**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




_____________




**FORM
      10-Q**





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


**Securities
      Exchange Act of 1934**





For
      the
      Quarterly Period Ended June 30, 2006 - Commission File Number
      000-25422


_____________









**PAB
      BANKSHARES, INC.**


(A
      Georgia Corporation)


IRS
      Employer Identification Number: 58-1473302





**3250
      North Valdosta Road, Valdosta, Georgia 31602**


**Telephone
      Number: (229) 241-2775**




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


Yes x No o





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


Large
      accelerated filer o Accelerated filer x Non-accelerated filer o





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


Yes o No x





The
      number of shares outstanding of the registrant’s common stock at July 31, 2006
      was 9,501,280 shares.









**TABLE
      OF CONTENTS**





PagePART
                I
            FINANCIAL
                INFORMATIONItem
                1.
            Consolidated
                Financial StatementsStatements
                of Condition
            1Statements
                of Income
            2Statements
                of Comprehensive Income
            3Statements
                of Stockholders’ Equity
            4Statements
                of Cash Flows
            5Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial
                Conditionand
                Results of Operations
            13Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            23Item
                4.
            Controls
                and Procedures
            24PART
                II
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            24Item
                1A.
            Risk
                Factors
            24Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            25Item
                3.
            Defaults
                Upon Senior Securities
            25Item
                4.
            Submissions
                of Matters to a Vote of Security
                Holders
            25Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            26SIGNATURES
            
            26


i




**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Consolidated Financial Statements**




**PAB
                  BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CONDITION****AS
                  OF JUNE 30, 2006 AND DECEMBER 31, 2005****June
                  30,**
              
              **December
                  31,****2006**
              
              **2005****(UNAUDITED)****ASSETS**Cash
                  and due from banks
              
              $
              24,546,488
              
              $
              21,196,183Interest-bearing
                  deposits in other banks
              
              
              748,051
              
              
              3,077,900Federal
                  funds sold
              
              
              9,380,205
              
              
              42,578,849Investment
                  securities
              
              
              175,955,954
              
              
              157,454,725Loans
              
              
              803,035,130
              
              
              752,938,145Allowance
                  for loan losses
              
              
              (10,902,972
              )
              
              (11,079,193
              )Net
                  loans
              
              
              792,132,158
              
              
              741,858,952Premises
                  and equipment, net
              
              
              20,082,330
              
              
              18,511,163Goodwill
              
              
              5,984,604
              
              
              5,984,604Cash
                  value of bank-owned life insurance policies
              
              
              11,270,676
              
              
              11,080,722Foreclosed
                  assets
              
              
              975,659
              
              
              41,774Other
                  assets
              
              
              18,970,345
              
              
              15,541,495Total
                  assets
              
              $
              1,060,046,470
              
              $
              1,017,326,367**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
                  demand
              
              $
              95,457,873
              
              $
              107,917,453Interest-bearing
                  demand and savings
              
              
              315,492,158
              
              
              284,125,557Time
              
              
              445,827,915
              
              
              423,637,732Total
                  deposits
              
              
              856,777,946
              
              
              815,680,742Federal
                  funds purchased and securities sold under agreements to
                  repurchase
              
              
              5,911,392
              
              
              6,317,135Advances
                  from the Federal Home Loan Bank of Atlanta
              
              
              90,485,482
              
              
              90,043,598Guaranteed
                  preferred beneficial interests in debentures (trust preferred
                  securities)
              
              
              10,310,000
              
              
              10,310,000Other
                  liabilities
              
              
              7,644,407
              
              
              7,974,109Total
                  liabilities
              
              
              971,129,227
              
              
              930,325,584**Stockholders'
                  equity:**Preferred
                  stock, no par value; 1,500,000 shares authorized; no shares
                  issued
              
              
              -
              
              
              -Common
                  stock, no par value; 98,500,000 shares authorized;9,498,026
                  and 9,469,017 shares issued and outstanding
              
              
              1,217,065
              
              
              1,217,065Additional
                  paid-in capital
              
              
              27,825,195
              
              
              28,126,032Retained
                  earnings
              
              
              63,304,245
              
              
              58,872,179Accumulated
                  other comprehensive loss
              
              
              (3,429,262
              )
              
              (1,214,493
              )Total
                  stockholders' equity
              
              
              88,917,243
              
              
              87,000,783Total
                  liabilities and stockholders' equity
              
              $
              1,060,046,470
              
              $
              1,017,326,367See
                  accompanying notes to consolidated financial statements.
 1


**PAB
                BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME****THREE
                MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND
                2005****(UNAUDITED)****Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Interest
                income**Interest
                and fees on loans
            
            $
            16,823,683
            
            $
            12,472,680
            
            $
            32,224,306
            
            $
            23,309,453Interest
                and dividends on investment securities:Taxable
            
            
            1,902,010
            
            
            1,329,477
            
            
            3,671,992
            
            
            2,626,304Nontaxable
            
            
            226,339
            
            
            93,421
            
            
            381,501
            
            
            175,320Other
                interest income
            
            
            354,069
            
            
            284,340
            
            
            875,894
            
            
            536,187Total
                interest income
            
            
            19,306,101
            
            
            14,179,918
            
            
            37,153,693
            
            
            26,647,264**Interest
                expense**Interest
                on deposits
            
            
            6,813,091
            
            
            3,604,708
            
            
            12,746,111
            
            
            6,618,270Interest
                on Federal Home Loan Bank advances
            
            
            919,902
            
            
            769,340
            
            
            1,692,536
            
            
            1,452,223Interest
                on other borrowings
            
            
            273,150
            
            
            206,421
            
            
            523,507
            
            
            404,272Total
                interest expense
            
            
            8,006,143
            
            
            4,580,469
            
            
            14,962,154
            
            
            8,474,765Net
                interest income
            
            
            11,299,958
            
            
            9,599,449
            
            
            22,191,539
            
            
            18,172,499**Provision
                for loan losses**
            
            
            -
            
            
            153,400
            
            
            -
            
            
            613,600Net
                interest income after provision for loan losses
            
            
            11,299,958
            
            
            9,446,049
            
            
            22,191,539
            
            
            17,558,899**Other
                income**Service
                charges on deposit accounts
            
            
            987,709
            
            
            1,019,056
            
            
            1,939,256
            
            
            1,941,110Other
                fee income
            
            
            362,595
            
            
            301,766
            
            
            717,297
            
            
            602,475Securities
                transactions, net
            
            
            (612
            )
            
            (1,242
            )
            
            (430,343
            )
            
            (1,242
            )Other
                noninterest income
            
            
            207,230
            
            
            138,442
            
            
            371,397
            
            
            263,061Total
                other income
            
            
            1,556,922
            
            
            1,458,022
            
            
            2,597,607
            
            
            2,805,404**Other
                expenses**Salaries
                and employee benefits
            
            
            4,637,363
            
            
            3,886,195
            
            
            8,936,819
            
            
            7,376,520Occupancy
                expense of premises
            
            
            492,337
            
            
            487,841
            
            
            963,675
            
            
            957,048Furniture
                and equipment expense
            
            
            513,699
            
            
            526,399
            
            
            1,022,341
            
            
            1,029,552Other
                noninterest expense
            
            
            1,538,424
            
            
            1,327,186
            
            
            3,014,727
            
            
            2,629,827Total
                other expenses
            
            
            7,181,823
            
            
            6,227,621
            
            
            13,937,562
            
            
            11,992,947Income
                before income tax expense
            
            
            5,675,057
            
            
            4,676,450
            
            
            10,851,584
            
            
            8,371,356**Income
                tax expense**
            
            
            2,082,940
            
            
            1,549,392
            
            
            3,948,123
            
            
            2,765,650Net
                income
            
            $
            3,592,117
            
            $
            3,127,058
            
            $
            6,903,461
            
            $
            5,605,706**Earnings
                per common share**Basic
            
            $
            0.38
            
            $
            0.33
            
            $
            0.73
            
            $
            0.59Diluted
            
            $
            0.37
            
            $
            0.32
            
            $
            0.71
            
            $
            0.58See
                accompanying notes to consolidated financial statements.


2




**PAB
                BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF COMPREHENSIVE INCOME****THREE
                MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND
                2005****(UNAUDITED)****Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income
            
            $
            3,592,117
            
            $
            3,127,058
            
            $
            6,903,461
            
            $
            5,605,706Other
                comprehensive income (loss):Unrealized
                loss on cash flow hedge during the period, net oftax
                of $3,255 and $0 for the quarter and $3,255 and $0 for theyear
                to date
            
            
            (6,046
            )
            
            -
            
            
            (6,046
            )
            
            -Unrealized
                holding gains (losses) arising during the period, net oftax
                (benefit) of ($949,585) and $496,147 for the quarter and($1,339,935)
                and $24,522 for the year to date
            
            
            (1,763,510
            )
            
            963,105
            
            
            (2,488,446
            )
            
            47,601Reclassification
                adjustment for losses included in netincome,
                net of tax (benefit) of ($214) and ($422) for the quarterand
                ($150,620) and ($422) for the year to date
            
            
            397
            
            
            820
            
            
            279,723
            
            
            820(1,769,159
            )
            
            963,925
            
            
            (2,214,769
            )
            
            48,421Comprehensive
                income
            
            $
            1,822,958
            
            $
            4,090,983
            
            $
            4,688,692
            
            $
            5,654,127See
                accompanying notes to consolidated financial statements.


