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 September 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 S No £





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


Large
accelerated filer £ Accelerated
filer S  Non-accelerated
filer £
Smaller reporting company £





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


Yes £ No S





The
number of shares outstanding of the registrant’s common stock at October 31,
2008 was 9,324,407 shares.










TABLEOF
CONTENTS





PagePART I
                            FINANCIAL INFORMATIONItem
      1.
                            Consolidated Financial StatementsStatements of Condition
                            
                            1Statements of Income (Loss)
                            
                            2Statements of Comprehensive Income (Loss)
                            
                            3Statements of Stockholders’ Equity
                            
                            4Statements of Cash Flows
                            
                            5Notes to Consolidated Financial
    Statements
                            
                            7Item
      2.
                            Management’s Discussion and Analysis of Financial Condition
      and
      Results of Operations
                            
                            13Item
      3.
                            Quantitative and Qualitative Disclosures About Market
      Risk
                            
                            30Item
      4.
                            Controls and Procedures
                            
                            32PART II
                            OTHER INFORMATIONItem
      1.
                            Legal Proceedings
                            
                            32Item
      1A.
                            Risk Factors
                            
                            32Item
      2.
                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                            
                            33Item
      3.
                            Defaults Upon Senior Securities
                            
                            34Item
      4.
                            Submission of Matters to a Vote of Security
      Holders
                            
                            34Item
      5.
                            Other Information
                            
                            34Item
      6.
                            Exhibits
                            
                            34SIGNATURES
                            
                            34


Table of Contents




PART
I.  FINANCIAL INFORMATION


Item1. Consolidated Financial Statements





PABBANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CONDITIONAS
      OF SEPTEMBER 30, 2008 AND DECEMBER 31,
2007





September
      30,
                    
                    
                    December
      31,2008
                    
                    
                    2007(UNAUDITED)ASSETSCash
      and due from banks
                    
                    $
                    19,178,306
                    
                    
                    $
                    29,451,700Interest-bearing
      deposits in other banks
                    
                    
                    22,058,633
                    
                    
                    
                    393,276Federal
      funds sold
                    
                    
                    7,248,143
                    
                    
                    
                    559,444Investment
      securities
                    
                    
                    172,115,629
                    
                    
                    
                    194,794,481Loans
                    
                    
                    982,570,958
                    
                    
                    
                    921,348,906Allowance
      for loan losses
                    
                    
                    (20,240,270
                    )
                    
                    
                    (12,905,938
                    )Net
      loans
                    
                    
                    962,330,688
                    
                    
                    
                    908,442,968Premises
      and equipment, net
                    
                    
                    19,431,903
                    
                    
                    
                    20,177,671Goodwill
                    
                    
                    5,984,604
                    
                    
                    
                    5,984,604Cash
      value of bank-owned life insurance policies
                    
                    
                    12,198,085
                    
                    
                    
                    11,881,384Foreclosed
      assets
                    
                    
                    11,971,830
                    
                    
                    
                    6,360,258Other
      assets
                    
                    
                    25,350,799
                    
                    
                    
                    20,625,156Total
      assets
                    
                    $
                    1,257,868,620
                    
                    
                    $
                    1,198,670,942LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
                    
                    $
                    101,417,154
                    
                    
                    $
                    89,423,571Interest-bearing
      demand and savings
                    
                    
                    262,723,327
                    
                    
                    
                    354,742,862Time
                    
                    
                    665,703,838
                    
                    
                    
                    535,982,585Total
      deposits
                    
                    
                    1,029,844,319
                    
                    
                    
                    980,149,018Federal
      funds purchased and securities sold under agreements to
      repurchase
                    
                    
                    8,834,884
                    
                    
                    
                    16,175,370Advances
      from the Federal Home Loan Bank of Atlanta
                    
                    
                    109,852,474
                    
                    
                    
                    86,297,705Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
                    
                    
                    10,310,000
                    
                    
                    
                    10,310,000Other
      liabilities
                    
                    
                    6,045,986
                    
                    
                    
                    8,062,877Total
      liabilities
                    
                    
                    1,164,887,663
                    
                    
                    
                    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
                    
                    
                    24,171,819
                    
                    
                    
                    22,792,940Retained
      earnings
                    
                    
                    68,279,001
                    
                    
                    
                    72,822,852Accumulated
      other comprehensive income (loss)
                    
                    
                    (686,928
                    )
                    
                    
                    843,115Total
      stockholders' equity
                    
                    
                    92,980,957
                    
                    
                    
                    97,675,972Total
      liabilities and stockholders' equity
                    
                    $
                    1,257,868,620
                    
                    
                    $
                    1,198,670,942





See
accompanying notes to consolidated financial statements.


1
 Table of Contents




PAB
      BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME (LOSS)THREE
      MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007(UNAUDITED)





Three
      Months
                        Ended
      September 30,
                      
                      
                      Nine
      Months
                        Ended
      September 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Interest
      incomeInterest
      and fees on loans
                      
                      $
                      15,390,664
                      
                      
                      $
                      19,243,282
                      
                      
                      $
                      47,187,488
                      
                      
                      $
                      55,639,658Interest
      and dividends on investment securities:Taxable
                      
                      
                      1,890,711
                      
                      
                      
                      2,052,386
                      
                      
                      
                      5,785,424
                      
                      
                      
                      6,150,338Nontaxable
                      
                      
                      329,017
                      
                      
                      
                      309,373
                      
                      
                      
                      992,107
                      
                      
                      
                      891,169Other
      interest income
                      
                      
                      69,502
                      
                      
                      
                      261,069
                      
                      
                      
                      205,470
                      
                      
                      
                      981,628Total
      interest income
                      
                      
                      17,679,894
                      
                      
                      
                      21,866,110
                      
                      
                      
                      54,170,489
                      
                      
                      
                      63,662,793Interest
      expenseInterest
      on deposits
                      
                      
                      7,262,644
                      
                      
                      
                      9,755,683
                      
                      
                      
                      23,141,670
                      
                      
                      
                      27,235,546Interest
      on Federal Home Loan Bank advances
                      
                      
                      986,325
                      
                      
                      
                      1,005,063
                      
                      
                      
                      2,844,695
                      
                      
                      
                      3,094,322Interest
      on other borrowings
                      
                      
                      210,658
                      
                      
                      
                      323,631
                      
                      
                      
                      755,909
                      
                      
                      
                      923,612Total
      interest expense
                      
                      
                      8,459,627
                      
                      
                      
                      11,084,377
                      
                      
                      
                      26,742,274
                      
                      
                      
                      31,253,480Net
      interest income
                      
                      
                      9,220,267
                      
                      
                      
                      10,781,733
                      
                      
                      
                      27,428,215
                      
                      
                      
                      32,409,313Provision
      for loan losses
                      
                      
                      7,300,000
                      
                      
                      
                      400,000
                      
                      
                      
                      9,550,000
                      
                      
                      
                      600,000Net
      interest income after provision for loan losses
                      
                      
                      1,920,267
                      
                      
                      
                      10,381,733
                      
                      
                      
                      17,878,215
                      
                      
                      
                      31,809,313Other
      incomeService
      charges on deposit accounts
                      
                      
                      930,643
                      
                      
                      
                      916,890
                      
                      
                      
                      2,813,370
                      
                      
                      
                      2,657,812Other
      fee income
                      
                      
                      407,758
                      
                      
                      
                      304,482
                      
                      
                      
                      1,302,408
                      
                      
                      
                      921,197Securities
      transactions, net
                      
                      
                      2,033
                      
                      
                      
                      49,174
                      
                      
                      
                      202,250
                      
                      
                      
                      184,009Gain
      (loss) on sale and write-down of other assets
                      
                      
                      (433,531
                      )
                      
                      
                      27,999
                      
                      
                      
                      (541,974
                      )
                      
                      
                      20,550Other
      noninterest income
                      
                      
                      174,148
                      
                      
                      
                      172,613
                      
                      
                      
                      520,010
                      
                      
                      
                      525,308Total
      other income
                      
                      
                      1,081,051
                      
                      
                      
                      1,471,158
                      
                      
                      
                      4,296,064
                      
                      
                      
                      4,308,876Other
      expensesSalaries
      and employee benefits
                      
                      
                      4,573,088
                      
                      
                      
                      4,698,504
                      
                      
                      
                      14,110,146
                      
                      
                      
                      14,048,867Occupancy
      expense of premises
                      
                      
                      655,180
                      
                      
                      
                      621,205
                      
                      
                      
                      1,902,695
                      
                      
                      
                      1,720,059Furniture
      and equipment expense
                      
                      
                      516,336
                      
                      
                      
                      588,564
                      
                      
                      
                      1,562,462
                      
                      
                      
                      1,751,808Other
      noninterest expense
                      
                      
                      1,765,767
                      
                      
                      
                      1,563,195
                      
                      
                      
                      4,955,459
                      
                      
                      
                      4,629,466Total
      other expenses
                      
                      
                      7,510,371
                      
                      
                      
                      7,471,468
                      
                      
                      
                      22,530,762
                      
                      
                      
                      22,150,200Income
      (loss) before income tax expense (benefit)
                      
                      
                      (4,509,053
                      )
                      
                      
                      4,381,423
                      
                      
                      
                      (356,483
                      )
                      
                      
                      13,967,989Income
      tax expense (benefit)
                      
                      
                      (1,648,774
                      )
                      
                      
                      1,523,496
                      
                      
                      
                      (257,219
                      )
                      
                      
                      4,823,256Net
      income (loss)
                      
                      $
                      (2,860,279
                      )
                      
                      $
                      2,857,927
                      
                      
                      $
                      (99,264
                      )
                      
                      $
                      9,144,733Earnings
      (loss) per common shareBasic
                      
                      $
                      (0.31
                      )
                      
                      $
                      0.30
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.95Diluted
                      
                      $
                      (0.32
                      )
                      
                      $
                      0.29
                      
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.93





See
accompanying notes to consolidated financial statements.


2
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)THREE
      MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007(UNAUDITED)


Three
      Months
                          Ended
      September 30,
                        
                        
                        Nine
      Months Ended
                          September
      30,2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Net
      income (loss)
                        
                        $
                        (2,860,279
                        )
                        
                        $
                        2,857,927
                        
                        
                        $
                        (99,264
                        )
                        
                        $
                        9,144,733Other
      comprehensive income (loss):Unrealized
      gain on cash flow hedge arising during the period, net of tax of $117,357
      and $218,386 for the quarter and $92,625 and $125,844 for the year to
      date
                        
                        
                        217,947
                        
                        
                        
                        405,574
                        
                        
                        
                        172,018
                        
                        
                        
                        217,320Unrealized
      holding gains (losses) on securities available for sale arising during the
      period, net of tax (benefit) of ($72,791) and $1,033,875 for the quarter
      and ($845,706) and $55,545 for the year to date
                        
                        
                        (135,184
                        )
                        
                        
                        1,920,056
                        
                        
                        
                        (1,570,599
                        )
                        
                        
                        103,158Reclassification
      adjustment for gains on securities available for sale included in net
      income, net of tax of $712 and $17,211for the quarter and $70,788 and
      $64,403 for the year to date
                        
                        
                        (1,321
                        )
                        
                        
                        (31,963
                        )
                        
                        
                        (131,462
                        )
                        
                        
                        (119,606
                        )81,442
                        
                        
                        
                        2,293,667
                        
                        
                        
                        (1,530,043
                        )
                        
                        
                        200,872Comprehensive
      income (loss)
                        
                        $
                        (2,778,837
                        )
                        
                        $
                        5,151,594
                        
                        
                        $
                        (1,629,307
                        )
                        
                        $
                        9,345,605





See
accompanying notes to consolidated financial statements.


