UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




_____________




FORM
10-Q





Quarterly
Report Pursuant to Section 13 or 15(d) of the


Securities
Exchange Act of 1934





For the
Quarterly Period Ended September 30, 2009 – Commission File Number
000-25422


_____________









PAB
BANKSHARES, INC.


(A
Georgia Corporation)


IRS
Employer Identification Number: 58-1473302





3250
North Valdosta Road, Valdosta, Georgia 31602


Telephone
Number: (229) 241-2775





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes o   No
o





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





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x





The
number of shares outstanding of the registrant’s common stock at October 30,
2009 was 13,795,040 shares.










TABLEOF
CONTENTS





PagePART I
            FINANCIAL INFORMATIONItem
      1.
            Consolidated Financial StatementsStatements of Condition
            1Statements of Operations
            2Statements of Comprehensive Income (Loss)
            3Statements of Stockholders’ Equity
            4Statements of Cash Flows
            5Notes to Consolidated Financial Statements
            7Item
      2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            25Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            44Item
      4.
            Controls and Procedures
            46PART II
            OTHER INFORMATIONItem
      1.
            Legal Proceedings
            46Item
      1A.
            Risk Factors
            46Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            46Item
      3.
            Defaults Upon Senior Securities
            46Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            47Item
      5.
            Other Information
            47Item
      6.
            Exhibits
            47SIGNATURES
            47





i
 Table of Contents





PARTI.  FINANCIAL INFORMATION


Item
1. Consolidated Financial Statements





PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CONDITION


AS
OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008


September
      30,
            
            
            December
      31,2009
            
            
            2008(UNAUDITED)ASSETSCash
      and due from banks
            
            $
            11,633,433
            
            
            $
            18,104,521Interest-bearing
      deposits in other banks
            
            
            125,848,537
            
            
            
            118,244,771Federal
      funds sold
            
            
            203,848
            
            
            
            1,054,719Investment
      securities
            
            
            137,834,224
            
            
            
            185,773,315Loans
            
            
            891,981,314
            
            
            
            956,687,391Allowance
      for loan losses
            
            
            (40,000,000
            )
            
            
            (19,373,625
            )Net
      loans
            
            
            851,981,314
            
            
            
            937,313,766Premises
      and equipment, net
            
            
            19,002,420
            
            
            
            19,984,288Goodwill
            
            
            5,984,604
            
            
            
            5,984,604Cash
      value of bank-owned life insurance policies
            
            
            12,732,441
            
            
            
            12,302,586Foreclosed
      assets
            
            
            55,195,128
            
            
            
            25,268,901Other
      assets
            
            
            30,803,085
            
            
            
            26,071,460Total
      assets
            
            $
            1,251,219,034
            
            
            $
            1,350,102,931LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
            
            $
            106,572,611
            
            
            $
            91,114,337Interest-bearing
      demand and savings
            
            
            241,074,276
            
            
            
            252,122,046Time
            
            
            681,991,559
            
            
            
            780,466,875Total
      deposits
            
            
            1,029,638,446
            
            
            
            1,123,703,258Federal
      funds purchased and securities sold under agreements to
      repurchase
            
            
            12,773,682
            
            
            
            8,954,253Advances
      from the Federal Home Loan Bank of Atlanta
            
            
            90,295,470
            
            
            
            109,703,917Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
            
            
            10,310,000
            
            
            
            10,310,000Other
      borrowings
            
            
            20,000,000
            
            
            
            -Other
      liabilities
            
            
            4,961,998
            
            
            
            5,830,761Total
      liabilities
            
            
            1,167,979,596
            
            
            
            1,258,502,189Stockholders'
      equity:Preferred
      stock, no par value; 1,500,000 shares authorized; no shares
      issued
            
            
            -
            
            
            
            -Common
      stock, no par value; 98,500,000 shares authorized; 13,795,040 and
      9,324,407 shares issued and outstanding
            
            
            1,217,065
            
            
            
            1,217,065Additional
      paid-in capital
            
            
            37,222,921
            
            
            
            24,225,407Retained
      earnings
            
            
            42,557,397
            
            
            
            62,467,000Accumulated
      other comprehensive income
            
            
            2,242,055
            
            
            
            3,691,270Total
      stockholders' equity
            
            
            83,239,438
            
            
            
            91,600,742Total
      liabilities and stockholders' equity
            
            $
            1,251,219,034
            
            
            $
            1,350,102,931





See
accompanying notes to consolidated financial statements.


1
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(UNAUDITED)Three Months Ended September
      30,
            
            
            Nine Months Ended
              September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      incomeInterest
      and fees on loans
            
            $
            13,119,681
            
            
            $
            15,390,664
            
            
            $
            41,098,368
            
            
            $
            47,187,488Interest
      and dividends on investment securities:Taxable
            
            
            1,487,428
            
            
            
            1,890,711
            
            
            
            5,212,782
            
            
            
            5,785,424Nontaxable
            
            
            129,340
            
            
            
            329,017
            
            
            
            513,142
            
            
            
            992,107Other
      interest income
            
            
            79,862
            
            
            
            69,502
            
            
            
            232,881
            
            
            
            205,470Total
      interest income
            
            
            14,816,311
            
            
            
            17,679,894
            
            
            
            47,057,173
            
            
            
            54,170,489Interest
      expenseInterest
      on deposits
            
            
            6,199,294
            
            
            
            7,262,644
            
            
            
            20,585,898
            
            
            
            23,141,670Interest
      on Federal Home Loan Bank advances
            
            
            1,052,374
            
            
            
            986,325
            
            
            
            3,203,873
            
            
            
            2,844,695Interest
      on other borrowings
            
            
            310,727
            
            
            
            210,658
            
            
            
            835,076
            
            
            
            755,909Total
      interest expense
            
            
            7,562,395
            
            
            
            8,459,627
            
            
            
            24,624,847
            
            
            
            26,742,274Net
      interest income
            
            
            7,253,916
            
            
            
            9,220,267
            
            
            
            22,432,326
            
            
            
            27,428,215Provision
      for loan losses
            
            
            31,437,987
            
            
            
            7,300,000
            
            
            
            35,187,987
            
            
            
            9,550,000Net
      interest income(expense) after provision for loan losses
            
            
            (24,184,071
            )
            
            
            1,920,267
            
            
            
            (12,755,661
            )
            
            
            17,878,215Other
      incomeService
      charges on deposit accounts
            
            
            943,908
            
            
            
            930,643
            
            
            
            2,625,886
            
            
            
            2,813,370Other
      fee income
            
            
            483,568
            
            
            
            407,758
            
            
            
            1,512,299
            
            
            
            1,302,408Securities
      transactions, net
            
            
            92,742
            
            
            
            2,033
            
            
            
            865,243
            
            
            
            202,250Loss
      on sale and write-down of other assets
            
            
            (754,918
            )
            
            
            (433,531
            )
            
            
            (1,276,488
            )
            
            
            (541,974
            )Gain
      (loss) on derivative instruments
            
            
            (143,189
            )
            
            
            -
            
            
            
            1,025,722
            
            
            
            -Other
      noninterest income
            
            
            267,004
            
            
            
            174,148
            
            
            
            728,760
            
            
            
            520,010Total
      other income
            
            
            889,115
            
            
            
            1,081,051
            
            
            
            5,481,422
            
            
            
            4,296,064Other
      expensesSalaries
      and employee benefits
            
            
            3,631,008
            
            
            
            4,573,088
            
            
            
            12,306,131
            
            
            
            14,110,146Occupancy
      expense of premises
            
            
            569,441
            
            
            
            655,180
            
            
            
            1,756,721
            
            
            
            1,902,695Furniture
      and equipment expense
            
            
            502,080
            
            
            
            516,336
            
            
            
            1,504,201
            
            
            
            1,562,462Other
      noninterest expense
            
            
            2,581,902
            
            
            
            1,765,767
            
            
            
            7,944,786
            
            
            
            4,955,459Total
      other expenses
            
            
            7,284,431
            
            
            
            7,510,371
            
            
            
            23,511,839
            
            
            
            22,530,762Loss
      before income tax benefit
            
            
            (30,579,387
            )
            
            
            (4,509,053
            )
            
            
            (30,786,078
            )
            
            
            (356,483
            )Income
      tax benefit
            
            
            (10,622,932
            )
            
            
            (1,648,774
            )
            
            
            (10,876,475
            )
            
            
            (257,219
            )Net
      loss
            
            $
            (19,956,455
            )
            
            $
            (2,860,279
            )
            
            $
            (19,909,603
            )
            
            $
            (99,264
            )Loss
      per common shareBasic
            
            $
            (1.93
            )
            
            $
            (0.31
            )
            
            $
            (2.06
            )
            
            $
            (0.01
            )Diluted
            
            $
            (1.93
            )
            
            $
            (0.31
            )
            
            $
            (2.06
            )
            
            $
            ( 0.01
            )





See
accompanying notes to consolidated financial statements.


2
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(UNAUDITED)Three Months Ended September
      30,
            
            
            Nine Months Ended
              September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      loss
            
            $
            (19,956,455
            )
            
            $
            (2,860,279
            )
            
            $
            (19,909,603
            )
            
            $
            (99,264
            )Other
      comprehensive income (loss):Unrealized
      gains (losses) on cash flow hedge during the period, net of tax (benefit)
      of ($44,859) and $117,357 for the quarter and ($614,502) and $92,625 for
      the year to date
            
            
            (87,080
            )
            
            
            217,947
            
            
            
            (1,192,854
            )
            
            
            172,018Reclassification
      adjustment for (gains) losses on cash flow hedge included in net income,
      net of tax (benefit) of ($48,684) and $0 for the quarter and $348,745 and
      $0 for the year to date
            
            
            94,505
            
            
            
            -
            
            
            
            (676,977
            )
            
            
            -Unrealized
      holding gains (losses) on securities available for sale arising during the
      period, net of tax (benefit) of $1,025,652 and ($72,791) for the quarter
      and $510,612 and ($845,706) for the year to date
            
            
            1,988,737
            
            
            
            (135,184
            )
            
            
            991,676
            
            
            
            (1,570,599
            )Reclassification
      adjustment for gains on securities available for sale included in net
      income, net of tax of $32,460 and $712 for the quarter and $294,183 and
      $70,788 for the year to date
            
            
            (60,283
            )
            
            
            (1,321
            )
            
            
            (571,060
            )
            
            
            (131,462
            )1,935,879
            
            
            
            81,442
            
            
            
            (1,449,215
            )
            
            
            (1,530,043
            )Comprehensive
      income (loss)
            
            $
            (18,020,576
            )
            
            $
            (2,778,837
            )
            
            $
            (21,358,818
            )
            
            $
            1,629,307





See
accompanying notes to consolidated financial statements.


3
 Table of Contents




PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


NINE
MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED) AND YEAR ENDED DECEMBER 31,
2008


AccumulatedAdditional
            
            
            
            
            
            OtherCommon Stock
            
            
            Paid-in
            
            
            Retained
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            Income
            
            
            TotalBalance,
      December 31, 2007
            
            
            9,223,217
            
            
            $
            1,217,065
            
            
            $
            22,792,940
            
            
            $
            72,822,852
            
            
            $
            843,115
            
            
            $
            97,675,972Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,911,265
            )
            
            
            -
            
            
            
            (5,911,265
            )Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,848,155
            
            
            
            2,848,155Cash
      dividends declared,
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -$0.24
      per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,195,622
            )
            
            
            -
            
            
            
            (2,195,622
            )2%
      stock dividend declared
            
            
            183,739
            
            
            
            -
            
            
            
            2,248,965
            
            
            
            (2,248,965
            )
            
            
            -
            
            
            
            -Stock
      acquired and cancelled
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -under
      stock repurchase plan
            
            
            (86,065
            )
            
            
            -
            
            
            
            (1,162,521
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,162,521
            )Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            310,043
            
            
            
            -
            
            
            
            -
            
            
            
            310,043Stock
      options exercised
            
            
            3,516
            
            
            
            -
            
            
            
            35,980
            
            
            
            -
            
            
            
            -
            
            
            
            35,980Balance,
      December 31, 2008
            
            
            9,324,407
            
            
            
            1,217,065
            
            
            
            24,225,407
            
            
            
            62,467,000
            
            
            
            3,691,270
            
            
            
            91,600,742Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (19,909,603
            )
            
            
            -
            
            
            
            (19,909,603
            )Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,449,215
            )
            
            
            (1,449,215
            )Proceeds
      from private placement of capital
            
            
            4,470,633
            
            
            
            
            
            
            
            12,772,471
            
            
            
            
            
            
            
            
            
            
            
            12,772,471Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            225,043
            
            
            
            -
            
            
            
            -
            
            
            
            225,043Balance,
      September 30, 2009
            
            
            13,795,040
            
            
            $
            1,217,065
            
            
            $
            37,222,921
            
            
            $
            42,557,397
            
            
            $
            2,242,055
            
            
            $
            83,239,438





See
accompanying notes to consolidated financial statements.


4
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(UNAUDITED)Nine Months Ended September
    30,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (19,909,603
            )
            
            $
            (99,264
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
            
            
            1,079,601
            
            
            
            1,284,092Provision
      for loan losses
            
            
            35,187,987
            
            
            
            9,550,000Net
      realized gain on securities transactions
            
            
            (865,243
            )
            
            
            (202,250
            )Loss
      on disposal of assets
            
            
            1,276,488
            
            
            
            541,974Stock-based
      compensation expense
            
            
            225,043
            
            
            
            256,455Increase
      in cash value of bank-owned life insurance
            
            
            (429,855
            )
            
            
            (316,701
            )Increase
      (decrease) in deferred compensation accrual
            
            
            180,156
            
            
            
            (118,374
            )Net
      realized gain on derivative instruments
            
            
            (1,025,722
            )
            
            
            -Net
      change in deferred taxes, taxes receivable and taxes
    payable
            
            
            (6,916,603
            )
            
            
            (2,296,220
            )Decrease
      in interest receivable
            
            
            526,184
            
            
            
            1,283,103Decrease
      in interest payable
            
            
            (468,843
            )
            
            
            (219,823
            )Net
      increase in prepaid expenses and other assets
            
            
            (1,556,006
            )
            
            
            (2,125,216
            )Net
      decrease in accrued expenses and other liabilities
            
            
            (580,075
            )
            
            
            (622,744
            )Net
      cash provided by operating activities
            
            
            6,723,509
            
            
            
            6,915,032CASH
      FLOWS FROM INVESTING ACTIVITIESIncrease  in
      interest-bearing deposits in other banks
            
            
            (7,603,766
            )
            
            
            (21,665,357
            )(Increase)
      decrease in federal funds sold
            
            
            850,871
            
            
            
            (6,688,699
            )Purchase
      of debt securities
            
            
            (44,313,619
            )
            
            
            (44,991,251
            )Proceeds
      from sales of debt securities
            
            
            58,435,008
            
            
            
            36,459,026Proceeds
      from calls of debt securities
            
            
            15,532,000
            
            
            
            20,102,927Proceeds
      from maturities and paydowns of debt securities
            
            
            19,866,109
            
            
            
            10,273,137Purchase
      of equity investments
            
            
            (288,023
            )
            
            
            (1,658,585
            )Redemption
      of equity investments
            
            
            94,700
            
            
            
            452,100Net
      (increase) decrease in loans
            
            
            11,541,262
            
            
            
            (71,888,615
            )Purchase
      of premises and equipment
            
            
            (587,323
            )
            
            
            (851,254
            )Proceeds
      from disposal of assets
            
            
            7,882,599
            
            
            
            2,804,092Net
      cash provided by (used in) investing activities
            
            
            61,409,818
            
            
            
            (77,652,479
            )


5
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)


NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(UNAUDITED)Nine
      Months Ended
              September
      30,2009
            
            
            2008CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase (decrease) in deposits
            
            
            (94,064,812
            )
            
            
            49,695,301Net
      increase (decrease) in federal funds purchased and securities sold under
      repurchase agreements
            
            
            3,819,429
            
            
            
            (7,340,486
            )Advances
      from the Federal Home Loan Bank
            
            
            -
            
            
            
            41,000,000Payments
      on Federal Home Loan Bank advances
            
            
            (19,408,447
            )
            
            
            (17,445,231
            )Proceeds
      from other borrowings
            
            
            20,000,000
            
            
            
            -Proceeds
      from termination of cash flow hedge derivative instrument
            
            
            2,276,944
            
            
            
            -Proceeds
      from private placement of capital
            
            
            12,772,471
            
            
            
            -Dividends
      paid
            
            
            -
            
            
            
            (3,532,990
            )Proceeds
      from the exercise of stock options
            
            
            -
            
            
            
            35,980Acquisition
      of stock under stock repurchase plans
            
            
            -
            
            
            
            (1,162,521
            )Purchase
      of cash flow hedge derivative instrument
            
            
            -
            
            
            
            (786,000
            )Net
      cash provided by (used in) financing activities
            
            
            (74,604,415
            )
            
            
            60,464,053Net
      decrease in cash and due from banks
            
            $
            (6,471,088
            )
            
            $
            (10,273,394
            )Cash
      and due from banks at beginning of period
            
            
            18,104,521
            
            
            
            29,451,700Cash
      and due from banks at end of period
            
            $
            11,633,433
            
            
            $
            19,178,306SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid (received) during the period for:Interest
            
            $
            25,093,690
            
            
            $
            26,962,097Taxes
            
            $
            (3,959,872
            )
            
            $
            2,044,000NONCASH
      INVESTING AND FINANCING TRANSACTIONSIncrease
      (decrease) in unrealized gains on securities available for
      sale
            
            $
            637,045
            
            
            $
            (2,618,555
            )Decrease
      in unrealized gain on cash flow hedge
            
            $
            (2,827,354
            )
            
            $
            264,644Transfer
      of loans to foreclosed assets
            
            $
            38,603,204
            
            
            $
            8,450,895





See
accompanying notes to consolidated financial statements.


