UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2007

Commission File Number 000-25422

PAB BANKSHARES, INC.

(A Georgia Corporation)

IRS Employer Identification Number: 58-1473302

3250 North Valdosta Road, Valdosta, Georgia 31602

Telephone Number: (229) 241-2775

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Title of each class	Name of exchange on which registered
Common Stock, no par value	The NASDAQ Stock Market LLC
	(NASDAQ Global Select Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

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

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

Yes ¨ No x

The aggregate market value of voting common stock held by non-affiliates on June 29, 2007 was approximately $139.0 million (based on shares held by non-affiliates at $19.00 per share, the closing stock price on the NASDAQ Stock Market on June 29, 2007).

As of February 29, 2008 (the latest practicable date), the registrant had 9,162,392 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on May 20, 2008 are incorporated by reference in answer to Part III of this Form 10-K.

TABLE OF CONTENTS

Item		Page
Cautionary Notice Regarding Forward-Looking Statements		3
PART I
1.	BUSINESS
	General	3
	Supervision and Regulation	8
1A.	RISK FACTORS	13
1B.	UNRESOLVED STAFF COMMENTS	17
2.	PROPERTIES	17
3.	LEGAL PROCEEDINGS	18
4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	18
PART II
5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	18
6.	SELECTED FINANCIAL DATA	20
7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Overview of Key Financial, Strategic and Performance Factors	21
	Statistical Disclosures	24
	Liquidity and Capital Resources	34
	Results of Operations	37
7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Quarterly Financial Summary for 2007 and 2006	43
	Management’s Report On Internal Control Over Financial Reporting	44
	Auditor’s Attestation Report	45
	Reports of Independent Registered Public Accounting Firm	47
	Consolidated Balance Sheets at December 31, 2007 and 2006	48
	Consolidated Statements of Income for the Three Years Ended December 31, 2007	49
	Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2007	50
	Consolidated Statements of Stockholders’ Equity for the Three Years Ended December 31, 2007	51
	Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2007	52
	Notes to Consolidated Financial Statements	54
9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	81
9A.	CONTROLS AND PROCEDURES	81
9B.	OTHER INFORMATION	81
PART III
10.	DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	81
11.	EXECUTIVE COMPENSATION	81
12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	82
13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	82
14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	82
PART IV
15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	83
SIGNATURES		85

2

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 Operations” 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, economic conditions, real estate markets and projected growth, and are based upon management’s beliefs as well as assumptions made based on data currently available to management.  In this Report, the terms “PAB”, “the Company”, “we”, “us”, or “our” refer to PAB Bankshares, Inc.  When words like “anticipate”, “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions are used, you should consider them as identifying forward-looking statements.  These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements.  Many of these factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements.  The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins or the volumes or values of loans made by us; (3) general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduction in demand for credit; (4) the general decline in the real estate and lending market, particularly the market areas surrounding metropolitan Atlanta; (5) legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged; (6) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than we can; (7) our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry; (8) adverse changes may occur in the bond and equity markets; (9) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; (10) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals; (11) economic, governmental or other factors may prevent the projected population and commercial growth in the markets in which we operate; and (12) the risk factors discussed from time to time in the Company’s Periodic Reports filed with the Securities and Exchange Commission (the “SEC”), including but not limited to, this Annual Report on Form 10-K.  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.

PART I

ITEM 1. BUSINESS

General

PAB Bankshares, Inc. is a bank holding company headquartered in Valdosta, Lowndes County, Georgia.  PAB was organized and incorporated in 1982 under the laws of the State of Georgia as the holding company for The Park Avenue Bank (the “Bank”).  Since our incorporation in 1982, we have acquired five other Georgia financial institutions and one Florida financial institution, and subsequently merged those institutions into the Bank.  The Bank was founded in Valdosta in 1956, and it became a state-chartered commercial bank in 1971.  In 2001, the Bank became a state member bank of the Federal Reserve System.  Currently, the Bank operates 13 branches located in seven counties in South Georgia; five branches and two loan production offices located in five counties in North Georgia; and two branches and one loan production office located in three counties in Florida.  Additional information on each of the markets that we serve is provided below under the caption “Markets and Competition”.

The Bank

The Bank offers traditional banking products and services to commercial and individual customers in our markets.  Our product line includes, among other things, loans to small- and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans, and a variety of commercial and consumer demand, savings and time deposit products.  We also offer internet banking, on-line cash management, electronic bill payment services, safe deposit box rentals, telephone banking, credit and debit card services, remote depository products and the availability of a network of ATMs to our customers.  In addition, through an agreement with a third-party broker-dealer and investment advisory firm, we are able to offer securities brokerage and investment advisory services to our customers.

3

Markets and Competition

The financial services industry is highly competitive.  In our markets, we face competitive pressures from both larger regional banks and smaller community banks and thrifts in attracting and retaining commercial and consumer accounts.  The competitive environment is amplified in some of our smaller markets as there are more financial service providers competing for fewer customers.  The principal factors in competing for such accounts include interest rates, fee structures, the range of products and services offered, convenience of office and ATM locations, and flexible office hours.  Other competition for such accounts comes from credit unions, internet banks, retail brokerage firms, mortgage companies, insurance companies and consumer finance offices.  Other investment alternatives such as stocks and mutual funds made readily accessible by the internet have also had an effect on our ability to grow deposits in our markets.

When it comes to competing with the larger financial institutions in our markets, we believe that our people make the difference.  Our experience and strong community relationships in our markets allow us to deliver a higher level of customer service to the small- and medium-sized commercial businesses and to individual consumers.  Being smaller and less bureaucratic than our regional and national competitors allows us to provide a more timely response and greater flexibility in serving the needs of our customers.  At the same time, our success has allowed us to invest in systems and support to provide a product line that gives us a competitive edge over many of the smaller financial institutions in our markets.

A brief description on the characteristics of our markets and our history in those markets is provided below.

