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, 2010 – 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 x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o   No
o





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


Large
accelerated filer o
Accelerated filer o  Non-accelerated
filer o Smaller
reporting company x





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


Yes o No x





The
number of shares outstanding of the registrant’s common stock at April 30, 2010
was 13,795,040 shares.










TABLEOF
CONTENTS





PagePART I
              FINANCIAL INFORMATIONItem
      1.
              Consolidated Financial Statements
    (Unaudited)Statements of Condition
              1Statements of Loss
              2Statements of Comprehensive 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
              24Item
      3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              46Item
      4T.
              Controls and Procedures
              48PART II
              OTHER INFORMATIONItem
      1.
              Legal Proceedings
              48Item
      1A.
              Risk Factors
              48Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              48Item
      3.
              Defaults Upon Senior Securities
              48Item
      4.
              (Removed and Reserved)
              48Item
      5.
              Other Information
              48Item
      6.
              Exhibits
              49SIGNATURES
              49


i
 Table of Contents


PARTI.  FINANCIAL INFORMATION


Item
1.  Consolidated Financial Statements





PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CONDITION


AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009


March
      31,
            
            
            December
      31,2010
            
            
            2009(UNAUDITED)ASSETSCash
      and due from banks
            
            $
            15,220,686
            
            
            $
            16,641,978Interest-bearing
      deposits in other banks
            
            
            197,949,176
            
            
            
            169,732,493Federal
      funds sold
            
            
            2,000
            
            
            
            103,825Investment
      securities
            
            
            149,716,808
            
            
            
            111,541,113Restricted
      equity securities
            
            
            9,459,600
            
            
            
            9,459,600Loans
            
            
            757,732,094
            
            
            
            805,313,687Allowance
      for loan losses
            
            
            (30,528,897
            )
            
            
            (29,314,145
            )Net
      loans
            
            
            727,203,197
            
            
            
            775,999,542Premises
      and equipment, net
            
            
            17,870,975
            
            
            
            18,609,472Cash
      value of bank-owned life insurance policies
            
            
            12,969,903
            
            
            
            12,874,651Foreclosed
      assets
            
            
            95,492,705
            
            
            
            92,117,123Other
      assets
            
            
            23,799,109
            
            
            
            24,864,778Total
      assets
            
            $
            1,249,684,159
            
            
            $
            1,231,944,575LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
            
            $
            95,227,644
            
            
            $
            100,458,230Interest-bearing
      demand and savings
            
            
            252,662,889
            
            
            
            250,232,355Time
            
            
            719,316,816
            
            
            
            694,524,617Total
      deposits
            
            
            1,067,207,349
            
            
            
            1,045,215,202Federal
      funds purchased and securities sold under agreements to
      repurchase
            
            
            7,606,968
            
            
            
            10,011,024Advances
      from the Federal Home Loan Bank of Atlanta
            
            
            89,970,565
            
            
            
            90,139,501Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
            
            
            10,310,000
            
            
            
            10,310,000Other
      borrowings
            
            
            20,000,000
            
            
            
            20,000,000Other
      liabilities
            
            
            8,568,840
            
            
            
            5,682,200Total
      liabilities
            
            
            1,203,663,722
            
            
            
            1,181,357,927Stockholders'
      equity:Preferred
      stock, no par value; 10,000,000 and 1,500,000 shares authorized; no shares
      issued
            
            
            -
            
            
            
            -Common
      stock, no par value; 300,000,000 and 98,500,000 shares authorized;
      13,795,040 shares issued and outstanding
            
            
            1,217,065
            
            
            
            1,217,065Additional
      paid-in capital
            
            
            37,466,093
            
            
            
            37,348,508Retained
      earnings
            
            
            5,963,818
            
            
            
            11,295,000Accumulated
      other comprehensive income
            
            
            1,373,461
            
            
            
            726,075Total
      stockholders' equity
            
            
            46,020,437
            
            
            
            50,586,648Total
      liabilities and stockholders' equity
            
            $
            1,249,684,159
            
            
            $
            1,231,944,575





See
accompanying notes to consolidated financial statements.


1
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF LOSS


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





Three
      Months Ended March 31,2010
            
            
            2009Interest
      income:Interest
      and fees on loans
            
            $
            9,547,535
            
            
            $
            13,949,385Interest
      and dividends on investment securities:Taxable
            
            
            1,194,728
            
            
            
            1,890,426Nontaxable
            
            
            99,829
            
            
            
            230,157Other
      interest income
            
            
            89,368
            
            
            
            80,691Total
      interest income
            
            
            10,931,460
            
            
            
            16,150,659Interest
      expense:Interest
      on deposits
            
            
            5,212,958
            
            
            
            7,660,956Interest
      on Federal Home Loan Bank advances
            
            
            859,222
            
            
            
            1,077,245Interest
      on other borrowings
            
            
            256,458
            
            
            
            220,251Total
      interest expense
            
            
            6,328,638
            
            
            
            8,958,452Net
      interest income
            
            
            4,602,822
            
            
            
            7,192,207Provision
      for loan losses
            
            
            2,000,000
            
            
            
            1,750,000Net
      interest income after provision for loan losses
            
            
            2,602,822
            
            
            
            5,442,207Other
      income:Service
      charges on deposit accounts
            
            
            736,977
            
            
            
            816,028Other
      fee income
            
            
            479,498
            
            
            
            437,532Securities
      transactions, net
            
            
            144,734
            
            
            
            16,590Loss
      on sale and write-down of other assets
            
            
            (1,456,002
            )
            
            
            (127,355
            )Gain
      on derivative instruments
            
            
            63,421
            
            
            
            782,086Other
      noninterest income
            
            
            237,043
            
            
            
            180,881Total
      other income
            
            
            205,671
            
            
            
            2,105,762Other
      expenses:Salaries
      and employee benefits
            
            
            2,665,567
            
            
            
            4,639,771Occupancy
      expense of premises
            
            
            523,539
            
            
            
            608,134Furniture
      and equipment expense
            
            
            514,761
            
            
            
            504,340Other
      noninterest expense
            
            
            4,435,808
            
            
            
            2,373,576Total
      other expenses
            
            
            8,139,675
            
            
            
            8,125,821Loss
      before income tax expense
            
            
            (5,331,182
            )
            
            
            (577,852
            )Income
      tax benefit
            
            
            -
            
            
            
            (283,166
            )Net
      loss
            
            $
            (5,331,182
            )
            
            $
            (294,686
            )Loss  per
      common share:Basic
            
            $
            (0.39
            )
            
            $
            (0.03
            )Diluted
            
            $
            (0.39
            )
            
            $
            (0.03
            )





See
accompanying notes to consolidated financial statements.


2
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





Three
      Months Ended March 31,2010
            
            
            2009Net
      loss
            
            $
            (5,331,182
            )
            
            $
            (294,686
            )Other
      comprehensive income (loss):Unrealized
      losses on cash flow hedge during the period, net of tax benefit $33,719
      and $261,711
            
            
            (65,459
            )
            
            
            (508,027
            )Reclassification
      adjustment for gains on cash flow hedge included in net loss, net of tax
      of $21,563 and $207,472
            
            
            (41,858
            )
            
            
            (402,739
            )Unrealized
      holding gains on securities available for sale arising during the period,
      net of tax of $437,996 and $115,892
            
            
            850,227
            
            
            
            224,964Reclassification
      adjustment for gains on securities available for sale included in net
      loss, net of tax of $49,210 and $5,641
            
            
            (95,524
            )
            
            
            (10,949
            )647,386
            
            
            
            (696,751
            )Comprehensive
      loss
            
            $
            (4,683,796
            )
            
            $
            (991,437
            )





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, 2010 (UNAUDITED) AND YEAR ENDED DECEMBER 31,
2009







AccumulatedAdditional
            
            
            
            
            
            Other
            
            
            TotalCommon Stock
            
            
            Paid-in
            
            
            Retained
            
            
            Comprehensive
            
            
            Stockholders’Shares
            
            
            Par Value
            
            
            Capital
            
            
            Earnings
            
            
            Income
            
            
            EquityBalance,
      December 31, 2008
            
            
            9,324,407
            
            
            $
            1,217,065
            
            
            $
            24,225,407
            
            
            $
            62,467,000
            
            
            $
            3,691,270
            
            
            $
            91,600,742Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (51,172,000
            )
            
            
            -
            
            
            
            (51,172,000
            )Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,965,195
            )
            
            
            (2,965,195
            )Proceeds
      from private placement of capital
            
            
            4,470,633
            
            
            
            -
            
            
            
            12,772,471
            
            
            
            -
            
            
            
            -
            
            
            
            12,772,471Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            350,630
            
            
            
            -
            
            
            
            -
            
            
            
            350,630Balance,
      December 31, 2009
            
            
            13,795,040
            
            
            
            1,217,065
            
            
            
            37,348,508
            
            
            
            11,295,000
            
            
            
            726,075
            
            
            
            50,586,648Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,331,182
            )
            
            
            -
            
            
            
            (5,331,182
            )Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            647,386
            
            
            
            647,386Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            117,585
            
            
            
            -
            
            
            
            -
            
            
            
            117,585Balance,
      March 31, 2010
            
            
            13,795,040
            
            
            $
            1,217,065
            
            
            $
            37,466,093
            
            
            $
            5,963,818
            
            
            $
            1,373,461
            
            
            $
            46,020,437





See
accompanying notes to consolidated financial statements.


4
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





Three
      Months Ended March 31,2010
            
            
            2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (5,331,182
            )
            
            $
            (294,686
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
            
            
            379,261
            
            
            
            370,181Provision
      for loan losses
            
            
            2,000,000
            
            
            
            1,750,000Net
      realized gain on securities transactions
            
            
            (144,734
            )
            
            
            (16,590
            )Loss
      on disposal of assets
            
            
            1,456,002
            
            
            
            127,355Gain
      on derivative instruments
            
            
            (63,421
            )
            
            
            (782,086
            )Stock-based
      compensation expense
            
            
            117,585
            
            
            
            84,282Increase
      in cash value of bank-owned life insurance
            
            
            (95,252
            )
            
            
            (104,452
            )Increase
      (decrease) in deferred compensation accrual
            
            
            38,397
            
            
            
            (51,190
            )Net
      change in taxes receivable and taxes payable
            
            
            -
            
            
            
            (42,499
            )Decrease
      in interest receivable
            
            
            1,014,963
            
            
            
            310,823Decrease
      in interest payable
            
            
            (150,254
            )
            
            
            (96,860
            )Net
      increase in prepaid expenses and other assets
            
            
            (296,042
            )
            
            
            (1,074,419
            )Net
      increase in accrued expenses and other liabilities
            
            
            2,998,497
            
            
            
            490,653Net
      cash provided by operating activities
            
            
            1,923,820
            
            
            
            670,512CASH
      FLOWS FROM INVESTING ACTIVITIESIncrease
      in interest-bearing deposits in other banks
            
            
            (28,216,683
            )
            
            
            (12,609,342
            )Decrease
      in federal funds sold
            
            
            101,825
            
            
            
            998,769Purchase
      of debt securities
            
            
            (53,124,977
            )
            
            
            (32,174,781
            )Proceeds
      from sales of debt securities
            
            
            2,756,580
            
            
            
            22,326,382Proceeds
      from calls of debt securities
            
            
            7,020,000
            
            
            
            3,712,000Proceeds
      from maturities and paydowns of debt securities
            
            
            6,330,860
            
            
            
            5,076,712Purchase
      of equity investments
            
            
            -
            
            
            
            (278,454
            )Proceeds
      from sales of loans
            
            
            15,226,883
            
            
            
            -Net
      decrease in loans
            
            
            21,368,918
            
            
            
            7,731,894Purchase
      of premises and equipment
            
            
            (41,174
            )
            
            
            (333,011
            )Proceeds
      from disposal of assets
            
            
            5,813,501
            
            
            
            1,868,894Net
      cash used in investing activities
            
            
            (22,764,267
            )
            
            
            (3,680,937
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) in deposits
            
            
            21,992,147
            
            
            
            (18,405,021
            )Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
            
            
            (2,404,056
            )
            
            
            36,579Proceeds
      from the Federal Home Loan Bank
            
            
            5,000,000
            
            
            
            -Payments
      on Federal Home Loan Bank advances
            
            
            (5,168,936
            )
            
            
            (4,102,195
            )Proceeds
      from the issuance of long-term debt
            
            
            -
            
            
            
            20,000,000Net
      cash provided by (used in) financing activities
            
            
            19,419,155
            
            
            
            (2,470,637
            )


5
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009 (Continued)


(UNAUDITED)





Three
      Months Ended March 31,2010
            
            
            2009Net
      decrease in cash and due from banks
            
            $
            (1,421,292
            )
            
            $
            (5,481,062
            )Cash
      and due from banks at beginning of period
            
            
            16,641,978
            
            
            
            18,104,521Cash
      and due from banks at end of period
            
            $
            15,220,686
            
            
            $
            12,623,459SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid (received) during the period for:Interest
            
            $
            6,478,892
            
            
            $
            9,055,312Taxes
            
            $
            -
            
            
            $
            (240,667
            )NONCASH
      INVESTING AND FINANCING TRANSACTIONSIncrease
      in unrealized gains on securities available for sale
            
            $
            1,143,488
            
            
            $
            324,266Decrease
      in unrealized gain on cash flow hedges
            
            $
            (168,320
            )
            
            $
            (1,379,949
            )Transfer
      of loans to foreclosed assets
            
            $
            10,200,543
            
            
            $
            7,955,954





See
accompanying notes to consolidated financial statements.


6
 Table of Contents


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 1
            1Bainbridge,
      Decatur County
            3Cairo,
      Grady County
            1Statesboro,
      Bulloch County 1
            2Baxley,
      Appling County 1
            1Hazlehurst,
      Jeff Davis County 1
            1North
      Georgia Market:McDonough,
      Henry County
            1Stockbridge,
      Henry County
            1Oakwood,
      Hall County
            1Athens,
      Oconee County
            1Florida
      Market:Ocala,
      Marion County
            1





1 The Company
entered into a Purchase and Assumption Agreement on February 23, 2010 to sell
these offices.  Subject to regulatory approval and other customary
closing conditions, the sale is expected to close during the second quarter of
2010.





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.




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, 2010 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, 2009.





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





7
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


---




NOTE
2.     BASIS OF PRESENTATION (Continued)





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 foreclosed assets and deferred
taxes.