3




**PAB
                BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY****SIX
                MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31,
                2005****Accumulated****Additional**
            
            
            
            **Other****Common
                Stock**
            
            **Paid-in**
            
            **Retained**
            
            **Comprehensive****Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Loss**
            
            **Total****Balance,
                December 31, 2004**
            
            
            9,495,320
            
            $
            1,217,065
            
            $
            29,143,017
            
            $
            50,938,254
            
            $
            (298,452
            )
            $
            80,999,884Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            12,452,723
            
            
            -
            
            
            12,452,723Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (916,041
            )
            
            (916,041
            )Cash
                dividends declared,$.475
                per share
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,518,798
            )
            
            -
            
            
            (4,518,798
            )Stock
                acquired and cancelledunder
                stock repurchase plan
            
            
            (87,483
            )
            
            -
            
            
            (1,468,714
            )
            
            -
            
            
            -
            
            
            (1,468,714
            )Stock
                options exercised
            
            
            61,180
            
            
            -
            
            
            451,729
            
            
            -
            
            
            -
            
            
            451,729**Balance,
                December 31, 2005**
            
            
            9,469,017
            
            
            1,217,065
            
            
            28,126,032
            
            
            58,872,179
            
            
            (1,214,493
            )
            
            87,000,783Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            6,903,461
            
            
            -
            
            
            6,903,461Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,214,769
            )
            
            (2,214,769
            )Cash
                dividends declared,$.26
                per share
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,471,395
            )
            
            -
            
            
            (2,471,395
            )Stock
                acquired and cancelledunder
                stock repurchase plan
            
            
            (76,984
            )
            
            -
            
            
            (1,559,334
            )
            
            -
            
            
            -
            
            
            (1,559,334
            )Stock
                options expensed
            
            
            -
            
            
            -
            
            
            161,836
            
            
            -
            
            
            -
            
            
            161,836Stock
                options exercised
            
            
            105,993
            
            
            -
            
            
            1,096,661
            
            
            -
            
            
            -
            
            
            1,096,661**Balance,
                June 30, 2006**
            
            
            9,498,026
            
            $
            1,217,065
            
            $
            27,825,195
            
            $
            63,304,245
            
            $
            (3,429,262
            )
            $
            88,917,243See
                accompanying notes to consolidated financial statements.


4




**PAB
                BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****SIX
                MONTHS ENDED JUNE 30, 2006 AND 2005****(UNAUDITED)****Six
                Months Ended June 30,****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            6,903,461
            
            $
            5,605,706Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation,
                amortization and accretion, net
            
            
            902,090
            
            
            1,101,065Provision
                for loan losses
            
            
            -
            
            
            613,600Net
                realized loss on securities transactions
            
            
            430,343
            
            
            1,242(Gain)
                loss on disposal of assets
            
            
            (12,798
            )
            
            21,831Compensation
                expense related to stock options
            
            
            161,836
            
            
            -Increase
                in cash value of bank-owned life insurance
            
            
            (189,954
            )
            
            (162,662
            )Increase
                (decrease) in deferred compensation accrual
            
            
            77,743
            
            
            (7,364
            )Decrease
                in retirement accruals
            
            
            (114,602
            )
            
            (178,033
            )Net
                change in taxes receivable and taxes payable
            
            
            (76,864
            )
            
            (580,350
            )Increase
                in interest receivable
            
            
            (1,110,158
            )
            
            (666,657
            )Increase
                in interest payable
            
            
            213,817
            
            
            429,761Net
                increase in prepaid expenses and other assets
            
            
            (690,359
            )
            
            (313,512
            )Net
                decrease in accrued expenses and other liabilities
            
            
            (605,267
            )
            
            (115,641
            )Net
                cash provided by operating activities
            
            
            5,889,288
            
            
            5,748,986**CASH
                FLOWS FROM INVESTING ACTIVITIES**(Increase)
                decrease in interest-bearing deposits in other banks
            
            
            2,329,849
            
            
            (4,851,400
            )Decrease
                in federal funds sold
            
            
            33,198,644
            
            
            20,546,003Purchase
                of debt securities
            
            
            (40,635,577
            )
            
            (22,424,049
            )Proceeds
                from sales and calls of debt securities
            
            
            13,083,832
            
            
            8,861,857Proceeds
                from maturities and paydowns of debt securities
            
            
            5,484,363
            
            
            7,949,931Purchase
                of equity investments
            
            
            (665,147
            )
            
            (302,300
            )Redemption
                of equity investments
            
            
            338,600
            
            
            -Net
                increase in loans
            
            
            (57,368,894
            )
            
            (72,798,775
            )Purchase
                of premises and equipment
            
            
            (2,325,888
            )
            
            (453,576
            )Proceeds
                from disposal of assets
            
            
            6,174,601
            
            
            129,665Net
                cash used in investing activities
            
            
            (40,385,617
            )
            
            (63,342,644
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase in deposits
            
            
            41,097,204
            
            
            69,370,121Net
                  decrease in federal funds purchased andsecurities sold under
                  repurchase agreements
            
            
            (405,743
            )
            
            (7,863,589
            )Advances
                from the Federal Home Loan Bank
            
            
            33,000,000
            
            
            38,318,600Payments
                on Federal Home Loan Bank advances
            
            
            (32,558,116
            )
            
            (38,928,481
            )Dividends
                paid
            
            
            (2,372,788
            )
            
            (1,997,153
            )Proceeds
                from the exercise of stock options
            
            
            1,096,661
            
            
            347,427Acquisition
                of stock under stock repurchase plans
            
            
            (1,559,334
            )
            
            (249,988
            )Purchase
                of cash flow hedge derivative instrument
            
            
            (451,250
            )
            
            -Repurchase
                of preferred stock in REIT subsidiaries
            
            
            -
            
            
            (8,000
            )Net
                cash provided by financing activities
            
            
            37,846,634
            
            
            58,988,937


5




**PAB
                BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS (CONTINUED)****SIX
                MONTHS ENDED JUNE 30, 2006 AND 2005****(UNAUDITED)****Six
                Months Ended June 30,****2006**
            
            **2005**Net
                increase in cash and due from banks
            
            $
            3,350,305
            
            $
            1,395,279Cash
                and due from banks at beginning of period
            
            
            21,196,183
            
            
            22,976,924Cash
                and due from banks at end of period
            
            $
            24,546,488
            
            $
            24,372,203**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION**Cash
                paid during the period for:Interest
            
            $
            14,748,337
            
            $
            8,045,004Taxes
            
            $
            4,024,987
            
            $
            3,346,000**NONCASH
                INVESTING AND FINANCING TRANSACTIONS**Increase
                (decrease) in unrealized gains on securities available for
                sale
            
            $
            (3,398,038
            )
            $
            73,364See
                accompanying notes to consolidated financial statements.





6


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**











**NOTE
      1.  NATURE OF BUSINESS**





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




**Banking
                    Locations**
                **Number
                    of Banking Offices****South
                    Georgia Market:**Valdosta,
                    Lowndes County, Georgia
                1
                    (including the main office)Lake
                    Park, Lowndes County, Georgia
                1Adel,
                    Cook County, Georgia
                1Bainbridge,
                    Decatur County, Georgia
                3Cairo,
                    Grady County, Georgia
                1Statesboro,
                    Bulloch County, Georgia
                2Baxley,
                    Appling County, Georgia
                1Hazlehurst,
                    Jeff Davis County, Georgia
                1**North
                    Georgia Market:**McDonough,
                    Henry County, Georgia
                1Stockbridge,
                    Henry County, Georgia
                1Oakwood,
                    Hall County, Georgia
                1Athens,
                    Clarke County, Georgia
                1
                    (loan production office)Atlanta,
                    Cobb County, Georgia
                1
                    (loan production office)Snellville,
                    Gwinnett County, Georgia
                1
                    (loan production office)**Florida
                    Market:**Ocala,
                    Marion County, Florida
                1St.
                    Augustine, St. Johns County, Florida
                1
                    (loan production office)Jacksonville,
                    Duval County, Florida
                1
                    (loan production office)


The
      Company also owns PAB Bankshares Capital Trust I, a Delaware statutory business
      trust. This non-operating subsidiary was created in 2001 for the sole purpose
      of
      issuing trust preferred securities and investing the proceeds in subordinated
      debt issued by the Company. During the first quarter of 2004, the Company
      adopted 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 revised
      provisions required deconsolidation of PAB Bankshares Capital Trust I. The
      adoption of FASB Interpretation No. 46R did not have a material effect on the
      Company’s financial condition or results of operations.





In
      1998,
      the Company formed two real estate investment trusts (each, a “REIT”) and two
      intermediate REIT holding
      companies as subsidiaries of the Bank. The REITs were established to realize
      state income tax benefits and to provide the Bank with ready access to capital
      markets if additional capital were needed. The REIT holding companies were
      established to provide assistance in managing the Company’s investment in the
      REITs. To comply with federal tax law, a minority interest in the non-voting,
      cumulative preferred stock of the REITs was issued to certain directors,
      officers and employees of the Company. The $500 par value preferred stock paid
      an 8% annual dividend. Both the REITs and the REIT holding companies were
      liquidated and dissolved as of December 31, 2005, thus eliminating the minority
      interest that had previously been included in other liabilities. The total
      minority interest of the REITs included in other liabilities at June 30, 2005
      was $107,000.


7




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**









**NOTE
      2.  BASIS OF PRESENTATION**





The
      accompanying consolidated financial information of the Company is unaudited;
      however, such information reflects all adjustments (consisting of normal
      recurring adjustments) which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position and results of operations. The
      results of operations for the three months and six months ended June 30, 2006
      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, 2005.





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. Significant intercompany transactions and balances are eliminated
      in consolidation.





In
      preparing the consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America, management is
      required to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and the disclosure of contingent assets and liabilities
      as of the balance sheet date and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      Material estimates that are particularly susceptible to significant change
      relate to the determination of the allowance for loan losses, the valuation
      of
      goodwill, the valuation of foreclosed assets and deferred
      taxes.








