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, 2008 – Commission File Number
000-25422
 _____________
  
   PAB BANKSHARES, INC.
 (A
Georgia Corporation)
 IRS
Employer Identification Number: 58-1473302
 
 3250
North Valdosta Road, Valdosta, Georgia 31602
 Telephone
Number: (229) 241-2775
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes x No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 Large
accelerated filer o   
Accelerated filer x    
Non-accelerated filer o    Smaller
reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o No x
 
 The
number of shares outstanding of the registrant’s common stock at July 31, 2008
was 9,324,407 shares.




TABLEOF
CONTENTS


PagePART
      I   FINANCIAL INFORMATIONItem 1.
              Consolidated Financial StatementsStatements of Condition
              1Statements of Income
              2Statements of Comprehensive Income (Loss)
              3Statements of Stockholders’ Equity
              4Statements of Cash Flows
              5Notes to Consolidated Financial
    Statements
              7Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of OperationsItem 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              27Item 4.
              Controls and Procedures
              29PART
      II   OTHER INFORMATIONItem 1.
              Legal Proceedings
              29Item 1A.
              Risk Factors
              29Item 2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              30Item 3.
              Defaults Upon Senior Securities
              30Item 4.
              Submission of Matters to a Vote of Security
      Holders
              30Item 5.
              Other Information
              31Item 6.
              Exhibits
              31SIGNATURES
              31
  i
 Table
of Contents
  PART I.  FINANCIAL INFORMATION
 Item
1. Consolidated Financial Statements
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CONDITIONAS
      OF JUNE 30, 2008 AND DECEMBER 31, 2007June
      30,
              
              
              December
      31,2008
              
              
              2007(UNAUDITED)ASSETSCash
      and due from banks
              
              $
              24,520,118
              
              
              $
              29,451,700Interest-bearing
      deposits in other banks
              
              
              441,144
              
              
              
              393,276Federal
      funds sold
              
              
              375,590
              
              
              
              559,444Investment
      securities
              
              
              178,312,997
              
              
              
              194,794,481Loans
              
              
              963,499,605
              
              
              
              921,348,906Allowance
      for loan losses
              
              
              (14,302,733
              )
              
              
              (12,905,938
              )Net
      loans
              
              
              949,196,872
              
              
              
              908,442,968Premises
      and equipment, net
              
              
              19,719,578
              
              
              
              20,177,671Goodwill
              
              
              5,984,604
              
              
              
              5,984,604Cash
      value of bank-owned life insurance policies
              
              
              12,091,891
              
              
              
              11,881,384Foreclosed
      assets
              
              
              8,792,495
              
              
              
              6,360,258Other
      assets
              
              
              22,932,424
              
              
              
              20,625,156Total
      assets
              
              $
              1,222,367,713
              
              
              $
              1,198,670,942LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
              
              $
              102,909,152
              
              
              $
              89,423,571Interest-bearing
      demand and savings
              
              
              336,358,345
              
              
              
              354,742,862Time
              
              
              557,327,095
              
              
              
              535,982,585Total
      deposits
              
              
              996,594,592
              
              
              
              980,149,018Federal
      funds purchased and securities sold under agreements to
      repurchase
              
              
              13,177,397
              
              
              
              16,175,370Advances
      from the Federal Home Loan Bank of Atlanta
              
              
              99,999,267
              
              
              
              86,297,705Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
              
              
              10,310,000
              
              
              
              10,310,000Other
      liabilities
              
              
              6,609,927
              
              
              
              8,062,877Total
      liabilities
              
              
              1,126,691,183
              
              
              
              1,100,994,970Stockholders'
      equity:Preferred
      stock, no par value; 1,500,000 shares authorized; no shares
      issued
              
              
              -
              
              
              
              -Common
      stock, no par value; 98,500,000 shares authorized;9,324,407
      and 9,223,217 shares issued and outstanding
              
              
              1,217,065
              
              
              
              1,217,065Additional
      paid-in capital
              
              
              24,088,556
              
              
              
              22,792,940Retained
      earnings
              
              
              71,139,280
              
              
              
              72,822,852Accumulated
      other comprehensive income (loss)
              
              
              (768,371
              )
              
              
              843,115Total
      stockholders' equity
              
              
              95,676,530
              
              
              
              97,675,972Total
      liabilities and stockholders' equity
              
              $
              1,222,367,713
              
              
              $
              1,198,670,942See
      accompanying notes to consolidated financial statements.
  1
 Table of Contents
  PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOMETHREE
      MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007(UNAUDITED)Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      incomeInterest
      and fees on loans
              
              $
              15,140,028
              
              
              $
              18,711,674
              
              
              $
              31,796,825
              
              
              $
              36,396,377Interest
      and dividends on investment securities:Taxable
              
              
              1,901,665
              
              
              
              2,085,495
              
              
              
              3,894,714
              
              
              
              4,097,952Nontaxable
              
              
              335,506
              
              
              
              297,225
              
              
              
              663,089
              
              
              
              581,796Other
      interest income
              
              
              82,924
              
              
              
              251,071
              
              
              
              135,969
              
              
              
              720,559Total
      interest income
              
              
              17,460,123
              
              
              
              21,345,465
              
              
              
              36,490,597
              
              
              
              41,796,684Interest
      expenseInterest
      on deposits
              
              
              7,461,664
              
              
              
              9,026,334
              
              
              
              15,879,025
              
              
              
              17,479,864Interest
      on Federal Home Loan Bank advances
              
              
              928,070
              
              
              
              1,037,696
              
              
              
              1,858,370
              
              
              
              2,089,259Interest
      on other borrowings
              
              
              207,878
              
              
              
              322,150
              
              
              
              545,250
              
              
              
              599,980Total
      interest expense
              
              
              8,597,612
              
              
              
              10,386,180
              
              
              
              18,282,645
              
              
              
              20,169,103Net
      interest income
              
              
              8,862,511
              
              
              
              10,959,285
              
              
              
              18,207,952
              
              
              
              21,627,581Provision
      for loan losses
              
              
              1,050,000
              
              
              
              200,000
              
              
              
              2,250,000
              
              
              
              200,000Net
      interest income after provision for loan losses
              
              
              7,812,511
              
              
              
              10,759,285
              
              
              
              15,957,952
              
              
              
              21,427,581Other
      incomeService
      charges on deposit accounts
              
              
              977,822
              
              
              
              905,034
              
              
              
              1,882,726
              
              
              
              1,740,922Other
      fee income
              
              
              446,966
              
              
              
              302,563
              
              
              
              894,649
              
              
              
              616,715Securities
      transactions, net
              
              
              16,833
              
              
              
              (38,497
              )
              
              
              200,217
              
              
              
              134,835Other
      noninterest income
              
              
              130,163
              
              
              
              190,125
              
              
              
              237,419
              
              
              
              345,245Total
      other income
              
              
              1,571,784
              
              
              
              1,359,225
              
              
              
              3,215,011
              
              
              
              2,837,717Other
      expensesSalaries
      and employee benefits
              
              
              4,524,952
              
              
              
              4,573,826
              
              
              
              9,537,056
              
              
              
              9,350,364Occupancy
      expense of premises
              
              
              648,465
              
              
              
              563,057
              
              
              
              1,247,515
              
              
              
              1,098,854Furniture
      and equipment expense
              
              
              521,613
              
              
              
              584,275
              
              
              
              1,046,128
              
              
              
              1,163,243Other
      noninterest expense
              
              
              1,496,083
              
              
              
              1,487,393
              
              
              
              3,189,694
              
              
              
              3,066,271Total
      other expenses
              
              
              7,191,113
              
              
              
              7,208,551
              
              
              
              15,020,393
              
              
              
              14,678,732Income
      before income tax expense
              
              
              2,193,182
              
              
              
              4,909,959
              
              
              
              4,152,570
              
              
              
              9,586,566Income
      tax expense
              
              
              729,641
              
              
              
              1,687,934
              
              
              
              1,391,555
              
              
              
              3,299,760Net
      income
              
              $
              1,463,541
              
              
              $
              3,222,025
              
              
              $
              2,761,015
              
              
              $
              6,286,806Earnings
      per common shareBasic
              
              $
              0.16
              
              
              $
              0.33
              
              
              $
              0.30
              
              
              $
              0.65Diluted
              
              $
              0.15
              
              
              $
              0.33
              
              
              $
              0.29
              
              
              $
              0.64See
      accompanying notes to consolidated financial statements.
  2
 Table of Contents
  PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)THREE
      MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007(UNAUDITED)Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income
              
              $
              1,463,541
              
              
              $
              3,222,025
              
              
              $
              2,761,015
              
              
              $
              6,286,806Other
      comprehensive loss:Unrealized
      loss on cash flow hedge arising during the period,net of tax
      benefit of $451,660 and $114,447 for the quarter and$24,731 and $92,542 for the year to
      date
              
              
              (838,798
              )
              
              
              (212,547
              )
              
              
              (45,930
              )
              
              
              (188,254
              )Unrealized
      holding losses on securities available for sale arisingduring the
      period, net of tax benefit of $1,521,996 and $1,294,344for the quarter and $772,915
      and $978,330 for the year to date
              
              
              (2,826,567
              )
              
              
              (2,403,782
              )
              
              
              (1,435,415
              )
              
              
              (1,816,898
              )Reclassification
      adjustment for (gains) losses on securitiesavailable for sale
      included in net income, net of tax (benefit) of$5,892 and ($13,474) for the quarter and $70,076
      and $47,192for the year to
      date
              
              
              (10,941
              )
              
              
              25,024
              
              
              
              (130,141
              )
              
              
              (87,643
              )(3,676,306
              )
              
              
              (2,591,305
              )
              
              
              (1,611,486
              )
              
              
              (2,092,795
              )Comprehensive
      income (loss)
              
              $
              (2,212,765
              )
              
              $
              630,720
              
              
              $
              1,149,529
              
              
              $
              4,194,011See
      accompanying notes to consolidated financial statements.
  3
 Table of Contents
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITYSIX
      MONTHS ENDED JUNE 30, 2008 (UNAUDITED) AND YEAR ENDED DECEMBER 31,
      2007AccumulatedAdditional
              
              
              
              
              
              OtherCommon
      Stock
              
              
              Paid-in
              
              
              Retained
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Income
      (Loss)
              
              
              TotalBalance,
      December 31, 2006
              
              
              9,504,969
              
              
              $
              1,217,065
              
              
              $
              27,584,852
              
              
              $
              67,476,178
              
              
              $
              (962,361
              )
              
              $
              95,315,734Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,785,715
              
              
              
              -
              
              
              
              10,785,715Other
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,805,476
              
              
              
              1,805,476Cash
      dividends declared,$0.58 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,439,041
              )
              
              
              -
              
              
              
              (5,439,041
              )Stock
      acquired and cancelled under stock repurchase
      plan
              
              
              (344,492
              )
              
              
              -
              
              
              
              (5,894,104
              )
              
              
              -
              
              
              
              -
              
              
              
              (5,894,104
              )Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              410,851
              
              
              
              -
              
              
              
              -
              
              
              