3
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITYNINE
      MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED) AND YEAR ENDED DECEMBER 31,
      2007





Common
      Stock
                  
                  
                  Additional
      Paid-in
                  
                  
                  Retained
                  
                  
                  Accumulated
      Other 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
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (99,264
                  )
                  
                  
                  -
                  
                  
                  
                  (99,264
                  )Other
      comprehensive loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,530,043
                  )
                  
                  
                  (1,530,043
                  )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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  256,455
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  256,455Stock
      options exercised
                  
                  
                  3,516
                  
                  
                  
                  -
                  
                  
                  
                  35,980
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  35,980Balance,
      September 30, 2008
                  
                  
                  9,324,407
                  
                  
                  $
                  1,217,065
                  
                  
                  $
                  24,171,819
                  
                  
                  $
                  68,279,001
                  
                  
                  $
                  (686,928
                  )
                  
                  $
                  92,980,957





See
accompanying notes to consolidated financial statements.


4
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSNINE
      MONTHS ENDED SEPTEMBER 30, 2008 AND 2007(UNAUDITED)


Nine
      Months Ended September 30,2008
                        
                        
                        2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                        
                        $
                        (99,264
                        )
                        
                        $
                        9,144,733Adjustments to
      reconcile net income to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
                        
                        
                        1,284,092
                        
                        
                        
                        1,299,923Provision
      for loan losses
                        
                        
                        9,550,000
                        
                        
                        
                        600,000Net
      realized gain on securities transactions
                        
                        
                        (202,250
                        )
                        
                        
                        (184,009
                        )Gain
      (loss) on sale and write-down of other assets
                        
                        
                        541,974
                        
                        
                        
                        (20,550
                        )Stock-based
      compensation expense
                        
                        
                        256,455
                        
                        
                        
                        333,641Increase
      in cash value of bank-owned life insurance
                        
                        
                        (316,701
                        )
                        
                        
                        (303,522
                        )Decrease
      in deferred compensation accrual
                        
                        
                        (118,374
                        )
                        
                        
                        (235,777
                        )Decrease
      in retirement accruals
                        
                        
                        -
                        
                        
                        
                        (159,799
                        )Net
      change in taxes receivable and taxes payable
                        
                        
                        (2,296,220
                        )
                        
                        
                        (603,892
                        )Decrease
      in interest receivable
                        
                        
                        1,283,103
                        
                        
                        
                        417,515Increase
      (decrease) in interest payable
                        
                        
                        (219,823
                        )
                        
                        
                        183,047Net
      increase in prepaid expenses and other assets
                        
                        
                        (2,125,216
                        )
                        
                        
                        (155,142
                        )Net
      decrease in accrued expenses and other liabilities
                        
                        
                        (622,744
                        )
                        
                        
                        (543,570
                        )Net
      cash provided by operating activities
                        
                        
                        6,915,032
                        
                        
                        
                        9,772,598CASH
      FLOWS FROM INVESTING ACTIVITIESIncrease
      in interest-bearing deposits in other banks
                        
                        
                        (21,665,357
                        )
                        
                        
                        (64,128
                        )(Increase)
      decrease in federal funds sold
                        
                        
                        (6,688,699
                        )
                        
                        
                        7,854,722Purchase
      of debt securities
                        
                        
                        (44,991,251
                        )
                        
                        
                        (27,422,030
                        )Proceeds
      from sales of debt securities
                        
                        
                        36,459,026
                        
                        
                        
                        941,654Proceeds
      from calls of debt securities
                        
                        
                        20,102,927
                        
                        
                        
                        13,501,591Proceeds
      from maturities and paydowns of debt securities
                        
                        
                        10,273,137
                        
                        
                        
                        9,383,771Purchase
      of equity investments
                        
                        
                        (1,658,585
                        )
                        
                        
                        (59,892
                        )Redemption
      of equity investments
                        
                        
                        452,100
                        
                        
                        
                        753,035Net
      increase in loans
                        
                        
                        (71,888,615
                        )
                        
                        
                        (88,079,363
                        )Purchase
      of premises and equipment
                        
                        
                        (851,254
                        )
                        
                        
                        (938,660
                        )Proceeds
      from disposal of assets
                        
                        
                        2,804,092
                        
                        
                        
                        1,524,370Net
      cash used in investing activities
                        
                        
                        (77,652,479
                        )
                        
                        
                        (82,604,930
                        )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase in deposits
                        
                        
                        49,695,301
                        
                        
                        
                        71,308,608Net
      increase (decrease) in federal funds purchased andsecurities
      sold under repurchase agreements
                        
                        
                        (7,340,486
                        )
                        
                        
                        6,015,076Advances
      from the Federal Home Loan Bank
                        
                        
                        41,000,000
                        
                        
                        
                        47,500,000Payments
      on Federal Home Loan Bank advances
                        
                        
                        (17,445,231
                        )
                        
                        
                        (51,251,292
                        )Dividends
      paid
                        
                        
                        (3,532,990
                        )
                        
                        
                        (4,085,142
                        )Proceeds
      from the exercise of stock options
                        
                        
                        35,980
                        
                        
                        
                        594,784Acquisition
      of stock under stock repurchase plans
                        
                        
                        (1,162,521
                        )
                        
                        
                        (4,654,611
                        )Purchase
      of cash flow hedge derivative instrument
                        
                        
                        (786,000
                        )
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        60,464,053
                        
                        
                        
                        65,427,423





5
 Table of Contents




PAB
      BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)NINE
      MONTHS ENDED SEPTEMBER 30, 2008 AND 2007(UNAUDITED)


Nine
      Months Ended September 30,2008
                    
                    
                    2007Net
      decrease in cash and due from banks
                    
                    $
                    (10,273,394
                    )
                    
                    $
                    (7,404,909
                    )Cash
      and due from banks at beginning of period
                    
                    
                    29,451,700
                    
                    
                    
                    26,712,252Cash
      and due from banks at end of period
                    
                    $
                    19,178,306
                    
                    
                    $
                    19,307,343SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                    
                    $
                    26,962,097
                    
                    
                    $
                    31,070,433Taxes
                    
                    $
                    2,044,000
                    
                    
                    $
                    4,503,001NONCASH
      INVESTING AND FINANCING TRANSACTIONSIncrease
      in unrealized losses on securities available for sale
                    
                    $
                    (2,618,555
                    )
                    
                    $
                    (25,306
                    )Increase
      in unrealized gain on cash flow hedge
                    
                    $
                    264,644
                    
                    
                    $
                    343,164Transfer
      of loans to foreclosed assets
                    
                    $
                    8,450,895
                    
                    
                    $
                    4,192,307See
      accompanying notes to consolidated financial statements.


6
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
      1.
            NATURE
      OF BUSINESS





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





Banking Locations
                          
                          Number of 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 nine
months ended September 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.





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




NOTE
      3.
            EARNINGS
      PER COMMON SHARE





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





The
components used to calculate basic and diluted earnings per share for the three
months and nine months ended September 30, 2008 and 2007 follow:





Three
      Months Ended September  30,
                
                
                Nine
      Months Ended September 30,2008
                
                
                2007
                
                
                2008
                
                
                2007Basic
      earnings (loss) per share:Net
      income (loss)
                
                $
                (2,860,279
                )
                
                $
                2,857,927
                
                
                $
                (99,264
                )
                
                $
                9,144,733Weighted
      average common shares outstanding
                
                
                9,324,407
                
                
                
                9,594,060
                
                
                
                9,339,059
                
                
                
                9,658,307Earnings
      (loss) per common share
                
                $
                (0.31
                )
                
                $
                0.30
                
                
                $
                (0.01
                )
                
                $
                0.95Diluted
      earnings (loss) per share:Net
      income (loss)
                
                $
                (2,860,279
                )
                
                $
                2,857,927
                
                
                $
                (99,264
                )
                
                $
                9,144,733Weighted
      average common shares outstanding
                
                
                9,324,407
                
                
                
                9,594,060
                
                
                
                9,339,059
                
                
                
                9,658,307Effect
      of dilutive stock options
                
                
                1,376
                
                
                
                131,601
                
                
                
                33,838
                
                
                
                156,607Weighted
      average diluted common shares outstanding
                
                
                9,325,783
                
                
                
                9,725,661
                
                
                
                9,372,897
                
                
                
                9,814,914Earnings
      (loss) per common share
                
                $
                (0.32
                )
                
                $
                0.29
                
                
                $
                (0.01
                )
                
                $
                0.93


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 September 30, 2008, the Company reported a $172,000
gain, net of a $93,000 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 nine month periods ended September 30, 2008 and September 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 September 30, 2008 is shown in the
following table:





Weighted-AverageNotional
                        amount
                      
                      
                      Floor
      rate
                      
                      
                      Cap
      rate
                      
                      
                      Maturity
      in months
                      
                      
                      Estimated
      fair value at September 30, 2008
                      
                      
                      Net
      unrealized gainsDerivatives
      Designated as Cash Flow Hedges:Hedging
      cash flows on prime- based floating rate loans
                      
                      $
                      100,000,000
                      
                      
                      
                      7.06
                      %
                      
                      
                      6.88
                      %
                      
                      
                      25
                      
                      
                      $
                      1,565,000
                      
                      
                      $
                      1,064,000Hedging
      cash flows on floating rate deposit accounts
                      
                      
                      25,000,000
                      
                      
                      
                      -
                      
                      
                      
                      2.98
                      %
                      
                      
                      30
                      
                      
                      
                      505,000
                      
                      
                      
                      178,000Total
      Derivative Instruments
                      
                      $
                      125,000,000
                      
                      
                      
                      7.06
                      %
                      
                      
                      5.58
                      %
                      
                      
                      26
                      
                      
                      $
                      2,070,000
                      
                      
                      $
                      1,242,000


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
September 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 September 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 September 30, 2008, there were 599,585 shares available
for grant and there were 673,778 options outstanding that were granted under the
1999 Stock Option Plan.





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





At
September 30, 2008, there was approximately $811,000 of unrecognized
compensation cost related to stock-based payments that is expected to be
recognized over a weighted-average period of 3.32 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 September
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 September 30,
2008.





The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of September 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
                  
                  $
                  558,069
                  
                  
                  $
                  171,557,560
                  
                  
                  $
                  -
                  
                  
                  $
                  172,115,629Derivative
      financial instruments
                  
                  
                  -
                  
                  
                  
                  2,070,403
                  
                  
                  
                  -
                  
                  
                  
                  2,070,403Total
      assets at fair value
                  
                  $
                  558,069
                  
                  
                  $
                  173,627,963
                  
                  
                  $
                  -
                  
                  
                  $
                  174,186,032


11
 Table of Contents




NOTE
      7.
            SUBSEQUENT
      EVENT





On
October 24, 2008, the Company notified its officers and employees assigned to
its Jacksonville, Florida and Gwinnett County, Georgia bank branches of its
intention to close the two branches and that their jobs would be
eliminated.  The Company’s Board of Directors approved the branch
closings as part of its plan to reduce its noninterest expense.  The
Company expects to incur employee-related expenses of approximately $550,000 and
other costs, including lease termination payments and asset disposal charges, of
up to $1,450,000 in the branch closing process.  The Company
anticipates completing the closings by January 30, 2009.