6
 Table of Contents


PABBANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)










NOTE
      1.
            NATURE
      OF BUSINESS





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





Banking Locations
            Number of Banking
OfficesSouth
      Georgia Market:Valdosta,
      Lowndes County
            
            3
      (including the main office)Lake
      Park, Lowndes County
            
            1Adel,
      Cook County
            
            1Bainbridge,
      Decatur County
            
            3Cairo,
      Grady County
            
            1Statesboro,
      Bulloch County
            
            2Baxley,
      Appling County
            
            1Hazlehurst,
      Jeff Davis County
            
            1North
      Georgia Market:McDonough,
      Henry County
            
            1Stockbridge,
      Henry County
            
            1Oakwood,
      Hall County
            
            1Athens,
      Oconee County
            
            1Cumming,
      Forsyth County
            
            1
      (loan production office)Florida
      Market:Ocala,
      Marion County
            
            1St.
      Augustine, St. Johns County
            
            1
      (loan production office)





The
Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business
trust.  This non-operating subsidiary was created in 2006 for the sole
purpose of issuing trust preferred securities and investing the proceeds in
subordinated debt issued by the Company.  The Company follows
Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (Revised
December 2003), Consolidation
of Variable Interest Entities.  This interpretation addresses
consolidation by business entities of variable interest entities and when such
entities are subject to consolidation under the provisions of this
interpretation.  The Company has determined that the provisions of
FASB Interpretation No. 46R require deconsolidation of PAB Bankshares Capital
Trust II.





NOTE
      2.
            BASIS
      OF PRESENTATION





The
accompanying consolidated financial information of the Company is unaudited;
however, such information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of
operations.  The results of operations for the three months and nine
months ended September 30, 2009 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, 2008.


7
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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.





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





NOTE
      3.
            INVESTMENT
      SECURITIES





A summary
of the amortized cost and approximate fair value of investment securities, with
gross unrealized gains and losses, follows.





Amortized Cost
            
            
            Gross Unrealized Gains
            
            
            Gross Unrealized Losses
            
            
            Fair ValueSeptember
      30, 2009U.S.
      Government sponsored agencies
            
            $
            16,700,783
            
            
            $
            430,002
            
            
            $
            (6,980
            )
            
            $
            17,123,805State
      and municipal securities
            
            
            11,997,369
            
            
            
            289,552
            
            
            
            (155,603
            )
            
            
            12,131,318Mortgage-backed
      securities
            
            
            91,654,457
            
            
            
            2,685,505
            
            
            
            (124,363
            )
            
            
            94,215,599Corporate
      debt securities
            
            
            5,502,637
            
            
            
            63,890
            
            
            
            (280,125
            )
            
            
            5,286,402Equity
      securities
            
            
            9,077,100
            
            
            
            -
            
            
            
            -
            
            
            
            9,077,100$
            134,932,346
            
            
            $
            3,468,949
            
            
            $
            (567,071
            )
            
            $
            137,834,224December
      31, 2008U.S.
      Government sponsored agencies
            
            $
            34,425,092
            
            
            $
            878,996
            
            
            $
            (947
            )
            
            $
            35,303,141State
      and municipal securities
            
            
            31,591,669
            
            
            
            151,276
            
            
            
            (1,381,782
            )
            
            
            30,361,163Mortgage-backed
      securities
            
            
            100,306,541
            
            
            
            3,196,157
            
            
            
            (89,246
            )
            
            
            103,413,452Corporate
      debt securities
            
            
            7,456,382
            
            
            
            69,975
            
            
            
            (561,857
            )
            
            
            6,964,500Equity
      securities
            
            
            9,728,798
            
            
            
            2,261
            
            
            
            -
            
            
            
            9,731,059$
            183,508,482
            
            
            $
            4,298,665
            
            
            $
            (2,033,832
            )
            
            $
            185,773,315


8
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      3.
            INVESTMENT
      SECURITIES (Continued)





The
amortized cost and fair value of investment securities as of September 30, 2009,
by contractual maturity, are shown below.  Maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any
penalties.  Equity securities have a perpetual life and no stated
maturity; therefore, these securities and the mortgage-backed securities are
shown separately from the other debt securities in the following maturity
summary.





Amortized
              Cost
            
            
            Fair
              ValueDue
      in one year or less
            
            $
            -
            
            
            $
            -Due
      from one to five years
            
            
            2,262,134
            
            
            
            2,218,749Due
      from five to ten years
            
            
            9,552,676
            
            
            
            9,680,483Due
      after ten years
            
            
            22,385,979
            
            
            
            22,642,293Mortgage-backed
      securities
            
            
            91,654,457
            
            
            
            94,215,599Equity
      securities
            
            
            9,077,100
            
            
            
            9,077,100$
            134,932,346
            
            
            $
            137,834,224





Securities
with a carrying value of $114,491,865 and $109,607,145 at September 30, 2009 and
December 31, 2008, respectively, were pledged to secure public deposits, certain
borrowing arrangements and for other purposes.





Realized
gains and losses on securities transactions, determined using the specific
identification method, are included in earnings on the settlement
date.  Gains and losses on sales and calls of investment securities
for the three and nine month periods ended September 30, 2009 and 2008 consist
of the following:




Three
      Months ended
                September
      30,
              
              
              Nine
      Months ended
                September
      302009
              
              
              2008
              
              
              2009
              
              
              2008Gross
      gains on securities transactions
              
              $
              92,742
              
              
              $
              64,595
              
              
              $
              1,491,505
              
              
              $
              315,937Gross
      losses on securities transactions
              
              
              -
              
              
              
              (62,562
              )
              
              
              (626,262
              )
              
              
              (113,687
              )Net
      realized gain (loss) on securities transactions
              
              $
              92,742
              
              
              $
              2,033
              
              
              $
              865,243
              
              
              $
              202,250


9
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      3.
            INVESTMENT
      SECURITIES (Continued)





The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category, at September 30, 2009 and December 31,
2008.  At September 30, 2009 there was one mortgage-backed security
issued by U.S. Government sponsored agencies, twelve municipal securities and
three corporate debt securities in the investment portfolio that have been in a
continuous unrealized loss position for twelve months or longer.  As
management has the intent and ability to hold the securities until maturity, or
the foreseeable future, and due to the fact that the unrealized losses relate
primarily to changes in interest rates and do not affect the expected cash flows
of the underlying collateral or issuer, none of the declines in value are deemed
to be other than temporary.





Less than Twelve Months
            
            
            Twelve Months or LongerSeptember
      30, 2009
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesU.S.
      Government sponsored agencies
            
            $
            3,019,020
            
            
            $
            6,980
            
            
            $
            -
            
            
            $
            -State
      and municipal securities
            
            
            -
            
            
            
            -
            
            
            
            5,551,692
            
            
            
            155,603Mortgage-backed
      securities
            
            
            14,652,764
            
            
            
            109,042
            
            
            
            632,564
            
            
            
            15,321Corporate
      debt securities
            
            
            -
            
            
            
            -
            
            
            
            2,222,512
            
            
            
            280,125Total
      temporarily impaired securities
            
            $
            17,665,784
            
            
            $
            116,022
            
            
            $
            8,406,768
            
            
            $
            451,049December
      31, 2008U.S.
      Government sponsored agencies
            
            $
            3,019,053
            
            
            $
            947
            
            
            $
            -
            
            
            $
            -State
      and municipal securities
            
            
            18,905,887
            
            
            
            1,298,823
            
            
            
            875,407
            
            
            
            82,959Mortgage-backed
      securities
            
            
            2,176,031
            
            
            
            8,209
            
            
            
            1,606,997
            
            
            
            81,037Corporate
      debt securities
            
            
            2,491,548
            
            
            
            534,776
            
            
            
            470,462
            
            
            
            27,081Total
      temporarily impaired securities
            
            $
            26,592,519
            
            
            $
            1,842,755
            
            
            $
            2,952,866
            
            
            $
            191,077


10
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      4.
            LOSS
      PER COMMON SHARE





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





The
components used to calculate basic and diluted loss per share for the three
months and nine months ended September 30, 2009 and 2008 follow:





Three Months Ended
              September 30,
            
            
            Nine Months Ended
              September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Basic
      loss per share:Net
      loss
            
            $
            (19,956,455
            )
            
            $
            (2,860,279
            )
            
            $
            (19,909,603
            )
            
            $
            (99,264
            )Weighted
      average common shares outstanding
            
            
            10,344,878
            
            
            
            9,324,407
            
            
            
            9,668,302
            
            
            
            9,339,059Loss
      per common share
            
            $
            (1.93
            )
            
            $
            (0.31
            )
            
            $
            (2.06
            )
            
            $
            (0.01
            )Diluted
      loss per share:Net
      loss
            
            $
            (19,956,455
            )
            
            $
            (2,860,279
            )
            
            $
            (19,909,603
            )
            
            $
            (99,264
            )Weighted
      average common shares outstanding
            
            
            10,344,878
            
            
            
            9,324,407
            
            
            
            9,668,302
            
            
            
            9,339,059Effect
      of dilutive stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Weighted
      average diluted common shares outstanding
            
            
            10,344,878
            
            
            
            9,324,407
            
            
            
            9,668,302
            
            
            
            9,339,059Loss
      per common share
            
            $
            (1.93
            )
            
            $
            (0.31
            )
            
            $
            (2.06
            )
            
            $
            (0.01
            )


11
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      5.
            DERIVATIVE
      FINANCIAL INSTRUMENTS





Accounting
Policy for Derivative Instruments and Hedging Activities




FASB ASC
815 provides the disclosure requirements for derivatives and hedging activities
with the intent to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under FASB ASC
815, and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. FASB ASC 815
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about the fair value of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.





As
required by FASB ASC 815, the Company records all derivatives on the balance
sheet at fair value.  The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative, whether the Company
has elected to designate a derivative in a hedging relationship and apply hedge
accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualifying as a
hedge of the exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives designated and qualifying as a
hedge of the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges. Derivatives
may also be designated as hedges of the foreign currency exposure of a net
investment in a foreign operation. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging instrument
with the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow
hedge.  The Company may enter into derivative contracts that are
intended to economically hedge certain of its risk, even though hedge accounting
does not apply or the Company elects not to apply hedge accounting under FASB
ASC 815.





Risk
Management Objective of Using Derivatives





The
Company is exposed to certain risks arising from both its business operations
and economic conditions.  The Company principally manages its
exposures to a wide variety of business and operational risks through management
of its core business activities. The Company manages economic risks, including
interest rate, liquidity, and credit risk, primarily by managing the amount,
sources, and duration of its assets and liabilities and through the use of
derivative financial instruments.  Specifically, the Company enters
into derivative financial instruments to manage exposures that arise from
business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest
rates.  The Company’s derivative financial instruments are used to
manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally
related to certain variable rate loan assets and variable rate
borrowings.


12
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      5.
            DERIVATIVE
      FINANCIAL INSTRUMENTS (Continued)





Fair
Values of Derivative Instruments on the Balance Sheet





The table
below presents the fair value of the Company’s derivative financial instruments
as well as their classification on the Statement of Condition as
of  September 30, 2009 and December 31, 2008.





Asset
      Derivatives
            
            Liability
      DerivativesAs of September 30, 2009
            
            As of December 31, 2008
            
            As of September 30, 2009
            
            As of December 31, 2008Balance
      Sheet Location
            
            Fair
      Value
            
            Balance
      Sheet Location
            
            Fair
              Value
            
            Balance
      Sheet Location
            
            Fair
      Value
            
            Balance
      Sheet Location
            
            Fair
      ValueDerivatives
      designated as hedging instruments under FASB ACS 815:Interest
      Rate Products
            Other
      Assets
            
            
            -
            
            Other
      Assets
            
            $
            3,992,797
            
            Other
      Liabilities
            
            
            -
            
            Other
      Liabilities
            
            
            -Total
      derivatives designated as hedging instruments under FASB ASC
      815
            
            
            -
            
            
            
            $
            3,992,797
            
            
            
            
            -
            
            
            
            
            -Derivatives
      not designated as hedging instruments under FASB ASC
  815:Interest
      Rate Products
            Other
      Assets
            
            $
            31,181
            
            Other
      Assets
            
            
            -
            
            Other
      Liabilities
            
            
            -
            
            Other
      Liabilities
            
            
            -Total
      derivatives not
      designated as hedging instruments under FASB ASC 815
            
            $
            31,181
            
            
            
            
            -
            
            
            
            
            -
            
            
            
            
            -





Cash
Flow Hedges of Interest Rate Risk





The
Company’s objectives in using interest rate derivatives are to add stability to
interest income and expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest
rate caps as part of its interest rate risk management strategy.  For
hedges of the Company’s variable-rate borrowings, an interest rate cap is
designated as cash flow hedge to protect the company against interest rate
movements above the strike rate of the cap in exchange for an upfront
premium.  Historically the Company also has used interest rate collars
and floors as part of its interest rate risk management
strategy.  Interest rate collars designated as cash flow hedges
involve the receipt of variable-rate amounts from a counterparty if interest
rates fall below the strike rate on the purchased floor and the payment of
variable-rate amounts if interest rates rise above the cap rate on the sold
cap.  Interest rate floors designated as cash flow hedges involve the
receipt of variable-rate amounts from a counterparty if interest rates fall
below the strike rate on the contract in exchange for an up front
premium   As of September 30, 2009, the Company had one interest
rate cap with a notional amount of $25 million that had previously been
designated as cash flow hedge of interest rate risk.


13
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)










NOTE
      5.
            DERIVATIVE
      FINANCIAL INSTRUMENTS (Continued)





During
2009, such derivatives were used to hedge the variable cash outflows associated
with the Company’s floating rate deposit accounts.  During 2009, the
Company also had interest rate floors and collars associated with existing pools
of prime-based floating-rate loans.  The effective portion of changes
in the fair value of derivatives designated and that qualify as cash flow hedges
are recorded in accumulated other comprehensive income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. The ineffective portions of the change in fair value of the
derivatives are recognized directly in earnings as a component of other
non-interest income/expense. During the three and nine months ended September
30, 2009, the Company recognized a loss of $722 and $22,076 respectively, for
hedge ineffectiveness.  No gain or loss was recognized for
ineffectiveness during 2008.





Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest income or expense as interest payments are
received/made on the Company’s variable-rate assets/liabilities. During the next
twelve months, the Company estimates that $418,395 will be reclassified as an
increase to interest income and $78,910 will be reclassified as an increase to
interest expense.  During the three and nine months ended September
30, 2009 the Company accelerated the reclassification of amounts in other
comprehensive income to earnings as a result of a portion of the hedged
forecasted transactions related to the Company’s interest rate cap and two
interest rate collar’s becoming probable not to occur.  The
accelerated amount for the three and nine months ended September 30, 2009 was a
gain (loss) of $(127,393) and $1,168,000 respectively.





Non-designated
Hedges





The
Company does not use derivatives for trading or speculative
purposes.  Derivatives not designated as hedges are used to manage the
Company’s exposure to interest rate movements and other identified risks but do
not meet the strict hedge accounting requirements. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly in
earnings.  As of September 30, 2009, the Company had one outstanding
derivative, a $25 million dollar notional cap, which failed to qualify for hedge
accounting due to a mismatch between the cap notional and the money market
account balances being hedged.  Subsequently, the changes in fair
value of the cap for the period were recognized directly in earnings which
resulted in a loss for the period of $15,074.





During
the quarter ended June 30, 2009 the Company terminated a $25 million notional
collar that failed to qualify for hedge accounting; accordingly, the changes in
fair value of the collar during the six months ended June 30, 2009 of $137,151
has been recognized directly in earnings as a loss.


14
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)










NOTE
      5.
            DERIVATIVE
      FINANCIAL INSTRUMENTS (Continued)





Effect
of Derivative Instruments on the Income Statement





The
tables below present the effect of the Company’s derivative financial
instruments on the Income Statement for the three and nine months ended
September 30, 2009 and 2008.





Derivatives
      in Cash Flow
            
            Amount
      of Gain or (Loss) Recognized in OCI on Derivative (Effective
      Portion)
            
            Location
      of Gain or (Loss) Reclassified from Accumulated OCI into
      Income
            
            Amount
      of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
      Portion)
            
            Location
      of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
      and Amount Excluded from
            
            Amount
      of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
      and Amount Excluded from Effectiveness Testing)Hedging
      Relationships
            
            Three
      Months Ended
              September
      30,
            
            (Effective
      Portion)
            
            Three
      Months Ended September 30,
            
            Effectiveness
      Testing)
            
            Three
      Months Ended September 30,2009
            
            
            2008
            
            
            
            2009
            
            
            2008
            
            
            
            2009
            
            
            2008Interest
      Rate Products
            
            $
            (
      13,338
            )
            
            $
            725,331
            
            Interest
      Income
            
            $
            102,805
            
            
            $
            390,027
            
            Other
      Income
            
            $
            (722
            )
            
            
            -Other
      Income
            
            
            (127,393
            )Total
            
            $
            (13,338
            )
            
            $
            725,331
            
            
            
            $
            (24,588
            )
            
            $
            390,027
            
            
            
            $
            (722
            )
            
            
            -





Derivatives
      in Cash Flow
            
            Amount
      of Gain or (Loss) Recognized in OCI on Derivative (Effective
      Portion)
            
            Location
      of Gain or (Loss) Reclassified from Accumulated OCI into
      Income
            
            Amount
      of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
      Portion)
            
            Location
      of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
      and Amount Excluded from
            
            Amount
      of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
      and Amount Excluded from Effectiveness Testing)Hedging
      Relationships
            
            Nine
      Months Ended
              September
      30,
            
            (Effective
      Portion)
            
            Nine
      Months Ended
              September
      30,
            
            Effectiveness
      Testing)
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            
            2009
            
            
            2008
            
            
            
            2009
            
            
            2008Interest
      Rate Products
            
            $
            (141,100
            )
            
            $
            1,271,884
            
            Interest
      Income
            
            $
            1,423,993
            
            
            $
            1,007,241
            
            Other
      Income
            
            $
            (22,076
            )
            
            
            -Other  Income
            
            
            1,168,000Total
            
            $
            (141,100
            )
            
            $
            1,271,884
            
            
            
            $
            2,591,993
            
            
            $
            1,007,241
            
            
            
            $
            (22,076
            )
            
            
            -


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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      5.
            DERIVATIVE
      FINANCIAL INSTRUMENTS (Continued)





Effect
of Derivative Instruments on the Income Statement (Continued)





Amount
      of Gain or (Loss) Recognized in Income on Derivative
              Three
      Months Ended
              September
      30,Derivatives
      Not Designated as Hedging Instruments
            Location of Gain or (Loss)
      Recognized in Income on Derivative
            
            2009
            
            
            2008Interest
      Rate Products
            Other
      Income / Expense
            
            $
            (15,074
            )
            
            
            -Total
            
            
            $
            (15,074
            )
            
            
            -





Amount
      of Gain or (Loss) Recognized in Income on Derivative
              Nine
      Months Ended
              September
      30,Derivatives
      Not Designated as Hedging Instruments
            Location
      of Gain or (Loss) Recognized in Income on Derivative
            
            2009
            
            
            2008Interest
      Rate Products
            Other
      Income / Expense
            
            $
            (152,224
            )
            
            
            -Total
            
            
            $
            (152,225
            )
            
            
            -


16
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      6.
            STOCK
      PLANS AND STOCK-BASED EMPLOYEE
COMPENSATION





At
September 30, 2009, the Company had two fixed stock option plans under which it
has granted options to its employees and directors to purchase common stock at
the fair market value on the date of the grant.  Both plans provide
for “incentive stock options” and “non-qualified stock options”.  The
incentive stock options are intended to qualify under Section 422 of the
Internal Revenue Code for favorable tax treatment.





Under the
1994 Employee Stock Option Plan, the Board of Directors could grant up to
400,000 stock options to employees of the Company as part of an incentive plan
to attract and retain key personnel in the Company.  The 1994 Employee
Stock Option Plan expired in 2004.  At September 30, 2009, there were
42,483 options outstanding that were granted under the 1994 Employee Stock
Option Plan.





Under the
1999 Stock Option Plan (as amended), the Board of Directors can grant up to
1,428,000 stock options to directors, employees, consultants and advisors of the
Company.  The 1999 Stock Option Plan expires in 2016.  At
September 30, 2009, there were 317,733 shares available for grant and there were
955,630 options outstanding that were granted under the 1999 Stock Option
Plan.





At
September 30, 2009, there was approximately $1,206,000 of unrecognized
compensation cost related to stock-based payments that is expected to be
recognized over a weighted-average period of 2.40 years.





NOTE
      7.
            FAIR
      VALUE MEASUREMENTS AND DISCLOSURES




On
January 1, 2008, the Company adopted Fair Value Measurements and
Disclosures.  It defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.  It applies to reported balances that are required or
permitted to be measured at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value measurements of
reported balances.




Fair Value Measurements and
Disclosures emphasizes that fair value is a market-based measurement, not
an entity-specific measurement.  Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability.  As a basis for considering market
participant assumptions in fair value measurements, Fair Value Measurements and
Disclosures establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified
within Levels 1 and 2 of the hierarchy) and the reporting entity’s own
assumptions about market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy).




Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which is typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.


17
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      7.
            FAIR
      VALUE MEASUREMENTS AND DISCLOSURES
(Continued)





As
discussed in Note 4, the Company uses floor and collar derivative contracts to
manage its interest rate risk.   The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves and implied volatilities.  The fair values of interest
rate options are determined using the market standard methodology of discounting
the future expected cash receipts that would occur if variable interest rates
fell below the strike rate of the floors or rise above the strike price of the
collar.  The variable interest rates used in the calculation of
projected receipts on the floor (cap) are based on an expectation of future
interest rates derived from observable market interest rate curves and
volatilities.  The Company incorporates credit valuation adjustments
to appropriately reflect both its own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements.  In
adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, mutual
puts, and guarantees.





Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of September
30, 2009, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the
overall valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy.  The Company did not have any fair value
measurements using significant unobservable inputs (Level 3) as of September 30,
2009.





The table
below presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of September 30, 2009, aggregated by the level in the fair
value hierarchy within which those measurements fall.





Quoted Prices in Active Markets for Identical
      Assets
              (Level 1)
            
            
            Significant Other Observable
      Inputs
              (Level 2)
            
            
            Significant Unobservable
Inputs
              (Level 3)
            
            
            TotalAssetsInvestment
      securities available-for-sale
            
            $
            -
            
            
            $
            137,834,224
            
            
            $
            -
            
            
            $
            137,834,224Derivative
      financial instruments
            
            
            -
            
            
            
            31,181
            
            
            
            -
            
            
            
            31,181Total
      assets at fair value
            
            $
            -
            
            
            $
            137,865,405
            
            
            $
            -
            
            
            $
            137,865,405





Assets
Measured at Fair Value on a Nonrecurring Basis





The
following is a description of the valuation methodologies used for instruments
measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.




18
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      7.
            FAIR
      VALUE MEASUREMENTS AND DISCLOSURES
(Continued)





Loan
impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows
using the loan's existing rate, or the fair value of collateral if the loan is
collateral dependent. A portion of the allowance for loan losses is allocated to
impaired loans if the value of such loans is deemed to be less than the unpaid
balance. If these allocations cause the allowance for loan losses to require an
increase, such increase is reported as a component of the provision for loan
losses. Loan losses are charged against the allowance when management believes
the uncollectibility of a loan is confirmed.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the loan impairment as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, the Company records the loan impairment as nonrecurring
Level 3.





Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying
value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or management’s estimation of the value of
the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
assets as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records
the foreclosed asset as nonrecurring Level 3.





The table
below presents the Company’s assets and liabilities for which a nonrecurring
change in fair value has been recorded during the three and nine months ended
September 30, 2009, aggregated by the level in the fair value hierarchy within
which those measurements fall.





Carrying
      value at September 30, 2009Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)
            
            
            Total
            
            
            Total
      losses for the three months ended
              September
      30, 2009
            
            
            Total
      losses for the nine months ended
              September
      30, 2009Impaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            55,650,726
            
            
            $
            55,650,726
            
            
            $
            -
            
            
            $
            -Foreclosed
      assets
            
            
            -
            
            
            
            6,686,408
            
            
            
            48,508,720
            
            
            
            55,195,128
            
            
            
            (754,038
            )
            
            
            (1,271,617
            )Total
      fair value of assets on a nonrecurring basis
            
            $
            -
            
            
            $
            6,686,408
            
            
            $
            104,159,446
            
            
            $
            110,845,854
            
            
            $
            (754,038
            )
            
            $
            (1,271,617
            )


19
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      7.
            FAIR
      VALUE MEASUREMENTS AND DISCLOSURES
(Continued)





Fair
Value of Financial Instruments


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





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





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





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





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





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





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





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





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


20
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      7.
            FAIR
      VALUE MEASUREMENTS AND DISCLOSURES
(Continued)





The
carrying amounts and estimated fair value of the Company's financial instruments
as of September 30, 2009 and December 31, 2008 are summarized
below.  All dollar amounts have been rounded to the nearest
thousand.





September
      30, 2009
            
            
            December
      31, 2008Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueCash
      and balances due from banks, interest-bearing deposits with other banks
      and federal funds sold
            
            $
            137,686,000
            
            
            $
            137,686,000
            
            
            $
            137,404,000
            
            
            $
            137,404,000Investment
      securities
            
            
            137,834,000
            
            
            
            137,834,000
            
            
            
            185,773,000
            
            
            
            185,773,000Loans,
      net
            
            
            851,981,000
            
            
            
            850,136,000
            
            
            
            937,314,000
            
            
            
            940,533,000Cash
      flow hedge derivative instrument
            
            
            31,000
            
            
            
            31,000
            
            
            
            3,993,000
            
            
            
            3,993,000Deposits
            
            
            1,029,638,000
            
            
            
            1,032,991,000
            
            
            
            1,123,703,000
            
            
            
            1,134,568,000Federal
      funds purchased and securities sold under agreements to
      repurchase
            
            
            12,774,000
            
            
            
            12,774,000
            
            
            
            8,954,000
            
            
            
            8,954,000Advances
      from the FHLB
            
            
            90,295,000
            
            
            
            88,098,000
            
            
            
            109,704,000
            
            
            
            106,847,000Other
      borrowings
            
            
            20,000,000
            
            
            
            20,000,000
            
            
            
            -
            
            
            
            -Beneficial
      interest in debentures
            
            
            10,310,000
            
            
            
            10,310,000
            
            
            
            10,310,000
            
            
            
            10,310,000





NOTE
      8.
            SEGMENT
      REPORTING





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





The
Company evaluates performance and allocates resources based on profit or loss
from operations.  There are no material intersegment sales or
transfers.  Net interest revenue is used as the basis for performance
evaluation rather than its components, total interest revenue and total interest
expense.    The Company uses a funds transfer pricing system
to credit or charge the segments with the economic value or cost of the funds
the segments create or use.  The accounting policies used by each
reportable segment are the same as those discussed in Note 2.  All
costs have been allocated to the reportable segments, therefore, combined
segment amounts agree to the consolidated totals.


21
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PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      8.
            SEGMENT
      REPORTING (Continued)





South
      Georgia
            
            
            North
      Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(In
      thousands)Three
      Months ended September 30, 2009Net
      interest income
            
            
            4,238
            
            
            
            3,091
            
            
            
            343
            
            
            
            (418
            )
            
            
            7,254Provision
      for loan losses
            
            
            3,110
            
            
            
            11,612
            
            
            
            2,632
            
            
            
            14,084
            
            
            
            31,438Noninterest
      income
            
            
            983
            
            
            
            (379
            )
            
            
            (53
            )
            
            
            338
            
            
            
            889Noninterest
      expense
            
            
            2,056
            
            
            
            1,400
            
            
            
            386
            
            
            
            3,442
            
            
            
            7,284Income
      tax expense (benefit)
            
            
            19
            
            
            
            (3,502
            )
            
            
            (928
            )
            
            
            (6,212
            )
            
            
            (10,623
            )Net
      income (loss)
            
            
            36
            
            
            
            (6,798
            )
            
            
            (1,800
            )
            
            
            (11,394
            )
            
            
            (19,956
            )Total
      assets
            
            
            389,987
            
            
            
            435,814
            
            
            
            97,072
            
            
            
            328,346
            
            
            
            1,251,219Three
      Months ended September 30, 2008Net
      interest income
            
            
            5,001
            
            
            
            3,171
            
            
            
            980
            
            
            
            68
            
            
            
            9,220Provision
      for loan losses
            
            
            267
            
            
            
            4,739
            
            
            
            988
            
            
            
            1,306
            
            
            
            7,300Noninterest
      income
            
            
            1,032
            
            
            
            (338
            )
            
            
            25
            
            
            
            362
            
            
            
            1,081Noninterest
      expense
            
            
            2,342
            
            
            
            1,482
            
            
            
            468
            
            
            
            3,218
            
            
            
            7,510Income
      tax expense (benefit)
            
            
            1,164
            
            
            
            (1,152
            )
            
            
            (153
            )
            
            
            (1,508
            )
            
            
            (1,649
            )Net
      income (loss)
            
            
            2,260
            
            
            
            (2,236
            )
            
            
            (298
            )
            
            
            (2,586
            )
            
            
            (2,860
            )Total
      assets
            
            
            412,753
            
            
            
            467,165
            
            
            
            111,387
            
            
            
            266,564
            
            
            
            1,257,869Nine
      Months ended September 30, 2009Net
      interest income
            
            
            11,920
            
            
            
            8,604
            
            
            
            1,583
            
            
            
            325
            
            
            
            22,432Provision
      for loan losses
            
            
            4,893
            
            
            
            16,696
            
            
            
            3,468
            
            
            
            10,131
            
            
            
            35,188Noninterest
      income
            
            
            3,013
            
            
            
            (577
            )
            
            
            7
            
            
            
            3,038
            
            
            
            5,481Noninterest
      expense
            
            
            6,796
            
            
            
            4,905
            
            
            
            1,291
            
            
            
            10,519
            
            
            
            23,511Income
      tax expense (benefit)
            
            
            1,103
            
            
            
            (4,615
            )
            
            
            (1,077
            )
            
            
            (6,286
            )
            
            
            (10,876
            )Net
      income (loss)
            
            
            2,141
            
            
            
            (8,959
            )
            
            
            (2,092
            )
            
            
            (11,001
            )
            
            
            (19,910
            )Nine
      Months ended September 30, 2008Net
      interest income
            
            
            13,994
            
            
            
            9,855
            
            
            
            2,780
            
            
            
            799
            
            
            
            27,428Provision
      for loan losses
            
            
            (1,121
            )
            
            
            6,707
            
            
            
            1,306
            
            
            
            2,658
            
            
            
            9,550Noninterest
      income
            
            
            3,230
            
            
            
            (269
            )
            
            
            110
            
            
            
            1,225
            
            
            
            4,296Noninterest
      expense
            
            
            7,336
            
            
            
            4,199
            
            
            
            1,526
            
            
            
            9,470
            
            
            
            22,531Income
      tax expense (benefit)
            
            
            3,743
            
            
            
            (449
            )
            
            
            20
            
            
            
            (3,571
            )
            
            
            (257
            )Net
      income (loss)
            
            
            7,266
            
            
            
            (871
            )
            
            
            38
            
            
            
            (6,533
            )
            
            
            (100
            )


22
 Table of Contents


PAB
BANKSHARES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








NOTE
      9.
            SUBSEQUENT
      EVENTS





Management
has evaluated all significant events and transactions that occurred after
September 30, 2009, but prior to November 5, 2009, the date these financial
statements were available to be issued, for potential recognition or disclosure
in these financial statements.