              410,851Stock
      options exercised
              
              
              62,740
              
              
              
              -
              
              
              
              691,341
              
              
              
              -
              
              
              
              -
              
              
              
              691,341Balance,
      December 31, 2007
              
              
              9,223,217
              
              
              
              1,217,065
              
              
              
              22,792,940
              
              
              
              72,822,852
              
              
              
              843,115
              
              
              
              97,675,972Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,761,015
              
              
              
              -
              
              
              
              2,761,015Other
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,611,486
              )
              
              
              (1,611,486
              )Cash
      dividends declared, $0.24 per
    share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,195,622
              )
              
              
              -
              
              
              
              (2,195,622
              )2%
      stock dividend declared
              
              
              183,739
              
              
              
              -
              
              
              
              2,248,965
              
              
              
              (2,248,965
              )
              
              
              -
              
              
              
              -Stock
      acquired and cancelled under stock repurchase
      plan
              
              
              (86,065
              )
              
              
              -
              
              
              
              (1,162,521
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,162,521
              )Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              173,192
              
              
              
              -
              
              
              
              -
              
              
              
              173,192Stock
      options exercised
              
              
              3,516
              
              
              
              -
              
              
              
              35,980
              
              
              
              -
              
              
              
              -
              
              
              
              35,980Balance,
      June 30, 2008
              
              
              9,324,407
              
              
              $
              1,217,065
              
              
              $
              24,088,556
              
              
              $
              71,139,280
              
              
              $
              (768,371
              )
              
              $
              95,676,530See
      accompanying notes to consolidated financial statements.
  4
 Table of Contents
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSSIX
      MONTHS ENDED JUNE 30, 2008 AND 2007(UNAUDITED)Six
      Months Ended June 30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
              
              $
              2,761,015
              
              
              $
              6,286,806Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
              
              
              836,656
              
              
              
              868,598Provision
      for loan losses
              
              
              2,250,000
              
              
              
              200,000Net
      realized gain on securities transactions
              
              
              (200,217
              )
              
              
              (134,835
              )Loss
      on disposal of assets
              
              
              108,643
              
              
              
              7,449Stock-based
      compensation expense
              
              
              173,192
              
              
              
              248,618Increase
      in cash value of bank-owned life insurance
              
              
              (210,507
              )
              
              
              (200,625
              )Decrease
      in deferred compensation accrual
              
              
              (81,724
              )
              
              
              (179,534
              )Decrease
      in retirement accruals
              
              
              -
              
              
              
              (159,799
              )Net
      change in taxes receivable and taxes payable
              
              
              (398,445
              )
              
              
              (1,238,388
              )Decrease
      in interest receivable
              
              
              1,438,752
              
              
              
              133,900Increase
      (decrease) in interest payable
              
              
              (337,869
              )
              
              
              25,873Net
      increase in prepaid expenses and other assets
              
              
              (1,914,662
              )
              
              
              (481,995
              )Net
      decrease in accrued expenses and other liabilities
              
              
              (1,134,353
              )
              
              
              (309,071
              )Net
      cash provided by operating activities
              
              
              3,290,481
              
              
              
              5,066,997CASH
      FLOWS FROM INVESTING ACTIVITIES(Increase)
      decrease in interest-bearing deposits in other banks
              
              
              (47,868
              )
              
              
              337,879Decrease
      in federal funds sold
              
              
              183,854
              
              
              
              41,509,728Purchase
      of debt securities
              
              
              (32,221,423
              )
              
              
              (22,527,424
              )Proceeds
      from sales of debt securities
              
              
              24,417,488
              
              
              
              8,436,633Proceeds
      from calls of debt securities
              
              
              16,102,927
              
              
              
              650,771Proceeds
      from maturities and paydowns of debt securities
              
              
              7,360,948
              
              
              
              6,740,409Purchase
      of equity investments
              
              
              (1,211,083
              )
              
              
              (54,047
              )Redemption
      of equity investments
              
              
              452,100
              
              
              
              275,318Net
      increase in loans
              
              
              (47,300,029
              )
              
              
              (87,968,441
              )Purchase
      of premises and equipment
              
              
              (496,708
              )
              
              
              (948,573
              )Proceeds
      from disposal of assets
              
              
              1,965,735
              
              
              
              1,232,298Net
      cash used in investing activities
              
              
              (30,794,059
              )
              
              
              (52,315,449
              )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase in deposits
              
              
              16,445,574
              
              
              
              37,363,819Net
      increase (decrease) in federal funds purchased and securities
      sold under repurchase agreements
              
              
              (2,997,973
              )
              
              
              10,011,323Advances
      from the Federal Home Loan Bank
              
              
              31,000,000
              
              
              
              40,000,000Payments
      on Federal Home Loan Bank advances
              
              
              (17,298,438
              )
              
              
              (38,608,052
              )Dividends
      paid
              
              
              (2,664,626
              )
              
              
              (2,710,615
              )Proceeds
      from the exercise of stock options
              
              
              35,980
              
              
              
              379,745Acquisition
      of stock under stock repurchase plans
              
              
              (1,162,521
              )
              
              
              (1,093,445
              )Purchase
      of cash flow hedge derivative instrument
              
              
              (786,000
              )
              
              
              -Net
      cash provided by financing activities
              
              
              22,571,996
              
              
              
              45,342,775
  5
 Table of Contents
  PAB
      BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)SIX
      MONTHS ENDED JUNE 30, 2008 AND 2007(UNAUDITED)Six
      Months Ended June 30,2008
              
              
              2007Net
      decrease in cash and due from banks
              
              $
              (4,931,582
              )
              
              $
              (1,905,677
              )Cash
      and due from banks at beginning of period
              
              
              29,451,700
              
              
              
              26,712,252Cash
      and due from banks at end of period
              
              $
              24,520,118
              
              
              $
              24,806,575SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
              
              $
              18,620,514
              
              
              $
              20,143,230Taxes
              
              $
              1,795,000
              
              
              $
              3,614,001NONCASH
      INVESTING AND FINANCING TRANSACTIONSDecrease
      in unrealized gains on securities available for sale
              
              $
              (2,408,547
              )
              
              $
              (2,930,063
              )Decrease
      in unrealized gain on cash flow hedge
              
              $
              (70,660
              )
              
              $
              (280,796
              )Transfer
      of loans to foreclosed assets
              
              $
              4,296,125
              
              
              $
              3,251,217See
      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
      OfficesSouth
      Georgia Market:Valdosta,
      Lowndes County
              
              
              3
      (including the main office)Lake
      Park, Lowndes County
              
              
              1Adel,
      Cook County
              
              
              1Bainbridge,
      Decatur County
              
              
              3Cairo,
      Grady County
              
              
              1Statesboro,
      Bulloch County
              
              
              2Baxley,
      Appling County
              
              
              1Hazlehurst,
      Jeff Davis County
              
              
              1North
      Georgia Market:McDonough,
      Henry County
              
              
              1Stockbridge,
      Henry County
              
              
              1Oakwood,
      Hall County
              
              
              1Athens,
      Oconee County
              
              
              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, 2008 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, 2007.
  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.
 
 In May
2008, the Company declared a 2% stock dividend on the Company’s common stock,
payable on July 15, 2008 to holders of record on June 30, 2008.  The
weighted average number of shares and all other share and per share data
included in this Report has been restated for all periods presented to reflect
this stock dividend.
 
 The
components used to calculate basic and diluted earnings per share for the three
months and six months ended June 30, 2008 and 2007 follow:
 
 Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Basic
      earnings per share:Net
      income
              
              $
              1,463,541
              
              
              $
              3,222,025
              
              
              $
              2,761,015
              
              
              $
              6,286,806Weighted
      average common shares outstanding
              
              
              9,328,241
              
              
              
              9,682,308
              
              
              
              9,346,466
              
              
              
              9,690,963Earnings
      per common share
              
              $
              0.16
              
              
              $
              0.33
              
              
              $
              0.30
              
              
              $
              0.65Diluted
      earnings per share:Net
      income
              
              $
              1,463,541
              
              
              $
              3,222,025
              
              
              $
              2,761,015
              
              
              $
              6,286,806Weighted
      average common shares outstanding
              
              
              9,328,241
              
              
              
              9,682,308
              
              
              
              9,346,466
              
              
              
              9,690,963Effect
      of dilutive stock options
              
              
              47,945
              
              
              
              163,127
              
              
              
              54,246
              
              
              
              169,448Weighted
      average diluted commonshares
    outstanding
              
              
              9,376,186
              
              
              
              9,845,435
              
              
              
              9,400,712
              
              
              
              9,860,411Earnings
      per common share
              
              $
              0.15
              
              
              $
              0.33
              
              
              $
              0.29
              
              
              $
              0.64
  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 for the use of certain
derivative and 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 the
floor 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.  In January 2008, the Company entered into a $25 million
notional amount, 3-year 5.75%/6.50% Prime rate collar contract and a $25 million
notional amount, 5-year 6.00%/7.25% Prime rate collar contract to hedge against
interest rate risk in a declining rate environment.  The premiums paid
for these contracts were $170,000 and $286,000, respectively.  InApril 2008, the Company
entered into a $25 million notional amount, 3-year cap contract tied to the
1-month London Interbank Offered Rate (“LIBOR”) with a strike rate of
2.975%  to further hedge against interest rate risk.  The
premium paid for this contract was $330,000.  These contracts are
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, 2008, the Company reported a $46,000 gain, net
of a $25,000 tax effect, in other comprehensive income related to its cash flow
hedges.  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, 2008 and June 30, 2007, there was no
ineffectiveness recognized in other non-interest expense attributable to the
Company’s cash flow hedges.  A summary of the Company’s derivative
financial instruments at June 30, 2008 is shown in the following
table:
 
 Weighted-AverageNotional
                amount
              
              
              Floor
                rate
              
              
              Cap
                rate
              
              
              Maturity
      in
                months
              
              
              Estimated
      fair value
                at
      June 30, 2008
              
              
              Net
      unrealized
                gainsDerivatives
      Designated as CashFlow
      Hedges:Hedging
      cash flows on prime-based
      floating rate loans
              
              $
              100,000,000
              
              
              
              7.06
              %
              
              
              6.88
              %
              
              
              28
              
              
              $
              1,239,000
              
              
              $
              603,000Hedging
      cash flows on floatingrate
      deposit accounts
              
              
              25,000,000
              
              
              
              -
              
              
              
              2.98
              %
              
              
              33
              
              
              
              633,000
              
              
              
              304,000Total
      Derivative Instruments
              
              $
              125,000,000
              
              
              
              7.06
              %
              
              
              5.58
              %
              
              
              29
              
              
              $
              1,872,000
              
              
              $
              907,000
 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, 2008, 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, 2008, there were
62,832 options outstanding that were granted under the 1994 Employee Stock
Option Plan.
 
 Under the
1999 Stock Option Plan (as amended), the Board of Directors can grant up to
1,428,000 stock options to directors, employees, consultants and advisors of the
Company.  At June 30, 2008, there were 601,525 shares available for
grant and there were 671,838 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, 2008, there was approximately $888,000 of unrecognized compensation cost
related to stock-based payments that is expected to be recognized over a
weighted-average period of 3.53 years.
 
