
                                                      14.8
                                                      %
                                                      
                                                      
                                                      40,413
                                                      
                                                      
                                                      
                                                      14.6
                                                      %
                                                      
                                                      
                                                      36,432
                                                      
                                                      
                                                      
                                                      15.1
                                                      %Not
      owner-occupied:Office
                                                      
                                                      
                                                      24,896
                                                      
                                                      
                                                      
                                                      9.1
                                                      %
                                                      
                                                      
                                                      25,425
                                                      
                                                      
                                                      
                                                      9.2
                                                      %
                                                      
                                                      
                                                      27,598
                                                      
                                                      
                                                      
                                                      11.4
                                                      %Retail
                                                      
                                                      
                                                      35,586
                                                      
                                                      
                                                      
                                                      13.0
                                                      %
                                                      
                                                      
                                                      36,085
                                                      
                                                      
                                                      
                                                      13.1
                                                      %
                                                      
                                                      
                                                      34,613
                                                      
                                                      
                                                      
                                                      14.4
                                                      %Other
                                                      
                                                      
                                                      24,198
                                                      
                                                      
                                                      
                                                      8.8
                                                      %
                                                      
                                                      
                                                      24,656
                                                      
                                                      
                                                      
                                                      8.9
                                                      %
                                                      
                                                      
                                                      25,082
                                                      
                                                      
                                                      
                                                      10.4
                                                      %Other:Hotel/motel
                                                      
                                                      
                                                      15,826
                                                      
                                                      
                                                      
                                                      5.8
                                                      %
                                                      
                                                      
                                                      15,812
                                                      
                                                      
                                                      
                                                      5.7
                                                      %
                                                      
                                                      
                                                      10,885
                                                      
                                                      
                                                      
                                                      4.5
                                                      %Industrial
                                                      
                                                      
                                                      4,598
                                                      
                                                      
                                                      
                                                      1.7
                                                      %
                                                      
                                                      
                                                      4,677
                                                      
                                                      
                                                      
                                                      1.7
                                                      %
                                                      
                                                      
                                                      4,789
                                                      
                                                      
                                                      
                                                      2.0
                                                      %Multi-family
      properties
                                                      
                                                      
                                                      22,822
                                                      
                                                      
                                                      
                                                      8.3
                                                      %
                                                      
                                                      
                                                      22,685
                                                      
                                                      
                                                      
                                                      8.2
                                                      %
                                                      
                                                      
                                                      12,374
                                                      
                                                      
                                                      
                                                      5.1
                                                      %Special
      purpose property
                                                      
                                                      
                                                      39,459
                                                      
                                                      
                                                      
                                                      14.4
                                                      %
                                                      
                                                      
                                                      39,240
                                                      
                                                      
                                                      
                                                      14.2
                                                      %
                                                      
                                                      
                                                      34,897
                                                      
                                                      
                                                      
                                                      14.5
                                                      %Other
                                                      
                                                      
                                                      4,751
                                                      
                                                      
                                                      
                                                      1.7
                                                      %
                                                      
                                                      
                                                      4,973
                                                      
                                                      
                                                      
                                                      1.8
                                                      %
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      0.0
                                                      %Total
      commercial real estate loans
                                                      
                                                      $
                                                      274,338
                                                      
                                                      
                                                      
                                                      100.0
                                                      %
                                                      
                                                      $
                                                      276,645
                                                      
                                                      
                                                      
                                                      100.0
                                                      %
                                                      
                                                      $
                                                      241,165
                                                      
                                                      
                                                      
                                                      100.0
                                                      %Percentage
      of total loans
                                                      
                                                      
                                                      29.1
                                                      %
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      28.9
                                                      %
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      25.8
                                                      %





23
 Table of Contents





The table
below summarizes our deposit portfolio by deposit type as of the end of each of
the last five quarters.





As of Quarter End
                                                                  
                                                                  Mar-09
                                                                  
                                                                  
                                                                  Dec-08
                                                                  
                                                                  
                                                                  Sep-08
                                                                  
                                                                  
                                                                  Jun-08
                                                                  
                                                                  
                                                                  Mar-08(Dollars
      In Thousands)Noninterest-bearing
      demand
                                                                  
                                                                  $
                                                                  111,472
                                                                  
                                                                  
                                                                  $
                                                                  91,114
                                                                  
                                                                  
                                                                  $
                                                                  101,417
                                                                  
                                                                  
                                                                  $
                                                                  102,909
                                                                  
                                                                  
                                                                  $
                                                                  97,029Interest-bearing
      demand and savings
                                                                  
                                                                  
                                                                  250,325
                                                                  
                                                                  
                                                                  
                                                                  252,122
                                                                  
                                                                  
                                                                  
                                                                  262,723
                                                                  
                                                                  
                                                                  
                                                                  336,359
                                                                  
                                                                  
                                                                  
                                                                  331,184Retail
      time less than $100,000
                                                                  
                                                                  
                                                                  330,854
                                                                  
                                                                  
                                                                  
                                                                  328,329
                                                                  
                                                                  
                                                                  
                                                                  323,377
                                                                  
                                                                  
                                                                  
                                                                  292,981
                                                                  
                                                                  
                                                                  
                                                                  298,799Retail
      time greater than or equal to $100,000
                                                                  
                                                                  
                                                                  198,768
                                                                  
                                                                  
                                                                  
                                                                  198,845
                                                                  
                                                                  
                                                                  
                                                                  182,491
                                                                  
                                                                  
                                                                  
                                                                  175,914
                                                                  
                                                                  
                                                                  
                                                                  179,316Retail
      time placed in CDARs programs
                                                                  
                                                                  
                                                                  53,712
                                                                  
                                                                  
                                                                  
                                                                  46,690
                                                                  
                                                                  
                                                                  
                                                                  18,343
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Brokered
                                                                  
                                                                  
                                                                  160,167
                                                                  
                                                                  
                                                                  
                                                                  206,603
                                                                  
                                                                  
                                                                  
                                                                  141,493
                                                                  
                                                                  
                                                                  
                                                                  88,432
                                                                  
                                                                  
                                                                  
                                                                  65,776Total
      deposits
                                                                  
                                                                  $
                                                                  1,105,298
                                                                  
                                                                  
                                                                  $
                                                                  1,123,703
                                                                  
                                                                  
                                                                  $
                                                                  1,029,844
                                                                  
                                                                  
                                                                  $
                                                                  996,595
                                                                  
                                                                  
                                                                  $
                                                                  972,104





The
percentage of deposits outstanding by deposit type at the indicated dates is
presented in the following table:





As of Quarter End
                                  
                                  Mar-09
                                  
                                  
                                  Dec-08
                                  
                                  
                                  Sep-08
                                  
                                  
                                  Jun-08
                                  
                                  
                                  Mar-08Noninterest-bearing
      demand
                                  
                                  
                                  10.09
                                  %
                                  
                                  
                                  8.11
                                  %
                                  
                                  
                                  9.85
                                  %
                                  
                                  
                                  10.33
                                  %
                                  
                                  
                                  9.98
                                  %Interest-bearing
      demand and savings
                                  
                                  
                                  22.65
                                  %
                                  
                                  
                                  22.44
                                  %
                                  
                                  
                                  25.51
                                  %
                                  
                                  
                                  33.75
                                  %
                                  
                                  
                                  34.07
                                  %Retail
      time less than $100,000
                                  
                                  
                                  29.93
                                  %
                                  
                                  
                                  29.22
                                  %
                                  
                                  
                                  31.40
                                  %
                                  
                                  
                                  29.40
                                  %
                                  
                                  
                                  30.74
                                  %Retail
      time greater than or equal to $100,000
                                  
