**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 June 30, 2007 – 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  ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
        accelerated filer  ̈Accelerated
        filer xNon-accelerated
        filer  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
 ̈
        No
x
 
 The
        number of shares outstanding of the registrant’s common stock at July 31, 2007
        was 9,482,454 shares.
  
 
  **TABLE
        OF CONTENTS**
 
 PagePART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial StatementsStatements
                  of Condition
              1Statements
                  of Income
              2Statements
                  of Comprehensive Income
              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
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              24Item
                  4.
              Controls
                  and Procedures
              26PART
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              26Item
                  1A.
              Risk
                  Factors
              26Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              26Item
                  3.
              Defaults
                  Upon Senior Securities
              26Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              27Item
                  5.
              Other
                  Information
              27Item
                  6.
              Exhibits
              27SIGNATURES
              28
  ***Table
            of Contents***
  **PART
        I.  FINANCIAL INFORMATION**
 **Item
        1. Consolidated Financial Statements**
 
 **PAB
                  BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CONDITION****AS
                  OF JUNE 30, 2007 AND DECEMBER 31, 2006****June
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006****(UNAUDITED)****ASSETS**Cash
                  and due from banks
              
              $
              24,806,575
              
              
              $
              26,712,252Interest-bearing
                  deposits in other banks
              
              
              212,428
              
              
              
              550,307Federal
                  funds sold
              
              
              103,000
              
              
              
              41,612,728Investment
                  securities
              
              
              187,805,678
              
              
              
              184,092,858Loans
              
              
              905,157,640
              
              
              
              820,304,092Allowance
                  for loan losses
              
              
              (11,342,421
              )
              
              
              (11,006,097
              )Net
                  loans
              
              
              893,815,219
              
              
              
              809,297,995Premises
                  and equipment, net
              
              
              20,863,134
              
              
              
              20,779,587Goodwill
              
              
              5,984,604
              
              
              
              5,984,604Cash
                  value of bank-owned life insurance policies
              
              
              11,675,589
              
              
              
              11,474,964Foreclosed
                  assets
              
              
              2,999,284
              
              
              
              987,814Other
                  assets
              
              
              21,701,148
              
              
              
              19,310,677Total
                  assets
              
              $
              1,169,966,659
              
              
              $
              1,120,803,786**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
                  demand
              
              $
              98,862,386
              
              
              $
              100,910,593Interest-bearing
                  demand and savings
              
              
              349,719,830
              
              
              
              328,828,309Time
              
              
              497,264,595
              
              
              
              478,744,090Total
                  deposits
              
              
              945,846,811
              
              
              
              908,482,992Federal
                  funds purchased and securities sold under agreements to
                  repurchase
              
              
              17,659,987
              
              
              
              7,648,664Advances
                  from the Federal Home Loan Bank of Atlanta
              
              
              91,582,650
              
              
              
              90,190,702Guaranteed
                  preferred beneficial interests in debentures (trust preferred
                  securities)
              
              
              10,310,000
              
              
              
              10,310,000Other
                  liabilities
              
              
              8,276,994
              
              
              
              8,855,694Total
                  liabilities
              
              
              1,073,676,442
              
              
              
              1,025,488,052**Stockholders'
                  equity:**Preferred
                  stock, no par value; 1,500,000 shares authorized; no shares
                  issued
              
              
              -
              
              
              
              -Common
                  stock, no par value; 98,500,000 shares authorized; 9,479,490 and
                  9,504,969
                  shares issued and outstanding
              
              
              1,217,065
              
              
              
              1,217,065Additional
                  paid-in capital
              
              
              27,119,770
              
              
              
              27,584,852Retained
                  earnings
              
              
              71,008,538
              
              
              
              67,476,178Accumulated
                  other comprehensive loss
              
              
              (3,055,156
              )
              
              
              (962,361
              )Total
                  stockholders' equity
              
              
              96,290,217
              
              
              
              95,315,734Total
                  liabilities and stockholders' equity
              
              $
              1,169,966,659
              
              
              $
              1,120,803,786
 
 See
        accompanying notes to consolidated financial statements.
  1
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****THREE
                  MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND
                  2006****(UNAUDITED)****Three
                  Months Ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Interest
                  income**Interest
                  and fees on loans
              
              $
              18,711,674
              
              
              $
              16,823,683
              
              
              $
              36,396,377
              
              
              $
              32,224,306Interest
                  and dividends on investment securities:Taxable
              
              
              2,085,495
              
              
              
              1,902,010
              
              
              
              4,097,952
              
              
              
              3,671,992Nontaxable
              
              
              297,225
              
              
              
              226,339
              
              
              
              581,796
              
              
              
              381,501Other
                  interest income
              
              
              251,071
              
              
              
              354,069
              
              
              
              720,559
              
              
              
              875,894Total
                  interest income
              
              
              21,345,465
              
              
              
              19,306,101
              
              
              
              41,796,684
              
              
              
              37,153,693**Interest
                  expense**Interest
                  on deposits
              
              
              9,026,334
              
              
              
              6,813,091
              
              
              
              17,479,864
              
              
              
              12,746,111Interest
                  on Federal Home Loan Bank advances
              
              
              1,037,696
              
              
              
              919,902
              
              
              
              2,089,259
              
              
              
              1,692,536Interest
                  on other borrowings
              
              
              322,150
              
              
              
              273,150
              
              
              
              599,980
              
              
              
              523,507Total
                  interest expense
              
              
              10,386,180
              
              
              
              8,006,143
              
              
              
              20,169,103
              
              
              
              14,962,154Net
                  interest income
              
              
              10,959,285
              
              
              
              11,299,958
              
              
              
              21,627,581
              
              
              
              22,191,539**Provision
                  for loan losses**
              
              
              200,000
              
              
              
              -
              
              
              
              200,000
              
              
              
              -Net
                  interest income after provision for loan losses
              
              
              10,759,285
              
              
              
              11,299,958
              
              
              
              21,427,581
              
              
              
              22,191,539**Other
                  income**Service
                  charges on deposit accounts
              
              
              905,034
              
              
              
              987,709
              
              
              
              1,740,922
              
              
              
              1,939,256Other
                  fee income
              
              
              302,563
              
              
              
              362,595
              
              
              
              616,715
              
              
              
              717,297Securities
                  transactions, net
              
              
              (38,497
              )
              
              
              (612
              )
              
              
              134,835
              
              
              
              (430,343
              )Other
                  noninterest income
              
              
              190,125
              
              
              
              207,230
              
              
              
              345,245
              
              
              
              371,397Total
                  other income
              
              
              1,359,225
              
              
              
              1,556,922
              
              
              
              2,837,717
              
              
              
              2,597,607**Other
                  expenses**Salaries
                  and employee benefits
              
              
              4,573,826
              
              
              
              4,637,363
              
              
              
              9,350,364
              
              
              
              8,936,819Occupancy
                  expense of premises
              
              
              563,057
              
              
              
              492,337
              
              
              
              1,098,854
              
              
              
              963,675Furniture
                  and equipment expense
              
              
              584,275
              
              
              
              513,699
              
              
              
              1,163,243
              
              
              
              1,022,341Other
                  noninterest expense
              
              
              1,487,393
              
              
              
              1,538,424
              
              
              
              3,066,271
              
              
              
              3,014,727Total
                  other expenses
              
              
              7,208,551
              
              
              
              7,181,823
              
              
              
              14,678,732
              
              
              
              13,937,562Income
                  before income tax expense
              
              
              4,909,959
              
              
              
              5,675,057
              
              
              
              9,586,566
              
              
              
              10,851,584**Income
                  tax expense**
              
              
              1,687,934
              
              
              
              2,082,940
              
              
              
              3,299,760
              
              
              
              3,948,123Net
                  income
              
              $
              3,222,025
              
              
              $
              3,592,117
              
              
              $
              6,286,806
              
              
              $
              6,903,461**Earnings
                  per common share**Basic
              
              $
              0.34
              
              
              $
              0.38
              
              
              $
              0.66
              
              
              $
              0.73Diluted
              
              $
              0.33
              
              
              $
              0.37
              
              
              $
              0.65
              
              
              $
              0.71
 
 See
        accompanying notes to consolidated financial statements.
  2
 ***Table
            of Contents***
 
 **PABBANKSHARES,
                  INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME****THREE
                  MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND
                  2006****(UNAUDITED)****Three
                  Months Ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Net
                  income
              
              $
              3,222,025
              
              
              $
              3,592,117
              
              
              $
              6,286,806
              
              
              $
              6,903,461Other
                  comprehensive loss:Unrealized
                  loss on cash flow hedge arising during the period,  net of tax
                  benefit of $114,447 and $3,255 for the quarter and  $92,542 and
                  $3,255 for the year to date
              
              
              (212,547
              )
              
              
              (6,046
              )
              
              
              (188,254
              )
              
              
              (6,046
              )Unrealized
                  holding losses on securities available for sale arising  during
                  the period, net of tax benefit of $1,267,396 and $949,585  for
                  the quarter and $978,330 and $1,339,935 for the year to
                  date
              
              
              (2,353,734
              )
              
              
              (1,763,510
              )
              
              
              (1,816,898
              )
              
              
              (2,488,446
              )Reclassification
                  adjustment for (gains) losses on securities  available for sale
                  included in net income, net of tax (benefit) of  $13,474 and
                  $(214) for the quarter and $47,192 and ($150,620)  for the year
                  to date
              
              
              (25,024
              )
              
              
              397
              
              
              
              (87,643
              )
              
              
              279,723(2,591,305
              )
              
              
              (1,769,159
              )
              
              
              (2,092,795
              )
              
              
              (2,214,769
              )Comprehensive
                  income
              
              $
              630,720
              
              
              $
              1,822,958
              
              
              $
              4,194,011
              
              
              $
              4,688,692
 
 See
        accompanying notes to consolidated financial statements.
  3
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS’ EQUITY****SIX
                  MONTHS ENDED JUNE 30, 2007 (UNAUDITED) AND YEAR ENDED DECEMBER
                  31,
                  2006****Accumulated****Additional**
              
              
              
              
              
              **Other****Common
                  Stock**
              
              
              **Paid-in**
              
              
              **Retained**
              
              
              **Comprehensive****Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **Earnings**
              
              
              **Loss**
              
              
              **Total****Balance,
                  December 31, 2005**
              
              
              9,469,017
              
              
              $
              1,217,065
              
              
              $
              28,126,032
              
              
              $
              58,872,179
              
              
              $
              (1,214,493
              )
              