**NOTE
      3.  EARNINGS PER COMMON SHARE**





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





The
      components used to calculate basic and diluted earnings per share for the three
      months and six months ended June 30, 2006 and 2005 follow:




**Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Basic
                  earnings per share:Net
                  income
              
              $
              3,592,117
              
              $
              3,127,058
              
              $
              6,903,461
              
              $
              5,605,706Weighted
                  average common shares outstanding
              
              
              9,511,395
              
              
              9,526,343
              
              
              9,498,057
              
              
              9,512,741Earnings
                  per common share
              
              $
              0.38
              
              $
              0.33
              
              $
              0.73
              
              $
              0.59Diluted
                  earnings per share:Net
                  income
              
              $
              3,592,117
              
              $
              3,127,058
              
              $
              6,903,461
              
              $
              5,605,706Weighted
                  average common shares outstanding
              
              
              9,511,395
              
              
              9,526,343
              
              
              9,498,057
              
              
              9,512,741Effect
                  of dilutive stock options
              
              
              210,702
              
              
              145,602
              
              
              221,581
              
              
              147,871Weighted
                  average diluted commonshares
                  outstanding
              
              
              9,722,097
              
              
              9,671,945
              
              
              9,719,638
              
              
              9,660,612Earnings
                  per common share
              
              $
              0.37
              
              $
              0.32
              
              $
              0.71
              
              $
              0.58


8




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**







**NOTE
      4.  DERIVATIVE FINANCIAL INSTRUMENTS**





The
      Company’s asset-liability management policy allows the use of certain derivative
      and financial instruments for hedging purposes in managing the Company’s
      interest rate risk. The Company does not enter into derivatives or other
      financial instruments for trading or speculative purposes. A derivative is
      a
      financial instrument that derives its cash flows, and therefore its value,
      by
      reference to an underlying instrument, index or referenced interest rate. The
      most common derivative instruments include interest rate swaps, caps, floors
      and
      collars. The Company accounts for its derivative financial instruments under
      FASB No. 133, Accounting for Derivative Instruments and Hedging Activities,
      and
      as such, the fair value of the floor is included in other assets in the
      Consolidated Statement of Condition.





In
      June
      2006, the Company entered into its first derivative instrument, a $50 million
      notional amount, 3-year, 8.25% Prime floor contract to hedge against interest
      rate risk in a declining rate environment. The premium paid for this contract
      was $451,000. The contract is classified as a hedge of an exposure to changes
      in
      the cash flows of a recognized asset (“cash flow hedge”). As a cash flow hedge,
      the portion of a change in the fair value of the derivative that has been deemed
      highly effective is recognized in other comprehensive income until the related
      cash flows from the hedged item are recognized in earnings. The initial fair
      value of the premium paid is allocated and recognized in the same future period
      that the hedged forecasted transaction impacts earnings. At June 30, 2006,
      the
      Company reported a $6,000 loss, net of a $3,000 tax effect, in other
      comprehensive income related to cash flow hedges. The Company documents, both
      at
      inception and periodically over the life of the hedge, its analysis of actual
      and expected hedge effectiveness. To the extent that the hedge of future cash
      flows is deemed ineffective, changes in the fair value of the derivative are
      recognized in earnings as a component of other non-interest expense. For the
      three and six month periods ended June 30, 2006, there was no ineffectiveness
      recognized in other non-interest expense attributable to cash flow hedges.
      A
      summary of the Company’s derivative financial instruments at June 30, 2006 is
      shown in the following table:




**Notional**
              **amount**
            
            **Floor
                rate**
            
            **Maturity**
              **in
                months**
            
            **Estimated**
              **fair
                value at**
              **June
                30, 2006**
            
            **Net**
              **unrealized**
              **gains
                (losses)****Derivatives
                Designated as Cash**
              **Flow
                Hedges:**Hedging
                cash flows on prime-
              based
                floating rate loans
            
            $
            50,000,000
            
            
            8.25
            %
            
            36
            
            $
            442,000
            
            $
            (9,000
            )**Total
                Derivative Instruments**
            
            $
            50,000,000
            
            
            8.25
            %
            
            36
            
            $
            442,000
            
            $
            (9,000
            )







**NOTE
      5.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION**





At
      June 30, 2006, the Company had two fixed stock option plans under which it
      has granted options to its employees and directors to purchase common stock
      at
      the fair market price on the date of the grant. Both plans provide for
“incentive stock options” and “non-qualified stock options”. The incentive stock
      options are intended to qualify under Section 422 of the Internal Revenue Code
      for favorable tax treatment. Under the 1994 Employee Stock Option Plan, the
      Board of Directors was able to 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. Under the
      1999
      Stock Option Plan, the Board of Directors may grant up to 600,000 stock options
      to directors, employees, consultants and advisors of the Company. On February
      28, 2006, the Company’s Board of Directors adopted an amendment to the 1999 Plan
      to increase the maximum aggregate number of shares of common stock for which
      options may be granted from 600,000 shares to 1,400,000 shares and to extend
      the
      term of the Plan for ten years from the date of the adoption of these
      amendments. This amendment
      was approved at the Company’s annual meeting of shareholders on May 23, 2006. As
      of June 30, 2006, 805,016 shares were available for grant under the 1999 Stock
      Option Plan.


9




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**







**NOTE
      5.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION
      (continued)**





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





As
      a
      result of adopting FASB No. 123R on January 1, 2006, the Company’s income before
      income taxes and net income for the three months ended June 30, 2006 decreased
      by $81,200 and $72,200, respectively, compared to accounting for stock-based
      compensation under APB Opinion No. 25. The Company’s income before income taxes
      and net income for the six months ended June 30, 2006 decreased by $161,800
      and
      $144,000, respectively, compared to accounting for stock-based compensation
      under APB Opinion No. 25. Basic and diluted earnings per share for the quarter
      ended June 30, 2006 would have been $0.39 and $0.38, respectively, if the
      Company had not adopted FASB No. 123R, compared to reported basic and diluted
      earnings per share of $0.38 and $0.37, respectively. Basic and diluted earnings
      per share for the six months ended June 30, 2006 would have been $0.74 and
      $0.73, respectively, if the Company had not adopted FASB No. 123R, compared
      to
      reported basic and diluted earnings per share of $0.73 and $0.71,
      respectively.





At
      June
      30, 2006, there was approximately $714,000 of unrecognized compensation cost
      related to stock-based payments, which is expected to be recognized over a
      weighted-average period of 1.67 years.





Pro
      forma
      information regarding the impact of total stock-based compensation on net income
      and income per share for prior periods as if the Company had accounted for
      its
      employee stock options under the fair value method is illustrated in the
      following table:





**Three
                Months**
              **Ended**
              **June
                30, 2005**
            
            **Six
                Months**
              **Ended**
              **June
                30, 2005**Net
                income, as reported
            
            $
            3,127,058
            
            $
            5,605,706Deduct:Total
                stock-based employee compensation expensedetermined
                under fair value based method for allawards,
                net of related tax effects
            
            
            (65,560
            )
            
            (124,022
            )Pro
                forma net income
            
            $
            3,061,498
            
            $
            5,481,685Earnings
                per share:Basic
                - as reported
            
            $
            0.33
            
            $
            0.59Basic
                - pro forma
            
            $
            0.32
            
            $
            0.58Diluted
                - as reported
            
            $
            0.32
            
            $
            0.58Diluted
                - pro forma
            
            $
            0.32
            
            $
            0.57


10




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**







**NOTE
      5.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION
      (continued)**





A
      summary
      of the status of the two fixed stock option plans at June 30, 2006 and December
      31, 2005 and changes during the periods ended on those dates
      follows.





**Quarter
                ended June 30, 2006**
            
            **Six
                Months ended June 30, 2006**
            
            **Year
                ended December 31, 2005****Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Under
                option, beginningof
                period
            
            
            657,371
            
            $
            12.33
            
            
            703,597
            
            $
            11.91
            
            
            651,777
            
            $
            11.03Granted
            
            
            10,000
            
            
            19.00
            
            
            36,000
            
            
            18.64
            
            
            122,500
            
            
            14.57Exercised
            
            
            (34,567
            )
            
            10.58
            
            
            (105,993
            )
            
            10.35
            
            
            (61,180
            )
            
            7.38Forfeited
            
            
            -
            
            
            -
            
            
            (800
            )
            
            13.94
            
            
            (9,500
            )
            
            13.16Under
                option, end of period
            
            
            632,804
            
            $
            12.55
            
            
            632,804
            
            $
            12.55
            
            
            703,597
            
            $
            11.91Exercisable
                at end of period
            
            
            413,032
            
            $
            12.10
            
            
            413,032
            
            $
            12.10
            
            
            477,295
            
            $
            11.73Weighted-average
                fair valueper
                option of options grantedduring
                period
            
            
            
            
            $
            5.94
            
            
            
            
            $
            6.02
            
            
            
            
            $
            4.41Total
                intrinsic value ofoptions
                exercised duringthe
                period
            
            
            
            
            $
            340,000
            
            
            
            
            $
            1,012,000
            
            
            
            
            $
            439,000Weighted
                average remainingcontractual
                term ofexercisable
                options at endof
                the period
            
            
            
            
            
            4.18
                years
            
            
            
            
            
            4.18
                years
            
            
            
            
            
            4.16
                yearsAggregate
                intrinsic value ofexercisable
                options at endofperiod
            
            
            
            
            $
            2,646,000
            
            
            
            
            $
            2,646,000
            
            
            
            
            $
            3,113,000


11




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**









**NOTE
      5.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION
      (continued)**





A
      summary
      of the status of the nonvested options in the two fixed stock option plans
      at
      June 30, 2006 and changes during the three and six month period ended on that
      date follows.




**Three
                Months ended**
              **June
                30, 2006**
            
            **Six
                Months ended**
              **June
                30, 2006****Number**
            
            **Weighted-**
              **Average**
              **Grant-Date**
              **Fair
                Value**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Grant-Date**
              **Fair
                Value**Nonvested,
                beginning of period
            
            
            210,772
            
            $
            4.35
            
            
            226,302
            
            $
            4.07Granted
            
            
            10,000
            
            
            5.94
            
            
            36,000
            
            
            6.02Vested
            
            
            (1,000
            )
            
            3.02
            
            
            (41,730
            )
            
            3.88Forfeited
            
            
            -
            
            
            -
            
            
            (800
            )
            
            4.26Nonvested,
                end of period
            
            
            219,772
            
            $
            4.44
            
            
            219,772
            
            $
            4.44Total
                fair value of options vested during period
            
            
            
            
            $
            3,000
            
            
            
            
            $
            162,000





A
      further
      summary of the options outstanding at June 30, 2006 follows.