 
 NOTE
6.  FAIR VALUE MEASUREMENTS
  On
January 1, 2008, the Company adopted FASB No. 157, Fair Value
Measurements.  FASB No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  FASB No. 157 applies to reported balances that are
required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
  FASB No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement.  Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability.  As a basis for considering market
participant assumptions in fair value measurements, FASB No. 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
  10
 Table of Contents
  Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
 
 As
discussed in Note 4, the Company uses floor and collar derivative contracts to
manage its interest rate risk.   The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves and implied volatilities.  The fair values of interest
rate options are determined using the market standard methodology
of discounting the future expected cash receipts that would occur if
variable interest rates fell below the strike rate of the floors or rise above
the strike price of the collar.  The variable interest rates used in the
calculation of projected receipts on the floor (cap) are based on an expectation
of future interest rates derived from observable market interest rate curves and
volatilities.  To comply with the provisions of FASB No. 157, the
Company incorporates credit valuation adjustments to appropriately reflect both
its own nonperformance risk and the respective counterparty’s nonperformance
risk in the fair value measurements.  In adjusting the fair value of
its derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as
collateral postings, thresholds, mutual puts, and guarantees.
 
 Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of June 30,
2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.  The Company does not have any fair value
measurements using significant unobservable inputs (Level 3) as of June 30,
2008.
 
 The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of June 30, 2008, aggregated by the level in the fair value
hierarchy within which those measurements fall.
 
 Quoted
      Prices
                in
      Active
                Markets
      for
                Identical
                Assets
                (Level
      1)
              
              
              Significant
                Other
                Observable
                Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
                Inputs
                (Level
      3)
              
              
              TotalAssetsInvestment
      securities available-for-sale
              
              $
              551,097
              
              
              $
              177,761,900
              
              
              $
              -
              
              
              $
              178,312,997Derivative
      financial instruments
              
              
              -
              
              
              
              1,872,153
              
              
              
              -
              
              
              
              1,872,153Total
      assets at fair value
              
              $
              551,097
              
              
              $
              179,634,053
              
              
              $
              -
              
              
              $
              180,185,150
 11
 Table of Contents
  CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
 Certain
statements set forth in this Report or incorporated herein by reference,
including, without limitation, matters discussed in Item 2 “Management's Discussion and Analysis
of Financial Condition and Results of Operation” beginning on this page,
are “forward-looking statements” within the meaning of the federal securities
laws, including, without limitation, statements regarding our outlook on
earnings, asset quality, projected growth, capital position, our plans regarding
our nonperforming assets, business opportunities in our markets and economic
conditions, 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) the general decline in the real estate and lending market,
particularly the market areas surrounding metropolitan Atlanta; (5) legislative
or regulatory changes, including changes in accounting standards and compliance
requirements, may adversely affect the businesses in which we are engaged; (6)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than we can; (7) our
ability to attract and retain key personnel can be affected by the increased
competition for experienced employees in the banking industry; (8) adverse
changes may occur in the bond and equity markets; (9) war or terrorist
activities may cause further deterioration in the economy or cause instability
in credit markets; (10) restrictions or conditions imposed by our regulators on
our operations may make it more difficult for us to achieve our goals; (11)
economic, governmental or other factors may prevent the projected population,
residential and commercial growth in the markets in which we operate; and (12)
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, 2007.  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.
 
 
 ITEM2.  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 2007 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 $1.2 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.
  12
 Table of Contents
  We
generally group our offices into three geographic regions for discussion
purposes due to the varying demographics of each market.  Our offices
in Lowndes, Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties are
collectively referred to as our “South Georgia” market.  Our offices
in Henry, Hall, Oconee, 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.”
 
 The table
below provides summary demographic data on each of our markets.
 
 Projected
                
                
                Median
      2007
                
                
                Household
                
                
                ProjectedMarket/
                
                Total
                
                
                Population
                
                
                Population
                
                
                Household
                
                
                Income
                
                
                Household
      IncomeCounty
                
                Population1
                
                
                Change
      (%)2
                
                
                Change
      (%)3
                
                
                Income
      ($)1
                
                
                Change
      (%)2
                
                
                Change
      (%)3Selected
      Georgia Counties:South
      Georgia:Appling
                
                
                17,928
                
                
                
                2.92
                
                
                
                2.32
                
                
                
                36,004
                
                
                
                19.00
                
                
                
                13.37Bulloch
                
                
                65,115
                
                
                
                16.31
                
                
                
                10.35
                
                
                
                36,690
                
                
                
                24.74
                
                
                
                16.22Cook
                
                
                16,824
                
                
                
                6.68
                
                
                
                4.43
                
                
                
                32,716
                
                
                
                19.72
                
                
                
                13.35Decatur
                
                
                29,981
                
                
                
                6.17
                
                
                
                3.97
                
                
                
                35,199
                
                
                
                22.60
                
                
                
                14.83Grady
                
                
                24,999
                
                
                
                5.66
                
                
                
                2.84
                
                
                
                34,565
                
                
                
                20.19
                
                
                
                13.23Jeff
      Davis
                
                
                13,042
                
                
                
                2.82
                
                
                
                1.79
                
                
                
                32,307
                
                
                
                19.91
                
                
                
                13.21Lowndes
                
                
                102,189
                
                
                
                10.94
                
                
                
                7.54
                
                
                
                40,606
                
                
                
                24.48
                
                
                
                15.44North
      Georgia:Forsyth
                
                
                158,051
                
                
                
                60.61
                
                
                
                36.71
                
                
                
                90,724
                
                
                
                33.41
                
                
                
                22.04Gwinnett
                
                
                800,680
                
                
                
                36.07
                
                
                
                20.47
                
                
                
                79,730
                
                
                
                31.74
                
                
                
                21.40Hall
                
                
                176,932
                
                
                
                27.04
                
                
                
                15.50
                
                
                
                56,358
                
                
                
                25.49
                
                
                
                16.44Henry
                
                
                196,080
                
                
                
                64.30
                
                
                
                33.63
                
                
                
                72,290
                
                
                
                26.15
                
                
                
                15.25Oconee
                
                
                33,600
                
                
                
                28.12
                
                
                
                17.22
                
                
                
                67,533
                
                
                
                23.43
                
                
                
                16.79State
      of Georgia
                
                
                9,654,958
                
                
                
                17.94
                
                
                
                11.69
                
                
                
                55,102
                
                
                
                29.09
                
                
                
                19.57Selected
      Florida Counties:Duval
                
                
                897,561
                
                
                
                15.24
                
                
                
                10.64
                
                
                
                50,508
                
                
                
                23.99
                
                
                
                17.89Marion
                
                
                328,656
                
                
                
                26.94
                
                
                
                18.57
                
                
                
                39,452
                
                
                
                23.18
                
                
                
                15.17St.
      Johns
                
                
                178,025
                
                
                
                44.58
                
                
                
                26.01
                
                
                
                63,436
                
                
                
                26.61
                
                
                
                18.69State
      of Florida
                
                
                18,893,813
                
                
                
                18.22
                
                
                
                12.80
                
                
                
                48,591
                
                
                
                25.10
                
                
                
                17.12National
      Total
                
                
                306,348,230
                
                
                
                8.86
                
                
                
                6.26
                
                
                
                53,154
                
                
                
                26.06
                
                
                
                17.59


1
              Based
      on actual 2007 market demographics provided by SNL
    Financial.
 2
              Based
      on actual changes from 2000 to 2007 provided by SNL
    Financial.
 3
              Estimated
      changes from 2007 to 2012 provided by SNL
  Financial.
  13
 Table of Contents
 
 FINANCIAL
CONDITION
 
 During
the six months ended June 30, 2008, our total assets increased $23.7 million, or
4.0% on an annualized basis, to $1.22 billion.  Our loan portfolio
increased $42.2 million, or 9.2% on an annualized basis, to $963.5 million at
June 30, 2008 from $921.3 million at December 31, 2007.  Total
deposits increased $16.4 million, or 3.4% on an annualized basis, to $996.6
million at June 30, 2008 from $980.1 million at December 31, 2007.  In
the beginning of 2008, we made the decision not to aggressively compete in our
markets for higher-priced deposits and tightened our liquidity to limit the
impact on our earnings.   Instead, we utilized brokered deposits
and advances from the Federal Home Loan Bank (the “FHLB”), which were at lower
rates than our in-market retail deposits, to fund our loan growth during the
first six months of 2008.  Because of this decision, brokered deposits
increased $52.8 million and advances from the FHLB increased $13.7 million
during the first six months of 2008.  However, since the first quarter
of 2008, the disparity between rates on brokered deposits and retail deposits
decreased, and in July 2008, we began an aggressive marketing campaign to
increase retail deposits in our markets, which we expect to continue for the
remainder of 2008.
 
 The
following table summarizes our loan and deposit portfolios classified by type
and market as of June 30, 2008.
 
 South
              
              
              NorthAs
      of June  30, 2008
              
              Georgia
              
              
              Georgia
              
              
              Florida
              
              
              Treasury
              
              
              Total(Dollars
      in Thousands)LoansCommercial
      and financial
              
              $
              32,339
              
              
              $
              47,450
              
              
              $
              2,262
              
              
              $
              36
              
              
              $
              82,087Agricultural
      (including loans secured by farmland)
              
              
              36,145
              
              
              
              4,691
              
              
              
              6,055
              
              
              
              -
              
              
              
              46,891Real
      estate – construction
              
              
              80,317
              
              
              
              205,864
              
              
              
              57,542
              
              
              
              670
              
              
              
              344,393Real
      estate - commercial
              
              
              91,899
              
              
              
              154,474
              
              
              
              25,208
              
              
              
              4,381
              
              
              
              275,962Real
      estate - residential
              
              
              131,317
              
              
              
              36,116
              
              
              
              8,934
              
              
              
              4,802
              
              
              
              181,169Installment
      loans to individuals and other loans
              
              
              13,635
              
              
              
              5,831
              
              
              
              179
              
              
              
              13,592
              
              
              
              33,237385,652
              
              
              
              454,426
              
              
              
              100,180
              
              
              
              23,481
              
              
              
              963,739Deferred
      loan fees and unearned interest, net
              
              
              270
              
              
              
              (184
              )
              
              
              (305
              )
              
              
              (20
              )
              
              
              (239
              )Total
      loans
              
              $
              385,922
              
              
              $
              454,242
              
              
              $
              99,875
              
              
              $
              23,461
              
              
              $
              963,500Percentage
      of total
              
              
              40.3
              %
              
              
              46.9
              %
              
              
              10.4
              %
              
              
              2.4
              %
              
              
              100.0
              %DepositsNoninterest-bearing
      demand
              
              $
              75,624
              
              
              $
              16,309
              
              
              $
              3,820
              
              
              $
              7,156
              
              
              $
              102,909Interest-bearing
      demand and savings
              
              
              259,652
              
              
              
              45,635
              
              
              
              30,431
              
              
              
              641
              
              
              
              336,359Time
      less than $100,000
              
              
              161,271
              
              
              
              42,628
              
              
              
              88,462
              
              
              
              620
              
              
              
              292,981Time
      greater than or equal to $100,000
              
              
              99,544
              
              
              
              32,849
              
              
              
              43,421
              
              
              
              100
              
              
              
              175,914Brokered
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              88,432
              
              
              
              88,432Total
      deposits
              
              $
              596,091
              
              
              $
              137,421
              
              
              $
              166,134
              
              
              $
              96,949
              
              
              $
              996,595Percentage
      of total
              
              
              59.8
              %
              
              
              13.8
              %
              
              
              16.7
              %
              
              
              9.7
              %
              
              
              100.0
              %
 
 In
addition to the geographic concentrations noted in the tables above, we had
approximately $77.4 million in loans secured by real estate in Florida to
customers of our South Georgia, North Georgia and Treasury offices.
 