              $
              87,000,783Net
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,735,217
              
              
              
              -
              
              
              
              13,735,217Other
                  comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              252,132
              
              
              
              252,132Cash
                  dividends declared,   $0.54 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,131,218
              )
              
              
              -
              
              
              
              (5,131,218
              )Stock
                  acquired and cancelled  under stock repurchase
                  plan
              
              
              (124,559
              )
              
              
              -
              
              
              
              (2,503,298
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,503,298
              )Stock-based
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              290,245
              
              
              
              -
              
              
              
              -
              
              
              
              290,245Stock
                  options exercised
              
              
              160,511
              
              
              
              -
              
              
              
              1,671,873
              
              
              
              -
              
              
              
              -
              
              
              
              1,671,873**Balance,
                  December 31, 2006**
              
              
              9,504,969
              
              
              
              1,217,065
              
              
              
              27,584,852
              
              
              
              67,476,178
              
              
              
              (962,361
              )
              
              
              95,315,734Net
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,286,806
              
              
              
              -
              
              
              
              6,286,806Other
                  comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,092,795
              )
              
              
              (2,092,795
              )Cash
                  dividends declared,   $0.29 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,754,446
              )
              
              
              -
              
              
              
              (2,754,446
              )Stock
                  acquired and cancelled  under stock repurchase
                  plan
              
              
              (56,942
              )
              
              
              -
              
              
              
              (1,093,445
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,093,445
              )Stock-based
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              248,618
              
              
              
              -
              
              
              
              -
              
              
              
              248,618Stock
                  options exercised
              
              
              31,463
              
              
              
              -
              
              
              
              379,745
              
              
              
              -
              
              
              
              -
              
              
              
              379,745**Balance,
                  June 30, 2007**
              
              
              9,479,490
              
              
              $
              1,217,065
              
              
              $
              27,119,770
              
              
              $
              71,008,538
              
              
              $
              (3,055,156
              )
              
              $
              96,290,217
 
 See
        accompanying notes to consolidated financial statements.
  4
 ***Table
            of Contents***
 
 **PABBANKSHARES,
                  INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****SIX
                  MONTHS ENDED JUNE 30, 2007 AND 2006****(UNAUDITED)****Six
                  Months Ended June 30,****2007**
              
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              6,286,806
              
              
              $
              6,903,461Adjustments
                  to reconcile net income to net cash  provided by operating
                  activities:Depreciation,
                  amortization and accretion, net
              
              
              868,598
              
              
              
              902,090Provision
                  for loan losses
              
              
              200,000
              
              
              
              -Net
                  realized (gain) loss on securities transactions
              
              
              (134,835
              )
              
              
              430,343(Gain)
                  loss on disposal of assets
              
              
              7,449
              
              
              
              (12,798
              )Stock-based
                  compensation expense
              
              
              248,618
              
              
              
              161,836Increase
                  in cash value of bank-owned life insurance
              
              
              (200,625
              )
              
              
              (189,954
              )Increase
                  (decrease) in deferred compensation accrual
              
              
              (179,534
              )
              
              
              77,743Decrease
                  in retirement accruals
              
              
              (159,799
              )
              
              
              (114,602
              )Net
                  change in taxes receivable and taxes payable
              
              
              (1,238,388
              )
              
              
              (76,864
              )(Increase)
                  decrease in interest receivable
              
              
              133,900
              
              
              
              (1,110,158
              )Increase
                  in interest payable
              
              
              25,873
              
              
              
              213,817Net
                  increase in prepaid expenses and other assets
              
              
              (481,995
              )
              
              
              (690,359
              )Net
                  decrease in accrued expenses and other liabilities
              
              
              (309,071
              )
              
              
              (605,267
              )Net
                  cash provided by operating activities
              
              
              5,066,997
              
              
              
              5,889,288**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Decrease
                  in interest-bearing deposits in other banks
              
              
              337,879
              
              
              
              2,329,849Decrease
                  in federal funds sold
              
              
              41,509,728
              
              
              
              33,198,644Purchase
                  of debt securities
              
              
              (22,527,424
              )
              
              
              (40,635,577
              )Proceeds
                  from sales and calls of debt securities
              
              
              9,087,404
              
              
              
              13,083,832Proceeds
                  from maturities and paydowns of debt securities
              
              
              6,740,409
              
              
              
              5,484,363Purchase
                  of equity investments
              
              
              (54,047
              )
              
              
              (665,147
              )Redemption
                  of equity investments
              
              
              275,318
              
              
              
              338,600Net
                  increase in loans
              
              
              (87,968,441
              )
              
              
              (57,368,894
              )Purchase
                  of premises and equipment
              
              
              (948,573
              )
              
              
              (2,325,888
              )Proceeds
                  from disposal of assets
              
              
              1,232,298
              
              
              
              6,174,601Net
                  cash used in investing activities
              
              
              (52,315,449
              )
              
              
              (40,385,617
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Net
                  increase in deposits
              
              
              37,363,819
              
              
              
              41,097,204Net
                  increase (decrease) in federal funds purchased and  securities
                  sold under repurchase agreements
              
              
              10,011,323
              
              
              
              (405,743
              )Advances
                  from the Federal Home Loan Bank
              
              
              40,000,000
              
              
              
              33,000,000Payments
                  on Federal Home Loan Bank advances
              
              
              (38,608,052
              )
              
              
              (32,558,116
              )Dividends
                  paid
              
              
              (2,710,615
              )
              
              
              (2,372,788
              )Proceeds
                  from the exercise of stock options
              
              
              379,745
              
              
              
              1,096,661Acquisition
                  of stock under stock repurchase plans
              
              
              (1,093,445
              )
              
              
              (1,559,334
              )Purchase
                  of cash flow hedge derivative instrument
              
              
              -
              
              
              
              (451,250
              )Net
                  cash provided by financing activities
              
              
              45,342,775
              
              
              
              37,846,634
  5
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS (CONTINUED)****SIX
                  MONTHS ENDED JUNE 30, 2007 AND 2006****(UNAUDITED)****Six
                  Months Ended June 30,****2007**
              
              
              **2006**Net
                  increase (decrease) in cash and due from banks
              
              $
              (1,905,677
              )
              
              $
              3,350,305Cash
                  and due from banks at beginning of period
              
              
              26,712,252
              
              
              
              21,196,183Cash
                  and due from banks at end of period
              
              $
              24,806,575
              
              
              $
              24,546,488**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION**Cash
                  paid during the period for:Interest
              
              $
              20,143,230
              
              
              $
              14,748,337Taxes
              
              $
              3,614,001
              
              
              $
              4,024,987**NONCASH
                  INVESTING AND FINANCING TRANSACTIONS**Increase  in
                  unrealized losses on securities available for sale
              
              $
              (2,930,063
              )
              
              $
              (3,398,038
              )Decrease
                  in unrealized gain on cash flow hedge
              
              $
              (280,796
              )
              
              $
              (6,045
              )Transfer
                  of loans to foreclosed assets
              
              $
              3,251,217
              
              
              $
              7,095,688
 
 See
        accompanying notes to consolidated financial statements.
  6
 ***Table
            of Contents***
  **PAB
        BANKSHARES, 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 Banking Offices****South
                  Georgia Market:**Valdosta,
                  Lowndes County
              3
                  (including the main office)Lake
                  Park, Lowndes County
              1Adel,
                  Cook County
              1Bainbridge,
                  Decatur County
              3Cairo,
                  Grady County
              1Statesboro,
                  Bulloch County
              2Baxley,
                  Appling County
              1Hazlehurst,
                  Jeff Davis County
              1**North
                  Georgia Market:**McDonough,
                  Henry County
              1Stockbridge,
                  Henry County
              1Oakwood,
                  Hall County
              1Athens,
                  Oconee County
              1Snellville,
                  Gwinnett County
              2
                  (including a loan production office)Cumming,
                  Forsyth County
              1
                  (loan production office)**Florida
                  Market:**Ocala,
                  Marion County
              1St.
                  Augustine, St. Johns County
              1
                  (loan production office)Jacksonville,
                  Duval County
              1
 
 
 The
        Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business
        trust.  This non-operating subsidiary was created in 2006 for the sole
        purpose of issuing trust preferred securities and investing the proceeds
        in
        subordinated debt issued by the Company.  The Company follows
        Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (Revised
        December 2003), *Consolidation of Variable Interest
        Entities*.  This interpretation addresses consolidation by
        business entities of variable interest entities and when such entities are
        subject to consolidation under the provisions of this
        interpretation.  The Company has determined that the provisions of
        FASB Interpretation No. 46R require deconsolidation of PAB Bankshares Capital
        Trust II.
 
 **NOTE
        2.  BASIS OF PRESENTATION**
 
 The
        accompanying consolidated financial information of the Company is unaudited;
        however, such information reflects all adjustments (consisting of normal
        recurring adjustments) which are, in the opinion of management, necessary
        for a
        fair presentation of the financial position and results of
        operations.  The results of operations for the three months and six
        months ended June 30, 2007 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, 2006.
  7
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries.  Significant intercompany transactions and balances are
        eliminated in consolidation.
 
 In
        preparing the consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America, management
        is
        required to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and the disclosure of contingent assets and liabilities
        as of the balance sheet date and the reported amounts of revenues and expenses
        during the reporting period.  Actual results could differ from those
        estimates.  Material estimates that are particularly susceptible to
        significant change relate to the determination of the allowance for loan
        losses,
        the valuation of goodwill, the valuation of foreclosed assets and deferred
        taxes.
  **NOTE
        3.  EARNINGS PER COMMON SHARE**
 
 Basic
        earnings per share are computed by dividing net income by the weighted-average
        number of shares of common stock outstanding during the year.  Diluted
        earnings per share are computed by dividing net income by the sum of the
        weighted-average number of shares of common stock outstanding and dilutive
        potential common shares.  Potential common shares consist of stock
        options.
 
