**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  _____________
 **FORM
        10-Q**
 
 **Quarterly
        Report Pursuant to Section 13 or 15(d) of the**
 **Securities
        Exchange Act of 1934**
 
 For
        the
        Quarterly Period Ended March 31, 2007 - Commission File Number
        000-25422
 _____________
  
 
 **PAB
        BANKSHARES, INC.**
 (A
        Georgia Corporation)
 IRS
        Employer Identification Number: 58-1473302
 
 **3250
        North Valdosta Road, Valdosta, Georgia 31602**
 **Telephone
        Number: (229) 241-2775**
 
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes x No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
        accelerated filer o Accelerated
        filer x Non-accelerated
        filer o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No x
 
 The
        number of shares outstanding of the registrant’s common stock at April 30, 2007
        was 9,516,581 shares.
  
  
  **TABLE
        OF CONTENTS**
 
 PagePART
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial Statements
                  (Unaudited)Statements
                  of Condition
              1Statements
                  of Income
              2Statements
                  of Comprehensive Income
              3Statements
                  of Stockholders’ Equity
              4Statements
                  of Cash Flows
              5Notes
                  to Consolidated Financial
                  Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              22Item
                  4.
              Controls
                  and Procedures
              24PART
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              24Item
                  1A.
              Risk
                  Factors
              24Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              24Item
                  3.
              Defaults
                  Upon Senior Securities
              24Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              24Item
                  5.
              Other
                  Information
              24Item
                  6.
              Exhibits
              25SIGNATURES
              
              25
  i
 ***Table
            of Contents***
  **PART
        I. FINANCIAL INFORMATION**
 
 **PAB
                  BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CONDITION****AS
                  OF MARCH 31, 2007 AND DECEMBER 31, 2006****March
                  31,**
              
              **December
                  31,****2007**
              
              **2006****(Unaudited)****ASSETS**Cash
                  and due from banks
              
              $
              19,986,909
              
              $
              26,712,252Interest-bearing
                  deposits in other banks
              
              
              1,316,820
              
              
              550,307Federal
                  funds sold
              
              
              65,050,000
              
              
              41,612,728Investment
                  securities
              
              
              185,415,661
              
              
              184,092,858Loans
              
              
              854,076,090
              
              
              820,304,092Allowance
                  for loan losses
              
              
              (11,085,054
              )
              
              (11,006,097
              )Net
                  loans
              
              
              842,991,036
              
              
              809,297,995Premises
                  and equipment, net
              
              
              21,094,146
              
              
              20,779,587Goodwill
              
              
              5,984,604
              
              
              5,984,604Cash
                  value of bank-owned life insurance policies
              
              
              11,574,051
              
              
              11,474,964Foreclosed
                  assets
              
              
              361,644
              
              
              987,814Other
                  assets
              
              
              18,070,161
              
              
              19,310,677Total
                  assets
              
              $
              1,171,845,032
              
              $
              1,120,803,786**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
                  demand
              
              $
              107,917,210
              
              $
              100,910,593Interest-bearing
                  demand and savings
              
              
              371,484,133
              
              
              328,828,309Time
              
              
              475,015,076
              
              
              478,744,090Total
                  deposits
              
              
              954,416,419
              
              
              908,482,992Federal
                  funds purchased and securities sold under agreements to
                  repurchase
              
              
              11,639,529
              
              
              7,648,664Advances
                  from the Federal Home Loan Bank of Atlanta
              
              
              90,031,153
              
              
              90,190,702Guaranteed
                  preferred beneficial interests in debentures (trust preferred
                  securities)
              
              
              10,310,000
              
              
              10,310,000Other
                  liabilities
              
              
              7,790,690
              
              
              8,855,694Total
                  liabilities
              
              
              1,074,187,791
              
              
              1,025,488,052**Stockholders'
                  equity:**Preferred
                  stock, no par value; 1,500,000 shares authorized; no shares
                  issued
              
              
              -
              
              
              -Common
                  stock, no par value; 98,500,000 shares authorized; 9,516,673 and
                  9,504,969
                  shares issued and outstanding
              
              
              1,217,065
              
              
              1,217,065Additional
                  paid-in capital
              
              
              27,742,985
              
              
              27,584,852Retained
                  earnings
              
              
              69,161,042
              
              
              67,476,178Accumulated
                  other comprehensive loss
              
              
              (463,851
              )
              
              (962,361
              )Total
                  stockholders' equity
              
              
              97,657,241
              
              
              95,315,734Total
                  liabilities and stockholders' equity
              
              $
              1,171,845,032
              
              $
              1,120,803,786
 
 See
        accompanying notes to consolidated financial statements.
  1
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****THREE
                  MONTHS ENDED MARCH 31, 2007 AND 2006****(Unaudited)****Three
                  Months Ended March 31,****2007**
              
              **2006****Interest
                  income:**Interest
                  and fees on loans
              
              $
              17,684,704
              
              $
              15,400,623Interest
                  and dividends on investment securities:Taxable
              
              
              2,012,457
              
              
              1,769,979Nontaxable
              
              
              284,571
              
              
              155,162Other
                  interest income
              
              
              469,487
              
              
              521,825Total
                  interest income
              
              
              20,451,219
              
              
              17,847,589**Interest
                  expense:**Interest
                  on deposits
              
              
              8,453,531
              
              
              5,933,020Interest
                  on Federal Home Loan Bank advances
              
              
              1,051,564
              
              
              772,634Interest
                  on other borrowings
              
              
              277,831
              
              
              250,359Total
                  interest expense
              
              
              9,782,926
              
              
              6,956,013Net
                  interest income
              
              
              10,668,293
              
              
              10,891,576**Provision
                  for loan losses**
              
              
              -
              
              
              -Net
                  interest income after provision for loan losses
              
              
              10,668,293
              
              
              10,891,576**Other
                  income:**Service
                  charges on deposit accounts
              
              
              835,888
              
              
              951,547Other
                  fee income
              
              
              314,153
              
              
              354,701Securities
                  transactions, net
              
              
              173,333
              
              
              (429,732
              )Other
                  noninterest income
              
              
              155,119
              
              
              164,167Total
                  other income
              
              
              1,478,493
              
              
              1,040,683**Other
                  expenses:**Salaries
                  and employee benefits
              
              
              4,776,539
              
              
              4,299,456Occupancy
                  expense of premises
              
              
              535,797
              
              
              471,338Furniture
                  and equipment expense
              
              
              578,968
              
              
              508,643Other
                  noninterest expense
              
              
              1,578,874
              
              
              1,476,294Total
                  other expenses
              
              
              7,470,178
              
              
              6,755,731Income
                  before income tax expense
              
              
              4,676,608
              
              
              5,176,528**Income
                  tax expense**
              
              
              1,611,826
              
              
              1,865,183Net
                  income
              
              $
              3,064,782
              
              $
              3,311,345**Earnings
                  per common share:**Basic
              
              $
              0.32
              
              $
              0.35Diluted
              
              $
              0.32
              
              $
              0.34
 
 See
        accompanying notes to consolidated financial statements.
  2
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME****THREE
                  MONTHS ENDED MARCH 31, 2007 AND 2006****(Unaudited)****Three
                  Months Ended March 31,****2007**
              
              **2006**Net
                  income
              
              $
              3,064,782
              
              $
              3,311,345Other
                  comprehensive income (loss):Unrealized
                  gain on cash flow hedge during the period, net of tax of $21,905
                  and $0
              
              
              24,293
              
              
              -Unrealized
                  holding gains (losses) on securities available for sale arising
                  during the
                  period, net of tax (benefit) of $316,015 and ($390,350)
              
              
              586,883
              
              
              (724,936
              )Reclassification
                  adjustment for (gains) losses on securities available for sale
                  included in
                  net income, net of tax (benefit) of $60,667 and ($150,406)
              
              
              (112,666
              )
              
              279,326498,510
              
              
              (445,610
              )Comprehensive
                  income
              
              $
              3,563,292
              
              $
              2,865,735
 
 See
        accompanying notes to consolidated financial statements.
  3
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS’ EQUITY****THREE
                  MONTHS ENDED MARCH 31, 2007 (Unaudited) AND YEAR ENDED DECEMBER
                  31,
                  2006****Accumulated****Additional**
              
              
              
              **Other****Common
                  Stock**
              
              **Paid-in**
              
              **Retained**
              
              **Comprehensive****Shares**
              
              **Par
                  Value**
              
              **Capital**
              
              **Earnings**
              
              **Loss**
              
              **Total****Balance,
                  December 31, 2005**
              
              
              9,469,017
              
              $
              1,217,065
              
              $
              28,126,032
              
              $
              58,872,179
              
              $
              (1,214,493
              )
              $
              87,000,783Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              13,735,217
              
              
              -
              
              
              13,735,217Other
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              252,132
              
              
              252,132Cash
                  dividends declared, $0.54 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,131,218
              )
              
              -
              
              
              (5,131,218
              )Stock
                  acquired and cancelled under stock repurchase plan
              
              
              (124,559
              )
              
              -
              
              
              (2,503,298
              )
              