 With
approximately 20% of our loan portfolio concentrated in residential construction
and development loans and an additional 19% of our loan portfolio in residential
mortgages, we continuously monitor and evaluate economic trends in our
residential real estate markets.  We have underwriting criteria and
internal controls to manage our credit risks.  However, we expect to
incur additional losses as a result of the continuing weakness in the
residential real estate markets around Atlanta and North Florida.  We
have established an allowance for loan losses based on our estimate of those
losses inherent in our loan portfolio as of June 30, 2008.  Additional
information on our asset quality and factors considered in assessing our
allowance for loan losses are included under the heading “Provision for Loan
Losses” in our “RESULTS OF OPERATIONS” discussion below.
  14
 Table of Contents
  During
the second half of 2007, finished housing inventories began to increase in
several of our markets in the Atlanta MSA; but we believe the housing
inventories are still within manageable levels given the growth projections for
those markets.  However, the supply of vacant, developed lots has
continued to increase as the number of new building permits and housing starts
have decreased.  The ability to sell these lots to investors or
builders at a fair value over the past year has been increasingly
difficult.  We believe it may take at least three to four years for
the market to absorb the lot inventories in some areas on the south side of the
Atlanta MSA.
 
 The table
below summarizes, from data available to the Company, the inventory supply
trends for housing and vacant developed lots for select counties on the south
side of the Atlanta MSA where we have a significant presence in residential real
estate construction and development loans and other real estate
owned.
 
 For
      the Quarter Ended
              Jun-08
              Mar-08
              Dec-07
              Sep-07
              Jun-07
              Jun-06
              Jun-05(#
      of Months Supply)Housing
      Inventory:Henry
      County
              13.1
              12.6
              11.5
              10.8
              10.1
              8.4
              9.3Clayton
      County
              9.9
              9.3
              9.5
              11.7
              13.1
              10.2
              5.4Newton
      County
              13.9
              12.3
              11.1
              9.8
              8.6
              9.0
              8.6South
      Fulton County
              9.2
              9.1
              8.0
              8.0
              8.0
              8.4
              8.7Vacant
      Developed
                Lots
      Inventory:Henry
      County
              153.0
              113.0
              86.0
              60.0
              46.0
              27.0
              24.0Clayton
      County
              91.0
              62.0
              53.0
              39.0
              30.0
              25.0
              15.0Newton
      County
              142.0
              93.0
              64.0
              45.0
              36.0
              22.0
              23.0South
      Fulton County
              83.0
              67.0
              57.0
              43.0
              35.0
              19.0
              21.0
 
 The table
below summarizes our loan portfolio by loan type as of the end of each of the
last five quarters.
 
 As
      of Quarter End
              
              Jun-08
              
              
              Mar-08
              
              
              Dec-07
              
              
              Sep-07
              
              
              Jun-07(Dollars
      in Thousands)Commercial
      and financial
              
              $
              82,087
              
              
              $
              83,343
              
              
              $
              78,730
              
              
              $
              78,556
              
              
              $
              78,048Agricultural
      (including loans securedby
      farmland)
              
              
              46,891
              
              
              
              42,573
              
              
              
              41,861
              
              
              
              42,608
              
              
              
              46,973Real
      estate - construction
              
              
              344,393
              
              
              
              363,392
              
              
              
              352,732
              
              
              
              339,019
              
              
              
              328,347Real
      estate - commercial
              
              
              275,962
              
              
              
              241,165
              
              
              
              248,272
              
              
              
              257,841
              
              
              
              270,978Real
      estate – residential
              
              
              181,169
              
              
              
              179,091
              
              
              
              174,157
              
              
              
              164,967
              
              
              
              161,404Installment
      loans to individuals andother
      loans
              
              
              33,237
              
              
              
              25,704
              
              
              
              26,011
              
              
              
              21,691
              
              
              
              20,246963,739
              
              
              
              935,268
              
              
              
              921,763
              
              
              
              904,682
              
              
              
              905,996Deferred
      loan fees and unearned interest, net
              
              
              (239
              )
              
              
              (341
              )
              
              
              (414
              )
              
              
              (600
              )
              
              
              (839
              )963,500
              
              
              
              934,927
              
              
              
              921,349
              
              
              
              904,082
              
              
              
              905,157Allowance
      for loan losses
              
              
              (14,303
              )
              
              
              (13,875
              )
              
              
              (12,906
              )
              
              
              (11,497
              )
              
              
              (11,342
              )$
              949,197
              
              
              $
              921,052
              
              
              $
              908,443
              
              
              $
              892,585
              
              
              $
              893,815  15
 Table of Contents
  The
percentage of loans outstanding by loan type at the indicated dates is presented
in the following table:
 
 As
      of Quarter End
              
              Jun-08
              
              
              Mar-08
              
              
              Dec-07
              
              
              Sep-07
              
              
              Jun-07Commercial
      and financial
              
              
              8.52
              %
              
              
              8.91
              %
              
              
              8.55
              %
              
              
              8.69
              %
              
              
              8.62
              %Agricultural
      (including loans secured by farmland)
              
              
              4.87
              %
              
              
              4.55
              %
              
              
              4.54
              %
              
              
              4.71
              %
              
              
              5.19
              %Real
      estate - construction
              
              
              35.74
              %
              
              
              38.87
              %
              
              
              38.28
              %
              
              
              37.50
              %
              
              
              36.27
              %Real
      estate - commercial
              
              
              28.64
              %
              
              
              25.80
              %
              
              
              26.95
              %
              
              
              28.52
              %
              
              
              29.94
              %Real
      estate - residential
              
              
              18.80
              %
              
              
              19.16
              %
              
              
              18.90
              %
              
              
              18.25
              %
              
              
              17.83
              %Installment
      loans to individuals and other loans
              
              
              3.45
              %
              
              
              2.75
              %
              
              
              2.82
              %
              
              
              2.40
              %
              
              
              2.24
              %100.02
              %
              
              
              100.04
              %
              
              
              100.04
              %
              
              
              100.07
              %
              
              
              100.09
              %Deferred
      loan fees and unearned interest, net
              
              
              -0.02
              %
              
              
              -0.04
              %
              
              
              -0.04
              %
              
              
              -0.07
              %
              
              
              -0.09
              %Total
      loans
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %Allowance
      for loan losses
              
              
              -1.48
              %
              
              
              -1.48
              %
              
              
              -1.40
              %
              
              
              -1.27
              %
              
              
              -1.25
              %Net
      loans
              
              
              98.52
              %
              
              
              98.52
              %
              
              
              98.60
              %
              
              
              98.73
              %
              
              
              98.75
              %
 
 Below is
a table showing the collateral distribution of our construction and development
and commercial real estate loan portfolios at the indicated dates.
 
 
 June
      30, 2008
              
              
              December
      31, 2007
              
              
              June
      30, 2007$
      Amount
              
              
              %
      to Total
              
              
              $
      Amount
              
              
              %
      to Total
              
              
              $
      Amount
              
              
              %
      to Total(Dollars
      in Thousands)Construction and
      development:Acquisition
      and development:1-4
      family residential
              
              $
              132,885
              
              
              
              38.6
              %
              
              $
              130,097
              
              
              
              36.9
              %
              
              $
              135,601
              
              
              
              41.3
              %Commercial
      and multi-family
              
              
              103,772
              
              
              
              30.1
              %
              
              
              105,718
              
              
              
              30.0
              %
              
              
              90,808
              
              
              
              27.7
              %Construction1-4
      family residential spec
              
              
              32,985
              
              
              
              9.6
              %
              
              
              40,392
              
              
              
              11.4
              %
              
              
              42,155
              
              
              
              12.9
              %1-4
      family residential pre-sold
              
              
              965
              
              
              
              0.3
              %
              
              
              1,604
              
              
              
              0.4
              %
              
              
              1,032
              
              
              
              0.3
              %1-4
      family residential other
              
              
              29,165
              
              
              
              8.5
              %
              
              
              26,694
              
              
              
              7.6
              %
              
              
              20,837
              
              
              
              6.4
              %Commercial
      owner-occupied
              
              
              5,123
              
              
              
              1.5
              %
              
              
              5,685
              
              
              
              1.6
              %
              
              
              5,692
              
              
              
              1.7
              %Commercial
      not owner-occupied
              
              
              25,233
              
              
              
              7.3
              %
              
              
              17,497
              
              
              
              5.0
              %
              
              
              9,947
              
              
              
              3.0
              %Hotel/motel
              
              
              496
              
              
              
              0.1
              %
              
              
              12,909
              
              
              
              3.7
              %
              
              
              12,202
              
              
              
              3.7
              %Multi-family
      properties
              
              
              12,540
              
              
              
              3.6
              %
              
              
              7,789
              
              
              
              2.2
              %
              
              
              8,353
              
              
              
              2.5
              %Special
      purpose property
              
              
              1,229
              
              
              
              0.4
              %
              
              
              2,337
              
              
              
              0.6
              %
              
              
              1,250
              
              
              
              0.4
              %Other
              
              
              -
              
              
              
              0.0
              %
              
              
              2,010
              
              
              
              0.6
              %
              
              
              470
              
              
              
              0.1
              %Total
      construction and development loans
              
              $
              344,393
              
              
              
              100.0
              %
              
              $
              352,732
              
              
              
              100.0
              %
              
              $
              328,347
              
              
              
              100.0
              %Percentage
      of total loans
              
              
              35.7
              %
              
              
              
              
              
              
              38.3
              %
              
              
              
              
              
              
              36.3
              %
 16
 Table of Contents
  June
      30, 2008
              
              
              December
      31, 2007
              
              
              June
      30, 2007$
      Amount
              
              
              %
      to Total
              
              
              $
      Amount
              
              
              %
      to Total
              
              
              $
      Amount
              
              
              %
      to TotalCommercial real
      estate:Owner-occupied:Office
              
              $
              37,100
              
              
              
              13.4
              %
              
              $
              34,291
              
              
              
              13.8
              %
              
              $
              31,386
              
              
              
              11.6
              %Retail
              
              
              22,775
              
              
              
              8.3
              %
              
              
              22,114
              
              
              
              8.9
              %
              
              
              23,413
              
              
              
              8.6
              %Other
              
              
              36,988
              
              
              
              13.4
              %
              
              
              34,263
              
              
              