On
October 2, 2009 the Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission, for the purpose of registering up to
$7,000,000 of non-transferable subscription rights to existing shareholders to
purchase units consisting of common stock and warrants in the
Company.


23
 Table of Contents


CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS





Certain
statements set forth in this Report or incorporated herein by reference,
including, without limitation, matters discussed in Item 2 “Management's Discussion and Analysis
of Financial Condition and Results of Operation” are “forward-looking
statements” within the meaning of the federal securities laws, including,
without limitation, statements regarding our outlook on asset quality, our
capital position, our plans regarding our nonperforming assets, the interest
rate environment and economic conditions, and are based upon management’s
beliefs as well as assumptions made based on data currently available to
management.  In this Report, the terms “PAB”, “the Company”, “we”,
“us” or “our” refer to PAB Bankshares, Inc.  When words like
“believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”,
“estimate”, “could”, “should”, “will”, and similar expressions are used, you
should consider them as identifying forward-looking statements.  These
forward-looking statements are not guarantees of future performance, and a
variety of factors could cause our actual results to differ materially from the
anticipated or expected results expressed in these forward-looking
statements.  Many of these factors are beyond our ability to control
or predict, and readers are cautioned not to put undue reliance on such
forward-looking statements.  The following list, which is not intended
to be an all-encompassing list of risks and uncertainties affecting us,
summarizes several factors that could cause our actual results to differ
materially from those anticipated or expected in these forward-looking
statements: (1) general economic conditions (both generally and in our markets)
may be less favorable than expected, resulting in, among other things, a
continued deterioration in credit quality, a further reduction in demand for
credit and/or a further decline in real estate values; (2) the general decline
in the real estate and lending market, particularly the market areas surrounding
metropolitan Atlanta; (3)our ability to raise additional capital may be impaired
if current levels of market disruption and volatility continue or worsen; (4)
restrictions or conditions imposed by our regulators on our operations,
including the terms of our written agreement with the Federal Reserve Board, may
make it more difficult for us to achieve our goals; (5) legislative or
regulatory changes, including changes in accounting standards and compliance
requirements, may adversely affect the businesses in which we are engaged; (6)
competitive pressures among depository and other financial institutions may
increase significantly; (7) changes in the interest rate environment may reduce
margins or the volumes or values of loans made by us; (8) competitors may have
greater financial resources and develop products that enable such competitors to
compete more successfully than we can; (9) our ability to attract and retain key
personnel can be affected by the increased competition for experienced employees
in the banking industry; (10) adverse changes may occur in the bond and equity
markets; (11) war or terrorist activities may cause further deterioration in the
economy or cause instability in credit markets; (12) economic, governmental or
other factors may prevent the projected population, residential and commercial
growth in the markets in which we operate; and (13) 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, 2008.  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.


24
 Table of Contents


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





The
following discussion and analysis of the consolidated financial condition and
results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes included in this Report as
well as the Consolidated Financial Statements, related Notes, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008, and is qualified in its entirety by the foregoing and other more
detailed financial information appearing elsewhere herein.  Historical
results of operations and the percentage relationships among any amounts
included, and any trends which may appear to be inferred, should not be taken as
being necessarily indicative of trends in operations or results of operations
for any future periods.





Our
operating subsidiary, The Park Avenue Bank, is a $1.25 billion community bank
with 18 branches and two 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, and Forsyth counties are collectively referred to as our
“North Georgia” market.  Our offices in Marion 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”.  In January 2009, we closed our branch and loan production
office in Snellville, Georgia and our branch in Jacksonville, Florida due to the
economic downturn and disappointing results from these markets.





The
tables below provide summary demographic data on each of our
markets.





Market/
              County
            
            NumberofOffices
            
            
            TotalLoans1
            
            
            TotalDeposits1
            
            
            MarketShare (%)2
            
            
            MarketShareRank2South
      GeorgiaLowndes
            
            
            4
            
            
            $
            244,553
            
            
            $
            260,654
            
            
            
            20.3
            
            
            
            2Cook
            
            
            1
            
            
            $
            12,198
            
            
            $
            47,757
            
            
            
            26.0
            
            
            
            2Decatur
            
            
            3
            
            
            
            45,184
            
            
            
            112,141
            
            
            
            29.6
            
            
            
            1Grady
            
            
            1
            
            
            
            12,112
            
            
            
            23,040
            
            
            
            8.5
            
            
            
            5Appling
            
            
            1
            
            
            $
            14,180
            
            
            $
            38,736
            
            
            
            15.4
            
            
            
            5Jeff
      Davis
            
            
            1
            
            
            $
            9,154
            
            
            $
            51,825
            
            
            
            29.1
            
            
            
            2Bulloch
            
            
            2
            
            
            
            35,037
            
            
            
            53,785
            
            
            
            4.9
            
            
            
            613
            
            
            $
            372,418
            
            
            $
            587,938North
      GeorgiaHenry
            
            
            2
            
            
            $
            214,055
            
            
            $
            68,355
            
            
            
            3.5
            
            
            
            9Hall
            
            
            1
            
            
            
            91,321
            
            
            
            29,587
            
            
            
            1.6
            
            
            
            13Oconee
            
            
            1
            
            
            
            46,401
            
            
            
            15,174
            
            
            
            2.0
            
            
            
            9Forsyth
            
            
            1
            
            
            
            52,133
            
            
            
            11,105
            
            
            
            -
            
            
            
            -5
            
            
            $
            403,910
            
            
            $
            124,221FloridaMarion
            
            
            1
            
            
            $
            29,842
            
            
            $
            172,763
            
            
            
            3.4
            
            
            
            6St.
      Johns
            
            
            1
            
            
            
            51,276
            
            
            
            831
            
            
            
            -
            
            
            
            -2
            
            
            $
            81,118
            
            
            $
            173,594




1
            Dollar
      amounts are presented in thousands as of September 30,
      2009.  Amounts exclude $39.5 million in loans and $144.4 million
      in deposits assigned to the “Treasury” that are not allocated to any
      particular market (i.e. participation loans, employee and director
      accounts, brokered    deposits, official checks,
      etc.).


2
            Based
      on the FDIC/OTS Summary of Deposits report as of June 30,
      2009.


25
 Table of Contents





Median
      2009Market/
            
            Total
            
            
            Population
            
            
            Employment
            
            
            Unemployment
            
            
            HouseholdCounty
            
            Population1
            
            
            Growth (%)2
            
            
            Growth (%)3
            
            
            Rate (%)4
            
            
            Income ($)5Selected
      Georgia Counties:South
      Georgia:Appling
            
            
            17,975
            
            
            
            3.19
            
            
            
            1.8
            
            
            
            9.9
            
            
            
            36,176Bulloch
            
            
            67,245
            
            
            
            20.12
            
            
            
            (1.8
            )
            
            
            8.6
            
            
            
            36,618Cook
            
            
            16,662
            
            
            
            5.65
            
            
            
            (2.7
            )
            
            
            11.7
            
            
            
            32,980Decatur
            
            
            29,732
            
            
            
            5.28
            
            
            
            (1.8
            )
            
            
            11.9
            
            
            
            35,129Grady
            
            
            25,305
            
            
            
            6.96
            
            
            
            (1.9
            )
            
            
            9.2
            
            
            
            35,015Jeff
      Davis
            
            
            13,235
            
            
            
            4.34
            
            
            
            (3.7
            )
            
            
            13.9
            
            
            
            32,465Lowndes
            
            
            104,738
            
            
            
            13.70
            
            
            
            (3.1
            )
            
            
            7.8
            
            
            
            41,277North
      Georgia:Forsyth
            
            
            175,192
            
            
            
            78.03
            
            
            
            (6.6
            )
            
            
            8.4
            
            
            
            96,085Hall
            
            
            186,789
            
            
            
            34.11
            
            
            
            (5.4
            )
            
            
            9.0
            
            
            
            57,198Henry
            
            
            202,104
            
            
            
            69.35
            
            
            
            (6.6
            )
            
            
            9.3
            
            
            
            72,929Oconee
            
            
            34,510
            
            
            
            31.59
            
            
            
            (2.8
            )
            
            
            6.0
            
            
            
            66,899State
      of Georgia
            
            
            9,932,949
            
            
            
            21.33
            
            
            
            (5.3
            )
            
            
            9.6
            
            
            
            56,761Selected
      Florida Counties:Marion
            
            
            341,870
            
            
            
            32.04
            
            
            
            (4.3
            )
            
            
            12.2
            
            
            
            40,201St.
      Johns
            
            
            188,194
            
            
            
            52.84
            
            
            
            (4.1
            )
            
            
            8.3
            
            
            
            65,697State
      of Florida
            
            
            19,021,613
            
            
            
            19.02
            
            
            
            (4.3
            )
            
            
            10.1
            
            
            
            50,413National
      Total
            
            
            309,731,508
            
            
            
            10.06
            
            
            
            (3.5
            )
            
            
            9.1
            
            
            
            54,719





FINANCIAL
CONDITION





During
the nine months ended September 30, 2009, our total assets decreased $98.9
million, or 9.8% on an annualized basis, to $1.25 billion.  Our loan
portfolio decreased $64.7 million, or 9.0% on an annualized basis, to $892.0
million at September 30, 2009 from $956.7 million at December 31,
2008.  During the nine months ended September 30, 2009, $39.0 million
of loans were transferred from loans to foreclosed assets and $8.3 million of
foreclosed assets were sold. Total deposits decreased $94.1 million, or 11.2% on
an annualized basis, to $1.03 billion at September 30, 2009 from $1.12 billion
at December 31, 2008.  The decrease in total deposits is primarily the
result of an $87.4 million decrease in brokered deposits, an $11.1 million
dollar decrease in retail time deposits and an $11.0 million decrease in
interest-bearing demand and savings accounts, offset by a $15.4 million increase
in noninterest-bearing deposits.  During the first quarter of 2009,
the Bank issued $20 million of 3-year unsecured debt under the FDIC’s Temporary
Liquidity Guarantee Program.  During the nine months ended September
30, 2009, borrowings from the Federal Home Loan Bank also decreased $19.4
million.







1
            Estimated
      2009 population provided by SNL
Financial.


2
            Estimated
      percentage population change from 2000 to 2009 provided by SNL
      Financial.


3
            Total
      employment growth (not seasonally adjusted) for the Second Quarter 2009
      year-to-date percentage change from the prior year’s year-to-date data
      provided by the Bureau of Labor Statistics Household
    Survey.


4
            Unemployment
      rate (not seasonally adjusted) for the Second Quarter 2009 provided by the
      Bureau of Labor Statistics.


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


26
 Table of Contents


The
following table summarizes our loan and deposit portfolios classified by type
and market as of September 30, 2009.





South
            
            
            NorthAs of September  30,
      2009
            
            Georgia
            
            
            Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(Dollars
      in Thousands)LoansCommercial
      and financial
            
            $
            29,163
            
            
            $
            43,064
            
            
            $
            4,799
            
            
            $
            11,837
            
            
            $
            88,863Agricultural
      (including loans secured by farmland)
            
            
            35,010
            
            
            
            2,986
            
            
            
            6,474
            
            
            
            -
            
            
            
            44,470Real
      estate - construction
            
            
            77,130
            
            
            
            148,204
            
            
            
            39,929
            
            
            
            4,541
            
            
            
            269,804Real
      estate - commercial
            
            
            96,110
            
            
            
            158,759
            
            
            
            20,640
            
            
            
            7,895
            
            
            
            283,404Real
      estate - residential
            
            
            122,864
            
            
            
            45,465
            
            
            
            9,278
            
            
            
            3,441
            
            
            
            181,048Installment
      loans to individuals and other loans
            
            
            11,946
            
            
            
            5,600
            
            
            
            129
            
            
            
            6,886
            
            
            
            24,561372,223
            
            
            
            404,078
            
            
            
            81,249
            
            
            
            34,600
            
            
            
            892,150Deferred
      loan fees and unearned interest, net
            
            
            194
            
            
            
            (168
            )
            
            
            (131
            )
            
            
            (64
            )
            
            
            (169
            )372,417
            
            
            
            403,910
            
            
            
            81,118
            
            
            
            34,536
            
            
            
            891,981Allowance
      for loan losses
            
            
            (5,338
            )
            
            
            (21,937
            )
            
            
            (3,632
            )
            
            
            (9,093
            )
            
            
            (40,000
            )Net
      loans
            
            $
            367,079
            
            
            $
            381,973
            
            
            $
            77,486
            
            
            $
            25,443
            
            
            $
            851,981Percentage
      of total
            
            
            43.1
            %
            
            
            44.8
            %
            
            
            9.1
            %
            
            
            3.0
            %
            
            
            100.0
            %DepositsNoninterest-bearing
      demand
            
            $
            78,616
            
            
            $
            17,184
            
            
            $
            6,510
            
            
            $
            4,263
            
            
            $
            106,573Interest-bearing
      demand and savings
            
            
            184,105
            
            
            
            30,175
            
            
            
            26,056
            
            
            
            737
            
            
            
            241,073Retail
      time less than $100,000
            
            
            174,463
            
            
            
            46,932
            
            
            
            95,826
            
            
            
            1,795
            
            
            
            319,016Retail
      time greater than or equal to $100,000
            
            
            111,184
            
            
            
            27,844
            
            
            
            45,201
            
            
            
            17,711
            
            
            
            201,940Retail
      time placed in CDARs program
            
            
            39,571
            
            
            
            2,085
            
            
            
            -
            
            
            
            143
            
            
            
            41,799Brokered
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            119,237
            
            
            
            119,237Total
      deposits
            
            $
            587,939
            
            
            $
            124,220
            
            
            $
            173,593
            
            
            $
            143,886
            
            
            $
            1,029,638Percentage
      of total
            
            
            57.1
            %
            
            
            12.1
            %
            
            
            16.8
            %
            
            
            14.0
            %
            
            
            100.0
            %





In
addition to the geographic concentrations noted in the tables above, we had
approximately $69.8 million in loans secured by real estate in Florida to
customers of our South Georgia, North Georgia and Treasury
offices.


27
 Table of Contents


With
approximately 16% of our loan portfolio concentrated in residential construction
and development loans and an additional 20% of our loan portfolio in residential
mortgages, we monitor and evaluate economic trends in our residential real
estate markets.Since the second half of
2007, finished housing inventories and the supply of vacant developed lots have
continued to increase in several of our markets in the Atlanta MSA as the number
of home sales, new building permits and housing starts have
decreased.  The table below summarizes, from data available to the
Company, the inventory supply trends for housing and vacant developed lots for
select counties on the south side of the Atlanta MSA where we have a significant
presence in residential real estate construction and development loans and other
real estate owned.  These statistics are based on estimated absorption
rates using actual house sales compared to the number of houses for sale and
housing starts and/or building permits compared to the number of vacant
developed lots available.  The actual absorption periods may differ
from these estimates given changes in the future volume of home sales and
housing starts.