South Georgia

The Bank has a proud tradition of community banking in South Georgia spanning decades, and we have developed a large market share in many of these communities.  As previously mentioned, we have been in Valdosta since 1956, but our roots run deeper in some of the financial institutions we acquired in other South Georgia communities.  We have been in Adel (Cook County) since 1948, and we have been in both Bainbridge (Decatur County) and Baxley (Appling County) since 1934.  We are also located in Statesboro (Bulloch County), Hazlehurst (Jeff Davis County) and Cairo (Grady County).  Collectively, we refer to these seven communities as our “South Georgia” market in this Report.  In 2001, we began consolidating the separate charters of our banks into one charter, The Park Avenue Bank.  The charter consolidation was completed in April 2002, and all of our banking offices now operate under the “PAB” logo.  Overall, we have the sixth largest market share1 with 2.57% of the total deposits in the state’s southern tier2.  Our branch network in South Georgia has allowed us to deliver retail banking services in these communities more effectively.  Therefore, our primary focus in South Georgia is on providing traditional community banking products and services to consumers, businesses, and municipalities.  The timber and farming industries and agricultural-related businesses are vital to the local economies in each of our South Georgia markets.

Valdosta and Adelare located off Interstate 75 in the middle of South Georgia.  Valdosta is the county seat of Lowndes County and is 18 miles north of the Florida state line.  The Valdosta Metropolitan Statistical Area (“MSA”) is comprised of Lowndes, Brooks, Berrien, and Echols Counties.  Adel is in Cook County and is 21 miles north of Valdosta.  We have 69 employees, five branches, and seven ATM’s serving our customers in these communities.  The Company’s administrative and operational facilities and 107 additional employees are also located in Valdosta.  Prior to its merger with the Bank in 2001, the Adel office operated under a separate bank charter called Farmers and Merchants Bank.  Moody Air Force Base, Valdosta State University, and several transportation and distribution facilities of regional and national firms are some of the major economic contributors to the area.

Bainbridge and Cairo are 82 and 58 miles, respectively, west of Valdosta along U.S. Highway 84 in the southwest corner of the state in the heart of Georgia’s “Plantation Trace”, a region dotted with historic antebellum-era plantations and farms.  Also, both communities are within 42 miles of the Tallahassee, Florida MSA.  We have 36 employees, four branches, and five ATM’s serving our customers in these communities.  Prior to their merger with the Bank in 2002, the Bainbridge and Cairo offices were part of the First Community Bank of Southwest Georgia charter, with the Cairo office using the trade name Bank of Grady County.  First Community Bank of Southwest Georgia was formed in 1998 from the merger of First Federal Savings Bank and Bainbridge National Bank.

__________________________

1 Based on the FDIC/OTS Summary of Deposits report as of June 30, 2007.

2 Regions 9-12 (58 counties) as defined by the Georgia Department of Community Affairs.

4

Statesboro, 161 miles northeast of Valdosta, sits at the intersection of U.S. Highway 80 and U.S. Highway 301, near Interstate 16, in Southeast Georgia.  Statesboro is also 53 miles west of the Savannah MSA.  We have 25 employees, two branches, and three ATM’s in this community.  Prior to its merger with the Bank in 2002, the Statesboro offices had operated under the Eagle Bank and Trust charter.  Georgia Southern University is located in Statesboro.

Baxley and Hazlehurst are both approximately 90 miles northeast of Valdosta.  The two communities are located 16 miles apart along U.S. Highway 341 in Southeast Georgia.  We have 17 employees, two branches, and two ATM’s serving our customers in these communities.  Prior to its merger with the Bank in 2002, the Baxley and Hazlehurst offices operated under the Baxley Federal Savings Bank thrift charter.  The Georgia Power Company’s Edwin I. Hatch Nuclear Power Plant located in Appling County is one of the area’s largest employers.

North Georgia

During the fourth quarter of 2000, we adopted an expansion strategy to enter into higher growth metropolitan markets that would complement our South Georgia market.  This expansion began with the opening of an office in McDonough (Henry County) on the south side of the Atlanta MSA in October 2000.  In October 2001, we opened an office in Oakwood (Hall County), north of Atlanta in the Gainesville MSA.  Both the McDonough and Oakwood offices initially began as loan production offices and were subsequently developed into full service branches.  In October 2003, we opened a loan production office in Athens (Clarke County), east of Atlanta.  In October 2006, the Athens loan production office was converted into our full service branch in Oconee County in the Athens MSA.  In July 2004, we expanded our presence in Henry County with the opening of a branch office in Stockbridge.  In April 2005, we opened a loan production office in Cobb County, and in December 2005, we opened a loan production office in Snellville (Gwinnett County) on the east side of the Atlanta MSA.  In February 2007, we opened a branch in Snellville and a loan production office in Cumming (Forsyth County) on the north side of the Atlanta MSA.  In March 2007, we closed the loan production office in Cobb County and shifted the remaining resources to our Henry County market.  Our offices in Henry, Hall, Oconee, Gwinnett and Forsyth counties are also referred to collectively as our “North Georgia” market in this Report.  Due to our relative newness and the lack of a large retail branch network, we do not have a significant retail presence or deposit market share in the North Georgia market.  Thus far, we have primarily catered to residential and commercial builders and developers and small- to medium-sized commercial operations in the North Georgia market.

McDonough and Stockbridge are located along Interstate 75 in Henry County.  Henry County is the southern-most county of the Atlanta MSA.  McDonough is 30 miles south of Downtown Atlanta.  We have 25 employees, two branches, and three ATM’s serving our customers in these communities.  Our McDonough office opened in 2000 and our Stockbridge location opened in 2004.  Henry County has consistently been ranked among the fastest growing counties in the nation over the past several years.  According to the U.S. Census Bureau, Henry County was the seventh fastest growing county in the U.S. from 2000 to 2006 with a 49.2% increase in population.  We have been actively involved in financing several residential and commercial construction and development projects in Henry and surrounding counties, as we have also worked to increase our retail presence in the county.

Oakwood is 8 miles south of Gainesville along Interstate 985 in Hall County.  Oakwood is 50 miles northeast of Downtown Atlanta and 12 miles north of the Mall of Georgia retail shopping complex in Gwinnett County.  Oakwood is part of the Gainesville MSA.  We have ten employees, one branch, and one ATM serving our customers in this community.  The poultry industry has been a significant economic factor for the region over the past several decades.  As the Atlanta MSA continues its urban sprawl, Hall County has experienced significant growth in recent years.  Our primary focus in Hall County has been in commercial lending.

Athens is 70 miles east of Downtown Atlanta.  The consolidated city/county government of Athens-Clarke County and neighboring Oconee County comprise the Athens-Clarke County MSA.  The University of Georgia is located in Athens and is the single largest economic factor in the Athens-Clarke County MSA.  Prior to October 2006, we had one loan production office in this area.  In October 2006, we closed the loan production office and opened a newly constructed full service branch in neighboring Oconee County.  We now have nine employees and one ATM serving our customers in this community through this branch.