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, branch closures and related charges and future cost
savings, 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.


12
 Table of Contents


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 $1.3 billion community bank
with 20 branches and three loan production offices in Georgia and
Florida.  We have offices in both smaller, rural communities as well
as larger, metropolitan areas.  We provide traditional banking
products and services to commercial and individual customers in our
markets.  Competition, regulation, credit risk and interest rate risk
are the primary factors that we must manage in order to be
successful.





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





In
October 2008, we decided to close our offices in Gwinnett County, Georgia and
Duval County, Florida.  These offices will remain open until January
30, 2009.  This business decision is discussed in more detail in the
“RESULTS OF OPERATIONS” section further in this report.


13
 Table of Contents




The table
below provides summary demographic data on each of our markets.





Market/County
                
                Total
      Population1
                
                
                Population
      Change (%)2
                
                
                Projected
      Population Change (%)3
                
                
                Median
      2007 Household Income ($)1
                
                
                Household
      Income Change (%)2
                
                
                Projected
      Household Income 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





__________________________________


1Based 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.


14
 Table of Contents




FINANCIAL
CONDITION





During
the nine months ended September 30, 2008, our total assets increased $59.2
million, or 6.6% on an annualized basis, to $1.28 billion.  Our loan
portfolio increased $61.3 million, or 8.9% on an annualized basis, to $982.6
million at September 30, 2008 from $921.3 million at December 31,
2007.  Total deposits increased $49.7 million, or 6.8% on an
annualized basis, to $1.03 billion at September 30, 2008 from $980.1 million at
December 31, 2007. Approximately a year ago, we began to see more aggressive
advertising for deposits from our competitors offering higher interest rates in
our North Georgia and Florida markets.  At that time, we made the
decision to not compete in those markets for higher-priced deposits and to
reduce our excess liquidity in order to limit the impact on our earnings in a
falling-rate environment.   In the interim, we decided to utilize
brokered deposits and advances from the Federal Home Loan Bank (the “FHLB”),
which then were at lower rates than those market retail deposits, to fund our
balance sheet.  Then, in the third quarter of 2008, as concerns over
market instability and economic weakness increased, we decided to further
utilize brokered deposits to build up our liquidity and strengthen our balance
sheet.  Because of these decisions, brokered deposits increased $105.9
million (excluding those retail deposits that have been placed in the CDARs
reciprocal deposits program and required to be classified as brokered deposits
by our banking regulators) and advances from the FHLB increased $23.6 million
during the first nine months of 2008.  Also in the third quarter of
2008, we began a new marketing campaign to increase retail deposits in our
markets, which we expect to continue into 2009.





The
following table summarizes our loan and deposit portfolios classified by type
and market as of September 30, 2008.





As
      of September  30, 2008
                  
                  South
      Georgia
                  
                  
                  North
      Georgia
                  
                  
                  Florida
                  
                  
                  Treasury
                  
                  
                  Total(Dollars
      in Thousands)LoansCommercial
      and financial
                  
                  $
                  38,236
                  
                  
                  $
                  47,174
                  
                  
                  $
                  5,956
                  
                  
                  $
                  35
                  
                  
                  $
                  91,401Agricultural
      (including loans secured by farmland)
                  
                  
                  36,757
                  
                  
                  
                  6,084
                  
                  
                  
                  6,386
                  
                  
                  
                  -
                  
                  
                  
                  49,227Real
      estate – construction
                  
                  
                  73,635
                  
                  
                  
                  199,405
                  
                  
                  
                  59,466
                  
                  
                  
                  395
                  
                  
                  
                  332,901Real
      estate - commercial
                  
                  
                  93,452
                  
                  
                  
                  157,984
                  
                  
                  
                  26,043
                  
                  
                  
                  4,302
                  
                  
                  
                  281,781Real
      estate - residential
                  
                  
                  137,157
                  
                  
                  
                  43,798
                  
                  
                  
                  9,654
                  
                  
                  
                  4,830
                  
                  
                  
                  195,439Installment
      loans to individuals and other loans
                  
                  
                  13,376
                  
                  
                  
                  5,793
                  
                  
                  
                  159
                  
                  
                  
                  12,747
                  
                  
                  
                  32,075392,613
                  
                  
                  
                  460,238
                  
                  
                  
                  107,664
                  
                  
                  
                  22,309
                  
                  
                  
                  982,824Deferred
      loan fees and unearned interest, net
                  
                  
                  201
                  
                  
                  
                  (164
                  )
                  
                  
                  (277
                  )
                  
                  
                  (13
                  )
                  
                  
                  (253
                  )Total
      loans
                  
                  $
                  392,814
                  
                  
                  $
                  460,074
                  
                  
                  $
                  107,387
                  
                  
                  $
                  22,296
                  
                  
                  $
                  982,571Percentage
      of total
                  
                  
                  40.5
                  %
                  
                  
                  46.4
                  %
                  
                  
                  10.9
                  %
                  
                  
                  2.2
                  %
                  
                  
                  100.0
                  %DepositsNoninterest-bearing
      demand
                  
                  $
                  72,186
                  
                  
                  $
                  15,776
                  
                  
                  $
                  6,149
                  
                  
                  $
                  7,306
                  
                  
                  $
                  101,417Interest-bearing
      demand and savings
                  
                  
                  206,071
                  
                  
                  
                  31,728
                  
                  
                  
                  24,402
                  
                  
                  
                  522
                  
                  
                  
                  262,723Time
      less than $100,000
                  
                  
                  184,822
                  
                  
                  
                  46,825
                  
                  
                  
                  91,138
                  
                  
                  
                  592
                  
                  
                  
                  323,377Time
      greater than or equal to $100,000
                  
                  
                  110,334
                  
                  
                  
                  30,297
                  
                  
                  
                  41,654
                  
                  
                  
                  206
                  
                  
                  
                  182,491Brokered
                  
                  
                  18,337
                  *
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  141,499
                  
                  
                  
                  159,836Total
      deposits
                  
                  $
                  591,750
                  
                  
                  $
                  124,626
                  
                  
                  $
                  163,343
                  
                  
                  $
                  150,125
                  
                  
                  $
                  1,029,844Percentage
      of total
                  
                  
                  57.4
                  %
                  
                  
                  12.1
                  %
                  
                  
                  15.9
                  %
                  
                  
                  14.6
                  %
                  
                  
                  100.0
                  %





*
Represent $18.3 million in retail deposits placed in the CDARs
program.





In
addition to the geographic concentrations noted in the tables above, we had
approximately $77.1 million in loans secured by real estate in Florida to
customers of our South Georgia, North Georgia and Treasury offices.


15
 Table of Contents




With
approximately 19% of our loan portfolio concentrated in residential construction
and development loans and an additional 20% of our loan portfolio in residential
mortgages, we continuously monitor and evaluate economic trends in our
residential real estate markets.  With the continued weakness in the
residential real estate markets, we expect to incur additional losses in this
segment of our portfolio.  We have established an allowance for loan
losses based on our estimate of those losses in our loan portfolio as of
September 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.





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.  According to the U.S. Census Bureau statistics, the
population in Henry County, where we are located on the south side of the
Atlanta MSA, is projected to increase 34%, or 67,000 people by
2012.  However, the supply of vacant, developed lots is a greater
concern of ours.  These inventories have 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 has been increasingly
difficult.  Although market data indicates that there is more than ten
years of lot inventory in some of our markets, we believe it may take only 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
                        
                        Sep-08
                        
                        
                        Jun-08
                        
                        
                        Mar-08
                        
                        
                        Dec-07
                        
                        
                        Sep-07
                        
                        
                        Sep-06
                        
                        
                        Sep-05(#
      of Months Supply)Housing Inventory:Henry
      County
                        
                        
                        13.8
                        
                        
                        
                        13.1
                        
                        
                        
                        12.6
                        
                        
                        
                        11.5
                        
                        
                        
                        10.8
                        
                        
                        
                        8.8
                        
                        
                        
                        8.2Clayton
      County
                        
                        
                        11.5
                        
                        
                        
                        9.9
                        
                        
                        
                        9.3
                        
                        
                        
                        9.5
                        
                        
                        
                        11.7
                        
                        
                        
                        11.5
                        
                        
                        
                        5.9Newton
      County
                        
                        
                        15.3
                        
                        
                        
                        13.9
                        
                        
                        
                        12.3
                        
                        
                        
                        11.1
                        
                        
                        
                        9.8
                        
                        
                        
                        9.1
                        
                        
                        
                        7.6South
      Fulton County
                        
                        
                        9.3
                        
                        
                        
                        9.2
                        
                        
                        
                        9.1
                        
                        
                        
                        8.0
                        
                        
                        
                        8.0
                        
                        
                        
                        8.2
                        
                        
                        
                        8.5Vacant Developed Lots
      Inventory:Henry
      County
                        
                        
                        207.0
                        
                        
                        
                        153.0
                        
                        
                        
                        113.0
                        
                        
                        
                        86.0
                        
                        
                        
                        60.0
                        
                        
                        
                        26.0
                        
                        
                        
                        25.0Clayton
      County
                        
                        
                        122.0
                        
                        
                        
                        91.0
                        
                        
                        
                        62.0
                        
                        
                        
                        53.0
                        
                        
                        
                        39.0
                        
                        
                        
                        25.0
                        
                        
                        
                        20.0Newton
      County
                        
                        
                        210.0
                        
                        
                        
                        142.0
                        
                        
                        
                        93.0
                        
                        
                        
                        64.0
                        
                        
                        
                        45.0
                        
                        
                        
                        21.0
                        
                        
                        
                        25.0South
      Fulton County
                        
                        
                        96.0
                        
                        
                        
                        83.0
                        
                        
                        
                        67.0
                        
                        
                        
                        57.0
                        
                        
                        
                        43.0
                        
                        
                        
                        22.0
                        
                        
                        
                        22.0


16
 Table of Contents




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





As
      of Quarter End
                      
                      Sep-08
                      
                      
                      Jun-08
                      
                      
                      Mar-08
                      
                      
                      Dec-07
                      
                      
                      Sep-07(Dollars
      in Thousands)Commercial
      and financial
                      
                      $
                      91,401
                      
                      
                      $
                      82,087
                      
                      
                      $
                      83,343
                      
                      
                      $
                      78,730
                      
                      
                      $
                      78,556Agricultural
      (including loans secured by farmland)
                      
                      
                      49,227
                      
                      
                      
                      46,891
                      
                      
                      
                      42,573
                      
                      
                      
                      41,861
                      
                      
                      
                      42,608Real
      estate - construction
                      
                      
                      332,901
                      
                      
                      
                      344,393
                      
                      
                      
                      363,392
                      
                      
                      
                      352,732
                      
                      
                      
                      339,019Real
      estate - commercial
                      
                      
                      281,781
                      
                      
                      