NOTE
3.      REGULATORY OVERSIGHT, CAPITAL ADEQUACY,
OPERATING LOSSES, LIQUIDITY AND MANAGEMENT’S PLANS





Regulatory
Oversight





The
Company and the Bank are currently operating under heightened regulatory
scrutiny and entered into a Written Agreement with the Federal Reserve Bank of
Atlanta and the Georgia Department of Banking and Finance on July 14, 2009
(the "Written Agreement"). The Written Agreement places certain requirements and
restrictions on the Bank.  Under the terms of the Written Agreement,
the Bank is required to prepare and submit written plans and reports to the
regulators that address strengthening the Bank’s credit risk management
practices, improving loan underwriting and loan administration, improving asset
quality, including improving the Bank’s position on problem loans through
repayment, additional collateral or other means; reviewing and revising as
necessary the Bank’s allowance for loan and lease losses policy; maintaining
sufficient capital at the Bank; revising and implementing a profitability plan
and comprehensive budget to improve and sustain the Bank’s earnings; and
improving the Bank’s liquidity position and funds management
practices.  The Company submitted the requested plans to the
regulators for their review on August 26, 2009.  The Company continues
to supplement these plans and reports on a quarterly basis and as needed in
response to comments and requests from our regulators.  While the
Written Agreement remains in place, the Company may not pay dividends and may
not increase debt or redeem any shares of stock without the prior written
consent of the regulators.





Since the
Bank entered into the Written Agreement, it has aggressively taken steps to
address the components of the Written Agreement.  The Bank has taken
an active role in working with the Federal Reserve and the Georgia Department to
improve its financial condition and is addressing the items included in the
Written Agreement on a continuing basis, including establishing new commercial
real estate loan concentration limits, new policies on the use of interest
reserves, and comprehensive underwriting criteria for commercial credit
analysis.  The Bank has also developed plans to strengthen its problem
asset management function and to reduce the level of problem assets on its
balance sheet over a period of time.  The Bank is in ongoing dialogue
with its regulators to remain in compliance with the terms of the Written
Agreement.  Failure to adequately address the Written Agreement may
result in actions by the banking regulators, including the eventual appointment
of a receiver or conservator of the Bank’s assets.





Capital
Adequacy





As of
March 31, 2010, the Bank was considered “adequately capitalized,” not “well
capitalized,” under regulatory guidelines.  Management is pursuing a
number of strategic alternatives to improve the capital ratios of the Bank and
to reduce the level of classified assets.   Current market
conditions for banking institutions, the overall uncertainty in financial
markets and the Bank’s high level of non-performing assets are potential
barriers to the success of these strategies. If current adverse market factors
continue for a prolonged period of time, new adverse market factors emerge,
and/or the Bank is unable to successfully execute its plans or adequately
address regulatory concerns in a sufficiently timely manner, it could have a
material adverse effect on the Bank’s business, results of operations and
financial position.


8
 Table of Contents




PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
3.      REGULATORY OVERSIGHT, CAPITAL ADEQUACY,
OPERATING LOSSES, LIQUIDITY AND MANAGEMENT’S PLANS (Continued)





Operating
Losses





The
Company incurred a net loss of $5.3 million for the three months ended
March 31, 2010. This loss was largely the result of increases in
non-performing assets, which caused the Company to record increased provisions
for loan losses, carrying costs on foreclosed properties and losses on the sale
of foreclosed properties.  Carrying costs on foreclosed assets are
expected to remain elevated during the remainder of 2010 as the Company works
towards liquidation of these non-performing assets.  Margin
compression also contributed to the net loss for the first three months of
2010.





Liquidity





The
Bank’s primary sources of liquidity are provided by its deposits, the scheduled
repayments on its loans, and interest and maturities of its
investments. Cash and amounts due from banks and federal funds sold can
also be utilized to meet liquidity needs. At March 31, 2010, the Bank had
approximately $197.8 million, or approximately 16% of its total assets, in cash
balances on account at the Federal Reserve.  All securities have been
classified as available for sale, which means they are carried at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of other comprehensive income.  If necessary, the Bank
has the ability to sell a portion of its unpledged investment securities to
manage its interest rate sensitivity or liquidity. Unpledged securities
totaled $11.7 million at March 31, 2010.  Since the Bank is not
considered “well capitalized” as of March 31, 2010, it is unable to accept,
rollover, or renew any brokered deposits without prior regulatory approval.
Approximately $34.0 million, or 30%, of the Bank’s existing brokered deposits
are scheduled to mature in the remainder of 2010.  Based on current
and expected liquidity needs and sources, the Company expects to be able to meet
its obligations through March 31, 2011.





NOTE
4.     INVESTMENT SECURITIES





The
amortized cost and fair value of securities with gross unrealized gains and
losses are summarized as follows:





Securities
      Available for Sale
            
            Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized Losses
            
            
            Fair ValueMarch
      31, 2010:Debt
      securities:U.S.
      Government-sponsored enterprises (GSEs)
            
            $
            25,424,153
            
            
            $
            544,109
            
            
            $
            (26,189
            )
            
            $
            25,942,073State
      and municipal securities
            
            
            9,691,737
            
            
            
            136,456
            
            
            
            (328,248
            )
            
            
            9,499,945Corporate
            
            
            4,026,785
            
            
            
            -
            
            
            
            (156,409
            )
            
            
            3,870,376Mortgage-backedGSE
      residential
            
            
            108,035,446
            
            
            
            1,979,208
            
            
            
            (303,964
            )
            
            
            109,710,690Private-label
      residential
            
            
            569,211
            
            
            
            -
            
            
            
            (4,707
            )
            
            
            564,504Private-label
      commercial
            
            
            131,099
            
            
            
            -
            
            
            
            (1,879
            )
            
            
            129,220Total
      securities available for sale
            
            $
            147,878,431
            
            
            $
            2,659,773
            
            
            $
            (821,396
            )
            
            $
            149,716,808


9
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


---




NOTE
4.     INVESTMENT SECURITIES (Continued)





Securities
      Available for Sale
            
            Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized Losses
            
            
            Fair ValueDecember
      31, 2009:Debt
      securities:U.S.
      Government-sponsored enterprises (GSEs)
            
            $
            30,452,647
            
            
            $
            262,292
            
            
            $
            (247,182
            )
            
            $
            30,467,757State
      and municipal securities
            
            
            9,997,494
            
            
            
            117,577
            
            
            
            (393,701
            )
            
            
            9,721,370Corporate
            
            
            4,027,832
            
            
            
            -
            
            
            
            (198,492
            )
            
            
            3,829,340Mortgage-backedGSE
      residential
            
            
            65,585,084
            
            
            
            1,379,928
            
            
            
            (217,795
            )
            
            
            66,747,217Private-label
      residential
            
            
            606,719
            
            
            
            -
            
            
            
            (5,271
            )
            
            
            601,448Private-label
      commercial
            
            
            176,449
            
            
            
            -
            
            
            
            (2,468
            )
            
            
            173,981Total
      securities available for sale
            
            $
            110,846,225
            
            
            $
            1,759,797
            
            
            $
            (1,064,909
            )
            
            $
            111,541,113





The
amortized cost and fair value of investment securities as of March 31, 2010, by
contractual maturity, are shown below.  Maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any
penalties.  Therefore, the mortgage-backed securities are shown
separately from the other debt securities in the following maturity
summary.





Amortized Cost
            
            
            Fair ValueDue
      in one year or less
            
            $
            -
            
            
            $
            -Due
      from one to five years
            
            
            1,000,000
            
            
            
            870,375Due
      from five to ten years
            
            
            13,746,398
            
            
            
            14,044,987Due
      after ten years
            
            
            24,396,276
            
            
            
            24,397,030Mortgage-backed
      securities
            
            
            108,735,757
            
            
            
            110,404,416$
            147,878,431
            
            
            $
            149,716,808





Securities
with a carrying value of $137,200,705 and $91,299,710 at March 31, 2010 and
December 31, 2009, respectively, were pledged to secure public deposits, certain
borrowing arrangements and for other purposes.





Gains and
losses on sales and calls of investment securities for three months ended March
31, 2010, and 2009 consist of the following:





Three
      Months Ended March 31,2010
            
            
            2009Gross
      gains on securities transactions
            
            $
            144,734
            
            
            $
            347,210Gross
      losses on securities transactions
            
            
            -
            
            
            
            (330,620
            )Net
      realized gain on securities transactions
            
            $
            144,734
            
            
            $
            16,590


10
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
4.    INVESTMENT SECURITIES (Continued)





The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position at March 31, 2010 and December 31, 2009.





Available
for sale securities that have been in a continuous unrealized loss position are
as follows:





Less Than Twelve Months
            
            
            Over Twelve MonthsGross Unrealized Losses
            
            
            Fair Value
            
            
            Gross Unrealized Losses
            
            
            Fair Value
            
            
            Total Unrealized LossesAvailable
      for Sale SecuritiesMarch
      31, 2010:Debt
      securities:U.S.
      Government-sponsored enterprises (GSEs)
            
            $
            26,189
            
            
            $
            1,658,644
            
            
            $
            -
            
            
            $
            -
            
            
            $
            26,189State
      and municipal securities
            
            
            1,847
            
            
            
            246,175
            
            
            
            326,401
            
            
            
            4,977,074
            
            
            
            328,248Corporate
            
            
            129,624
            
            
            
            870,375
            
            
            
            26,785
            
            
            
            1,000,000
            
            
            
            156,409Mortgage-backedGSE
      residential
            
            
            303,964
            
            
            
            21,188,448
            
            
            
            -
            
            
            
            -
            
            
            
            303,964Private-label
      residential
            
            
            -
            
            
            
            -
            
            
            
            4,707
            
            
            
            564,503
            
            
            
            4,707Private-label
      commercial
            
            
            -
            
            
            
            -
            
            
            
            1,879
            
            
            
            129,220
            
            
            
            1,879Total
      securities available for sale
            
            $
            461,624
            
            
            $
            23,963,642
            
            
            $
            359,772
            
            
            $
            6,670,797
            
            
            $
            821,396Available
      for Sale SecuritiesDecember
      31, 2009:Debt
      securities:U.S.
      Government-sponsored enterprises (GSEs)
            
            $
            247,182
            
            
            $
            16,526,513
            
            
            $
            -
            
            
            $
            -
            
            
            $
            247,182State
      and municipal securities
            
            
            8,504
            
            
            
            584,492
            
            
            
            385,197
            
            
            
            4,917,796
            
            
            
            393,701Corporate
            
            
            143,160
            
            
            
            856,840
            
            
            
            55,332
            
            
            
            972,500
            
            
            
            198,492Mortgage-backedGSE
      residential
            
            
            217,795
            
            
            
            15,005,641
            
            
            
            -
            
            
            
            -
            
            
            
            217,795Private-label
      residential
            
            
            -
            
            
            
            -
            
            
            
            5,271
            
            
            
            601,448
            
            
            
            5,271Private-label
      commercial
            
            
            -
            
            
            
            -
            
            
            
            2,468
            
            
            
            173,981
            
            
            
            2,468Total
      securities available for sale
            
            $
            616,641
            
            
            $
            32,973,486
            
            
            $
            448,268
            
            
            $
            6,665,725
            
            
            $
            1,064,909





Management
evaluates securities for other-than-temporary impairment at least on an annual
basis, and more frequently when economic or market conditions warrant such
evaluation.


11
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
5.  LOSS PER COMMON SHARE





Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year.  Diluted loss
per share is computed by dividing net loss 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 and
warrants.





The
components used to calculate basic and diluted earnings (loss) per share for the
three months ended March 31, 2010 and 2009 follow.





Three
      Months Ended March 31,2010
            
            
            2009Basic
      loss per share:Net
      loss
            
            $
            (5,331,182
            )
            
            $
            (294,686
            )Weighted
      average common shares outstanding
            
            
            13,795,040
            
            
            
            9,324,407Loss
      per common share
            
            $
            (0.39
            )
            
            $
            (0.03
            )Diluted
      loss per share:Net
      loss
            
            $
            (5,331,182
            )
            
            $
            (294,686
            )Weighted
      average common shares outstanding
            
            
            13,795,040
            
            
            
            9,324,407Effect
      of dilutive stock options and warrants
            
            
            -
            
            
            
            -Weighted
      average diluted common shares outstanding
            
            
            13,795,040
            
            
            
            9,324,407Loss
      per common share
            
            $
            (0.39
            )
            
            $
            (0.03
            )





As of
March 31, 2010 and 2009, total options and warrants to purchase common shares
of  1,948,150 and 708,389, respectively, were outstanding but not
included in the computation of diluted earnings per share because they were
determined to be anti-dilutive.


12
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


---




NOTE
6.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION





At
March 31, 2010, 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, 2010, there were
31,926 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, 2010, there were 435,250 shares available for
grant and there were 838,113 options outstanding that were granted under the
1999 Stock Option Plan.





At March
31, 2010, there was approximately $864,000 of unrecognized compensation cost
related to stock-based payments, which is expected to be recognized over a
weighted-average period of 2.79 years.





NOTE
7.  DERIVATIVE FINANCIAL INSTRUMENTS





Accounting
Policy for Derivative Instruments and Hedging Activities





FASB ASC
815, Derivatives and
Hedging (“ASC 815”), provides the disclosure requirements for derivatives
and hedging activities 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 the entity accounts for derivative instruments and related
hedged items, and (c) how derivative instruments and related hedged items affect
an entity’s financial position, financial performance, and cash flows. Further,
qualitative disclosures are required that explain the Company’s objectives and
strategies for using derivatives, as well as 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 ASC 815, 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 risk, even though hedge
accounting does not apply or the Company elects not to apply hedge
accounting.


13
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
7.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)





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 values 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.





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 Balance Sheet as of March 31, 2010 and
December 31, 2009.





Asset
      Derivatives
            
            Liability
      DerivativesAs of March 31, 2010
            
            As of December 31, 2009
            
            As of March 31, 2010
            
            As of December 31, 2009Balance Sheet Location
            
            Fair Value
            
            Balance Sheet Location
            
            Fair
              Value
            
            Balance Sheet Location
            
            Fair Value
            
            Balance Sheet Location
            
            Fair ValueDerivatives
      designated as hedging instruments under FASB ASC 815:Interest
      Rate Products
            Other
              Assets
            
            $
            -
            
            Other
              Assets
            
            $
            -
            
            Other
              Liabilities
            
            $
            -
            
            Other
              Liabilities
            
            $
            -Total
      derivatives designated as hedging instruments under FASB ASC
      815
            
            $
            -
            
            
            
            $
            -
            
            
            
            $
            -
            
            
            
            $
            -Derivatives
      not designated as hedging instruments under FASB ASC 815:Interest
      Rate Products
            Other
              Assets
            
            $
            512
            
            Other
              Assets
            
            $
            13,757
            
            Other
              Liabilities
            
            $
            -
            
            Other
              Liabilities
            
            $
            -Total
      derivatives not
      designated as hedging instruments under FASB ASC 815
            
            $
            512
            
            
            
            $
            13,757
            
            
            
            $
            -
            
            
            
            $
            -


14
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


---




NOTE
7.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)





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 caps as part of its interest rate risk management strategy to protect the
company against interest rate movements above the strike rate of the cap in
exchange for an upfront premium.  Historically the Company also has
used interest rate collars and floors as part of its interest rate risk
management strategy.  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.  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.