              -
              
              
              -
              
              
              (2,503,298
              )Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              290,245
              
              
              -
              
              
              -
              
              
              290,245Stock
                  options exercised
              
              
              160,511
              
              
              -
              
              
              1,671,873
              
              
              -
              
              
              -
              
              
              1,671,873**Balance,
                  December 31, 2006**
              
              
              9,504,969
              
              
              1,217,065
              
              
              27,584,852
              
              
              67,476,178
              
              
              (962,361
              )
              
              95,315,734Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              3,064,782
              
              
              -
              
              
              3,064,782Other
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              498,510
              
              
              498,510Cash
                  dividends declared, $.145 per share
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,379,918
              )
              
              -
              
              
              (1,379,918
              )Stock
                  acquired and cancelled under stock repurchase plan
              
              
              (10,704
              )
              
              -
              
              
              (202,665
              )
              
              -
              
              
              -
              
              
              (202,665
              )Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              90,541
              
              
              -
              
              
              -
              
              
              90,541Stock
                  options exercised
              
              
              22,408
              
              
              -
              
              
              270,257
              
              
              -
              
              
              -
              
              
              270,257**Balance,
                  March 31, 2007**
              
              
              9,516,673
              
              $
              1,217,065
              
              $
              27,742,985
              
              $
              69,161,042
              
              $
              (463,851
              )
              $
              97,657,241
 
 See
        accompanying notes to consolidated financial statements.
  4
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****THREE
                  MONTHS ENDED MARCH 31, 2007 AND 2006****(Unaudited)****Three
                  Months Ended March 31,****2007**
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  income
              
              $
              3,064,782
              
              $
              3,311,345Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation,
                  amortization and accretion, net
              
              
              430,371
              
              
              472,611Provision
                  for loan losses
              
              
              -
              
              
              -Net
                  realized (gain) loss on securities transactions
              
              
              (173,333
              )
              
              429,732(Gain)
                  loss on disposal of assets
              
              
              6,824
              
              
              (4,799
              )Stock-based
                  compensation expense
              
              
              90,541
              
              
              80,618Increase
                  in cash value of bank-owned life insurance
              
              
              (99,087
              )
              
              (93,604
              )Decrease
                  in deferred compensation accrual
              
              
              (8,784
              )
              
              (3,988
              )Decrease
                  in retirement accruals
              
              
              (159,799
              )
              
              (56,979
              )Net
                  change in taxes receivable and taxes payable
              
              
              687,678
              
              
              1,865,183(Increase)
                  decrease in interest receivable
              
              
              728,032
              
              
              (477,175
              )Increase
                  in interest payable
              
              
              72,718
              
              
              274,024Net
                  increase in prepaid expenses and other assets
              
              
              (418,839
              )
              
              (512,531
              )Net
                  decrease in accrued expenses and other liabilities
              
              
              (1,018,361
              )
              
              (1,677,109
              )Net
                  cash provided by operating activities
              
              
              3,202,743
              
              
              3,607,328**CASH
                  FLOWS FROM INVESTING ACTIVITIES**(Increase)
                  decrease in interest-bearing deposits in other banks
              
              
              (766,513
              )
              
              2,401,437Increase
                  in federal funds sold
              
              
              (23,437,272
              )
              
              (20,903,631
              )Purchase
                  of debt securities
              
              
              (4,564,930
              )
              
              (25,837,385
              )Proceeds
                  from sales and calls of debt securities
              
              
              320,992
              
              
              12,672,706Proceeds
                  from maturities and paydowns of debt securities
              
              
              3,566,650
              
              
              2,891,538Purchase
                  of equity investments
              
              
              (5,702
              )
              
              (657,902
              )Proceeds
                  from sales and redemption of equity investments
              
              
              275,318
              
              
              338,600Net
                  increase in loans
              
              
              (33,853,362
              )
              
              (11,222,593
              )Purchase
                  of premises and equipment
              
              
              (744,573
              )
              
              (320,679
              )Proceeds
                  from disposal of assets
              
              
              779,667
              
              
              11,387Net
                  cash used in investing activities
              
              
              (58,429,725
              )
              
              (40,626,522
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Net
                  increase in deposits
              
              
              45,933,427
              
              
              39,542,808Net
                  increase in federal funds purchased and securities sold under repurchase
                  agreements
              
              
              3,990,865
              
              
              183,032Advances
                  from the Federal Home Loan Bank
              
              
              -
              
              
              8,000,000Payments
                  on Federal Home Loan Bank advances
              
              
              (159,549
              )
              
              (7,360,561
              )Dividends
                  paid
              
              
              (1,330,696
              )
              
              (1,183,628
              )Proceeds
                  from the exercise of stock options
              
              
              270,257
              
              
              748,988Acquisition
                  of stock under stock repurchase plans
              
              
              (202,665
              )
              
              (532,689
              )Net
                  cash provided by financing activities
              
              
              48,501,639
              
              
              39,397,950
  5
 ***Table
            of Contents***
 
 **PAB
                  BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****THREE
                  MONTHS ENDED MARCH 31, 2007 AND 2006 (Continued)****(Unaudited)****Three
                  Months Ended March 31,****2007**
              
              **2006**Net
                  increase (decrease) in cash and due from banks
              
              $
              (6,725,343
              )
              $
              2,378,756Cash
                  and due from banks at beginning of period
              
              
              26,712,252
              
              
              21,196,183Cash
                  and due from banks at end of period
              
              $
              19,986,909
              
              $
              23,574,939**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION**Cash
                  paid during the period for:Interest
              
              $
              9,710,208
              
              $
              6,681,989Taxes
              
              $
              -
              
              $
              -**NONCASH
                  INVESTING AND FINANCING TRANSACTIONS**Increase
                  (decrease) in unrealized losses on securities available for
                  sale
              
              $
              (729,565
              )
              $
              685,554Increase
                  in unrealized gain on cash flow hedge
              
              $
              46,198
              
              $
              -Transfer
                  of loans to foreclosed assets
              
              $
              160,321
              
              $
              176,688
 
 See
        accompanying notes to consolidated financial statements.
  6
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 **NOTE
        1. NATURE OF BUSINESS**
 
 PAB
        Bankshares, Inc. (the “Company”) is a bank holding company whose business is
        conducted primarily by its wholly-owned commercial bank subsidiary, The Park
        Avenue Bank (the “Bank”). The Bank is a state-chartered, member bank of the
        Federal Reserve System that was founded in 1956 in Valdosta, Lowndes County,
        Georgia. Through the Bank, the Company offers a broad range of commercial
        and
        consumer banking products and services to customers located primarily in
        the
        local market areas listed below. The Company and the Bank are subject to
        the
        regulations of certain federal and state agencies and are periodically examined
        by those regulatory agencies.
  **Banking
                    Locations**
                **Number
                    of Offices****South
                    Georgia Market:**Valdosta,
                    Lowndes County
                3
                    (including the main office)Lake
                    Park, Lowndes County
                1Adel,
                    Cook County
                1Bainbridge,
                    Decatur County
                3Cairo,
                    Grady County
                1Statesboro,
                    Bulloch County
                2Baxley,
                    Appling County
                1Hazlehurst,
                    Jeff Davis County
                1**North
                    Georgia Market:**McDonough,
                    Henry County
                1Stockbridge,
                    Henry County
                1Oakwood,
                    Hall County
                1Athens,
                    Oconee County
                1Snellville,
                    Gwinnett County
                2
                    (including a loan production office)Cumming,
                    Forsyth County
                1
                    (loan production office)**Florida
                    Market:**Ocala,
                    Marion County
                1St.
                    Augustine, St. Johns County
                1
                    (loan production office)Jacksonville,
                    Duval County
                1
 
 
 The
        Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business
        trust. This non-operating subsidiary was created in 2006 for the sole purpose
        of
        issuing trust preferred securities and investing the proceeds in subordinated
        debt issued by the Company. The Company follows Financial Accounting Standards
        Board (“FASB”) Interpretation No. 46R (Revised December 2003), *Consolidation
        of Variable Interest Entities* .
        This
        interpretation addresses consolidation by business entities of variable interest
        entities and when such entities are subject to consolidation under the
        provisions of this interpretation. The Company has determined that the
        provisions of FASB Interpretation No. 46R require deconsolidation of PAB
        Bankshares Capital Trust II.
 
 
 **NOTE
        2. BASIS OF PRESENTATION**
 
 The
        accompanying consolidated financial information of the Company is unaudited;
        however, such information reflects all adjustments (consisting of normal
        recurring adjustments) which are, in the opinion of management, necessary
        for a
        fair presentation of the financial position and results of operations. The
        results of operations for the three months ended March 31, 2007 are not
        necessarily indicative of the results that may be expected for the full year.
        These statements should be read in conjunction with the consolidated financial
        statements and related notes included in the Company’s Annual Report on Form
        10-K for the year ended December 31, 2006.
  7
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 
 **NOTE
        2. BASIS OF PRESENTATION (Continued)**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. Significant intercompany transactions and balances are eliminated
        in consolidation.
 