                      275,962
                      
                      
                      
                      241,165
                      
                      
                      
                      248,272
                      
                      
                      
                      257,841Real
      estate – residential
                      
                      
                      195,439
                      
                      
                      
                      181,169
                      
                      
                      
                      179,091
                      
                      
                      
                      174,157
                      
                      
                      
                      164,967Installment
      loans to individuals and other loans
                      
                      
                      32,075
                      
                      
                      
                      33,237
                      
                      
                      
                      25,704
                      
                      
                      
                      26,011
                      
                      
                      
                      21,691982,824
                      
                      
                      
                      963,739
                      
                      
                      
                      935,268
                      
                      
                      
                      921,763
                      
                      
                      
                      904,682Deferred
      loan fees and unearned interest, net
                      
                      
                      (253
                      )
                      
                      
                      (239
                      )
                      
                      
                      (341
                      )
                      
                      
                      (414
                      )
                      
                      
                      (600
                      )982,571
                      
                      
                      
                      963,500
                      
                      
                      
                      934,927
                      
                      
                      
                      921,349
                      
                      
                      
                      904,082Allowance
      for loan losses
                      
                      
                      (20,240
                      )
                      
                      
                      (14,303
                      )
                      
                      
                      (13,875
                      )
                      
                      
                      (12,906
                      )
                      
                      
                      (11,497
                      )$
                      962,331
                      
                      
                      $
                      949,197
                      
                      
                      $
                      921,052
                      
                      
                      $
                      908,443
                      
                      
                      $
                      892,585








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





As
      of Quarter End
                  
                  Sep-08
                  
                  
                  Jun-08
                  
                  
                  Mar-08
                  
                  
                  Dec-07
                  
                  
                  Sep-07Commercial
      and financial
                  
                  
                  9.30
                  %
                  
                  
                  8.52
                  %
                  
                  
                  8.91
                  %
                  
                  
                  8.55
                  %
                  
                  
                  8.69
                  %Agricultural
      (including loans secured by farmland)
                  
                  
                  5.01
                  %
                  
                  
                  4.87
                  %
                  
                  
                  4.55
                  %
                  
                  
                  4.54
                  %
                  
                  
                  4.71
                  %Real
      estate - construction
                  
                  
                  33.88
                  %
                  
                  
                  35.74
                  %
                  
                  
                  38.87
                  %
                  
                  
                  38.28
                  %
                  
                  
                  37.50
                  %Real
      estate - commercial
                  
                  
                  28.68
                  %
                  
                  
                  28.64
                  %
                  
                  
                  25.80
                  %
                  
                  
                  26.95
                  %
                  
                  
                  28.52
                  %Real
      estate - residential
                  
                  
                  19.89
                  %
                  
                  
                  18.80
                  %
                  
                  
                  19.16
                  %
                  
                  
                  18.90
                  %
                  
                  
                  18.25
                  %Installment
      loans to individuals and other loans
                  
                  
                  3.27
                  %
                  
                  
                  3.45
                  %
                  
                  
                  2.75
                  %
                  
                  
                  2.82
                  %
                  
                  
                  2.40
                  %100.03
                  %
                  
                  
                  100.02
                  %
                  
                  
                  100.04
                  %
                  
                  
                  100.04
                  %
                  
                  
                  100.07
                  %Deferred
      loan fees and unearned interest, net
                  
                  
                  -0.03
                  %
                  
                  
                  -0.02
                  %
                  
                  
                  -0.04
                  %
                  
                  
                  -0.04
                  %
                  
                  
                  -0.07
                  %Total
      loans
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %Allowance
      for loan losses
                  
                  
                  -2.06
                  %
                  
                  
                  -1.48
                  %
                  
                  
                  -1.48
                  %
                  
                  
                  -1.40
                  %
                  
                  
                  -1.27
                  %Net
      loans
                  
                  
                  97.94
                  %
                  
                  
                  98.52
                  %
                  
                  
                  98.52
                  %
                  
                  
                  98.60
                  %
                  
                  
                  98.73
                  %


17
 Table of Contents




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




September 30,
      2008
                                                              
                                                              
                                                              December 31,
      2007
                                                              
                                                              
                                                              September 30,
      2007$
      Amount
                                                              
                                                              
                                                              %
      to Total
                                                              
                                                              
                                                              $
      Amount
                                                              
                                                              
                                                              %
      to Total
                                                              
                                                              
                                                              $
      Amount
                                                              
                                                              
                                                              %
      to Total(Dollars
      in Thousands)Construction and
    development:Acquisition
      and development:1-4
      family residential
                                                              
                                                              $
                                                              134,529
                                                              
                                                              
                                                              
                                                              40.4
                                                              %
                                                              
                                                              $
                                                              130,097
                                                              
                                                              
                                                              
                                                              36.9
                                                              %
                                                              
                                                              $
                                                              132,263
                                                              
                                                              
                                                              
                                                              39.0
                                                              %Commercial
      and multi-family
                                                              
                                                              
                                                              99,822
                                                              
                                                              
                                                              
                                                              30.0
                                                              %
                                                              
                                                              
                                                              105,718
                                                              
                                                              
                                                              
                                                              30.0
                                                              %
                                                              
                                                              
                                                              95,447
                                                              
                                                              
                                                              
                                                              28.2
                                                              %Construction1-4
      family residential spec
                                                              
                                                              
                                                              26,159
                                                              
                                                              
                                                              
                                                              7.9
                                                              %
                                                              
                                                              
                                                              40,392
                                                              
                                                              
                                                              
                                                              11.4
                                                              %
                                                              
                                                              
                                                              41,916
                                                              
                                                              
                                                              
                                                              12.4
                                                              %1-4
      family residential pre-sold
                                                              
                                                              
                                                              366
                                                              
                                                              
                                                              
                                                              0.1
                                                              %
                                                              
                                                              
                                                              1,604
                                                              
                                                              
                                                              
                                                              0.4
                                                              %
                                                              
                                                              
                                                              1,681
                                                              
                                                              
                                                              
                                                              0.5
                                                              %1-4
      family residential other
                                                              
                                                              
                                                              29,501
                                                              
                                                              
                                                              
                                                              8.9
                                                              %
                                                              
                                                              
                                                              26,694
                                                              
                                                              
                                                              
                                                              7.6
                                                              %
                                                              
                                                              
                                                              21,160
                                                              
                                                              
                                                              
                                                              6.2
                                                              %Commercial
      owner-occupied
                                                              
                                                              
                                                              3,592
                                                              
                                                              
                                                              
                                                              1.1
                                                              %
                                                              
                                                              
                                                              5,685
                                                              
                                                              
                                                              
                                                              1.6
                                                              %
                                                              
                                                              
                                                              6,512
                                                              
                                                              
                                                              
                                                              1.9
                                                              %Commercial
      not owner-occupied
                                                              
                                                              
                                                              29,413
                                                              
                                                              
                                                              
                                                              8.8
                                                              %
                                                              
                                                              
                                                              17,497
                                                              
                                                              
                                                              
                                                              5.0
                                                              %
                                                              
                                                              
                                                              16,942
                                                              
                                                              
                                                              
                                                              5.0
                                                              %Hotel/motel
                                                              
                                                              
                                                              1,265
                                                              
                                                              
                                                              
                                                              0.4
                                                              %
                                                              
                                                              
                                                              12,909
                                                              
                                                              
                                                              
                                                              3.7
                                                              %
                                                              
                                                              
                                                              12,552
                                                              
                                                              
                                                              
                                                              3.7
                                                              %Multi-family
      properties
                                                              
                                                              
                                                              6,614
                                                              
                                                              
                                                              
                                                              2.0
                                                              %
                                                              
                                                              
                                                              7,789
                                                              
                                                              
                                                              
                                                              2.2
                                                              %
                                                              
                                                              
                                                              8,810
                                                              
                                                              
                                                              
                                                              2.6
                                                              %Special
      purpose property
                                                              
                                                              
                                                              1,500
                                                              
                                                              
                                                              
                                                              0.4
                                                              %
                                                              
                                                              
                                                              2,337
                                                              
                                                              
                                                              
                                                              0.6
                                                              %
                                                              
                                                              
                                                              1,353
                                                              
                                                              
                                                              
                                                              0.4
                                                              %Other
                                                              
                                                              
                                                              140
                                                              
                                                              
                                                              
                                                              0.0
                                                              %
                                                              
                                                              
                                                              2,010
                                                              
                                                              
                                                              
                                                              0.6
                                                              %
                                                              
                                                              
                                                              383
                                                              
                                                              
                                                              
                                                              0.1
                                                              %Total
      construction and development loans
                                                              
                                                              $
                                                              332,901
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              352,732
                                                              
                                                              
                                                              
                                                              100.0
                                                              %
                                                              
                                                              $
                                                              339,019
                                                              
                                                              
                                                              
                                                              100.0
                                                              %Percentage
      of total loans
                                                              
                                                              
                                                              33.9
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              38.3
                                                              %
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              37.5
                                                              %








September 30,
      2008
                                                                  
                                                                  
                                                                  December 31,
      2007
                                                                  
                                                                  
                                                                  September 30,
      2007$
      Amount
                                                                  
                                                                  
                                                                  %
      to Total
                                                                  
                                                                  
                                                                  $
      Amount
                                                                  
                                                                  
                                                                  %
      to Total
                                                                  
                                                                  
                                                                  $
      Amount
                                                                  
                                                                  
                                                                  %
      to TotalCommercial real estate:Owner-occupied:Office
                                                                  
                                                                  $
                                                                  42,621
                                                                  
                                                                  
                                                                  
                                                                  15.1
                                                                  %
                                                                  
                                                                  $
                                                                  34,291
                                                                  
                                                                  
                                                                  
                                                                  13.8
                                                                  %
                                                                  
                                                                  $
                                                                  33.993
                                                                  
                                                                  
                                                                  
                                                                  13.2
                                                                  %Retail
                                                                  
                                                                  
                                                                  22,309
                                                                  
                                                                  
                                                                  
                                                                  7.9
                                                                  %
                                                                  
                                                                  
                                                                  22,114
                                                                  
                                                                  
                                                                  
                                                                  8.9
                                                                  %
                                                                  
                                                                  
                                                                  21,907
                                                                  
                                                                  
                                                                  
                                                                  8.5
                                                                  %Other
                                                                  
                                                                  
                                                                  38,081
                                                                  
                                                                  
                                                                  
                                                                  13.5
                                                                  %
                                                                  
                                                                  
                                                                  34,263
                                                                  
                                                                  
                                                                  
                                                                  13.8
                                                                  %
                                                                  
                                                                  
                                                                  33,240
                                                                  
                                                                  
                                                                  
                                                                  12.9
                                                                  %Not
      owner-occupied:Office
                                                                  
                                                                  
                                                                  26,588
                                                                  
                                                                  
                                                                  
                                                                  9.4
                                                                  %
                                                                  
                                                                  
                                                                  29,210
                                                                  
                                                                  
                                                                  
                                                                  11.8
                                                                  %
                                                                  
                                                                  
                                                                  29,626
                                                                  
                                                                  
                                                                  
                                                                  11.5
                                                                  %Retail
                                                                  
                                                                  
                                                                  34,643
                                                                  
                                                                  
                                                                  