5

Snellville is 25 miles northeast of Downtown Atlanta along U.S. Highway 78 in Gwinnett County.  We acquired an office condominium and opened a commercial loan production office in this community in December 2005.  In September 2006, we entered into a ten-year agreement to lease office space for a full-service branch within this area.  The branch was completed and opened in February 2007.  With the addition of this full service branch, we now have eight employees, two offices and one ATM serving our customers in this community.

Cumming is located 40 miles northeast of Downtown Atlanta along Georgia Highway 400 in Forsyth County.  According to the U.S. Census Bureau, Forsyth County was the fifth fastest growing county in the U.S. from 2000 to 2006 with a 53.4% increase in population.  We opened a loan production office in February 2007 and now have four employees focusing on commercial lending in this community.

Florida

In December 2000, we acquired Friendship Community Bank in Ocala (Marion County).  The acquired bank was merged into the Bank in 2001.  In September 2003, we opened a loan production office in St. Augustine (St. Johns County).  In 2006, we entered into a five year agreement to lease space in the Jacksonville (Duval County) market for a full service branch.  This branch opened in December 2006.  Our offices in Ocala, Jacksonville and St. Augustine are collectively referred to as our “Florida” market.

Our Ocala office is near several retirement communities and has served primarily as a deposit gathering facility for the Bank.  Ocala is located in Central Florida, 130 miles south of Valdosta along Interstate 75.  We have 12 employees, one branch, and one ATM serving our customers in this community.  Ocala is known for its equestrian training facilities and retirement communities due to its mild year-round climate.

Jacksonville is located on the northeastern coast of Florida.  We have six employees, one branch and one ATM serving our customers in this community.  With over $24.6 billion in deposits3, Duval County is the largest deposit market in which we have a deposit branch.

Our St. Augustine loan production office serves as the base for a lender who calls on commercial customers along Interstate 95 between Jacksonville (40 miles to the North) and Palm Coast (25 miles to the South).  We primarily originate and service the financing of our construction and development loans in and around these coastal communities from this office.

6

The table below provides basic information and summary demographic data on each of our markets.  Further discussion regarding local real estate market conditions is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K.

Market/	# of		Total		Total		Market				Population		Employment			Unemployment
County	Offices		Loans4		Deposits4		Share (%)5		Population6		Growth (%)7		Growth (%)8			Rate (%)9
South Georgia
Lowndes		4	$	224,413	$	269,567		18.4		97,844		6.2		2.6			4.1
Cook		1		11,181		47,416		24.8		16,333		3.6		2.1			5.8
Decatur		3		46,510		119,084		31.6		28,665		1.5		0.0			6.0
Grady		1		12,501		22,447		7.6		25,082		6.0		0.5			4.3
Appling		1		19,609		37,708		15.2		17,860		2.6		(0.7	)		6.2
Jeff Davis		1		10,185		49,209		28.8		13,278		4.7		(1.6	)		7.4
Bulloch		2		44,711		59,639		5.5		63,207		12.9		2.1			4.8
		13	$	369,110	$	605,070
North Georgia
Henry		2	$	254,298	$	96,013		4.3		178,033		49.2		3.1			4.4
Hall		1		84,284		29,520		1.1		173,256		24.4		4.0			3.7
Oconee		1		56,200		12,933		1.3		30,858		17.7		3.3			3.1
Gwinnett		2		16,887		19,730		0.2		757,104		28.7		3.1			4.0
Forsyth		1		27,098		1,527		-		150,968		53.4		3.1			3.4
		7	$	438,767	$	159,723
State of Georgia												14.4		2.7			4.7
Florida
Marion		1	$	28,776	$	159,603		3.0		316,183		22.1		2.9			4.8
Duval		1		18,231		13,540		0.5		837,964		7.6		2.8			4.3
St. Johns		1		50,610		344		-		169,224		37.4		2.8			3.5
		3	$	97,617	$	173,487
State of Florida												13.2		2.5			4.3
National Total												6.4		1.3			4.7

Employees

On December 31, 2007, we had a total of 316 full-time and 21 part-time employees.  We consider our relationship with our employees to be excellent.  We offer a competitive compensation and benefits package to our employees.

Availability of Information

More information on the Company is available on our internet website at www.pabbankshares.com and on the Bank at www.parkavebank.com.  We are not incorporating by reference into this Report the information contained on our websites and, therefore, the content of our websites is not a part of this Report.  Copies of this Report and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, including exhibits, are available free of charge on our website under the “Investor Relations” link as soon as reasonably practicable after they have been filed or furnished electronically to the Securities and Exchange Commission (the “SEC”).  Copies of these filings may also be obtained free of charge on the SEC’s website at www.sec.gov.

________________________________

3 Based on the FDIC/OTS Summary of Deposits report as of June 30, 2007.

4 Dollar amounts are presented in thousands as of December 31, 2007.  Amounts exclude $15.9 million in loans and $41.9 million in deposits assigned to the “Treasury” that are not allocated to any particular market (i.e. participation loans, employee and director accounts, brokered deposits, official checks, etc.).

5 Based on the FDIC/OTS Summary of Deposits report as of June 30, 2007.

6 Estimated July 1, 2006 population provided by the U.S. Census Bureau.

7 Estimated percentage population change from 2000 to 2006 provided by the U.S. Census Bureau.

8 Total employment growth (not seasonally adjusted) for the Third Quarter 2007 Year-To-Date percentage change from the prior year’s Year-To-Date data provided by the Bureau of Labor Statistics Household Survey.

9 Unemployment rate (not seasonally adjusted) for the Third Quarter 2007 provided by the Bureau of Labor Statistics.

7

Supervision and Regulation

The banking industry is heavily regulated at both the federal and state levels.  Legislation and regulations authorized by legislation influence, among other things:

· How, when and where we may expand geographically;

· Into what product or service market we may enter;

· How we must manage our assets; and

· Under what circumstances money may or must flow between the parent bank holding company and the subsidiary bank.

Set forth below is an explanation of the major pieces of legislation affecting our industry and how that legislation affects our actions.

General

PAB is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Georgia Department of Banking and Finance (the “Georgia Department”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and the Financial Institutions Code of Georgia, respectively.