For
      the Quarter Ended
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08
            
            
            Sep-07
            
            
            Sep-06Housing Inventory:
            
            (Number
      of Months Supply)Henry
      County
            
            
            11.4
            
            
            
            11.9
            
            
            
            12.7
            
            
            
            14.0
            
            
            
            13.8
            
            
            
            10.8
            
            
            
            8.8Clayton
      County
            
            
            17.7
            
            
            
            18.5
            
            
            
            16.7
            
            
            
            15.1
            
            
            
            11.5
            
            
            
            11.7
            
            
            
            11.5Newton
      County
            
            
            10.1
            
            
            
            10.4
            
            
            
            12.9
            
            
            
            14.5
            
            
            
            15.3
            
            
            
            9.8
            
            
            
            9.1South
      Fulton County
            
            
            11.5
            
            
            
            8.7
            
            
            
            9.7
            
            
            
            9.5
            
            
            
            9.3
            
            
            
            8.0
            
            
            
            8.2Vacant Developed Lots
      Inventory:Henry
      County
            
            
            631.5
            
            
            
            362.9
            
            
            
            348.8
            
            
            
            291.0
            
            
            
            207.0
            
            
            
            60.0
            
            
            
            26.0Clayton
      County
            
            
            772.9
            
            
            
            436.8
            
            
            
            273.9
            
            
            
            169.0
            
            
            
            122.0
            
            
            
            39.0
            
            
            
            25.0Newton
      County
            
            
            649.0
            
            
            
            410.3
            
            
            
            399.9
            
            
            
            326.0
            
            
            
            210.0
            
            
            
            45.0
            
            
            
            21.0South
      Fulton County
            
            
            399.2
            
            
            
            192.7
            
            
            
            161.7
            
            
            
            126.0
            
            
            
            96.0
            
            
            
            43.0
            
            
            
            22.0





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





As
      of Quarter End
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08(Dollars
      in Thousands)Commercial
      and financial
            
            $
            88,863
            
            
            $
            84,599
            
            
            $
            82,534
            
            
            $
            87,530
            
            
            $
            91,401Agricultural
      (including loans securedby
      farmland)
            
            
            44,470
            
            
            
            45,774
            
            
            
            44,671
            
            
            
            48,647
            
            
            
            49,227Real
      estate - construction
            
            
            269,804
            
            
            
            290,949
            
            
            
            314,863
            
            
            
            315,786
            
            
            
            332,901Real
      estate - commercial
            
            
            283,404
            
            
            
            285,731
            
            
            
            274,338
            
            
            
            276,645
            
            
            
            281,781Real
      estate - residential
            
            
            181,048
            
            
            
            183,074
            
            
            
            191,388
            
            
            
            196,306
            
            
            
            195,439Installment
      loans to individuals andother
      loans
            
            
            24,561
            
            
            
            29,790
            
            
            
            32,740
            
            
            
            32,084
            
            
            
            32,075892,150
            
            
            
            919,917
            
            
            
            940,534
            
            
            
            956,998
            
            
            
            982,824Deferred
      loan fees and unearned interest, net
            
            
            (169
            )
            
            
            (219
            )
            
            
            (255
            )
            
            
            (310
            )
            
            
            (253
            )891,981
            
            
            
            919,698
            
            
            
            940,279
            
            
            
            956,688
            
            
            
            982,571Allowance
      for loan losses
            
            
            (40,000
            )
            
            
            (19,719
            )
            
            
            (20,403
            )
            
            
            (19,374
            )
            
            
            (20,240
            )$
            851,981
            
            
            $
            899,979
            
            
            $
            919,876
            
            
            $
            937,314
            
            
            $
            962,331


28
 Table of Contents


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





As
      of Quarter End
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08Commercial
      and financial
            
            
            9.96
            %
            
            
            9.20
            %
            
            
            8.78
            %
            
            
            9.15
            %
            
            
            9.30
            %Agricultural
      (including loans secured by farmland)
            
            
            4.99
            %
            
            
            4.98
            %
            
            
            4.75
            %
            
            
            5.08
            %
            
            
            5.01
            %Real
      estate – construction
            
            
            30.25
            %
            
            
            31.63
            %
            
            
            33.49
            %
            
            
            33.01
            %
            
            
            33.88
            %Real
      estate – commercial
            
            
            31.77
            %
            
            
            31.07
            %
            
            
            29.18
            %
            
            
            28.92
            %
            
            
            28.68
            %Real
      estate – residential
            
            
            20.30
            %
            
            
            19.90
            %
            
            
            20.35
            %
            
            
            20.52
            %
            
            
            19.89
            %Installment
      loans to individuals and other loans
            
            
            2.75
            %
            
            
            3.24
            %
            
            
            3.48
            %
            
            
            3.35
            %
            
            
            3.27
            %100.02
            %
            
            
            100.02
            %
            
            
            100.03
            %
            
            
            100.03
            %
            
            
            100.03
            %Deferred
      loan fees and unearned interest, net
            
            
            -0.02
            %
            
            
            -0.02
            %
            
            
            -0.03
            %
            
            
            -0.03
            %
            
            
            -0.03
            %Total
      loans
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %Allowance
      for loan losses
            
            
            -4.48
            %
            
            
            -2.14
            %
            
            
            -2.17
            %
            
            
            -2.03
            %
            
            
            -2.06
            %Net
      loans
            
            
            95.52
            %
            
            
            97.86
            %
            
            
            97.83
            %
            
            
            97.97
            %
            
            
            97.94
            %





At
September 30, 2009, our loan portfolio was $892.0 million compared to $956.7
million at December 31, 2008, a decrease of $64.7 million, or
6.8%.  Since December 31, 2004, the composition of the loan portfolio
has shifted as commercial real estate mortgages decreased from 36.9% of our
portfolio at December 31, 2004 to 31.8% at September 30, 2009, and construction
and land development loans increased from 25.8% of our portfolio to 30.3% of our
portfolio during that same time period.  However, it should be noted
that construction and land development loans have decreased from 38.3% of our
portfolio at December 31, 2007.  This increase in construction and
land development lending was largely the result of our decision in 2000 to
expand into our North Georgia markets.  The more recent decrease in
construction and development loans is due to management’s conscious efforts to
reduce the concentration risk in our loan portfolio.  Of the $269.8
million in construction and development loans outstanding at September 30, 2009,
$148.2 million, or 54.9%, were originated in our North Georgia
offices.





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





September
      30, 2009
            
            
            December
      31, 2008
            
            
            September
      30, 2008$ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total(Dollars
      in Thousands)Construction and
    development:Acquisition
      and development:1-4
      family residential
            
            $
            109,941
            
            
            
            40.7
            %
            
            $
            129,412
            
            
            
            41.0
            %
            
            $
            134,529
            
            
            
            40.4
            %Commercial
      and multi-family
            
            
            79,370
            
            
            
            29.4
            %
            
            
            95,934
            
            
            
            30.4
            %
            
            
            99,822
            
            
            
            30.0
            %Construction:1-4
      family residential spec
            
            
            11,939
            
            
            
            4.4
            %
            
            
            19,182
            
            
            
            6.1
            %
            
            
            26,159
            
            
            
            7.9
            %1-4
      family residential pre-sold
            
            
            261
            
            
            
            0.1
            %
            
            
            112
            
            
            
            0.1
            %
            
            
            366
            
            
            
            0.1
            %1-4
      family residential other
            
            
            17,239
            
            
            
            6.4
            %
            
            
            23,423
            
            
            
            7.4
            %
            
            
            29,501
            
            
            
            8.9
            %Commercial
      owner-occupied
            
            
            2,506
            
            
            
            0.9
            %
            
            
            3,340
            
            
            
            1.0
            %
            
            
            3,592
            
            
            
            1.1
            %Commercial
      not owner-occupied
            
            
            32,533
            
            
            
            12.1
            %
            
            
            27,038
            
            
            
            8.5
            %
            
            
            29,413
            
            
            
            8.8
            %Hotel/motel
            
            
            5,558
            
            
            
            2.1
            %
            
            
            7,949
            
            
            
            2.5
            %
            
            
            1,265
            
            
            
            0.4
            %Multi-family
      properties
            
            
            4,898
            
            
            
            1.8
            %
            
            
            -
            
            
            
            0.0
            %
            
            
            6,614
            
            
            
            2.0
            %Special
      purpose property
            
            
            1,840
            
            
            
            0.7
            %
            
            
            6,538
            
            
            
            2.1
            %
            
            
            1,500
            
            
            
            0.4
            %Other
            
            
            3,719
            
            
            
            1.4
            %
            
            
            2,858
            
            
            
            0.9
            %
            
            
            140
            
            
            
            0.0
            %Total
      construction and development loans
            
            $
            269,804
            
            
            
            100.0
            %
            
            $
            315,786
            
            
            
            100.0
            %
            
            $
            332,901
            
            
            
            100.0
            %Percentage
      of total loans
            
            
            30.3
            %
            
            
            
            
            
            
            33.0
            %
            
            
            
            
            
            
            33.9
            %


29
 Table of Contents




September
      30, 2009
            
            
            December
      31, 2008
            
            
            September
      30, 2008$ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to Total
            
            
            $ Amount
            
            
            % to TotalCommercial real estate:Owner-occupied:Office
            
            $
            41,197
            
            
            
            14.5
            %
            
            $
            41,617
            
            
            
            15.0
            %
            
            $
            42,621
            
            
            
            15.1
            %Retail
            
            
            19,005
            
            
            
            6.7
            %
            
            
            21,062
            
            
            
            7.6
            %
            
            
            22,309
            
            
            
            7.9
            %Other
            
            
            40,220
            
            
            
            14.2
            %
            
            
            40,413
            
            
            
            14.6
            %
            
            
            38,081
            
            
            
            13.5
            %Not
      owner-occupied:Office
            
            
            22,068
            
            
            
            7.8
            %
            
            
            25,425
            
            
            
            9.2
            %
            
            
            26,588
            
            
            
            9.4
            %Retail
            
            
            44,985
            
            
            
            15.9
            %
            
            
            36,085
            
            
            
            13.1
            %
            
            
            34,643
            
            
            
            12.3
            %Other
            
            
            25,487
            
            
            
            9.0
            %
            
            
            24,656
            
            
            
            8.9
            %
            
            
            26,585
            
            
            
            9.4
            %Other:Hotel/motel
            
            
            22,186
            
            
            
            7.8
            %
            
            
            15,812
            
            
            
            5.7
            %
            
            
            19,754
            
            
            
            5.6
            %Industrial
            
            
            4,405
            
            
            
            1.5
            %
            
            
            4,677
            
            
            
            1.7
            %
            
            
            4,765
            
            
            
            1.7
            %Multi-family
      properties
            
            
            26,783
            
            
            
            9.5
            %
            
            
            22,685
            
            
            
            8.2
            %
            
            
            25,023
            
            
            
            8.9
            %Special
      purpose property
            
            
            37,068
            
            
            
            13.1
            %
            
            
            39,240
            
            
            
            14.2
            %
            
            
            40,421
            
            
            
            14.4
            %Other
            
            
            -
            
            
            
            0.0
            %
            
            
            4,973
            
            
            
            1.8
            %
            
            
            991
            
            
            
            1.8
            %Total
      commercial real estate loans
            
            $
            283,404
            
            
            
            100.0
            %
            
            $
            276,645
            
            
            
            100.0
            %
            
            $
            281,781
            
            
            
            100.0
            %Percentage
      of total loans
            
            
            31.8
            %
            
            
            
            
            
            
            28.9
            %
            
            
            
            
            
            
            28.7
            %





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





As of Quarter End
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08(Dollars
      In Thousands)Noninterest-bearing
      demand
            
            $
            106,573
            
            
            $
            108,973
            
            
            $
            111,472
            
            
            $
            91,114
            
            
            $
            101,417Interest-bearing
      demand and savings
            
            
            241,073
            
            
            
            245,459
            
            
            
            250,325
            
            
            
            252,122
            
            
            
            262,723Retail
      time less than $100,000
            
            
            319,016
            
            
            
            320,834
            
            
            
            330,854
            
            
            
            328,329
            
            
            
            323,377Retail
      time greater than or equal to $100,000
            
            
            201,940
            
            
            
            191,852
            
            
            
            198,768
            
            
            
            198,845
            
            
            
            182,491Retail
      time placed in CDARs programs
            
            
            41,799
            
            
            
            35,190
            
            
            
            53,712
            
            
            
            46,690
            
            
            
            18,343Brokered
            
            
            119,237
            
            
            
            134,074
            
            
            
            160,167
            
            
            
            206,603
            
            
            
            141,493Total
      deposits
            
            $
            1,029,638
            
            
            $
            1,036,382
            
            
            $
            1,105,298
            
            
            $
            1,123,703
            
            
            $
            1,029,844





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





As
      of Quarter End
            
            Sep-09
            
            
            Jun-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08Noninterest-bearing
      demand
            
            
            10.35
            %
            
            
            10.51
            %
            
            
            10.09
            %
            
            
            8.11
            %
            
            
            9.85
            %Interest-bearing
      demand and savings
            
            
            23.42
            %
            
            
            23.68
            %
            
            
            22.65
            %
            
            
            22.44
            %
            
            
            25.51
            %Retail
      time less than $100,000
            
            
            30.98
            %
            
            
            30.96
            %
            
            
            29.93
            %
            
            
            29.22
            %
            
            
            31.40
            %Retail
      time greater than or equal to $100,000
            
            
            19.61
            %
            
            
            18.51
            %
            
            
            17.98
            %
            
            
            17.69
            %
            
            
            17.72
            %Retail
      time placed in CDARs program
            
            
            4.06
            %
            
            
            3.40
            %
            
            
            4.86
            %
            
            
            4.15
            %
            
            
            1.78
            %Brokered
            
            
            11.58
            %
            
            
            12.94
            %
            
            
            14.49
            %
            
            
            18.39
            %
            
            
            13.74
            %Total
      deposits
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %
            
            
            100.00
            %


30
 Table of Contents


RESULTS
OF OPERATIONS





During
the three months ended September 30, 2009 we incurred a net loss of $20.0
million, or ($1.93) per diluted share, as compared to a net loss of $2.9
million, or ($0.31) per diluted share, during the same period in
2008.  The $17.1 million, or (597.7%), decrease in net income is the
net result of a $24.1 million increase in the provision for loan losses and a
$2.0 million decrease in net interest income offset by a $9.0 million decrease
in income tax expense.  Our return on average assets (“ROA”) and
return on average equity (“ROE”) for the three months ended September 30, 2009
were (6.17%) and (86.37%), respectively, compared to a (.92%) ROA and a (11.83%)
ROE for the same period in 2008.





For the
nine months ended September 30, 2009 we incurred a net loss of $20.0 million, or
($2.06) per diluted share, as compared to a net loss of $99,000, or ($0.01) per
diluted share, during the same period in 2008.  The $19.8 million
decrease in net income is the net result of a $25.6 million increase in the
provision for loan losses and a $5.0 million decrease in net interest income and
a $981,000 increase in other expenses, offset by a $1.2 million increase in
other income and a $10.6 million decrease in income tax expense.  Our
ROA and ROE for the nine months ended September 30, 2009 were (2.02%) and
(29.16%), respectively, compared to a (0.01%) ROA and a (0.14%) ROE for the same
period in 2008.





The
reasons for these changes are discussed in more detail below.