                                                                  12.3
                                                                  %
                                                                  
                                                                  
                                                                  36,780
                                                                  
                                                                  
                                                                  
                                                                  14.8
                                                                  %
                                                                  
                                                                  
                                                                  36,136
                                                                  
                                                                  
                                                                  
                                                                  14.0
                                                                  %Other
                                                                  
                                                                  
                                                                  26,585
                                                                  
                                                                  
                                                                  
                                                                  9.4
                                                                  %
                                                                  
                                                                  
                                                                  27,418
                                                                  
                                                                  
                                                                  
                                                                  11.0
                                                                  %
                                                                  
                                                                  
                                                                  27,070
                                                                  
                                                                  
                                                                  
                                                                  10.5
                                                                  %Other:Hotel/motel
                                                                  
                                                                  
                                                                  19,754
                                                                  
                                                                  
                                                                  
                                                                  5.6
                                                                  %
                                                                  
                                                                  
                                                                  11,399
                                                                  
                                                                  
                                                                  
                                                                  4.6
                                                                  %
                                                                  
                                                                  
                                                                  12,624
                                                                  
                                                                  
                                                                  
                                                                  4.9
                                                                  %Industrial
                                                                  
                                                                  
                                                                  4,765
                                                                  
                                                                  
                                                                  
                                                                  1.7
                                                                  %
                                                                  
                                                                  
                                                                  2,626
                                                                  
                                                                  
                                                                  
                                                                  1.1
                                                                  %
                                                                  
                                                                  
                                                                  2,679
                                                                  
                                                                  
                                                                  
                                                                  1.0
                                                                  %Multi-family
      properties
                                                                  
                                                                  
                                                                  25,023
                                                                  
                                                                  
                                                                  
                                                                  8.9
                                                                  %
                                                                  
                                                                  
                                                                  14,894
                                                                  
                                                                  
                                                                  
                                                                  6.0
                                                                  %
                                                                  
                                                                  
                                                                  17,261
                                                                  
                                                                  
                                                                  
                                                                  6.7
                                                                  %Special
      purpose property
                                                                  
                                                                  
                                                                  40,421
                                                                  
                                                                  
                                                                  
                                                                  14.4
                                                                  %
                                                                  
                                                                  
                                                                  34,876
                                                                  
                                                                  
                                                                  
                                                                  14.0
                                                                  %
                                                                  
                                                                  
                                                                  43,305
                                                                  
                                                                  
                                                                  
                                                                  16.8
                                                                  %Other
                                                                  
                                                                  
                                                                  991
                                                                  
                                                                  
                                                                  
                                                                  1.8
                                                                  %
                                                                  
                                                                  
                                                                  401
                                                                  
                                                                  
                                                                  
                                                                  0.2
                                                                  %
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  0.0
                                                                  %Total
      commercial real estate loans
                                                                  
                                                                  $
                                                                  281,781
                                                                  
                                                                  
                                                                  
                                                                  100.0
                                                                  %
                                                                  
                                                                  $
                                                                  248,272
                                                                  
                                                                  
                                                                  
                                                                  100.0
                                                                  %
                                                                  
                                                                  $
                                                                  257,841
                                                                  
                                                                  
                                                                  
                                                                  100.0
                                                                  %Percentage
      of total loans
                                                                  
                                                                  
                                                                  28.7
                                                                  %
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  26.9
                                                                  %
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  28.5
                                                                  %


18
 Table of Contents




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





As
      of Quarter End
                                      
                                      Sep-08
                                      
                                      
                                      Jun-08
                                      
                                      
                                      Mar-08
                                      
                                      
                                      Dec-07
                                      
                                      
                                      Sep-07(Dollars
      In Thousands)Noninterest-bearing
      demand
                                      
                                      $
                                      101,417
                                      
                                      
                                      $
                                      102,909
                                      
                                      
                                      $
                                      97,029
                                      
                                      
                                      $
                                      89,423
                                      
                                      
                                      $
                                      91,053Interest-bearing
      demand and savings
                                      
                                      
                                      262,723
                                      
                                      
                                      
                                      336,359
                                      
                                      
                                      
                                      331,184
                                      
                                      
                                      
                                      354,743
                                      
                                      
                                      
                                      362,079Time
      less than $100,000
                                      
                                      
                                      323,377
                                      
                                      
                                      
                                      292,981
                                      
                                      
                                      
                                      298,799
                                      
                                      
                                      
                                      312,722
                                      
                                      
                                      
                                      315,532Time
      greater than or equal to $100,000
                                      
                                      
                                      182,491
                                      
                                      
                                      
                                      175,914
                                      
                                      
                                      
                                      179,316
                                      
                                      
                                      
                                      187,662
                                      
                                      
                                      
                                      172,529Brokered*
                                      
                                      
                                      159,836
                                      
                                      
                                      
                                      88,432
                                      
                                      
                                      
                                      65,776
                                      
                                      
                                      
                                      35,599
                                      
                                      
                                      
                                      38,599Total
      deposits
                                      
                                      $
                                      1,029,844
                                      
                                      
                                      $
                                      996,595
                                      
                                      
                                      $
                                      972,104
                                      
                                      
                                      $
                                      980,149
                                      
                                      
                                      $
                                      979,792





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





As
      of Quarter End
                                    
                                    Sep-08
                                    
                                    
                                    Jun-08
                                    
                                    
                                    Mar-08
                                    
                                    
                                    Dec-07
                                    
                                    
                                    Sep-07Noninterest-bearing
      demand
                                    
                                    
                                    9.85
                                    %
                                    
                                    
                                    10.33
                                    %
                                    
                                    
                                    9.98
                                    %
                                    
                                    
                                    9.12
                                    %
                                    
                                    
                                    9.29
                                    %Interest-bearing
      demand and savings
                                    
                                    
                                    25.51
                                    %
                                    
                                    
                                    33.75
                                    %
                                    
                                    
                                    34.07
                                    %
                                    
                                    
                                    36.19
                                    %
                                    
                                    
                                    36.96
                                    %Time
      less than $100,000
                                    
                                    
                                    31.40
                                    %
                                    
                                    
                                    29.40
                                    %
                                    
                                    
                                    30.74
                                    %
                                    
                                    
                                    31.91
                                    %
                                    
                                    
                                    32.20
                                    %Time
      greater than or equal to $100,000
                                    
                                    
                                    17.72
                                    %
                                    
                                    
                                    17.65
                                    %
                                    
                                    
                                    18.44
                                    %
                                    
                                    
                                    19.15
                                    %
                                    
                                    
                                    17.61
                                    %Brokered*
                                    
                                    
                                    15.52
                                    %
                                    
                                    
                                    8.87
                                    %
                                    
                                    
                                    6.77
                                    %
                                    
                                    
                                    3.63
                                    %
                                    
                                    
                                    3.94
                                    %Total
      deposits
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    100.00
                                    %
                                    
                                    
                                    100.00
                                    %





*
Includes $18.3 million (1.78%) in retail deposits placed in the CDARs program as
of September 30, 2008.





RESULTS
OF OPERATIONS





During
the three months ended September 30, 2008 we incurred a net loss of $2.9
million, or ($0.31) per diluted share, as compared to net income of $2.9
million, or $0.30 per diluted share, during the same period in
2007.  The $5.8 million, or 200.1%, decrease in net income is the net
result of a $6.9 million increase in the provision for loan losses, a $1.6
million decrease in net interest income, a $390,000 decrease in other income and
a $39,000 increase in other expenses, offset by  a $3.1 million
decrease in income tax expense.  Our return on average assets (“ROA”)
and return on average equity (“ROE”) for the three months ended September 30,
2008 were -0.92% and -11.8%, respectively, compared to a 0.96% ROA and a 11.63%
ROE for the same period in 2007.





During
the nine months ended September 30, 2008, we incurred a net loss of $99,000, or
($0.01) per diluted share, as compared to $9.1 million, or $0.95 per diluted
share, during the same period in 2007.  The $9.2 million, or 101.1%,
decrease in net income is the net result of an $8.9 million increase in the
provision for loan losses, a $5.0 million decrease in net interest income, a
$381,000 increase in other expenses and a $13,000 decrease in other income,
offset by a $5.1 million decrease in income tax expense.  Our ROA and
ROE for the nine months ended September 30, 2008 were -0.01% and -0.14%,
respectively, compared to a 1.06% ROA and a 12.49% ROE for the same period in
2007.  The reasons for these changes are discussed in more detail
below.





Branch Closures and Cost
Saving Initiatives for 2009


In
October 2008, our Board of Directors approved a plan to reduce annual
noninterest expense by at least 12% (approximately $3.6 million) of 2008
anticipated noninterest expense, including a reduction of our workforce by up to
9% (approximately 30 positions) by the end of the first quarter of
2009.  As part of this plan, we will close our offices in
Jacksonville, Florida and Gwinnett County, Georgia, and will eliminate the
employee positions in those markets including two Executive Vice President
positions.  We expect to incur employee-related expenses of
approximately $550,000 and other costs, including lease termination payments and
asset disposal charges, of up to $1,450,000 in the branch closing
process.  We expect these branch closings to be complete by January
30, 2009.


19
 Table of Contents




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 September 30, 2008, our net
interest income on a taxable-equivalent basis was $9.4 million, a 14.2% decrease
from the $10.9 million in net interest income for the third quarter of
2007.  The decrease in net interest income is due to a $4.2 million
decrease in interest income offset by a $2.6 million decrease in interest
expense.  During the third quarter of 2008, our average earning assets
were 4.4% higher compared to the same period in 2007, and the average balances
of our interest-bearing liabilities increased by 5.3% to fund the asset
growth.  A portion of the decrease in interest income is due to an
increase in nonaccrual loans, causing approximately $858,000 in interest income
to not be recognized during the third quarter of 2008, compared to $208,000 in
interest income forgone during the same period in 2007.  The average
yield on our earning assets decreased 173 basis points from 7.82% for the third
quarter of 2007, to 6.09% for the third quarter of 2008.  However, the
average rates paid for our funds only decreased 123 basis points from 4.48% for
the third quarter of 2007, to 3.25% for the third quarter of 2008.  As
a result, our net interest spread declined by 50 basis points from 3.34% in the
third quarter of 2007, to 2.84% for the same period in 2008.





For the
nine months ended September 30, 2008, our net interest income on a
taxable-equivalent basis was $28.0 million, a 15.0% decrease from the $32.9
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 $2.5 million for the first nine months of 2008,
compared to $391,000 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 third quarter
of 2008 was 3.20%, 69 basis points lower than the 3.89% recorded for the third
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 30 basis points
during the third quarter of 2008, which was slightly higher than the 28 basis
point impact in the second quarter of 2008, but was significantly higher than
the seven basis point impact in the third 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.