The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”), and as such, our deposits are insured by the FDIC to the maximum extent provided by law.  The Bank is also a state member bank of the Federal Reserve and it is subject to regulation, supervision, and examination by the Federal Reserve and the Georgia Department.  These regulatory agencies regularly examine our operations and are given authority to approve or disapprove mergers, consolidations, the establishment of branches, and similar corporate actions.  The agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Acquisitions

The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:  (i) it may acquire direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank; (ii) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or (iii) it may merge or consolidate with any other bank holding company.

The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served.  The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served.  Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues generally focuses on the parties' performance under the Community Reinvestment Act of 1977.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, the restrictions on interstate acquisitions of banks by bank holding companies were repealed.  As a result, PAB, and any other bank holding company located in Georgia, is able to acquire a bank located in any other state, and a bank holding company located outside of Georgia can acquire any Georgia-based bank, in either case subject to certain deposit percentage and other restrictions.  The legislation provides that unless an individual state has elected to prohibit out-of-state banks from operating interstate branches within its territory, adequately capitalized and managed bank holding companies are able to consolidate their multistate banking operations into a single bank subsidiary and to branch interstate through acquisitions.  De novo branching by an out-of-state bank is permitted only if it is expressly permitted by the laws of the host state.  Georgia does not permit de novo branching by an out-of-state bank.  Therefore, the only method by which an out-of-state bank or bank holding company may enter Georgia is through an acquisition.  Georgia has adopted an interstate banking statute that removes the existing restrictions on the ability of banks to branch interstate through mergers, consolidations and acquisitions.  However, Georgia law prohibits a bank holding company from acquiring control of a financial institution until the target financial institution has been incorporated for three years.

8

Activities

The BHC Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be closely related to banking or managing or controlling banks as to be a proper incident thereto.  Provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), discussed below, have expanded the permissible activities of a bank holding company that qualifies as a financial holding company.  In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can be reasonably expected to produce benefits to the public, such as a greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

Gramm-Leach-Bliley Act

The GLB Act implemented major changes to the statutory framework for providing banking and other financial services in the United States.  The GLB Act, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms, and other financial service providers.  A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incidental or complimentary to a financial activity.  The GLB Act specifies certain activities that are deemed to be financial in nature, including underwriting and selling insurance, providing financial and investment advisory services, underwriting, dealing in, or making a market in securities, limited merchant banking activities, and any activity currently permitted for bank holding companies under Section 4(c)(8) of the BHC Act.

To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company.  To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed, and have at least a satisfactory rating under the Community Reinvestment Act.  In addition, the bank holding company must file a declaration with the Federal Reserve of its intention to become a financial holding company.

The GLB Act designates the Federal Reserve as the overall umbrella supervisor of financial holding companies.  The GLB Act adopts a system of functional regulation where the primary regulator is determined by the nature of activity rather than the type of institution.  Under this principle, securities activities are regulated by the SEC and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate banking regulator.  As a result, to the extent that we engage in non-banking activities permitted under the GLB Act, we will be subject to the regulatory authority of the SEC or state insurance authority, as applicable.

Payment of Dividends

PAB is a legal entity separate and distinct from its subsidiaries.  Its principal source of cash flow is dividends from its subsidiary bank.  There are statutory and regulatory limitations on the payment of dividends by its operating subsidiary, the Bank, to PAB, as well as by PAB to its stockholders.

If, in the opinion of the federal banking agencies, a depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such institution cease and desist from such practice.  The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice.  Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  See “Prompt Corrective Action”.  Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally pay dividends only out of current operating earnings.

During 2007, PAB paid a total of $.58 per share in dividends to its stockholders.  At January 1, 2008, the Bank could declare approximately $5.80 million in dividends to PAB without regulatory approval.

Capital Adequacy

We are required to comply with the capital adequacy standards established by the federal banking agencies.  There are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure.  All applicable capital standards must be satisfied for a bank holding company to be considered in compliance.

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The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets.  Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

The minimum guideline for the ratio of Total Capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%.  Total Capital consists of Tier 1 Capital, which is comprised of common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and non-cumulative perpetual preferred stock, less goodwill and certain other intangible assets, and Tier 2 Capital, which consists of subordinated debt, other preferred stock, and a limited amount of loan loss reserves.  At December 31, 2007, our consolidated Total Capital Ratio and our Tier 1 Capital Ratio were 11.27% and 10.02%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies.  These guidelines provide for a minimum ratio (the “Leverage Ratio”) of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3.0% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating.  All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis points.  Our Leverage Ratio at December 31, 2007 was 8.49%.  The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.  Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital Leverage Ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

The Bank is subject to risk-based and leverage capital requirements adopted by its federal banking regulators, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business.  As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements.  See “Prompt Corrective Action”.

The federal bank agencies continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels.  In this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA, recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank's capital adequacy.  The bank regulatory agencies have concurrently proposed a methodology for evaluating interest rate risk that would require banks with excessive interest rate risk exposure to hold additional amounts of capital against such exposures.

Support of Subsidiary Institutions

Under Federal Reserve policy, we are expected to act as a source of financial strength for, and to commit resources to support, the Bank.  This support may be required at times when, absent such Federal Reserve policy, we may not be inclined to provide such support.  In addition, any capital loans by a bank holding company to any of its banking subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks.  In the event of a bank holding company's bankruptcy, any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of a banking subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Prompt Corrective Action

FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized institutions.  Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), and are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories.  The severity of the action will depend upon the capital category in which the institution is placed.  Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.  The federal banking agencies have specified by regulation the relevant capital level for each category.

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An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency.  A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations.  The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements.  An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.  In addition, the appropriate federal banking agency may treat an undercapitalized institution in the same manner as it treats a significantly undercapitalized institution if it determines that those actions are necessary.

At December 31, 2007, the Bank had the requisite capital level to qualify as “well capitalized” under the regulatory framework for prompt corrective action.

FDIC Insurance Assessments

The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance.  Member institutions pay deposit insurance assessments to the Deposit Insurance Fund, or the “DIF.”  The FDIC previously maintained the Savings Association Insurance Fund and the Bank Insurance Fund, which primarily insured the deposits of banks and state chartered savings banks.  These two funds were merged into the DIF effective March 31, 2006.