Net Interest
Income


The
primary component of our profitability is net interest income, or the difference
between the interest income earned on assets, primarily loans and investments,
and interest paid on liabilities, primarily deposits and other borrowed
funds.  For the three months ended September 30, 2009, our net
interest income on a taxable-equivalent basis was $7.3 million, a 22.1% decrease
from the $9.4 million in net interest income for the third quarter of
2008.  The decrease in net interest income is due to a $3.0 million
decrease in interest income, offset by an $897,000 decrease in interest
expense.  During the third quarter of 2009, our average earning assets
were 1.5% higher compared to the same period in 2008, and the average balances
of our interest-bearing liabilities increased by 3.5% to fund the asset
growth.  Because of economic conditions and illiquidity in our loan
portfolio, we are carrying approximately $80 million in excess liquidity at a
negative net spread that adversely impacted the net interest margin by 18 basis
points during the third quarter of 2009.  A portion of the decrease in
interest income is due to an increase in nonaccrual loans, causing approximately
$1.4 million in interest income to not be recognized during the third quarter of
2009, compared to $858,000 in interest income forgone during the same period in
2008.  The average yield on our earning assets decreased 110 basis
points from 6.09% for the third quarter of 2008, to 4.99% for the third quarter
of 2009.  However, the average rates paid for our funds only decreased
45 basis points from 3.25% for the third quarter of 2008, to 2.80% for the third
quarter of 2009.  As a result, our net interest spread declined by 65
basis points from 2.84% in the third quarter of 2008, to 2.19% for the same
period in 2009.





For the
nine months ended September 30, 2009, our net interest income on a
taxable-equivalent basis was $22.7 million, an 18.8% decrease from the $28.0
million in net interest income for the same period in 2008.  The
decrease in net interest income is due primarily to the same factors described
above for the quarterly results.   Interest income not recognized
due to nonaccrual loans totaled $3.40 million for the first nine months of 2009,
compared to $2.5 million in interest income forgone during the same period in
2008.





Net
interest margin is net interest income expressed as a percentage of average
earning assets.   Our net interest margin for the third quarter
of 2009 was 2.45%, 75 basis points lower than the 3.20% recorded for the third
quarter of 2008.  The reduction in short-term interest rates during
2008 caused our earning assets to re-price downwards faster than our
interest-bearing liabilities re-priced downwards.  The reduction of
interest income due to our nonperforming assets also negatively impacted the net
interest margin by 46 basis points during the third quarter of 2009, compared to
a 30 basis point impact in the third quarter of 2008.  We do not
expect our net interest margin for the remainder of 2009 to increase back to
2008 levels, considering the increase in our nonperforming assets, the interest
rate environment and the narrowing spreads on our earning
assets.


31
 Table of Contents


The
following tables detail the average balances of interest-earning assets and
interest-bearing liabilities, the amount of interest earned and paid, and the
average yields and rates for the three months and nine months ended September
30, 2009 and 2008.  Federally tax-exempt income is presented on a
taxable-equivalent basis assuming a 34% Federal tax rate in 2009 and a 35%
Federal tax rate in 2008.  Loan average balances include loans on
nonaccrual status.





For the Three Months Ended September
      30,
            
            
            2009
            
            
            
            
            
            
            
            
            2008Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/Balance
            
            
            Expense
            
            
            Rate
            
            
            Balance
            
            
            Expense
            
            
            Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
            
            $
            914,699
            
            
            $
            13,120
            
            
            
            5.69
            %
            
            $
            973,017
            
            
            $
            15,391
            
            
            
            6.29
            %Investment
      securities:Taxable
            
            
            130,555
            
            
            
            1,487
            
            
            
            4.52
            %
            
            
            145,731
            
            
            
            1,891
            
            
            
            5.16
            %Nontaxable
            
            
            12,539
            
            
            
            199
            
            
            
            6.30
            %
            
            
            33,055
            
            
            
            506
            
            
            
            6.09
            %Other
      short-term investments
            
            
            126,030
            
            
            
            80
            
            
            
            0.25
            %
            
            
            14,696
            
            
            
            69
            
            
            
            1.88
            %Total
      interest-earning assets
            
            $
            1,183,823
            
            
            $
            14,886
            
            
            
            4.99
            %
            
            $
            1,166,499
            
            
            $
            17,857
            
            
            
            6.09
            %Interest-bearing
      liabilities:Demand
      deposits
            
            $
            206,329
            
            
            $
            294
            
            
            
            0.57
            %
            
            $
            267,595
            
            
            $
            1,149
            
            
            
            1.71
            %Savings
      deposits
            
            
            36,576
            
            
            
            23
            
            
            
            0.25
            %
            
            
            36,175
            
            
            
            46
            
            
            
            0.50
            %Time
      deposits
            
            
            683,548
            
            
            
            5,882
            
            
            
            3.41
            %
            
            
            604,761
            
            
            
            6,068
            
            
            
            3.99
            %FHLB
      advances
            
            
            101,303
            
            
            
            1,052
            
            
            
            4.12
            %
            
            
            100,042
            
            
            
            986
            
            
            
            3.92
            %Notes
      payable
            
            
            30,310
            
            
            
            262
            
            
            
            3.43
            %
            
            
            10,310
            
            
            
            117
            
            
            
            4.50
            %Other
      short-term borrowings
            
            
            12,461
            
            
            
            49
            
            
            
            1.56
            %
            
            
            15,540
            
            
            
            94
            
            
            
            2.40
            %Total
      interest-bearing liabilities
            
            $
            1,070,527
            
            
            $
            7,562
            
            
            
            2.80
            %
            
            $
            1,034,423
            
            
            $
            8,460
            
            
            
            3.25
            %Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.19
            %
            
            
            
            
            
            
            
            
            
            
            2.84
            %Net
      interest income
            
            
            
            
            
            $
            7,324
            
            
            
            
            
            
            
            
            
            
            $
            9,397Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.45
            %
            
            
            
            
            
            
            
            
            
            
            3.20
            %


32
 Table of Contents




For
      the Nine Months Ended September 30,
            
            
            2009
            
            
            
            
            
            
            
            
            2008Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/Balance
            
            
            Expense
            
            
            Rate
            
            
            Balance
            
            
            Expense
            
            
            Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
            
            $
            930,502
            
            
            $
            41,098
            
            
            
            5.91
            %
            
            $
            948,908
            
            
            $
            47,188
            
            
            
            6.64
            %Investment
      securities:Taxable
            
            
            145,540
            
            
            
            5,213
            
            
            
            4.79
            %
            
            
            146,957
            
            
            
            5,785
            
            
            
            5.26
            %Nontaxable
            
            
            17,008
            
            
            
            790
            
            
            
            6.21
            %
            
            
            33,359
            
            
            
            1,526
            
            
            
            6.11
            %Other
      short-term investments
            
            
            130,488
            
            
            
            233
            
            
            
            0.24
            %
            
            
            12,554
            
            
            
            205
            
            
            
            2.19
            %Total
      interest-earning assets
            
            $
            1,223,538
            
            
            $
            47,334
            
            
            
            5.17
            %
            
            $
            1,141,778
            
            
            $
            54,704
            
            
            
            6.40
            %Interest-bearing
      liabilities:Demand
      deposits
            
            $
            211,970
            
            
            $
            879
            
            
            
            0.55
            %
            
            $
            288,706
            
            
            $
            4,414
            
            
            
            2.04
            %Savings
      deposits
            
            
            35,756
            
            
            
            67
            
            
            
            0.25
            %
            
            
            35,896
            
            
            
            174
            
            
            
            0.65
            %Time
      deposits
            
            
            719,647
            
            
            
            19,640
            
            
            
            3.65
            %
            
            
            565,130
            
            
            
            18,553
            
            
            
            4.39
            %FHLB
      advances
            
            
            105,153
            
            
            
            3,204
            
            
            
            4.07
            %
            
            
            96,681
            
            
            
            2,845
            
            
            
            3.93
            %Notes
      payable
            
            
            27,306
            
            
            
            715
            
            
            
            3.50
            %
            
            
            10,310
            
            
            
            398
            
            
            
            5.15
            %Other
      short-term borrowings
            
            
            10,107
            
            
            
            120
            
            
            
            1.59
            %
            
            
            16,052
            
            
            
            358
            
            
            
            2.98
            %Total
      interest-bearing liabilities
            
            $
            1,109,939
            
            
            $
            24,625
            
            
            
            2.97
            %
            
            $
            1,012,775
            
            
            $
            26,742
            
            
            
            3.53
            %Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            2.20
            %
            
            
            
            
            
            
            
            
            
            
            2.87
            %Net
      interest income
            
            
            
            
            
            $
            22,709
            
            
            
            
            
            
            
            
            
            
            $
            27,962Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.48
            %
            
            
            
            
            
            
            
            
            
            
            3.27
            %





Provision for Loan
Losses





During
the third quarter of 2009, we provided $31.4 million to our allowance for loan
losses due to an increase in nonperforming loans and continued weaknesses in the
real estate market.  Additional provisions for loan losses in the
fourth quarter of 2009 may be warranted if, among other factors, further
weakness in real estate is observed in our markets, if our asset quality
continues to deteriorate from current levels or if we attempt to aggressively
liquidate our collateral on these impaired loans under current market
conditions.





For the
year to date, we have charged-off $14.9 million in loans and we have recovered
$305,000 in previously charged-off loans. During the third quarter of 2009, we
charged-off a $3.0 million loan in which we believe there
was misrepresentation and a $5.0 million loan to a bank holding company
located in Georgia whose subsidiary bank is under-capitalized and is under a
regulatory enforcement action.  We do not have any other loans to bank
holding companies located in Georgia and only have one loan with a $6.0 million
exposure to a non-Georgia bank holding company.  The $14.6 million in
net charge-offs for the year to date results in an annualized 2.09% ratio of net
charge-offs to average loans, which is higher than our 2008 net charge-off ratio
of 1.21% and our five-year average net charge-off ratio of
0.33%.


33
 Table of Contents


We
consider the current level of the allowance for loan losses adequate to absorb
losses from loans in the portfolio.  As an integral part of our credit
risk management process, we regularly review loans in our portfolio for credit
quality and documentation of collateral.  We have a comprehensive
methodology for determining the adequacy of our allowance for loan
losses.  We perform an allowance analysis quarterly that is broken
down into the following three components: (1) specific allowances for individual
loans, (2) allowances for pools of loans identified by credit risk grades or
delinquency status, and (3) general allowances for all other loans pooled by
loan type.  Our Problem Asset Committee, which is comprised of senior
members of management, credit administration, collections, accounting and Market
Presidents,  has the responsibility for assessing the risk elements,
determining the specific allowance valuations, and affirming the methodology
used.  The Board of Directors reviews management’s assessment and
affirms the amount recorded.





The first
component of the allowance for loan loss methodology covers the measurement of
specific allowances for individual impaired loans.  Each loan
relationship with amounts due in excess of $500,000 that has been identified for
potential credit weakness is evaluated for impairment.  A loan is
impaired when, based on current information and events, it is probable that the
borrower will be unable to pay all amounts due according to the contractual
terms of the loan agreement.  By definition, we consider all loans on
nonaccrual status and all loans whose terms have been modified in a troubled
debt restructuring as impaired.  If impairment is determined, a
specific valuation is assessed on that loan based on realizable collateral
values (if collateral dependent), discounted cash flows, or observable market
values.  At September 30, 2009, we had $16.3 million in specific
reserves on $83.0 million in individually evaluated impaired and other
significant potential problem loans, compared to $3.4 million in specific
reserves on $59.9 million in individually evaluated impaired and other
significant potential problem loans at December 31, 2008.





The
second component of the allowance for loan loss methodology addresses all loans
not individually evaluated for impairment but are either internally rated,
criticized by our banking examiners, or past due 30 days or more.  The
allowance factors are based on industry standards and supported by our own
historical loss analysis.  At September 30, 2009, we had $12.0 million
in general reserves allocated to $304.2 million rated and delinquent
loans.  This is an increase from the $7.4 million in general reserves
allocated to $200.5 million rated and delinquent loans at December 31,
2008.





The third
component of the allowance addresses general allowances on all loans not
individually reserved due to impairment, rating or delinquency
status.  These loans are divided into smaller homogenous groups based
on loan type.  The allowances are determined by applying loss factors
to each pool of loans with similar characteristics.  The factors used
are based on historical loss percentages for each pool adjusted by current known
and documented internal and external environmental factors.  The
environmental factors considered in developing our loss measurements
include:




·
              lending
      policies and procedures, including changes in underwriting standards and
      collection, charge-off and recovery
practices;
 
 ·
              changes
      in international, national, regional and local economic and business
      conditions that affect the collectibility of the
  portfolio;
  ·
              changes
      in the nature and volume of the loan
portfolio;
 
 ·
              experience,
      ability, and depth of lending management and other relevant
      staff;
 
 ·
              levels
      of and trends in delinquencies and impaired
  loans;
 
 ·
              changes
      in the quality of our loan review
system;
 
 ·
              value
      of underlying collateral for collateral-dependent
  loans;
 
 ·
              existence
      and effect of any concentrations of credit, and changes in the level of
      such concentrations; and
 
 ·
              other
      external factors such as competition and legal and regulatory
      requirements.


34
 Table of Contents


The
quantitative risk factors used in determining these general reserves require a
high degree of management judgment.  At September 30, 2009, we had
$11.6 million in general reserves compared to $7.8 million at December 31,
2008.  This 49% increase in the general reserves at September 30, 2009
compared to December 31, 2008 is primarily due to increased recent historical
loss experience and continued deterioration in economic factors evaluated in our
analysis.





This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.  While we use the best information available to make the
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions or other environmental
factors.  In addition, regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan losses,
and may require us to make additions to the allowance based on their judgment
about information available to them at the time of their
examinations.





Allocation
of the Allowance for Loan Losses





As
      of
            
            September
      30, 2009
            
            
            December
      31, 2008Amount
            
            
            Percentage
      of Loans in Category to Total Loans
            
            
            Amount
            
            
            Percentage
      of Loans in Category to Total Loans(Dollars
      in thousands)Commercial
      and financial
            
            $
            1,815
            
            
            
            10.0
            %
            
            $
            1,382
            
            
            
            9.1
            %Agricultural
      (including loans secured by farmland)
            
            
            599
            
            
            
            5.0
            %
            
            
            112
            
            
            
            5.1
            %Real
      estate – construction
            
            
            19,945
            
            
            
            30.2
            %
            
            
            11,950
            
            
            
            33.0
            %Real
      estate – commercial
            
            
            7,381
            
            
            
            31.8
            %
            
            
            2,552
            
            
            
            28.9
            %Real
      estate – residential
            
            
            3,004
            
            
            
            20.3
            %
            
            
            2,417
            
            
            
            20.5
            %Consumer
      and other loans
            
            
            415
            
            
            
            2.7
            %
            
            
            176
            
            
            
            3.4
            %Unallocated
            
            
            6,841
            
            
            
            N/A
            
            
            
            785
            
            
            
            N/ATotal
            
            $
            40,000
            
            
            
            100.0
            %
            
            $
            19,374
            
            
            
            100.0
            %


35
 Table of Contents


Summary
of Loan Loss Experience





The
following table summarizes the activity in the allowance for loan losses, the
average balance of loans outstanding, and the ratio of net losses experienced
for the nine months ended September 30, 2009 and the year ended December 31,
2008.





Nine
      months ended
              September
      30,
              2009
            
            
            Year
      ended
              December
      31,
              2008Balance
      at beginning of year
            
            $
            19,373
            
            
            $
            12,906Charge-offs:Commercial
      and financial
            
            
            3,468
            
            
            
            709Agricultural
      (including loans secured by farmland)
            
            
            -
            
            
            
            -Real
      estate – construction and development
            
            
            5,108
            
            
            
            8,023Real
      estate – commercial
            
            
            100
            
            
            
            25Real
      estate – residential
            
            
            753
            
            
            
            3,188Installment loans to individuals and other
      loans
            
            
            5,437
            
            
            
            18314,866
            
            
            
            12,128Recoveries:Commercial
      and financial
            
            
            113
            
            
            
            38Agricultural
      (including loans secured by farmland)
            
            
            38
            
            
            
            38Real
      estate – construction and development
            
            
            4
            
            
            
            2Real
      estate – commercial
            
            
            16
            
            
            
            340Real
      estate – residential
            
            
            35
            
            
            
            33Installment loans to individuals and other
      loans
            
            
            99
            
            
            
            94305
            
            
            
            545Net charge-offs
(recoveries)
            
            
            14,561
            
            
            
            11,583Additions provided to the allowance charged to
      operations
            
            
            35,188
            
            
            
            18,050Balance at end of period
            
            $
            40,000
            
            
            $
            19,373Average balance of loans
      outstanding
            
            $
            930,502
            
            
            $
            955,253Ratio of net charge-offs (recoveries) during the
      year to average loans outstanding during the year
      (annualized)
            
            
            2.09
            %
            
            
            1.21
            %





Nonaccrual,
Past Due and Restructured Loans


Our
nonperforming loans increased $9.4 million, from $55.4 million at December 31,
2008 to $64.8 million at September 30, 2009, due primarily to the adverse
economic and real estate market conditions in our North Georgia and Florida
markets.  As a percentage of total loans, nonperforming loans
increased 148 basis points to 7.27% at September 30, 2009 from 5.79% at December
31, 2008.  Approximately 49% of the loans on nonaccrual status at
September 30, 2009 were construction and development loans, and these loans
represented approximately 12% of our total portfolio of construction and
development loans.