                                  
                                  17.98
                                  %
                                  
                                  
                                  17.69
                                  %
                                  
                                  
                                  17.72
                                  %
                                  
                                  
                                  17.65
                                  %
                                  
                                  
                                  18.44
                                  %Retail
      time placed in CDARs program
                                  
                                  
                                  4.86
                                  %
                                  
                                  
                                  4.15
                                  %
                                  
                                  
                                  1.78
                                  %
                                  
                                  
                                  0.0
                                  %
                                  
                                  
                                  0.0
                                  %Brokered
                                  
                                  
                                  14.49
                                  %
                                  
                                  
                                  18.39
                                  %
                                  
                                  
                                  13.74
                                  %
                                  
                                  
                                  8.87
                                  %
                                  
                                  
                                  6.77
                                  %Total
      deposits
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %
                                  
                                  
                                  100.00
                                  %








RESULTS
OF OPERATIONS





During
the three months ended March 31, 2009 we incurred a net loss of $295,000, or
($0.03) per diluted share, as compared to net income of $1.3 million, or $0.14
per diluted share, during the same period in 2008.  The $1.6 million,
or 122.7%, decrease in net income is the net result of a $2.2 million decrease
in net interest income, a $550,000 increase in the provision for loan loss
expense and a $297,000 increase in other expenses, offset by a $463,000 increase
in other income and a $945,000 decrease in income tax expense.  Our
return on average assets (“ROA”) and return on average equity (“ROE”) for the
three months ended March 31, 2009 were -0.09% and -1.3%, respectively, compared
to a 0.44% ROA and a 5.24% ROE for the same period in 2008.





The
reasons for these changes are discussed in more detail below.





Net Interest
Income


The
primary component of a financial institution’s profitability is net interest
income, or the difference between the interest earned on assets, primarily loans
and investments, and interest paid on liabilities, primarily deposits and other
borrowed funds.  For the three months ended March 31, 2009, our net
interest income on a taxable-equivalent basis was $7.3 million, a 23.2% decrease
from the $9.5 million in net interest income for the first quarter of
2008.  The decrease in net interest income is due to a 15.0% decrease
in interest income offset in part by a 7.5% decrease in interest
expense.  During the first quarter of 2009, the average balance of our
earning assets increased 12.9% compared to the same period in
2008.  The average balances of our interest-bearing liabilities
increased by 16.2% to fund the asset growth.  The average yield on our
earning assets decreased 168 basis points from 6.89% during the first quarter of
2008, to 5.21% for the first quarter of 2009.  The average rates paid
for our funds decreased 77 basis points from 3.91% during the first quarter of
2008, to 3.14% for the first quarter of 2009.  As a result of these
rate decreases, our net interest spread declined by 91 basis points from 2.98%
during the first quarter of 2008, to 2.07% for the same period in
2009.





24
 Table of Contents





Net
interest margin is net interest income expressed as a percentage of average
earning assets.   Our net interest margin for the first quarter
of 2009 was 2.34%, 6 basis points lower than our net interest margin of 2.40%
for the fourth quarter of 2008, and 107 basis points lower than the 3.41%
recorded for the first quarter of 2008.  The reduction in short-term
interest rates during 2008 caused our earning assets to re-price downwards
faster than our interest-bearing liabilities re-priced downwards.  The
reduction of interest income due to our nonperforming assets also negatively
impacted the net interest margin by 32 basis points during the first quarter of
2009, compared to a 36 basis point impact in the fourth quarter of 2008 and a 28
basis point impact in the first quarter of 2008.  We do not expect our
net interest margin in 2009 to increase back to 2008 levels, considering the
increase in nonperforming assets, the interest rate environment and the
narrowing spreads on our earning assets.





The
following table details the average balances of interest-earning assets and
interest-bearing liabilities, the amount of interest earned and paid, and the
average yields and rates for the three months ended March 31, 2009 and
2008.  Federally tax-exempt income is presented on a
taxable-equivalent basis assuming a 34% Federal tax rate in 2009 and a 35%
Federal tax rate in 2008.  Loan average balances include loans on
nonaccrual status.





For the Three Months Ended March
      31,
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2009
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2008Interest
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Average
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Interest
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            AverageAverage
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Income/
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Yield/
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Average
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Income/
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Yield/Balance
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Expense
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Rate
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Balance
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Expense
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            947,030
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            13,949
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            5.97
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            930,049
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            16,657
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            7.20
                                                                                                                                            %Investment
      securities:Taxable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            149,823
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,890
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            5.12
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            151,172
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,993
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            5.30
                                                                                                                                            %Nontaxable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            23,358
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            354
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            6.15
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            33,143
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            504
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            6.12
                                                                                                                                            %Other
      short-term investments
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            146,099
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            81
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            0.22
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            7,097
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            53
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.01
                                                                                                                                            %Total
      interest-earning assets
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            1,266,310
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            16,274
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            5.21
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            1,121,461
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            19,207
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            6.89
                                                                                                                                            %Interest-bearing
      liabilities:Demand
      deposits
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            214,468
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            291
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            0.55
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            305,907
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            1,927
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2.53
                                                                                                                                            %Savings
      deposits
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            34,200
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            21
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            0.25
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            35,342
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            76
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            0.86
                                                                                                                                            %Time
      deposits
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            769,994
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            7,349
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.87
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            533,563
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            6,415
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            4.84
                                                                                                                                            %FHLB
      advances
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            108,705
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1,077
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            4.02
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            92,454
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            930
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            4.05
                                                                                                                                            %Notes
      payable
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            21,199
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            183
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.50
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            10,310
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            168
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            6.57
                                                                                                                                            %Other
      short-term borrowings
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            8,931
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            37
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            1.69
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            18,418
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            169
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.69
                                                                                                                                            %Total
      interest-bearing liabilities
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            1,157,497
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            8,958
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.14
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            995,994
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            9,685
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.91
                                                                                                                                            %Interest
      rate spread
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2.07
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2.98
                                                                                                                                            %Net
      interest income
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            7,316
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            $
                                                                                                                                            9,522Net
      interest margin
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            2.34
                                                                                                                                            %
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            
                                                                                                                                            3.41
                                                                                                                                            %





25
 Table of Contents





Provision for Loan
Losses


During
the first quarter of 2009, we provided $1.75 million to our allowance for loan
losses due to an increase in nonperforming loans, a decrease in the valuation of
underlying collateral on previously recognized nonperforming
loans  and further deterioration in residential real estate market
conditions.  Additional provisions for loan losses in the second and
third quarters of 2009 may be warranted if, among other factors, further
weakness in real estate is observed in our markets, if our asset quality
deteriorates from current levels or if we attempt to aggressively liquidate our
collateral on these impaired loans under current market conditions.





For the
first three months of 2009, we charged-off $838,000 in loans and recovered
$117,000 in previously charged-off loans.  The $721,000 in net
charge-offs for the quarter resulted in an annualized 0.31% ratio of net
charge-offs to average loans, which is lower than our 2008 net charge-off ratio
of 1.21%, but comparable to our five-year average net charge-off ratio of
0.33%.  At March 31, 2009, the allowance for loan losses as a
percentage of total loans was 2.17%, compared to 2.03% at December 31,
2008.