The FDIC recently amended its risk-based assessment system for 2007 to implement authority that the FDIC was granted under the Federal Deposit Insurance Reform Act of 2005, or the “Reform Act.”  Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and other factors.  The new regulation allows the FDIC to more closely tie each financial institution’s deposit insurance premiums to the risk it poses to the DIF. The assessment rate of an institution depends upon the category to which it is assigned.  Risk Category I, which contains the least risky depository institutions, is expected to include more than 90 percent of all institutions.  Risk Category I, unlike the other risk categories, contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination components and other information.  The new assessment rates for nearly all financial institutions (Risk Category I) are expected to vary between five and seven basis points, or five to seven cents for every $100 of domestic deposits.  The riskiest institutions (Risk Category IV) may be assessed up to 43 basis points.  The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.

In addition to the assessments for deposit insurance, institutions are required to make payments on bonds which were issued in the late 1980s by the Financing Corporation in order to recapitalize the predecessor to the Savings Association Insurance Fund.  During 2007, Financing Corporation payments for Savings Association Insurance Fund members approximated 1.18 basis points of assessable deposits. These assessments, which are adjusted quarterly, will continue until the Financing Corporation bonds mature in 2017.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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Safety and Soundness Standards

The Federal Deposit Insurance Act, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate.  The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended.  The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation and fees and benefits.  In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.  The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.  In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan.  If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA.  See “Prompt Corrective Action”.  If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.  The federal regulatory agencies also proposed guidelines for asset quality and earnings standards.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”) the Bank, as an FDIC insured institution, has a continuing and affirmative obligation to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA requires the appropriate federal regulator, in connection with its examination of an insured institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as applications for a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application by the federal banking regulator.  The Bank received satisfactory ratings in its most recent CRA examinations.

Restrictions on Transactions with Affiliates

PAB and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act.  Section 23A places limits on: the amount of a bank’s loans or extensions of credit to affiliates; a bank’s investment in affiliates; assets a bank may purchase from affiliates, except for real and personal property exemption by the Federal Reserve; the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10.0% of a bank’s capital and surplus and, as to all affiliates combined, to 20.0% of a bank’s capital and surplus.  In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements.  The Bank must also comply with other provisions designed to avoid the taking of low-quality assets.

PAB and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests.  These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and must not involve more than the normal risk of repayment or present other unfavorable features.

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Privacy

The GLB Act also modified laws related to financial privacy.  The new financial privacy provisions generally prohibit a financial institution from disclosing nonpublic personal financial information about consumers to third parties unless consumers have the opportunity to “opt out” of the disclosure.  A financial institution is also required to provide its privacy policy annually to its customers.  Compliance with the implementing regulations was mandatory effective July 1, 2001.  The Bank implemented the required financial privacy provisions by July 1, 2001.

Effect of Governmental Monetary Policies

The earnings of the Bank are affected by domestic and foreign conditions, particularly by the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve has had, and will continue to have, an important impact on the operating results of commercial banks through its power to implement monetary policy in order, among other things, to mitigate recessionary and inflationary pressures by regulating the national money supply.  The techniques used by the Federal Reserve include setting the reserve requirements of member banks and establishing the discount rate on member bank borrowings.  The Federal Reserve also conducts open market transactions in United States government securities.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 (the “Patriot Act”) was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington, D.C. that occurred on September 11, 2001.  The Patriot Act impacts financial institutions in particular through its anti-money laundering and financial transparency laws.  The Patriot Act amended the Bank Secrecy Act and the rules and regulations of the Office of Foreign Assets Control to establish regulations which, among others, set standards for identifying customers who open an account and promoting cooperation with law enforcement agencies and regulators in order to effectively identify parties that may be associated with, or involved in, terrorist activities or money laundering.

On March 2, 2006, Congress passed the USA Patriot Act Improvement and Reauthorization Act of 2005.  This act reauthorized all provisions of the Patriot Act that would otherwise have expired, made 14 of the 16 sunsetting provisions permanent, and extended the sunset period of the remaining two for an additional four years.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain certain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

ITEM 1A. RISK FACTORS

Our business is subject to certain risks, including those described below.  The risks below do not describe all risks applicable to our business and are intended only as a summary of certain material factors that affect our operations in our industry and markets. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our financial performance in which we operate.  More detailed information concerning these and other risks is contained in other sections of this Annual Report on Form 10-K, including “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

If our allowance for loan losses is not sufficient to cover actual loan losses, or if credit delinquencies increase, our earnings could decrease.

Like other financial institutions, we face the risk that our customers will not repay their loans, that the collateral securing the payment of those loans may be insufficient to assure repayment, and that we may be unsuccessful in recovering the remaining loan balances. Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Based in part on those assumptions and judgments, we maintain an allowance for loan losses in an attempt to cover any loan losses which may occur. In determining the size of the allowance, we also rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, delinquencies and non-accruals, national and local economic conditions and other pertinent information.  However, those established loan loss reserves may prove insufficient.  If we are unable to raise revenue to compensate for these losses, such losses could have a material adverse effect on our operating results.

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In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Higher charge-off rates and an increase in our allowance for loan losses may hurt our overall financial performance and may increase our cost of funds.  For the year ended December 31, 2007, we recorded $2.4 million as a provision for loan losses, while we did not incur a provision for loan looses expense in 2006.  The increase is due to a growing loan portfolio, as well as a significant increase in the level of nonperforming loans.

We face strong competition from other financial services providers.

We operate in a highly competitive market for the products and services we offer. The competition among financial services providers to attract and retain customers is strong. Customer loyalty can be easily influenced by a competitor’s new products, especially offerings that could provide cost savings or a higher return to the customer. Some of our competitors may be better able to provide a wider range of products and services over a greater geographic area.  We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our market areas and elsewhere.  Moreover, this highly competitive industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Many of our competitors have fewer regulatory constraints and some have lower cost structures.  While we believe we can and do successfully compete with these other financial institutions in our market areas, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market.

Our business is subject to the success of the economic conditions of the United States and the markets in which we operate.

The success of our business and earnings is affected by general business and economic conditions in the United States and our market areas, particularly the Georgia counties of Lowndes, Cook, Decatur, Appling, Bulloch, Jeff Davis, Grady, Henry, Hall, Oconee, Gwinnett and Forsyth and the Florida counties of Duval, Marion, and St. Johns. If the communities in which we operate do not grow as anticipated or if prevailing economic conditions locally or nationally are unfavorable, our business may be negatively impacted.  An economic downturn, an increase in unemployment, or other events that affect household and/or corporate incomes either nationally or locally could decrease the demand for loans and our other products and services and increase the number of customers who fail to pay interest or principal on their loans.  Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our market areas if they do occur.