 The
        components used to calculate basic and diluted earnings per share for the
        three
        months and six months ended June 30, 2007 and 2006 follow:
 
 **Three
                  Months Ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Basic
                  earnings per share:Net
                  income
              
              $
              3,222,025
              
              
              $
              3,592,117
              
              
              $
              6,286,806
              
              
              $
              6,903,461Weighted
                  average common shares outstanding
              
              
              9,498,569
              
              
              
              9,511,395
              
              
              
              9,507,224
              
              
              
              9,498,057Earnings
                  per common share
              
              $
              0.34
              
              
              $
              0.38
              
              
              $
              0.66
              
              
              $
              0.73Diluted
                  earnings per share:Net
                  income
              
              $
              3,222,025
              
              
              $
              3,592,117
              
              
              $
              6,286,806
              
              
              $
              6,903,461Weighted
                  average common shares outstanding
              
              
              9,498,569
              
              
              
              9,511,395
              
              
              
              9,507,224
              
              
              
              9,498,057Effect
                  of dilutive stock options
              
              
              163,127
              
              
              
              210,702
              
              
              
              169,448
              
              
              
              221,581Weighted
                  average diluted common shares outstanding
              
              
              9,661,696
              
              
              
              9,722,097
              
              
              
              9,676,672
              
              
              
              9,719,638Earnings
                  per common share
              
              $
              0.33
              
              
              $
              0.37
              
              
              $
              0.65
              
              
              $
              0.71
  8
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  
 
 **NOTE
        4.  DERIVATIVE FINANCIAL INSTRUMENTS**
 
 The
        Company’s asset-liability management policy allows the use of certain derivative
        financial instruments for hedging purposes in managing the Company’s interest
        rate risk.  The Company does not enter into derivatives or other
        financial instruments for trading or speculative purposes.  A
        derivative is a financial instrument that derives its cash flows, and therefore
        its value, by reference to an underlying instrument, index or referenced
        interest rate.  The most common derivative instruments include
        interest rate swaps, caps, floors and collars.  The Company accounts
        for its derivative financial instruments under FASB No. 133, *Accounting for
        Derivative Instruments and Hedging Activities*, and as such, the fair value
        of its derivative financial instruments is included in other assets in the
        Consolidated Statement of Condition.
 
 In
        June
        2006, the Company 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.  The premium paid for this contract was
        $451,250.  The contract is classified as a hedge of an exposure to
        changes in the cash flows of a recognized asset (“cash flow
        hedge”).  As a cash flow hedge, the portion of a change in the fair
        value of the derivative that has been deemed highly effective is recognized
        in
        other comprehensive income until the related cash flows from the hedged item
        are
        recognized in earnings.  The initial fair value of the premium paid is
        allocated and recognized in the same future period that the hedged forecasted
        transaction impacts earnings.  At June 30, 2007, the Company reported
        a $188,000 loss, net of a $93,000 tax effect, in other comprehensive income
        related to cash flow hedges.  Included in this tax effect is $5,700
        from a prior period deferred tax adjustment.  The Company documents,
        both at inception and periodically over the life of the hedge, its analysis
        of
        actual and expected hedge effectiveness.  To the extent that the hedge
        of future cash flows is deemed ineffective, changes in the fair value of
        the
        derivative are recognized in earnings as a component of other non-interest
        expense.  For the three and six month periods ended June 30, 2007,
        there was no ineffectiveness recognized in other non-interest expense
        attributable to cash flow hedges.  A summary of the Company’s
        derivative financial instruments at June 30, 2007 is shown in the following
        table:
 
 **Notional**
                **amount**
              
              
              **Floor
                  rate**
              
              
              **Maturity**
                **in
                  months**
              
              
              **Estimated
                  fair value**
                **at
                  June 30, 2007**
              
              
              **Net
                  unrealized**
                **gains
                  (losses)****Derivatives
                  Designated as Cash Flow Hedges:**Hedging
                  cash flows on prime- based floating rate loans
              
              $
              50,000,000
              
              
              
              8.25
              %
              
              
              24
              
              
              $
              311,000
              
              
              $
              (91,000
              )**Total
                  Derivative Instruments**
              
              $
              50,000,000
              
              
              
              8.25
              %
              
              
              24
              
              
              $
              311,000
              
              
              $
              (91,000
              )
  9
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
  
 
 **NOTE
        5.  STOCK PLANS AND STOCK-BASED EMPLOYEE
        COMPENSATION**
 
 At
        June 30, 2007, 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 price 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 June 30, 2007, there were
        83,200 options outstanding that were granted under the 1994 Employee Stock
        Option Plan.
 
 Under
        the
        1999 Stock Option Plan, the Board of Directors can grant up to 600,000 stock
        options to directors, employees, consultants and advisors of the
        Company.  On February 28, 2006, the Company’s Board of Directors
        adopted an amendment to the 1999 Plan to increase the maximum aggregate number
        of shares of common stock for which options may be granted from 600,000 shares
        to 1,400,000 shares and to extend the term of the Plan for ten years from
        the
        date of the adoption of these amendments.  This amendment was
        subsequently approved at the Company’s annual meeting of shareholders on May 23,
        2006.  At June 30, 2007, there were 691,366 shares available for grant
        and there were 574,223 options outstanding that were granted under the 1999
        Stock Option Plan.
 
 Prior
        to
        January 1, 2006, the Company accounted for its stock option plans under the
        recognition and measurement provision of Accounting Principles Board (“APB”)
        Opinion No. 25, *Accounting for Stock Issued to Employees*, and related
        Interpretations, as permitted by FASB No. 123, *Accounting for Stock-Based
        Compensation*.  Effective January 1, 2006, the Company
        adopted FASB No. 123R, *Share-Based Payment*, utilizing the
“modified prospective” method as described in FASB No. 123R.  In
        the “modified prospective” method, compensation cost is recognized for all
        stock-based payments granted after the effective date and for all unvested
        awards granted prior to the effective date.  In accordance with FASB
        No. 123R, prior period amounts were not restated.  FASB
        No. 123R also requires the tax benefits associated with these stock-based
        payments to be classified as financing activities in the Consolidated Statements
        of Cash Flows, rather than as operating cash flows as required under previous
        regulations.
 
 At
        June
        30, 2007, there was approximately $922,000 of unrecognized compensation cost
        related to stock-based payments that is expected to be recognized over a
        weighted-average period of 3.46 years.
  10
 ***Table
            of Contents***
  **CAUTIONARY
        NOTICE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
        statements set forth in this Report or incorporated herein by reference,
        including, without limitation, matters discussed in Item 2 “*Management's
        Discussion and Analysis of Financial Condition and Results of Operation*”
beginning on page 12, 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, credit losses, loan
        and
        deposit growth, interest rates, economic conditions, the effects of our de
        novo
        branch expansion, and the anticipated stabilization of our net interest margin,
        and are based upon management’s beliefs as well as assumptions made based on
        data currently available to management.  In this Report, the terms
“PAB”, “the Company”, “we”, “us” or “our” refer to PAB Bankshares,
        Inc.  When words like “believe”, “intend”, “plan”, “may”, “continue”,
“project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar
        expressions are used, you should consider them as identifying forward-looking
        statements.  These forward-looking statements are not guarantees of
        future performance, and a variety of factors could cause our actual results
        to
        differ materially from the anticipated or expected results expressed in these
        forward-looking statements.  Many of these factors are beyond our
        ability to control or predict, and readers are cautioned not to put undue
        reliance on such forward-looking statements.  The following list,
        which is not intended to be an all-encompassing list of risks and uncertainties
        affecting us, summarizes several factors that could cause our actual results
        to
        differ materially from those anticipated or expected in these forward-looking
        statements: (1) competitive pressures among depository and other financial
        institutions may increase significantly; (2) changes in the interest rate
        environment may reduce margins or the volumes or values of loans made by
        us; (3)
        general economic conditions (both generally and in our markets) may be less
        favorable than expected, resulting in, among other things, a deterioration
        in
        credit quality, a reduction in demand for credit and/or a decline in real
        estate
        values; (4) legislative or regulatory changes, including changes in accounting
        standards and compliance requirements, may adversely affect the businesses
        in
        which we are engaged; (5) competitors may have greater financial resources
        and
        develop products that enable such competitors to compete more successfully
        than
        we can; (6) our ability to attract and retain key personnel can be affected
        by
        the increased competition for experienced employees in the banking industry;
        (7)
        adverse changes may occur in the bond and equity markets; (8) war or terrorist
        activities may cause further deterioration in the economy or cause instability
        in credit markets; (9) restrictions or conditions imposed by our regulators
        on
        our operations may make it more difficult for us to achieve our goals; (10)
        economic, governmental or other factors may prevent the projected population,
        residential and commercial growth in the markets in which we operate; and
        (11)
        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, 2006.  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.
  11
 ***Table
            of Contents***
  **ITEM
                  2.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION  AND 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 2006 Annual Report on Form 10-K, and is qualified in
        its entirety by the foregoing and other more detailed financial information
        appearing elsewhere herein.  Historical results of operations and the
        percentage relationships among any amounts included, and any trends which
        may
        appear to be inferred, should not be taken as being necessarily indicative
        of
        trends in operations or results of operations for any future
        periods.
 
 Our
        operating subsidiary, The Park Avenue Bank, is a $1.17 billion community
        bank
        with 20 branches and three loan production offices in Georgia and
        Florida.  We have offices in both smaller, rural communities as well
        as larger, metropolitan areas.  We provide traditional banking
        products and services to commercial and individual customers in our
        markets.  Competition, regulation, credit risk and interest rate risk
        are the primary factors that we must manage in order to be
        successful.
 
 We
        generally group our offices into three geographic regions for discussion
        purposes due to the varying demographics of each market.  Our offices
        in Lowndes, Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties
        are collectively referred to as our “South Georgia” market.  Our
        offices in Henry, Hall, Oconee, Gwinnett and Forsyth counties are collectively
        referred to as our “North Georgia” market.  Our offices in Marion, St.
        Johns and Duval counties are collectively referred to as our “Florida”
market.  In addition, our corporate assets, correspondent bank account
        balances, investment portfolio, out-of-market participation loans, insider
        loans
        and insider deposits, borrowings, etc. are reported at the corporate level,
        in
        what we refer to as the “Treasury.”
 
 Over
        the
        next five years, we plan to double our presence in Atlanta and other North
        Georgia markets and to build a North Florida franchise to compliment our
        South
        Georgia franchise.  Thus far in 2007, we have opened a full-service
        branch in Snellville (Gwinnett County), Georgia and a loan production office
        in
        Cumming (Forsyth County), Georgia.  Both of these locations extend our
        presence in the Atlanta MSA from Henry County on the southside to Gwinnett
        County on the eastside and Forsyth County on the northside.  We intend
        to continue to add experienced bankers and grow our market share in and around
        these three anchors of our Atlanta franchise and towards our branches in
        the
        neighboring Athens and Gainesville MSAs.
 