We
consider the current level of the allowance for loan losses adequate to absorb
losses from loans in the portfolio.  As an integral part of our credit
risk management process, we regularly review loans in our portfolio for credit
quality and documentation of collateral.  We have a comprehensive
methodology for determining the adequacy of our allowance for loan
losses.  We perform an allowance analysis quarterly that is broken
down into the following three components: (1) specific allowances for individual
loans, (2) allowances for pools of loans identified by credit risk grades or
delinquency status, and (3) general allowances for all other loans pooled by
loan type.  The Problem Asset Committee has the responsibility for
assessing the risk elements, determining the specific allowance valuations, and
affirming the methodology used.  The Board of Directors reviews
management’s assessment and affirms the amount recorded.





The first
component of the allowance for loan loss methodology covers the measurement of
specific allowances for individual impaired loans as required by Financial
Accounting Standards Board (“FASB”) Statement No. 114, Accounting by Creditors for
Impairment of a Loan.  Each loan relationship with amounts due
in excess of $500,000 that has been identified for potential credit weakness is
evaluated for impairment.  A loan is impaired when, based on current
information and events, it is probable that the borrower will be unable to pay
all amounts due according to the contractual terms of the loan
agreement.  By definition, we consider all loans on nonaccrual status
and all loans whose terms have been modified in a troubled debt restructuring as
impaired.  If impairment is determined, a specific valuation is
assessed on that loan based on realizable collateral values (if collateral
dependent), discounted cash flows, or observable market values.  At
March 31, 2009, we had $6.4 million in specific reserves on $61.8 million in
individually evaluated impaired and other significant potential problem loans,
compared to $3.4 million in specific reserves on $59.9 million in individually
evaluated impaired and other significant potential problem loans at December 31,
2008 and $2.3 million in specific reserves on $16.3 million in individually
evaluated impaired and other significant potential problem at December 31,
2007.  During the fourth quarter of 2008, we wrote down $5.8 million
of our nonperforming loans.





The
second component of the allowance for loan loss methodology addresses all loans
not individually evaluated for impairment but are either internally rated,
criticized by our banking examiners, or past due 30 days or more.  The
allowance factors are based on industry standards and supported by our own
historical loss analysis.  At March 31, 2009, we had $7.3 million in
general reserves allocated to $249.9 million rated and delinquent
loans.  This is a slight decrease from the $7.4 million in general
reserves allocated to $200.5 million rated and delinquent loans at December 31,
2008 and the $4.0 million reserved on a lower balance of $119.7 million rated
and delinquent loans at December 31, 2007.





The third
component of the allowance addresses general allowances on all loans not
individually reserved due to impairment, rating or delinquency
status.  These loans are divided into smaller homogenous groups based
on loan type.  The allowances are determined by applying loss factors
to each pool of loans with similar characteristics.  The factors used
are based on historical loss percentages for each pool adjusted by current known
and documented internal and external environmental factors.  The
environmental factors considered in developing our loss measurements
include:





·
            lending
      policies and procedures, including changes in underwriting standards and
      collection, charge-off and recovery
practices;





·
            changes
      in international, national, regional and local economic and business
      conditions that affect the collectibility of the
  portfolio;





26
 Table of Contents




·
            changes
      in the nature and volume of the loan
portfolio;





·
            experience,
      ability, and depth of lending management and other relevant
      staff;





·
            levels
      of and trends in delinquencies and impaired
  loans;





·
            changes
      in the quality of our loan review
system;





·
            value
      of underlying collateral for collateral-dependent
  loans;





·
            existence
      and effect of any concentrations of credit, and changes in the level of
      such concentrations; and





·
            other
      external factors such as competition and legal and regulatory
      requirements.





The
quantitative risk factors used in determining these general reserves require a
high degree of management judgment.  At March 31, 2009, we had $6.7
million in general reserves compared to $7.8 million at December 31, 2008 and
$6.6 million December 31, 2007.  This 14% decrease in the general
reserves at the end of the first quarter compared to December 31, 2008 is
primarily due to the shift of general reserves into specific reserves on
impaired loans.





This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.  While we use the best information available to make the
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions or other environmental
factors.  In addition, regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan losses,
and may require us to make additions to the allowance based on their judgment
about information available to them at the time of their
examinations.








Allocation
of the Allowance for Loan Losses








As of
                
                March 31, 2009
                
                
                December 31, 2008
                
                
                December 31, 2007
                
                
                December 31, 2006Amount
                
                
                Percentage of Loans in Category to Total
      Loans
                
                
                Amount
                
                
                Percentage of Loans in Category to Total
      Loans
                
                
                Amount
                
                
                Percentage of Loans in Category to Total
      Loans
                
                
                Amount
                
                
                Percentage of Loans in Category to Total
      LoansCommercial
      and financial
                
                $
                1,355
                
                
                
                8.8
                %
                
                $
                1,382
                
                
                
                9.1
                %
                
                $
                229
                
                
                
                8.6
                %
                
                $
                972
                
                
                
                8.1
                %Agricultural
      (including loans secured by farmland)
                
                
                90
                
                
                
                4.7
                %
                
                
                112
                
                
                
                5.1
                %
                
                
                1,029
                
                
                
                4.5
                %
                
                
                1,184
                
                
                
                5.3
                %Real
      estate – construction
                
                
                13,393
                
                
                
                33.5
                %
                
                
                11,950
                
                
                
                33.0
                %
                
                
                8,383
                
                
                
                38.2
                %
                
                
                4,875
                
                
                
                35.9
                %Real
      estate – commercial
                
                
                2,407
                
                
                
                29.2
                %
                
                
                2,552
                
                
                
                28.9
                %
                
                
                2,008
                
                
                
                27.0
                %
                
                
                2,276
                
                
                
                31.1
                %Real
      estate – residential
                
                
                2,754
                
                
                
                20.3
                %
                
                
                2,417
                
                
                
                20.5
                %
                
                
                815
                
                
                
                18.9
                %
                
                
                547
                
                
                
                17.4
                %Consumer
      and other loans
                
                
                200
                
                
                
                3.5
                %
                
                
                176
                
                
                
                3.4
                %
                
                
                215
                
                
                
                2.8
                %
                
                
                255
                
                
                
                2.2
                %Unallocated
                
                
                204
                
                
                
                N/A
                
                
                
                785
                
                
                
                N/A
                
                
                
                227
                
                
                
                N/A
                
                
                
                897
                
                
                
                N/ATotal
                
                $
                20,403
                
                
                
                100.0
                %
                
                $
                19,374
                
                
                
                100.0
                %
                
                $
                12,906
                
                
                
                100.0
                %
                
                $
                11,006
                
                
                
                100.0
                %





27
 Table of Contents




Summary
of Loan Loss Experience





The
following table summarizes the activity in the allowance for loan losses, the
average balance of loans outstanding, and the ratio of net losses experienced
for the quarter ended March 31, 2009 and each of the last three fiscal years
ended December 31.