 In
        preparing the consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America, management
        is
        required to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and the disclosure of contingent assets and liabilities
        as of the balance sheet date and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
        Material estimates that are particularly susceptible to significant change
        relate to the determination of the allowance for loan losses, the valuation
        of
        goodwill, the valuation of foreclosed assets and deferred
        taxes.
 
 
 **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 ended March 31, 2007 and 2006 follow.
  **Three
                  Months Ended March 31,****2007**
              
              **2006**Basic
                  earnings per share:Net
                  income
              
              $
              3,064,782
              
              $
              3,311,345Weighted
                  average common shares outstanding
              
              
              9,515,976
              
              
              9,484,570Earnings
                  per common share
              
              $
              0.32
              
              $
              0.35Diluted
                  earnings per share:Net
                  income
              
              $
              3,064,782
              
              $
              3,311,345Weighted
                  average common shares outstanding
              
              
              9,515,976
              
              
              9,484,570Effect
                  of dilutive stock options
              
              
              175,257
              
              
              228,063Weighted
                  average diluted common shares outstanding
              
              
              9,691,233
              
              
              9,712,633Earnings
                  per common share
              
              $
              0.32
              
              $
              0.34
  8
 ***Table
            of Contents***
  **PAB
        BANKSHARES, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 
 **NOTE
        4. DERIVATIVE FINANCIAL INSTRUMENT**
 
 The
        Company’s asset-liability management policy allows 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. The contract
        is classified as a hedge of an exposure to changes in the cash flows of a
        recognized asset (“cash flow hedge”). As a cash flow hedge, the portion of a
        change in the fair value of the derivative that has been deemed highly effective
        is recognized in other comprehensive income until the related cash flows
        from
        the hedged item are recognized in earnings. The initial fair value of the
        premium paid is allocated and recognized in the same future period that the
        hedged forecasted transaction impacts earnings. At March 31, 2007, the Company
        reported a $24,000 gain, net of a $22,000 tax effect, in other comprehensive
        income related to cash flow hedges. Included in this tax effect is $5,700
        from a
        prior period deferred tax adjustment. The Company documents, both at inception
        and periodically over the life of the hedge, its analysis of actual and expected
        hedge effectiveness. To the extent that the hedge of future cash flows is
        deemed
        ineffective, changes in the fair value of the derivative are recognized in
        earnings as a component of other non-interest expense. For the three month
        period ended March 31, 2007, there was no ineffectiveness recognized in other
        non-interest expense attributable to cash flow hedges. A summary of the
        Company’s derivative financial instruments at March 31, 2007 is shown in the
        following table:
  **Notional****amount**
              
              **Floor
                  rate**
              
              **Maturity
                  in months**
              
              **Estimated
                  fair value at March 31, 2007**
              
              **Net
                  unrealized gains (losses)****Derivatives
                  Designated as Cash Flow Hedges:**Hedging
                  cash flows on prime-based floating rate loans
              
              $
              50,000,000
              
              
              8.25
              %
              
              27
              
              $
              658,000
              
              $
              236,000**Total
                  Derivative Instruments**
              
              $
              50,000,000
              
              
              8.25
              %
              
              27
              
              $
              658,000
              
              $
              236,000
  9
 ***Table
            of Contents***
  **NOTE
        5. STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION**
 
 At
        March 31, 2007, the Company had two fixed stock option plans under which it
        has granted options to its employees and directors to purchase common stock
        at
        the fair market price on the date of the grant. Both plans provide for
“incentive stock options” and “non-qualified stock options”. The incentive stock
        options are intended to qualify under Section 422 of the Internal Revenue
        Code
        for favorable tax treatment.
 
 Under
        the
        1994 Employee Stock Option Plan, the Board of Directors could grant up to
        400,000 stock options to employees of the Company as part of an incentive
        plan
        to attract and retain key personnel in the Company. The 1994 Employee Stock
        Option Plan expired in 2004. At March 31, 2007, there were 92,480 options
        outstanding that were granted under the 1994 Employee Stock Option
        Plan.
 
 Under
        the
        1999 Stock Option Plan, the Board of Directors can grant up to 600,000 stock
        options to directors, employees, consultants and advisors of the Company.
        On
        February 28, 2006, the Company’s Board of Directors adopted an amendment to the
        1999 Plan to increase the maximum aggregate number of shares of common stock
        for
        which options may be granted from 600,000 shares to 1,400,000 shares and
        to
        extend the term of the Plan for ten years from the date of the adoption of
        these
        amendments. This amendment was subsequently approved at the Company’s annual
        meeting of shareholders on May 23, 2006. On March 31, 2007, there were 685,766
        shares available for grant under the 1999 Stock Option Plan. At March 31,
        2007,
        there were 581,398 options outstanding that were granted under the 1999 Stock
        Option Plan.
 
 Prior
        to
        January 1, 2006, the Company accounted for its stock option plans under the
        recognition and measurement provision of Accounting Principles Board (“APB”)
        Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        related Interpretations, as permitted by FASB No. 123, *Accounting
        for Stock-Based Compensation* .
        Effective January 1, 2006, the Company adopted FASB No. 123R, *Share-Based
        Payment* ,
        utilizing the “modified prospective” method as described in FASB No. 123R.
        In the “modified prospective” method, compensation cost is recognized for all
        stock-based payments granted after the effective date and for all unvested
        awards granted prior to the effective date. In accordance with FASB
        No. 123R, prior period amounts were not restated. FASB No. 123R also
        requires the tax benefits associated with these stock-based payments to be
        classified as financing activities in the Consolidated Statements of Cash
        Flows,
        rather than as operating cash flows as required under previous
        regulations.
 
 At
        March
        31, 2007, there was approximately $1,012,000 of unrecognized compensation
        cost
        related to stock-based payments, which is expected to be recognized over
        a
        weighted-average period of 3.67 years.
  10
 ***Table
            of Contents***
  **CAUTIONARY
        NOTICE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
        statements set forth in this Report or incorporated herein by reference,
        including, without limitation, matters discussed in Item 2 “ *Management's
        Discussion and Analysis of Financial Condition and Results of
        Operation* ”
        beginning on page 12, are “forward-looking statements” within the meaning of the
        federal securities laws, including, without limitation, statements regarding
        our
        outlook on earnings, stock performance, asset quality and projected growth,
        and
        are based upon management’s beliefs as well as assumptions made based on data
        currently available to management. In this Report, the terms “PAB”, “the
        Company”, “we”, “us” or “our” refer to PAB Bankshares, Inc. When words like
“believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”,
“estimate”, “could”, “should”, “will”, and similar expressions are used, you
        should consider them as identifying forward-looking statements. These
        forward-looking statements are not guarantees of future performance, and
        a
        variety of factors could cause our actual results to differ materially from
        the
        anticipated or expected results expressed in these forward-looking statements.
        Many of these factors are beyond our ability to control or predict, and readers
        are cautioned not to put undue reliance on such forward-looking statements.
        The
        following list, which is not intended to be an all-encompassing list of risks
        and uncertainties affecting us, summarizes several factors that could cause
        our
        actual results to differ materially from those anticipated or expected in
        these
        forward-looking statements: (1) competitive pressures among depository and
        other
        financial institutions may increase significantly; (2) changes in the interest
        rate environment may reduce margins or the volumes or values of loans made
        by
        us; (3) general economic conditions (both generally and in our markets) may
        be
        less favorable than expected, resulting in, among other things, a deterioration
        in credit quality, a reduction in demand for credit and/or a decline in real
        estate values; (4) legislative or regulatory changes, including changes in
        accounting standards and compliance requirements, may adversely affect the
        businesses in which we are engaged; (5) competitors may have greater financial
        resources and develop products that enable such competitors to compete more
        successfully than we can; (6) our ability to attract and retain key personnel
        can be affected by the increased competition for experienced employees in
        the
        banking industry; (7) adverse changes may occur in the bond and equity markets;
        (8) war or terrorist activities may cause further deterioration in the economy
        or cause instability in credit markets; (9) restrictions or conditions imposed
        by our regulators on our operations may make it more difficult for us to
        achieve
        our goals; (10) economic, governmental or other factors may prevent the
        projected population, residential and commercial growth in the markets in
        which
        we operate; and (11) the risk factors discussed from time to time in the
        Company’s periodic reports filed with the Securities and Exchange Commission
        (the “SEC”), including but not limited to, the Company’s Annual Report on Form
        10-K for the year ended December 31, 2006. We undertake no obligation to,
        and we
        do not intend to, update or revise these statements following the date of
        this
        filing, whether as a result of new information, future events or otherwise,
        except as may be required by law.
  11
 ***Table
            of Contents***
  **ITEM2.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATION**
 
 The
        following discussion and analysis of the consolidated financial condition
        and
        results of operations of the Company should be read in conjunction with the
        Consolidated Financial Statements and related Notes included in this Report
        as
        well as the Consolidated Financial Statements, related Notes, and Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        included in the Company’s 2006 Annual Report on Form 10-K, and is qualified in
        its entirety by the foregoing and other more detailed financial information
        appearing elsewhere. Historical results of operations
        and the percentage relationships among any amounts included, and any trends
        which may appear to be inferred ,
        should
        not be taken as being necessarily indicative of trends in operations or results
        of operations for any future periods.
 