 
 **FINANCIAL
        CONDITION**
 
 During
        the six months ended June 30, 2007, our total assets increased $49.2 million,
        or
        4.4%, to $1.17 billion, due primarily to an increase in total deposits of
        $37.4
        million, or 4.1%, to $945.8 million.  Time deposits increased $18.5
        million, or 3.9%; interest-bearing demand deposits increased $20.9 million,
        or
        6.4%; while non-interest bearing demand deposits decreased $2.0 million,
        or
        2.0%.  During the second quarter ended June 30, 2007, total deposits
        decreased by $8.6 million due to approximately $22.3 million in temporary
        deposits of local municipalities, individuals and corporations that were
        deposited in the first quarter of 2007 and withdrawn during the second quarter
        of 2007.  Over the past year, we have increased our focus on retail
        banking efforts and expanding our relationships with our commercial loan
        customers to also provide deposit products and services to meet their
        needs.  Core deposit accounts are an important aspect in our long-term
        strategic plan, and this year, we have begun to incent our retail branch
        personnel and our commercial lenders to grow deposits, especially
        noninterest-bearing deposits.
  12
 ***Table
            of Contents***
  Our
        loan
        portfolio increased $84.9 million, or 10.3%, to $905.2 million at June 30,
        2007
        from $820.3 million at December 31, 2006.  We funded the majority of
        this loan growth with the $37.4 million increase in deposits and reducing
        our
        balances in federal funds sold by $41.5 million.  Our loan growth can
        be attributed to our presence in some of the fastest growing markets in the
        Southeastern United States and strong production from our seasoned
        bankers.  However, we have seen a slowdown in residential construction
        activity in certain sections of the Atlanta and Jacksonville
        markets.  Approximately 22% of our loan portfolio is in residential
        construction and development lending and an additional 18% of our loan portfolio
        is in mortgages on residential real estate in our markets.  We
        understand the risks involved in this type of lending, and we have established
        conservative underwriting criteria and internal controls to help protect
        our
        interests.  However, we are not immune to credit risk and we expect to
        incur some losses as a result of this real estate slowdown.  We are
        proactive in recognizing our problems, and we intend to minimize our losses
        whenever possible as those problems arise.  We expect that this
        slowdown will result in a slower pace of growth for us over the next few
        quarters.  Additional information on our asset quality is included
        under the heading “Provision for Loan Losses” in our “RESULTS OF OPERATIONS”
discussion below.
 
 
 The
        following table summarizes our loan and deposit portfolios classified by
        type
        and market as of June 30, 2007.
 
 **As
                  of June  30, 2007**
              
              **South**
                **Georgia**
              
              
              **North**
                **Georgia**
              
              
              **Florida**
              
              
              **Treasury**
              
              
              **Total**(Dollars
                  in Thousands)**Loans**Commercial
                  and financial
              
              $
              32,228
              
              
              $
              44,676
              
              
              $
              1,104
              
              
              $
              40
              
              
              $
              78,048Agricultural
                  (including loans secured by farmland)
              
              
              39,561
              
              
              
              4,376
              
              
              
              3,036
              
              
              
              -
              
              
              
              46,973Real
                  estate – construction
              
              
              71,923
              
              
              
              213,460
              
              
              
              42,517
              
              
              
              447
              
              
              
              328,347Real
                  estate - commercial
              
              
              85,414
              
              
              
              148,091
              
              
              
              32,683
              
              
              
              4,790
              
              
              
              270,978Real
                  estate - residential
              
              
              123,825
              
              
              
              26,488
              
              
              
              8,173
              
              
              
              2,918
              
              
              
              161,404Installment
                  loans to individuals and other loans
              
              
              14,284
              
              
              
              3,711
              
              
              
              45
              
              
              
              2,206
              
              
              
              20,246367,235
              
              
              
              440,802
              
              
              
              87,558
              
              
              
              10,401
              
              
              
              905,996Deferred
                  loan fees and unearned interest, net
              
              
              204
              
              
              
              (557
              )
              
              
              (498
              )
              
              
              12
              
              
              
              (839
              )Total
                  loans
              
              $
              367,439
              
              
              $
              440,245
              
              
              $
              87,060
              
              
              $
              10,413
              
              
              $
              905,157Percentage
                  of total
              
              
              40.6
              %
              
              
              48.6
              %
              
              
              9.6
              %
              
              
              1.2
              %
              
              
              100.0
              %**Deposits**Noninterest-bearing
                  demand
              
              $
              70,250
              
              
              $
              14,275
              
              
              $
              6,752
              
              
              $
              7,585
              
              
              $
              98,862Interest-bearing
                  demand and savings
              
              
              264,804
              
              
              
              51,273
              
              
              
              33,187
              
              
              
              456
              
              
              
              349,720Time
                  less than $100,000
              
              
              163,578
              
              
              
              47,773
              
              
              
              89,393
              
              
              
              112
              
              
              
              300,856Time
                  greater than or equal to $100,000
              
              
              86,690
              
              
              
              39,613
              
              
              
              37,470
              
              
              
              200
              
              
              
              163,973Brokered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              32,436
              
              
              
              32,436Total
                  deposits
              
              $
              585,322
              
              
              $
              152,934
              
              
              $
              166,802
              
              
              $
              40,789
              
              
              $
              945,847Percentage
                  of total
              
              
              61.9
              %
              
              
              16.2
              %
              
              
              17.6
              %
              
              
              4.3
              %
              
              
              100.0
              %
 
 In
        addition to the geographic concentrations noted in the tables above, we had
        approximately $74.7 million in loans secured by real estate in Florida to
        customers of our South Georgia, North Georgia and Treasury
        offices.
  13
 ***Table
            of Contents***
  The
        table
        below summarizes our loan portfolio by loan type as of the end of each of
        the
        last five quarters.
 
 As
                  of Quarter End
              
              Jun-07
              
              
              Mar-07
              
              
              Dec-06
              
              
              Sep-06
              
              
              Jun-06(Dollars
                  in Thousands)Commercial
                  and financial
              
              $
              78,048
              
              
              $
              69,347
              
              
              $
              66,376
              
              
              $
              60,413
              
              
              $
              53,185Agricultural
                  (including loans secured by farmland)
              
              
              46,973
              
              
              
              38,102
              
              
              
              43,302
              
              
              
              44,716
              
              
              
              47,754Real
                  estate - construction
              
              
              328,347
              
              
              
              323,837
              
              
              
              295,246
              
              
              
              297,026
              
              
              
              304,387Real
                  estate - commercial
              
              
              270,978
              
              
              
              252,654
              
              
              
              255,462
              
              
              
              253,586
              
              
              
              251,966Real
                  estate – residential
              
              
              161,404
              
              
              
              153,025
              
              
              
              142,501
              
              
              
              133,983
              
              
              
              127,020Installment
                  loans to individuals and other loans
              
              
              20,246
              
              
              
              17,958
              
              
              
              18,414
              
              
              
              18,211
              
              
              
              19,966905,996
              
              
              
              854,923
              
              
              
              821,301
              
              
              
              807,935
              
              
              
              804,278Deferred
                  loan fees and unearned interest, net
              
              
              (839
              )
              
              
              (847
              )
              
              
              (997
              )
              
              
              (1,299
              )
              
              
              (1,243
              )905,157
              
              
              
              854,076
              
              
              
              820,304
              
              
              
              806,636
              
              
              
              803,035Allowance
                  for loan losses
              
              
              (11,342
              )
              
              
              (11,085
              )
              
              
              (11,006
              )
              
              
              (10,686
              )
              
              
              (10,903
              )$
              893,815
              
              
              $
              842,991
              
              
              $
              809,298
              
              
              $
              795,950
              
              
              $
              792,132
 
 
 The
        percentage of loans outstanding by loan type at the indicated dates is presented
        in the following table:
 
 As
                  of Quarter End
              
              Jun-07
              
              
              Mar-07
              
              
              Dec-06
              
              
              Sep-06
              
              
              Jun-06Commercial
                  and financial
              
              
              8.62
              %
              
              
              8.12
              %
              
              
              8.09
              %
              
              
              7.49
              %
              
              
              6.62
              %Agricultural
                  (including loans secured by farmland)
              
              
              5.19
              %
              
              
              4.46
              %
              
              
              5.28
              %
              
              
              5.54
              %
              
              
              5.95
              %Real
                  estate - construction
              
              
              36.27
              %
              
              
              37.92
              %
              
              
              35.99
              %
              
              
              36.82
              %
              
              
              37.89
              %Real
                  estate - commercial
              
              
              29.94
              %
              
              
              29.58
              %
              
              
              31.14
              %
              
              
              31.44
              %
              
              
              31.38
              %Real
                  estate - residential
              
              
              17.83
              %
              
              
              17.92
              %
              
              
              17.37
              %
              
              
              16.61
              %
              
              
              15.82
              %Installment
                  loans to individuals and other loans
              
              
              2.24
              %
              
              
              2.10
              %
              
              
              2.25
              %
              
              
              2.26
              %
              
              
              2.49
              %100.09
              %
              
              
              100.10
              %
              
              
              100.12
              %
              
              
              100.16
              %
              
              
              100.15
              %Deferred
                  loan fees and unearned    interest,
                  net
              
              
              -0.09
              %
              
              
              -0.10
              %
              
              
              -0.12
              %
              
              
              -0.16
              %
              
              
              -0.15
              %Total
                  loans
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %Allowance
                  for loan losses
              
              
              -1.25
              %
              
              
              -1.30
              %
              
              
              -1.34
              %
              
              
              -1.32
              %
              
              
              -1.36
              %Net
                  loans
              
              
              98.75
              %
              
              
              98.70
              %
              
              
              98.66
              %
              
              
              98.68
              %
              
              
              98.64
              %
  14
 ***Table
            of Contents***
  With
        a
        total of 66.2% of our loan portfolio concentrated in construction and
        development and commercial real estate loans, we carefully monitor and estimate
        trends in our real estate markets and periodically adjust our strategies
        and
        underwriting requirements to manage the risks associated with these types
        of
        loans.  Below is a table showing the collateral distribution of our
        construction and development and commercial real estate loan portfolios as
        of
        June 30, 2007.
 