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Contractual**
              **Life
                in Years**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$
                7.70 - 9.38
            
            
            144,499
            
            
            5.53
            
            $
            8.33
            
            
            97,699
            
            $
            8.5810.01
                - 10.60
            
            
            138,505
            
            
            4.24
            
            
            10.37
            
            
            113,433
            
            
            10.3510.71
                - 13.94
            
            
            134,900
            
            
            5.35
            
            
            13.00
            
            
            90,300
            
            
            12.7614.00
                - 16.25
            
            
            130,000
            
            
            5.54
            
            
            15.49
            
            
            87,200
            
            
            15.9916.99
                - 21.63
            
            
            84,900
            
            
            7.46
            
            
            18.10
            
            
            24,400
            
            
            17.97632,804
            
            
            5.47
            
            
            12.55
            
            
            413,032
            
            
            12.10





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the assumptions listed in the table
      below. Expected volatilities are based on historical volatility of the Company’s
      stock. Expected dividends are based on dividend trends and the market price
      of
      the Company’s stock price at grant. Historical data is used to estimate option
      exercises and employee terminations within the valuation model. The risk-free
      rate for periods within the contractual life of the option is based on the
      U.S.
      Treasury yield curve in effect at the time of grant.





**Quarter
                ended**
              **June
                30, 2006**
            
            **Six
                months ended**
              **June
                30, 2006**
            
            **Year
                ended**
              **December
                31, 2005**Risk-free
                interest rate
            
            
            4.85%
                - 4.86%
            
            
            4.39%
                - 4.86%
            
            
            3.95%
                - 4.27%Expected
                life of the options
            
            
            7
                - 10 years
            
            
            7
                - 10 years
            
            
            7
                - 10 yearsExpected
                dividends (as a percentageof
                the fair value of the stock)
            
            
            2.73%
            
            
            2.73%
                - 2.74%
            
            
            3.05%
                - 3.08%Expected
                volatility
            
            
            32.19%
            
            
            31.44%
                - 32.19%
            
            
            32.68%
                - 35.29%


12


**CAUTIONARY
      NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





Certain
      statements set forth in this Report or incorporated herein by reference,
      including, without limitation, matters discussed under the caption “ *Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation* ”,
      as
      well as oral statements made by PAB Bankshares, Inc. (“PAB”, and also referred
      to in this Report as either “the Company”, “we”, “us”, or “our”) or the
      officers, directors, or employees of PAB are “forward-looking statements” within
      the meaning of the federal securities laws, including, without limitation,
      statements regarding our outlook on earnings, stock performance, asset quality,
      branch expansion and projected growth, and are based upon management’s beliefs
      as well as assumptions made based on data currently available to management.
      When words like “anticipate”, “believe”, “intend”, “plan”, “may”, “contemplate”,
“continue”, “project”, “predict”, “would”, “expect”, “estimate”, “could”,
“should”, “will”, and similar expressions are used, you should consider them as
      identifying forward-looking statements. These forward-looking statements are
      not
      guarantees of future performance, and a variety of factors could cause our
      actual results to differ materially from the anticipated or expected results
      expressed in these forward-looking statements. Many of these factors are beyond
      our ability to control or predict, and readers are cautioned not to put undue
      reliance on such forward-looking statements. The following list, which is not
      intended to be an all-encompassing list of risks and uncertainties affecting
      us,
      summarizes several factors that could cause our actual results to differ
      materially from those anticipated or expected in these forward-looking
      statements: (1) competitive pressures among depository and other financial
      institutions may increase significantly; (2) changes in the interest rate
      environment may reduce margins or the volumes or values of loans made by the
      Company’s subsidiary, The Park Avenue Bank (the “Bank”); (3) general economic
      conditions (both generally and in our markets) may be less favorable than
      expected, resulting in, among other things, a deterioration in credit quality
      and/or a reduction in demand for credit; (4) legislative or regulatory changes,
      including changes in accounting standards and compliance requirements, may
      adversely affect the businesses in which we are engaged; (5) competitors may
      have greater financial resources and develop products that enable such
      competitors to compete more successfully than we can; (6) our ability to attract
      and retain key personnel can be affected by the increased competition for
      experienced employees in the banking industry; (7) adverse changes may occur
      in
      the bond and equity markets; (8) war or terrorist activities may cause further
      deterioration in the economy or cause instability in credit markets; (9)
      restrictions or conditions imposed by our regulators on our operations may
      make
      it more difficult for us to achieve our goals; (10) economic, governmental
      or
      other factors may prevent the projected population, residential and commercial
      growth in the markets in which we operate; and (11) the risk factors discussed
      from time to time in the Company’s periodic reports filed with the Securities
      and Exchange Commission (the “SEC”), including but not limited to, the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005. 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.





**ITEM
      2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION** **AND
      RESULTS OF OPERATION**





The
      following discussion and analysis of the consolidated financial condition and
      results of operations of the Company should be read in conjunction with the
      Consolidated Financial Statements and related Notes included in this Report
      as
      well as the Consolidated Financial Statements, related Notes, and Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      included in the Company’s 2005 Annual Report on Form 10-K, and is qualified in
      its entirety by the foregoing and other more detailed financial information
      appearing elsewhere. Historical results of operations and the percentage
      relationships among any amounts included, and any trends which 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 $1.06 billion community bank
      with 17 branches and five 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, Clarke,
      Cobb and Gwinnett counties are referred to collectively as our “North Georgia”
market. Our offices in Marion, St. Johns and Duval counties
      are collectively referred to as our “Florida” market. In addition, our corporate
      assets, correspondent bank account balances, investment portfolio, out-of-market
      participation loans, insider loans and insider deposits, borrowings, etc. are
      reported at the corporate level, in what we refer to as the
“Treasury.”


13




**FINANCIAL
      CONDITION**





The
      Company’s total assets increased $42.7 million, or 4.2%, during the six months
      ended June 30, 2006 to $1.06 billion from $1.02 billion at December 31, 2005.
      A
      $41.1 million, or 5.0%, increase in deposits fueled this growth. Time deposits
      increased $22.2 million, or 5.2%; interest-bearing demand deposits increased
      $31.4 million, or 11.0%; while non-interest bearing demand deposits decreased
      $12.5 million, or 11.6%. These new deposits are the result of a concentrated
      effort to grow deposits in each of our markets. Our loan portfolio increased
      $50.1 million, or 6.7%, during the first six months of 2006. Our loan growth
      can
      be attributed to our presence in some of the fastest growing markets in the
      Southeastern United States and strong production from our seasoned
      bankers.





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





As
                of Quarter End
            Jun-06
            
            Mar-06
            
            Dec-05
            
            Sep-05
            
            Jun-05(Dollars
                In Thousands)Commercial
                and financial
            $
            53,185
            
            $
            47,164
            
            $
            50,860
            
            $
            55,536
            
            $
            60,127Agricultural
                (including loans securedby
                farmland)
            
            47,754
            
            
            53,368
            
            
            55,830
            
            
            45,759
            
            
            32,475Real
                estate - construction
            
            304,387
            
            
            290,863
            
            
            268,629
            
            
            257,522
            
            
            228,539Real
                estate - commercial
            
            251,966
            
            
            229,236
            
            
            231,601
            
            
            206,910
            
            
            227,079Real
                estate - residential
            
            127,020
            
            
            123,902
            
            
            127,326
            
            
            145,395
            
            
            151,033Installment
                loans to individuals andother
                loans
            
            19,966
            
            
            20,836
            
            
            20,380
            
            
            22,239
            
            
            22,663804,278
            
            
            765,369
            
            
            754,626
            
            
            733,361
            
            
            721,916Deferred
                loan fees and unearned interest, net
            
            (1,243
            )
            
            (1,279
            )
            
            (1,688
            )
            
            (1,816
            )
            
            (2,282
            )803,035
            
            
            764,090
            
            
            752,938
            
            
            731,545
            
            
            719,634Allowance
                for loan losses
            
            (10,903
            )
            
            (11,186
            )
            
            (11,079
            )
            
            (10,768
            )
            
            (10,460
            )$
            792,132
            
            $
            752,904
            
            $
            741,859
            
            $
            720,777
            
            $
            709,174




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





As
                of Quarter End
            
            Jun-06
            
            Mar-06
            
            Dec-05
            
            Sep-05
            
            Jun-05Commercial
                and financial
            
            
            6.62
            %
            
            6.17
            %
            
            6.75
            %
            
            7.59
            %
            
            8.36
            %Agricultural
                (including loans securedby
                farmland)
            
            
            5.95
            %
            
            6.98
            %
            
            7.41
            %
            
            6.26
            %
            
            4.51
            %Real
                estate - construction
            
            
            37.89
            %
            
            38.07
            %
            
            35.68
            %
            
            35.20
            %
            
            31.76
            %Real
                estate - commercial
            
            
            31.38
            %
            
            30.00
            %
            
            30.76
            %
            
            28.28
            %
            
            31.55
            %Real
                estate - residential
            
            
            15.82
            %
            
            16.22
            %
            
            16.91
            %
            
            19.88
            %
            
            20.99
            %Installment
                loans to individuals andother
                loans
            
            
            2.49
            %
            
            2.73
            %
            
            2.71
            %
            
            3.04
            %
            
            3.15
            %100.15
            %
            
            100.17
            %
            
            100.22
            %
            
            100.25
            %
            
            100.32
            %Deferred
                  loan fees and unearnedinterest, net
            
            
            -0.15
            %
            
            -0.17
            %
            
            -0.22
            %
            
            -0.25
            %
            
            -0.32
            %Total
                loans
            
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %Allowance
                for loan losses
            
            
            -1.36
            %
            
            -1.46
            %
            
            -1.47
            %
            
            -1.47
            %
            
            -1.45
            %Net
                loans
            
            
            98.64
            %
            
            98.54
            %
            
            98.53
            %
            
            98.53
            %
            
            98.55
            %


14




Because
      we have a significant concentration in construction and development loans and
      commercial real estate loans we monitor and estimate trends in our real estate
      markets and periodically adjust our strategies and underwriting requirements
      manage the risks associated with these types of loans. Below is a table showing
      the collateral distribution of our construction and commercial real estate
      loans
      as of June 30, 2006.