20
 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 nine months ended September
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 September 30,
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2008
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2007Average
      Balance
                                                                                              
                                                                                              
                                                                                              Interest
      Income/Expense
                                                                                              
                                                                                              
                                                                                              Average
      Yield/Rate
                                                                                              
                                                                                              
                                                                                              Average
      Balance
                                                                                              
                                                                                              
                                                                                              Interest
      Income/Expense
                                                                                              
                                                                                              
                                                                                              Average
      Yield/Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
                                                                                              
                                                                                              $
                                                                                              973,017
                                                                                              
                                                                                              
                                                                                              $
                                                                                              15,391
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.29
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              905,931
                                                                                              
                                                                                              
                                                                                              $
                                                                                              19,243
                                                                                              
                                                                                              
                                                                                              
                                                                                              8.43
                                                                                              %Investment
      securities:Taxable
                                                                                              
                                                                                              
                                                                                              145,731
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,891
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.16
                                                                                              %
                                                                                              
                                                                                              
                                                                                              159,089
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,052
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.12
                                                                                              %Nontaxable
                                                                                              
                                                                                              
                                                                                              33,055
                                                                                              
                                                                                              
                                                                                              
                                                                                              506
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.09
                                                                                              %
                                                                                              
                                                                                              
                                                                                              31,503
                                                                                              
                                                                                              
                                                                                              
                                                                                              476
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.99
                                                                                              %Other
      short-term investments
                                                                                              
                                                                                              
                                                                                              14,696
                                                                                              
                                                                                              
                                                                                              
                                                                                              69
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.88
                                                                                              %
                                                                                              
                                                                                              
                                                                                              21,329
                                                                                              
                                                                                              
                                                                                              
                                                                                              261
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.86
                                                                                              %Total
      interest-earning assets
                                                                                              
                                                                                              $
                                                                                              1,166,499
                                                                                              
                                                                                              
                                                                                              $
                                                                                              17,857
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.09
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              1,117,852
                                                                                              
                                                                                              
                                                                                              $
                                                                                              22,032
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.82
                                                                                              %Interest-bearing
      liabilities:Demand
      deposits
                                                                                              
                                                                                              $
                                                                                              267,595
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,149
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.71
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              317,651
                                                                                              
                                                                                              
                                                                                              $
                                                                                              2,983
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.73
                                                                                              %Savings
      deposits
                                                                                              
                                                                                              
                                                                                              36,175
                                                                                              
                                                                                              
                                                                                              
                                                                                              46
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.50
                                                                                              %
                                                                                              
                                                                                              
                                                                                              37,494
                                                                                              
                                                                                              
                                                                                              
                                                                                              146
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.55
                                                                                              %Time
      deposits
                                                                                              
                                                                                              
                                                                                              604,761
                                                                                              
                                                                                              
                                                                                              
                                                                                              6,068
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.99
                                                                                              %
                                                                                              
                                                                                              
                                                                                              516,895
                                                                                              
                                                                                              
                                                                                              
                                                                                              6,627
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.09
                                                                                              %FHLB
      advances
                                                                                              
                                                                                              
                                                                                              100,042
                                                                                              
                                                                                              
                                                                                              
                                                                                              986
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.92
                                                                                              %
                                                                                              
                                                                                              
                                                                                              87,333
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,005
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.57
                                                                                              %Notes
      payable
                                                                                              
                                                                                              
                                                                                              10,310
                                                                                              
                                                                                              
                                                                                              
                                                                                              117
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.50
                                                                                              %
                                                                                              
                                                                                              
                                                                                              10,310
                                                                                              
                                                                                              
                                                                                              
                                                                                              184
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.09
                                                                                              %Other
      short-term borrowings
                                                                                              
                                                                                              
                                                                                              15,540
                                                                                              
                                                                                              
                                                                                              
                                                                                              94
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.40
                                                                                              %
                                                                                              
                                                                                              
                                                                                              12,826
                                                                                              
                                                                                              
                                                                                              
                                                                                              139
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.31
                                                                                              %Total
      interest-bearing liabilities
                                                                                              
                                                                                              $
                                                                                              1,034,423
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,460
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.25
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              982,509
                                                                                              
                                                                                              
                                                                                              $
                                                                                              11,084
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.48
                                                                                              %Interest
      rate spread
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.84
                                                                                              %
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.34
                                                                                              %Net
      interest income
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              9,397
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,948Net
      interest margin
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.20
                                                                                              %
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.89
                                                                                              %


21
 Table of Contents




For
      the Nine Months Ended September 30,
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            2008
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            2007Average
      Balance
                                                                                            
                                                                                            
                                                                                            Interest
      Income/Expense
                                                                                            
                                                                                            
                                                                                            Average
      Yield/Rate
                                                                                            
                                                                                            
                                                                                            Average
      Balance
                                                                                            
                                                                                            
                                                                                            Interest
      Income/Expense
                                                                                            
                                                                                            
                                                                                            Average
      Yield/Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
                                                                                            
                                                                                            $
                                                                                            948,908
                                                                                            
                                                                                            
                                                                                            $
                                                                                            47,188
                                                                                            
                                                                                            
                                                                                            
                                                                                            6.64
                                                                                            %
                                                                                            
                                                                                            $
                                                                                            872,591
                                                                                            
                                                                                            
                                                                                            $
                                                                                            55,640
                                                                                            
                                                                                            
                                                                                            
                                                                                            8.53
                                                                                            %Investment
      securities:Taxable
                                                                                            
                                                                                            
                                                                                            146,957
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,785
                                                                                            
                                                                                            
                                                                                            
                                                                                            5.26
                                                                                            %
                                                                                            
                                                                                            
                                                                                            159,758
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,150
                                                                                            
                                                                                            
                                                                                            
                                                                                            5.15
                                                                                            %Nontaxable
                                                                                            
                                                                                            
                                                                                            33,359
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,526
                                                                                            
                                                                                            
                                                                                            
                                                                                            6.11
                                                                                            %
                                                                                            
                                                                                            
                                                                                            30,410
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,371
                                                                                            
                                                                                            
                                                                                            
                                                                                            6.03
                                                                                            %Other
      short-term investments
                                                                                            
                                                                                            
                                                                                            12,554
                                                                                            
                                                                                            
                                                                                            
                                                                                            205
                                                                                            
                                                                                            
                                                                                            
                                                                                            2.19
                                                                                            %
                                                                                            
                                                                                            
                                                                                            25,096
                                                                                            
                                                                                            
                                                                                            
                                                                                            981
                                                                                            
                                                                                            
                                                                                            
                                                                                            5.23
                                                                                            %Total
      interest-earning assets
                                                                                            
                                                                                            $
                                                                                            1,141,778
                                                                                            
                                                                                            
                                                                                            $
                                                                                            54,704
                                                                                            
                                                                                            
                                                                                            
                                                                                            6.40
                                                                                            %
                                                                                            
                                                                                            $
                                                                                            1,087,855
                                                                                            
                                                                                            
                                                                                            $
                                                                                            64,142
                                                                                            
                                                                                            
                                                                                            
                                                                                            7.88
                                                                                            %Interest-bearing
      liabilities:Demand
      deposits
                                                                                            
                                                                                            $
                                                                                            288,706
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,414
                                                                                            
                                                                                            
                                                                                            
                                                                                            2.04
                                                                                            %
                                                                                            
                                                                                            $
                                                                                            308,984
                                                                                            
                                                                                            
                                                                                            $
                                                                                            8,393
                                                                                            
                                                                                            
                                                                                            
                                                                                            3.63
                                                                                            %Savings
      deposits
                                                                                            
                                                                                            
                                                                                            35,896
                                                                                            
                                                                                            
                                                                                            
                                                                                            174
                                                                                            
                                                                                            
                                                                                            
                                                                                            0.65
                                                                                            %
                                                                                            
                                                                                            
                                                                                            37,689
                                                                                            
                                                                                            
                                                                                            
                                                                                            444
                                                                                            
                                                                                            
                                                                                            
                                                                                            1.57
                                                                                            %Time
      deposits
                                                                                            
                                                                                            
                                                                                            565,130
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,553
                                                                                            
                                                                                            
                                                                                            
                                                                                            4.39
                                                                                            %
                                                                                            
                                                                                            
                                                                                            491,710
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,399
                                                                                            
                                                                                            
                                                                                            
                                                                                            5.00
                                                                                            %FHLB
      advances
                                                                                            
                                                                                            
                                                                                            96,681
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,845
                                                                                            
                                                                                            
                                                                                            
                                                                                            3.93
                                                                                            %
                                                                                            
                                                                                            
                                                                                            89,309
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,094
                                                                                            
                                                                                            
                                                                                            
                                                                                            4.63
                                                                                            %Notes
      payable
                                                                                            
                                                                                            
                                                                                            10,310
                                                                                            
                                                                                            
                                                                                            
                                                                                            398
                                                                                            
                                                                                            
                                                                                            
                                                                                            5.15
                                                                                            %
                                                                                            
                                                                                            
                                                                                            10,310
                                                                                            
                                                                                            
                                                                                            
                                                                                            546
                                                                                            
                                                                                            
                                                                                            
                                                                                            7.08
                                                                                            %Other
      short-term borrowings
                                                                                            
                                                                                            
                                                                                            16,052
                                                                                            
                                                                                            
                                                                                            
                                                                                            358
                                                                                            
                                                                                            
                                                                                            
                                                                                            2.98
                                                                                            %
                                                                                            
                                                                                            
                                                                                            11,727
                                                                                            
                                                                                            
                                                                                            
                                                                                            377
                                                                                            
                                                                                            
                                                                                            
                                                                                            4.30
                                                                                            %Total
      interest-bearing liabilities
                                                                                            
                                                                                            $
                                                                                            1,012,775
                                                                                            
                                                                                            
                                                                                            $
                                                                                            26,742
                                                                                            
                                                                                            
                                                                                            
                                                                                            3.53
                                                                                            %
                                                                                            
                                                                                            $
                                                                                            949,729
                                                                                            
                                                                                            
                                                                                            $
                                                                                            31,253
                                                                                            
                                                                                            
                                                                                            
                                                                                            4.40
                                                                                            %Interest
      rate spread
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            2.87
                                                                                            %
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            3.48
                                                                                            %Net
      interest income
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            $
                                                                                            27,962
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            $
                                                                                            32,889Net
      interest margin
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            3.27
                                                                                            %
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            4.04
                                                                                            %








Provision for Loan
Losses


During
the third quarter of 2008, we provided $6.9 million to our allowance for loan
losses due to an increase in nonperforming loans, a decrease in the valuation of
underlying collateral on previously recognized nonperforming
loans  and further deterioration in residential real estate market
conditions.  In particular, the valuations of our loans secured by lot
inventories has continued to decline.  Recent appraisals on new
foreclosures and re-appraisals of previously foreclosed lots still on our books
are the primary reason for the additional loan loss reserves, the loan
charge-offs and the write-downs on other real estate owned during the third
quarter of 2008.  Additional provisions for loan losses in the fourth
quarter 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 $2.7 million in bad debts and we have
recovered $475,000 in previously charged-off loans.  The $2.2 million
in net charge-offs for the year to date results in an annualized 0.31% ratio of
net charge-offs to average loans, which is higher than our 2007 net charge-off
ratio of 0.06% 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.