Quarter ended March 31,
      2009
                
                
                Year ended December 31,
      2008
                
                
                Year ended December 31,
      2007
                
                
                Year ended December 31,
      2006Balance
      at beginning of year
                
                $
                19,373
                
                
                $
                12,906
                
                
                $
                11,006
                
                
                $
                11,079Charge-offs:Commercial
      and financial
                
                
                351
                
                
                
                709
                
                
                
                66
                
                
                
                115Agricultural
      (including loans secured by farmland)
                
                
                -
                
                
                
                -
                
                
                
                10
                
                
                
                -Real
      estate – construction and development
                
                
                293
                
                
                
                8,023
                
                
                
                324
                
                
                
                24Real
      estate – commercial
                
                
                -
                
                
                
                25
                
                
                
                257
                
                
                
                314Real
      estate – residential
                
                
                121
                
                
                
                3,188
                
                
                
                65
                
                
                
                208Installment loans to individuals and other
      loans
                
                
                73
                
                
                
                183
                
                
                
                146
                
                
                
                160838
                
                
                
                12,128
                
                
                
                868
                
                
                
                821Recoveries:Commercial
      and financial
                
                
                40
                
                
                
                38
                
                
                
                55
                
                
                
                118Agricultural
      (including loans secured by farmland)
                
                
                39
                
                
                
                38
                
                
                
                56
                
                
                
                41Real
      estate – construction and development
                
                
                3
                
                
                
                2
                
                
                
                -
                
                
                
                -Real
      estate – commercial
                
                
                6
                
                
                
                340
                
                
                
                28
                
                
                
                335Real
      estate – residential
                
                
                6
                
                
                
                33
                
                
                
                108
                
                
                
                87Installment loans to individuals and other
      loans
                
                
                24
                
                
                
                94
                
                
                
                121
                
                
                
                167118
                
                
                
                545
                
                
                
                368
                
                
                
                748Net charge-offs
(recoveries)
                
                
                720
                
                
                
                11,583
                
                
                
                500
                
                
                
                73Additions provided to the allowance charged to
      operations
                
                
                1,750
                
                
                
                18,050
                
                
                
                2,400
                
                
                
                -Balance at end of year
                
                $
                20,403
                
                
                $
                19,373
                
                
                $
                12,906
                
                
                $
                11,006Average balance of loans
      outstanding
                
                $
                947,030
                
                
                $
                955,253
                
                
                $
                883,334
                
                
                $
                792,278Ratio of net charge-offs (recoveries) during the
      year to average loans outstanding during the year
                
                
                0.31
                %
                
                
                1.21
                %
                
                
                0.06
                %
                
                
                0.01
                %








Nonaccrual,
Past Due and Restructured Loans


Our
nonperforming loans increased $7.6 million, from $55.4 million at December 31,
2008 to $63.0 million at March 31, 2009, due primarily to the adverse economic
and real estate market conditions in our North Georgia and Florida
markets.  As a percentage of total loans, nonperforming loans
increased 91 basis points to 6.70% at March 31, 2009 from 5.79% at December 31,
2008.  Approximately 62% of the loans on nonaccrual status at March
31, 2009 were construction and development loans, and these loans represented
approximately 12% of our total portfolio of construction and development
loans.





28
 Table of Contents





A
schedule of our nonperforming loans at March 31, 2009 is presented in the
following table.





Category
                            
                            Net
      Carrying Value *
                            
                            Collateral Description
                            
                            Average
      Carrying Value/
  UnitConstruction
      and Development
                            
                            $10.5
      million
                            
                            9
      parcels of undeveloped land totaling 468 acres
                            
                            $14,200
      per residential acre and
                              $180,300
      per commercial acreConstruction
      and Development
                            
                            $13.3
      million
                            
                            467
      residential lots
                            
                            $28,600
      per lot1-4
      Family Residential
                            
                            $8.0
      million
                            
                            73
      houses
                            
                            $109,000
      per houseCommercial
      Real Estate
                            
                            $11.1
      million
                            
                            10
      commercial properties
                            
                            $1.1
      million per propertyAgriculture
                            
                            $1.4
      million
                            
                            1
      parcel of farm land totaling 223 acres
                            
                            $6,500
      per acreCommercial
      and Industrial
                            
                            $3.0
      million
                            
                            Non-real
      estate collateral
                            
                            $378,000
      per loanMulti-Family
      Residential
                            
                            $8.6
      million
                            
                            9
      condominium units
                            
                            $950,000
      per unitConsumer
                            
                            $85,000
                            
                            Non-real
      estate collateral
                            
                            $5,000
      per
loan


* The
term “net carrying value” represents the book value of the loan less any
allocated allowance for loan losses.





The table
below summarizes our levels of nonperforming loans and the level of reserves
allocated to those loans over the past five quarters.





As of Quarter End
                
                Mar-09
                
                
                Dec-08
                
                
                Sep-08
                
                
                Jun-08
                
                
                Mar-08(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
                
                $
                62,653
                
                
                $
                54,903
                
                
                $
                43,471
                
                
                $
                40,464
                
                
                $
                26,090Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
                
                
                19
                
                
                
                206
                
                
                
                4
                
                
                
                332
                
                
                
                13Troubled debt restructurings not included
      above
                
                
                311
                
                
                
                311
                
                
                
                9,808
                
                
                
                9,808
                
                
                
                -Total nonperforming loans
                
                $
                62,983
                
                
                $
                55,420
                
                
                $
                53,283
                
                
                $
                50,604
                
                
                $
                26,103Ratio
      of  nonperforming loans to total loans
                
                
                6.70
                %
                
                
                5.79
                %
                
                
                5.42
                %
                
                
                5.25
                %
                
                
                2.79
                %Reserves
      allocated to nonperforming loans:Specific
      Reserves (FAS 114)
                
                $
                6,179
                
                
                $
                2,888
                
                
                $
                9,905
                
                
                $
                6,222
                
                
                $
                2,241General Reserves (FAS 5)
                
                
                788
                
                
                
                1,188
                
                
                
                1,136
                
                
                
                390
                
                
                
                4,578Total reserves allocated to nonperforming
      loans
                
                $
                6,967
                
                
                $
                4,076
                
                
                $
                11,041
                
                
                $
                6,612
                
                
                $
                6,819Total reserves allocated as a percentage of
      nonperforming loans
                
                
                11.06
                %
                
                
                7.35
                %
                
                
                20.72
                %
                
                
                13.07
                %
                
                
                26.12
                %





29
 Table of Contents





The
following table summarizes our nonperforming assets by type and market as of
March 31, 2009.





South Georgia
                    
                    
                    North Georgia
                    
                    
                    Florida
                    
                    
                    Treasury
                    
                    
                    Total(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
                    
                    $
                    7,428
                    
                    
                    $
                    48,643
                    
                    
                    $
                    6,582
                    
                    
                    $
                    -
                    
                    
                    $
                    62,653Accruing
      loans which are contractually past due90
      days or more as to principal or interest payments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19
                    
                    
                    
                    19Troubled debt restructurings not included
      above
                    
                    
                    -
                    
                    
                    
                    311
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    311Total
      nonperforming loans
                    
                    $
                    7,248
                    
                    
                    $
                    48,954
                    
                    
                    $
                    6,582
                    
                    
                    $
                    19
                    
                    
                    $
                    62,983Foreclosed assets
                    
                    
                    1,727
                    
                    
                    
                    29,102
                    
                    
                    
                    660
                    
                    
                    
                    -
                    
                    
                    
                    31,489Total nonperforming assets
                    
                    $
                    9,155
                    
                    
                    $
                    78,056
                    
                    
                    $
                    7,242
                    
                    
                    $
                    19
                    
                    
                    $
                    94,472Ratio
      of nonperforming loans to total loans in market
                    
                    
                    1.91
                    %
                    
                    
                    11.11
                    %
                    
                    
                    6.46
                    %
                    
                    
                    0.07
                    %
                    
                    
                    6.70
                    %Ratio of nonperforming assets to total assets in
      market
                    
                    
                    2.30
                    %
                    
                    
                    17.21
                    %
                    
                    
                    6.89
                    %
                    
                    
                    0.00
                    %
                    
                    
                    7.01
                    %








Potential
Problem Loans


At March
31, 2009, we had $13.7 million in total delinquent loans (loans past due 30 days
or more) and still accruing interest, or 1.46% of total loans, representing a
decrease from $21.6 million, or 2.25% at December 31,
2008.  Approximately 42% of the loans past due 30-89 days at March 31,
2009 were construction and development loans, and these loans represented
approximately 1.8% of our total portfolio of construction and development
loans.