              13.8
              %
              
              
              33,542
              
              
              
              12.4
              %Not
      owner-occupied:Office
              
              
              27,634
              
              
              
              10.0
              %
              
              
              29,210
              
              
              
              11.8
              %
              
              
              29,233
              
              
              
              10.8
              %Retail
              
              
              34,629
              
              
              
              12.5
              %
              
              
              36,780
              
              
              
              14.8
              %
              
              
              41,314
              
              
              
              15.2
              %Other
              
              
              26,883
              
              
              
              9.7
              %
              
              
              27,418
              
              
              
              11.0
              %
              
              
              25,759
              
              
              
              9.5
              %Other:Hotel/motel
              
              
              21,197
              
              
              
              7.7
              %
              
              
              11,399
              
              
              
              4.6
              %
              
              
              15,217
              
              
              
              5.6
              %Industrial
              
              
              4,716
              
              
              
              1.7
              %
              
              
              2,626
              
              
              
              1.1
              %
              
              
              2,719
              
              
              
              1.0
              %Multi-family
      properties
              
              
              26,655
              
              
              
              9.7
              %
              
              
              14,894
              
              
              
              6.0
              %
              
              
              22,098
              
              
              
              8.2
              %Special
      purpose property
              
              
              35,572
              
              
              
              12.9
              %
              
              
              34,876
              
              
              
              14.0
              %
              
              
              46,297
              
              
              
              17.1
              %Other
              
              
              1,813
              
              
              
              0.7
              %
              
              
              401
              
              
              
              0.2
              %
              
              
              -
              
              
              
              0.0
              %Total
      commercial real estate loans
              
              $
              275,962
              
              
              
              100.0
              %
              
              $
              248,272
              
              
              
              100.0
              %
              
              $
              270,978
              
              
              
              100.0
              %Percentage
      of total loans
              
              
              28.6
              %
              
              
              
              
              
              
              26.9
              %
              
              
              
              
              
              
              29.9
              %
 
 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-08
              
              
              Mar-08
              
              
              Dec-07
              
              
              Sep-07
              
              
              Jun-07(Dollars
      In Thousands)Noninterest-bearing
      demand
              
              $
              102,909
              
              
              $
              97,029
              
              
              $
              89,423
              
              
              $
              91,053
              
              
              $
              98,862Interest-bearing
      demand and savings
              
              
              336,359
              
              
              
              331,184
              
              
              
              354,743
              
              
              
              362,079
              
              
              
              349,720Time
      less than $100,000
              
              
              292,981
              
              
              
              298,799
              
              
              
              312,722
              
              
              
              315,532
              
              
              
              300,856Time
      greater than or equal to $100,000
              
              
              175,914
              
              
              
              179,316
              
              
              
              187,662
              
              
              
              172,529
              
              
              
              163,973Brokered
              
              
              88,432
              
              
              
              65,776
              
              
              
              35,599
              
              
              
              38,599
              
              
              
              32,436Total
      deposits
              
              $
              996,595
              
              
              $
              972,104
              
              
              $
              980,149
              
              
              $
              979,792
              
              
              $
              945,847
 
 The
percentage of deposits outstanding by deposit type at the indicated dates is
presented in the following table:
 
 As
      of Quarter End
              
              Jun-08
              
              
              Mar-08
              
              
              Dec-07
              
              
              Sep-07
              
              
              Jun-07Noninterest-bearing
      demand
              
              
              10.33
              %
              
              
              9.98
              %
              
              
              9.12
              %
              
              
              9.29
              %
              
              
              10.45
              %Interest-bearing
      demand and savings
              
              
              33.75
              %
              
              
              34.07
              %
              
              
              36.19
              %
              
              
              36.96
              %
              
              
              36.98
              %Time
      less than $100,000
              
              
              29.40
              %
              
              
              30.74
              %
              
              
              31.91
              %
              
              
              32.20
              %
              
              
              31.78
              %Time
      greater than or equal to $100,000
              
              
              17.65
              %
              
              
              18.44
              %
              
              
              19.15
              %
              
              
              17.61
              %
              
              
              17.36
              %Brokered
              
              
              8.87
              %
              
              
              6.77
              %
              
              
              3.63
              %
              
              
              3.94
              %
              
              
              3.43
              %Total
      deposits
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
              
              
              100.00
              %
 
 RESULTS
OF OPERATIONS
 
 Net
income for the three months ended June 30, 2008 was $1.5 million, or $0.15 per
diluted share, as compared to $3.2 million, or $0.33 per diluted share, during
the same period in 2007.  The $1.7 million, or 54.6%, decrease in net
income is the net result of a $2.1 million decrease in net interest income and
an $850,000 increase in the provision for loan losses, offset by
a  $213,000 increase in other income, a $17,000 decrease in other
expenses and a $958,000 decrease in income tax expense.  Our return on
average assets (“ROA”) and return on average equity (“ROE”) for the three months
ended June 30, 2008 were 0.49% and 5.96%, respectively, compared to a 1.12% ROA
and a 13.10% ROE for the same period in 2007.
  17
 Table of Contents
  Net
income for the six months ended June 30, 2008 was $2.8 million, or $0.29 per
diluted share, as compared to $6.3 million, or $0.64 per diluted share, during
the same period in 2007.  The $3.5 million, or 56.1%, decrease in net
income is the net result of a $3.4 million decrease in net interest income, a
$2.1 million increase in the provision for loan losses and a $342,000 increase
in other expenses, offset by a $377,000 increase in other income and a $1.9
million decrease in income tax expense.  Our ROA and ROE for the six
months ended June 30, 2008 were 0.46% and 5.60%, respectively, compared to a
1.11% ROA and a 12.93% ROE for the same period in 2007.
 
 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, 2008, our net interest
income on a taxable-equivalent basis was $9.0 million, an 18.7% decrease from
the $11.1 million in net interest income for the second quarter of
2007.  The decrease in net interest income is due to a $3.9 million
decrease in interest income offset by a $1.8 million decrease in interest
expense.  During the second quarter of 2008, our average earning
assets were 4.5% higher compared to the same period in 2007, and the average
balances of our interest-bearing liabilities increased by 6.4% to fund the asset
growth.  A portion of the decrease in interest income is due to an
increase in nonaccrual loans, causing approximately $804,000 in interest income
to not be recognized during the second quarter of 2008, compared to $91,000 in
interest income forgone during the same period in 2007.  The average
yield on our earning assets decreased 169 basis points from 7.93% for the second
quarter of 2007, to 6.24% for the second quarter of 2008.  However,
the average rates paid for our funds only decreased 97 basis points from 4.40%
for the second quarter of 2007, to 3.43% for the second quarter of
2008.  As a result, our net interest spread declined by 72 basis
points from 3.53% in the second quarter of 2007, to 2.81% for the same period in
2008.
 
 For the
six months ended June 30, 2008, our net interest income on a taxable-equivalent
basis was $18.6 million, a 15.4% decrease from the $21.9 million in net interest
income for the same period in 2007.  The decrease in net interest
income is due primarily to the same factors described above for the quarterly
results.   Interest income not recognized due to nonaccrual loans
totaled $1.6 million for the first six months of 2008, compared to $183,000 in
interest income forgone during the same period in 2007.
 
 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 2008 was 3.20%, 90 basis points lower than the 4.10% recorded for the second
quarter of 2007.  The reduction in short-term interest rates during
the fourth quarter of 2007 and first quarter of 2008 caused our earning assets
to re-price downwards faster than our interest-bearing liabilities re-priced
downwards.  The reduction of interest income due to our nonperforming
assets also negatively impacted the net interest margin by 28 basis points
during the second quarter of 2008, which was consistent with the 28 basis point
impact in the first quarter of 2008, but was significantly higher than the three
basis point impact in the second quarter of 2007.  We do not expect
our net interest margin to materially improve over the next few quarters
considering the increase in nonperforming assets, the interest rate environment
and the narrowing spreads on our earning assets.
  18
 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, 2008
and 2007.  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,
              
              
              
              
              2008
              
              
              
              
              
              
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              Income/
              
              
              Yield/
              
              
              Average
              
              
              Income/
              
              
              Yield/Balance
              
              
              Expense
              
              
              Rate
              
              
              Balance
              
              
              Expense
              
              
              Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
              
              $
              943,391
              
              
              $
              15,140
              
              
              
              6.45
              %
              
              $
              876,982
              
              
              $
              18,712
              
              
              
              8.56
              %Investment
      securities:Taxable
              
              
              143,982
              
              
              
              1,902
              
              
              
              5.31
              %
              
              
              162,827
              
              
              
              2,085
              
              
              
              5.14
              %Nontaxable
              
              
              33,882
              
              
              
              516
              
              
              
              6.13
              %
              
              
              30,370
              
              
              
              457
              
              
              
              6.04
              %Other
      short-term investments
              
              
              15,845
              
              
              
              83
              
              
              
              2.10
              %
              
              
              17,747
              
              
              
              251
              
              
              
              5.67
              %Total
      interest-earning assets
              
              $
              1,137,100
              
              
              $
              17,641
              
              
              
              6.24
              %
              
              $
              1,087,926
              
              
              $
              21,505
              
              
              
              7.93
              %Interest-bearing
      liabilities:Demand
      deposits
              
              $
              292,848
              
              
              $
              1,339
              
              
              
              1.84
              %
              
              $
              311,097
              
              
              $
              2,819
              
              
              
              3.63
              %Savings
      deposits
              
              
              36,168
              
              
              
              53
              
              
              
              0.59
              %
              
              
              37,986
              
              
              
              150
              
              
              
              1.59
              %Time
      deposits
              
              
              556,630
              
              
              
              6,070
              
              
              
              4.39
              %
              
              
              484,208
              
              
              
              6,057
              
              
              
              5.02
              %FHLB
      advances
              
              
              97,511
              
              
              
              928
              
              
              
              3.83
              %
              
              
              90,512
              
              
              
              1,038
              
              
              
              4.60
              %Notes
      payable
              
              
              10,310
              
              
              
              113
              
              
              
              4.40
              %
              
              
              10,310
              
              
              
              182
              
              
              
              7.08
              %Other
      short-term borrowings
              
              
              14,205
              
              
              
              95
              
              
              
              2.69
              %
              
              
              13,208
              
              
              
              140
              
              
              
              4.26
              %Total
      interest-bearing liabilities
              
              $
              1,007,672
              
              
              $
              8,598
              
              
              
              3.43
              %
              
              $
              947,321
              
              
              $
              10,386
              
              
              
              4.40
              %Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              2.81
              %
              
              
              
              
              
              
              
              
              
              
              3.53
              %Net
      interest income
              
              
              
              
              
              $
              9,043
              
              
              
              
              
              
              
              
              
              
              $
              11,119Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              3.20
              %
              
              
              
              
              
              
              
              
              
              
              4.10
              %
  19
 Table of Contents
  For
      the Six Months Ended June 30,
              
              
              
              
              2008
              
              
              
              
              