During
2009, such derivatives were used to hedge the variable cash outflows and inflows
associated with the Company’s floating rate deposit accounts and prime-based
floating-rate loans.  The effective portion of changes in the fair
value of derivatives designated and that qualify as cash flow hedges are
recorded in accumulated other comprehensive income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction
affects earnings.  The ineffective portions of the change in fair
value of the derivatives are recognized directly in earnings as a component of
other non-interest income/expense.  As of March 31, 2010, the Company
had one outstanding interest rate cap with a notional amount of $25 million that
had failed to qualify for hedge accounting due to a mismatch between the cap
notional and the aggregate principal amount of floating-rate deposit
accounts.  The interest rate cap failed to qualify for hedge
accounting as of September 30, 2009, and accordingly all changes in value
subsequent to June 30, 2009 were recognized directly in
earnings.  During 2009, the Company also had interest rate floors and
collars associated with existing pools of prime-based floating-rate
loans.  One of the Company’s interest rate collars failed to qualify
for hedge accounting as of March 31, 2009 due to a mismatch between the collar
notional and the aggregate principal amount of the designated loan
pools.  All changes in value subsequent to December 31, 2008 were
recognized directly in earnings through the date of
termination.  Refer to amounts disclosed under the sections entitled
“Derivatives Not Designated as Hedging Instruments under FASB ASC 815”
throughout this footnote for information regarding changes in value for
derivatives that failed to qualify in hedging relationships.  During
the three months ended March 31, 2010, the Company did not recognize any hedge
ineffectiveness.  During the three months ended March 31, 2009, the
Company recognized a gain of $616 due to hedge ineffectiveness.





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 $256,414 will be reclassified as an
increase to interest income and $42,111 will be reclassified as an increase to
interest expense.  During the three months ended March 31, 2010 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 the Company’s interest rate cap and two interest rate
collar’s becoming probable not to occur.  The accelerated amount for
the three months ended March 31, 2010 was a gain of $82,387.


15
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


---




NOTE
7.  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,
2010.





Derivatives
      in
              FASB
      ASC 815 Cash Flow Hedging Relationships
            
            Amount
      of Gain or (Loss) Recognized in OCI on Derivatives (Effective
      Portion)
              Three
      Months Ended
              March
      31,
            
            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)
              Three
      Months Ended
              March
      31,
            
            Location of Gain or (Loss)
      Recognized in Income on Derivatives (Ineffective Portion and Amount
      Excluded from Effectiveness Testing)
            
            Amount
      of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion
      and Amount Excluded from Effectiveness Testing)
              Three
      Months Ended March 31,2010
            
            
            2009
            
            
            
            2010
            
            
            2009
            
            
            
            2010
            
            
            2009Interest
      Rate Products
            
            $
            -
            
            
            $
            14,166
            
            Interest
      Income
            
            $
            85,933
            
            
            $
            1,478,092
            
            Other
      Income
            
            $
            -
            
            
            $
            616Other
      Income
            
            $
            82,387Total
            
            $
            -
            
            
            $
            14,166
            
            
            
            $
            168,320
            
            
            $
            1,478,092
            
            
            
            $
            -
            
            
            $
            616





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. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly in
earnings.  As of March 31, 2010 the Company had one outstanding
derivative, a $25 million dollar notional cap, which failed to qualify for hedge
accounting as of September 30, 2009 due to a mismatch between the cap notional
and the money market account balances being hedged.  Subsequently, the
changes in fair value of the cap from June 30, 2009 are recognized directly in
earnings.





During
the quarter ended June 30, 2009 the Company terminated a $25 million notional
collar that failed to qualify for hedge accounting; 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.





Effect
of Derivative Instruments on the Income Statement (Continued)





Derivatives
      Not Designated as Hedging Instruments Under
            Location
      of Gain or (Loss) Recognized in Income on
            
            Amount
      of Gain or (Loss) Recognized in Income on Derivatives
              Three
      Months Ended
              March
      31,FASB
      ASC 815
            Derivatives
            
            2010
            
            
            2009Interest
      Rate Products
            Other
      Income / Expense
            
            $
            (13,245
            )
            
            $
            89,200Total
            
            
            $
            (13,245
            )
            
            $
            89,200


16
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES





On
January 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements and
Disclosures ("ASC
820").  It defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.  It 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.





ASC
820emphasizes 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, ASC
820establishes 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).





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 is 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 would
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.


17
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)





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 ASC 820, 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,
2010 and December 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, 2010 and December 31, 2009.


18
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)





The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of March 31, 2010 and December 31, 2009, aggregated by the
level in the fair value hierarchy within which those measurements
fall.





As of March 31,
      2010:
            
            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
            
            $
            -
            
            
            $
            149,716,808
            
            
            $
            -
            
            
            $
            149,716,808Derivative
      financial instruments
            
            
            -
            
            
            
            512
            
            
            
            -
            
            
            
            512Total
      fair value of assets on a recurring basis
            
            $
            -
            
            
            $
            149,717,320
            
            
            $
            -
            
            
            $
            149,717,320








As
      of December 31, 2009:
            
            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
            
            $
            -
            
            
            $
            111,541,113
            
            
            $
            -
            
            
            $
            111,541,113Derivative
      financial instruments
            
            
            -
            
            
            
            13,757
            
            
            
            -
            
            
            
            13,757Total
      fair value of assets on a recurring basis
            
            $
            -
            
            
            $
            111,554,870
            
            
            $
            -
            
            
            $
            111,554,870





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.  During the first quarter
of 2010, certain impaired loans were partially charged-off or re-evaluated for
impairment resulting in a remaining balance for these loans, net of specific
allowances, of $124,312,000 as of March 31, 2010.  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.


19
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)





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.





The table
below presents the Company’s assets and liabilities for which a nonrecurring
change in fair value has been recorded during the quarter ended March 31, 2010
and the year ended December 31, 2009, aggregated by the level in the fair value
hierarchy within which those measurements fall.





Carrying
      value at March 31, 2010Quoted Prices in Active Markets for Identical
      Assets
              (Level 1)
            
            
            Significant Other Observable
      Inputs
              (Level 2)
            
            
            Significant Unobservable
Inputs
              (Level 3)
            
            
            Total
            
            
            Total losses for the Quarter Ended March 31,
      2010Nonperforming
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            124,311,991
            
            
            $
            124,311,991
            
            
            $
            -Foreclosed
      assets
            
            
            -
            
            
            
            2,729,300
            
            
            
            3,207,482
            
            
            
            5,936,782
            
            
            
            (1,477,225
            )Total
      fair value of assets on a  nonrecurring basis
            
            $
            -
            
            
            $
            2,729,300
            
            
            $
            127,519,473
            
            
            $
            130,248,773
            
            
            $
            (1,477,225
            )





Carrying
      value at December 31, 2009Quoted Prices in Active Markets for Identical
      Assets
              (Level 1)
            
            
            Significant Other Observable
      Inputs
              (Level 2)
            
            
            Significant Unobservable
Inputs
              (Level 3)
            
            
            Total
            
            
            Total losses for the Quarter Ended March 31,
      2009Nonperforming  loans
            
            $
            -
            
            
            $
            -
            
            
            $
            80,723,630
            
            
            $
            80,723,630
            
            
            $
            -Foreclosed
      assets
            
            
            -
            
            
            
            20,313,388
            
            
            
            71,803,735
            
            
            
            92,117,123
            
            
            
            (121,013
            )Total
      fair value of assets on a  nonrecurring basis
            
            $
            -
            
            
            $
            20,313,388
            
            
            $
            152,527,365
            
            
            $
            172,840,753
            
            
            $
            (121,013
            )





Fair
Value of Financial Instruments


The fair value of a financial
instrument is the current amount that would be exchanged between willing
parties, other than in a forced liquidation.  Fair value is best
determined based upon quoted market prices.  However, in many
instances, there are no quoted market prices for the Company’s various financial
instruments.  In cases where quoted market prices are not available,
fair value is based on discounted cash flows or other valuation
techniques.  These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows.  Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.


20
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)





The
following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:





Cash and Balances Due From Banks,
Interest-Bearing Deposits in Other Banks and Federal Funds
Sold:The carrying amount of cash and balances due from banks,
interest-bearing deposits at other financial institutions and federal funds sold
approximates fair value.





Investment Securities and Restricted
Equity Securities:The fair value of debt and marketable
equity securities is based on available quoted market prices.  The
carrying amount of equity securities with no readily determinable fair value
approximates fair value.





Loans:The carrying
amount of variable-rate loans that reprice frequently and have no significant
change in credit risk approximates fair value.  The fair value of
fixed-rate loans is estimated based on discounted contractual cash flows, using
interest rates currently being offered for loans with similar terms to borrowers
with similar credit quality.  The fair value of impaired loans is
estimated based on discounted contractual cash flows or underlying collateral
values, where applicable.





Derivatives:  The
carrying amount of derivatives approximates fair value.  The fair
value is defined as the amount the Company would receive or pay to terminate the
contracts at the reporting date.





Deposits:The carrying amount of demand
deposits and savings deposits approximates fair value.  The fair value
of time deposits is estimated based on discounted contractual cash flows using
interest rates currently being offered for time deposits of similar
maturities.





Federal Funds Purchased, Securities
Sold Under Agreements to Repurchase, Advances from Federal Home Loan Bank and
Other Borrowings:The carrying amount of variable rate
borrowings, federal funds purchased and securities sold under agreements to
repurchase approximate fair value.The fair value of fixed
rate  borrowings are estimated based on discounted contractual cash
flows using the current incremental borrowing rates for similar type borrowing
arrangements.  The fair value of borrowings with convertible features
is based on available quoted market values.





Beneficial Interests in
Debentures:  The carrying amount of beneficial interests in
debentures approximates fair value because these are variable rate
instruments.





Off-Balance-SheetInstruments:The
carrying amount of commitments to extend credit and standby letters of credit
approximates fair value.  The carrying amount of these off-balance-sheet
financial instruments is based on fees charged to enter into such
agreements.  The carrying amount and fair value of cash flow hedge
derivative instruments is based on available quoted market
prices.


21
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
8.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)





The
carrying amounts and estimated fair value of the Company's financial instruments
as of March 31, 2010 and December 31, 2009 are summarized below.  All
dollar amounts have been rounded to the nearest thousand.





March
      31, 2010
            
            
            December
      31, 2009Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueCash
      and balances due from banks, interest-bearing deposits with other banks
      and federal funds sold
            
            $
            213,172,000
            
            
            $
            213,172,000
            
            
            $
            186,478,000
            
            
            $
            186,478,000Investment
      securities
            
            
            149,717,000
            
            
            
            149,717,000
            
            
            
            111,541,000
            
            
            
            111,541,000Restricted
      equity securities
            
            
            9,460,000
            
            
            
            9,460,000
            
            
            
            9,460,000
            
            
            
            9,460,000Loans,
      net
            
            
            727,203,000
            
            
            
            729,611,000
            
            
            
            776,000,000
            
            
            
            777,400,000Cash
      flow hedge derivative instrument
            
            
            1,000
            
            
            
            1,000
            
            
            
            14,000
            
            
            
            14,000Deposits
            
            
            1,067,207,000
            
            
            
            1,078,384,000
            
            
            
            1,045,215,000
            
            
            
            1,057,778,000Federal
      funds purchased and securities sold under agreements to
      repurchase
            
            
            7,607,000
            
            
            
            7,607,000
            
            
            
            10,011,000
            
            
            
            10,011,000Advances
      from the FHLB
            
            
            89,971,000
            
            
            
            88,246,000
            
            
            
            90,140,000
            
            
            
            88,829,000Other
      borrowings
            
            
            20,000,000
            
            
            
            21,728,000
            
            
            
            20,000,000
            
            
            
            22,489,000Beneficial
      interest in debentures
            
            
            10,310,000
            
            
            
            10,310,000
            
            
            
            10,310,000
            
            
            
            10,310,000





NOTE
9.  SEGMENT REPORTING





The
Company has four reportable segments, the South Georgia market, the North
Georgia market, the Florida market and the Treasury segment.  The
South Georgia market includes the Company’s locations in Lowndes County, Cook
County, Decatur County, Appling County, Bulloch County, Jeff Davis County and
Grady County.  The North Georgia market includes the Company’s current and
former locations in Henry County, Hall County, Oconee County, Forsyth County and
Gwinnett County.  The Florida market includes the Company’s current
and former locations in Marion County, St. Johns County and Duval
County.  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" segment.  The Treasury segment also includes
the administrative and operational support facilities of the Company, such as
accounting, internal audit, credit administration, marketing, information
technology, human resources and operations.  All four segments derive
revenues from the delivery of financial services, which include commercial
loans, mortgage loans, consumer loans and deposit accounts.  The South
Georgia, North Georgia and Florida markets are managed as separate business
units because of their different geographic areas and the Treasury segment is
managed separately because it provides support services to the other
markets.





The
Company evaluates performance and allocates resources based on profit or loss
from operations.  There are no material inter-segment sales or
transfers.  Net interest revenue is used as the basis for performance
evaluation rather than its components, total interest revenue and total interest
expense.    The Company uses a funds transfer pricing system
to credit or charge the segments with the economic value or cost of the funds
the segments create or use.  All costs have been allocated to the
reportable segments, therefore, combined segment amounts agree to the
consolidated totals.