Of the
total delinquent loans discussed above, we have identified $5.8 million in
potential problem loans that are not classified as nonperforming loans as of
March 31, 2009, as compared to $9.8 million as of December 31,
2008.  These are all construction and land development loans that were
past due 30 to 89 days at March 31, 2009 and December 31,
2008.  Potential problem loans are loans where known credit problems
of the borrowers cause management to doubt the ability of such borrowers to
comply with the present repayment terms.  These loans are at a higher
risk of becoming nonperforming in future periods.





Other
Real Estate Owned


Our
foreclosed assets increased $7.9 million in the first quarter of 2009, from
$25.3 million at December 31, 2008 to $31.5 million at March 31,
2009.  Due to economic conditions in the Atlanta area, some builders
and developers have been unable to satisfy their obligations to us and we have
foreclosed on their collateral.  However, we have decided to hold
certain parcels of foreclosed assets rather than to force distressed sales of
these properties in this market.





A
schedule of the foreclosed properties held at March 31, 2009 is presented in the
following table.





Category
                            
                            Book Value
                            
                            Description
                            
                            Average Value/ UnitConstruction
      and Development
                            
                            $5.8
      million
                            
                            7
      parcels of undeveloped land totaling 657 acres
                            
                            $8,900
      per residential acreConstruction
      and Development
                            
                            $8.0
      million
                            
                            324
      residential lots
                            
                            $24,600
      per lot1-4
      Family Residential
                            
                            $11.8
      million
                            
                            64
      houses
                            
                            $184,000
      per houseCommercial
      Real Estate
                            
                            $5.9
      million
                            
                            22
      commercial properties
                            
                            $267,000
      per
property





30
 Table of Contents





Other
Income


A summary
of noninterest income follows:





For the Three Months Ended March
      31,
                          
                          2009
                          
                          
                          2008PercentAmount
                          
                          
                          Amount
                          
                          
                          Change(Dollars
      In Thousands)Noninterest
      income:Service
      charges on deposit accounts
                          
                          $
                          816
                          
                          
                          $
                          905
                          
                          
                          
                          -9.8
                          %Mortgage
      origination fees
                          
                          
                          197
                          
                          
                          
                          206
                          
                          
                          
                          -4.4
                          %ATM/
      debit card fee income
                          
                          
                          189
                          
                          
                          
                          175
                          
                          
                          
                          8.0
                          %Securities
      transactions, net
                          
                          
                          17
                          
                          
                          
                          183
                          
                          
                          
                          -90.7
                          %Earnings
      on bank-owned life insurance
                          
                          
                          104
                          
                          
                          
                          105
                          
                          
                          
                          -1.0
                          %Gain
      (loss) on disposal of assets
                          
                          
                          (127
                          )
                          
                          
                          (66
                          )
                          
                          
                          92.4
                          %Gain
      on derivative instrument
                          
                          
                          782
                          
                          
                          
                          -
                          
                          
                          
                          -Other noninterest income
                          
                          
                          128
                          
                          
                          
                          135
                          
                          
                          
                          -5.2
                          %Total noninterest income
                          
                          $
                          2,106
                          
                          
                          $
                          1,643
                          
                          
                          
                          28.2
                          %Noninterest
      income (annualized) as apercentage of
      average assets
                          
                          
                          0.63
                          %
                          
                          
                          0.55
                          %





Service
charges on deposit accounts decreased during the first quarter of 2009 due to a
$110,000 net decrease in NSF and overdraft fees, offset by a $21,000 increase in
our basic service charge fee income on deposit accounts.





Fee
income from ATM and debit cards increased as the volume of point-of-sale
transactions continues to increase.  However, we continue to offer a
no-fee ATM deposit product in certain markets for competitive reasons, which may
reduce our ATM fee income opportunities going forward.





During
the first quarter 2009, we incurred a loss of $123,000 on the sale of foreclosed
assets and a $4,000 loss on the disposal of equipment.  This is
compared to a loss of $58,000 on the sale of a parcel of foreclosed real estate
and an $8,000 loss on the disposal of an ATM machine during the first quarter of
2008.





During
the first quarter of 2009, we recorded a $782,000 gain on our hedging
activities, while we did not have any recorded gain on hedging activities during
the first quarter of 2008.





31
 Table of Contents





Other
Expenses


A summary
of noninterest expense follows:





For the Three Months Ended March
      31,
                            
                            2009
                            
                            
                            2008PercentAmount
                            
                            
                            Amount
                            
                            
                            Change(Dollars
      In Thousands)Noninterest
      expenses:Salaries
      and wages
                            
                            $
                            4,131
                            
                            
                            $
                            4,236
                            
                            
                            
                            -2.5
                            %Deferred
      loan costs
                            
                            
                            (371
                            )
                            
                            
                            (388
                            )
                            
                            
                            -4.4
                            %Employee
      benefits
                            
                            
                            880
                            
                            
                            
                            1,164
                            
                            
                            
                            -24.4
                            %Net
      occupancy expense of premises
                            
                            
                            608
                            
                            
                            
                            599
                            
                            
                            
                            1.5
                            %Furniture
      and equipment expense
                            
                            
                            504
                            
                            
                            
                            525
                            
                            
                            
                            -4.0
                            %Advertising
      and business development
                            
                            
                            96
                            
                            
                            
                            182
                            
                            
                            
                            -47.3
                            %Supplies
      and printing
                            
                            
                            96
                            
                            
                            
                            110
                            
                            
                            
                            -12.7
                            %Telephone
      and internet charges
                            
                            
                            172
                            
                            
                            
                            202
                            
                            
                            
                            -14.9
                            %Postage
      and courier
                            
                            
                            134
                            
                            
                            
                            162
                            
                            
                            
                            -17.3
                            %Legal
      and accounting fees
                            
                            
                            128
                            
                            
                            
                            113
                            
                            
                            
                            13.3
                            %Deposit
      insurance
                            
                            
                            216
                            
                            
                            
                            28
                            
                            
                            
                            671.4
                            %Director
      fees and expenses
                            
                            
                            177
                            
                            
                            
                            174
                            
                            
                            
                            1.7
                            %Service
      charges and fees
                            
                            
                            148
                            
                            
                            
                            175
                            
                            
                            
                            -15.4
                            %Foreclosure
      and repossession expenses
                            
                            
                            703
                            
                            
                            
                            79
                            
                            
                            
                            789.9
                            %Other noninterest expense
                            
                            
                            504
                            
                            
                            
                            468
                            
                            
                            
                            7.7
                            %Total noninterest expense
                            
                            $
                            8,126
                            
                            
                            $
                            7,829
                            
                            
                            
                            3.8
                            %Noninterest
      expense (annualized) as apercentage of
      average assets
                            
                            
                            2.43
                            %
                            
                            
                            2.64
                            %





Noninterest
expense increased 3.8% from $7.8 million in the first quarter of 2008 to $8.1
million in the first quarter of 2009.  However, as a percentage of
average assets, noninterest expense improved from 2.64% at March 31, 2008 to
2.43% at March 31, 2009.





Salaries
and wages expense and employee benefits decreased 2.5% for the first quarter of
2009 compared to the same period in 2008 due to the reduction of our staff from
321 full time equivalent employees at March 31, 2008 to 287 full time equivalent
employees at March 31, 2009.  The decreases in salary due to these
reductions were offset by a one-time severance accrual of $730,000 in the first
quarter of 2009 related to the retirement of our President and Chief Executive
Officer.  Deferred loan costs, which are credits against salaries and
wages, decreased due to a decrease in loan volume.