              
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              Income/
              
              
              Yield/
              
              
              Average
              
              
              Income/
              
              
              Yield/Balance
              
              
              Expense
              
              
              Rate
              
              
              Balance
              
              
              Expense
              
              
              Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
              
              $
              936,720
              
              
              $
              31,797
              
              
              
              6.83
              %
              
              $
              855,644
              
              
              $
              36,396
              
              
              
              8.58
              %Investment
      securities:Taxable
              
              
              147,577
              
              
              
              3,895
              
              
              
              5.31
              %
              
              
              160,099
              
              
              
              4,098
              
              
              
              5.16
              %Nontaxable
              
              
              33,513
              
              
              
              1,020
              
              
              
              6.12
              %
              
              
              29,855
              
              
              
              895
              
              
              
              6.05
              %Other
      short-term investments
              
              
              11,471
              
              
              
              136
              
              
              
              2.38
              %
              
              
              27,011
              
              
              
              721
              
              
              
              5.38
              %Total
      interest-earning assets
              
              $
              1,129,281
              
              
              $
              36,848
              
              
              
              6.56
              %
              
              $
              1,072,609
              
              
              $
              42,110
              
              
              
              7.92
              %Interest-bearing
      liabilities:Demand
      deposits
              
              $
              299,377
              
              
              $
              3,265
              
              
              
              2.19
              %
              
              $
              304,578
              
              
              $
              5,409
              
              
              
              3.25
              %Savings
      deposits
              
              
              35,755
              
              
              
              129
              
              
              
              0.72
              %
              
              
              37,788
              
              
              
              298
              
              
              
              1.59
              %Time
      deposits
              
              
              545,096
              
              
              
              12,485
              
              
              
              4.61
              %
              
              
              478,909
              
              
              
              11,773
              
              
              
              4.96
              %FHLB
      advances
              
              
              94,983
              
              
              
              1,859
              
              
              
              3.93
              %
              
              
              90,313
              
              
              
              2,089
              
              
              
              4.67
              %Notes
      payable
              
              
              10,310
              
              
              
              281
              
              
              
              5.48
              %
              
              
              10,310
              
              
              
              362
              
              
              
              7.08
              %Other
      short-term borrowings
              
              
              16,311
              
              
              
              264
              
              
              
              3.26
              %
              
              
              11,168
              
              
              
              238
              
              
              
              4.29
              %Total
      interest-bearing liabilities
              
              $
              1,001,832
              
              
              $
              18,283
              
              
              
              3.67
              %
              
              $
              933,066
              
              
              $
              20,169
              
              
              
              4.36
              %Interest
      rate spread
              
              
              
              
              
              
              
              
              
              
              2.89
              %
              
              
              
              
              
              
              
              
              
              
              3.56
              %Net
      interest income
              
              
              
              
              
              $
              18,565
              
              
              
              
              
              
              
              
              
              
              $
              21,941Net
      interest margin
              
              
              
              
              
              
              
              
              
              
              3.31
              %
              
              
              
              
              
              
              
              
              
              
              4.13
              %
 
 Provision for Loan
Losses
 
 During
the second quarter of 2008, we provided $1.05 million to our allowance for loan
losses due to an increase in nonperforming loans and residential real estate
market conditions.  Additional provisions for loan losses in the
second half of 2008 may be warranted if, among other factors, further weakness
in real estate is observed in our markets, if our asset quality deteriorates
from current levels or if we attempt to aggressively liquidate our collateral on
these impaired loans under current market conditions.
 
 For the
year to date, we have charged-off $1.3 million in bad debts and we have
recovered $415,000 in previously charged-off loans.  The $853,000 in
net charge-offs for the year to date results in an annualized 0.18% ratio of net
charge-offs to average loans, which is higher than our 2007 net charge-off ratio
of 0.10% and our five-year average net charge-off ratio of 0.10%.
 
 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 loans and nonperforming loans, and an assessment based on
environmental factors applied to other homogenous groups of otherwise performing
loans.
  20
 Table of Contents
  The
environmental factors considered in developing our loss measurements
include:
 ·
              lending
      policies and procedures, including changes in underwriting standards and
      collection, charge-off and recovery
practices:
 ·
              changes
      in international, national, regional and local economic and business
      conditions that affect the collectibility of the
  portfolio;
 ·
              changes
      in the nature and volume of the loan
portfolio;
 ·
              experience,
      ability, and depth of lending management and other relevant
      staff;
 ·
              levels
      of and trends in delinquencies and impaired
  loans;
 ·
              changes
      in the quality of our loan review
system;
 ·
              value
      of underlying collateral for collateral-dependent
  loans;
 ·
              existence
      and effect of any concentrations of credit, and changes in the level of
      such concentrations; and
 ·
              other
      external factors such as competition and legal and regulatory
      requirements.
 
 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.
 
 Our
nonperforming loans increased $39.2 million, from $11.4 million at December 31,
2007 to $50.6 million at June 30, 2008, due primarily to the adverse economic
and market conditions in our Atlanta and Athens, Georgia markets and our
Jacksonville, Florida market.  As a percentage of total loans,
nonperforming loans increased 246 basis points to 5.25% at June 30, 2008 from
1.24% at December 31, 2007.  Two relationships totaling $20.3 million
accounted for 40.3% of total nonperforming loans at
quarter-end.  Approximately 84.1% of the loans on nonaccrual status at
June 30, 2008 were construction and development loans, and these loans
represented approximately 10.0% of our total portfolio of construction and
development loans.  The underlying collateral on the nonperforming
loans consists of (1) 1,023 acres of undeveloped land in six parcels zoned for
residential development with a total carrying value of $11.2 million, or $11,000
per acre on average, (2) 614 residential lots with a total carrying value of
$19.4 million, or $31,600 per lot on average, (3) 65 residential houses with a
total carrying value of $9.7 million, or $150,000 per house on average, and (4)
20 commercial properties with a total carrying value of $9.4 million, or
$467,900 per property on average.  The table below summarizes our
levels of nonperforming loans and the level of reserves allocated to those loans
over the past five quarters.
 
 As
      of Quarter End
              
              Jun-08
              
              
              Mar-08
              
              
              Dec-07
              
              
              Sep-07
              
              
              Jun-07(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
              
              $
              40,464
              
              
              $
              26,090
              
              
              $
              11,405
              
              
              $
              5,185
              
              
              $
              1,986Accruing
      loans which are contractually past due 90 days or more as to
      principal or interest payments
              
              
              332
              
              
              
              13
              
              
              
              37
              
              
              
              34
              
              
              
              27Troubled
      debt restructurings not included above
              
              
              9,808
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      nonperforming loans
              
              $
              50,604
              
              
              $
              26,103
              
              
              $
              11,442
              
              
              $
              5,219
              
              
              $
              2,013Total
      nonperforming loans as a percentage of total loans
              
              
              5.25
              %
              
              
              2.79
              %
              
              
              1.24
              %
              
              
              0.58
              %
              
              
              0.22
              %Specific
      Reserves (FAS 114)
              
              $
              6,222
              
              
              $
              2,241
              
              
              $
              1,577
              
              
              $
              408
              
              
              $
              -General
      Reserves (FAS 5)
              
              
              390
              
              
              
              4,578
              
              
              
              397
              
              
              
              301
              
              
              
              303Total
      reserves allocated to nonperforming loans
              
              $
              6,612
              
              
              $
              6,819
              
              
              $
              1,974
              
              
              $
              709
              
              
              $
              303Total
      reserves allocated as a percentage of nonperforming loans
              
              
              13.07
              %
              
              
              26.12
              %
              
              
              17.25
              %
              
              
              13.59
              %
              
              
              15.07
              %
 21
 Table of Contents
  Total
loans past due 30-89 days and not categorized as a nonperforming loan amounted
to $6.0 million, or 0.63% of total loans at June 30, 2008, a 129 basis point
decrease compared to a 1.92% ratio at December 31, 2007.  The decrease
in this category is due primarily to the migration of most of those loans to
nonaccrual status or other real estate through workout
situations.  Approximately 46.3% of the loans past due 30-89 days at
June 30, 2008 were construction and development loans, and these loans
represented approximately 0.8% of our total portfolio of construction and
development loans.
 
 Our
foreclosed assets increased $2.4 million in the first six months of 2008, from
$6.4 million at December 31, 2007 to $8.8 million at June 30,
2008.  Due to economic conditions in the Atlanta area, some builders
and developers have been unable to satisfy their obligations to us and we have
foreclosed on their collateral.  The foreclosed properties held at
June 30, 2008 include (1) 88 acres of undeveloped land in three parcels zoned
for residential development with a total carrying value of $1.8 million, or
$20,600 per acre on average, (2) 61 residential lots with a total carrying value
of $1.7 million, or $27,200 per lot on average, (3) 18 residential houses with a
total carrying value of $3.2 million, or $175,000 per house on average, and (4)
six commercial properties with a total carrying value of $2.2 million, or
$359,800 per property on average.
 
 The
following table summarizes our nonperforming assets by type and market as of
June 30, 2008.
 
 North
      Georgia
              
              
              South
      Georgia
              
              
              Florida
              
              
              Treasury
              
              
              Total(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
              
              $
              33,580
              
              
              $
              1,305
              
              
              $
              5,579
              
              
              $
              -
              
              
              $
              40,464Accruing
      loans which are contractually past due90 days or more as to
      principal or interest payments
              
              
              324
              
              
              
              -
              
              
              
              -
              
              
              
              8
              
              
              
              332Troubled
      debt restructurings not included above
              
              
              9,340
              
              
              
              468
              
              
              
              -
              
              
              
              -
              
              
              
              9,808Foreclosed
      assets
              
              
              8,311
              
              
              
              481
              
              
              
              -
              
              
              
              -
              
              
              
              8,792Total
      nonperforming assets
              
              $
              51,555
              
              
              $
              2,254
              
              
              $
              5,579
              
              
              $
              8
              
              
              $
              59,396
 
 In
addition to our nonperforming loans discussed above, we have identified
$2.8 million in potential problem loans as of June 30,
2008.  These are construction and land development loans that were
past due 30 to 89 days at quarter-end.  Potential problem loans are
loans where known credit problems of the borrowers causes management to doubt
the ability of such borrowers to comply with the present repayment
terms.  This may result in classifying of such loans as nonperforming
in future periods.
  22
 Table of Contents
  Other
Income
 A summary
of noninterest income follows:
 
 Three
      Months Ended June 30,
              
              
              
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              Pct.
      Chg.
              