Construction
                  and Development
              
              %
                  of Total
              
              
              
              Commercial
                  Real Estate
              
              %
                  of Total(Dollarsin
                  Thousands)Acquisition
                  and Development:
              
              
              
              
              
              
              
              
              Owner-occupied:1-4
                  family residential
              
              $
              125,845
              
              
              41.34
              %
              
              Office
              
              $
              32,255
              
              
              12.80
              %Commercial
                  and multi-family
              
              
              78,082
              
              
              25.65
              %
              
              Retail
              
              
              29,224
              
              
              11.60
              %Construction:
              
              
              
              
              
              
              
              
              Other
              
              
              39,780
              
              
              15.79
              %1-4
                  family residential spec
              
              
              30,495
              
              
              10.02
              %
              
              Not
                  owner-occupied:1-4
                  family residential pre-sold
              
              
              3,216
              
              
              1.06
              %
              
              Office
              
              
              24,498
              
              
              9.72
              %1-4
                  family residential other
              
              
              10,428
              
              
              3.43
              %
              
              Retail
              
              
              24,324
              
              
              9.65
              %Commercial
                  owner-occupied
              
              
              14,174
              
              
              4.66
              %
              
              Other
              
              
              26,483
              
              
              10.51
              %Commercial
                  not owner-occupied
              
              
              12,377
              
              
              4.07
              %
              
              Other:Hotel/motel
              
              
              6,596
              
              
              2.17
              %
              
              Hotel/motel
              
              
              17,583
              
              
              6.98
              %Multi-family
                  properties
              
              
              19,956
              
              
              6.56
              %
              
              Industrial
              
              
              3,069
              
              
              1.22
              %Special
                  purpose property
              
              
              1,617
              
              
              0.53
              %
              
              Multi-family
                  properties
              
              
              17,382
              
              
              6.90
              %Other
              
              
              1,601
              
              
              0.53
              %
              
              Special
                  purpose property
              
              
              37,368
              
              
              14.83
              %Total
                  Construction and Development
              
              $
              304,387
              
              
              100.00
              %
              
              Total
                  Commercial Real Estate
              
              $
              251,966
              
              
              100.00
              %


The
      following table summarizes our loan and deposit portfolios classified by type
      and market as of June 30, 2006.





**South**
            
            **North****As
                of June 30, 2006**
            
            **Georgia**
            
            **Georgia**
            
            **Florida**
            
            **Treasury**
            
            **Total**(Dollars
                in Thousands)**Loans**Commercial
                and financial
            
            $
            32,899
            
            $
            19,859
            
            $
            352
            
            $
            75
            
            $
            53,185Agricultural
                (including loans secured by farmland)
            
            
            40,888
            
            
            5,565
            
            
            1,301
            
            
            -
            
            
            47,754Real
                estate - construction
            
            
            61,908
            
            
            197,468
            
            
            44,951
            
            
            60
            
            
            304,387Real
                estate - commercial
            
            
            86,489
            
            
            133,229
            
            
            24,701
            
            
            7,547
            
            
            251,966Real
                estate - residential
            
            
            96,225
            
            
            24,787
            
            
            4,083
            
            
            1,925
            
            
            127,020Installment
                loans to individuals and other loans
            
            
            17,024
            
            
            1,368
            
            
            129
            
            
            1,445
            
            
            19,966335,433
            
            
            382,276
            
            
            75,517
            
            
            11,052
            
            
            804,278Deferred
                loan fees and unearned interest, net
            
            
            (23
            )
            
            (743
            )
            
            (489
            )
            
            12
            
            
            (1,243
            )Total
                loans
            
            $
            335,410
            
            $
            381,533
            
            $
            75,028
            
            $
            11,064
            
            $
            803,035Percentage
                of total
            
            
            41.8
            %
            
            47.5
            %
            
            9.3
            %
            
            1.4
            %
            
            100.0
            %**Deposits**Noninterest-bearing
                demand
            
            $
            73,570
            
            $
            13,273
            
            $
            3,624
            
            $
            4,991
            
            $
            95,458Interest-bearing
                demand and savings
            
            
            227,284
            
            
            57,581
            
            
            29,787
            
            
            840
            
            
            315,492Time
            
            
            247,792
            
            
            60,620
            
            
            100,585
            
            
            36,831
            
            
            445,828Total
                deposits
            
            $
            548,646
            
            $
            131,474
            
            $
            133,996
            
            $
            42,662
            
            $
            856,778Percentage
                of total
            
            
            64.0
            %
            
            15.4
            %
            
            15.6
            %
            
            5.0
            %
            
            100.0
            %





In
      addition to the geographic concentrations noted in the tables above, we had
      approximately $62.0 million in loans secured by real estate in Florida to
      customers of our South Georgia, North Georgia and Treasury
      offices.


15




Stockholders’
      equity was 8.4% of total assets at quarter end, a decrease compared to 8.6%
      at
      December 31, 2005. Total equity increased $1.9 million, or 2.2%, since December
      31, 2005. This increase is primarily the net result of $6.9 million in earnings,
      less $2.5 million in dividends and $2.2 million in unrealized losses on
      investment securities. We paid a $0.125 per common share dividend for the first
      quarter 2006 and declared a $0.135 per common share dividend for the second
      quarter of 2006, compared to $0.11 and $0.12 per common share dividend paid
      for
      the first and second quarters of 2005, respectively. Our dividend payout ratios
      for the first and second quarters of 2006 were 35.91% and 35.70%, respectively,
      compared to 42.27% and 36.57% for the first and second quarters of
      2005.





**RESULTS
      OF OPERATIONS**





Net
      income for the three months ended June 30, 2006 was $3.59 million, or $0.37
      per
      diluted share, as compared to $3.13 million, or $0.32 per diluted share, during
      the same period in 2005. The $465,000, or 14.9%, increase in net income is
      the
      net result of a $1,701,000 increase in net interest income (or $1,774,000 on
      a
      taxable-equivalent basis), a $153,000 decrease in the provision for loan losses
      and a $99,000 increase in other income, offset by a $954,000 increase in other
      expenses and a $534,000 increase in income tax expense. Our return on average
      assets (“ROA”) and return on average equity (“ROE”) for the three months ended
      June 30, 2006 were 1.36% and 15.93%, respectively, compared to 1.37% ROA and
      14.89% ROE for the same period in 2005.





Net
      income for the six months ended June 30, 2006 was $6.90 million, or $0.71 per
      diluted share, as compared to $5.61 million, or $0.58 per diluted share, during
      the same period in 2005. The $1,298,000, or 23.2%, increase in net income is
      the
      net result of a $4,019,000 increase in net interest income (or $4,134,000 on
      a
      taxable-equivalent basis) and a $614,000 decrease in the provision for loan
      losses, offset by a $208,000 decrease in other income, a $1,945,000 increase
      in
      other expenses and a $1,182,000 increase in income tax expense. Our ROA and
      ROE
      for the six months ended June 30, 2006 were 1.33% and 15.51%, respectively,
      both
      an increase compared to 1.25% ROA and 13.55% ROE for the same period in
      2005.





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





*Net
      Interest Income*


The
      primary component of our profitability is net interest income, or the difference
      between the interest income earned on assets, primarily loans and investments,
      and interest paid on liabilities, primarily deposits and other borrowed funds.
      For the three months ended June 30, 2006, our net interest income on a
      taxable-equivalent basis was $11.4 million, an 18.4% increase over the $9.6
      million in net interest income for the second quarter of 2005. The increase
      in
      net interest income is due to an increase in loan volume and an increase in
      loan
      yields offset by an increase in interest-bearing deposits and an increase in
      rates paid for those deposits and FHLB advances. During the second quarter
      of
      2006, our average earning assets were 15.4% higher compared to the same period
      in 2005. The average balances of our interest-bearing liabilities increased
      by
      18.9% to fund the asset growth. As short-term interest rates rose during 2005
      and the first half of 2006, the average yield on our earning assets increased
      122 basis points from 6.62% for the second quarter of 2005, to 7.84% for the
      second quarter of 2006. However, the average rates paid for our funds increased
      120 basis points from 2.54% for the second quarter of 2005, to 3.74% for the
      second quarter of 2006. As a result, our net interest spread widened by 2 basis
      points from 4.08% in the second quarter of 2005, to 4.10% for the same period
      in
      2006.





For
      the
      six months ended June 30, 2006, our net interest income on a taxable-equivalent
      basis was $22.4 million, a 22.6% increase over the $18.3 million in net interest
      income for the same period in 2005. The increase in net interest income is
      due
      primarily to the same factors described above for the quarterly results.





The
      net
      interest margin is net interest income expressed as a percentage of average
      earning assets. Our net interest margin for the second quarter of 2006 was
      4.61%, 12 basis points higher than the 4.49% recorded for the second quarter
      of
      2005. If we continue to grow our earning assets, and the steady increases in
      short-term interest rates were to end or revert to lower interest rates, we
      would expect to have tighter net interest spreads and a decline in our net
      interest margin. A flat or inverted interest rate curve and incrementally higher
      cost of funds needed for such growth will also have an impact on our
      profitability. The
      following tables detail the average balances of interest-earning assets and
      interest-bearing liabilities, the amount of interest earned and paid, and the
      average yields and rates for the three months and six months ended June 30,
      2006
      and 2005. Federally tax-exempt income is presented on a taxable-equivalent
      basis
      assuming a 35% Federal tax rate. Loan average balances include loans on
      nonaccrual status.