Advertising
and business development expenses, office supplies and printing charges and
telephone and internet fees decreased from the first quarter of 2008 to the
first quarter of 2009 due to cost-saving awareness and efforts among our
locations to reduce noninterest expenses.  The decrease in postage and
courier fees is due to a reduction in our courier’s schedule as part of our
cost-saving awareness efforts.





Service
charges and fees were higher in the first quarter of 2008, compared to the first
quarter of 2009, due to expenses related to our remote deposit product that we
incurred in the first quarter of 2008.





Foreclosure
and repossession expenses increased significantly from the first quarter of 2008
to the first quarter of 2009 due to the increased level of foreclosed assets
owned by the Company.  These increased expenses include property
taxes, repairs and maintenance, insurance and legal and collection
expenses.





Our
deposit insurance premiums increased from $28,000 during the first quarter of
2008 to $216,000 in the first quarter of 2009 due to rate increases from the
FDIC.





32
 Table of Contents




Income Tax
Expense


As a
percentage of net income before taxes, income tax expense was 49.0% and 33.8%
for the three-month periods ended March 31, 2009 and 2008,
respectively.  There is a difference between the effective rate and
the statutory federal rate of 35% due primarily to income earned on tax-exempt
municipalities, earnings on the cash value of our bank-owned life insurance and
state income taxes.








LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is an important factor in our financial condition and affects our ability to
meet the borrowing needs and deposit withdrawal requirements of our
customers.  Assets, consisting primarily of loans and investment
securities, are funded by customer deposits, borrowed funds and retained
earnings.  Maturities in the investment and loan portfolios also
provide a steady flow of funds for reinvestment.  In addition, our
liquidity is enhanced by a relatively stable core deposit base and the
availability of additional funding sources.





At March
31, 2009, our ratio of liquid assets (defined as the sum of cash and due from
bank balances, interest-bearing deposits in other banks, federal funds sold, and
investment securities) to total assets was 24.6%, compared to 23.9% at December
31, 2008.  It is our policy to maintain a ratio of liquid assets to
total assets of at least 15%.





During
the first quarter of 2009, we utilized the $20.0 million proceeds from the
issuance of a three year unsecured debt at an interest rate of 2.74% under the
FDIC’s Temporary Liquidity Guarantee Program and the $16.4 million decrease in
loans to fund the  $18.4 decrease in deposits, the $4.1 million
decrease in advances from the FHLB and the $13.3 million increase in liquid
assets.





Contractual
Obligations


Summarized
below are our contractual obligations as of March 31, 2009.





Contractual Obligations
                          
                          Total
                          
                          
                          Less
      than 1 year
                          
                          
                          1
      to 3 years
                          
                          
                          3
      to 5 years
                          
                          
                          More
      than 5 years(Dollars
      In Thousands)Federal
      Home Loan Bank of Atlanta Advances
                          
                          $
                          105,602
                          
                          
                          $
                          20,631
                          
                          
                          $
                          30,821
                          
                          
                          $
                          31,659
                          
                          
                          $
                          22,491Senior
      Unsecured Debt
                          
                          
                          20,000
                          
                          
                          
                          -
                          
                          
                          
                          20,000
                          
                          
                          
                          -
                          
                          
                          
                          -Operating
      Lease Obligations
                          
                          
                          1,668
                          
                          
                          
                          352
                          
                          
                          
                          623
                          
                          
                          
                          382
                          
                          
                          
                          311Guaranteed
      Preferred Beneficial Interests in Debentures
                          
                          
                          10,310
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,310$
                          137,580
                          
                          
                          $
                          20,983
                          
                          
                          $
                          51,444
                          
                          
                          $
                          32,041
                          
                          
                          $
                          33,112





Off Balance Sheet
Arrangements


Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business.  These
off-balance sheet financial instruments include commitments to extend credit and
standby letters of credit.  Such financial instruments are included in
the financial statements when funds are distributed or when the instruments
become payable.  Our exposure to credit loss in the event of
nonperformance by the other party to a financial instrument for commitments to
extend credit, standby letters of credit and credit card commitments is
represented by the contractual amount of those instruments.  We use
the same credit policies in making commitments as we do for on-balance sheet
instruments.  Although these amounts do not necessarily represent
future cash requirements, a summary of our commitments as of March 31, 2009 and
December 31, 2008 are as follows:





Mar-09
                  
                  
                  Dec-08Commitments
      to extend credit
                  
                  $
                  138,201,000
                  
                  
                  $
                  147,187,000Standby
      letters of credit
                  
                  $
                  4,311,000
                  
                  
                  $
                  4,134,000





33
 Table of Contents





In June
2006, we entered into a $50 million notional amount, 3-year, 8.25% Prime rate
floor contract to hedge against interest rate risk in a declining rate
environment.  In January 2008, we entered into a $25 million notional
amount, 3-year 5.75%/6.50% Prime rate collar contract and a $25 million notional
amount, 5-year 6.00%/7.25% Prime rate collar contract and in April 2008, we
entered into a $25 million notional amount, 3-year 2.975% 1-month LIBOR cap
contract to further hedge against interest rate risk.  In April 2009,
we terminated the two Prime rate collar contracts.  Notional amounts
provide the basis for calculating payments between counterparties and do not
represent amounts to be exchanged between parties, and are not a measure of
financial risk.  The risk of loss with our counterparty is limited to
a small fraction of the notional amount.  We only deal with
counterparties that have investment grade credit ratings, are well capitalized
and are approved by our Board of Directors.  Due to these factors, we
feel our credit risk exposure under these hedging arrangements at March 31, 2009
was not material.





Stockholders’
Equity


Stockholders’
equity represented 6.7% of total assets at March 31, 2009, a slight decrease
compared to 6.8% at December 31, 2008.  Total stockholders’ equity
decreased $907,000, or 1.0%, since December 31, 2008.  This decrease
is primarily the result of our net loss of $295,000 and a $696,000 decrease in
accumulated other comprehensive gains, offset by our stock based compensation
expense of $84,000.  We did not declare a dividend in the first
quarter of 2009, compared to a $0.145 per common share cash dividend declared
during the first quarter of 2008.  In setting our dividend on a
quarterly basis, we evaluate our capital adequacy and the quality of our
earnings, and we estimate our capital requirements and our earnings outlook for
the next year. Based on these evaluations, we suspended our quarterly dividends
on our Common Stock in the third quarter of 2008, and we do not intend to pay a
Common Stock dividend in 2009 due to continued pressure on earnings and
capital.





The
Company maintains a ratio of stockholders’ equity to total assets that is
considered adequate according to regulatory standards.  The Company
and the Bank are required to comply with capital adequacy standards established
by our regulators.  At March 31, 2009, the Company and the Bank were
in compliance with those standards.  There are no conditions or events
since quarter end that we believe have materially changed our regulatory capital
ratios.





The
following table summarizes the regulatory capital ratios of the Company and the
Bank at March 31, 2009.