              
              2008
              
              
              2007
              
              
              Pct.
      Chg.(Dollars
      in Thousands)Noninterest
      income:Service
      charges on deposit accounts
              
              $
              978
              
              
              $
              905
              
              
              
              8.1
              %
              
              $
              1,883
              
              
              $
              1,741
              
              
              
              8.2
              %Mortgage
      origination fees
              
              
              216
              
              
              
              90
              
              
              
              140.0
              %
              
              
              422
              
              
              
              172
              
              
              
              145.3
              %ATM/debit
      card fee income
              
              
              174
              
              
              
              161
              
              
              
              8.1
              %
              
              
              349
              
              
              
              314
              
              
              
              11.1
              %Securities
      transactions, net
              
              
              17
              
              
              
              (38
              )
              
              
              144.7
              %
              
              
              200
              
              
              
              135
              
              
              
              48.1
              %Earnings
      on bank-owned life insurance
              
              
              105
              
              
              
              102
              
              
              
              2.9
              %
              
              
              210
              
              
              
              201
              
              
              
              4.5
              %Gain
      (loss) on disposal of assets
              
              
              (42
              )
              
              
              6
              
              
              
              -800.0
              %
              
              
              (108
              )
              
              
              (7
              )
              
              
              -1442.9
              %Other
      noninterest income
              
              
              124
              
              
              
              133
              
              
              
              -6.8
              %
              
              
              259
              
              
              
              282
              
              
              
              -8.2
              %Total
      noninterest income
              
              $
              1,572
              
              
              $
              1,359
              
              
              
              15.7
              %
              
              $
              3,215
              
              
              $
              2,838
              
              
              
              13.3
              %Noninterest
      income (annualized) as apercentage of average
      assets
              
              
              0.52
              %
              
              
              0.48
              %
              
              
              
              
              
              
              0.54
              %
              
              
              0.50
              %
 
 Compared
to the same periods in 2007, service charges on deposit accounts increased
during the three months and six months ended June 30, 2008 due to a net increase
in NSF and overdraft fees.  We tightened our policy on waiving these
fees for customers, which has resulted in a lower percentage of waived overdraft
and NSF fees.  Our basic service charge fee income on deposit accounts
remained stable from the first six months of 2007 to the first six months of
2008 as we have not changed our fee schedules and we continue to offer a free
checking product with no monthly service fees.
 
 Mortgage
origination fees increased from the first six months of 2007 to the first six
months of 2008 as we hired new mortgage originators to replace several lenders
lost in 2006 and 2007 due to unexpected turnover.
 
 Fee
income from ATM and debit cards increased as the volume of point-of-sale
transactions continues to increase.  However, we have begun to offer a
no-fee ATM deposit product in certain markets for competitive reasons, which may
reduce our ATM fee income opportunities going forward.
 
 During
the first six months of 2008, we incurred a loss of $100,000 on the sale of
foreclosed real estate and an $8,000 loss on the disposal of an ATM
machine.  This was compared to a loss of $7,000 on the sale of two
parcels of foreclosed real estate in the first six months of
2007.
  23
 Table of Contents
  Other
Expenses
 A summary
of noninterest expense follows:
 
 Three
      Months Ended
                June
      30,
              
              
              
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              Pct.
      Chg.
              
              
              2008
              
              
              2007
              
              
              Pct.
      Chg.(Dollars
      in Thousands)Noninterest
      expenses:Salaries
      and wages
              
              $
              3,921
              
              
              $
              4,114
              
              
              
              -4.7
              %
              
              $
              8,157
              
              
              $
              8,265
              
              
              
              -1.3
              %Deferred
      loan cost
              
              
              (468
              )
              
              
              (534
              )
              
              
              -12.4
              %
              
              
              (856
              )
              
              
              (1,005
              )
              
              
              -14.8
              %Employee
      benefits
              
              
              1,072
              
              
              
              994
              
              
              
              7.8
              %
              
              
              2,236
              
              
              
              2,090
              
              
              
              7.0
              %Net
      occupancy expense of premises
              
              
              648
              
              
              
              563
              
              
              
              15.1
              %
              
              
              1,248
              
              
              
              1,099
              
              
              
              13.6
              %Furniture
      and equipment expense
              
              
              522
              
              
              
              584
              
              
              
              -10.6
              %
              
              
              1,046
              
              
              
              1,163
              
              
              
              -10.1
              %Advertising
      and business development
              
              
              126
              
              
              
              149
              
              
              
              -15.4
              %
              
              
              308
              
              
              
              327
              
              
              
              -5.8
              %Supplies
      and printing
              
              
              102
              
              
              
              119
              
              
              
              -14.3
              %
              
              
              212
              
              
              
              253
              
              
              
              -16.2
              %Telephone
      and internet charges
              
              
              211
              
              
              
              148
              
              
              
              42.6
              %
              
              
              413
              
              
              
              295
              
              
              
              40.0
              %Postage
      and courier
              
              
              140
              
              
              
              145
              
              
              
              -3.4
              %
              
              
              302
              
              
              
              304
              
              
              
              -0.7
              %Legal
      and accounting fees
              
              
              102
              
              
              
              134
              
              
              
              -23.9
              %
              
              
              214
              
              
              
              242
              
              
              
              -11.6
              %Director
      fees and expenses
              
              
              154
              
              
              
              81
              
              
              
              90.1
              %
              
              
              328
              
              
              
              211
              
              
              
              55.5
              %Service
      charges and fees
              
              
              139
              
              
              
              137
              
              
              
              1.5
              %
              
              
              314
              
              
              
              280
              
              
              
              12.1
              %Other
      noninterest expense
              
              
              522
              
              
              
              575
              
              
              
              -9.2
              %
              
              
              1,098
              
              
              
              1,155
              
              
              
              -4.9
              %Total
      noninterest expense
              
              $
              7,191
              
              
              $
              7,209
              
              
              
              -0.2
              %
              
              $
              15,020
              
              
              $
              14,679
              
              
              
              2.3
              %Noninterest
      expense as a percentageof average assets
      (annualized)
              
              
              2.39
              %
              
              
              2.50
              %
              
              
              
              
              
              
              2.52
              %
              
              
              2.60
              %
 
 Salaries
and wages expense and employee benefits were down for the first six months of
2008 due to a decrease in annual bonus and incentive
accruals.  Deferred loan costs, which are credits against salaries and
wages, decreased due to a decrease in loan volume.
 
 The
increase in occupancy expense is due to increased rental rates and common area
maintenance charges associated with leased properties.  The decrease
in furniture and equipment expenses is due to a reduction in depreciation
expense on several large pieces of operations equipment that became fully
depreciated during the third quarter of 2007.  We anticipate
depreciation expense to increase during the third quarter of 2008 as we made new
capital expenditures in the second quarter of 2008 to replace these
items.
 
 Advertising
and business development expenses, along with office supplies and printing
charges, decreased from the 2007 to 2008 due to cost-saving awareness and
efforts among our locations to reduce noninterest expenses.  The
increase in telephone and internet charges is due to the addition of redundant
lines for capacity and disaster recovery and rate increases from our service
providers beginning in January 2008.
 
 Director
fees and expenses increased 55.5% for the first six months of 2008 compared to
the same period in 2007 due to an increase for the first time in three years in
the fee structure of quarterly retainers, meeting fees and committee fees paid
to our directors.  We also incurred additional expenses for a director
strategic planning session held in March 2008.
 
 Service
charges and fees increased for the first six months of 2008 due to expenses
related to a new remote deposit product that we began offering in
2007.  These fees were nominal during the first quarter of 2007, as
the product was not fully implemented until the second quarter of
2007.
 
 
 Income Tax
Expense
 As a
percentage of net income before taxes, income tax expense was 33.3% and 34.4%
for the three-month periods ended June 30, 2008 and 2007,
respectively.  For the six-month periods ended June 30, 2008 and 2007,
income tax expense as a percentage of net income before taxes was 33.5% and
34.4%, respectively.  Since the first quarter of 2006, we have
invested in several affordable housing projects to receive State of Georgia low
income housing tax credits to help reduce our state income tax
expense.  The difference between the effective rate and the statutory
federal rate of 35% is due primarily to income earned on tax-exempt
municipalities and earnings on the cash value of our bank-owned life insurance
offset in part by state income tax expense.
  24
 Table of Contents
  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.
 
 At June
30, 2008, 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 16.7%, compared to 18.8% at December
31, 2007.  It is our policy to maintain a ratio of liquid assets to
total assets of at least 15%.
 
 During
the first six months of 2008, we funded the $42.2 million growth in loans and
the $18.4 million decrease in interest-bearing demand deposits by utilizing a
$13.5 million increase in noninterest-bearing demand deposits, a $21.3 million
increase in savings and time deposits, a decrease in our investment securities
by $16.5 million and an increase in our advances from the FHLB by $13.7
million.
 
 Contractual
Obligations
 Summarized
below are our contractual obligations as of June 30, 2008.
 
 Less
      than
              
              
              1
      to 3
              
              
              3
      to 5
              
              
              More
      thanContractual
      Obligations
              
              Total
              
              
              1
      year
              
              
              years
              
              
              years
              
              
              5
      years(Dollars
      In Thousands)Federal
      Home Loan Bank of Atlanta Advances
              
              $
              99,999
              
              
              $
              608
              
              
              $
              35,243
              
              
              $
              41,534
              
              
              $
              22,614Operating
      Lease Obligations
              
              
              1,973
              
              
              
              408
              
              
              
              670
              
              
              
              439
              
              
              
              456Guaranteed
      Preferred Beneficial Interests in
      Debentures
              
              
              10,310
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,310$
              112,282
              
              
              $
              1,016
              
              
              $
              35,913
              
              
              $
              41,973
              
              
              $
              33,380
 
 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, 2008 and
December 31, 2007 are as follows:
 
 Jun-08
              
              
              Dec-07Commitments
      to extend credit
              
              $
              152,870,000
              
              
              $
              154,113,000Standby
      letters of credit
              
              $
              4,102,000
              
              
              $
              4,239,000
 
 In June
2006, we entered into a $50 million notional amount, 3-year, 8.25% Prime rate
floor contract to hedge against interest rate risk in a declining rate
environment.  In January 2008, we entered into a $25 million notional
amount, 3-year 5.75%/6.50% Prime rate collar contract and a $25 million notional
amount, 5-year 6.00%/7.25% Prime rate collar contract and in April 2008, we
entered into a $25 million notional amount, 3-year 2.975% 1-month LIBOR cap
contract to further hedge against interest rate risk.  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, are well capitalized and are
approved by our Board of Directors.  Due to these factors, we feel our
credit risk exposure under these hedging arrangements at June 30, 2008 was not
material.
  25
 Table of Contents
  Stockholders’
Equity
 Stockholders’
equity represented 7.8% of total assets at June 30, 2008, a decrease compared to
8.2% at December 31, 2007.  Total stockholders’ equity has decreased
$2.0 million, or 2.1%, since December 31, 2007.  This decrease is
primarily the net result of  $2.8 million in earnings, less $2.2
million in cash dividends, a $1.6 million decrease in accumulated other
comprehensive gains and the repurchase and cancellation of  $1.2
million of common stock under our stock repurchase plan.  We paid a
$0.145 per common share cash dividend for the first quarter of 2008 and declared
a $0.095 per common share cash dividend for the second quarter of 2008, compared
to $0.145 per common share cash dividend paid for each of the first and second
quarters of 2007.  We also declared a 2% stock dividend in the second
quarter of 2008.  Due to a decline in net income, our dividend payout
ratios for the first and second quarters of 2008 were 102.39% and 59.33%,
respectively, compared to 45.02% and 42.66% for the first and second quarters of
2007.  In setting our dividend on a quarterly basis, we evaluate our
capital adequacy and the quality of our earnings, and we estimate our capital
requirements and our earnings outlook for the next year.  If our
actual operating results deteriorate significantly from our estimates, we may
have to further adjust our dividend level in future quarters.
 