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all.  In the future, we may not have the benefit of a favorable interest rate environment or a strong real estate market. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

Risks associated with unpredictable economic and political conditions may be amplified as a result of our limited market areas.

Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. Because the majority of our borrowers are individuals and businesses located and doing business in the Georgia counties of Lowndes, Cook, Decatur, Appling, Bulloch, Jeff Davis, Grady, Henry, Hall, Oconee, Gwinnett and Forsyth and the Florida counties of Duval, Marion and St. Johns, our success will depend significantly upon the economic conditions in those and the surrounding counties. Due to our limited market areas, these negative conditions may have a more noticeable effect on us than would be experienced by a larger institution more able to spread these risks of unfavorable local economic conditions across a large number of diversified economies.

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Deteriorating credit quality, particularly with respect to our loans which are secured by real estate in our Atlanta MSA market, has adversely impacted us and may continue to adversely impact us, leading to higher loan charge-offs or an increase in our provision for loan losses.

The second half of 2007 was highlighted by volatility in the financial markets associated with subprime mortgages, including adverse impacts on credit quality and liquidity within the financial markets. The volatility has been exacerbated by a general decline in the real estate and housing market along with significant mortgage loan related losses reported by many other financial institutions.  We have a significant presence in residential construction and development lending on the south side of the Atlanta MSA.  Approximately 70% of our residential construction and development loans and 17% of our residential mortgages are in our North Georgia markets.  The majority of our residential builders construct houses in the $150,000 - $250,000 selling price range and carry inventories of lots for new construction.  During the second half of 2007, the supply of vacant, developed lots increased dramatically as the number of new building permits and housing starts decreased.  It may take three to four years for the market to fully absorb the existing lot inventories in some areas on the south side of the Atlanta MSA.

Loan defaults result in a decrease in interest income and may require the establishment of or an increase in loan loss reserves. Furthermore, the decrease in interest income resulting from a loan default or defaults may be for a prolonged period of time as we seek to recover, primarily through legal proceedings, the outstanding principal balance and interest due on defaulted loans plus the legal costs incurred in pursuing our legal remedies. These conditions may result in our need to increase loan loss reserves or charge-off a higher percentage of loans, thereby reducing net income. Furthermore, because we rely more heavily on loans secured by real estate, a continued decrease in real estate values, particularly in our North Georgia market, could cause higher loan losses and require higher loan loss provisions.  As of December 31, 2007, approximately 88% of our total loans were secured by real estate.  Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market areas could adversely affect the value of our assets, our revenues, results of operations and financial condition.

Departures of our key personnel may harm our ability to operate successfully.

Our success has been and continues to be largely dependent upon the services of our senior management team, including our senior loan officers, and our board of directors, many of whom have significant relationships with our customers. Our continued success will depend, to a significant extent, on the continued service of these key personnel. The prolonged unavailability or the unexpected loss of any of them could have an adverse effect on our financial condition and results of operations. We cannot be assured of the continued service of our senior management team or our board of directors with us.

We may face risks with respect to the future expansion of our business.

As we expand our business in the future into new and emerging markets, we may also consider and enter into new lines of business or offer new products or services.  Such expansion involves risks, including:

· entry into new markets where we lack experience;

· the introduction of new products or services into our business with which we lack experience;

· the time and cost associated with identifying and evaluating potential markets, products and services, hiring experienced local management and opening new offices;

· potential time lags between preparatory activities and the generation of sufficient assets and deposits to support the costs of expansion; and

· the estimates and judgments used to evaluate market risks with respect to new markets, products and services may not be accurate.

Future growth may require us to raise additional capital, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will continue to satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time and on our financial performance. Accordingly, we cannot ensure our ability to raise additional capital if needed on favorable terms. If we cannot raise additional capital when needed, our ability to expand our operations through internal growth and acquisitions could be materially impaired.

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We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Many of these regulations are intended to protect depositors, the public and the FDIC rather than shareholders.  The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. In addition, the Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the SEC and NASDAQ, that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audit and maintaining our internal controls.

The monetary policies and laws of the United States, including interest rate policies of the Federal Reserve Board, could affect our earnings.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and our return on those loans and investments, both of which affect our net interest margin. They can also materially affect the value of financial instruments we hold.  Changes in interest rates by the Federal Reserve may affect our level of interest income and interest expense.  In a period of rising interest rates, our interest expense could increase in different amounts and at different rates while the interest that we earn on our assets may not change in the same amounts or at the same rates. Accordingly, increases in interest rates could decrease our net interest income.  In addition, an increase in interest rates may decrease the demand for consumer and commercial credit, including real estate loans, which are a major component of our loan portfolio.

Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds or result in our lenders requiring additional collateral from us under our loan agreements. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses. Changes in Federal Reserve Board policies and laws are beyond our control and hard to predict.

Fluctuations in our expenses and other costs may hurt our financial results.

Our expenses and other costs, such as operating and marketing expenses, directly affect our earnings results. In light of the extremely competitive environment in which we operate, and because the size and scale of many of our competitors provides them with increased operational efficiencies, we must successfully manage such expenses. As our business develops, changes or expands, additional expenses can arise.

We must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.

If our competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult or expensive than we anticipate.

Changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact our financial statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.

Our directors and executive officers own a significant portion of our common stock.

Our directors and executive officers, as a group, beneficially owned approximately 24% of our outstanding common stock as of December 31, 2007. As a result of their ownership, the directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

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The costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our business, operating results and financial condition.

We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business. Our insurance may not cover all claims that may be asserted against it, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition and results of operations. In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all.

Various domestic or international military or terrorist activities or conflicts could affect our business and financial condition.

Acts or threats of war or terrorism, or actions taken by the United States or other governments in response to such acts or threats could negatively affect business and economic conditions in the United States. If terrorist activity, acts of war or other international hostilities cause an overall economic decline, our financial condition and results of operations could be adversely affected. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security and other actual or potential conflicts or acts of war, including war in the Middle East, have created many economic and political uncertainties that could seriously harm our business and results of operations in ways that we cannot predict.

The trading volume in our common stock has been low, and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.