22
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
9.  SEGMENT REPORTING (Continued)





South Georgia
            
            
            North Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(In
      thousands)Three
      Months ended March 31, 2010Net
      interest income
            
            $
            3,585
            
            
            $
            1,582
            
            
            $
            269
            
            
            $
            (833
            )
            
            $
            4,603Provision
      for loan losses
            
            
            3,520
            
            
            
            (444
            )
            
            
            2,453
            
            
            
            (3,529
            )
            
            
            2,000Noninterest
      income (expense)
            
            
            757
            
            
            
            (1,332
            )
            
            
            22
            
            
            
            759
            
            
            
            206Noninterest
      expense
            
            
            2,028
            
            
            
            2,072
            
            
            
            967
            
            
            
            3,073
            
            
            
            8,140Income
      tax expense (benefit)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      income (loss)
            
            
            (1,206
            )
            
            
            (1,377
            )
            
            
            (3,129
            )
            
            
            381
            
            
            
            (5,331
            )Total
      assets
            
            
            350,921
            
            
            
            384,762
            
            
            
            80,295
            
            
            
            433,706
            
            
            
            1,249,684Three
      Months ended March 31, 2009Net
      interest income
            
            
            3,772
            
            
            
            2,519
            
            
            
            767
            
            
            
            134
            
            
            
            7,192Provision
      for loan losses
            
            
            1,499
            
            
            
            3,170
            
            
            
            921
            
            
            
            (3,840
            )
            
            
            1,750Noninterest
      income (expense)
            
            
            954
            
            
            
            (6
            )
            
            
            35
            
            
            
            1,123
            
            
            
            2,106Noninterest
      expense
            
            
            2,201
            
            
            
            1,660
            
            
            
            467
            
            
            
            3,798
            
            
            
            8,126Income
      tax expense (benefit)
            
            
            349
            
            
            
            (788
            )
            
            
            (199
            )
            
            
            355
            
            
            
            (283
            )Net
      income (loss)
            
            
            677
            
            
            
            (1,529
            )
            
            
            (387
            )
            
            
            944
            
            
            
            (295
            )Total
      assets
            
            
            397,414
            
            
            
            458,363
            
            
            
            105,149
            
            
            
            386,142
            
            
            
            1,347,068





NOTE
10.  SUBSEQUENT EVENT





On Apri1
14, 2010 the Company filed an Amended Registration Statement on Form S-1/A with
the Securities and Exchange Commission, for the purpose of registering up to
$92,000,000 of the Company’s common stock.


23
 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 under the caption “Management's Discussion and Analysis
of Financial Condition and Results of Operations” 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, stock performance, asset quality, economic conditions, real estate
markets and projected growth, 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 “anticipate”, “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) economic
conditions (both generally and in our markets) may be less favorable than
expected, resulting in, among other things, a continued deterioration in credit
quality, a further reduction in demand for credit and/or a further decline in
real estate values; (2) the general decline in the real estate and lending
market, particularly the market areas surrounding metropolitan Atlanta, may
continue to negatively affect our financial results; (3) our ability to raise
additional capital may be impaired if current levels of market disruption and
volatility continue or worsen; (4) restrictions or conditions imposed by our
regulators on our operations, including the terms of our written agreement with
the Federal Reserve Board and the Georgia Department of Banking and Finance, may
make it more difficult for us to achieve our goals; (5) legislative or
regulatory changes, including changes in accounting standards and compliance
requirements, may adversely affect the businesses in which we are engaged; (6)
competitive pressures among depository and other financial institutions may
increase significantly; (7) changes in the interest rate environment may reduce
margins or the volumes or values of the loans we make; (8) competitors may have
greater financial resources and develop products that enable those competitors
to compete more successfully than we can; (9) our ability to attract and retain
key personnel can be affected by the increased competition for experienced
employees in the banking industry; (10) adverse changes may occur in the bond
and equity markets; (11) war or terrorist activities may cause further
deterioration in the economy or cause instability in credit markets; (12) we may
not close the sale of five of our South Georgia branches when we anticipate or
at all; (13) economic, governmental or other factors may prevent the projected
population, residential and commercial growth in the markets in which we
operate; and (14) 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, 2009.  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. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by this
Cautionary Note. Our actual results may differ significantly from those we
discuss in these forward-looking statements. Any forward-looking statement
speaks only as of the date that the statement was made, and, except as required
by law, we expressly disclaim any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement to reflect events or
circumstances after the date on which we made the statement or to reflect the
occurrence of unanticipated events.





ITEM2.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
      OPERATIONS





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, 2009, 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.


24
 Table of Contents




Our
operating subsidiary, The Park Avenue Bank, is a $1.25 billion community bank
with 18 branches 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.





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 and Oconee counties are collectively referred to as our “North
Georgia” market.  Our office in Marion County is 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.  In January 2010, we closed
our loan production offices in Forsyth County, Georgia and St. Johns County,
Florida in a further effort to reduce expenses.  On February 23, 2010,
we entered into a Purchase and Assumption Agreement whereby we agreed to sell
our five branches located in Cook, Bulloch, Appling and Jeff Davis counties to
HeritageBank of the South.  The closing of the transaction is subject
to regulatory approval and other customary closing conditions and is expected to
be completed in the second quarter of 2010.





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
            
            
            $
            235,861
            
            
            $
            238,352
            
            
            
            20.3
            
            
            
            2Cook3
            
            
            1
            
            
            
            9,124
            
            
            
            51,176
            
            
            
            26.0
            
            
            
            2Decatur
            
            
            3
            
            
            
            36,309
            
            
            
            108,566
            
            
            
            29.6
            
            
            
            1Grady
            
            
            1
            
            
            
            10,676
            
            
            
            20,713
            
            
            
            8.5
            
            
            
            5Appling3
            
            
            1
            
            
            
            12,706
            
            
            
            37,620
            
            
            
            15.4
            
            
            
            5Jeff
      Davis3
            
            
            1
            
            
            
            8,978
            
            
            
            48,782
            
            
            
            29.1
            
            
            
            2Bulloch3
            
            
            2
            
            
            
            30,360
            
            
            
            48,251
            
            
            
            4.9
            
            
            
            613
            
            
            $
            344,014
            
            
            $
            553,460North
      GeorgiaHenry
            
            
            2
            
            
            $
            152,466
            
            
            $
            65,997
            
            
            
            3.5
            
            
            
            9Hall
            
            
            1
            
            
            
            114,355
            
            
            
            37,835
            
            
            
            1.6
            
            
            
            13Oconee
            
            
            1
            
            
            
            39,652
            
            
            
            19,976
            
            
            
            2.0
            
            
            
            94
            
            
            $
            306,473
            
            
            $
            123,808FloridaMarion
            
            
            1
            
            
            $
            66,880
            
            
            $
            173,215
            
            
            
            3.4
            
            
            
            61
            
            
            $
            66,880
            
            
            $
            173,215




1
            Dollar
      amounts are presented in thousands as of March 31,
      2010.  Amounts exclude $40.4 million in loans and
      $216.7 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,
      2009.


3
              The
      Company entered into a Purchase and Assumption Agreement on February 23,
      2010 to sell these offices.  Subject to regulatory approval and
      other customary closing conditions, the sale is expected to close during
      the second quarter of
2010.


25
 Table of Contents




Median
      2009Market/
            
            Total
            
            
            Population
            
            
            Employment
            
            
            Unemployment
            
            
            HouseholdCounty
            
            Population1
            
            
            Growth (%)2
            
            
            Growth (%)3
            
            
            Rate (%)4
            
            
            Income ($)5Selected
      Georgia Counties:South
      Georgia:Appling6
            
            
            18,011
            
            
            
            3.4
            
            
            
            1.1
            
            
            
            9.6
            
            
            
            36,176Bulloch6
            
            
            69,213
            
            
            
            23.6
            
            
            
            (3.2
            )
            
            
            8.9
            
            
            
            36,618Cook6
            
            
            16,603
            
            
            
            5.3
            
            
            
            (5.4
            )
            
            
            13.1
            
            
            
            32,980Decatur
            
            
            28,838
            
            
            
            2.1
            
            
            
            (3.6
            )
            
            
            12.5
            
            
            
            35,129Grady
            
            
            25,187
            
            
            
            6.5
            
            
            
            (4.0
            )
            
            
            9.5
            
            
            
            35,015Jeff
      Davis6
            
            
            13,659
            
            
            
            7.7
            
            
            
            (4.4
            )
            
            
            13.9
            
            
            
            32,465Lowndes
            
            
            106,814
            
            
            
            15.9
            
            
            
            (4.1
            )
            
            
            8.4
            
            
            
            41,277North
      Georgia:Hall
            
            
            187,743
            
            
            
            34.8
            
            
            
            (5.6
            )
            
            
            9.0
            
            
            
            57,198Henry
            
            
            195,370
            
            
            
            63.7
            
            
            
            (6.5
            )
            
            
            10.2
            
            
            
            72,929Oconee
            
            
            33,320
            
            
            
            27.1
            
            
            
            (3.1
            )
            
            
            5.8
            
            
            
            66,899State
      of Georgia
            
            
            9,829,211
            
            
            
            20.1
            
            
            
            (4.9
            )
            
            
            10.0
            
            
            
            56,761Selected
      Florida Counties:Marion
            
            
            328,547
            
            
            
            26.9
            
            
            
            (5.0
            )
            
            
            13.8
            
            
            
            40,201State
      of Florida
            
            
            18,537,969
            
            
            
            16.0
            
            
            
            (4.6
            )
            
            
            11.5
            
            
            
            50,413National
      Total
            
            
            307,006,550
            
            
            
            9.1
            
            
            
            (3.8
            )
            
            
            9.5
            
            
            
            54,719




1
            Estimated
      July 1, 2009 poulation provided by the U.S. Census
  Bureau.


2
            Estimated
      percentage population change from 2000 to 2009 provided by the U.S. Census
      Bureau.


3
            Total
      employment growth (not seasonally adjusted) for the Fourth Quarter 2009
      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 2009 provided by the
      Bureau of Labor Statistics.


5
            Based
      on actual 2009 market demographics provided by SNL
    Financial.


6
            The
      Company entered into a Purchase and Assumption Agreement on February 23,
      2010 to sell these offices.  Subject to regulatory approval and
      other customary closing conditions, the sale is expected to close during
      the second quarter of 2010.


26
 Table of Contents


FINANCIAL
CONDITION





During
the three months ended March 31, 2010, our total assets increased $17.7 million,
or 1.4% to $1.25 billion.  Our loan portfolio decreased $47.6 million,
or 5.9% to $757.7 million at March 31, 2010 from $805.3 million at December 31,
2009.  During the first quarter of 2010, $15.2 million of loans were
sold to another financial institution.  During the three months ended
March 31, 2010, $10.5 million of loans were transferred from loans to foreclosed
assets and $6.0 million of foreclosed assets were sold.  Total
deposits increased $22.0 million, or 2.1% to $1.07 billion at March 31, 2010
from $1.05 billion at December 31, 2009. The
increase in total deposits is primarily the result of a $51.8 million increase
in internet time deposits (bank deposits solicited via multiple internet
services), a $9.0 million increase in retail time deposits, and a $2.4 million
increase in interest-bearing demand and savings accounts, offset by a $19.3
million decrease in brokered deposits (bank deposits solicited by a third-party
broker), a $16.7 million decrease in retail time deposits placed in the CDARs
program, and a $5.2 million decrease in noninterest-bearing deposits.During the first quarter of 2009, the Bank issued $20 million of
three-year, fixed rate 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, 2010.





South
            
            
            NorthAs of March  31,
    2010
            
            Georgia
            
            
            Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(Dollars
      in Thousands)LoansCommercial
      and financial
            
            $
            24,560
            
            
            $
            36,582
            
            
            $
            1,806
            
            
            $
            15,447
            
            
            $
            78,395Agricultural
      (including loans secured by farmland)
            
            
            33,499
            
            
            
            2,749
            
            
            
            6,148
            
            
            
            -
            
            
            
            42,396Real
      estate – construction and development
            
            
            69,753
            
            
            
            83,215
            
            
            
            26,367
            
            
            
            1,983
            
            
            
            181,318Real
      estate – commercial
            
            
            94,751
            
            
            
            137,954
            
            
            
            21,236
            
            
            
            10,400
            
            
            
            264,341Real
      estate – residential
            
            
            111,609
            
            
            
            45,613
            
            
            
            11,155
            
            
            
            3,466
            
            
            
            171,843Installment
      loans to individuals and other loans
            
            
            9,680
            
            
            
            481
            
            
            
            280
            
            
            
            9,101
            
            
            
            19,542343,852
            
            
            
            306,594
            
            
            
            66,992
            
            
            
            40,397
            
            
            
            757,835Deferred
      loan fees and unearned interest, net
            
            
            163
            
            
            
            (120
            )
            
            
            (113
            )
            
            
            (33
            )
            
            
            (103
            )344,015
            
            
            
            306,474
            
            
            
            66,879
            
            
            
            40,364
            
            
            
            757,732Allowance
      for loan losses
            
            
            (13,142
            )
            
            
            (11,846
            )
            
            
            (3,716
            )
            
            
            (1,825
            )
            
            
            (30,529
            )Net
      loans
            
            $
            330,873
            
            
            $
            294,628
            
            
            $
            63,163
            
            
            $
            38,539
            
            
            $
            727,203Percentage
      of total
            
            
            45.5
            %
            
            
            40.5
            %
            
            
            8.7
            %
            
            
            5.3
            %
            
            
            100.0
            %DepositsNoninterest-bearing
      demand
            
            $
            74,144
            
            
            $
            15,128
            
            
            $
            2,837
            
            
            $
            3,119
            
            
            $
            95,228Interest-bearing
      demand and savings
            
            
            196,264
            
            
            
            27,595
            
            
            
            28,264
            
            
            
            539
            
            
            
            252,662Retail
      time less than $100,000
            
            
            162,890
            
            
            
            45,432
            
            
            
            93,644
            
            
            
            159
            
            
            
            302,125Retail
      time greater than or equal to $100,000
            
            
            109,383
            
            
            
            33,613
            
            
            
            48,470
            
            
            
            113
            
            
            
            191,579Retail
      time placed in CDARs program
            
            
            10,779
            
            
            
            2,040
            
            
            
            -
            
            
            
            -
            
            
            
            12,819Brokered
      time1
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            113,701
            
            
            
            113,701Internet
      time1
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            99,093
            
            
            
            99,093Total
      deposits
            
            $
            553,460
            
            
            $
            123,808
            
            
            $
            173,215
            
            
            $
            216,724
            
            
            $
            1,067,207Percentage
      of total
            
            
            51.9
            %
            
            
            11.6
            %
            
            
            16.2
            %
            
            
            20.3
            %
            
            
            100.0
            %





1Brokered
time deposits are defined as bank deposits solicited by a third-party
broker.  Internet time deposits are defined as bank deposits solicited
via multiple internet services.