22
 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 $41.8 million, from $11.4 million at December 31,
2007 to $53.3 million at September 30, 2008, due primarily to the adverse
economic and real estate market conditions in our North Georgia and Florida
markets.  As a percentage of total loans, nonperforming loans
increased 418 basis points to 5.42% at September 30, 2008 from 1.24% at December
31, 2007.  Two relationships totaling $20.3 million accounted for
38.2% of total nonperforming loans at quarter-end.  Approximately
84.0% of the loans on nonaccrual status at September 30, 2008 were construction
and development loans, and these loans represented approximately 11.0% of our
total portfolio of construction and development loans.  The underlying
collateral on our nonperforming loans consists of (1) 1,068 acres of undeveloped
land in eight parcels zoned for residential development with a net carrying
value (book value less allocated reserves for loan losses) of $11.2 million, or
$10,500 per acre on average, (2) 671 residential lots with a net carrying value
of $16.9 million, or $25,100 per lot on average, (3) 85 residential houses with
a net carrying value of $8.9 million, or $104,000 per house on average, and (4)
25 commercial properties with a net carrying value of $10.3 million, or $386,000
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
                    
                    Sep-08
                    
                    
                    Jun-08
                    
                    
                    Mar-08
                    
                    
                    Dec-07
                    
                    
                    Sep-07(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
                    
                    $
                    43,471
                    
                    
                    $
                    40,464
                    
                    
                    $
                    26,090
                    
                    
                    $
                    11,405
                    
                    
                    $
                    5,185Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
                    
                    
                    4
                    
                    
                    
                    332
                    
                    
                    
                    13
                    
                    
                    
                    37
                    
                    
                    
                    34Troubled
      debt restructurings not included above
                    
                    
                    9,808
                    
                    
                    
                    9,808
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      nonperforming loans
                    
                    $
                    53,283
                    
                    
                    $
                    50,604
                    
                    
                    $
                    26,103
                    
                    
                    $
                    11,442
                    
                    
                    $
                    5,219Total
      nonperforming loans as a percentage of total loans
                    
                    
                    5.42
                    %
                    
                    
                    5.25
                    %
                    
                    
                    2.79
                    %
                    
                    
                    1.24
                    %
                    
                    
                    0.58
                    %Specific
      Reserves (FAS 114)
                    
                    $
                    9,905
                    
                    
                    $
                    6,222
                    
                    
                    $
                    2,241
                    
                    
                    $
                    1,577
                    
                    
                    $
                    408General
      Reserves (FAS 5)
                    
                    
                    1,136
                    
                    
                    
                    390
                    
                    
                    
                    4,578
                    
                    
                    
                    397
                    
                    
                    
                    301Total
      reserves allocated to nonperforming loans
                    
                    $
                    11,041
                    
                    
                    $
                    6,612
                    
                    
                    $
                    6,819
                    
                    
                    $
                    1,974
                    
                    
                    $
                    709Total
      reserves allocated as a percentage of nonperforming loans
                    
                    
                    20.72
                    %
                    
                    
                    13.07
                    %
                    
                    
                    26.12
                    %
                    
                    
                    17.25
                    %
                    
                    
                    13.59
                    %


23
 Table of Contents




Total
loans past due 30-89 days and not categorized as a nonperforming loan amounted
to $8.2 million, or 0.84% of total loans at September 30, 2008, a 108 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 45.7% of the loans past due 30-89 days at
September 30, 2008 were construction and development loans, and these loans
represented approximately 1.1% of our total portfolio of construction and
development loans.





Our
foreclosed assets increased $5.6 million in the first nine months of 2008, from
$6.4 million at December 31, 2007 to $12.0 million at September 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
September 30, 2008 include (1) 238 acres of undeveloped land in three parcels
zoned for residential development with a total carrying value of $2.3 million,
or $9,600 per acre on average, (2) 116 residential lots with a total carrying
value of $3.6 million, or $31,000 per lot on average, (3) 21 residential houses
with a total carrying value of $4.0 million, or $190,000 per house on average,
and (4) four commercial properties with a total carrying value of $1.9 million,
or $475,000 per property on average.





The
following table summarizes our nonperforming assets by type and market as of
September 30, 2008.





North
      Georgia
                  
                  
                  South
      Georgia
                  
                  
                  Florida
                  
                  
                  Treasury
                  
                  
                  Total(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
                  
                  $
                  37,346
                  
                  
                  $
                  679
                  
                  
                  $
                  5,446
                  
                  
                  $
                  -
                  
                  
                  $
                  43,471Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  4Troubled
      debt restructurings not included above
                  
                  
                  9,340
                  
                  
                  
                  468
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,808Foreclosed
      assets
                  
                  
                  11,318
                  
                  
                  
                  654
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,972Total
      nonperforming assets
                  
                  $
                  58,004
                  
                  
                  $
                  1,801
                  
                  
                  $
                  5,446
                  
                  
                  $
                  4
                  
                  
                  $
                  65,255








In
addition to our nonperforming loans discussed above, we have identified
$3.8 million in potential problem loans as of September 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.


24
 Table of Contents


Other
Income


A summary
of noninterest income follows:





Three
      Months Ended
                  September 30,
                
                
                
                
                
                Nine
      Months Ended
                  September 30,2008
                
                
                2007
                
                
                Pct.
      Chg.
                
                
                2008
                
                
                2007
                
                
                Pct.
      Chg.(Dollars
      in Thousands)Noninterest
      income:Service
      charges on deposit accounts
                
                $
                931
                
                
                $
                917
                
                
                
                1.5
                %
                
                $
                2,813
                
                
                $
                2,658
                
                
                
                5.8
                %Mortgage
      origination fees
                
                
                151
                
                
                
                90
                
                
                
                67.8
                %
                
                
                573
                
                
                
                262
                
                
                
                118.7
                %ATM/debit
      card fee income
                
                
                201
                
                
                
                161
                
                
                
                24.8
                %
                
                
                550
                
                
                
                475
                
                
                
                15.8
                %Securities
      transactions, net
                
                
                2
                
                
                
                49
                
                
                
                -95.9
                %
                
                
                202
                
                
                
                184
                
                
                
                9.8
                %Earnings
      on bank-owned life insurance
                
                
                106
                
                
                
                103
                
                
                
                2.9
                %
                
                
                317
                
                
                
                304
                
                
                
                4.3
                %Gain
      (loss) on sale and write-down of other assets
                
                
                (434
                )
                
                
                28
                
                
                
                -1650.0
                %
                
                
                (542
                )
                
                
                21
                
                
                
                -2681.0
                %Other
      noninterest income
                
                
                124
                
                
                
                123
                
                
                
                0.8
                %
                
                
                383
                
                
                
                405
                
                
                
                -5.4
                %Total
      noninterest income
                
                $
                1,081
                
                
                $
                1,471
                
                
                
                -26.5
                %
                
                $
                4,296
                
                
                $
                4,309
                
                
                
                -0.3
                %Noninterest
      income (annualized) as a percentage of average assets
                
                
                0.35
                %
                
                
                0.49
                %
                
                
                
                
                
                
                0.47
                %
                
                
                0.50
                %






Excluding
gains and losses on securities transactions and the disposal of other assets,
our total noninterest income increased 8.5% and 13.0% in the respective three
and nine months ended September 30, 2008 compared to the same periods in
2007.





Compared
to the same periods in 2007, service charges on deposit accounts increased
during the three months and nine months ended September 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 nine months of 2007 to the first
nine months of 2008.





Mortgage
origination fees increased significantly from the first nine months of 2007 to
the first nine 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 nine months of 2008, we incurred a loss of $534,000 on the sale and
write-down of foreclosed real estate and an $8,000 loss on the disposal of an
ATM machine.  This was compared to a net gain of $21,000 on the sale
of foreclosed real estate in the first nine months of 2007.


25
 Table of Contents




Other
Expenses


A summary
of noninterest expense follows:





Three
      Months Ended
                  September 30,
                
                
                
                
                
                Nine
      Months Ended
                  September 30,2008
                
                
                2007
                
                
                Pct.
      Chg.
                
                
                2008
                
                
                2007
                
                
                Pct.
      Chg.(Dollars
      in Thousands)Noninterest
      expense:Salaries
      and wages
                
                $
                3,898
                
                
                $
                4,057
                
                
                
                -3.9
                %
                
                $
                12,055
                
                
                $
                12,322
                
                
                
                -2.2
                %Deferred
      loan cost
                
                
                (426
                )
                
                
                (508
                )
                
                
                -16.1
                %
                
                
                (1,282
                )
                
                
                (1,513
                )
                
                
                -15.3
                %Employee
      benefits
                
                
                1,101
                
                
                
                1,150
                
                
                
                -4.3
                %
                
                
                3,337
                
                
                
                3,240
                
                
                
                3.0
                %Net
      occupancy expense of premises
                
                
                655
                
                
                
                621
                
                
                
                5.5
                %
                
                
                1,903
                
                
                
                1,720
                
                
                
                10.6
                %Furniture
      and equipment expense
                
                
                516
                
                
                
                588
                
                
                
                -12.2
                %
                
                
                1,562
                
                
                
                1,752
                
                
                
                -10.8
                %Advertising
      and business development
                
                
                128
                
                
                
                145
                
                
                
                -11.7
                %
                
                
                436
                
                
                
                471
                
                
                
                -7.4
                %Supplies
      and printing
                
                
                89
                
                
                
                101
                
                
                
                -11.9
                %
                
                
                301
                
                
                
                354
                
                
                
                -15.0
                %Telephone
      and internet charges
                
                
                191
                
                
                
                160
                
                
                
                19.4
                %
                
                
                605
                
                
                
                455
                
                
                
                33.0
                %Postage
      and courier
                
                
                159
                
                
                
                158
                
                
                
                0.6
                %
                
                
                461
                
                
                
                462
                
                
                
                -0.2
                %Legal
      and accounting fees
                
                
                115
                
                
                
                149
                
                
                
                -22.8
                %
                
                
                329
                
                
                
                390
                
                
                
                -15.6
                %Director
      fees and expenses
                
                
                157
                
                
                
                78
                
                
                
                101.3
                %
                
                
                485
                
                
                
                288
                
                
                
                68.4
                %Service
      charges and fees
                
                
                143
                
                
                
                152
                
                
                
                -5.9
                %
                
                
                457
                
                
                
                432
                
                
                
                5.8
                %Other
      noninterest expense
                
                
                784
                
                
                
                620
                
                
                
                26.5
                %
                
                
                1,882
                
                
                
                1,777
                
                
                
                5.9
                %Total
      noninterest expense
                
                $
                7,510
                
                
                $
                7,471
                
                
                
                0.5
                %
                
                $
                22,531
                
                
                $
                22,150
                
                
                
                1.7
                %Noninterest
      expense as a percentage of average assets (annualized)
                
                
                2.36
                %
                
                
                2.50
                %
                
                
                
                
                
                
                2.48
                %
                
                
                2.56
                %






Expenditures
for salaries and wages and employee benefits declined in the third quarter of
2008 due to a slight decrease in the number of employees and a reduction in the
accrual for annual bonuses and incentives.  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 fourth quarter of 2008 as we made
new capital expenditures in the second and third quarters of 2008 to replace
some of 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 68.4% for the first nine 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 and an increase in the number of committee meetings held
in 2008.  We also incurred additional expenses for a director
strategic planning session held in March 2008.





Other
noninterest expense has increased from 2007 to 2008 due to increased expenses on
foreclosed assets, such as property taxes, repairs and maintenance, insurance
and legal and collection expenses.