The trading volume in our common stock on the NASDAQ Global Select Market and, prior to November 1, 2005, on the American Stock Exchange, has been relatively low when compared with larger companies listed on NASDAQ or other stock exchanges. We cannot say with any certainty that a more active and liquid trading market for our common stock will develop. Because of this, it may be more difficult for you to sell a substantial number of shares for the same price at which you could sell a smaller number of shares.

We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We, therefore, can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.

Our ability to pay dividends is limited and we may be unable to pay future dividends.

Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our Bank subsidiary to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to our Bank and banks that are regulated by the Federal Reserve.  If we do not satisfy these regulatory requirements, we will be unable to pay dividends on our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

We currently operate 20 bank branches, three loan production offices, an operations center, an executive office suite and an administrative building.  With the exception of our Ocala and Jacksonville, Florida branches and our Stockbridge and Snellville, Georgia branches, we own all of the real property and/or buildings in which our bank branch offices are located.  The Ocala office is under a five-year operating lease that expires in December 2008.  The Jacksonville branch is under a five-year operating lease that expires in September 2011.  The Stockbridge office is under a five-year operating lease that expires in May 2009.  The Snellville branch is under a ten-year operating lease that expires in December 2016.  We own the real property where our Snellville, Georgia loan production office is located.  The other two loan production offices and a 4,300 square-foot executive office suite in McDonough, Georgia are located in leased office space.  In addition, we own a three-story, 10,000 square-foot administrative building, which houses our corporate offices, and a 12,000 square-foot operations center in Valdosta, Georgia.  All of the properties are in a good state of repair and are appropriately designed for the purposes for which they are used.

17

We also currently own four parcels of land that we are holding for potential future expansion.  These vacant lots are located in Locust Grove, Henry County, Georgia; St. Johns County, Florida; and two lots in Valdosta, Lowndes County, Georgia.  The two lots in Valdosta include land behind our main office building and a lot near the initial Park Avenue Bank location.

Other than real estate held for future branch expansion and the normal real estate and commercial lending activities of the Bank, we generally do not invest in real estate, interests in real estate, real estate mortgages, or securities of persons primarily engaged in real estate activities.

ITEM 3. LEGAL PROCEEDINGS

The nature of the business of PAB and the Bank ordinarily results in a certain amount of litigation.  Accordingly, we are party to a limited number of lawsuits incidental to our respective businesses.  In our opinion, the ultimate disposition of these matters will not have a material adverse impact on our consolidated financial position or results of operations.

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

No matters were submitted to a vote of our stockholders during the fourth quarter of 2007.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been traded on NASDAQ under the symbol “PABK” since November 1, 2005.  From July 9, 1996 to October 31, 2005, our common stock was listed for quotation on the American Stock Exchange under the symbol “PAB”.  On February 29, 2008, there were 2,081 holders of record of our common stock.

Our ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution.  Our ability to generate liquid assets for distribution is primarily dependent on the ability of the Bank to pay dividends up to the parent holding company.  The payment of dividends is an integral part of our goal to retain sufficient capital to support future growth and to meet regulatory requirements while providing a competitive return on investment to our stockholders.  When possible, it has been our intent to pay out 35-50% of our net earnings in the form of cash dividends to our stockholders on a quarterly basis; however, there is no assurance that we will do so in the future.

The following table sets forth, for the indicated periods, the high and low closing sales prices for our common stock, the cash dividends declared, and the diluted earnings per share.

	Sales Price
Calendar Period	High		Low		Dividends		Earnings
2006
First Quarter	$	22.20	$	18.24	$	0.125	$	0.34
Second Quarter		21.73		18.35		0.135		0.37
Third Quarter		21.12		17.90		0.14		0.36
Fourth Quarter		22.49		19.86		0.14		0.34
2007
First Quarter	$	22.48	$	17.75	$	0.145	$	0.32
Second Quarter		20.44		17.65		0.145		0.33
Third Quarter		19.00		15.60		0.145		0.30
Fourth Quarter		17.40		12.44		0.145		0.18

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Performance Graph

The following graph compares our yearly percentage change in cumulative, five-year shareholder return with the NASDAQ – Composite Index and the SNL Southeast Bank Index.  We have determined that the SNL Southeast Bank Index provides an appropriate and accurate comparison with our industry peers.  The graph assumes that the value of the investment in the Company’s common stock and in each index was $100 on December 31, 2002 and that all dividends were reinvested.  The change in cumulative total return is measured by dividing (i) the sum of (a) the cumulative amount of dividends for the period, and (b) the change in share price between the beginning and the end of the period, by (ii) the share price at the beginning of the period.

	Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
PAB Bankshares, Inc.		100.00		194.51		168.52		241.72		290.20		175.49
NASDAQ Composite Index		100.00		150.01		162.89		165.13		180.85		198.60
SNL Southeast Bank Index		100.00		125.58		148.92		152.44		178.75		134.65

The foregoing Total Return Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such filing.

Stock Buyback Plan

A summary of our purchases of PAB common stock during the fourth quarter ended December 31, 2007 follows.

	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 programs1
October		24,700	$	16.92		24,700		65,650
November		42,500		15.67		42,500		23,150
December		10,900		14.28		10,900		212,250
Total		78,100	$	15.87		78,100		212,250

1 On May 22, 2007, the Board of Directors renewed its annual plan to repurchase up to 300,000 shares of the Company’s common stock over a 12 month period.  The plan will expire May 22, 2008.  On December 18, 2007 the Board of Directors authorized an additional stock repurchase program to repurchase up to 200,000 shares of the Company’s common stock over a 12 month period.  The plan will expire December 18, 2008.

19

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial data for PAB.  This selected financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and the Notes in Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.