 Construction
                and
                Development
              
              
              %
                  of Total
              
              
              
              Commercial
                Real
                  Estate
              
              
              %
                  of Total(Dollars
                  in
                  Thousands)Acquisition
                  and Development:
              
              
              
              
              
              
              Owner-occupied:1-4
                  family residential
              
              $
              135,601
              
              
              
              41.30
              %
              Office
              
              $
              31,386
              
              
              
              11.58
              %Commercial
                  and multi-family
              
              
              90,808
              
              
              
              27.66
              %
              Retail
              
              
              23,413
              
              
              
              8.64
              %Construction:
              
              
              
              
              
              
              
              
              Other
              
              
              33,542
              
              
              
              12.38
              %1-4
                  family residential spec
              
              
              42,155
              
              
              
              12.84
              %
              Not
                  owner-occupied:1-4
                  family residential pre-sold
              
              
              1,032
              
              
              
              0.31
              %
              Office
              
              
              29,233
              
              
              
              10.79
              %1-4
                  family residential other
              
              
              20,837
              
              
              
              6.35
              %
              Retail
              
              
              41,314
              
              
              
              15.25
              %Commercial
                  owner-occupied
              
              
              5,692
              
              
              
              1.73
              %
              Other
              
              
              25,759
              
              
              
              9.51
              %Commercial
                  not owner-occupied
              
              
              9,947
              
              
              
              3.03
              %
              Other:Hotel/motel
              
              
              12,202
              
              
              
              3.72
              %
              Hotel/motel
              
              
              15,217
              
              
              
              5.62
              %Multi-family
                  properties
              
              
              8,353
              
              
              
              2.54
              %
              Industrial
              
              
              2,719
              
              
              
              1.00
              %Special
                  purpose property
              
              
              1,250
              
              
              
              0.38
              %
              Multi-family
                  properties
              
              
              22,098
              
              
              
              8.15
              %Other
              
              
              470
              
              
              
              0.14
              %
              Special
                  purpose property
              
              
              46,297
              
              
              
              17.08
              %Total
                  Construction and Development
              
              $
              328,347
              
              
              
              100.00
              %
              Total
                  Commercial Real Estate
              
              $
              270,978
              
              
              
              100.00
              %
 
 
 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
              
              Jun-07
              
              
              Mar-07
              
              
              Dec-06
              
              
              Sep-06
              
              
              Jun-06(Dollars
                  In Thousands)Noninterest-bearing
                  demand
              
              $
              98,862
              
              
              $
              107,917
              
              
              $
              100,911
              
              
              $
              100,703
              
              
              $
              95,458Interest-bearing
                  demand and savings
              
              
              349,720
              
              
              
              371,484
              
              
              
              328,828
              
              
              
              316,385
              
              
              
              315,492Time
                  less than $100,000
              
              
              300,856
              
              
              
              287,982
              
              
              
              279,936
              
              
              
              273,697
              
              
              
              264,552Time
                  greater than or equal to $100,000
              
              
              163,973
              
              
              
              158,464
              
              
              
              161,054
              
              
              
              151,075
              
              
              
              145,002Brokered
              
              
              32,436
              
              
              
              28,569
              
              
              
              37,754
              
              
              
              41,841
              
              
              
              36,274Total
                  deposits
              
              $
              945,847
              
              
              $
              954,416
              
              
              $
              908,483
              
              
              $
              883,701
              
              
              $
              856,778
 
 The
        percentage of deposits outstanding by deposit type at the indicated dates
        is
        presented in the following table:
 
 As
                  of Quarter End
              
              Jun-07
              
              
              Mar-07
              
              
              Dec-06
              
              
              Sep-06
              
              
              Jun-06Noninterest-bearing
                  demand
              
              
              10.45
              %
              
              
              11.31
              %
              
              
              11.11
              %
              
              
              11.40
              %
              
              
              11.14
              %Interest-bearing
                  demand and savings
              
              
              36.98
              %
              
              
              38.92
              %
              
              
              36.19
              %
              
              
              35.80
              %
              
              
              36.82
              %Time
                  less than $100,000
              
              
              31.78
              %
              
              
              30.18
              %
              
              
              30.81
              %
              
              
              30.97
              %
              
              
              30.88
              %Time
                  greater than or equal to $100,000
              
              
              17.36
              %
              
              
              16.60
              %
              
              
              17.73
              %
              
              
              17.10
              %
              
              
              16.93
              %Brokered
              
              
              3.43
              %
              
              
              2.99
              %
              
              
              4.16
              %
              
              
              4.73
              %
              
              
              4.23
              %Total
                  deposits
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
  15
 ***Table
            of Contents***
  Stockholders’
        equity represented 8.2% of total assets at quarter end, a decrease compared
        to
        8.5% at December 31, 2006.  Total stockholders’ equity has increased
        $970,000, or 1.0%, since December 31, 2006.  This increase is
        primarily the net result of  $6.3 million in earnings, less $2.8
        million in dividends and a $2.1 million decrease in accumulated other
        comprehensive losses.  We paid a $0.145 per common share dividend for
        the first quarter 2007 and declared a $0.145 per common share dividend for
        the
        second quarter of 2007, compared to $0.125 and $0.135 per common share dividends
        paid for the first and second quarters of 2006, respectively.  Our
        dividend payout ratios for the first and second quarters of 2007 were 45.02%
        and
        42.66%, respectively, compared to 35.91% and 35.70% for the first and second
        quarters of 2006.
 
 **RESULTS
        OF OPERATIONS**
 
 Net
        income for the three months ended June 30, 2007 was $3.2 million, or $0.33
        per
        diluted share, as compared to $3.6 million, or $0.37 per diluted share, during
        the same period in 2006.  The $370,000, or 10.3%, decrease in net
        income is the net result of a $340,000 decrease in net interest income (or
        $303,000 on a taxable-equivalent basis), a $200,000 increase in the provision
        for loan losses, a $198,000 decrease in other income and a $27,000 increase
        in
        other expenses, offset by a  $395,000 decrease in income tax
        expense.  Our return on average assets (“ROA”) and return on average
        equity (“ROE”) for the three months ended June 30, 2007 were 1.12% and 13.10%,
        respectively, compared to a 1.36% ROA and a 15.93% ROE for the same period
        in
        2006.
 
 Net
        income for the six months ended June 30, 2007 was $6.3 million, or $0.65
        per
        diluted share, as compared to $6.9 million, or $0.71 per diluted share, during
        the same period in 2006.  The $617,000, or 8.9%, decrease in net
        income is the net result of a $564,000 decrease in net interest income (or
        $456,000 on a taxable-equivalent basis), a $200,000 increase in the provision
        for loan losses and a $741,000 increase in other expenses, offset by a $240,000
        increase in other income and a $648,000 decrease in income tax
        expense.  Our ROA and ROE for the six months ended June 30, 2007 were
        1.11% and 12.93%, respectively, compared to a 1.33% ROA and a 15.51% ROE
        for the
        same period in 2006.
 
 The
        reasons for these changes are discussed in more detail below.
 
 *Net
        Interest Income*
 The
        primary component of our profitability is net interest income, or the difference
        between the interest income earned on assets, primarily loans and investments,
        and interest paid on liabilities, primarily deposits and other borrowed
        funds.  For the three months ended June 30, 2007, our net interest
        income on a taxable-equivalent basis was $11.1 million, a 2.7% decrease from
        the
        $11.4 million in net interest income for the second quarter of
        2006.  The decrease in net interest income is due to a 29.7% increase
        in interest expense offset in part by a 10.6% increase in interest
        income.  During the second quarter of 2007, our average earning assets
        were 9.4% higher compared to the same period in 2006.  The average
        balances of our interest-bearing liabilities increased by 10.4% to fund the
        asset growth.  The average yield on our earning assets increased 9
        basis points from 7.84% for the second quarter of 2006, to 7.93% for the
        second
        quarter of 2007.  However, the average rates paid for our funds
        increased 66 basis points from 3.74% for the second quarter of 2006, to 4.40%
        for the second quarter of 2007.  As a result of these rate increases,
        our net interest spread declined by 57 basis points from 4.10% in the second
        quarter of 2006, to 3.53% for the same period in 2007.
 
 For
        the
        six months ended June 30, 2007, our net interest income on a taxable-equivalent
        basis was $21.9 million, a 2.0% decrease from the $22.4 million in net interest
        income for the same period in 2006.  The decrease in net interest
        income is due primarily to the same factors described above for the quarterly
        results.
 
 The
        net
        interest margin is net interest income expressed as a percentage of average
        earning assets.   Our net interest margin for the second quarter
        of 2007 was 4.10%, 51 basis points lower than the 4.61% recorded for the
        second
        quarter of 2006.  The lack of movement in short-term interest rates
        over the past twelve months has allowed our interest-bearing liabilities
        to
        re-price upwards without much opportunity to re-price our earning assets
        upwards.  Improvement of our net interest margin in 2007 is not
        expected considering the interest rate environment and narrowing spreads
        on our
        earning assets caused by our rising cost of funds.
  16
 ***Table
            of Contents***
  The
        following tables detail 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 and six months ended June 30,
        2007
        and 2006.  Federally tax-exempt income is presented on a
        taxable-equivalent basis assuming a 35% Federal tax rate.  Loan
        average balances include loans on nonaccrual status.
 