 Our
        operating subsidiary, The Park Avenue Bank, is a $1.17 billion community
        bank
        with 20 branches and three loan production offices in Georgia and Florida.
        We
        have offices in both smaller, rural communities as well as larger, metropolitan
        areas. We provide traditional banking products and services to commercial
        and
        individual customers in our markets. Competition, regulation, credit risk,
        and
        interest rate risk are the primary factors that we must manage in order to
        be
        successful.
 
 We
        generally group our offices into three geographic regions for discussion
        purposes due to the varying demographics of each market. Our offices in Lowndes,
        Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties are collectively
        referred to as our “South Georgia” market. Our offices in Henry, Hall, Oconee,
        Cobb, Gwinnett and Forsyth counties are collectively referred to as our “North
        Georgia” market. Our offices in Marion, Duval and St. Johns counties are
        collectively referred to as our “Florida” market. In addition, our corporate
        assets, correspondent bank account balances, investment portfolio, out-of-market
        participation loans, insider loans and insider deposits, borrowings, etc.
        are
        reported at the corporate level, in what we refer to as the
“Treasury”.
 
 Over
        the
        next five years, we plan to double our presence in Atlanta and other North
        Georgia markets and to build a North Florida franchise to compliment our
        South
        Georgia franchise. Thus far in 2007, we have opened a full-service branch
        in
        Snellville (Gwinnett County), Georgia and a loan production office in Cumming
        (Forsyth County), Georgia. Both of these locations extend our presence in
        the
        Atlanta MSA from Henry County on the southside to Gwinnett County on the
        eastside and Forsyth County on the northside. We will continue to add
        experienced bankers and grow our market share in and around these three anchors
        of our Atlanta franchise and towards our branches in the neighboring Athens
        and
        Gainesville MSAs.
 
 **FINANCIAL
        CONDITION**
 
 During
        the three months ended March 31, 2007, our total assets increased $51.0 million,
        or 18.5% on an annualized basis, to $1.17 billion, due primarily to an increase
        in total deposits of $45.9 million, or 20.5% on an annualized basis, to $954.4
        million. We estimate that at least $30 million of the deposit growth realized
        over the past two quarters are temporary deposits of local municipalities,
        individuals and corporations, and we expect those funds to be withdrawn during
        the second quarter of 2007. Over the past year, we have focused on increasing
        our retail banking efforts and expanding our relationships with our commercial
        loan officers to also provide deposit products and services to meet their
        needs.
        These accounts are an important factor in our strategic plan, and for 2007,
        we
        have begun to incent our retail branch personnel and our commercial lenders
        to
        grow deposits, especially noninterest-bearing deposits.
 
 The
        additional deposits were used to fund $33.8 million in new loan growth during
        the quarter. Our loan growth can be attributed to our presence in some of
        the
        fastest growing markets in the Southeastern United States and strong production
        from our seasoned bankers. However, we have seen a slowdown in residential
        construction activity in certain sections of the Atlanta and Jacksonville
        markets. We expect that this slowdown combined with our conservative
        underwriting criteria will result in a slower pace of growth for us over
        the
        next few quarters.
  12
 ***Table
            of Contents***
  The
        following table summarizes our loan and deposit portfolios classified by
        type
        and market as of March 31, 2007.
 
 As
                  of March 31, 2007
              
              South
                Georgia
              
              North
                Georgia
              
              Florida
              
              Treasury
              
              Total(Dollars
                  in Thousands)**Loans**Commercial
                  and financial
              
              $
              30,968
              
              $
              37,069
              
              $
              1,262
              
              $
              48
              
              $
              69,347Agricultural
                  (including loans secured by farmland)
              
              
              32,714
              
              
              4,410
              
              
              978
              
              
              -
              
              
              38,102Real
                  estate - construction
              
              
              74,509
              
              
              210,510
              
              
              38,739
              
              
              79
              
              
              323,837Real
                  estate - commercial
              
              
              78,990
              
              
              143,563
              
              
              24,717
              
              
              5,384
              
              
              252,654Real
                  estate - residential
              
              
              117,246
              
              
              25,570
              
              
              7,888
              
              
              2,321
              
              
              153,025Installment
                  loans to individuals and other loans
              
              
              15,059
              
              
              1,379
              
              
              74
              
              
              1,446
              
              
              17,958349,486
              
              
              422,501
              
              
              73,658
              
              
              9,278
              
              
              854,923Deferred
                  loan fees and unearned interest, net
              
              
              104
              
              
              (574
              )
              
              (389
              )
              
              12
              
              
              (847
              )Total
                  loans
              
              $
              349,590
              
              $
              421,927
              
              $
              73,269
              
              $
              9,290
              
              $
              854,076Percentage
                  of total
              
              
              40.9
              %
              
              49.4
              %
              
              8.6
              %
              
              1.1
              %
              
              100.0
              %**Deposits**Noninterest-bearing
                  demand
              
              $
              79,750
              
              $
              14,187
              
              $
              6,981
              
              $
              6,999
              
              $
              107,917Interest-bearing
                  demand and savings
              
              
              281,074
              
              
              58,549
              
              
              31,166
              
              
              695
              
              
              371,484Time
                  less than $100,000
              
              
              161,178
              
              
              42,195
              
              
              84,562
              
              
              47
              
              
              287,982Time
                  greater than or equal to $100,000
              
              
              85,013
              
              
              42,844
              
              
              30,407
              
              
              200
              
              
              158,464Brokered
              
              
              -
              
              
              -
              
              
              -
              
              
              28,569
              
              
              28,569Total
                  deposits
              
              $
              607,015
              
              $
              157,775
              
              $
              153,116
              
              $
              36,510
              
              $
              954,416Percentage
                  of total
              
              
              63.6
              %
              
              16.5
              %
              
              16.1
              %
              
              3.8
              %
              
              100.0
              %
 
 In
        addition to the geographic concentrations noted in the tables above, we had
        approximately $73.9 million in loans secured by real estate in Florida to
        customers of our South Georgia, North Georgia and Treasury offices.
 
 The
        table
        below summarizes our loan portfolio by loan type as of the end of each of
        the
        last five quarters.
 
 As
                  of Quarter End
              
              Mar-07
              
              Dec-06
              
              Sep-06
              
              Jun-06
              
              Mar-06(Dollars
                  In Thousands)Commercial
                  and financial
              
              $
              69,347
              
              $
              66,376
              
              $
              60,413
              
              $
              53,185
              
              $
              47,164Agricultural
                  (including loans secured by farmland)
              
              
              38,102
              
              
              43,302
              
              
              44,716
              
              
              47,754
              
              
              53,368Real
                  estate - construction
              
              
              323,837
              
              
              295,246
              
              
              297,026
              
              
              304,387
              
              
              290,863Real
                  estate - commercial
              
              
              252,654
              
              
              255,462
              
              
              253,586
              
              
              251,966
              
              
              229,236Real
                  estate - residential
              
              
              153,025
              
              
              142,501
              
              
              133,983
              
              
              127,020
              
              
              123,902Installment
                  loans to individuals and other loans
              
              
              17,958
              
              
              18,414
              
              
              18,211
              
              
              19,966
              
              
              20,836854,923
              
              
              821,301
              
              
              807,935
              
              
              804,278
              
              
              765,369Deferred
                  loan fees and unearnedinterest, net
              
              
              (847
              )
              
              (997
              )
              
              (1,299
              )
              
              (1,243
              )
              
              (1,279
              )854,076
              
              
              820,304
              
              
              806,636
              
              
              803,035
              
              
              764,090Allowance
                  for loan losses
              
              
              (11,085
              )
              
              (11,006
              )
              
              (10,686
              )
              
              (10,903
              )
              
              (11,186
              )$
              842,991
              
              $
              809,298
              
              $
              795,950
              
              $
              792,132
              
              $
              752,904
  13
 ***Table
            of Contents***
  The
        percentage of loans outstanding at the indicated dates is presented in the
        following table according to type of loan:
 
 As
                  of Quarter End
              
              Mar-07
              
              Dec-06
              
              Sep-06
              
              Jun-06
              
              Mar-06Commercial
                  and financial
              
              
              8.12
              %
              
              8.09
              %
              
              7.49
              %
              
              6.62
              %
              
              6.17
              %Agricultural
                  (including loans secured by farmland)
              
              
              4.46
              %
              
              5.28
              %
              
              5.54
              %
              
              5.95
              %
              
              6.98
              %Real
                  estate - construction
              
              
              37.92
              %
              
              35.99
              %
              
              36.82
              %
              
              37.89
              %
              
              38.07
              %Real
                  estate - commercial
              
              
              29.58
              %
              
              31.14
              %
              
              31.44
              %
              
              31.38
              %
              
              30.00
              %Real
                  estate - residential
              
              
              17.92
              %
              
              17.37
              %
              
              16.61
              %
              
              15.82
              %
              
              16.22
              %Installment
                  loans to individuals and other loans
              