16




For
                the Three Months Ended June 30,
            
            
            
            2006
            
            
            
            
            
            2005Interest
            
            Average
            
            
            
            Interest
            
            AverageAverage
            
            Income/
            
            Yield/
            
            Average
            
            Income/
            
            Yield/Balance
            
            Expense
            
            Rate
            
            Balance
            
            Expense
            
            Rate(Dollars
                In Thousands)Interest-earning
                assets:Loans
            
            $
            787,332
            
            $
            16,824
            
            
            8.57
            %
            $
            693,433
            
            $
            12,473
            
            
            7.21
            %Investment
                securities:Taxable
            
            
            154,347
            
            
            1,902
            
            
            4.94
            %
            
            120,741
            
            
            1,329
            
            
            4.42
            %Nontaxable
            
            
            23,685
            
            
            348
            
            
            5.90
            %
            
            9,603
            
            
            142
            
            
            5.91
            %Other
                short-term investments
            
            
            28,809
            
            
            354
            
            
            4.93
            %
            
            37,685
            
            
            284
            
            
            3.03
            %Total
                interest-earning assets
            
            $
            994,173
            
            $
            19,428
            
            
            7.84
            %
            $
            861,462
            
            $
            14,228
            
            
            6.62
            %Interest-bearing
                liabilities:Demand
                deposits
            
            $
            267,483
            
            $
            2,037
            
            
            3.05
            %
            $
            198,141
            
            $
            690
            
            
            1.40
            %Savings
                deposits
            
            
            40,675
            
            
            129
            
            
            1.27
            %
            
            43,559
            
            
            74
            
            
            0.68
            %Time
                deposits
            
            
            443,350
            
            
            4,647
            
            
            4.20
            %
            
            364,083
            
            
            2,841
            
            
            3.13
            %FHLB
                advances
            
            
            90,612
            
            
            920
            
            
            4.07
            %
            
            98,926
            
            
            769
            
            
            3.12
            %Notes
                payable
            
            
            10,310
            
            
            226
            
            
            8.81
            %
            
            10,310
            
            
            176
            
            
            6.86
            %Other
                short-term borrowings
            
            
            5,781
            
            
            47
            
            
            3.24
            %
            
            6,924
            
            
            30
            
            
            1.75
            %Total
                interest-bearing liabilities
            
            $
            858,211
            
            $
            8,006
            
            
            3.74
            %
            $
            721,943
            
            $
            4,580
            
            
            2.54
            %Interest
                rate spread
            
            
            
            
            
            
            
            
            4.10
            %
            
            
            
            
            
            
            
            4.08
            %Net
                interest income
            
            
            
            
            $
            11,422
            
            
            
            
            
            
            
            $
            9,648Net
                interest margin
            
            
            
            
            
            
            
            
            4.61
            %
            
            
            
            
            
            
            
            4.49
            %






For
                the Six Months Ended June 30,
            
            
            
            
            
            2006
            
            
            
            
            
            
            
            
            2005Interest
            
            
            
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/Balance
            
            
            Expense
            
            
            Rate
            
            
            Balance
            
            
            Expense
            
            
            Rate(Dollars
                In Thousands)Interest-earning
                assets:Loans
            
            $
            774,686
            
            $
            32,224
            
            
            8.39
            %
            $
            679,668
            
            $
            23,310
            
            
            6.92
            %Investment
                securities:Taxable
            
            
            151,887
            
            
            3,672
            
            
            4.88
            %
            
            118,939
            
            
            2,626
            
            
            4.45
            %Nontaxable
            
            
            20,158
            
            
            587
            
            
            5.87
            %
            
            9,002
            
            
            266
            
            
            5.95
            %Other
                short-term investments
            
            
            38,263
            
            
            876
            
            
            4.62
            %
            
            39,925
            
            
            536
            
            
            2.71
            %Total
                interest-earning assets
            
            $
            984,994
            
            $
            37,359
            
            
            7.65
            %
            $
            847,534
            
            $
            26,738
            
            
            6.36
            %Interest-bearing
                liabilities:Demand
                deposits
            
            $
            260,608
            
            $
            3,632
            
            
            2.81
            %
            $
            195,638
            
            $
            1,186
            
            
            1.22
            %Savings
                deposits
            
            
            40,646
            
            
            241
            
            
            1.20
            %
            
            43,009
            
            
            137
            
            
            0.64
            %Time
                deposits
            
            
            439,216
            
            
            8,873
            
            
            4.07
            %
            
            353,617
            
            
            5,296
            
            
            3.02
            %FHLB
                advances
            
            
            89,879
            
            
            1,692
            
            
            3.80
            %
            
            98,811
            
            
            1,452
            
            
            2.96
            %Notes
                payable
            
            
            10,310
            
            
            446
            
            
            8.72
            %
            
            10,310
            
            
            344
            
            
            6.73
            %Other
                short-term borrowings
            
            
            6,041
            
            
            78
            
            
            2.59
            %
            
            8,310
            
            
            60
            
            
            1.46
            %Total
                interest-bearing liabilities
            
            $
            846,700
            
            $
            14,962
            
            
            3.56
            %
            $
            709,695
            
            $
            8,475
            
            
            2.41
            %Interest
                rate spread
            
            
            
            
            
            
            
            
            4.09
            %
            
            
            
            
            
            
            
            3.95
            %Net
                interest income
            
            
            
            
            $
            22,397
            
            
            
            
            
            
            
            $
            18,263Net
                interest margin
            
            
            
            
            
            
            
            
            4.59
            %
            
            
            
            
            
            
            
            4.35
            %


17




*Provision
      for Loan Losses*


For
      the
      second consecutive quarter, the Company did not incur a provision for loan
      losses. Factors necessitating a need for a provision, such as loan growth,
      credit quality and concentration risks were offset by a significant improvement
      in the level of nonperforming loans during the quarter. At June 30, 2006, the
      allowance for loan losses as a percentage of total loans was 1.36%, compared
      to
      1.47% at December 31, 2005. The decrease in the ratio is due to a $50.1
      million increase in outstanding loans and $176,000 in net charge-offs for the
      year to date. Our nonperforming loans decreased $7.3 million, or 94.4%, during
      the quarter from $7.8 million at March 31, 2006 to $435,000 as of June 30,
      2006.
      During the second quarter of 2006, we foreclosed on a commercial real estate
      relationship with an outstanding balance of $7.1 million at March 31, 2006.
      We
      charged-off $274,000 and sold three of the four properties foreclosed upon
      during the quarter. The remaining parcel is included in other real estate owned
      on our Consolidated Statement of Condition at a value of $765,000 at June
      30, 2006.





The
      table
      below summarizes our levels of nonperforming loans over the past five quarters.





As
                of Quarter End
            
            Jun-06
            
            Mar-06
            
            Dec-05
            
            Sep-05
            
            Jun-05(Dollars
                In Thousands)Loans
                accounted for on a nonaccrual basis
            
            $
            412
            
            $
            7,760
            
            $
            7,856
            
            $
            7,446
            
            $
            7,534Accruing
                loans which are contractually past due90
                days or more as to principal or interest payments
            
            
            23
            
            
            17
            
            
            2
            
            
            20
            
            
            9Total
                nonperforming loans
            
            $
            435
            
            $
            7,777
            
            $
            7,858
            
            $
            7,466
            
            $
            7,543Total
                nonperforming loans as a percentage oftotal
                loans
            
            
            0.05
            %
            
            1.02
            %
            
            1.04
            %
            
            1.02
            %
            
            0.91
            %








We
      consider the current level of the allowance for loan losses adequate to absorb
      losses from loans in the portfolio. As an integral part of our credit risk
      management process, we regularly review loans in our portfolio for credit
      quality and documentation of collateral. We have a comprehensive methodology
      for
      determining the adequacy of our allowance for loan losses. This methodology
      includes an assessment for specific valuations on larger loan lines and
      nonperforming loans, and an assessment based on environmental factors applied
      to
      other homogenous groups of otherwise performing loans.





The
      environmental factors considered in developing our loss measurements
      include:


·  levels
      of
      and trends in delinquencies and impaired loans;


·  levels
      of
      and trends in charge-offs and recoveries;


·  trends
      in
      volume and terms of loans;


·  effects
      of any changes in risk selection and underwriting standards and other changes
      in
      lending policies, procedures, and practices;


·  experience,
      ability, and depth of lending management and other relevant staff;


·  national
      and local economic trends and conditions;


·  industry
      conditions; and


·  effects
      of changes in credit concentrations.





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


18




*Other
      Income*


A
      summary
      of noninterest income follows:





Three
                Months Ended June 30,
            
            
            
            Six
                Months Ended June 30,2006
            
            2005
            
            Pct.
                Chg.
            
            2006
            
            2005
            
            Pct.
                Chg.(Dollars
                in Thousands)Noninterest
                income:Service
                charges on deposit accounts
            
            $
            987
            
            $
            1,019
            
            
            -3.1
            %
            $
            1,939
            
            $
            1,941
            
            
            -0.1
            %Mortgage
                origination fees
            
            
            160
            
            
            130
            
            
            23.1
            %
            
            276
            
            
            235
            
            
            17.4
            %Securities
                transactions, net
            
            
            (1
            )
            
            (1
            )
            
            0.0
            %
            
            (430
            )
            
            (1
            )
            
            42900.0
            %Earnings
                on bank-owned life insurance
            
            
            96
            
            
            83
            
            
            15.7
            %
            
            190
            
            
            162
            
            
            17.3
            %Gain
                (loss) on disposal of assets
            
            
            8
            
            
            (19
            )
            
            142.1
            %
            
            10
            
            
            (22
            )
            
            145.5
            %Other
                noninterest income
            
            
            307
            
            
            246
            
            
            24.8
            %
            
            613
            
            
            490
            
            
            25.1
            %Total
                noninterest income
            
            $
            1,557
            
            $
            1,458
            
            
            6.8
            %
            $
            2,598
            
            $
            2,805
            
            
            -7.4
            %Noninterest
                income as a percentage of average assets (annualized)
            
            
            0.59
            %
            
            0.63
            %
            
            
            
            
            0.50
            %
            
            0.61
            %





During
      the first quarter of 2006, we sold $12.0 million lower-yield, cash flow bonds
      and replaced them with higher-yield, call protected bonds to protect us in
      a
      declining interest rate environment. We incurred a net loss of $430,000 on
      these
      securities transactions that we expect to recover in the form of an increase
      in
      interest income over the next few years. Excluding the net loss on securities
      transactions, total noninterest income increased $223,000, or 7.9%, for the
      first six months of 2006 compared to the same period in 2005. Mortgage
      origination fees increased due to a higher demand for secondary mortgage
      products and an effort by our mortgage lenders to increase volume. Earnings
      on
      bank-owned life insurance increased primarily as a result of a higher rate
      of
      return on these policies compared to 2005. Increased ATM fees, check order
      revenue and rental income also helped to improve our level of other noninterest
      income in 2006.