 For
                  the Three Months Ended June 30,
              
              
              
              
              2007
              
              
              
              
              
              
              
              
              2006Average
                Balance
              
              
              Interest
                Income/
                Expense
              
              
              Average
                Yield/
                Rate
              
              
              Average
                Balance
              
              
              Interest
                Income/
                Expense
              
              
              Average
                Yield/
                Rate(Dollars
                  In Thousands)Interest-earning
                  assets:Loans
              
              $
              876,982
              
              
              $
              18,712
              
              
              
              8.56%
              
              
              $
              787,332
              
              
              $
              16,824
              
              
              
              8.57%Investment
                  securities:Taxable
              
              
              162,827
              
              
              
              2,085
              
              
              
              5.14%
              
              
              
              154,347
              
              
              
              1,902
              
              
              
              4.94%Nontaxable
              
              
              30,370
              
              
              
              457
              
              
              
              6.04%
              
              
              
              23,685
              
              
              
              348
              
              
              
              5.90%Other
                  short-term investments
              
              
              17,747
              
              
              
              251
              
              
              
              5.67%
              
              
              
              28,809
              
              
              
              354
              
              
              
              4.93%Total
                  interest-earning assets
              
              $
              1,087,926
              
              
              $
              21,505
              
              
              
              7.93%
              
              
              $
              994,173
              
              
              $
              19,428
              
              
              
              7.84%Interest-bearing
                  liabilities:Demand
                  deposits
              
              $
              311,097
              
              
              $
              2,819
              
              
              
              3.63%
              
              
              $
              267,483
              
              
              $
              2,037
              
              
              
              3.05%Savings
                  deposits
              
              
              37,986
              
              
              
              150
              
              
              
              1.59%
              
              
              
              40,675
              
              
              
              129
              
              
              
              1.27%Time
                  deposits
              
              
              484,208
              
              
              
              6,057
              
              
              
              5.02%
              
              
              
              443,350
              
              
              
              4,647
              
              
              
              4.20%FHLB
                  advances
              
              
              90,512
              
              
              
              1,038
              
              
              
              4.60%
              
              
              
              90,612
              
              
              
              920
              
              
              
              4.07%Notes
                  payable
              
              
              10,310
              
              
              
              182
              
              
              
              7.08%
              
              
              
              10,310
              
              
              
              226
              
              
              
              8.81%Other
                  short-term borrowings
              
              
              13,208
              
              
              
              140
              
              
              
              4.26%
              
              
              
              5,781
              
              
              
              47
              
              
              
              3.24%Total
                  interest-bearing liabilities
              
              $
              947,321
              
              
              $
              10,386
              
              
              
              4.40%
              
              
              $
              858,211
              
              
              $
              8,006
              
              
              
              3.74%Interest
                  rate spread
              
              
              
              
              
              
              
              
              
              
              3.53%
              
              
              
              
              
              
              
              
              
              
              
              4.10%Net
                  interest income
              
              
              
              
              
              $
              11,119
              
              
              
              
              
              
              
              
              
              
              $
              11,422Net
                  interest margin
              
              
              
              
              
              
              
              
              
              
              4.10%
              
              
              
              
              
              
              
              
              
              
              
              4.61%
  17
 ***Table
            of Contents***
 
 For
                  the Six Months Ended June 30,
              
              
              2007
              
              
              
              
              
              
              
              
              2006Average
                Balance
              
              
              Interest
                Income/
                Expense
              
              
              Average
                Yield/
                Rate
              
              
              Average
                Balance
              
              
              Interest
                Income/
                Expense
              
              
              Average
                Yield/
                Rate(Dollars
                  In Thousands)Interest-earning
                  assets:Loans
              
              $
              855,644
              
              
              $
              36,396
              
              
              
              8.58%
              
              
              $
              774,686
              
              
              $
              32,224
              
              
              
              8.39%Investment
                  securities:Taxable
              
              
              160,099
              
              
              
              4,098
              
              
              
              5.16%
              
              
              
              151,887
              
              
              
              3,672
              
              
              
              4.88%Nontaxable
              
              
              29,855
              
              
              
              895
              
              
              
              6.05%
              
              
              
              20,158
              
              
              
              587
              
              
              
              5.87%Other
                  short-term investments
              
              
              27,011
              
              
              
              721
              
              
              
              5.38%
              
              
              
              38,263
              
              
              
              876
              
              
              
              4.62%Total
                  interest-earning assets
              
              $
              1,072,609
              
              
              $
              42,110
              
              
              
              7.92%
              
              
              $
              984,994
              
              
              $
              37,359
              
              
              
              7.65%Interest-bearing
                  liabilities:Demand
                  deposits
              
              $
              304,578
              
              
              $
              5,409
              
              
              
              3.25%
              
              
              $
              260,608
              
              
              $
              3,632
              
              
              
              2.81%Savings
                  deposits
              
              
              37,788
              
              
              
              298
              
              
              
              1.59%
              
              
              
              40,646
              
              
              
              241
              
              
              
              1.20%Time
                  deposits
              
              
              478,909
              
              
              
              11,773
              
              
              
              4.96%
              
              
              
              439,216
              
              
              
              8,873
              
              
              
              4.07%FHLB
                  advances
              
              
              90,313
              
              
              
              2,089
              
              
              
              4.67%
              
              
              
              89,879
              
              
              
              1,692
              
              
              
              3.80%Notes
                  payable
              
              
              10,310
              
              
              
              362
              
              
              
              7.08%
              
              
              
              10,310
              
              
              
              446
              
              
              
              8.72%Other
                  short-term borrowings
              
              
              11,168
              
              
              
              238
              
              
              
              4.29%
              
              
              
              6,041
              
              
              
              78
              
              
              
              2.59%Total
                  interest-bearing liabilities
              
              $
              933,066
              
              
              $
              20,169
              
              
              
              4.36%
              
              
              $
              846,700
              
              
              $
              14,962
              
              
              
              3.56%Interest
                  rate spread
              
              
              
              
              
              
              
              
              
              
              3.56%
              
              
              
              
              
              
              
              
              
              
              
              4.09%Net
                  interest income
              
              
              
              
              
              $
              21,941
              
              
              
              
              
              
              
              
              
              
              $
              22,397Net
                  interest margin
              
              
              
              
              
              
              
              
              
              
              4.13%
              
              
              
              
              
              
              
              
              
              
              
              4.59%
 
 *Provision
        for Loan Losses*
 
 During
        the second quarter of 2007, we increased our allowance for loan losses by
        $200,000 due to recent loan growth and concerns over the slowdown in real
        estate
        activity.  Additional provisions for loan losses in the second half of
        2007 may be warranted if, among other factors, further weakness in real estate
        is observed in our markets or if our asset quality deteriorates from current
        levels.
 
 For
        the
        year to date, we have charged-off $124,000 in bad debts and we have recovered
        $260,000 in previously charged-off loans.  The $136,000 in net
        recoveries for the year to date results in an annualized 0.03% net recoveries
        to
        average loan ratio.  Including these annualized results, we have a
        five-year average net charge-off ratio of 0.08%.  In 2006, we had a
        net charge-off ratio of 0.01%.  Given the noted slowdown in real
        estate activity in our markets and an expected increase in nonperforming
        assets
        over the next few quarters, we expect to realize an increase in our net
        charge-offs over the next year to a level that more closely resembles our
        five-year average net charge-off ratio.
  18
 ***Table
            of Contents***
  Our
        nonperforming loans decreased by 27 basis points to 0.22% of total loans
        at June
        30, 2007 from 0.49% of total loans at December 31, 2006 due primarily to
        the
        foreclosure and transfer to other real estate of $1.7 million on a large
        problem
        asset.  Of the $2.0 million in nonperforming loans at quarter end, two
        loans totaling $851,000 were scheduled for foreclosure in the third quarter
        of
        2007. The table below summarizes our levels of nonperforming loans over the
        past
        five quarters.
 
 As
                  of Quarter End
              
              Jun-07
              
              
              Mar-07
              
              
              Dec-06
              
              
              Sep-06
              
              
              Jun-06(Dollars
                  In Thousands)Loans
                  accounted for on a nonaccrual basis
              
              $
              1,986
              
              
              $
              4,192
              
              
              $
              4,013
              
              
              $
              1,928
              
              
              $
              412Accruing
                  loans which are contractually past due 90 days or more as to principal
                  or
                  interest payments
              
              
              27
              
              
              
              69
              
              
              
              34
              
              
              
              40
              
              
              
              23Total
                  nonperforming loans
              
              $
              2,013
              
              
              $
              4,261
              
              
              $
              4,047
              
              
              $
              1,968
              
              
              $
              435Total
                  nonperforming loans as a percentage of  total
                  loans
              
              
              0.22
              %
              
              
              0.50
              %
              
              
              0.49
              %
              
              
              0.24
              %
              
              
              0.05
              %
 
 Total
        loans past due 30-89 days and not categorized as a nonperforming loan amounted
        to $7.9 million, or 0.88% of total loans at June 30, 2007, a 67 basis point
        increase compared to a 0.21% ratio at March 31, 2007.  The increase in
        this category is due primarily to the delinquency of two development projects
        to
        a related borrower totaling $3.8 million.  As of June 30, 2007, a
        specific reserve of $245,000 was allocated to the loans on this
        relationship.
 
 At
        June
        30, 2007, the allowance for loan losses as a percentage of total loans was
        1.25%, compared to 1.34% at December 31, 2006.   The decrease in
        this ratio is due to the increase in outstanding loans of $51.1 million,
        offset
        by a $200,000 provision for loan losses in the second quarter of 2007 and
        the
        $136,000 in net recoveries of previous bad debts for the year to
        date.
 
 We
        consider the current level of the allowance for loan losses adequate to absorb
        losses from loans in the portfolio.  As an integral part of our credit
        risk management process, we regularly review loans in our portfolio for credit
        quality and documentation of collateral.  We have a comprehensive
        methodology for determining the adequacy of our allowance for loan
        losses.  This methodology includes an assessment for specific
        valuations on larger loan lines and nonperforming loans, and an assessment
        based
        on environmental factors applied to other homogenous groups of otherwise
        performing loans.
 
 The
        environmental factors considered in developing our loss measurements
        include:
 ·
              levels
                  of and trends in delinquencies and impaired
                  loans;
 ·
              levels
                  of and trends in charge-offs and
                  recoveries;
 ·
              trends
                  in volume and terms of loans;
 ·
              effects
                  of any changes in risk selection and underwriting standards and
                  other
                  changes in lending policies, procedures and
                  practices;
 ·
              experience,
                  ability and depth of lending management and other relevant
                  staff;
 ·
              national
                  and local economic trends and
                  conditions;
 ·
              industry
                  conditions; and
 ·
              effects
                  of changes in credit
                  concentrations.
 
 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.
  19
 ***Table
            of Contents***
  *Other
        Income*
 A
        summary
        of noninterest income follows:
 
 Three
                  Months Ended
                June
                  30,
              
              
              
              
              
              Six
                  Months Ended
                June
                  30,2007
              
              
              2006
              
              
              Pct.
                  Chg.
              