              
              2.10
              %
              
              2.25
              %
              
              2.26
              %
              
              2.49
              %
              
              2.73
              %100.10
              %
              
              100.12
              %
              
              100.16
              %
              
              100.15
              %
              
              100.17
              %Deferred
                  loan fees and unearned interest, net
              
              
              -0.10
              %
              
              -0.12
              %
              
              -0.16
              %
              
              -0.15
              %
              
              -0.17
              %Total
                  loans
              
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %Allowance
                  for loan losses
              
              
              -1.30
              %
              
              -1.34
              %
              
              -1.32
              %
              
              -1.36
              %
              
              -1.46
              %Net
                  loans
              
              
              98.70
              %
              
              98.66
              %
              
              98.68
              %
              
              98.64
              %
              
              98.54
              %
 
 Due
        to
        our concentration in construction and development loans and commercial real
        estate loans, we monitor and estimate trends in our real estate markets and
        periodically adjust our strategies and underwriting requirements to manage
        the
        risks associated with these types of loans. Below is a table showing the
        collateral distribution of our construction and commercial real estate loan
        portfolios as of March 31, 2007.
 As
                        of March 31, 2007
                    
                    Construction
                        and Development
                    
                    %
                        of Total
                    
                    
                    
                    Commercial
                        Real Estate
                    
                    %
                        of Total(Dollars
                        in Thousands)Acquisition
                        and Development:
                    
                    
                    
                    
                    
                    
                    
                    
                    Owner-occupied:1-4
                        family residential
                    
                    $
                    132,857
                    
                    
                    41.03
                    %
                    
                    Office
                    
                    $
                    31,113
                    
                    
                    12.31
                    %Commercial
                        and multi-family
                    
                    
                    92,527
                    
                    
                    28.57
                    %
                    
                    Retail
                    
                    
                    22,329
                    
                    
                    8.84
                    %Construction:
                    
                    
                    
                    
                    
                    
                    
                    
                    Other
                    
                    
                    38,340
                    
                    
                    15.17
                    %1-4
                        family residential spec
                    
                    
                    36,883
                    
                    
                    11.39
                    %
                    
                    Not
                        owner-occupied:1-4
                        family residential pre-sold
                    
                    
                    2,068
                    
                    
                    0.64
                    %
                    
                    Office
                    
                    
                    28,429
                    
                    
                    11.25
                    %1-4
                        family residential other
                    
                    
                    17,891
                    
                    
                    5.52
                    %
                    
                    Retail
                    
                    
                    29,399
                    
                    
                    11.64
                    %Commercial
                        owner-occupied
                    
                    
                    5,585
                    
                    
                    1.72
                    %
                    
                    Other
                    
                    
                    25,468
                    
                    
                    10.08
                    %Commercial
                        not owner-occupied
                    
                    
                    12,939
                    
                    
                    4.00
                    %
                    
                    Other:Hotel/motel
                    
                    
                    10,545
                    
                    
                    3.26
                    %
                    
                    Hotel/motel
                    
                    
                    15,291
                    
                    
                    6.05
                    %Multi-family
                        properties
                    
                    
                    7,869
                    
                    
                    2.43
                    %
                    
                    Industrial
                    
                    
                    2,755
                    
                    
                    1.09
                    %Special
                        purpose property
                    
                    
                    2,339
                    
                    
                    0.72
                    %
                    
                    Multi-family
                        properties
                    
                    
                    20,031
                    
                    
                    7.93
                    %Other
                    
                    
                    2,334
                    
                    
                    0.72
                    %
                    
                    Special
                        purpose property
                    
                    
                    39,499
                    
                    
                    15.64
                    %Total
                        Construction and Development
                    
                    $
                    323,837
                    
                    
                    100.00
                    %
                    
                    Total
                        Commercial Real Estate
                    
                    $
                    252,654
                    
                    
                    100.00
                    %
  14
 ***Table
            of Contents***
  The
        table
        below summarizes our deposit portfolio by deposit type as of the end of each
        of
        the last five quarters.
 
 As
                  of Quarter End
              
              Mar-07
              
              Dec-06
              
              Sep-06
              
              Jun-06
              
              Mar-06(Dollars
                  In Thousands)Noninterest-bearing
                  demand
              
              $
              107,917
              
              $
              100,911
              
              $
              100,703
              
              $
              95,458
              
              $
              107,200Interest-bearing
                  demand and savings
              
              
              371,484
              
              
              328,828
              
              
              316,385
              
              
              315,492
              
              
              301,663Time
                  less than $100,000
              
              
              287,982
              
              
              279,936
              
              
              273,697
              
              
              264,552
              
              
              259,197Time
                  greater than or equal to $100,000
              
              
              158,464
              
              
              161,054
              
              
              151,075
              
              
              145,002
              
              
              145,311Brokered
              
              
              28,569
              
              
              37,754
              
              
              41,841
              
              
              36,274
              
              
              41,853Total
                  deposits
              
              $
              954,416
              
              $
              908,483
              
              $
              883,701
              
              $
              856,778
              
              $
              855,224
 
 The
        percentage of deposits outstanding at the indicated dates is presented in
        the
        following table according to type of deposit:
 
 As
                  of Quarter End
              
              Mar-07
              
              Dec-06
              
              Sep-06
              
              Jun-06
              
              Mar-06Noninterest-bearing
                  demand
              
              
              11.31
              %
              
              11.11
              %
              
              11.40
              %
              
              11.14
              %
              
              12.54
              %Interest-bearing
                  demand and savings
              
              
              38.92
              %
              
              36.19
              %
              
              35.80
              %
              
              36.82
              %
              
              35.27
              %Time
                  less than $100,000
              
              
              30.18
              %
              
              30.81
              %
              
              30.97
              %
              
              30.88
              %
              
              30.31
              %Time
                  greater than or equal to $100,000
              
              
              16.60
              %
              
              17.73
              %
              
              17.10
              %
              
              16.93
              %
              
              16.99
              %Brokered
              
              
              2.99
              %
              
              4.16
              %
              
              4.73
              %
              
              4.23
              %
              
              4.89
              %Total
                  deposits
              
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
              
              100.00
              %
 
 Stockholders’
        equity represented 8.3% of total assets at March 31, 2007, a slight decrease
        compared to 8.5% at December 31, 2006. However, total equity increased $2.3
        million, or 2.5%, during the quarter due primarily to the retention of earnings
        and a $499,000 decrease in accumulated other comprehensive losses. The Company
        earned $3.1 million and declared $1.4 million in dividends during the quarter.
        We declared a $0.145 per common share dividend for the first quarter 2007,
        which
        is a 3.6% increase from the $0.14 per common share dividend paid for the
        fourth
        quarter of 2006, and a 16% increase from the $0.125 per common share dividend
        paid in the first quarter of 2006. Our dividend payout ratio for the first
        quarter of 2007 was 45.02%, compared to 35.91% for the first quarter of
        2006.
 
 **RESULTS
        OF OPERATIONS**
 
 Net
        income for the three months ended March 31, 2007 was $3.1 million, or $0.32
        per
        diluted share, as compared to $3.3 million, or $0.34 per diluted share, during
        the same period in 2006. The $247,000, or 7.5%, decrease in net income is
        the
        net result of a $223,000 decrease in net interest income (or $154,000 on
        a
        taxable-equivalent basis) and a $715,000 increase in other expenses, offset
        by a
        $438,000 increase in other income and a $253,000 decrease in income tax
        expense.
 
 The
        reasons for these changes are discussed in more detail below.
 
 *Net
        Interest Income*
 The
        primary component of a financial institution’s profitability is net interest
        income, or the difference between the interest earned on assets, primarily
        loans
        and investments, and interest paid on liabilities, primarily deposits and
        other
        borrowed funds. For the three months ended March 31, 2007, our net interest
        income on a taxable-equivalent basis was $10.82 million, a 1.4% decrease
        from
        the $10.98 million in net interest income for the first quarter of 2006.
        The
        decrease in net interest income is due to a 40.6% increase in interest expense
        offset in part by a 14.9% increase in interest income. During the first quarter
        of 2007, our average earning assets were 8.3% higher compared to the same
        period
        in 2006. The average balances of our interest-bearing liabilities increased
        by
        10.0% to fund the asset growth. The average yield on our earning assets
        increased 45 basis points from 7.45% during the first quarter of 2006, to
        7.90%
        for the first quarter of 2007. However, the average rates paid for our funds
        increased 94 basis points from 3.38% during the first quarter of 2006, to
        4.32%
        for the first quarter of 2007. As a result of these rate increases, our net
        interest spread declined by 48 basis points from 4.07% during the first quarter
        of 2006, to 3.59% for the same period in 2007.
  15
 ***Table
            of Contents***
  The
        net
        interest margin is net interest income expressed as a percentage of average
        earning assets. Our net interest margin for the first quarter of 2007 was
        4.15%,
        6 basis points higher than our net interest margin of 4.09% for the fourth
        quarter of 2006, but 41 basis points lower than the 4.56% recorded for the
        first
        quarter of 2006. Although our net interest margin improved from the fourth
        quarter of 2006, further improvement of our net interest margin in 2007 is
        not
        expected considering the current inversion of the interest rate curve, narrowing
        spreads on our earning assets and our rising costs of funds. If we continue
        to
        grow the balance sheet, we would expect to have tighter net interest spreads
        due
        to the flat or inverted interest rate curve and incrementally higher cost
        of
        funds needed for such growth.
 