Included
in the table above, are approximately $57.1 million in loans to customers of our
South Georgia, North Georgia, and Treasury offices that are secured by real
estate in Florida.  27
 Table of Contents




Since the
second half of 2007, finished housing inventories and the supply of vacant
developed lots in several of our markets in the Atlanta MSA remain high,
although the number of home sales, new building permits and housing starts
has 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-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Mar-08
            
            
            Mar-07Housing Inventory:
            
            (Number
      of Months Supply)Henry
      County
            
            
            8.4
            
            
            
            9.4
            
            
            
            11.4
            
            
            
            11.9
            
            
            
            12.7
            
            
            
            12.6
            
            
            
            9.3Clayton
      County
            
            
            11.5
            
            
            
            9.1
            
            
            
            17.7
            
            
            
            18.5
            
            
            
            16.7
            
            
            
            9.3
            
            
            
            12.5Newton
      County
            
            
            11.0
            
            
            
            10.7
            
            
            
            10.1
            
            
            
            10.4
            
            
            
            12.9
            
            
            
            12.3
            
            
            
            7.9South
      Fulton County
            
            
            10.2
            
            
            
            10.4
            
            
            
            11.5
            
            
            
            8.7
            
            
            
            9.7
            
            
            
            9.1
            
            
            
            7.5Vacant Developed Lots
      Inventory:Henry
      County
            
            
            514.8
            
            
            
            300.1
            
            
            
            631.5
            
            
            
            362.9
            
            
            
            348.8
            
            
            
            113.0
            
            
            
            37.0Clayton
      County
            
            
            2,307.5
            
            
            
            304.4
            
            
            
            772.9
            
            
            
            436.8
            
            
            
            273.9
            
            
            
            62.0
            
            
            
            29.0Newton
      County
            
            
            687.6
            
            
            
            620.5
            
            
            
            649.0
            
            
            
            410.3
            
            
            
            399.9
            
            
            
            93.0
            
            
            
            29.0South
      Fulton County
            
            
            288.5
            
            
            
            291.8
            
            
            
            399.2
            
            
            
            192.7
            
            
            
            161.7
            
            
            
            67.0
            
            
            
            26.0





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-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09(Dollars
      In Thousands)Commercial
      and financial
            
            $
            78,395
            
            
            $
            84,771
            
            
            $
            88,863
            
            
            $
            84,599
            
            
            $
            82,534Agricultural
      (including loans secured by farmland)
            
            
            42,396
            
            
            
            40,215
            
            
            
            44,470
            
            
            
            45,774
            
            
            
            44,671Real
      estate – construction and development
            
            
            181,318
            
            
            
            204,663
            
            
            
            269,804
            
            
            
            290,949
            
            
            
            314,863Real
      estate – commercial
            
            
            264,341
            
            
            
            275,927
            
            
            
            283,404
            
            
            
            285,731
            
            
            
            274,338Real
      estate –  residential
            
            
            171,843
            
            
            
            174,879
            
            
            
            181,048
            
            
            
            183,074
            
            
            
            191,388Installment
      loans to individuals and other loans
            
            
            19,542
            
            
            
            24,949
            
            
            
            24,561
            
            
            
            29,790
            
            
            
            32,740757,835
            
            
            
            805,404
            
            
            
            892,150
            
            
            
            919,917
            
            
            
            940,534Deferred
      loan fees and unearned interest, net
            
            
            (103
            )
            
            
            (90
            )
            
            
            (169
            )
            
            
            (219
            )
            
            
            (255
            )Total
      loans
            
            
            757,732
            
            
            
            805,314
            
            
            
            891,981
            
            
            
            919,698
            
            
            
            940,279Allowance
      for loan losses
            
            
            (30,529
            )
            
            
            (29,314
            )
            
            
            (40,000
            )
            
            
            (19,719
            )
            
            
            (20,403
            )Net
      loans
            
            $
            727,203
            
            
            $
            776,000
            
            
            $
            851,981
            
            
            $
            899,979
            
            
            $
            919,876


28
 Table of Contents




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





As of Quarter End
            
            Mar-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09Commercial
      and financial
            
            
            10.35
            %
            
            
            10.53
            %
            
            
            9.96
            %
            
            
            9.20
            %
            
            
            8.78
            %Agricultural
      (including loans secured by farmland)
            
            
            5.59
            %
            
            
            4.99
            %
            
            
            4.99
            %
            
            
            4.98
            %
            
            
            4.75
            %Real
      estate – construction and development
            
            
            23.93
            %
            
            
            25.41
            %
            
            
            30.25
            %
            
            
            31.63
            %
            
            
            33.49
            %Real
      estate – commercial
            
            
            34.88
            %
            
            
            34.26
            %
            
            
            31.77
            %
            
            
            31.07
            %
            
            
            29.18
            %Real
      estate – residential
            
            
            22.68
            %
            
            
            21.72
            %
            
            
            20.30
            %
            
            
            19.90
            %
            
            
            20.35
            %Installment
      loans to individuals and other loans
            
            
            2.58
            %
            
            
            3.10
            %
            
            
            2.75
            %
            
            
            3.24
            %
            
            
            3.48
            %100.01
            %
            
            
            100.01
            %
            
            
            100.02
            %
            
            
            100.02
            %
            
            
            100.03
            %Deferred
      loan fees and unearnedinterest,
      net
            
            
            -0.01
            %
            
            
            -0.01
            %
            
            
            -0.02
            %
            
            
            -0.02
            %
            
            
            -0.03
            %Total
      loans
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %Allowance
      for loan losses
            
            
            -4.03
            %
            
            
            -3.64
            %
            
            
            -4.48
            %
            
            
            -2.14
            %
            
            
            -2.17
            %Net
      loans
            
            
            95.97
            %
            
            
            96.36
            %
            
            
            95.52
            %
            
            
            97.86
            %
            
            
            97.83
            %





At
March 31, 2010, the loan portfolio was $757.7 million compared to
$805.3 million at December 31, 2009, a decrease of $47.6 million,
or 5.9%.  The composition of the loan portfolio has shifted as
commercial real estate mortgages increased from 30.8% of our portfolio in 2005
to 34.9% at the end March 2010, and construction and land development loans
decreased from 35.7% of our portfolio to 23.9% of our portfolio over the same
time frame.  A large portion of our construction and development loans
are in our North Georgia market.  Of the $181.3 million in
construction and development loans outstanding at the end of March 2010, $83.2
million, or 45.9%, were originated in our North Georgia
offices.


29
 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, 2010
            
            
            December
      31, 2009
            
            
            March
      31, 2009$ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total(Dollars
      in Thousands)Construction and
    development:Acquisition
      and development:1-4
      family residential
            
            $
            78,660
            
            
            
            43.4
            %
            
            $
            83,868
            
            
            
            41.0
            %
            
            $
            129,628
            
            
            
            41.2
            %Commercial
      and multi-family
            
            
            51,047
            
            
            
            28.2
            %
            
            
            58,477
            
            
            
            28.6
            %
            
            
            95,669
            
            
            
            30.4
            %ConstructionResidential:1-4
      family residential spec
            
            
            5,961
            
            
            
            3.3
            %
            
            
            10,364
            
            
            
            5.1
            %
            
            
            17,019
            
            
            
            5.4
            %1-4
      family residential pre-sold
            
            
            379
            
            
            
            0.2
            %
            
            
            304
            
            
            
            0.1
            %
            
            
            112
            
            
            
            0.1
            %1-4
      family residential other
            
            
            7,149
            
            
            
            3.9
            %
            
            
            14,501
            
            
            
            7.1
            %
            
            
            21,356
            
            
            
            6.8
            %Commercial:Commercial
      owner-occupied
            
            
            1,005
            
            
            
            0.6
            %
            
            
            704
            
            
            
            0.3
            %
            
            
            2,297
            
            
            
            0.7
            %Commercial
      not owner-occupied
            
            
            28,469
            
            
            
            15.6
            %
            
            
            27,994
            
            
            
            13.7
            %
            
            
            35,689
            
            
            
            11.3
            %Other:Hotel/motel
            
            
            2,575
            
            
            
            1.4
            %
            
            
            2,427
            
            
            
            1.2
            %
            
            
            8,554
            
            
            
            2.7
            %Multi-family
      properties
            
            
            3,936
            
            
            
            2.2
            %
            
            
            4,512
            
            
            
            2.2
            %
            
            
            -
            
            
            
            0.0
            %Special
      purpose property
            
            
            2,137
            
            
            
            1.2
            %
            
            
            1,512
            
            
            
            0.7
            %
            
            
            3,319
            
            
            
            1.0
            %Other
            
            
            -
            
            
            
            0.0
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            1,220
            
            
            
            0.4
            %Total
      construction and development loans
            
            $
            181,318
            
            
            
            100.0
            %
            
            $
            204,663
            
            
            
            100.0
            %
            
            $
            314,863
            
            
            
            100.0
            %Percentage
      of total loans
            
            
            23.9
            %
            
            
            
            
            
            
            25.4
            %
            
            
            
            
            
            
            33.5
            %





March
      31, 2010
            
            
            December
      31, 2009
            
            
            March
      31, 2009$ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to TotalCommercial real estate:Owner-occupied:Office
            
            $
            37,976
            
            
            
            14.4
            %
            
            $
            40,718
            
            
            
            14.8
            %
            
            $
            42,075
            
            
            
            15.3
            %Retail
            
            
            18,340
            
            
            
            6.9
            %
            
            
            18,576
            
            
            
            6.7
            %
            
            
            19,581
            
            
            
            7.1
            %Other
            
            
            32,461
            
            
            
            12.3
            %
            
            
            39,783
            
            
            
            14.4
            %
            
            
            40,546
            
            
            
            14.8
            %Not
      owner-occupied:Office
            
            
            27,411
            
            
            
            10.4
            %
            
            
            27,342
            
            
            
            9.9
            %
            
            
            24,896
            
            
            
            9.1
            %Retail
            
            
            36,234
            
            
            
            13.7
            %
            
            
            36,525
            
            
            
            13.2
            %
            
            
            35,586
            
            
            
            13.0
            %Other
            
            
            23,722
            
            
            
            9.0
            %
            
            
            24,035
            
            
            
            8.7
            %
            
            
            24,198
            
            
            
            8.8
            %Other:Hotel/motel
            
            
            25,507
            
            
            
            9.6
            %
            
            
            25,756
            
            
            
            9.3
            %
            
            
            15,826
            
            
            
            5.8
            %Industrial
            
            
            4,102
            
            
            
            1.6
            %
            
            
            4,300
            
            
            
            1.6
            %
            
            
            4,598
            
            
            
            1.7
            %Multi-family
      properties
            
            
            17,670
            
            
            
            6.7
            %
            
            
            19,462
            
            
            
            7.1
            %
            
            
            22,822
            
            
            
            8.3
            %Special
      purpose property
            
            
            40,918
            
            
            
            15.4
            %
            
            
            38,748
            
            
            
            14.0
            %
            
            
            39,459
            
            
            
            14.4
            %Other
            
            
            0
            
            
            
            0.0
            %
            
            
            682
            
            
            
            0.3
            %
            
            
            4,751
            
            
            
            1.7
            %Total
      commercial real estate loans
            
            $
            264,341
            
            
            
            100.0
            %
            
            $
            275,927
            
            
            
            100.0
            %
            
            $
            274,338
            
            
            
            100.0
            %Percentage
      of total loans
            
            
            34.9
            %
            
            
            
            
            
            
            34.3
            %
            
            
            
            
            
            
            29.1
            %


30
 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-10
              
              
              Dec-09
              
              
              Sep-09
              
              
              Jun-09
              
              
              Mar-09(Dollars
      In Thousands)Noninterest-bearing
      demand
              
              $
              95,228
              
              
              $
              100,458
              
              
              $
              106,573
              
              
              $
              108,973
              
              
              $
              111,472Interest-bearing
      demand and savings
              
              
              252,662
              
              
              
              250,232
              
              
              
              241,073
              
              
              
              245,459
              
              
              
              250,325Retail
      time less than $100,000
              
              
              302,125
              
              
              
              305,381
              
              
              
              317,403
              
              
              
              320,834
              
              
              
              330,854Retail
      time greater than or equal to $100,000
              
              
              191,579
              
              
              
              179,325
              
              
              
              184,339
              
              
              
              191,852
              
              
              
              198,768Retail
      time placed in CDARs programs
              
              
              12,819
              
              
              
              29,532
              
              
              
              41,799
              
              
              
              35,190
              
              
              
              53,712Brokered
      time1
              
              
              113,701
              
              
              
              133,012
              
              
              
              119,237
              
              
              
              134,074
              
              
              
              160,167Internet
      time1
              
              
              99,093
              
              
              
              47,275
              
              
              
              19,214
              
              
              
              -
              
              
              
              -Total
      deposits
              
              $
              1,067,207
              
              
              $
              1,045,215
              
              
              $
              1,029,638
              
              
              $
              1,036,382
              
              
              $
              1,105,298





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





As
      of Quarter End
            
            Mar-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09Noninterest-bearing
      demand
            
            
            8.92
            %
            
            
            9.61
            %
            
            
            10.35
            %
            
            
            10.51
            %
            
            
            10.09
            %Interest-bearing
      demand and savings
            
            
            23.68
            %
            
            
            23.94
            %
            
            
            23.41
            %
            
            
            23.68
            %
            
            
            22.65
            %Retail
      time less than $100,000
            
            
            28.31
            %
            
            
            29.22
            %
            
            
            30.83
            %
            
            
            30.96
            %
            
            
            29.93
            %Retail
      time greater than or equal to $100,000
            
            
            17.95
            %
            
            
            17.15
            %
            
            
            17.90
            %
            
            
            18.51
            %
            
            
            17.98
            %Retail
      time placed in CDARs program
            
            
            1.20
            %
            
            
            2.83
            %
            
            
            4.06
            %
            
            
            3.40
            %
            
            
            4.86
            %Brokered
      time1
            
            
            10.65
            %
            
            
            12.73
            %
            
            
            11.58
            %
            
            
            12.94
            %
            
            
            14.49
            %Internet
      time1
            
            
            9.29
            %
            
            
            4.52
            %
            
            
            1.87
            %
            
            
            -
            
            
            
            -Total
      deposits
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %





1Brokered time deposits are
defined as bank deposits solicited by a third-party broker.  Internet
time deposits are defined as bank deposits solicited via multiple internet
services.