*Other
      Expenses*


A
      summary
      of noninterest expense follows:


Three
                  Months Ended
                June
                  30,
              
              
              
              Six
                    Months Ended
                  June
                    30,2006
              
              2005
              
              Pct.
                  Chg.
              
              2006
              
              2005
              
              Pct.
                  Chg.(Dollars
                  in Thousands)Noninterest
                  expenses:Salaries
                  and wages
              
              $
              3,917
              
              $
              3,441
              
              
              13.8
              %
              $
              7,640
              
              $
              6,565
              
              
              16.4
              %Deferred
                  loan cost
              
              
              (449
              )
              
              (377
              )
              
              19.1
              %
              
              (879
              )
              
              (767
              )
              
              14.6
              %Employee
                  benefits
              
              
              1,170
              
              
              823
              
              
              42.2
              %
              
              2,175
              
              
              1,579
              
              
              37.7
              %Net
                  occupancy expense of premises
              
              
              492
              
              
              488
              
              
              0.8
              %
              
              964
              
              
              957
              
              
              0.7
              %Furniture
                  and equipment expense
              
              
              514
              
              
              526
              
              
              -2.3
              %
              
              1,022
              
              
              1,030
              
              
              -0.8
              %Advertising
                  and business development
              
              
              126
              
              
              131
              
              
              -3.8
              %
              
              302
              
              
              258
              
              
              17.1
              %Supplies
                  and printing
              
              
              115
              
              
              124
              
              
              -7.3
              %
              
              267
              
              
              239
              
              
              11.7
              %Telephone
                  and internet charges
              
              
              116
              
              
              88
              
              
              31.8
              %
              
              221
              
              
              174
              
              
              27.0
              %Postage
                  and courier
              
              
              127
              
              
              135
              
              
              -5.9
              %
              
              277
              
              
              311
              
              
              -10.9
              %Legal
                  and accounting fees
              
              
              114
              
              
              103
              
              
              10.7
              %
              
              220
              
              
              209
              
              
              5.3
              %Director
                  fees and expenses
              
              
              98
              
              
              95
              
              
              3.2
              %
              
              234
              
              
              191
              
              
              22.5
              %Service
                  charges and fees
              
              
              129
              
              
              130
              
              
              -0.8
              %
              
              249
              
              
              257
              
              
              -3.1
              %Other
                  noninterest expense
              
              
              713
              
              
              521
              
              
              36.9
              %
              
              1,246
              
              
              990
              
              
              25.9
              %Total
                  noninterest expense
              
              $
              7,182
              
              $
              6,228
              
              
              15.3
              %
              $
              13,938
              
              $
              11,993
              
              
              16.2
              %Noninterest
                  expense as a percentageof
                  average assets (annualized)
              
              
              2.72
              %
              
              2.71
              %
              
              
              
              
              2.67
              %
              
              2.61
              %
 19




Salaries
      and wages expense and employee benefits were up for the quarter due primarily
      to
      the increase in the number of full-time equivalent employees from 291 at June
      30, 2005 to 314 at June 30, 2006. We staffed and opened two loan production
      offices between June 30, 2005 and June 30, 2006. We also hired several
      experienced bankers in the fourth quarter of 2005, including two executive
      officers and three additional lenders in our North Georgia market. We have
      also
      incurred $162,000 in stock option compensation expense during the first six
      months of 2006, due to the implementation of FAS 123R. (See Note 4 - Stock
      Plans
      and Stock-Based Employee Compensation in the Notes to the Consolidated Financial
      Statements for further discussion of FAS 123R). Deferred loan cost, which is
      a
      credit against salaries and wages, increased and resulted in a decrease in
      expense reported during the period. The increase in the deferral of direct
      loan
      costs is due to an increase in loan volume experienced during 2006 compared
      to
      the same period in 2005.





Advertising
      and business development expense increased for the first six months on 2006
      due
      to our focus on marketing and growing our franchise. Director fees and expenses
      increased 22.5% for the first six months, compared to 2005, due to an increase
      in the fee structure, including quarterly retainers paid to our directors.
      We
      also incurred additional expenses for a director strategic planning session
      during March 2006.





*Income
      Tax Expense*


As
      a
      percentage of net income before taxes, income tax expense was 36.7% and 33.1%
      for the three-month periods ended June 30, 2006 and 2005, respectively. For
      the
      six-month period ended June 30, 2006 and 2005, income tax expense as a
      percentage of net income before taxes was 36.4% and 33.0%, respectively. These
      increases are attributable to several items. During the fourth quarter of 2005,
      we liquidated and dissolved our REITs and our REIT holding companies, which
      had
      previously allowed us to realize state income tax benefits. During the second
      quarter of 2006, we incurred additional Georgia income tax expense as a result
      of filing an unconsolidated tax return with our banking subsidiary, The Park
      Avenue Bank. We also shifted into the highest federal corporate tax bracket
      near
      the end of 2005.








**LIQUIDITY
      AND CAPITAL RESOURCES**





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





At
      June
      30, 2006, 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 19.8%, compared to 21.4% at December
      31, 2005. It is our policy to maintain a ratio of liquid assets to total assets
      of at least 15%.





We
      funded
      the $50.1 million growth in loans, an $18.5 million increase in investments
      and
      a $12.5 million decrease in noninterest-bearing demand deposits during the
      first
      six months of 2006 by utilizing the $53.6 million increase in interest-bearing
      demand, savings and time deposits, and decreasing our federal funds by $33.2
      million.





During
      the first quarter of 2006, we acquired 1.54 acres of land in Oconee County,
      Georgia, directly across the line from Athens-Clarke County for $1.54 million.
      We have spent approximately $150,000 towards construction on a new full-service
      branch on this land and we have allocated an additional $750,000 to complete
      the
      building and to furnish this branch. We expect this branch to be open for
      business in the fourth quarter of 2006.





In
      June
      2006, we entered into a five-year agreement to lease approximately 3,000 square
      feet of office space for a branch in Jacksonville, Florida. We plan to spend
      an
      additional $400,000 for the build-out of the leased space and furnishings of
      the
      branch. We expect this branch to be completed by October 2006.


20




*Contractual
      Obligations*


Summarized
      below are our contractual obligations as of June 30, 2006.





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
            
            $
            90,485
            
            $
            5,606
            
            $
            1,222
            
            $
            5,510
            
            $
            78,147Operating
                Lease Obligations
            
            
            873
            
            
            262
            
            
            425
            
            
            165
            
            
            21Guaranteed
                Preferred Beneficial Interestsin
                Debentures
            
            
            10,310
            
            
            -
            
            
            -
            
            
            -
            
            
            10,310*$
            101,668
            
            $
            5,868
            
            $
            1,647
            
            $
            5,675
            
            $
            88,478





*
      Although the contractual maturity of this obligation is December 8, 2031, the
      Company intends to exercise its


call
      option and refinance this obligation during the fourth quarter of
      2006.





*Off
      Balance Sheet Arrangements*


Our
      financial statements do not reflect various commitments and contingent
      liabilities that arise in the normal course of business. These off-balance
      sheet
      financial instruments include commitments to extend credit and standby letters
      of credit. Such financial instruments are included in the financial statements
      when funds are distributed or when the instruments become payable. Our exposure
      to credit loss in the event of nonperformance by the other party to a financial
      instrument for commitments to extend credit, standby letters of credit and
      credit card commitments is represented by the contractual amount of those
      instruments. We use the same credit policies in making commitments as we do
      for
      on-balance sheet instruments. Although these amounts do not necessarily
      represent future cash requirements, a summary of our commitments as of June
      30,
      2006 and December 31, 2005 are as follows:





Jun-06
            
            Dec-05Commitments
                to extend credit
            
            $
            157,211,000
            
            $
            144,717,000Standby
                letters of credit
            
            $
            6,455,000
            
            $
            9,787,000





In
      June
      2006, we entered into our first derivative instrument, a $50 million notional
      amount, 3-year, 8.25% Prime floor contract to hedge against interest rate risk
      in a declining rate environment. Notional amounts provide the basis for
      calculating payments between counterparties and do not represent amounts to
      be
      exchanged between parties, and are not a measure of financial risk. The risk
      of
      loss with our counterparty is limited to a small fraction of the notional
      amount. We only deal with counterparties that have strong credit ratings and
      are
      approved by our Board. Due to these factors, we feel our credit risk exposure
      at
      June 30, 2006 was not material.





*Stockholders’
      Equity*


The
      Company maintains a ratio of stockholders’ equity to total assets that is
      considered adequate according to regulatory standards. The Company and the
      Bank
      are required to comply with capital adequacy standards established by our
      regulators. At June 30, 2006, the Company and the Bank were in compliance with
      those standards. There are no conditions or events since quarter end that we
      believe have materially changed our regulatory capital ratios.





The
      following table summarizes the regulatory capital ratios of the Company and
      the
      Bank at June 30, 2006.