              
              2007
              
              
              2006
              
              
              Pct.
                  Chg.(Dollars
                  in Thousands)Noninterest
                  income:Service
                  charges on deposit accounts
              
              $
              905
              
              
              $
              987
              
              
              
              -8.3
              %
              
              $
              1,741
              
              
              $
              1,939
              
              
              
              -10.2
              %Mortgage
                  origination fees
              
              
              90
              
              
              
              160
              
              
              
              -43.8
              %
              
              
              172
              
              
              
              276
              
              
              
              -37.7
              %ATM/debit
                  card fee income
              
              
              161
              
              
              
              145
              
              
              
              11.0
              %
              
              
              314
              
              
              
              280
              
              
              
              12.1
              %Securities
                  transactions, net
              
              
              (38
              )
              
              
              (1
              )
              
              
              -3700.0
              %
              
              
              135
              
              
              
              (430
              )
              
              
              131.4
              %Earnings
                  on bank-owned life insurance
              
              
              102
              
              
              
              96
              
              
              
              6.3
              %
              
              
              201
              
              
              
              190
              
              
              
              5.8
              %Gain
                  (loss) on disposal of assets
              
              
              6
              
              
              
              8
              
              
              
              -25.0
              %
              
              
              (7
              )
              
              
              10
              
              
              
              -170.0
              %Other
                  noninterest income
              
              
              133
              
              
              
              162
              
              
              
              -17.9
              %
              
              
              282
              
              
              
              333
              
              
              
              -15.3
              %Total
                  noninterest income
              
              $
              1,359
              
              
              $
              1,557
              
              
              
              -12.7
              %
              
              $
              2,838
              
              
              $
              2,598
              
              
              
              9.2
              %Noninterest
                  income (annualized) as a percentage of average assets
              
              
              0.48
              %
              
              
              0.59
              %
              
              
              
              
              
              
              0.50
              %
              
              
              0.50
              %
 
 We
        have
        continued to see a decline in our service charges on deposit accounts due
        to
        competitive pricing and the continuing promotion of a free checking product
        with
        no monthly service fees.  Mortgage origination fees decreased as
        refinancing activity has slowed and due to unexpected turnover in mortgage
        originators.
 
 Fee
        income from ATM and debit cards increased as the volume of point-of-sale
        transactions continues to increase.  We have also placed five
        additional ATMs in service over the past three quarters.  However, we
        have begun to offer a no-fee ATM deposit product in select markets for
        competitive reasons, which may reduce our ATM fee income opportunities going
        forward.
 
 During
        the first six months of 2006, we sold $12.0 million of lower-yielding, cash
        flow
        bonds and replaced them with higher-yielding, call protected bonds to protect
        us
        in a declining interest rate environment.  We incurred a net loss of
        $430,000 on these securities transactions that we expect to recover in the
        form
        of an increase in interest income over the next few years.  This is
        compared to a $135,000 gain on the sale of securities recorded in the first
        six
        months of 2007.  Excluding the net gain/loss on securities
        transactions, total noninterest income would have decreased $325,000, or
        10.7%,
        for the first six months of 2007 compared to the same period in
        2006.
  20
 ***Table
            of Contents***
  *Other
        Expenses*
 A
        summary
        of noninterest expense follows:
 
 Three
                  Months Ended
                June
                  30,
              
              
              
              
              
              Six
                  Months Ended
                June
                  30,2007
              
              
              2006
              
              
              Pct.
                  Chg.
              
              
              2007
              
              
              2006
              
              
              Pct.
                  Chg.(Dollars
                  in Thousands)Noninterest
                  expenses:Salaries
                  and wages
              
              $
              4,114
              
              
              $
              3,917
              
              
              
              5.0
              %
              
              $
              8,265
              
              
              $
              7,640
              
              
              
              8.2
              %Deferred
                  loan cost
              
              
              (534
              )
              
              
              (449
              )
              
              
              18.9
              %
              
              
              (1,005
              )
              
              
              (879
              )
              
              
              14.3
              %Employee
                  benefits
              
              
              994
              
              
              
              1,170
              
              
              
              -15.0
              %
              
              
              2,090
              
              
              
              2,175
              
              
              
              -3.9
              %Net
                  occupancy expense of premises
              
              
              563
              
              
              
              492
              
              
              
              14.4
              %
              
              
              1,099
              
              
              
              964
              
              
              
              14.0
              %Furniture
                  and equipment expense
              
              
              584
              
              
              
              514
              
              
              
              13.6
              %
              
              
              1,163
              
              
              
              1,022
              
              
              
              13.8
              %Advertising
                  and business development
              
              
              149
              
              
              
              126
              
              
              
              18.3
              %
              
              
              327
              
              
              
              302
              
              
              
              8.3
              %Supplies
                  and printing
              
              
              119
              
              
              
              115
              
              
              
              3.5
              %
              
              
              253
              
              
              
              267
              
              
              
              -5.2
              %Telephone
                  and internet charges
              
              
              148
              
              
              
              116
              
              
              
              27.6
              %
              
              
              295
              
              
              
              221
              
              
              
              33.5
              %Postage
                  and courier
              
              
              145
              
              
              
              127
              
              
              
              14.2
              %
              
              
              304
              
              
              
              277
              
              
              
              9.7
              %Legal
                  and accounting fees
              
              
              134
              
              
              
              114
              
              
              
              17.5
              %
              
              
              242
              
              
              
              220
              
              
              
              10.0
              %Director
                  fees and expenses
              
              
              81
              
              
              
              98
              
              
              
              -17.3
              %
              
              
              211
              
              
              
              234
              
              
              
              -9.8
              %Service
                  charges and fees
              
              
              137
              
              
              
              129
              
              
              
              6.2
              %
              
              
              280
              
              
              
              249
              
              
              
              12.4
              %Other
                  noninterest expense
              
              
              575
              
              
              
              713
              
              
              
              -19.4
              %
              
              
              1,155
              
              
              
              1,246
              
              
              
              -7.3
              %Total
                  noninterest expense
              
              $
              7,209
              
              
              $
              7,182
              
              
              
              0.4
              %
              
              $
              14,679
              
              
              $
              13,938
              
              
              
              5.3
              %Noninterest
                  expense as a percentage of average assets (annualized)
              
              
              2.50
              %
              
              
              2.72
              %
              
              
              
              
              
              
              2.60
              %
              
              
              2.67
              %
 
 Salaries
        and wages expense and employee benefits were up for the first six months
        of 2007
        due to annual raises and a 3% increase in the number of full-time equivalents
        from 314 in June of 2006 to 322 in June of 2007.  We have staffed and
        opened two full service branches and a loan production office between June
        30,
        2006 and June 30, 2007.  We also converted our Athens, Georgia loan
        production office to a full service branch in October 2006.  Deferred
        loan cost, which is a credit against salaries and wages, increased due to
        an
        increase in standard costs and an increase in loan volume.
 
 The
        additional facilities (three full service branches and one loan production
        office) are the primary cause for the increase in occupancy expense, furniture
        and equipment expense and telephone charges between June 30, 2006 and June
        30,
        2007.  Service charges and fees increased due to increased ATM network
        fees paid during the quarter.  We also placed five additional ATMs in
        service during the first six months of 2007, compared to the first six months
        of
        2006.
 
 Advertising
        and business development expense increased for the first six months on 2007
        due
        to our focus on marketing and growing our franchise.  Legal fees
        increased 17.5% for the first six months, compared to 2006, due to increased
        foreclosure activity on nonperforming loans.  Director fees and
        expenses have decreased in 2007, compared to 2006, as we incurred expenses
        for
        an off-site director strategic planning session during March 2006.
 
 *Income
        Tax Expense*
 As
        a
        percentage of net income before taxes, income tax expense was 34.4% and 36.7%
        for the three-month periods ended June 30, 2007 and 2006,
        respectively.  For the six-month periods ended June 30, 2007 and 2006,
        income tax expense as a percentage of net income before taxes was 34.4% and
        36.4%, respectively.  Since the first quarter of 2006, we have
        invested in additional affordable housing projects to receive State of Georgia
        low income housing tax credits that helped to reduce our state income tax
        expense.
 
 **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 continues to be enhanced by a relatively stable core deposit base
        and
        the availability of additional funding sources.
  21
 ***Table
            of Contents***
  At
        June
        30, 2007, our ratio of liquid assets (defined as the sum of cash and due
        from
        bank balances, interest-bearing deposits in other banks, federal funds sold,
        and
        investment securities) to total assets was 18.2%, compared to 22.6% at December
        31, 2006.  It is our policy to maintain a ratio of liquid assets to
        total assets of at least 15%.
 
 During
        the first six months of 2007, we funded the $84.9 million growth in loans,
        the
        $3.7 million increase in investments and the $2.0 million decrease in
        noninterest-bearing demand deposits by utilizing the $39.4 million increase
        in
        interest-bearing demand, savings and time deposits, increasing federal funds
        purchased and securities sold under repurchase agreements by $10.0 million
        and
        decreasing our federal funds sold by $41.5 million.
 
 *Contractual
        Obligations*
 Summarized
        below are our contractual obligations as of June 30, 2007.
 
 Contractual
                  Obligations
              
              Total
              
              
              Less
                  than
                1
                  year
              
              
              1
                  to 3
                years
              
              
              3
                  to 5
                years
              
              
              More
                  than
                5
                  years(Dollars
                  In Thousands)Federal
                  Home Loan Bank of Atlanta Advances
              
              $
              91,583
              
              
              $
              7,584
              
              
              $
              20,189
              
              
              $
              35,730
              
              
              $
              28,080Operating
                  Lease Obligations
              
              
              1,779
              
              
              
              375
              
              
              
              555
              
              
              
              395
              
              
              
              454Guaranteed
                  Preferred Beneficial Interests in Debentures
              
              
              10,310
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,310$
              103,672
              
              
              $
              7,959
              
              
              $
              20,744
              
              
              $
              36,125
              
              
              $
              38,844
 
 *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 June 30, 2007
        and
        December 31, 2006 are as follows:
 
 Jun-07
              
              
              Dec-06Commitments
                  to extend credit
              
              $
              146,346,000
              
              
              $
              154,450,000Standby
                  letters of credit
              
              $
              6,001,000
              
              
              $
              7,316,000
 
 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.  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 strong credit
        ratings and are approved by our Board.  Due to these factors, we feel
        our off balance sheet credit risk exposure at June 30, 2007 was not
        material.
  22
 ***Table
            of Contents***
  *Stockholders’
        Equity*
 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 June 30, 2007, the Company and the Bank were in
        compliance with those standards.  There are no conditions or events
        since quarter end that we believe have materially changed our regulatory
        capital
        ratios.
 
 The
        following table summarizes the regulatory capital ratios of the Company and
        the
        Bank at June 30, 2007.
 