RESULTS
OF OPERATIONS





During
the three months ended March 31, 2010, we incurred a net loss of $5.3 million,
or ($0.39) per diluted share, as compared to a net loss of $295,000, or ($0.03)
per diluted share, during the same period in 2009.  The $5.0 million
increase in net loss is the net result of a $2.6 million decrease in net
interest income, a $250,000 increase in the provision for loan loss expense, a
$1.3 million increase in the loss on sale and write-down of other assets, a
$571,000 decrease in noninterest income, a $14,000 increase in other expenses,
and a $283,000 decrease in income tax benefit.  Our return on average
assets (“ROA”) and return on average equity (“ROE”) for the three months ended
March 31, 2010 were -1.74% and -43.5%, respectively, compared to a -0.09% ROA
and a -1.3% ROE for the same period in 2009.





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, 2010, our net
interest income on a taxable-equivalent basis was $4.7 million, a 36.3% decrease
from the $7.3 million in net interest income for the first quarter of
2009.  The decrease in net interest income is due to a 32.5% decrease
in interest income offset in part by a 29.4% decrease in interest
expense.  During the first quarter of 2010, the average balance of our
earning assets decreased 13.0% compared to the same period in
2009.  The average balances of our interest-bearing liabilities
decreased by 6.2%.  The average yield on our earning assets decreased
117 basis points from 5.21% during the first quarter of 2009, to 4.04% for the
first quarter of 2010.  The average rates paid for our funds decreased
78 basis points from 3.14% during the first quarter of 2009, to 2.36% for the
first quarter of 2010.  As a result of these rate decreases, our net
interest spread declined by 39 basis points from 2.07% during the first quarter
of 2009, to 1.68% for the same period in 2010.


31
 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 2010 was 1.71%, 34 basis points lower than our net interest margin of 2.05%
for the fourth quarter of 2009, and  63 basis points lower than the
2.34% recorded for the first quarter of 2009.  Because of economic
conditions and illiquidity in our loan portfolio, we are carrying approximately
$150 million in excess liquidity at a negative net spread that adversely
impacted the net interest margin by 22 basis points during the first quarter of
2010.  A portion of the decrease in interest income is due to our
nonperforming assets negatively impacting the net interest margin by 103 basis
points during the first quarter of 2010, compared to a 88 basis point impact in
the fourth quarter of 2009 and a 32 basis point impact in the first quarter of
2009.  We do not expect our net interest margin in 2010 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, 2010 and
2009.  Federally tax-exempt income is presented on a
taxable-equivalent basis assuming a 34% Federal tax rate.  Loan
average balances include loans on nonaccrual status.





For the Three Months Ended March
      31,
            
            2010
            
            
            2009Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/Balance
            
            
            Expense
            
            
            Rate
            
            
            Balance
            
            
            Expense
            
            
            Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
            
            $
            783,524
            
            
            $
            9,548
            
            
            
            4.94
            %
            
            $
            947,030
            
            
            $
            13,949
            
            
            
            5.97
            %Investment
      securities:Taxable
            
            
            121,088
            
            
            
            1,195
            
            
            
            4.00
            %
            
            
            149,823
            
            
            
            1,890
            
            
            
            5.12
            %Nontaxable
            
            
            9,787
            
            
            
            151
            
            
            
            6.27
            %
            
            
            23,358
            
            
            
            354
            
            
            
            6.15
            %Other
      short-term investments
            
            
            186,867
            
            
            
            89
            
            
            
            0.19
            %
            
            
            146,099
            
            
            
            81
            
            
            
            0.22
            %Total
      interest-earning assets
            
            $
            1,101,266
            
            
            $
            10,983
            
            
            
            4.04
            %
            
            $
            1,266,310
            
            
            $
            16,274
            
            
            
            5.21
            %Interest-bearing
      liabilities:Demand
      deposits
            
            $
            218,545
            
            
            $
            320
            
            
            
            0.59
            %
            
            $
            214,468
            
            
            $
            291
            
            
            
            0.55
            %Savings
      deposits
            
            
            37,458
            
            
            
            23
            
            
            
            0.25
            %
            
            
            34,200
            
            
            
            21
            
            
            
            0.25
            %Time
      deposits
            
            
            702,150
            
            
            
            4,870
            
            
            
            2.81
            %
            
            
            769,994
            
            
            
            7,349
            
            
            
            3.87
            %FHLB
      advances
            
            
            89,724
            
            
            
            859
            
            
            
            3.88
            %
            
            
            108,705
            
            
            
            1,077
            
            
            
            4.02
            %Notes
      payable
            
            
            30,310
            
            
            
            242
            
            
            
            3.24
            %
            
            
            21,199
            
            
            
            183
            
            
            
            3.50
            %Other
      short-term borrowings
            
            
            7,867
            
            
            
            15
            
            
            
            0.75
            %
            
            
            8,931
            
            
            
            37
            
            
            
            1.69
            %Total
      interest-bearing liabilities
            
            $
            1,086,054
            
            
            $
            6,329
            
            
            
            2.36
            %
            
            $
            1,157,497
            
            
            $
            8,958
            
            
            
            3.14
            %Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            1.68
            %
            
            
            
            
            
            
            
            
            
            
            2.07
            %Net
      interest income
            
            
            
            
            
            $
            4,654
            
            
            
            
            
            
            
            
            
            
            $
            7,316Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            1.71
            %
            
            
            
            
            
            
            
            
            
            
            2.34
            %


32
 Table of Contents




Reconciliation
of Non-GAAP Measure





The
reconciliation of net interest margin to net interest margin, as adjusted for
the impact of nonperforming loans and excess liquidity follows:





Mar-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09Selected
      quarterly financial data:Net
      interest margin:
            
            
            1.71
            %
            
            
            2.05
            %
            
            
            2.45
            %
            
            
            2.65
            %
            
            
            2.34
            %Impact
      of nonperforming loans
            
            
            1.03
            %
            
            
            0.88
            %
            
            
            0.47
            %
            
            
            0.34
            %
            
            
            0.32
            %Impact
      of excess liquidity
            
            
            0.22
            %
            
            
            0.15
            %
            
            
            0.14
            %
            
            
            0.14
            %
            
            
            0.17
            %Net
      interest margin, as adjusted for impact of nonperforming loans and excess
      liquidity
            
            
            2.96
            %
            
            
            3.08
            %
            
            
            3.06
            %
            
            
            3.13
            %
            
            
            2.83
            %





The table
presented above contains financial information determined by methods other than
in accordance with U.S. generally accepted accounting principles
(“GAAP”).  Management uses the non-GAAP measure of “net interest
margin as adjusted for the impact of nonperforming loans and excess liquidity”
in its analysis of the Company’s performance.  This measure, as used
by the Company, adjusts net interest income to exclude the effects of
nonperforming loans and excess liquidity carried on the balance
sheet.  Because certain of these items and their impact on the
Company’s performance are difficult to predict and unusual during these
extraordinary economic times, management believes presentation of financial
measures excluding the impact of those items provides useful supplemental
information in evaluating the operating results of the Company’s core business
and assessing trends in the Company’s core operations reflected in the current
quarter and previous four quarters.  These disclosures should not be
viewed as a substitute for net interest margin as determined in accordance with
GAAP, nor are they necessarily comparable to non-GAAP performance measures that
may be presented by other companies.









Provision for Loan
Losses


During
the first quarter of 2010, we provided $2 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 real estate market conditions.  Additional provisions
for loan losses in the second and third quarters of 2010 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 2010, we charged-off $938,000 in loans and recovered
$153,000 in previously charged-off loans.  The $785,000 in net
charge-offs for the quarter resulted in an annualized 0.41% ratio of net
charge-offs to average loans, which is lower than our 2009 net charge-off ratio
of 4.50% and our five-year average net charge-off ratio of 1.24%.  At
March 31, 2010, the allowance for loan losses as a percentage of total loans was
4.03%, compared to 3.64% at December 31, 2009.


33
 Table of Contents




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.  The lenders are primarily
responsible for assigning a risk grade to each loan in their
portfolio.  Early in 2008 we created a Special Assets Group, which
reports to our chief credit officer and is comprised of bankers, workout
specialists, real estate professionals and collections and recovery department
personnel.  Once a loan is classified as a troubled loan or falls into
a default or workout/collection situation, it is turned over to our Special
Assets Group to manage the resolution process.  The Special Assets
Group provides assessments and progress reports to our Problem Asset
Committee.  Our Problem Asset Committee consists of senior members of
management with expertise in credit administration, collections, accounting and
real estate.  The Problem Asset Committee has direct responsibility
for assessing the adequacy of the risk-grading process, determining the specific
allowance valuations and affirming the methodology used for determining the
adequacy of our allowance for loan losses.  The Problem Asset
Committee reviews the assessments on all nonperforming assets over $100,000 on a
quarterly basis and all nonperforming assets over $500,000 on a monthly
basis.  The assessments prepared by the Special Assets Group are
supplemented with independent reviews conducted by our credit administration and
internal audit departments.  Further, loan officers prepare written
updates on all problem loans of $100,000 or greater on a quarterly
basis.  These regular meetings also include a review of OREO and Other
Assets where the Bank has taken ownership as full or partial satisfaction of
debt.  The loan officer reviews the status of these loans on an
ongoing basis with the market president and/or credit
administration.  We have also engaged an independent, external loan
review firm to perform quarterly targeted reviews of a cross-section of our loan
portfolio.  These independent loan reviews are designed to verify the
accuracy of our internal risk-grading process and compliance with our loan
policy and regulatory and accounting guidance.  Further, we have
engaged a commercial real estate brokerage firm to serve as external real estate
advisors for the management, marketing and disposition of our other real estate
owned (“OREO”).





Appraisals
or other collateral value assessments are generally updated when one of several
different circumstances occur; when doing loan renewals or modifications, when
loans are down-graded to non-pass risk rating grades, when it becomes apparent
that a loan is collaterally dependent, and/or when the Bank determines it is in
its best interest to take possession of the underlying collateral. Factors
typically used in determining the need to obtain a current appraisal include the
existence of any adverse physical changes in the condition of the collateral
since the last appraisal, whether there have been any material changes in market
conditions which would adversely effect collateral value, whether there has been
any material adverse change in the financial condition of the borrower and/or
guarantors, whether the original appraisal contained assumptions that are no
longer valid and whether or not the use, or planned use of the collateral is
different from the use identified in the last appraisal. In addition, other
factors include whether or not any additional funds are being advanced under a
renewal or modification, the nature of and reasons behind a modification,
whether or not the loan can be repaid via verifiable sources other than the sale
of the underlying collateral, and the age of the existing collateral evaluation.
When the Bank takes possession of collateral, a current collateral evaluation is
required to document the carrying value of the asset on the Bank’s balance sheet
and policy requires all value assessments to be updated annually for assets with
a carrying value of $250,000 or greater, or reviewed and updated as needed for
assets with carrying values below $250,000.  However, if the Bank
receives information on property sales in an area or appraisals of similar
properties in an area near the property in question, the Bank may take write
downs or establish specific reserves on these assets prior to receiving updated
appraisals.





We began
implementing these new procedures to better track those loan relationships that,
by policy, require annual reviews of the loan/relationship in September 2009 and
we conducted a full review of all real estate secured loans of $250,000 or more
that were rated 6 (special mention) or worse to ensure current appraisals were
in the loan file in November 2009.





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 two components, specific allowances for individual loans and general
allowances for pools of loans identified by loan type, credit risk grades and
delinquency status.  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.


34
 Table of Contents


The first
component of the allowance for loan loss methodology covers the measurement of
specific allowances for individual impaired loans as required by FASB ASC
310-10-35, 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.  As of
March 31, 2010, we had current (dated within 12 months of March 31, 2010) third
party appraisals of the collateral on $134.2 million, or 89%, of our impaired
loans.  We had pending sales contracts on the collateral on $1.5
million, or 1%, of our impaired loans.  We had current collateral
valuations (completed by a MAI appraiser) on collateral of $1.5 million, or 1%,
of our impaired loans.  The third party appraisals we had on the
remaining $13.9 million, or 9% of our impaired loans, were not current (dated
over 12 months prior to March 31, 2010).  Of the 9% of our impaired
loans, where third party appraisals that were not current at March 31, 2010, 3%
were appraisals dated between 12 months and 18 months old, 9% were appraisals
dated between 18 months and 24 months old, 87% were appraisals dated greater
than 24 months old, and 1% were non-real estate collateral.  For the
appraisals dated greater than 24 months old, we used recent area sales of
equivalent properties, listing prices from local realtors, recent offers on the
properties, current tax assessor values or local realtor estimates to estimate
collateral value rather than the outdated appraisal.  At March 31,
2010, we had $14.3 million in specific reserves on $151.0 million in
individually evaluated impaired and other significant potential problem loans,
compared to $15.6 million in specific reserves on $134.3 million in individually
evaluated impaired and other significant potential problem at December 31,
2009.  As of March 31, 2010, we reviewed $151.0 million of impaired
loans and determined that no specific valuation was necessary on $104.7 million
of these loans due to the underlying collateral value on these loans and the
effect of previous charge-offs of $15.1 million taken on these loans to reduce
the principal balance down to the underlying collateral value.  When
we partially charge-off a loan, the remaining loan balance remains in
non-performing status.  However, as we implement the new regulatory
guidance on prudent commercial real estate workouts, we may begin to treat the
remaining portion as performing, if it meets the qualifications under the new
regulatory guidance.





The
second component of the allowance for loan loss methodology addresses all loans
that are not individually evaluated for impairment.  In calculating
our general allowance, we divide our loan portfolio into the following groups of
loans: Construction and Development, Commercial Real Estate, 1-4 Family
Residential, Commercial (non-real estate), Credit Card Receivables, Farm and
Agriculture, Consumer, Credit Cards, Multi-family, SBA 7-A Loans, Overdrafts and
Other.  Within these category types, we further stratify these loans
into five sub-categories of risk level.  These five risk levels are
based on Asset Quality Rating (“AQR”), Status (accrual versus nonaccrual) and
past due category (current, 30-59 days past due, 60-89 days past due and 90+
days past due).  Based upon the five risk levels, we apply a risk
multiple to the adjusted historical loss ratio.  The multiple
represents our estimated probability of loss for each risk
category.  We apply these probability assumptions to our historical
loss ratios, which have been adjusted to reflect current environmental
conditions, to form our estimate of the level of loss within our
portfolio.





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;





·
            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.