 The
        following table details the average balances of interest-earning assets and
        interest-bearing liabilities, the amount of interest earned and paid, and
        the
        average yields and rates for the three months ended March 31, 2007 and 2006.
        Federally tax-exempt income is presented on a taxable-equivalent basis assuming
        a 35% Federal tax rate. Loan average balances include loans on nonaccrual
        status.
 
 For
                  the Three Months Ended March 31,
              
              
              
              2007
              
              
              
              
              
              2006Average
                Balance
              
              Interest
                Income/
                Expense
              
              Average
                Yield/
                Rate
              
              Average
                Balance
              
              Interest
                Income/
                Expense
              
              Average
                Yield/
                Rate(Dollars
                  In Thousands)Interest-earning
                  assets:Loans
              
              $
              834,070
              
              $
              17,685
              
              
              8.60
              %
              $
              761,900
              
              $
              15,400
              
              
              8.20
              %Investment
                  securities:Taxable
              
              
              157,340
              
              
              2,012
              
              
              5.19
              %
              
              149,384
              
              
              1,770
              
              
              4.81
              %Nontaxable
              
              
              29,333
              
              
              438
              
              
              6.05
              %
              
              16,592
              
              
              239
              
              
              5.83
              %Other
                  short-term investments
              
              
              36,378
              
              
              469
              
              
              5.23
              %
              
              47,823
              
              
              522
              
              
              4.43
              %Total
                  interest-earning assets
              
              $
              1,057,121
              
              $
              20,604
              
              
              7.91
              %
              $
              975,699
              
              $
              17,931
              
              
              7.45
              %Interest-bearing
                  liabilities:Demand
                  deposits
              
              $
              297,988
              
              $
              2,590
              
              
              3.53
              %
              $
              253,655
              
              $
              1,595
              
              
              2.55
              %Savings
                  deposits
              
              
              37,587
              
              
              147
              
              
              1.59
              %
              
              40,618
              
              
              112
              
              
              1.12
              %Time
                  deposits
              
              
              473,550
              
              
              5,716
              
              
              4.90
              %
              
              435,036
              
              
              4,226
              
              
              3.94
              %FHLB
                  advances
              
              
              90,112
              
              
              1,052
              
              
              4.73
              %
              
              89,139
              
              
              773
              
              
              3.52
              %Notes
                  payable
              
              
              10,310
              
              
              180
              
              
              7.09
              %
              
              10,310
              
              
              219
              
              
              8.63
              %Other
                  short-term borrowings
              
              
              9,105
              
              
              98
              
              
              4.35
              %
              
              6,304
              
              
              31
              
              
              1.99
              %Total
                  interest-bearing liabilities
              
              $
              918,652
              
              $
              9,783
              
              
              4.32
              %
              $
              835,062
              
              $
              6,956
              
              
              3.38
              %Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.59
              %
              
              
              
              
              
              
              
              4.07
              %Net
                  interest income
              
              
              
              
              $
              10,821
              
              
              
              
              
              
              
              $
              10,975Net
                  interest margin
              
              
              
              
              
              
              
              
              4.15
              %
              
              
              
              
              
              
              
              4.56
              %
  16
 ***Table
            of Contents***
  *Provision
        for Loan Losses*
 At
        March
        31, 2007, the allowance for loan losses as a percentage of total loans was
        1.30%, compared to 1.34% at December 31, 2006. The decrease is due to the
        increase in outstanding loans of $33.8 million, offset by the $79,000 in
        net
        recoveries of previous bad debts during the quarter. Due to the net recoveries
        and our stable asset quality levels, we did not provide any additional provision
        to the allowance for loan losses during the quarter. Our nonperforming loans
        increased by one basis point to 0.50% of total loans at March 31, 2007 from
        0.49% of total loans at December 31, 2006.
 
 The
        table
        below summarizes our levels of nonperforming loans over the past five quarters.
 
 As
                  of Quarter End
              
              Mar-07
              
              Dec-06
              
              Sep-06
              
              Jun-06
              
              Mar-06(Dollars
                  In Thousands)Loans
                  accounted for on a nonaccrual basis
              
              $
              4,192
              
              $
              4,013
              
              $
              1,928
              
              $
              412
              
              $
              7,760Accruing
                  loans which are contractually past due 90 days or more as to principal
                  or
                  interest payments
              
              
              69
              
              
              34
              
              
              40
              
              
              23
              
              
              17Total
                  nonperforming loans
              
              $
              4,261
              
              $
              4,047
              
              $
              1,968
              
              $
              435
              
              $
              7,777Total
                  nonperforming loans as a percentage of total loans
              
              
              0.50
              %
              
              0.49
              %
              
              0.24
              %
              
              0.05
              %
              
              1.02
              %
 
 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.
 
 The
        environmental factors considered in developing our loss measurements
        include:
 ·
              levels
                  of and trends in delinquencies and impaired
                  loans;
 ·
              levels
                  of and trends in charge-offs and
                  recoveries;
 ·
              trends
                  in volume and terms of loans;
 ·
              effects
                  of any changes in risk selection and underwriting standards and
                  other
                  changes in lending policies, procedures, and
                  practices;
 ·
              experience,
                  ability, and depth of lending management and other relevant
                  staff;
 ·
              national
                  and local economic trends and
                  conditions;
 ·
              industry
                  conditions; and
 ·
              effects
                  of changes in credit
                  concentrations.
 
 This
        evaluation is inherently subjective as it requires estimates that are
        susceptible to significant revision as more information becomes available.
        While
        we use the best information available to make the evaluation, future adjustments
        to the allowance may be necessary if there are significant changes in economic
        conditions or other environmental factors. In addition, regulatory agencies,
        as
        an integral part of their examination process, periodically review our allowance
        for loan losses, and may require us to make additions to the allowance based
        on
        their judgment about information available to them at the time of their
        examinations.
  17
 ***Table
            of Contents***
  *Other
        Income*
 A
        summary
        of noninterest income follows:
 
 For
                  the Three Months Ended March 31,
              
              2007
              
              2006Amount
              
              Amount
              
              Percent
                Change(Dollars
                  In Thousands)Noninterest
                  income:Service
                  charges on deposit accounts
              
              $
              836
              
              $
              951
              
              
              -12.1
              %Mortgage
                  origination fees
              
              
              83
              
              
              116
              
              
              -28.4
              %ATM/
                  debit card fee income
              
              
              153
              
              
              135
              
              
              13.3
              %Securities
                  transactions, net
              
              
              173
              
              
              (430
              )
              
              -140.2
              %Earnings
                  on bank-owned life insurance
              
              
              99
              
              
              94
              
              
              5.3
              %Gain
                  (loss) on disposal of assets
              
              
              (13
              )
              
              2
              
              
              -750.0
              %Other
                  noninterest income
              
              
              147
              
              
              173
              
              
              -15.0
              %Total
                  noninterest income
              
              $
              1,478
              
              $
              1,041
              
              
              42.0
              %Noninterest
                  income (annualized) as a percentage of average assets
              
              
              0.53
              %
              
              0.40
              %
 
 We
        have
        continued to see a decline in our service charges on deposit accounts due
        to
        competitive pricing and the continuing promotion of a free checking product
        with
        no monthly service fees. Mortgage origination fees decreased as refinancing
        activity has slowed and due to unexpected turnover in mortgage originators.
 
 Fee
        income from ATM and debit cards increased as the volume of point-of-sale
        transactions continues to increase. We have also placed five additional ATMs
        in
        service over the past two quarters. However, we have begun to offer a no-fee
        ATM
        deposit product in select markets for competitive reasons, which may reduce
        our
        ATM fee income opportunities going forward.
 