 Company
                Consolidated
              
              
              Bank
              
              
              Minimum
                Regulatory
                RequirementTotal
                  Capital to Risk Weighted Assets
              
              
              11.7
              %
              
              
              11.7
              %
              
              
              8.0
              %Tier
                  1 Capital to Risk Weighted Assets
              
              
              10.6
              %
              
              
              10.6
              %
              
              
              4.0
              %Tier
                  1 Capital to Average Assets (Leverage Ratio)
              
              
              9.0
              %
              
              
              9.0
              %
              
              
              4.0
              %
 
 On
        May
        22, 2007, the Company’s Board of Directors renewed its annual plan to repurchase
        up to 300,000 shares of the Company’s common stock over the next twelve-month
        period.  The Company plans to use cash on hand to repurchase its
        shares on the open market and through private transactions.  During
        the second quarter of 2007, 46,238 shares were repurchased, at a total cost
        of
        $891,000.  Although the Company may not repurchase all 300,000 shares
        within the allotted time period, the program will allow the Company to
        repurchase its shares as opportunities arise through either the open market
        or
        privately negotiated transactions at prices deemed appropriate by
        management.  At June 30, 2007, there were 299,800 shares available to
        be repurchased under the plan.  The expiration date for the plan is
        May 22, 2008.
 
 **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
        significant accounting policies are described in detail in Note 1 of our
        Consolidated Financial Statements provided in Item 8 of our 2006 Annual Report
        on Form 10-K.  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.
  23
 ***Table
            of Contents***
  Management’s
        assessment is inherently subjective, as it requires estimates that are
        susceptible to significant revision as more information becomes
        available.  Changes in various internal and external environmental
        factors including, but not limited to, the financial condition of individual
        borrowers, economic conditions, historical loss experience, or the condition
        of
        the various markets in which collateral may be sold may affect the required
        level of the allowance for loan losses and the associated provision for loan
        losses.  Should these environmental factors change; a different amount
        may be reported for the allowance for loan losses and the associated provision
        for loan losses.
 
 *Estimates
        of Fair Value*
 The
        estimation of fair value is significant to a number of the Company’s assets,
        including, but not limited to, investment securities, goodwill, other real
        estate owned and other repossessed assets.  These are all recorded at
        either fair value or at the lower of cost or fair value.  Fair values
        are volatile and may be influenced by a number of
        factors.  Circumstances that could cause estimates of the fair value
        of certain assets and liabilities to change include a change in prepayment
        speeds, discount rates or market interest rates.  Our estimates and
        assumptions are reviewed periodically and the effects of revisions are reflected
        in the consolidated financial statements in the period they are determined
        to be
        necessary.
 
 Fair
        values for most investment securities are based on quoted market
        prices.  If quoted market prices are not available, fair values are
        based on the quoted prices of similar instruments.  The fair values of
        other real estate owned are typically determined based on appraisals by third
        parties, less estimated costs to sell.
 
 Estimates
        of fair value are also required in performing an impairment analysis of
        goodwill.  The Company reviews goodwill for impairment on at least an
        annual basis and whenever events or circumstances indicate the carrying value
        may not be recoverable.  An impairment would be indicated if the
        carrying value exceeds the fair value of a reporting unit.
 
 **Recent
        Accounting Pronouncements**
 
 In
        management’s opinion, there are no recent accounting pronouncements that have
        had or will have had a material impact on our earnings or financial position
        as
        of or for the quarter ended June 30, 2007.
 
 
 **ITEM
        3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 We
        are
        subject to exposure to 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 June 30, 2007, our one-year
        management-adjusted gap ratio of 0.90 was within our policy
        guidelines.  Although we are now showing a slightly
        liability-sensitive balance sheet gap position in the one-year time horizon,
        we
        still consider ourselves asset-sensitive relative to the impact on our earnings
        in a changing rate environment as evidenced by our three-month gap ratio
        of 1.48
        at June 30, 2007.
 
 After
        suffering through a period of rapidly declining interest rates that compressed
        our net interest margins by 103 basis points from 2000 to 2001, we have reduced
        the level of asset-sensitivity on the Company’s balance sheet in anticipation of
        another eventual downturn in interest rates.  We accomplished this by
        conscientiously lengthening the duration of our earning assets and shortening
        the duration of our deposits and other borrowings.  In June 2006, we
        entered into a $50 million 3-year 8.25% Prime rate floor contract in an
        additional effort to hedge our interest rate risk in a declining interest
        rate
        environment.
  24
 ***Table
            of Contents***
  The
        table
        below has two gap ratio measurements: regulatory and
        management-adjusted.  The regulatory gap ratio 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
                  Defined*Rate
                  Sensitive Assets (RSA)
              
              $
              548,444
              
              
              $
              580,714
              
              
              $
              633,669Rate
                  Sensitive Liabilities (RSL)
              
              
              524,149
              
              
              
              613,663
              
              
              
              770,566RSA
                  minus RSL (Gap)
              
              $
              24,295
              
              
              $
              (32,949
              )
              
              $
              (136,897
              )Gap
                  Ratio (RSA/RSL)
              
              
              1.05
              
              
              
              0.95
              
              
              
              0.82*Management-Adjusted*Rate
                  Sensitive Assets (RSA)
              
              $
              559,457
              
              
              $
              596,621
              
              
              $
              657,193Rate
                  Sensitive Liabilities (RSL)
              
              
              377,234
              
              
              
              485,011
              
              
              
              729,571RSA
                  minus RSL (Gap)
              
              $
              182,223
              
              
              $
              111,610
              
              
              $
              (72,378
              )Gap
                  Ratio (RSA/RSL)
              
              
              1.48
              
              
              
              1.23
              
              
              
              0.90
 
 We
        use
        simulation analysis to monitor changes in net interest income due to changes
        in
        market interest rates.  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 10% using
        this
        analysis.  As of June 30, 2007, the simulation model projected net
        interest income would increase 5.4% over the next year if market rates
        immediately rose by 200 basis points and the model projected net interest
        income
        to decrease 3.3% over the next year if market rates immediately fell by 200
        basis points.  These projections are a significant change from the
        14.7% increase projected at March 31, 2006 if market rates increased by 200
        basis points and the 12.1% decrease projected at March 31, 2006 if market
        rates
        fell by 200 basis points.  The lower volatility in our results is due
        primarily to our efforts to neutralize our asset-sensitive balance sheet
        mix, to
        improve our A/L 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
              6.86%
              7.86%+200
                  bps
              5.83%
              5.41%+100
                  bps
              3.45%
              3.18%-100
                  bps
              -2.20%
              -2.03%-200
                  bps
              -2.89%
              -3.30%-300
                  bps
              -3.91%
              -8.32%
  25
 ***Table
            of Contents***
  **ITEM
        4.  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.  There have
        been no significant changes in the Company’s internal controls over financial
        reporting or in other factors that could significantly affect the Company’s
        internal controls subsequent to the date of their evaluation.  There
        were no material weaknesses identified in the course of such review and
        evaluation and, therefore, no corrective measures were taken by the
        Company.
 
 
 **PART
        II.OTHER INFORMATION**
 
 **ITEM
        1.  LEGAL PROCEEDINGS**
 
 None
   **ITEM
        1A.  RISK FACTORS**
 
 There
        has
        not been any material change in the risk factors disclosure from that contained
        in the Company’s 2006 Annual Report on Form 10-K for the fiscal year ended
        December 31, 2006.
   **ITEM
        2.  UNREGISTERED SALE OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 Total
                  number of shares purchased
              
              
              Average
                  price paid per share
              
              
              Number
                  of shares purchased as part of publicly announced plans or
                  programs
              
              
              Maximum
                  number of shares that may yet be purchased under the plans or
                  programs1April
              
              
              2,792
              
              
              $
              18.80
              
              
              
              2,792
              
              
              
              221,121May
              
              
              43,246
              
              
              
              19.30
              
              
              
              43,246
              
              
              
              300,000June
              
              
              200
              
              
              
              19.05
              
              
              
              200
              
              
              
              299,800Total
              
              
              46,238
              
              
              $
              19.27
              
              
              
              46,238
              
              
              
              299,800
 
 1
              On
                  May 22, 2007, the Board of Directors renewed its annual plan to
                  repurchase
                  up to 300,000 shares of the Company's common stock over the next
                  twelve
                  month period.  The plan will expire May 22,
                  2008.
   **ITEM
        3.  DEFAULTS UPON SENIOR SECURITIES**
 
 None
  26
 ***Table
            of Contents***
  **ITEM
        4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 At
        the
        annual meeting of stockholders held on May 22, 2007, two items were voted
        upon.  The first vote was for the election of four directors to hold
        office until the 2010 annual meeting of stockholders and until their successors
        are duly elected and qualified or until their earlier death, resignation,
        incapacity to serve, or removal:
 
 Name
              
              Votes
                  For
              
              
              Votes
                  WithheldJames
                  B. Lanier, Jr.
              
              
              5,603,803
              
              
              
              245,253Douglas
                  W. McNeill
              
              
              5,600,180
              
              
              
              248,876F.
                  Ferrell Scruggs, Sr.
              
              
              5,580,578
              
              
              
              268,478David
                  K. Williams
              
              
              5,600,380
              
              
              
              248,676
 
 The
        above
        directors were elected.
 
 The
        following directors will continue in office:
 
 Walter
        W.
        Carroll, II, James L. Dewar, Jr., John E. Mansfield, Jr., Joe P. Singletary,
        Jr.,
 R.
        Bradford Burnette, Michael H. Godwin, Kennith D. McLeod, Paul E. Parker and
        M.
        Burke Welsh, Jr.
 
 The
        second vote was for the ratification of the appointment of Mauldin &
Jenkins, LLC as independent auditors for 2007:
 
 Votes
                  For
              
              
              Votes
                  Against
              
              
              Votes
                  Abstained
              
              
              Broker
                  Non-Vote5,826,570
              
              
              
              6,681
              
              
              
              15,805
              
              
              
              0
 
 The
        selection of the independent auditors was ratified.
 
 
 **ITEM
        5.  OTHER INFORMATION**
 
 None
 
 
 **ITEM
        6.  EXHIBITS**
 
 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
  27
 ***Table
            of Contents***
  **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.**
 Registrant
 
 Date:
              ***August
                  9, 2007***
              
              By:
              ***/s/
                  M. Burke Welsh, Jr.***M.
                  Burke Welsh, Jr.President
                  and Chief Executive Officer(principal
                  executive officer of the registrant)Date:
              ***August
                  9, 2007***
              
              By:
              ***/s/
                  Donald J. Torbert, Jr.***Donald
                  J. Torbert, Jr.Executive
                  Vice President and Chief Financial Officer(principal
                  financial officer of the registrant)
   28