 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, 2008, 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, 2008.
 
 MinimumCompany
              
              
              
              
              
              RegulatoryConsolidated
              
              
              Bank
              
              
              RequirementTotal
      Capital to Risk Weighted Assets
              
              
              11.1
              %
              
              
              11.1
              %
              
              
              8.0
              %Tier
      1 Capital to Risk Weighted Assets
              
              
              9.8
              %
              
              
              9.8
              %
              
              
              4.0
              %Tier
      1 Capital to Average Assets (Leverage Ratio)
              
              
              8.3
              %
              
              
              8.3
              %
              
              
              4.0
              %
 
 On
December 18, 2007, our Board authorized a stock repurchase program to repurchase
up to 200,000 shares of our common stock over the next twelve-month
period.  We have used cash on hand to repurchase our shares on the
open market and through private transactions.   During the second
quarter of 2008, we repurchased 16,750 shares at a total cost of
$229,000.  Although we do not intend to repurchase any additional
shares within the allotted time period, the programs will allow us to repurchase
our shares if opportunities arise through either the open market or privately
negotiated transactions at prices deemed appropriate by
management.  At June 30, 2008, there were 126,185 shares available to
be repurchased under the plan.  The expiration date for this plan is
December 18, 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 2007 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.
  26
 Table of Contents
  Allowance for Loan
Losses
 The
allowance for loan losses represents management’s estimate of losses inherent in
the existing loan portfolio.  The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged off, net of recoveries.  The allowance for loan losses
is determined based on management’s assessment of several factors including, but
not limited to, reviews and evaluations of specific loans, changes in the nature
and volume of the loan portfolio, current economic conditions and the related
impact on segments of the loan portfolio, historical loan loss experiences and
the level of classified and nonperforming loans.
 
 Loans are
considered impaired if, based on current information and events, it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement.  The measurement of impaired loans is based on either the
fair value of the underlying collateral, the present value of the future cash
flows discounted at the historical effective interest rate stipulated in the
loan agreement, or the estimated market value of the loan.  In
measuring the fair value of the collateral, management uses assumptions (e.g.,
discount rate) and methodologies (e.g., comparison to the recent selling price
of similar assets) consistent with those that would be utilized by unrelated
third parties.
 
 Management’s
assessment is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available.  Changes in various internal and external environmental
factors including, but not limited to, the financial condition of individual
borrowers, economic conditions, historical loss experience, or the condition of
the various markets in which collateral may be sold may affect the required
level of the allowance for loan losses and the associated provision for loan
losses.  Should these environmental factors change; a different amount
may be reported for the allowance for loan losses and the associated provision
for loan losses.
 
 Estimates of Fair
Value
 The
estimation of fair value is significant to a number of the Company’s assets,
including, but not limited to, investment securities, goodwill, other real
estate owned and other repossessed assets.  These are all recorded at
either fair value or at the lower of cost or fair value.  Fair values
are volatile and may be influenced by a number of
factors.  Circumstances that could cause estimates of the fair value
of certain assets and liabilities to change include a change in prepayment
speeds, discount rates or market interest rates.  Our estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined to be
necessary.
 
 Fair
values for most investment securities are based on quoted market
prices.  If quoted market prices are not available, fair values are
based on the quoted prices of similar instruments.  The fair values of
other real estate owned are typically determined based on appraisals by third
parties, less estimated costs to sell.
 
 Estimates
of fair value are also required in performing an impairment analysis of
goodwill.  The Company reviews goodwill for impairment on at least an
annual basis and whenever events or circumstances indicate the carrying value
may not be recoverable.  An impairment would be indicated if the
carrying value exceeds the fair value of a reporting unit.
 
 Recent
Accounting Pronouncements
 
 In
management’s opinion, there are no recent accounting pronouncements that have
had or will have had a material impact on our earnings or financial position as
of or for the quarter ended June 30, 2008.
 
 
 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.
  27
 Table of Contents
  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, 2008, our one-year
management-adjusted gap ratio of 0.85 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 1.09
at June 30, 2008.
 
 We have
reduced the level of asset-sensitivity on the Company’s balance sheet in an
effort to better mitigate our interest rate risk in an interest rate
decline.  We have accomplished this by conscientiously lengthening the
duration of our earning assets and shortening the duration of our deposits and
other borrowings.  Also, 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.  In
January 2008, we entered into a $25 million notional amount, 3-year 5.75%/6.50%
Prime rate collar contract and a $25 million notional amount, 5-year 6.00%/7.25%
Prime rate collar contract and in April 2008, we entered into a $25 million
notional amount, 3-year 2.975% 1-month LIBOR cap contract to further hedge
against interest rate risk in a declining rate environment.
 
 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
      DefinedRate
      Sensitive Assets (RSA)
              
              $
              560,537
              
              
              $
              592,525
              
              
              $
              661,830Rate Sensitive
      Liabilities (RSL)
              
              
              520,012
              
              
              
              634,823
              
              
              
              810,348RSA
      minus RSL (Gap)
              
              $
              40,525
              
              
              $
              (42,298
              )
              
              $
              (148,518
              )Gap
      Ratio (RSA/RSL)
              
              
              1.08
              
              
              
              0.93
              
              
              
              0.82Management-AdjustedRate
      Sensitive Assets (RSA)
              
              $
              576,224
              
              
              $
              619,968
              
              
              $
              710,549Rate Sensitive
      Liabilities (RSL)
              
              
              528,298
              
              
              
              650,677
              
              
              
              837,532RSA
      minus RSL (Gap)
              
              $
              47,926
              
              
              $
              (30,709
              )
              
              $
              (126,983
              )Gap
      Ratio (RSA/RSL)
              
              
              1.09
              
              
              
              0.95
              
              
              
              0.85
 28
 Table of Contents
  We use
simulation analysis to monitor changes in net interest income due to the impact
that changes in market interest rates have on our financial
instruments.  The simulation of rising, declining, and flat interest
rate scenarios allows us to monitor and adjust interest rate sensitivity to
minimize the impact of market interest rate swings.  The analysis of
the impact on net interest income over a twelve-month period is subjected to
increases or decreases in market rates on net interest income and is monitored
on a quarterly basis.  Our policy states that net interest income
cannot be reduced by more than 10% using this analysis.  As of June
30, 2008, the simulation model projected net interest income would increase
3.73% over the next year if market rates immediately rose by 200 basis points
and the model projected net interest income to decrease 4.27% over the next year
if market rates immediately fell by 100 basis points.  The model
projects net interest income to decrease 6.42% over the next year if market
rates immediately fell by 200 basis points, but we believe this scenario is
highly unlikely, given the current interest rate levels, and this scenario is
included in the table for illustrative purposes only.  Over the past
two years, we have seen lower volatility in our results due to our efforts to
neutralize our asset-sensitive balance sheet mix, to improve our asset/liability
modeling with updated behavioral assumptions for repricing and prepayment speeds
and to implement an off-balance sheet derivative hedging program.
 
 The
following table shows the results of these projections for net interest income
expressed as a percentage change over net interest income in a flat rate
scenario for both a gradual change in market interest rates over a twelve-month
period and an immediate change, or “shock”, in market interest
rates.
 
 Market
              Effect
      on Net Interest IncomeRate
      Change
              Gradual
              Immediate+300
      bps
              4.54%
              4.31%+200
      bps
              3.93%
              3.73%+100
      bps
              2.04%
              1.98%-100
      bps
              -3.82%
              -4.27%-200
      bps
              -5.94%
              -6.42%
 
 
 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 as of the end of the
period covered by this report in alerting them on a timely basis to material
information relating to the Company required to be included in the Company’s
reports filed or submitted under the Securities Exchange Act of
1934.  There have been no significant changes in the Company’s
internal control over financial reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 
 PART II.  OTHER INFORMATION
 
  ITEM
1.  LEGAL PROCEEDINGS
 
 None
   ITEM
1A.  RISK FACTORS
 
 There has
not been any material change in the risk factors disclosure from that contained
in the Company’s 2007 Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
  29
 Table of Contents
  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
              
              
              7,200
              
              
              
              13.91
              
              
              
              7,200
              
              
              
              135,735May
              
              
              9,550
              
              
              
              13.51
              
              
              
              9,550
              
              
              
              126,185June
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              126,185Total
              
              
              16,750
              
              
              $
              13.68
              
              
              
              16,750
              
              
              
              126,185
 
 1
              On
      December 18, 2007, the Board of Directors authorized a plan to repurchase
      up to 200,000 shares of the Company's common stock over the next twelve
      month period.  The plan will expire December 18,
      2008.
 
 
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 At the
annual meeting of stockholders held on May 20, 2008, three items were voted
upon.  The first proposal was for the election of five directors to
hold office until the 2011 annual meeting of shareholders and one director 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
      Against
              Votes
      WithheldR.
      Bradford Burnette (2011)
              6,737,643
              0
              662,975Michael
      H. Godwin (2011)
              7,258,588
              0
              142,030Kennith
      D. McLeod (2011)
              7,207,752
              0
              192,866Paul
      E. Parker (2011)
              7,268,891
              0
              131,727M.
      Burke Welsh, Jr. (2011)
              7,265,188
              0
              135,430James
      W. Godbee, Jr. (2010)
              7,267,899
              0
              132,719
 
 The above
directors were elected.
 
 The
following directors will continue in office:
 
 James B.
Lanier, Jr., Douglas W. McNeill , F. Ferrell Scruggs, Sr., Walter W. Carroll,
II, James L. Dewar, Jr., John E. Mansfield, Jr., Joe P. Singletary, Jr., David
K. Williams
 
 
 The
second proposal was for the approval of an amendment to delete Article VI of the
Company’s Articles of Incorporation.  The amendment would eliminate
the requirement of supermajority voting for mergers, consolidations, sales of
all or substantially all of the Company’s assets, removal of a member of the
Board of Directors and calling a special meeting of the
shareholders:
 
 Votes
      For
              Votes
      Against
              Votes
      Abstained
              Broker
      Non-Vote7,246,389
              135,679
              18,550
              0
 
 The
amendment to delete Article VI of the Company’s Articles of Incorporation was
approved.
  30
 Table of Contents
 
 The third
proposal was for the ratification of the appointment of Mauldin & Jenkins,
LLC as independent auditors for 2008:
 
 Votes
      For
              Votes
      Against
              Votes
      Abstained
              Broker
      Non-Vote7,349,614
              41,893
              9,110
              0
 
 The
selection of the independent auditors was ratified.
 
 
 ITEM5.  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
 
 
 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 11,
      2008
              By:
              /s/ M. Burke Welsh,
    Jr.M.
      Burke Welsh, Jr.President
      and Chief Executive Officer(principal
      executive officer of the registrant)Date:
              August 11,
      2008
              By:
              /s/ Donald J. Torbert,
      Jr.Donald
      J. Torbert, Jr.Executive
      Vice President and Chief Financial Officer(principal
      financial officer of the
registrant)




31