35
 Table of Contents




The
quantitative risk factors used in determining these general reserves require a
high degree of management judgment.  At March 31, 2010, we had
$10.8 million in general reserves allocated to $303.0 million of rated
and delinquent loans.  This is compared to the $7.3 million in
general reserves allocated to $249.9 million of rated and delinquent loans
at December 31, 2009 and the $7.4 million reserved on a balance of
$200.5 million of rated and delinquent loans at December 31,
2008.  At March 31, 2010, we had $3.6 million in general
reserves on $303.7 million of current, non-rated loans (1.2% coverage ratio),
compared to $5.6 million in general reserves on $467.1 million of current,
non-rated loans (1.2% coverage ratio) at December 31, 2009.  In
addition, we had $1.8 million of unallocated reserves at March 31, 2010,
compared to $2.2 million of unallocated reserves at December 31,
2009.  This unallocated portion of the allowance represents the
difference between the recorded allowance and the lower end of the acceptable
range of adequacy.  At March 31, 2010, the amount of the unallocated
portions was deemed sufficient to account for various environmental
uncertainties and the imprecision inherent in the underlying assumptions used in
the methodology to estimate the adequacy of the allowance for loan
losses.





The
allowance for loan losses represented approximately 4.03% of total loans and
21.94% of total nonperforming loans at March 31, 2010, compared to 3.64% and
31.5%, respectively, at December 31, 2009.  However, we have
previously recognized the loss portion and charged off $15.1 million of our
existing impaired loans.  If these charge-offs had not been recognized
and were still reported as reserves in the allowance for loan losses, the
adjusted allowance for loan losses would represent 5.9% of total loans and 29.6%
of total nonperforming loans at March 31, 2010.  As of March 31, 2010,
our nonperforming loans for which the full loss has been charged off as a
percentage of total nonperforming loans was 23.6%, compared to 44.0% at December
31, 2009.    Our charge-off rate for nonperforming loans for
which the full loss has already been charged off was 45.9% at March 31, 2009,
compared to 34.5% at December 31, 2009. Our total allowance for loan losses as a
percentage of total loans less nonperforming loans for which the full loss has
been charged off was 4.2% at March 31, 2010, compared to 4.4% at December 31,
2009.  Our allowance for loan losses on impaired loans as a percentage
of total impaired loans was 9.5% at March 31, 2010, compared to 11.6% at
December 31, 2009.





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, 2010
            
            
            December 31, 2009
            
            
            December 31, 2008
            
            
            December 31, 2007Amount
            
            
            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
            
            $
            2,877
            
            
            
            10.4
            %
            
            $
            1,415
            
            
            
            10.5
            %
            
            $
            1,382
            
            
            
            9.1
            %
            
            $
            229
            
            
            
            8.6
            %Agricultural
      (including loans secured by farmland)
            
            
            2,237
            
            
            
            5.6
            %
            
            
            196
            
            
            
            5.0
            %
            
            
            112
            
            
            
            5.1
            %
            
            
            1,029
            
            
            
            4.5
            %Real
      estate – construction
            
            
            15,943
            
            
            
            23.9
            %
            
            
            16,828
            
            
            
            25.4
            %
            
            
            11,950
            
            
            
            33.0
            %
            
            
            8,383
            
            
            
            38.2
            %Real
      estate – commercial
            
            
            4,012
            
            
            
            34.9
            %
            
            
            5,121
            
            
            
            34.3
            %
            
            
            2,552
            
            
            
            28.9
            %
            
            
            2,008
            
            
            
            27.0
            %Real
      estate – residential
            
            
            3,118
            
            
            
            22.7
            %
            
            
            3,179
            
            
            
            21.7
            %
            
            
            2,417
            
            
            
            20.5
            %
            
            
            815
            
            
            
            18.9
            %Consumer
      and other loans
            
            
            532
            
            
            
            2.5
            %
            
            
            415
            
            
            
            3.1
            %
            
            
            176
            
            
            
            3.4
            %
            
            
            215
            
            
            
            2.8
            %Unallocated
            
            
            1,810
            
            
            
            N/A
            
            
            
            2,160
            
            
            
            N/A
            
            
            
            785
            
            
            
            N/A
            
            
            
            227
            
            
            
            N/ATotal
            
            $
            30,529
            
            
            
            100.0
            %
            
            $
            29,314
            
            
            
            100.0
            %
            
            $
            19,374
            
            
            
            100.0
            %
            
            $
            12,906
            
            
            
            100.0
            %


36
 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, 2010 and each of the last three fiscal years
ended December 31.





Quarter ended
              March 31,
              2010
            
            
            Year ended
              December 31,
              2009
            
            
            Year ended
              December 31,
              2008
            
            
            Year ended
              December 31,
              2007Balance at beginning of
year
            
            $
            29,314
            
            
            $
            19,374
            
            
            $
            12,906
            
            
            $
            11,006Charge-offs:Commercial
      and financial
            
            
            93
            
            
            
            5,965
            
            
            
            709
            
            
            
            66Agricultural
      (including loans secured by farmland)
            
            
            -
            
            
            
            1,108
            
            
            
            -
            
            
            
            10Real
      estate – construction and development
            
            
            484
            
            
            
            21,212
            
            
            
            8,023
            
            
            
            324Real
      estate – commercial
            
            
            -
            
            
            
            4,906
            
            
            
            25
            
            
            
            257Real
      estate – residential
            
            
            209
            
            
            
            3,063
            
            
            
            3,188
            
            
            
            65Installment loans to individuals and other
      loans
            
            
            152
            
            
            
            5,494
            
            
            
            183
            
            
            
            146938
            
            
            
            41,748
            
            
            
            12,128
            
            
            
            868Recoveries:Commercial
      and financial
            
            
            19
            
            
            
            138
            
            
            
            38
            
            
            
            55Agricultural
      (including loans secured by farmland)
            
            
            34
            
            
            
            38
            
            
            
            38
            
            
            
            56Real
      estate – construction and development
            
            
            15
            
            
            
            8
            
            
            
            2
            
            
            
            -Real
      estate – commercial
            
            
            5
            
            
            
            19
            
            
            
            340
            
            
            
            28Real
      estate – residential
            
            
            12
            
            
            
            38
            
            
            
            33
            
            
            
            108Installment loans to individuals and other
      loans
            
            
            68
            
            
            
            259
            
            
            
            94
            
            
            
            121153
            
            
            
            500
            
            
            
            545
            
            
            
            368Net charge-offs
            
            
            785
            
            
            
            41,248
            
            
            
            11,583
            
            
            
            500Additions provided to the allowance charged to
      operations
            
            
            2,000
            
            
            
            51,188
            
            
            
            18,050
            
            
            
            2,400Balance at end of year
            
            $
            30,529
            
            
            $
            29,314
            
            
            $
            19,373
            
            
            $
            12,906Average balance of loans
      outstanding
            
            $
            783,524
            
            
            $
            915,674
            
            
            $
            955,253
            
            
            $
            883,334Ratio of net charge-offs during the year to
      average loans outstanding during the year
    (annualized)
            
            
            0.41
            %
            
            
            4.50
            %
            
            
            1.21
            %
            
            
            0.06
            %





Nonaccrual,
Past Due and Restructured Loans


Our
nonperforming loans increased $46.0 million, from $93.2 million at December 31,
2009 to $139.2 million at March 31, 2010, due primarily to the continued adverse
economic and real estate market conditions in our North Georgia and Florida
markets.  As a percentage of total loans, nonperforming loans
increased 680 basis points to 18.37% at March 31, 2010 from 11.57% at December
31, 2009.  Approximately 53% of the loans on nonaccrual status at
March 31, 2009 were construction and development loans, and these loans
represented approximately 40% of our total portfolio of construction and
development loans.


37
 Table of Contents


A
schedule of our nonperforming loans at March 31, 2010 is presented in the
following table.





Category
            
            Net
      Carrying Value *
            
            Collateral Description
            
            Average
      Carrying
              Value/ UnitConstruction
      and Development
            
            $54.2
      million
            
            31
      parcels of undeveloped land totaling 4,765 acres
            
            $11,000
      per residential acre and
              $11,800
      per commercial acreConstruction
      and Development
            
            $8.3
      million
            
            309
      residential lots
            
            $27,000
      per lot1-4
      Family Residential
            
            $16.2
      million
            
            109
      houses
            
            $148,700
      per houseCommercial
      Real Estate
            
            $35.3
      million
            
            32
      commercial properties
            
            $1.1
      million per propertyAgriculture
            
            $7.8
      million
            
            7
      parcels of farm land totaling 1,495 acres
            
            $5,200
      per acreCommercial
      and Industrial
            
            $686,000
            
            Non-real
      estate collateral
            
            $42,900
      per loanMulti-Family
      Residential
            
            $1.4
      million
            
            8
      condominium units
            
            $175,500
      per unitConsumer
            
            $376,000
            
            Non-real
      estate collateral
            
            $37,600
      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-10
            
            
            Dec-09
            
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
            
            $
            138,290
            
            
            $
            92,272
            
            
            $
            64,808
            
            
            $
            70,232
            
            
            $
            62,653Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
            
            
            -
            
            
            
            15
            
            
            
            4
            
            
            
            190
            
            
            
            19Troubled debt restructurings not included
      above
            
            
            880
            
            
            
            881
            
            
            
            -
            
            
            
            84
            
            
            
            311Total nonperforming loans
            
            $
            139,170
            
            
            $
            93,168
            
            
            $
            64,812
            
            
            $
            70,506
            
            
            $
            62,983Ratio
      of  nonperforming loans to total loans
            
            
            18.37
            %
            
            
            11.57
            %
            
            
            7.27
            %
            
            
            7.67
            %
            
            
            6.70
            %Reserves
      allocated to nonperforming loans:Specific
      Reserves (FAS 114)
            
            $
            14,234
            
            
            $
            12,056
            
            
            $
            8,765
            
            
            $
            5,965
            
            
            $
            6,179General Reserves (FAS 5)
            
            
            624
            
            
            
            388
            
            
            
            300
            
            
            
            697
            
            
            
            788Total reserves allocated to nonperforming
      loans
            
            $
            14,858
            
            
            $
            12,444
            
            
            $
            9,065
            
            
            $
            6,662
            
            
            $
            6,967Total reserves allocated as a percentage of
      nonperforming loans
            
            
            10.68
            %
            
            
            13.36
            %
            
            
            13.99
            %
            
            
            9.45
            %
            
            
            11.06
            %


38
 Table of Contents


The
following table summarizes our nonperforming assets by type and market as of
March 31, 2010.





South Georgia
            
            
            North Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
            
            $
            38,307
            
            
            $
            67,430
            
            
            $
            32,553
            
            
            $
            -
            
            
            $
            138,290Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Troubled debt restructurings not included
      above
            
            
            -
            
            
            
            880
            
            
            
            -
            
            
            
            -
            
            
            
            880Total
      nonperforming loans
            
            $
            38,307
            
            
            $
            68,310
            
            
            $
            32,553
            
            
            $
            -
            
            
            $
            139,170Foreclosed assets
            
            
            3,237
            
            
            
            75,108
            
            
            
            17,148
            
            
            
            -
            
            
            
            95,493Total nonperforming assets
            
            $
            41,544
            
            
            $
            143,418
            
            
            $
            49,701
            
            
            $
            -
            
            
            $
            234,663Ratio
      of nonperforming loans to total loans in market
            
            
            11.14
            %
            
            
            22.29
            %
            
            
            48.67
            %
            
            
            0.00
            %
            
            
            18.37
            %Ratio of nonperforming assets to total assets in
      market
            
            
            11.84
            %
            
            
            37.27
            %
            
            
            61.90
            %
            
            
            0.00
            %
            
            
            18.78
            %





Potential
Problem Loans


At
March 31, 2010, we had $26.0 million in total delinquent loans (loans
past due 30 days or more) and still accruing interest, or 3.43% of total loans,
representing a decrease from $57.0 million, or 7.11% at December 31,
2009.  Approximately 22% of the loans past due 30-89 days at March 31,
2010 were construction and development loans, and these loans represented
approximately 3.1% of our total portfolio of construction and development
loans.





At
December 31, 2009, we identified our potential problem loans of $28.9 million as
all construction and land development loans that were past due 30 to 89
days.  Using the same criteria our potential problem loans at March
31, 2010 would have been $5.6 million.  We broadened our scope for
identifying potential problem loans during the first quarter of
2010.  We expanded on our original scope of construction and
development loans past due 30 to 89 days to include loans past due greater than
30 days and managed by our Special Assets Group.  We also included
loans past due greater than 30 days with an Asset Quality Rating of 6 or greater
(defined as special mention, substandard, doubtful, and loss).  Also
included were all loans past due greater than 60 days past due that were not
already identified as being managed by our Special Assets Group or having an
Asset Quality Rating of 6 or greater.   Lastly, management
identified specific borrowers that did not meet the previously mentioned
criteria but were known to have credit problems that led management to doubt the
ability of those borrowers to comply with present repayment terms. Based on the
broader scope, our potential problem loans at March 31, 2010 were determined to
be $30.4 million.  All of these loans are at a higher risk of becoming
nonperforming loans in future periods.
 
 In
addition, at March 31, 2010, loans with interest reserves totaled $63.8 million
and the accompanying available interest reserves totaled $1.6 million, compared
to loans of $63.0 million with accompanying interest reserves of $504,000 at
December 31, 2009.  At March 31, 2010, $23.5 million of these loans
were non-performing, compared to $22.8 million at December 31,
2009.


39
 Table of Contents




Other
Real Estate Owned


Our
foreclosed assets increased $3.4 million in the first quarter of 2010, from
$92.1 million at December 31, 2009 to $95.5 million at March 31,
2010.  Due to continued distressed economic conditions, some borrowers
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 real estate held at March 31, 2010 is
presented in the following table.  In addition to the real estate
listed in the table, we also own $923,000 in foreclosed non-real estate
collateral at March 31, 2010.