26
 Table of Contents




Income Tax
Expense


As a
percentage of net income before taxes, income tax expense (benefit) was 36.6%
and 34.8% for the three-month periods ended September 30, 2008 and 2007,
respectively.  For the nine-month periods ended September 30, 2008 and
2007, income tax expense (benefit) as a percentage of net income before taxes
was 72.2% and 34.5%, 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.  Due to an expected decrease in our taxable income for 2008,
we intend to sell our 2008 tax credits in the fourth quarter and recognize a
small gain.  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.








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 has continued to be enhanced by a relatively stable core deposit base
and the availability of additional funding sources.





At
September 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 17.5%, 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 nine months of 2008, we funded the $61.2 million growth in loans and
the $92.0 million decrease in interest-bearing demand deposits by utilizing a
$12.0 million increase in noninterest-bearing demand deposits, a $129.7 million
increase in savings and time deposits and a $23.6 million increase in our
advances from the FHLB.





Contractual
Obligations


Summarized
below are our contractual obligations as of September 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
                        
                        $
                        109,852
                        
                        
                        $
                        19,557
                        
                        
                        $
                        26,318
                        
                        
                        $
                        41,404
                        
                        
                        $
                        22,573Operating
      Lease Obligations
                        
                        
                        1,856
                        
                        
                        
                        374
                        
                        
                        
                        673
                        
                        
                        
                        402
                        
                        
                        
                        407Guaranteed
      Preferred Beneficial Interests in Debentures
                        
                        
                        10,310
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,310$
                        122,018
                        
                        
                        $
                        19,931
                        
                        
                        $
                        26,991
                        
                        
                        $
                        41,806
                        
                        
                        $
                        33,290


27
 Table of Contents




Off Balance Sheet
Arrangements


Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business.  These
off-balance sheet financial instruments include commitments to extend credit and
standby letters of credit.  Such financial instruments are included in
the financial statements when funds are distributed or when the instruments
become payable.  Our exposure to credit loss in the event of
nonperformance by the other party to a financial instrument for commitments to
extend credit, standby letters of credit and credit card commitments is
represented by the contractual amount of those instruments.  We use
the same credit policies in making commitments as we do for on-balance sheet
instruments.  Although these amounts do not necessarily represent
future cash requirements, a summary of our commitments as of September 30, 2008
and December 31, 2007 are as follows:





Sep-08
                  
                  
                  Dec-07Commitments
      to extend credit
                  
                  $
                  145,614,000
                  
                  
                  $
                  154,113,000Standby
      letters of credit
                  
                  $
                  3,724,000
                  
                  
                  $
                  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 investment grade credit ratings, are well capitalized
and are approved by our Board of Directors.  Due to these factors, we
feel our credit risk exposure under these hedging arrangements at September 30,
2008 was not material.





Stockholders’
Equity


Stockholders’
equity represented 7.4% of total assets at September 30, 2008, a decrease
compared to 8.2% at December 31, 2007.  Total stockholders’ equity has
decreased $4.7 million, or 4.8%, since December 31, 2007.  This
decrease is primarily the net result of $2.2 million paid in cash dividends, a
$1.5 million decrease in accumulated other comprehensive gains and the
repurchase and cancellation of  $1.2 million of common stock under our
stock repurchase plan, offset by our net loss of $100,000.  We did not
declare a dividend in the third quarter of 2008, compared to a $0.145 per common
share cash dividend declared during the third quarter of
2007.  However, we paid a $0.145 per common share cash dividend for
the first quarter of 2008 and paid a $0.095 per common share cash dividend for
the second quarter of 2008, compared to a $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.  In
setting our dividend on a quarterly basis, we evaluate our capital adequacy and
the quality of our earnings, and we estimate our capital requirements and our
earnings outlook for the next year. Based on these evaluations, we suspended our
quarterly dividend in the third quarter of 2008 until our outlook
improves.





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 September 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 September 30, 2008.





Company
      Consolidated
                      
                      
                      Bank
                      
                      
                      Minimum
      Regulatory RequirementTotal
      Capital to Risk Weighted Assets
                      
                      
                      10.7
                      %
                      
                      
                      10.7
                      %
                      
                      
                      8.0
                      %Tier
      1 Capital to Risk Weighted Assets
                      
                      
                      9.5
                      %
                      
                      
                      9.5
                      %
                      
                      
                      4.0
                      %Tier
      1 Capital to Average Assets (Leverage Ratio)
                      
                      
                      7.9
                      %
                      
                      
                      7.9
                      %
                      
                      
                      4.0
                      %


28
 Table of Contents




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.   At September 30, 2008, there were 126,185 shares
available to be repurchased under the plan.  The expiration date for
this plan is December 18, 2008.  We did not repurchase any shares
during the third quarter of 2008, and we do not intend to repurchase any
additional shares within the remaining allotted time period.





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.





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.


29
 Table of Contents




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.  The Company will perform its annual review
for potential impairment during the 4th quarter
of 2008 and the conclusion of such review is not currently known.  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 September 30, 2008.




ITEM3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





Interest
rates play a major part in the net interest income of a financial
institution.  The sensitivity to rate changes is known as “interest
rate risk.”  The repricing of interest-earning assets and
interest-bearing liabilities can influence the changes in net interest
income.  As part of our asset/liability management program, the timing
of repriced assets and liabilities is referred to as gap
management.  It is our policy to maintain a gap ratio in the one-year
time horizon between 0.80 and 1.20.  At September 30, 2008, our
one-year management-adjusted gap ratio of 0.97 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 1.37
at September 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.


30
 Table of Contents




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





3-Month
                                
                                
                                6-Month
                                
                                
                                1-Year(Dollars
      In Thousands)Regulatory DefinedRate
      Sensitive Assets (RSA)
                                
                                $
                                585,614
                                
                                
                                $
                                623,943
                                
                                
                                $
                                710,846Rate Sensitive Liabilities
      (RSL)
                                
                                
                                431,766
                                
                                
                                
                                546,858
                                
                                
                                
                                756,025RSA
      minus RSL (Gap)
                                
                                $
                                153,848
                                
                                
                                $
                                77,085
                                
                                
                                $
                                (45,179
                                )Gap
      Ratio (RSA/RSL)
                                
                                
                                1.36
                                
                                
                                
                                1.14
                                
                                
                                
                                0.94Management-AdjustedRate
      Sensitive Assets (RSA)
                                
                                $
                                601,422
                                
                                
                                $
                                652,235
                                
                                
                                $
                                762,990Rate Sensitive Liabilities
      (RSL)
                                
                                
                                439,909
                                
                                
                                
                                562,439
                                
                                
                                
                                784,608RSA
      minus RSL (Gap)
                                
                                $
                                161,513
                                
                                
                                $
                                89,796
                                
                                
                                $
                                (21,618
                                )Gap
      Ratio (RSA/RSL)
                                
                                
                                1.37
                                
                                
                                
                                1.16
                                
                                
                                
                                0.97





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
September 30, 2008, the simulation model projected net interest income would
increase 5.07% over the next year if market rates immediately rose by 200 basis
points and the model projected net interest income to decrease 4.93% over the
next year if market rates immediately fell by 100 basis points.  The
model projects net interest income to decrease 10.92% 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
                7.10%
                7.57%+200
      bps
                4.87%
                5.07%+100
      bps
                2.43%
                2.42%-100
      bps
                -4.80%
                -4.93%-200
      bps
                -9.25%
                -10.92%


31
 Table of Contents




ITEM4. CONTROLS
AND PROCEDURES





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





ITEM1. LEGAL
PROCEEDINGS





None





ITEM1A. RISK
FACTORS





In
addition to the risk factors previously disclosed in the Company’s Form 10-K for
the year ended December 31, 2007, we have identified the following additional
risk factors.
 
 Difficult
market conditions and economic trends have adversely affected our industry and
our business.
 
 Our
business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control.  In 2007, the housing and real estate sectors in our markets,
including the metropolitan Atlanta market and surrounding areas, experienced an
economic slowdown that has continued into 2008.  As a result of this
slowdown, we have experienced dramatic declines in the housing market with
decreasing home prices and increasing delinquencies and foreclosures, which have
negatively impacted the credit performance of mortgage and construction and
development loans and resulted in significant write-downs of assets by many
financial institutions, including us.  At the same time, competition
among depository institutions for deposits and quality loans has increased
significantly.  Bank and bank holding company stock prices have been
negatively affected, as has the ability of banks and bank holding companies to
raise capital or borrow in the debt markets compared to recent
years.  These market conditions and the tightening of credit has led
to increased deficiencies in our loan portfolio, increased market volatility and
widespread reduction in general business activity.
 
 As a
result of the negative developments in the financial industry, there is a
potential for new federal and state laws and regulations regarding lending and
funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations.  Difficult market conditions and the impact of new
legislation in response to those developments could restrict our business
operations, including our ability to originate loans.
 32
 Table of Contents




Recent
legislative and regulatory initiatives to address these difficult market and
economic conditions may not stabilize the U.S. banking system.
 
 The
recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”)
authorizes the United States Department of the Treasury (the “Treasury
Department”) to purchase from financial institutions and their holding companies
up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments, including debt and equity securities issued by
financial institutions and their holding companies in a troubled asset relief
program, otherwise known as the “TARP.”  The purpose of the TARP is to
restore confidence and stability to the U.S. banking system and to encourage
financial institutions to increase their lending to customers and to each
other.  The Treasury Department has allocated $250 billion towards the
TARP capital purchase program, under which the Treasury Department will purchase
senior preferred stock and warrants from participating
institutions.  The TARP is also expected to include direct purchases
or guarantees of troubled assets of financial institutions.
 
 EESA also
increased Federal Deposit Insurance Corporation deposit insurance on most
accounts from $100,000 to $250,000.  This increase is in place until
the end of 2009 and is not covered by deposit insurance premiums paid by the
banking industry.  In addition, the Federal Deposit Insurance
Corporation has implemented two temporary programs to provide deposit insurance
for the full amount of most non-interest bearing transaction accounts through
the end of 2009 and to guarantee certain unsecured debt of financial
institutions and their holding companies through June 2012.  The
purpose of these legislative and regulatory actions is to stabilize the
volatility in the U.S. banking system.  The failure of the U.S.
government to execute this program expeditiously could have a material adverse
effect on the financial markets, which in turn could materially and adversely
affect our business, financial condition and results of
operations.


ITEM2.  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
      programs1July
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              126,185August
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              126,185September
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              126,185Total
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              -
                              
                              
                              
                              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.


33
 Table of Contents


ITEM3.  DEFAULTS UPON SENIOR SECURITIES





None





ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None




ITEM5.  OTHER INFORMATION





None




ITEM6.  EXHIBITS





3.1
            Amended
      and Restated Articles of
Incorporation.




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





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





32.1
            Section
      1350 Certification of CEO.





32.2
            Section
      1350 Certification of CFO.








SIGNATURES





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





PAB BANKSHARES, INC.RegistrantDate:November 10,
      2008
                                            
                                            By:
                                            /s/ M. Burke Welsh, Jr.M.
      Burke Welsh, Jr.President
      and Chief Executive Officer(principal
      executive officer of the registrant)Date:November 10,
      2008
                                            
                                            By:
                                            /s/ Donald J. Torbert, Jr.Donald
      J. Torbert, Jr.Executive
      Vice President and Chief Financial Officer(principal
      financial officer of the
registrant)






34