Company
      Consolidated
                  
                  
                  Bank
                  
                  
                  Minimum
      Regulatory RequirementTotal
      Capital to Risk Weighted Assets
                  
                  
                  10.5
                  %
                  
                  
                  10.5
                  %
                  
                  
                  8.0
                  %Tier
      1 Capital to Risk Weighted Assets
                  
                  
                  9.2
                  %
                  
                  
                  9.2
                  %
                  
                  
                  4.0
                  %Tier 1 Capital to Average Assets (Leverage
      Ratio)
                  
                  
                  6.8
                  %
                  
                  
                  6.8
                  %
                  
                  
                  4.0
                  %





On March
5, 2009, we entered into investment agreements with certain purchasers to
purchase shares of our Series A Preferred Stock (the “Private
Placement”).  The Private Placement raised in the aggregate
approximately $10,305,000.  Under the terms of the investment
agreements, the purchasers agreed to purchase 10,305 shares of the Company’s
Series A Preferred Stock at a purchase price of $1,000 per share.  The
Series A Preferred Stock will be convertible into shares of Common Stock and
upon conversion of the Series A Preferred Stock, holders will receive warrants
to purchase shares of Common Stock equal to 30% of the aggregate value of the
Series A Preferred Stock.  The initial conversion price for the Series
A Preferred Stock is $3.00, subject to adjustment.  The warrants will
have an exercise price equal to $3.75 (which represents 125% of the conversion
price of the Series A Preferred Stock).  The Series A Preferred Stock
ranks senior to the Common Stock in terms of dividend payments and
distributions upon liquidation, dissolution and winding up of the
Company.  The proceeds of the Private Placement will be held by the
Bank in escrow until the satisfaction or waiver of a number of conditions,
including that the Bank’s total risk-based capital ratio equals or exceeds
twelve percent (12%). In calculating the Bank’s risk-based capital ratio, we
must exclude any funds received or held in escrow pursuant to the Private
Placement.  In the event we are unable to achieve this capital ratio
by June 30, 2009, the Company and the purchasers in the Private Placement will
enter into a 120-day negotiation period to negotiate the terms of a Stand-By
Purchase Agreement whereby the initial purchasers would purchase the Company’s
Common Stock in an aggregate value equal to the amount of Series A Preferred
Stock subscribed for under the Private Placement.  A majority of the
purchasers in the Private Placement were officers, directors and affiliates of
the Company.





34
 Table of Contents




CRITICAL
ACCOUNTING ESTIMATES





The
preparation of financial statements and the related disclosures in conformity
with accounting principles generally accepted in the United States requires that
management make estimates and assumptions which affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.  We believe that our determination of the
allowance for loan losses and the fair value of assets, including the impairment
of goodwill, affect our most significant judgments and estimates used in the
preparation of our consolidated financial statements.  The Company’s
accounting policies are described in detail in Note 1 of our Consolidated
Financial Statements provided in Item 8 of our  Annual Report on Form
10-K for the year ended December 31, 2008.  The following is a brief
description of the Company’s critical accounting estimates involving significant
management valuation judgment.  Management has discussed these
critical accounting policies with the Audit Committee.





Allowance for Loan
Losses


The
allowance for loan losses represents management’s estimate of losses inherent in
the existing loan portfolio.  The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries.  The allowance for loan losses
is determined based on management’s assessment of several factors including, but
not limited to, reviews and evaluations of specific loans, changes in the nature
and volume of the loan portfolio, current economic conditions and the related
impact on segments of the loan portfolio, historical loan loss experiences and
the level of classified and nonperforming loans.





Loans are
considered impaired if, based on current information and events, it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement.  The measurement of impaired loans is based on either the
fair value of the underlying collateral, the present value of the future cash
flows discounted at the historical effective interest rate stipulated in the
loan agreement, or the estimated market value of the loan.  In
measuring the fair value of the collateral, management uses assumptions (e.g.,
discount rate) and methodologies (e.g., comparison to the recent selling price
of similar assets) consistent with those that would be utilized by unrelated
third parties.





Management’s
assessment is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available.  Changes in various internal and external environmental
factors including, but not limited to, the financial condition of individual
borrowers, economic conditions, historical loss experience, or the condition of
the various markets in which collateral may be sold may affect the required
level of the allowance for loan losses and the associated provision for loan
losses.  Should these environmental factors change, a different amount
may be reported for the allowance for loan losses and the associated provision
for loan losses.





Estimates of Fair
Value


The
estimation of fair value is significant to a number of the Company’s assets,
including, but not limited to, investment securities, goodwill, other real
estate owned and other repossessed assets.  These are all recorded at
either fair value or at the lower of cost or fair value.  Fair values
are volatile and may be influenced by a number of
factors.  Circumstances that could cause estimates of the fair value
of certain assets and liabilities to change include a change in prepayment
speeds, discount rates, or market interest rates.  Our estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined to be
necessary.





Fair
values for most investment securities are based on quoted market
prices.  If quoted market prices are not available, fair values are
based on the quoted prices of similar instruments.  The fair values of
other real estate owned are typically determined based on appraisals by third
parties, less estimated costs to sell.





Estimates
of fair value are also required in performing an impairment analysis of
goodwill.  The Company reviews goodwill for impairment on at least an
annual basis and whenever events or circumstances indicate the carrying value
may not be recoverable.  An impairment would be indicated if the
carrying value exceeds the fair value of a reporting unit.





Recent
Accounting Pronouncements





In
management’s opinion, there are no recent accounting pronouncements that have
had or will have a material impact on our earnings or financial position as of
or for the quarter ended March 31, 2009.





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 Table of Contents




ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





We are
subject to exposure from U.S. dollar interest rate changes and accordingly, we
manage our exposure by considering the possible changes in the net interest
margin.  We do not engage in trading activity nor do we classify any
portion of the investment portfolio as held for trading.  Finally, we
have no material direct exposure to foreign currency exchange rate risk,
commodity price risk and other market risks.





Interest
rates play a major part in the net interest income of a financial
institution.  The sensitivity to rate changes is known as “interest
rate risk.”  The repricing of interest-earning assets and
interest-bearing liabilities can influence the changes in net interest
income.  As part of our asset/liability management program, the timing
of repriced assets and liabilities is referred to as gap
management.  It is our policy to maintain a gap ratio in the one-year
time horizon between 0.80 and 1.20.  At March 31, 2009, our one-year
management-adjusted gap ratio of 0.98 was within our policy
guidelines.  This is a significant improvement compared to our
one-year gap position of 1.25 three years ago at March 31, 2006.





We have
reduced the level of asset-sensitivity on the Company’s balance sheet in recent
years in an effort to better mitigate our interest rate risk in a declining
interest rate environment.  We have accomplished this by
conscientiously lengthening the duration of our earning assets, shortening the
duration of our deposits and other borrowings and utilizing off-balance sheet
derivative instruments to further hedge against interest rate risk in a
declining interest rate environment.





The table
below shows our contractual maturity gap at March 31, 2009.  A
positive maturity gap (a gap ratio > 1.00) occurs when more assets are
maturing than liabilities for any given time period, and generally equates to a
lower liquidity risk.  A negative maturity gap (a gap ratio < 1.00)
for any given time period results in a higher liquidity risk and could indicate
potential liquidity problems exist.