 During
        the first quarter of 2006, we sold $12.0 million of lower-yielding, cash
        flow
        bonds and replaced them with higher-yielding, call protected bonds to protect
        us
        in a declining interest rate environment. We incurred a net loss of $430,000
        on
        these securities transactions that we expect to recover in the form of an
        increase in interest income over the next few years. This is compared to
        a
        $174,000 gain on the sale of equity securities recorded in the first quarter
        of
        2007. Excluding the net gain/loss on securities transactions, total noninterest
        income would have decreased $166,000, or 11.3%, for the first quarter of
        2007
        compared to the same period in 2006.
  18
 ***Table
            of Contents***
  *Other
        Expenses*
 A
        summary
        of noninterest expense follows:
 
 For
                  the Three Months Ended March 31,
              
              2007
              
              2006Amount
              
              Amount
              
              Percent
                Change(Dollars
                  In Thousands)Noninterest
                  expenses:Salaries
                  and wages
              
              $
              4,151
              
              $
              3,723
              
              
              11.5
              %Deferred
                  loan costs
              
              
              (471
              )
              
              (430
              )
              
              9.5
              %Employee
                  benefits
              
              
              1,096
              
              
              1,006
              
              
              8.9
              %Net
                  occupancy expense of premises
              
              
              536
              
              
              471
              
              
              13.8
              %Furniture
                  and equipment expense
              
              
              579
              
              
              509
              
              
              13.8
              %Advertising
                  and business development
              
              
              178
              
              
              176
              
              
              1.1
              %Supplies
                  and printing
              
              
              133
              
              
              152
              
              
              -12.5
              %Telephone
                  and internet charges
              
              
              147
              
              
              104
              
              
              41.3
              %Postage
                  and courier
              
              
              159
              
              
              150
              
              
              6.0
              %Legal
                  and accounting fees
              
              
              108
              
              
              106
              
              
              1.9
              %Director
                  fees and expenses
              
              
              130
              
              
              136
              
              
              -4.4
              %Service
                  charges and fees
              
              
              143
              
              
              120
              
              
              19.2
              %Other
                  noninterest expense
              
              
              581
              
              
              533
              
              
              9.0
              %Total
                  noninterest expense
              
              $
              7,470
              
              $
              6,756
              
              
              10.6
              %Noninterest
                  expense (annualized) as a percentage of average assets
              
              
              2.66
              %
              
              2.61
              %
 
 Salaries
        and wages expense and employee benefits were up for the quarter due to annual
        raises and an 8% increase in the number of full-time equivalents from 305
        in
        March of 2006 to 329 in March of 2007. We staffed and opened two full service
        branches and a loan production office between March 31, 2006 and March 31,
        2007.
        We also converted our Athens, Georgia loan production office to a full service
        branch in October 2006. Deferred loan cost, which is a credit against salaries
        and wages, increased due to an increase in cost standards and an increase
        in
        loan volume.
 
 The
        additional facilities (three full service branches and one loan production
        office) primarily caused the increase in occupancy expense, furniture and
        equipment expense and telephone charges between March 31, 2006 and March
        31,
        2007. Service charges and fees increased due to increased ATM network fees
        paid
        during the quarter. We also had five additional ATMs in service during the
        first
        quarter of 2007, compared to the first quarter of 2006.
 
 *Income
        Tax Expense*
 As
        a
        percentage of net income before taxes, income tax expense was 34.5% and 36.0%
        for the three-month periods ended March 31, 2007 and 2006, respectively.
        Since
        the first quarter of 2006, we have invested in additional affordable housing
        projects to receive State of Georgia low income housing tax credits that
        helped
        to reduce our state income tax expense.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 Liquidity
        is an important factor in our financial condition and affects our ability
        to
        meet the borrowing needs and deposit withdrawal requirements of our customers.
        Assets, consisting primarily of loans and investment securities, are funded
        by
        customer deposits, borrowed funds and retained earnings. Maturities in the
        investment and loan portfolios also provide a steady flow of funds for
        reinvestment. In addition, our liquidity continues to be enhanced by a
        relatively stable core deposit base and the availability of additional funding
        sources.
 
 At
        March
        31, 2007, our ratio of liquid assets (defined as the sum of cash and due
        from
        bank balances, interest-bearing deposits in other banks, federal funds sold,
        and
        investment securities) to total assets was 23.2%, compared to 22.6% at December
        31, 2006. It is our policy to maintain a ratio of liquid assets to total
        assets
        of at least 15%.
  19
 ***Table
            of Contents***
  During
        the first three months of 2007, we utilized the $45.9 million in deposit
        growth,
        the $4.0 million proceeds from additional securities sold under repurchase
        agreements and the $3.2 million in cash flows from operations to fund the
        $18.8
        million increase in liquid assets, $33.8 million growth in loans and $1.3
        million in dividends paid to our stockholders during the first three months
        of
        2007. Our in-market deposit campaigns also allowed us to reduce our non-core
        funding (brokered deposits) by $9.2 million, or 24.3%, during the first quarter
        of 2007.
 
 *Contractual
        Obligations*
 Summarized
        below are our contractual obligations as of March 31, 2007.
 
 Contractual
                  Obligations
              
              Total
              
              Less
                  than
                1
                  year
              
              1
                  to 3
                years
              
              3
                  to 5
                years
              
              More
                  than
                5
                  years(Dollars
                  In Thousands)Federal
                  Home Loan Bank of Atlanta Advances
              
              $
              90,031
              
              $
              7,601
              
              $
              5,460
              
              $
              10,821
              
              $
              66,149Operating
                  Lease Obligations
              
              
              1,871
              
              
              374
              
              
              589
              
              
              431
              
              
              477Guaranteed
                  Preferred Beneficial Interests in Debentures
              
              
              10,310
              
              
              -
              
              
              -
              
              
              -
              
              
              10,310$
              102,212
              
              $
              7,975
              
              $
              6,049
              
              $
              11,252
              
              $
              76,936
 
 *Off
        Balance Sheet Arrangements*
 Our
        financial statements do not reflect various commitments and contingent
        liabilities that arise in the normal course of business. These off-balance
        sheet
        financial instruments include commitments to extend credit and standby letters
        of credit. Such financial instruments are included in the financial statements
        when funds are distributed or when the instruments become payable. Our exposure
        to credit loss in the event of nonperformance by the other party to a financial
        instrument for commitments to extend credit, standby letters of credit and
        credit card commitments is represented by the contractual amount of those
        instruments. We use the same credit policies in making commitments as we
        do for
        on-balance sheet instruments. Although these amounts do not necessarily
        represent future cash requirements, a summary of our commitments as of March
        31,
        2007 and December 31, 2006 are as follows:
 
 Mar-07
              
              Dec-06Commitments
                  to extend credit
              
              $
              158,592,000
              
              $
              154,450,000Standby
                  letters of credit
              
              $
              8,248,000
              
              $
              7,316,000
 
 In
        June
        2006, we entered into a $50 million notional amount, 3-year, 8.25% Prime
        floor
        contract to hedge against interest rate risk in a declining rate environment.
        Notional amounts provide the basis for calculating payments between
        counterparties and do not represent amounts to be exchanged between parties,
        and
        are not a measure of financial risk. The risk of loss with our counterparty
        is
        limited to a small fraction of the notional amount. We only deal with
        counterparties that have strong credit ratings and are approved by our Board.
        Due to these factors, we feel our credit risk exposure at March 31, 2007
        was not
        material.
 
 *Stockholders’
        Equity*
 The
        Company maintains a ratio of stockholders’ equity to total assets that is
        considered adequate according to regulatory standards. The Company and the
        Bank
        are required to comply with capital adequacy standards established by our
        regulators. At March 31, 2007, the Company and the Bank were in compliance
        with
        those standards. There are no conditions or events since quarter end that
        we
        believe have materially changed our regulatory capital ratios.
 
 The
        following table summarizes the regulatory capital ratios of the Company and
        the
        Bank at March 31, 2007.
 
 Company
                Consolidated
              
              Bank
              
              Minimum
                Regulatory
                RequirementTotal
                  Capital to Risk Weighted Assets
              
              
              12.0
              %
              
              11.9
              %
              
              8.0
              %Tier
                  1 Capital to Risk Weighted Assets
              
              
              10.8
              %
              
              10.8
              %
              
              4.0
              %Tier
                  1 Capital to Average Assets (Leverage Ratio)
              
              
              9.1
              %
              
              9.1
              %
              
              4.0
              %
  20
 ***Table
            of Contents***
  On
        May
        23, 2006, the Company’s Board of Directors renewed its annual plan to repurchase
        up to 300,000 shares of the Company’s common stock over the next twelve-month
        period. The Company plans to use cash on hand to repurchase its shares on
        the
        open market and through private transactions. During the first quarter of
        2007,
        10,704 shares were repurchased at a total cost of $203,000. Although the
        Company
        may not repurchase all 300,000 shares within the allotted time period, the
        program will allow the Company to repurchase its shares as opportunities
        arise
        through either the open market or privately negotiated transactions at prices
        deemed appropriate by management. At March 31, 2007, there were 223,916 shares
        available to be repurchased under the plan. The expiration date for this
        plan is
        May 23, 2007.
 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 The
        preparation of financial statements and the related disclosures in conformity
        with accounting principles generally accepted in the United States requires
        that
        management make estimates and assumptions which affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ from those
        estimates. We believe that our determination of the allowance for loan losses
        and the fair value of assets, including the impairment of goodwill, affect
        our
        most significant judgments and estimates used in the preparation of our
        consolidated financial statements. The
        Company’s accounting policies are described in detail in Note 1 of our
        Consolidated Financial Statements provided in Item 8 of our 2006 Annual Report
        on Form 10-K. The following is a brief description of the Company’s critical
        accounting estimates involving significant management valuation judgment.
        Management has discussed these critical accounting policies with the Audit
        Committee.
 