36
 Table of Contents


A
schedule of our nonperforming loans at September 30, 2009 is presented in the
following table.





Category
            Net
      Carrying Value *
            Collateral Description
            Average
      Carrying
              Value*/ UnitConstruction
      and Development
            $12.8
      million
            12
      parcels of undeveloped land totaling 558 acres
            $9,200
      per residential acre and
              $56,200
      per commercial acreConstruction
      and Development
            $4.5
      million
            161
      residential lots
            $27,800
      per lot1-4
      Family Residential
            $5.5
      million
            74
      houses
            $75,000
      per houseCommercial
      Real Estate
            $19.4
      million
            22
      commercial properties
            $880,600
      per propertyAgriculture
            $1.9
      million
            3
      parcels of farm land totaling 373 acres
            $5,000
      per acreCommercial
      and Industrial
            $3.6
      million
            Non-real
      estate collateral
            $297,000
      per loanMulti-Family
      Residential
            $8.0
      million
            9
      condominium units
            $891,900
      per unitConsumer
            $21,000
            Non-real
      estate collateral
            $3,000
      per loan





* The
term “net carrying value” represents the book value of the loan less any
allocated allowance for loan losses.





The table
below summarizes our levels of nonperforming loans and the level of reserves
allocated to those loans over the past five quarters.





As of Quarter End
            
            Sep-09
            
            
            June-09
            
            
            Mar-09
            
            
            Dec-08
            
            
            Sep-08(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
            
            $
            64,808
            
            
            $
            70,232
            
            
            $
            62,653
            
            
            $
            54,903
            
            
            $
            43,471Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
            
            
            4
            
            
            
            190
            
            
            
            19
            
            
            
            206
            
            
            
            4Troubled debt restructurings not included
      above
            
            
            -
            
            
            
            84
            
            
            
            311
            
            
            
            311
            
            
            
            9,808Total nonperforming loans
            
            $
            64,812
            
            
            $
            70,506
            
            
            $
            62,983
            
            
            $
            55,420
            
            
            $
            53,283Ratio
      of  nonperforming loans to total loans
            
            
            7.27
            %
            
            
            7.67
            %
            
            
            6.70
            %
            
            
            5.79
            %
            
            
            5.42
            %Reserves
      allocated to nonperforming loans:Specific
      Reserves
            
            $
            8,765
            
            
            $
            5,965
            
            
            $
            6,179
            
            
            $
            2,888
            
            
            $
            9,905General Reserves
            
            
            300
            
            
            
            697
            
            
            
            788
            
            
            
            1,188
            
            
            
            1,136Total reserves allocated to nonperforming
      loans
            
            $
            9,065
            
            
            $
            6,662
            
            
            $
            6,967
            
            
            $
            4,076
            
            
            $
            11,041Total reserves allocated as a percentage of
      nonperforming loans
            
            
            13.99
            %
            
            
            9.45
            %
            
            
            11.06
            %
            
            
            7.35
            %
            
            
            20.72
            %


37
 Table of Contents


The
following table summarizes our nonperforming assets by type and market as of
September 30, 2009.





South Georgia
            
            
            North Georgia
            
            
            Florida
            
            
            Treasury
            
            
            Total(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
            
            $
            3,721
            
            
            $
            43,606
            
            
            $
            17,481
            
            
            $
            -
            
            
            $
            64,808Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4
            
            
            
            4Troubled debt restructurings not included
      above
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      nonperforming loans
            
            $
            3,721
            
            
            $
            43,606
            
            
            $
            17,481
            
            
            $
            4
            
            
            $
            64,812Foreclosed assets
            
            
            2,383
            
            
            
            37,962
            
            
            
            14,850
            
            
            
            -
            
            
            
            55,195Total nonperforming assets
            
            $
            6,104
            
            
            $
            81,568
            
            
            $
            32,331
            
            
            $
            4
            
            
            $
            120,007Ratio
      of nonperforming loans to total loans in market
            
            
            1.00
            %
            
            
            10.80
            %
            
            
            21.55
            %
            
            
            0.01
            %
            
            
            7.27
            %Ratio of nonperforming assets to total assets in
      market
            
            
            1.56
            %
            
            
            18.38
            %
            
            
            32.74
            %
            
            
            0.00
            %
            
            
            9.59
            %





Potential
Problem Loans


At
September 30, 2009, we had $28.9 million in total delinquent loans (loans past
due 30 days or more) and still accruing interest, or 3.24% of total loans,
representing an increase from $21.6 million, or 2.25% at December 31,
2008.  Approximately 67.4% of the loans past due 30-89 days at
September 30, 2009 were construction and development loans, and these loans
represented approximately 7.2% of our total portfolio of construction and
development loans.





Of the
total delinquent loans discussed above, we have identified $19.5 million in
potential problem loans that are not classified as nonperforming loans as of
September 30, 2009, as compared to $9.8 million as of December 31,
2008.  These are all construction and land development loans that were
past due 30 to 89 days at September 30, 2009 and December 31,
2008.  Potential problem loans are loans where known credit problems
of the borrowers cause management to doubt the ability of such borrowers to
comply with the present repayment terms.  These loans are at a higher
risk of becoming nonperforming in future periods.





Other
Real Estate Owned


Our
foreclosed assets increased $29.9 million in the first nine months of 2009, from
$25.3 million at December 31, 2008 to $55.2 million at September 30,
2009.  Due to economic conditions in the Atlanta area, some builders
and developers have been unable to satisfy their obligations to us and we have
foreclosed on their collateral.  However, we have decided to hold
certain parcels of foreclosed assets rather than to force distressed sales of
these properties in this market.





A
schedule of the foreclosed properties held at September 30, 2009 is presented in
the following table.





Category
            Book Value
            Description
            Average Value/ UnitConstruction
      and Development
            $11.2
      million
            15
      parcels of undeveloped land totaling 1,039 acres
            $9,500
      per residential acre
              $53,200
      per commercial acreConstruction
      and Development
            $14.3
      million
            628
      residential lots
            $22,700
      per lot1-4
      Family Residential
            $11.3
      million
            65
      houses
            $174,600
      per houseCommercial
      Real Estate
            $18.4
      million
            26
      commercial properties
            $706,300
      per property


38
 Table of Contents


Other
Income


A summary
of noninterest income follows:





Three
      Months Ended September 30,
            
            
            
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Pct. Chg.
            
            
            2009
            
            
            2008
            
            
            Pct. Chg.(Dollars
      in Thousands)Noninterest
      income:Service
      charges on deposit accounts
            
            $
            944
            
            
            $
            931
            
            
            
            1.4
            %
            
            $
            2,626
            
            
            $
            2,813
            
            
            
            -6.6
            %Mortgage
      origination fees
            
            
            150
            
            
            
            151
            
            
            
            -0.7
            %
            
            
            614
            
            
            
            573
            
            
            
            7.2
            %ATM/debit
      card fee income
            
            
            212
            
            
            
            201
            
            
            
            5.5
            %
            
            
            620
            
            
            
            550
            
            
            
            12.7
            %Securities
      transactions, net
            
            
            93
            
            
            
            2
            
            
            
            4550.0
            %
            
            
            865
            
            
            
            202
            
            
            
            328.2
            %Earnings
      on bank-owned life insurance
            
            
            148
            
            
            
            106
            
            
            
            39.6
            %
            
            
            430
            
            
            
            317
            
            
            
            35.6
            %Gain
      (loss) on disposal of assets
            
            
            (755
            )
            
            
            (434
            )
            
            
            -74.0
            %
            
            
            (1,276
            )
            
            
            (542
            )
            
            
            -135.4
            %Gain
      (loss) on derivative instrument
            
            
            (143
            )
            
            
            -
            
            
            
            100.0
            %
            
            
            1,026
            
            
            
            -
            
            
            
            100.0
            %Other noninterest income
            
            
            240
            
            
            
            124
            
            
            
            93.5
            %
            
            
            577
            
            
            
            383
            
            
            
            50.7
            %Total noninterest income
            
            $
            889
            
            
            $
            1,081
            
            
            
            -17.8
            %
            
            $
            5,482
            
            
            $
            4,296
            
            
            
            27.6
            %Noninterest income (annualized) as a percentage of
      average assets
            
            
            0.27
            %
            
            
            0.35
            %
            
            
            
            
            
            
            0.57
            %
            
            
            0.47
            %





Excluding
gains and losses on securities transactions, derivative instruments, and the
disposal of other assets, our total noninterest income increased 12.0% and 5.0%
in the respective three and nine months ended September 30, 2009 compared to the
same periods in 2008.





Fee
income from ATM and debit cards increased as the volume of point-of-sale
transactions continues to increase.  However, we continue to offer a
no-fee ATM deposit product in certain markets for competitive reasons, which may
reduce our ATM fee income opportunities going forward.





During
the second quarter of 2009, we sold $32.5 million of higher risk-weighted
investment securities and recorded a $1.05 million realized gain on the sale of
these investment securities.  This was offset by a $261,000 write-down
of our investment in Silverton Bank stock.  This is compared to a
$202,000 realized gain on the sale of investment securities in the first nine
months of 2008.





Earnings
on bank-owned life insurance increased primarily as a result of a higher rate of
return on these policies compared to 2008.





During
the first nine months of 2009, we incurred a loss of $1.27 million on the sale
of foreclosed assets and a $4,000 loss on the disposal of
equipment.  This is compared to a loss of $534,000 on the sale of a
parcel of foreclosed real estate and an $8,000 loss on the disposal of an ATM
machine during the first nine months of 2008.





During
the first nine months of 2009, we recorded a $1.03 million gain on our hedging
activities, while we did not have any recorded gain on hedging activities during
the first nine months of 2008.





Other
noninterest income includes increased premiums on SBA loans and rental income on
our foreclosed assets during the first nine months of 2009, compared to the
first nine months of 2008.


39
 Table of Contents


Other
Expenses


A summary
of noninterest expense follows:





Three
      Months Ended
              September
      30,
            
            
            
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            Pct. Chg.
            
            
            2009
            
            
            2008
            
            
            Pct. Chg.(Dollars
      in Thousands)Noninterest
      expenses:Salaries
      and wages
            
            $
            2,947
            
            
            $
            3,898
            
            
            
            -24.4
            %
            
            $
            10,425
            
            
            $
            12,055
            
            
            
            -13.5
            %Deferred
      loan cost
            
            
            (356
            )
            
            
            (426
            )
            
            
            -16.4
            %
            
            
            (1,126
            )
            
            
            (1,282
            )
            
            
            -12.2
            %Employee
      benefits
            
            
            1,041
            
            
            
            1,101
            
            
            
            -5.4
            %
            
            
            3,008
            
            
            
            3,337
            
            
            
            -9.9
            %Net
      occupancy expense of premises
            
            
            569
            
            
            
            655
            
            
            
            -13.1
            %
            
            
            1,757
            
            
            
            1,903
            
            
            
            -7.7
            %Furniture
      and equipment expense
            
            
            502
            
            
            
            516
            
            
            
            -2.7
            %
            
            
            1,504
            
            
            
            1,562
            
            
            
            -3.7
            %Advertising
      and business development
            
            
            91
            
            
            
            128
            
            
            
            -28.9
            %
            
            
            296
            
            
            
            436
            
            
            
            -32.1
            %Supplies
      and printing
            
            
            77
            
            
            
            89
            
            
            
            -13.5
            %
            
            
            259
            
            
            
            301
            
            
            
            -14.0
            %Telephone
      and internet charges
            
            
            157
            
            
            
            191
            
            
            
            -17.8
            %
            
            
            496
            
            
            
            605
            
            
            
            -18.0
            %Postage
      and courier
            
            
            127
            
            
            
            159
            
            
            
            -20.1
            %
            
            
            395
            
            
            
            461
            
            
            
            -14.3
            %Legal
      and accounting fees
            
            
            245
            
            
            
            115
            
            
            
            113.0
            %
            
            
            599
            
            
            
            329
            
            
            
            82.1
            %Deposit
      insurance
            
            
            520
            
            
            
            72
            
            
            
            622.2
            %
            
            
            1,639
            
            
            
            127
            
            
            
            1190.6
            %Director
      fees and expenses
            
            
            121
            
            
            
            157
            
            
            
            -22.9
            %
            
            
            429
            
            
            
            485
            
            
            
            -11.5
            %Service
      charges and fees
            
            
            87
            
            
            
            143
            
            
            
            -39.2
            %
            
            
            359
            
            
            
            457
            
            
            
            -21.4
            %Foreclosure
      and repossession expenses
            
            
            582
            
            
            
            207
            
            
            
            181.2
            %
            
            
            1,792
            
            
            
            354
            
            
            
            406.2
            %Other noninterest expense
            
            
            574
            
            
            
            505
            
            
            
            13.7
            %
            
            
            1,680
            
            
            
            1,401
            
            
            
            19.9
            %Total noninterest expense
            
            $
            7,284
            
            
            $
            7,510
            
            
            
            -3.0
            %
            
            $
            23,512
            
            
            $
            22,531
            
            
            
            4.4
            %Noninterest expense as a percentage of average
      assets (annualized)
            
            
            2.25
            %
            
            
            2.36
            %
            
            
            
            
            
            
            2.45
            %
            
            
            2.48
            %





Noninterest
expense decreased 3.0% from $7.5 million in the third quarter of 2008 to $7.3
million in the third quarter of 2009.  As a percentage of average
assets, noninterest expense improved from 2.36% at September 30, 2008 to 2.25%
at September 30, 2009.





Noninterest
expense increased 4.4% from $22.5 million in the first nine months of 2008 to
$23.5 million in the first nine months of 2009.  However, as a
percentage of average assets, noninterest expense improved from 2.48% at
September 30, 2008 to 2.45% at September 30, 2009.





Salaries
and wages and employee benefits expense decreased 13.5% for the first nine
months of 2009 compared to the same period in 2008 due to the reduction of our
staff from 320 full time equivalent employees at September 30, 2008 to 266 full
time equivalent employees at September 30, 2009.  The decreases in
salary due to these reductions were offset by a one-time severance accrual of
$730,000 in the first quarter of 2009 related to the retirement of our President
and Chief Executive Officer and severance expenses of $185,000 in the second
quarter of 2009.  Deferred loan costs, which are credits against
salaries and wages, decreased due to a decrease in loan volume.





Advertising
and business development expenses, office supplies and printing charges and
telephone and internet fees decreased from the first nine months of 2008 to the
first nine months of 2009 due to cost-saving awareness and efforts among our
locations to reduce noninterest expenses.  The decrease in postage and
courier fees is due to a reduction in our courier’s schedule as part of our
cost-saving awareness efforts.





Our
deposit insurance premiums increased from $127,000 during the first nine months
of 2008 to $1.16 million in the first nine months of 2009 due to rate increases
and a $600,000 special assessment from the FDIC during the second quarter of
2009.





Service
charges and fees were higher in the first nine months of 2008, compared to the
first nine months of 2009, due to expenses related to our remote deposit product
that we incurred in the first quarter of 2008.





Foreclosure
and repossession expenses increased significantly from the first nine months of
2008 to the first nine months of 2009 due to the increased level of foreclosed
assets owned by the Company.  These increased expenses include
property taxes, repairs and maintenance, insurance and legal and collection
expenses.