MinimumCompany
            
            
            
            RegulatoryConsolidated
            
            Bank
            
            RequirementTotal
                Capital to Risk Weighted Assets
            
            
            12.11
            %
            
            12.12
            %
            
            8.0
            %Tier
                1 Capital to Risk Weighted Assets
            
            
            10.85
            %
            
            10.89
            %
            
            4.0
            %Tier
                1 Capital to Average Assets (Leverage Ratio)
            
            
            9.18
            %
            
            9.22
            %
            
            4.0
            %


21




On
      May
      23, 2006, the Company’s Board of Directors renewed its annual plan to repurchase
      up to 300,000 shares of the Company’s common stock over the next twelve-month
      period. The Company plans to use cash on hand to repurchase its shares on the
      open market and through private transactions. During the second quarter of
      2006,
      49,308 shares were repurchased, at a total cost of $1,027,000. Although the
      Company may not repurchase all 300,000 shares within the allotted time period,
      the program will allow the Company to repurchase its shares as opportunities
      arise through either the open market or privately negotiated transactions at
      prices deemed appropriate by management. The expiration date for the plan is
      May
      23, 2007.








**CRITICAL
      ACCOUNTING ESTIMATES**





The
      preparation of financial statements and the related disclosures in conformity
      with accounting principles generally accepted in the United States requires
      that
      management make estimates and assumptions which affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates. We believe that our determination of the allowance for loan losses
      and the fair value of assets, including the impairment of goodwill, affect
      our
      most significant judgments and estimates used in the preparation of our
      consolidated financial statements. The
      Company’s significant accounting policies are described in detail in Note 1 of
      our Consolidated Financial Statements provided in Item 8 of our 2005 Annual
      Report on Form 10-K. The following is a brief description of the Company’s
      critical accounting estimates involving significant management valuation
      judgment.





*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.


22




Estimates
      of fair value are alsorequired in performing an
      impairment analysis of goodwill. The Company reviews goodwill for impairment
      on
      at least an annual basis and whenever events or circumstances indicate the
      carrying value may not be recoverable. An impairment would be indicated if
      the
      carrying value exceeds the fair value of a reporting unit.





**Recent
      Accounting Pronouncements**





In
      management’s opinion, there are no recent accounting pronouncements that have
      had or will have had a material impact on our earnings or financial position
      as
      of or for the quarter ended June 30, 2006.








**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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





Interest
      rates play a major part in the net interest income of a financial institution.
      The sensitivity to rate changes is known as “interest rate risk.” The repricing
      of interest-earning assets and interest-bearing liabilities can influence the
      changes in net interest income. As part of our asset/liability management
      program, the timing of repriced assets and liabilities is referred to as gap
      management. It is our policy to maintain a gap ratio in the one-year time
      horizon between 0.80 and 1.20. At June 30, 2006, our one-year
      management-adjusted gap ratio of 1.05 was within of our policy guidelines.
      This
      is a significant improvement compared to our one-year gap position of 1.66
      at
      June 30, 2005. After suffering through a period of rapidly declining interest
      rates that compressed our net interest margins by 103 basis points from 2000
      to
      2001, we have reduced the level of asset-sensitivity on the Company’s balance
      sheet in anticipation of another eventual downturn in interest rates. In June
      2006, we entered into a $50 million 3-year 8.25% Prime floor contract in an
      effort to hedge our interest rate risk in a declining interest rate
      environment.





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





3-Month
            
            6-Month
            
            1-Year(Dollars
                In Thousands)*Regulatory
                Defined*Rate
                Sensitive Assets (RSA)
            
            $
            608,499
            
            $
            656,616
            
            $
            699,146Rate
                Sensitive Liabilities (RSL)
            
            
            461,280
            
            
            539,560
            
            
            694,267RSA
                minus RSL (Gap)
            
            $
            147,219
            
            $
            117,056
            
            $
            4,879Gap
                Ratio (RSA/RSL)
            
            
            1.32
            
            
            1.22
            
            
            1.01*Management-Adjusted*Rate
                Sensitive Assets (RSA)
            
            $
            584,824
            
            $
            613,359
            
            $
            659,439Rate
                Sensitive Liabilities (RSL)
            
            
            338,434
            
            
            416,714
            
            
            625,398RSA
                minus RSL (Gap)
            
            $
            246,390
            
            $
            196,645
            
            $
            34,041Gap
                Ratio (RSA/RSL)
            
            
            1.73
            
            
            1.47
            
            
            1.05


23




We
      use simulation analysis to monitor changes in net interest income due
      to changes in market interest rates. The simulation of rising, declining, and
      flat interest rate scenarios allows us to monitor and adjust interestrate
      sensitivity to minimize the impact of market interest rate swings. The analysis
      of the impact on net interest income over a twelve-month period is subjected
      to
      increases or decreases in market rates on net interest income and is monitored
      on a quarterly basis. Our policy states that net interest income cannot be
      reduced by more than 10% using this analysis. As of quarter end, the simulation
      model projected net interest income would increase 1.8% over the next year
      if
      market rates immediately rose by 200 basis points and the model projected net
      interest income to decrease 3.3% over the next year if market rates immediately
      fell by 200 basis points. These projections are a significant change from the
      15.4% increase projected at June 30, 2005 if market rates increased by 200
      basis
      points and the 18.9% decrease projected at June 30, 2005 if market rates fell
      by
      200 basis points. The lower volatility in our results is due primarily to our
      efforts to neutralize our asset-sensitive balance sheet mix, to improve our
      A/L
      modeling with updated behavioral assumptions for repricing and prepayment speeds
      and to implement an off-balance sheet derivative hedging program.





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




Market
                Effect
                    on Net Interest IncomeRate
                    Change
                Gradual
                Immediate+300
                    bps
                3.68%
                2.70%+200
                    bps
                2.77%
                1.79%+100
                    bps
                1.47%
                1.18%-100
                    bps
                -1.18%
                -0.96%-200
                    bps
                -3.43%
                -3.27%-300
                    bps
                -4.38%
                -8.56%


**ITEM
      4.  CONTROLS AND PROCEDURES**





A
      review
      and evaluation was performed by the Company’s management, including the
      Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures as of the end of the period covered by this
      Quarterly Report. Based on that review and evaluation, the CEO and CFO have
      concluded that the Company’s current disclosure controls and procedures, as
      designed and implemented, were effective. There have been no significant changes
      in the Company’s internal controls over financial reporting or in other factors
      that could significantly affect the Company’s internal controls subsequent to
      the date of their evaluation. There were no material weaknesses identified
      in
      the course of such review and evaluation and, therefore, no corrective measures
      were taken by the Company.








**PART
      II. OTHER INFORMATION**





**ITEM
      1.  LEGAL PROCEEDINGS**





None





**ITEM
      1A. RISK FACTORS**





There
      has
      not been any material change in the risk factors disclosure from that contained
      in the Company’s 2005 Annual Report on Form 10-K for the fiscal year ended
      December 31, 2005.


24




**ITEM
      2.  UNREGISTERED SALE OF EQUITY SECURITIES, USE OF
      PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**





Total
                number
              of
                shares
              purchased
            
            Average
              price
                paid
              per
                share
            
            Number
                of shares
              purchased
                as part of
              publicly
                announced
              plans
                or programs
            
            Maximum
                number of
              shares
                that may yet be
              purchased
                under the
              plans
                or programs1April
            
            
            760
            
            $
            19.01
            
            
            760
            
            
            301,773May
            
            
            32,971
            
            
            21.27
            
            
            32,971
            
            
            297,769June
            
            
            15,577
            
            
            19.95
            
            
            15,577
            
            
            282,192Total
            
            
            49,308
            
            $
            20.82
            
            
            49,308
            
            
            282,192




1 On May
        23, 2006, the Company renewed its annual plan to repurchase up to 300,000 shares
of
        the Company's common stock over the next twelve month period. The plan will
        expire May
        23,
        2007.




**ITEM
      3.DEFAULTS UPON SENIOR SECURITIES**





None








**ITEM
      4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





At
      the
      annual meeting of stockholders held on May 23, 2006, three items were voted
      upon. The first vote was for the appointment of four directors to hold office
      until the 2009 annual meeting of stockholders and until their successors are
      dully elected and qualified or until their earlier death, resignation,
      incapacity to serve, or removal:





Name
            Votes
                For
            Votes
                WithheldWalter
                W. Carroll, II
            7,467,745
            67,956James
                L. Dewar, Jr.
            7,468,932
            66,769John
                E. Mansfield, Jr.
            7,507,832
            27,869Joe
                P. Singletary, Jr.
            7,508,781
            26,921




The
      director appointments were approved.





The
      following directors will continue in office:





R.
      Bradford Burnette, Michael H. Godwin, Kennith D. McLeod, Paul E. Parker, M.
      Burke Welsh, Jr., Douglas W. McNeill, Bill J. Jones, James B. Lanier, Jr.,
      F.
      Ferrell Scruggs, Sr. and John M. Simmons, III





The
      second vote was for the ratification of the appointment of Mauldin &
Jenkins, LLC as independent auditors for 2006:





Votes
                For
            Votes
                Against
            Votes
                Abstained
            Broker
                Non-Vote7,505,568
            19,496
            0
            0





The
      selection of the independent auditors was ratified.




The
      third
      vote was for the amendment of the 1999 Stock Option Plan to (i) increase the
      number of shares reserved for issuance under the plan to 1,400,000 shares and
      (ii) to extend the term of the plan by ten years:





Votes
                For
            Votes
                Against
            Votes
                Abstained
            Broker
                Non-Vote4,505,851
            351,943
            0
            0





The
      amendments were approved.


25




**ITEM
      5.  OTHER INFORMATION**





None








**ITEM
      6.  EXHIBITS**





10.4
            PAB
                Bankshares, Inc. 1999 Stock Option Plan, as amended and
                restated





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





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





32.1
            Section
                1350 Certification of CEO





32.2
            Section
                1350 Certification of CFO








SIGNATURES





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


**PAB
      BANKSHARES, INC.**


Registrant




Date:
              .***August
                  9, 2006***
              
              By:
              ***/s/
                  M. Burke Welsh, Jr.***M.
                  Burke Welsh, JrPresident
                  and Chief Executive Officer(principal
                  executive officer of the registrant)Date:
              ***August
                  9, 2006***
              
              By:
              ***/s/
                  Donald J. Torbert, Jr.***Donald
                  J. Torbert, Jr.Executive
                  Vice President and Chief Financial Officer(principal
                  financial officer of the registrant)
   26