Category
            Book Value
            Description
            Average Value/ UnitConstruction
      and Development
            $43.3
      million
            40
      parcels of undeveloped land totaling 1,881 acres
            $10,400
      per residential acre and
              $82,700
      per commercial acreConstruction
      and Development
            $17.9
      million
            839
      residential lots
            $21,300
      per lot1-4
      Family Residential
            $9.3
      million
            64
      houses
            $145,000
      per houseCommercial
      Real Estate
            $19.1
      million
            26
      commercial properties
            $735,800
      per propertyMulti-Family
      Residential
            $5.0
      million
            7
      condominium units
            $710,700
      per unit


40
 Table of Contents


Other
Income


A summary
of noninterest income follows:





For the Three Months Ended March
      31,
            
            2010
            
            
            2009PercentAmount
            
            
            Amount
            
            
            Change(Dollars
      In Thousands)Noninterest
      income:Service
      charges on deposit accounts
            
            $
            737
            
            
            $
            816
            
            
            
            -9.7
            %Mortgage
      origination fees
            
            
            210
            
            
            
            197
            
            
            
            6.6
            %ATM/
      debit card fee income
            
            
            215
            
            
            
            189
            
            
            
            13.8
            %Securities
      transactions, net
            
            
            145
            
            
            
            17
            
            
            
            752.9
            %Earnings
      on bank-owned life insurance
            
            
            95
            
            
            
            104
            
            
            
            -8.7
            %Loss
      on disposal of assets
            
            
            (1,455
            )
            
            
            (127
            )
            
            
            1045.7
            %Gain
      on derivative instrument
            
            
            63
            
            
            
            782
            
            
            
            -91.9
            %Other noninterest income
            
            
            196
            
            
            
            128
            
            
            
            53.1
            %Total noninterest income
            
            $
            206
            
            
            $
            2,106
            
            
            
            -90.2
            %Noninterest income (annualized) as a percentage of
      average assets
            
            
            0.07
            %
            
            
            0.63
            %





Service
charges on deposit accounts decreased during the first quarter of 2010 due to a
$48,600 decrease in our basic service charge fee income on deposit accounts and
a $30,500 net decrease in NSF and overdraft fees.





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 of 2010, we sold higher risk weighted investment securities
and recorded a $145,000 realized gain on the sale of these
securities.





During
the first quarter of 2010, we recorded a net loss on the sale and write-down of
foreclosed assets of $1.5 million.





In the
first quarter of 2009, we recorded a $782,000 gain on our hedging activities,
while during the first quarter of 2010 these gains were minimal.





Other
noninterest income for the first quarter of 2010 includes a $64,000 increase in
rental income on our foreclosed assets when compared to the first quarter of
2009.


41
 Table of Contents


Other
Expenses


A summary
of noninterest expense follows:





For the Three Months Ended March
      31,
            
            2010
            
            
            2009PercentAmount
            
            
            Amount
            
            
            Change(Dollars
      In Thousands)Noninterest
      expenses:Salaries
      and wages
            
            $
            3,003
            
            
            $
            4,131
            
            
            
            -27.3
            %Deferred
      loan costs
            
            
            (198
            )
            
            
            (371
            )
            
            
            -46.6
            %Employee
      benefits
            
            
            (140
            )
            
            
            880
            
            
            
            -115.9
            %Net
      occupancy expense of premises
            
            
            524
            
            
            
            608
            
            
            
            -13.8
            %Furniture
      and equipment expense
            
            
            515
            
            
            
            504
            
            
            
            2.2
            %Advertising
      and business development
            
            
            97
            
            
            
            96
            
            
            
            1.0
            %Supplies
      and printing
            
            
            86
            
            
            
            96
            
            
            
            -10.4
            %Telephone
      and internet charges
            
            
            162
            
            
            
            172
            
            
            
            -5.8
            %Postage
      and courier
            
            
            113
            
            
            
            134
            
            
            
            -15.7
            %Legal
      and accounting fees
            
            
            119
            
            
            
            128
            
            
            
            -7.0
            %Deposit
      insurance
            
            
            882
            
            
            
            216
            
            
            
            308.3
            %Director
      fees and expenses
            
            
            115
            
            
            
            177
            
            
            
            -35.0
            %Service
      charges and fees
            
            
            46
            
            
            
            148
            
            
            
            -68.9
            %Foreclosure
      and repossession expenses
            
            
            1,920
            
            
            
            703
            
            
            
            173.1
            %Other noninterest expense
            
            
            896
            
            
            
            504
            
            
            
            77.8
            %Total noninterest expense
            
            $
            8,140
            
            
            $
            8,126
            
            
            
            0.2
            %Noninterest expense (annualized) as a percentage
      of average assets
            
            
            2.66
            %
            
            
            2.43
            %





Noninterest
expense slightly increased from $8.13 million in the first quarter of 2009 to
$8.14 million in the first quarter of 2010.  As a percentage of
average assets, noninterest expense increased from 2.43% at March 31, 2009 to
2.66% at March 31, 2010.





Salaries
and wages expense and employee benefits decreased 27.3% for the first quarter of
2010 compared to the same period in 2009 due to the reduction of our staff from
287 full time equivalent employees at March 31, 2009 to 264 full time equivalent
employees at March 31, 2010.  In the first quarter of 2009 there was a
one-time severance accrual of $730,000 related to the retirement of our former
President and Chief Executive Officer.  During the first quarter of
2010, our employee benefits expense was reduced by a one-time credit of $900,000
resulting from the change  of our self-funded, employee health
insurance plan to a traditional health insurance provider.  Deferred
loan costs, which are credits against salaries and wages, decreased due to a
decrease in loan volume.





The 13.8%
decrease in occupancy expense in the first quarter of 2010 compared to the first
quarter of 2009 is due to the closings of the loan production offices in Forsyth
County, Georgia and St. Augustine, Florida and the branches in Jacksonville,
Florida and Snellville, Georgia.





Office
supplies and printing charges and telephone and internet fees decreased from the
first quarter of 2009 to the first quarter of 2010 due to a decrease in the
number of offices and to cost-savings initiatives we implemented to reduce
noninterest expenses.  The decrease in postage and courier fees is due
to a decrease in the number of offices and a reduction in our courier’s schedule
as part of our cost-savings initiatives.





Our
deposit insurance premiums increased from $216,000 during the first quarter of
2009 to $882,000 in the first quarter of 2010 due to rate increases from the
FDIC.





The
director fee schedule was reduced 25% as a cost-saving measure during the first
quarter of 2009. This reduction, along with a decrease in the number of
directors, resulted in a decrease when comparing first quarter 2009 to first
quarter 2010.  42
 Table of Contents




Foreclosure
and repossession expenses increased significantly from the first quarter of 2009
to the first quarter of 2010 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.





Income Tax
Expense


As a
percentage of net income before taxes, income tax expense was 0.0% and 49.0% for
the three-month periods ended March 31, 2010 and 2009,
respectively.





In 2009,
we took advantage of  the five-year net operating loss (“NOL”) provision in
the Worker, Homeownership and
Business Assistance Act of2009 and realized a $15.3 million refund of
taxes paid in prior years.  As a result, we do not have a NOL carry-back
provision remaining, and our current year net loss is creating a NOL
carry-forward.  We expect to use this NOL carry-forward to offset future
taxable income.  However, this income tax benefit will not be recorded on
our books until our financial results return to a level of sustained
profitability.  At December 31, 2009, we recorded an $11.1 million
valuation allowance on our net deferred tax assets.  Once we return to
profitability, we expect to be able to recapture this amount back into capital
through the reversal of the valuation allowance.  Therefore, we are not
recording income tax benefits or deferred tax benefits in the current
period.





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, 2010, 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,
investment securities and restricted equity securities) to total assets was
29.8%, compared to 25.0% at December 31, 2009.  It is our policy to
maintain a ratio of liquid assets to total assets of at least 15%.  Excess
liquidity is defined as the amount by which our liquid assets exceed the amount
of liquid assets necessary to comply with our policy of 15%.  We had excess
liquidity of $185 million and $123 million at March 31, 2010 and December 31,
2009, respectively.  We continued to increase liquidity to meet our funding
needs and to have funds on hand for other contingencies through this economic
recession. During the first quarter of 2010, we utilized the $47.6 million
decrease in loans and the $22.0 million increase in deposits to fund the $64.9
million increase in liquid assets.





Contractual
Obligations


Summarized
below are our contractual obligations as of March 31, 2010.





Less
      than
            
            
            1
      to 3
            
            
            3
      to 5
            
            
            More
      thanContractual Obligations
            
            Total
            
            
            1 year
            
            
            years
            
            
            years
            
            
            5 years(Dollars
      In Thousands)Federal
      Home Loan Bank of Atlanta Advances
            
            $
            89,971
            
            
            $
            28,003
            
            
            $
            20,518
            
            
            $
            21,317
            
            
            $
            20,133Senior
      Unsecured Debt
            
            
            20,000
            
            
            
            -
            
            
            
            20,000
            
            
            
            -
            
            
            
            -Operating
      Lease Obligations
            
            
            1,041
            
            
            
            360
            
            
            
            494
            
            
            
            187
            
            
            
            -Guaranteed
      Preferred Beneficial Interests in Debentures
            
            
            10,310
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,310$
            121,322
            
            
            $
            28,363
            
            
            $
            41,012
            
            
            $
            21,504
            
            
            $
            30,443


43
 Table of Contents




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, 2010 and
December 31, 2009 are as follows:





Mar-10
            
            
            Dec-09Commitments
      to extend credit
            
            $
            82,166,000
            
            
            $
            89,064,000Standby
      letters of credit
            
            $
            2,761,000
            
            
            $
            3,682,000





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 believe our credit risk exposure under these hedging arrangements at
March 31, 2010 was not material.





Stockholders’
Equity


Stockholders’
equity represented 3.7% of total assets at March 31, 2010, compared to 4.1% at
December 31, 2009.  Total stockholders’ equity decreased $4.6 million,
or 9.0%, since December 31, 2009.  This decrease is primarily the
result of our net loss of $5.3 million offset by a $647,000 increase in
accumulated other comprehensive income and by our stock based compensation
expense of $118,000.





In the
third quarter of 2008, we suspended payment of dividends on our common
stock.  Further, under the terms of the Written Agreement, we are not
permitted to declare or pay any dividend without the prior written approval of
our regulators.  As a result, we currently cannot declare a dividend
on common shares.  We do not expect to be granted a waiver or be
released from this restriction until our financial performance improves
significantly.  Assuming our regulators permit us to pay dividends in
the future, our ability to pay dividends will be limited by regulatory
restrictions and the need to maintain sufficient consolidation
capital.  Holders of common stock are only entitled to receive the
dividends that our board of directors declare out of funds available for those
payments.





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, 2010, the Bank was in compliance but
the Company was not in compliance with those standards.  There are no
conditions or events since quarter end that we believe have materially changed
our regulatory capital ratios.


44
 Table of Contents




The
following table summarizes the regulatory capital ratios of the Company and the
Bank at March 31, 2010.





MinimumCompany
            
            
            
            
            
            RegulatoryConsolidated
            
            
            Bank
            
            
            RequirementTotal
      Capital to Risk Weighted Assets
            
            
            7.9
            %
            
            
            8.1
            %
            
            
            8.0
            %Tier
      1 Capital to Risk Weighted Assets
            
            
            6.6
            %
            
            
            6.8
            %
            
            
            4.0
            %Tier
      1 Capital to Average Assets (Leverage Ratio)
            
            
            4.4
            %
            
            
            4.5
            %
            
            
            4.0
            %





On Apri1
14, 2010 the Company filed an Amended Registration Statement on Form S-1/A with
the Securities and Exchange Commission, for the purpose of registering up to
$92,000,000 of the Company’s common stock.  The Company intends to use
the net proceeds from the offering to improve its regulatory capital position,
to invest in the Bank to improve its regulatory capital position and to retain
the remainder of any proceeds for general corporate purposes.





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, 2009.  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.


45
 Table of Contents




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, 2010.





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, 2010, our one-year management-adjusted gap ratio
of 0.84 was within our policy guidelines.




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, 2010.  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)
            
            $
            407,306
            
            
            $
            474,207
            
            
            $
            597,072Rate Sensitive Liabilities
      (RSL)
            
            
            174,958
            
            
            
            304,043
            
            
            
            505,475RSA
      minus RSL (Gap)
            
            $
            232,348
            
            
            $
            170,164
            
            
            $
            91,597Maturity
      Gap Ratio (RSA/RSL)
            
            
            2.33
            
            
            
            1.56
            
            
            
            1.18


46
 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)
            
            $
            594,648
            
            
            $
            628,657
            
            
            $
            708,732Rate Sensitive Liabilities
      (RSL)
            
            
            503,531
            
            
            
            631,982
            
            
            
            824,271RSA
      minus RSL (Gap)
            
            $
            91,117
            
            
            $
            (3,325
            )
            
            $
            (115,539
            )Gap
      Ratio (RSA/RSL)
            
            
            1.18
            
            
            
            0.99
            
            
            
            0.86Management-AdjustedRate
      Sensitive Assets (RSA)
            
            $
            599,106
            
            
            $
            634,898
            
            
            $
            715,321Rate Sensitive Liabilities
      (RSL)
            
            
            511,500
            
            
            
            647,229
            
            
            
            852,244RSA
      minus RSL (Gap)
            
            $
            87,606
            
            
            $
            (12,331
            )
            
            $
            (136,923
            )Gap
      Ratio (RSA/RSL)
            
            
            1.17
            
            
            
            0.98
            
            
            
            0.84





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, 2010, the simulation model projected net interest income would increase
12.56% over the next year if market rates immediately rose by 100 basis points
and the model projected net interest income would decrease 2.32% 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
            19.45%
            35.41%+200
      bps
            17.19%
            23.86%+100
      bps
            10.82%
            12.56%-25
      bps
            -2.32%
            -2.32%


47
 Table of Contents




ITEM4T.  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 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.





PARTII.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





The
nature of the business of the Company 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.





ITEM1A.  RISK FACTORS





There has
not been any material change in the risk factors disclosure from that contained
in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2009.





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





None.





ITEM3.  DEFAULTS UPON SENIOR SECURITIES





None





ITEM4.  (REMOVED AND RESERVED)





ITEM5.  OTHER INFORMATION





None


48
 Table of Contents




ITEM6.  EXHIBITS





2.1
            Purchase
      and Assumption Agreement between HeritageBank of the South and The Park
      Avenue Bank dated February 23, 2010 (incorporated by reference to Exhibit
      2.1 to the Company’s Current Report on Form 8-K filed February 25,
      2010).





3.1
            Articles
      of Amendment to the Amended and Restated Articles of Incorporation of PAB
      Bankshares, Inc., effective March 8, 2010 (incorporated by reference to
      Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 10,
      2010).





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,
    2010
            
            By:
            /s/ Donald J. Torbert, Jr.Donald
      J. Torbert, Jr.President
      and Chief Executive Officer(principal
      executive officer of the registrant)Date:May 11,
    2010
            
            By:
            /s/ Nicole S. StokesNicole
      S. StokesExecutive
      Vice President and Chief Financial Officer(principal
      financial officer of the
registrant)





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