40
 Table of Contents


Income Tax
Expense


As a
percentage of net income before taxes, income tax expense was 34.7% and 36.6%
for the three-month periods ended September 30, 2009 and 2008,
respectively.  For the nine-month periods ended September 30, 2009 and
2008, income tax expense as a percentage of net income before taxes was 35.37%
and 72.2%, respectively.  The difference between the effective rate
and the statutory federal rate of 35% is due primarily to income earned on
tax-exempt municipalities and earnings on the cash value of our bank-owned life
insurance offset in part by state income tax expense.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is an important factor in our financial condition and affects our ability to
meet the borrowing needs and deposit withdrawal requirements of our
customers.  Assets, consisting primarily of loans and investment
securities, are funded by customer deposits, borrowed funds and retained
earnings.  Maturities in the investment and loan portfolios also
provide a steady flow of funds for reinvestment.  In addition, our
liquidity continues to be enhanced by a relatively stable core deposit base and
the availability of additional funding sources.





At
September 30, 2009, 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 22.0%, compared to 23.9% at
December 31, 2008.  It is our policy to maintain a ratio of liquid
assets to total assets of at least 15%.





During
the first nine months of 2009, we utilized the $20.0 million proceeds from the
issuance of a three year unsecured debt at an interest rate of 2.74% under the
FDIC’s Temporary Liquidity Guarantee Program,  the $64.7 million
decrease in loans, the $47.9 million decrease in investment securities and the
$12.8 million in net proceeds from capital raised to offset the $94.1 million
decrease in deposits, the $19.4 million decrease in advances from the FHLB and
the $29.9 million increase in foreclosed assets.





Contractual
Obligations


Summarized
below are our contractual obligations as of September 30, 2009.





Less
      than
            
            
            1
      to 3
            
            
            3
      to 5
            
            
            More
      thanContractual Obligations
            
            Total
            
            
            1 year
            
            
            years
            
            
            years
            
            
            5 years(Dollars
      In Thousands)Federal
      Home Loan Bank of AtlantaAdvances
            
            $
            90,295
            
            
            $
            20,649
            
            
            $
            40,635
            
            
            $
            9,603
            
            
            $
            19,408Operating
      Lease Obligations
            
            
            793
            
            
            
            254
            
            
            
            371
            
            
            
            168
            
            
            
            -Guaranteed
      Preferred Beneficial Interests in Debentures
            
            
            10,310
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,310Other
      Borrowings
            
            
            20,000
            
            
            
            -
            
            
            
            20,000
            
            
            
            -Total
            
            $
            121,398
            
            
            $
            20,903
            
            
            $
            61,006
            
            
            $
            9,771
            
            
            $
            29,718





Off-Balance Sheet
Arrangements


Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business.  These
off-balance sheet financial instruments include commitments to extend credit and
standby letters of credit.  Such financial instruments are included in
the financial statements when funds are distributed or when the instruments
become payable.  Our exposure to credit loss in the event of
nonperformance by the other party to a financial instrument for commitments to
extend credit, standby letters of credit and credit card commitments is
represented by the contractual amount of those instruments.  We use
the same credit policies in making commitments as we do for on-balance sheet
instruments.  Although these amounts do not necessarily represent
future cash requirements, a summary of our commitments as of September 30, 2009
and December 31, 2008 are as follows:





Sep-09
            
            
            Dec-08(Dollars
      in thousands)Commitments
      to extend credit
            
            $
            105,715
            
            
            $
            147,187Standby
      letters of credit
            
            $
            3,474
            
            
            $
            4,134


41
 Table of Contents


In June
2006, we entered into a $50 million notional amount, 3-year, 8.25% Prime rate
floor contract to hedge against interest rate risk in a declining rate
environment.  In January 2008, we entered into a $25 million notional
amount, 3-year 5.75%/6.50% Prime rate collar contract and a $25 million notional
amount, 5-year 6.00%/7.25% Prime rate collar contract and in April 2008, we
entered into a $25 million notional amount, 3-year 2.975% 1-month LIBOR cap
contract to further hedge against interest rate risk.  In April 2009,
we terminated the two Prime rate collar contracts.  The Prime rate
floor contract expired July 1, 2009.  At September 30, 2009, the only
derivative contract outstanding is the LIBOR cap contract.  Notional
amounts provide the basis for calculating payments between counterparties and do
not represent amounts to be exchanged between parties, and are not a measure of
financial risk.  The risk of loss with our counterparty is limited to
a small fraction of the notional amount.  We only deal with
counterparties that have investment grade credit ratings, are well capitalized
and are approved by our Board of Directors.  Due to these factors, we
feel our credit risk exposure under these hedging arrangements at September 30,
2009 was not material.





Stockholders’
Equity


On
September 9, 2009, we completed a private placement of approximately $13.4
million of additional capital.  After expenses, the net proceeds of
the capital raise were $12.8 million.  The private placement was
issued through two newly-created classes of preferred stock.  The
issuance included $8.3 million of Series A preferred stock along with additional
investor funds of $5.1 million sold in Series B preferred stock.  As a
result of shareholder approval which was obtained at our 2009 Annual Meeting of
Shareholders held on June 23, 2009, both classes of preferred stock were
immediately converted into shares of the our common stock at a conversion price
of $3.00 per share.  Also, upon conversion, the investors received
warrants to purchase additional shares of common stock equal to 30% of the
aggregate value of their investment.  The warrants are exercisable for
a term of seven years at an exercise price of $3.75 per share.




Stockholders’
equity represented 6.7% of total assets at September 30, 2009, a slight decrease
compared to 6.8% at December 31, 2008.  Total stockholders’ equity
decreased $8.4 million, or 9.1%, since December 31, 2008.  This
decrease is primarily the result of our net loss of $19.9 million and a $1.4
million decrease in accumulated other comprehensive gains, offset by the $12.8
million of  new stock issued.  We did not declare a dividend
in the third quarter of 2009 or 2008.  In setting our dividend on a
quarterly basis, we evaluate our capital adequacy and the quality of our
earnings, and we estimate our capital requirements and our earnings outlook for
the next year. Based on these evaluations, we suspended our quarterly dividends
on our common stock in the third quarter of 2008, and we do not intend to pay a
common stock dividend for the remainder of 2009 or 2010 due to continued
pressure on earnings and capital.  Under the terms of the written
agreement with the Federal Reserve Board, the Company is restricted from paying
dividends or repurchasing shares of its common stock without the prior written
approval of the Federal Reserve Board.





The
Company maintains a ratio of stockholders’ equity to total assets that is
considered adequate according to regulatory standards.  The Company
and the Bank are required to comply with capital adequacy standards established
by our regulators.  At September 30, 2009, the Company and the Bank
were in compliance with those standards.  There are no conditions or
events since quarter end that we believe have materially changed our regulatory
capital ratios.





The
following table summarizes the regulatory capital ratios of the Company and the
Bank at September 30, 2009.





MinimumCompany
            
            
            
            
            
            RegulatoryConsolidated
            
            
            Bank
            
            
            RequirementTotal
      Capital to Risk Weighted Assets
            
            
            9.8
            %
            
            
            10.0
            %
            
            
            8.0
            %Tier
      1 Capital to Risk Weighted Assets
            
            
            8.5
            %
            
            
            8.7
            %
            
            
            4.0
            %Tier 1 Capital to Average Assets (Leverage
      Ratio)
            
            
            6.2
            %
            
            
            6.4
            %
            
            
            4.0
            %


42
 Table of Contents


CRITICAL
ACCOUNTING ESTIMATES





The
preparation of financial statements and the related disclosures in conformity
with accounting principles generally accepted in the United States requires that
management make estimates and assumptions which affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.  We believe that our determination of the
allowance for loan losses and the fair value of assets, including the impairment
of goodwill, affect our most significant judgments and estimates used in the
preparation of our consolidated financial statements.  The Company’s
accounting policies are described in detail in Note 1 of our Consolidated
Financial Statements provided in Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2008.  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.





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.


43
 Table of Contents


Recent
Accounting Pronouncements





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification TM and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162,” (“SFAS 168”).  SFAS 168 establishes the FASB Accounting Standards
Codification TM(“Codification”) as the source of authoritative generally accepted
accounting principles (“GAAP”) for nongovernmental entities.  The
Codification does not change GAAP. Instead, it takes the thousands of individual
pronouncements that currently comprise GAAP and reorganizes them into
approximately 90 accounting Topics, and displays all Topics using a consistent
structure.  Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is the only
level that contains substantive content. Citing particular content in the
Codification involves specifying the unique numeric path to the content through
the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all
citations begin with “FASB ASC,” where ASC stands for Accounting Standards
Codification. Changes to the ASC subsequent to June 30, 2009 are referred
to as Accounting Standards Updates (“ASU”).





ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





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





Interest
rates play a major part in the net interest income of a financial
institution.  The sensitivity to rate changes is known as “interest
rate risk.”  The repricing of interest-earning assets and
interest-bearing liabilities can influence the changes in net interest
income.  As part of our asset/liability management program, the timing
of repriced assets and liabilities is referred to as gap
management.  It is our policy to maintain a gap ratio in the one-year
time horizon between 0.80 and 1.20.  At September 30, 2009, our
one-year management-adjusted re-pricing gap ratio of 0.88 was within our policy
guidelines.





We have
reduced the level of asset-sensitivity on the Company’s balance sheet in recent
years in an effort to better mitigate our interest rate risk in a declining
interest rate environment.  We have accomplished this by
conscientiously lengthening the duration of our earning assets, shortening the
duration of our deposits and other borrowings and utilizing off-balance sheet
derivative instruments to further hedge against interest rate risk in a
declining interest rate environment.





The table
below shows our contractual maturity gap at September 30, 2009.  A
positive maturity gap (a gap ratio > 1.00) occurs when more assets are
maturing than liabilities for any given time period, and generally equates to a
lower liquidity risk.  A negative maturity gap (a gap ratio < 1.00)
for any given time period results in a higher liquidity risk and could indicate
potential liquidity problems exist.




3-Month
            
            
            6-Month
            
            
            1-Year(Dollars
      In Thousands)Regulatory DefinedRate
      Sensitive Assets (RSA)
            
            $
            232,000
            
            
            $
            322,599
            
            
            $
            479,665Rate Sensitive Liabilities
      (RSL)
            
            
            183,925
            
            
            
            312,145
            
            
            
            540,872RSA
      minus RSL (Gap)
            
            $
            48,075
            
            
            $
            10,454
            
            
            $
            (61,207
            )Gap
      Ratio (RSA/RSL)
            
            
            1.26
            
            
            
            1.03
            
            
            
            0.89


44
 Table of Contents


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





3-Month
            
            
            6-Month
            
            
            1-Year(Dollars
      In Thousands)Regulatory DefinedRate
      Sensitive Assets (RSA)
            
            $
            633,477
            
            
            $
            673,217
            
            
            $
            744,929Rate Sensitive Liabilities
      (RSL)
            
            
            462,923
            
            
            
            595,983
            
            
            
            820,820RSA
      minus RSL (Gap)
            
            $
            170,554
            
            
            $
            77,234
            
            
            $
            (75,891
            )Gap
      Ratio (RSA/RSL)
            
            
            1.37
            
            
            
            1.13
            
            
            
            0.91Management-AdjustedRate
      Sensitive Assets (RSA)
            
            $
            638,261
            
            
            $
            679,786
            
            
            $
            753,329Rate Sensitive Liabilities
      (RSL)
            
            
            471,773
            
            
            
            612,920
            
            
            
            851,890RSA
      minus RSL (Gap)
            
            $
            166,488
            
            
            $
            66,866
            
            
            $
            (98,561
            )Gap
      Ratio (RSA/RSL)
            
            
            1.35
            
            
            
            1.11
            
            
            
            0.88





We use
simulation analysis to monitor changes in net interest income due to the impact
that changes in market interest rates have on our financial
instruments.  The simulation of rising, declining, and flat interest
rate scenarios allows us to monitor and adjust interest rate sensitivity to
minimize the impact of market interest rate swings.  The analysis of
the impact on net interest income over a twelve-month period is subjected to
increases or decreases in market rates on net interest income and is monitored
on a quarterly basis.  Our policy states that net interest income
cannot be reduced by more than 20% using this analysis.  As of
September 30, 2009, the simulation model projected net interest income would
increase 11.19% over the next year if market rates immediately rose by 100 basis
points and the model projected net interest income to decrease 1.67% over the
next year if market rates immediately fell by 25 basis points.  Over
the past two years, we have seen lower volatility in our results due to our
efforts to neutralize our asset-sensitive balance sheet mix, to improve our
asset/liability modeling with updated behavioral assumptions for repricing and
prepayment speeds and to implement an off-balance sheet derivative hedging
program.





The
following table shows the results of these projections for net interest income
expressed as a percentage change over net interest income in a flat rate
scenario for both a gradual change in market interest rates over a twelve-month
period and an immediate change, or “shock”, in market interest
rates.





Market
            Effect
      on Net Interest IncomeRate
      Change
            Gradual
            Immediate+300
      bps
            17.42%
            32.74%+200
      bps
            15.09%
            21.39%+100
      bps
            8.84%
            10.19%-25
      bps
            -1.67%
            -1.67%


45
 Table of Contents


ITEM4.  CONTROLS AND PROCEDURES





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





PARTII.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





On July
14, 2009, the Company and the Bank entered into a written agreement (the
“Agreement”) with the Federal Reserve Bank of Atlanta (the “Federal Reserve”)
and the Georgia Department of Banking and Finance (the
“Department”).  The Agreement is based on the findings of the Federal
Reserve and the Department during an examination conducted as of January 19,
2009 (the “Examination”).  Since the completion of the Examination,
the Boards of Directors of the Company and the Bank have aggressively taken
steps to address the findings of the Examination.  The Company and the
Bank have taken an active role in working with the Federal Reserve and the
Department to improve the condition of the Bank and have addressed many of the
items included in the Agreement.





Under the
terms of the Agreement, the Bank will prepare and submit written plans and/or
reports to the regulators that address the following items: strengthening the
Bank’s credit risk management practices; improving loan underwriting and loan
administration; improving asset quality, including improving the Bank’s position
on problem loans through repayment, additional collateral or other means;
reviewing and revising as necessary the Bank’s allowance for loan and lease
losses policy; maintaining sufficient capital at the Bank; revising and
implementing a profitability plan and comprehensive budget to improve and
sustain the Bank’s earnings; and improving the Bank’s liquidity position and
funds management practices.  While the Agreement remains in place, the
Company and the Bank may not pay dividends and the Company may not increase debt
or redeem any shares of its stock without the prior written consent of the
regulators.  Further, the Bank will comply with applicable laws and
regulations.





ITEM1A.  RISK FACTORS





There has
not been any material change in the risk factors disclosure from that contained
in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2008 that has not been previously disclosed in our Quarterly Reports for the
periods ended March 31, 2009 and June 30, 2009.





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





None.





ITEM3.  DEFAULTS UPON SENIOR SECURITIES





None.


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 Table of Contents


ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None





ITEM5.  OTHER INFORMATION





None.





ITEM6.  EXHIBITS





3.1
            Articles
      of Amendment of PAB Bankshares, Inc. establishing the Series A Preferred
      Stock and Series B Preferred Stock (incorporated by reference to Exhibit
      3.1 to the Registrant’s Current Report on Form 8-K dated September 9,
      2009).





10.1
            Form
      of Investment Agreement for Series B Preferred Stock (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      dated September 9, 2009).





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





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





32.1
              Section
      1350 Certification of CEO.





32.2
            Section
      1350 Certification of CFO.





SIGNATURES





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





PAB BANKSHARES, INC.RegistrantDate:
            November 9, 2009
            By:
            /s/ Donald J. Torbert, Jr.Donald
      J. Torbert, Jr.President
      and Chief Executive Officer(principal
      executive officer of the registrant)Date:
            November 9, 2009
            By:
            /s/ Nicole S. StokesNicole
      S. StokesExecutive
      Vice President and Chief Financial Officer(principal
      financial officer of the registrant)






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