Cumulative
      Maturity Gap Analysis3-Month
                        
                        
                        6-Month
                        
                        
                        1-Year(Dollars
      in Thousands)Regulatory DefinedRate
      Sensitive Assets (RSA)
                        
                        $
                        245,339
                        
                        
                        $
                        375,879
                        
                        
                        $
                        550,672Rate Sensitive Liabilities
      (RSL)
                        
                        
                        166,715
                        
                        
                        
                        314,886
                        
                        
                        
                        523,720RSA
      minus RSL (Gap)
                        
                        $
                        78,624
                        
                        
                        $
                        60,993
                        
                        
                        $
                        26,952Maturity
      Gap Ratio (RSA/RSL)
                        
                        
                        1.47
                        
                        
                        
                        1.19
                        
                        
                        
                        1.05





36
 Table of Contents




The table
below has two gap ratio measurements, regulatory and
management-adjusted.  The regulatory gap considers only contractual
maturities or repricings.  The management-adjusted gap ratio includes
assumptions regarding prepayment speeds on certain rate sensitive assets, the
repricing frequency of interest-bearing demand and savings accounts, and the
stability of core deposit levels, all of which are adjusted periodically as
market conditions change.  The management-adjusted gap ratio indicates
we are highly asset sensitive in relation to changes in market interest rates in
the short-term.  Being asset sensitive would result in net interest
income increasing in a rising rate environment and decreasing in a declining
rate environment.





3-Month
                          
                          
                          6-Month
                          
                          
                          1-Year(Dollars
      In Thousands)Regulatory DefinedRate
      Sensitive Assets (RSA)
                          
                          $
                          690,428
                          
                          
                          $
                          757,962
                          
                          
                          $
                          826,851Rate Sensitive Liabilities
      (RSL)
                          
                          
                          455,273
                          
                          
                          
                          603,445
                          
                          
                          
                          816,909RSA
      minus RSL (Gap)
                          
                          $
                          235,155
                          
                          
                          $
                          154,517
                          
                          
                          $
                          9,942Gap
      Ratio (RSA/RSL)
                          
                          
                          1.52
                          
                          
                          
                          1.26
                          
                          
                          
                          1.01Management-AdjustedRate
      Sensitive Assets (RSA)
                          
                          $
                          694,219
                          
                          
                          $
                          763,074
                          
                          
                          $
                          835,313Rate Sensitive Liabilities
      (RSL)
                          
                          
                          464,667
                          
                          
                          
                          621,419
                          
                          
                          
                          849,884RSA
      minus RSL (Gap)
                          
                          $
                          229,552
                          
                          
                          $
                          141,655
                          
                          
                          $
                          (14,571
                          )Gap
      Ratio (RSA/RSL)
                          
                          
                          1.49
                          
                          
                          
                          1.23
                          
                          
                          
                          0.98





We use
simulation analysis to monitor changes in net interest income due to the impact
that changes in market interest rates has on our financial
instruments.  The simulation of rising, declining, and flat interest
rate scenarios allows us to monitor and adjust interest rate sensitivity to
minimize the impact of market interest rate swings.  The analysis of
the impact on net interest income over a twelve-month period is subjected to
increases or decreases in market rates on net interest income and is monitored
on a quarterly basis.  Our policy states that net interest income
cannot be reduced by more than 20% using this analysis.  As of March
31, 2009, the simulation model projected net interest income would increase
9.29% over the next year if market rates immediately rose by 100 basis points
and the model projected net interest income would decrease 0.86% over the next
year if market rates immediately fell by 25 basis points.  Over the
past two years, we have seen lower volatility in our results due to our efforts
to neutralize our asset-sensitive balance sheet mix, to improve our
asset/liability modeling with updated behavioral assumptions for repricing and
prepayment speeds and to implement an off-balance sheet derivative hedging
program.





The
following table shows the results of these projections for net interest income
expressed as a percentage change over net interest income in a flat rate
scenario for both a gradual change in market interest rates over a twelve-month
period and an immediate change, or “shock”, in market interest
rates.





Market
                      
                      Effect
      on Net Interest IncomeRate Change
                      
                      Gradual
                      
                      
                      Immediate+300 bps
                      
                      
                      16.79
                      %
                      
                      
                      28.55
                      %+200 bps
                      
                      
                      14.65
                      %
                      
                      
                      18.73
                      %+100 bps
                      
                      
                      8.45
                      %
                      
                      
                      9.29
                      %-25 bps
                      
                      
                      -0.86
                      %
                      
                      
                      -0.86
                      %





37
 Table of Contents





ITEM4.CONTROLS AND PROCEDURES





A review
and evaluation was performed by the Company’s management, including the
Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report.  Based on that review and evaluation, the CEO and
CFO have concluded that the Company’s current disclosure controls and
procedures, as designed and implemented, were effective as of the end of the
period covered by this report in alerting them on a timely basis to material
information relating to the Company required to be included in the Company’s
reports filed or submitted under the Securities Exchange Act of
1934.  There have been no significant changes in the Company’s
internal controls over financial reporting that occurred during the Company’s
most recent fiscal quarter 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





The
nature of the business of PAB and the Bank ordinarily results in a certain
amount of litigation.  Accordingly, we are party to a limited number
of lawsuits incidental to our respective businesses.  In our opinion,
the ultimate disposition of these matters will not have a material adverse
impact on our consolidated financial position or results of
operations.








ITEM
1A.RISK FACTORS





The
closing of the Private Placement and the receipt of the funds in connection
therewith is conditioned upon the Bank’s total risk-based capital ratio being
equal to or exceeding 12%.




In
addition to customary closing conditions, the closing of the Private Placement
will not occur and the Series A Preferred Stock will not be issued until the
Bank’s total risk-based capital ratio equals or exceeds 12%.  In
calculating the Bank’s risk-based capital ratio, we must exclude any funds
received or held in escrow pursuant to the Private Placement.  In the
event we are unable to achieve this capital ratio by June 30, 2009, the Company
and the purchasers in the Private Placement will enter into a 120-day
negotiation period to negotiate the terms of a purchase agreement (the “Stand-By
Purchase Agreement”) whereby the initial purchasers would purchase the Company’s
Common Stock in an aggregate value equal to the amount of Series A Preferred
Stock subscribed to under the Private Placement.  There are no
guarantees that the Company and the purchasers in the Private Placement will
come to an agreement on the terms of the Stand-By Purchase Agreement within the
120-day negotiation period.  If the Company and the purchasers in the
Private Placement do not consummate the Stand-By Purchase Agreement within the
120-day negotiation period, the $10,305,000 currently being held in escrow will
be returned to the purchasers in the Private Placement.





Other
than as provided above, there has not been any material change in the risk
factors disclosure from that contained in the Company’s 2008 Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.





38
 Table of Contents




ITEM2. UNREGISTERED SALE OF EQUITY SECURITIES, USE OF
PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES





As
described above under “Liquidity and Capital Resources,” the Company is
conducting an offering of 10,305 shares of its Series A Preferred Stock to
purchasers through a private placement in reliance upon an exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended, afforded by Section 4(2) thereunder, and, in particular, the safe
harbor provisions afforded by Regulation D, as promulgated thereunder. Each of
the purchasers has represented to the Company that he or she is an “accredited
investor” as defined in Rule 501(a) of Regulation D.








ITEM3.DEFAULTS UPON SENIOR SECURITIES





None








ITEM
4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
HOLDERS





None








ITEM
5.OTHER INFORMATION





None








ITEM6.  EXHIBITS





10.1
            Form
      of Investment Agreement





31.1
            Rule
      13a-14(a) Certification of CEO





31.2
            Rule
      13a-14(a) Certification of CFO





32.1
            Section
      1350 Certification of CEO





32.2
            Section
      1350 Certification of CFO








SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





PAB BANKSHARES, INC.RegistrantDate:  May
      11, 2009
                        By:
                        /s/ Donald J. Torbert, Jr.Donald
      J. Torbert, Jr.President
      and Interim Chief Executive Officer(principal
      executive officer of the registrant)Date:  May
      11, 2009
                        By:
                        /s/ Nicole S. StokesNicole
      S. StokesSenior
      Vice President and Chief Financial Officer(principal
      financial officer of the registrant)






39