 *Allowance
        for Loan Losses*
 The
        allowance for loan losses represents management’s estimate of losses inherent in
        the existing loan portfolio. The allowance for loan losses is increased by
        the
        provision for loan losses charged to expense and reduced by loans charged
        off,
        net of recoveries. The allowance for loan losses is determined based on
        management’s assessment of several factors including, but not limited to,
        reviews and evaluations of specific loans, changes in the nature and volume
        of
        the loan portfolio, current economic conditions and the related impact on
        segments of the loan portfolio, historical loan loss experiences and the
        level
        of classified and nonperforming loans.
 
 Loans
        are
        considered impaired if, based on current information and events, it is probable
        that the Bank will be unable to collect the scheduled payments of principal
        or
        interest when due according to the contractual terms of the loan agreement.
        The
        measurement of impaired loans is based on either the fair value of the
        underlying collateral, the present value of the future cash flows discounted
        at
        the historical effective interest rate stipulated in the loan agreement,
        or the
        estimated market value of the loan. In measuring the fair value of the
        collateral, management uses assumptions (e.g., discount rate) and methodologies
        (e.g., comparison to the recent selling price of similar assets) consistent
        with
        those that would be utilized by unrelated third parties.
 
 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.
  21
 ***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. 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 March 31, 2007.
 
 
 **ITEM3.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
 
 We
        are
        subject to exposure from U.S. dollar interest rate changes and accordingly,
        we
        manage our exposure by considering the possible changes in the net interest
        margin. We do not engage in trading activity nor do we classify any portion
        of
        the investment portfolio as held for trading. Finally, we have no material
        direct exposure to foreign currency exchange rate risk, commodity price risk
        and
        other market risks.
 
 Interest
        rates play a major part in the net interest income of a financial institution.
        The sensitivity to rate changes is known as “interest rate risk.” The repricing
        of interest-earning assets and interest-bearing liabilities can influence
        the
        changes in net interest income. As part of our asset/liability management
        program, the timing of repriced assets and liabilities is referred to as
        gap
        management. It is our policy to maintain a gap ratio in the one-year time
        horizon between 0.80 and 1.20. At March 31, 2007, our one-year
        management-adjusted gap ratio of 0.98 was within our policy guidelines. This
        is
        a significant improvement compared to our one-year gap position of 1.25 at
        March
        31, 2006. 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 1.62 at March 31,
        2007.
 
 After
        suffering through a period of rapidly declining interest rates that compressed
        our net interest margins by 103 basis points from 2000 to 2001, we have reduced
        the level of asset-sensitivity on the Company’s balance sheet in anticipation of
        another eventual downturn in interest rates. We accomplished this by
        conscientiously lengthening the duration of our earning assets and shortening
        the duration of our deposits and other borrowings. In June 2006, we entered
        into
        a $50 million 3-year 8.25% Prime rate floor contract in an additional effort
        to
        hedge our interest rate risk in a declining interest rate
        environment.
  22
 ***Table
            of Contents***
  The
        table
        below has two gap ratio measurements, regulatory and management-adjusted.
        The
        regulatory gap considers only contractual maturities or repricings. The
        management-adjusted gap ratio includes assumptions regarding prepayment speeds
        on certain rate sensitive assets, the repricing frequency of interest-bearing
        demand and savings accounts, and the stability of core deposit levels, all
        of
        which are adjusted periodically as market conditions change. The
        management-adjusted gap ratio indicates we are highly asset sensitive in
        relation to changes in market interest rates in the short-term. Being asset
        sensitive would result in net interest income increasing in a rising rate
        environment and decreasing in a declining rate environment.
 
 3-Month
              
              6-Month
              
              1-Year(Dollars
                  In Thousands)*Regulatory
                  Defined*Rate
                  Sensitive Assets (RSA)
              
              $
              619,926
              
              $
              643,114
              
              $
              699,508Rate
                  Sensitive Liabilities (RSL)
              
              
              539,619
              
              
              644,909
              
              
              783,547RSA
                  minus RSL (Gap)
              
              $
              80,307
              
              $
              (1,795
              )
              $
              (84,039
              )Gap
                  Ratio (RSA/RSL)
              
              
              1.15
              
              
              1.00
              
              
              0.89*Management-Adjusted*Rate
                  Sensitive Assets (RSA)
              
              $
              627,751
              
              $
              655,382
              
              $
              719,405Rate
                  Sensitive Liabilities (RSL)
              
              
              388,294
              
              
              513,115
              
              
              731,624RSA
                  minus RSL (Gap)
              
              $
              239,457
              
              $
              142,267
              
              $
              (12,219
              )Gap
                  Ratio (RSA/RSL)
              
              
              1.62
              
              
              1.28
              
              
              0.98
 
 We
        use
        simulation analysis to monitor changes in net interest income due to changes
        in
        market interest rates. The simulation of rising, declining, and flat interest
        rate scenarios allows us to monitor and adjust interest rate sensitivity
        to
        minimize the impact of market interest rate swings. The analysis of the impact
        on net interest income over a twelve-month period is subjected to increases
        or
        decreases in market rates on net interest income and is monitored on a quarterly
        basis. Our policy states that net interest income cannot be reduced by more
        than
        10% using this analysis. As of March 31, 2007, the simulation model projected
        net interest income would increase 7.20% over the next year if market rates
        immediately rose by 200 basis points and the model projected net interest
        income
        to decrease 5.44% over the next year if market rates immediately fell by
        200
        basis points. These projections are a significant change from the 14.74%
        increase projected at March 31, 2006 if market rates had increased 200 basis
        points and a 12.09% decrease projected at March 31, 2006 if market rates
        had
        fallen by 200 basis points. The lower volatility in our results is due primarily
        to our efforts to neutralize our asset-sensitive balance sheet mix, to improve
        our 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
                  Rate
                    Change
                Effect
                    on Net Interest IncomeGradual
                Immediate+300
                    bps
                7.77%
                10.45%+200
                    bps
                6.64%
                7.20%+100
                    bps
                3.85%
                3.90%-100
                    bps
                -2.93%
                -3.19%-200
                    bps
                -4.10%
                -5.44%-300
                    bps
                -5.12%
                -10.56%
  23
 ***Table
            of Contents***
  **ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
 
 A
        review
        and evaluation was performed by the Company’s management, including the
        Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s
        disclosure controls and procedures as of the end of the period covered by
        this
        Quarterly Report. Based on that review and evaluation, the CEO and CFO have
        concluded that the Company’s current disclosure controls and procedures, as
        designed and implemented, were effective. There have been no significant
        changes
        in the Company’s internal controls over financial reporting or in other factors
        that could significantly affect the Company’s internal controls subsequent to
        the date of their evaluation. There were no material weaknesses identified
        in
        the course of such review and evaluation and, therefore, no corrective measures
        were taken by the Company.
 
 
 **PART
        II. OTHER INFORMATION**
 
 
 **ITEM1.**
              **LEGAL
                  PROCEEDINGS**
 
 None
 
 
 **ITEM1A.**
              **RISK
                  FACTORS**
 
 There
        has
        not been any material change in the risk factors disclosure from that contained
        in the Company’s 2006 Annual Report on Form 10-K for the fiscal year ended
        December 31, 2006.
 
 
 **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
                  programs1January
              
              
              -
              
              $
              -
              
              
              -
              
              
              234,617February
              
              
              5,813
              
              
              19.35
              
              
              5,813
              
              
              228,804March
              
              
              4,891
              
              
              18.44
              
              
              4,891
              
              
              223,913Total
              
              
              10,704
              
              $
              19.25
              
              
              10,704
              
              
              223,913
 
 1
              On
                  May 23, 2006, the Board of Directors renewed its annual plan to
                  repurchase
                  up to 300,000 shares of the Company's common stock over the next
                  twelve
                  month period. The plan will expire May 23, 2007.
 
 
 **ITEM3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
 
 None
 
 
 **ITEM4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
 
 None
 
 
 **ITEM5.**
              **OTHER
                  INFORMATION**
 
 None
 
 24
 ***Table
            of Contents***
 
 **ITEM
                  6.**
              **EXHIBITS**
 
 3.2
              Amended
                  and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
                  the
                  Registrant’s Current Report on Form 8-K dated March 29,
                  2007).
 
 31.1
              Rule
                  13a-14(a) Certification of CEO
 
 31.2
              Rule
                  13a-14(a) Certification of CFO
 
 32.1
              Section
                  1350 Certification of CEO
 
 32.2
              Section
                  1350 Certification of CFO
 
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 **PAB
        BANKSHARES, INC.**
 Registrant
 
 Date:
              ***May
                  10, 2007***
              
              By:
              ***/s/
                  M. Burke Welsh, Jr.***M.
                  Burke Welsh, Jr.President
                  and Chief Executive Officer(principal
                  executive officer of the registrant)Date:
              ***May
                  10, 2007***
              
              By:
              ***/s/
                  Donald J. Torbert, Jr.***Donald
                  J. Torbert, Jr.Executive
                  Vice President and Chief Financial Officer(principal
                  financial officer of the
                  registrant)
   25