(In thousands, except per share and other data)	2007			2006			2005			2004			2003
Summary of Operations:
Interest income	$	84,676		$	77,566		$	59,371		$	40,597		$	40,040
Interest expense		42,210			33,555			20,398			10,624			12,467
Net interest income		42,466			44,011			38,973			29,973			27,573
Provision for loan losses		2,400			-			1,189			600			-
Other income		5,991			5,380			5,813			6,344			8,616
Other expense		29,590			28,167			24,778			23,055			25,702
Income before income tax expense		16,467			21,224			18,819			12,662			10,487
Income tax expense		5,681			7,488			6,366			4,144			3,361
Net income	$	10,786		$	13,736		$	12,453		$	8,518		$	7,126
Net interest income on a taxable-equivalent basis	$	43,120		$	44,507		$	39,195		$	30,148		$	27,759
Selected Average Balances:
Total assets	$	1,165,307		$	1,067,362		$	948,457		$	765,016		$	736,367
Earning assets		1,096,918			1,004,981			890,337			704,345			675,718
Loans		883,334			792,278			706,052			569,858			540,787
Deposits		948,613			859,216			741,409			575,767			576,871
Stockholders’ equity		98,055			91,611			85,431			79,499			74,229
Selected Year End Balances:
Total assets	$	1,198,671		$	1,120,804		$	1,017,326		$	868,975		$	730,741
Earning assets		1,116,776			1,048,239			957,918			808,886			666,488
Loans		921,349			820,304			752,938			646,149			538,644
Allowance for loan losses		12,906			11,006			11,079			9,066			10,139
Deposits		980,149			908,483			815,681			657,550			556,917
Stockholders’ equity		97,676			95,316			87,001			81,000			76,062
Common Share Data:
Outstanding at year end		9,223,217			9,504,969			9,469,017			9,495,320			9,484,660
Weighted average outstanding		9,418,796			9,499,434			9,514,775			9,499,709			9,476,158
Diluted weighted average outstanding		9,560,324			9,706,989			9,686,894			9,642,065			9,686,617
Per Share Ratios:
Net income - basic	$	1.14		$	1.45		$	1.31		$	0.89		$	0.75
Net income - diluted		1.13			1.41			1.28			0.88			0.74
Dividends declared		0.58			0.54			0.475			0.34			0.18
Book value		10.59			10.03			9.19			8.53			8.02
Tangible book value		9.94			9.40			8.56			7.90			7.39
Profitability Ratios:
Return on average assets		0.93	%		1.29	%		1.31	%		1.11	%		0.97	%
Return on average equity		11.00	%		14.99	%		14.58	%		10.71	%		9.60	%
Net interest margin		3.93	%		4.43	%		4.40	%		4.28	%		4.11	%
Efficiency ratio		60.74	%		55.88	%		54.94	%		63.18	%		68.90	%
Liquidity Ratios:
Total loans to total deposits		94.00	%		90.29	%		92.31	%		98.27	%		96.72	%
Average loans to average earning assets		80.53	%		78.84	%		79.30	%		80.91	%		80.03	%
Noninterest-bearing deposits to total deposits		9.12	%		11.11	%		13.23	%		15.15	%		17.04	%
Capital Adequacy Ratios:
Average equity to average assets		8.41	%		8.58	%		9.01	%		10.39	%		10.08	%
Dividend payout ratio		50.43	%		37.36	%		36.29	%		37.93	%		23.89	%
Asset Quality Ratios:
Net charge-offs to average loans		0.06	%		0.01	%		-0.12	%		0.29	%		0.36	%
Nonperforming loans to total loans		1.24	%		0.49	%		1.04	%		0.54	%		1.53	%
Nonperforming assets to total assets		1.49	%		0.45	%		0.78	%		0.40	%		1.75	%
Allowance for loan losses to total loans		1.40	%		1.34	%		1.47	%		1.40	%		1.88	%
Allowance for loan losses to nonperforming loans		112.79	%		271.95	%		140.98	%		261.04	%		123.41	%

20

GAAP Reconciliation and Management Explanation for Non-GAAP Financial Measures

Certain financial information included in “Selected Financial Data” above is determined by methods other than in accordance with GAAP.  “Tangible book value per share” is a non-GAAP financial measure that our management uses in its analysis of our performance.

“Tangible book value” is defined as total equity reduced by recorded intangible assets divided by total common shares outstanding.  This measure is important to investors interested in changes from period to period in book value per share exclusive of changes in intangible assets.  Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing the tangible assets of the company.  For companies that have engaged in multiple business combinations, purchase accounting can result in the recording of significant amounts of goodwill related to such transactions.

These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.  The following reconciliation table provides a more detailed analysis of these non-GAAP performance measures.

	2007		2006		2005		2004		2003
Book value per common share	$	10.59	$	10.03	$	9.19	$	8.53	$	8.02
Effect of intangible assets per share		0.65		0.63		0.63		0.63		0.63
Tangible book value per common share	$	9.94	$	9.40	$	8.56	$	7.90	$	7.39

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial condition and results of operations of PAB should be read in conjunction with the Consolidated Financial Statements and related Notes, and is qualified in its entirety by the foregoing and other more detailed financial information appearing elsewhere.  Historical results of operations and the percentage relationships among any amounts included, and any trends which may appear to be inferred, should not be taken as being necessarily indicative of trends in operations or results of operations for any future periods.

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters.  Comments regarding our business which are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties.  Actual results may differ materially from those contained in these forward-looking statements.  For additional information regarding our cautionary disclosures, see the “Cautionary Notice Regarding Forward-Looking Statements” at the beginning of this Report.

OVERVIEW OF KEY FINANCIAL, STRATEGIC AND PERFORMANCE FACTORS

Our operating subsidiary, The Park Avenue Bank, is a $1.20 billion community bank with 20 branches and three loan production offices in Georgia and Florida.  We have offices in both smaller, rural communities as well as larger, metropolitan areas.  We provide traditional banking products and services to both commercial and individual customers in our markets.  For additional information on our markets, see the “Markets and Competition” section in Part I of this Report.  As a bank, we operate in a highly regulated and competitive environment.  Our primary objective is to increase the return on our stockholders’ investment over the long-term by accepting deposits and borrowing additional funds as needed at low costs and investing those funds in a safe and sound manner in loans and investments at a higher yield.  Competition, regulation, credit risk, and interest rate risk are the primary factors that we must manage in order to be successful.

Our future success is dependent on our ability to effectively execute our de novo branching strategy, attract and retain excellent employees, utilize technology and support components efficiently, and focus on sales and service.

Earnings

Our net income decreased 21.5% from $13.74 million in 2006 to $10.79 million in 2007.  Our diluted earnings per share (“EPS”) decreased 20.3% from $1.41 in 2006 to $1.13 in 2007.  Our total revenues (which is net interest income plus noninterest income) decreased 0.1% from $49.39 million in 2006 to $48.46 million in 2007.  Our return on average assets (“ROA”) decreased from 1.29% in 2006 to 0.93% and our return on average equity (“ROE”) declined from 14.99% in 2006 to 11.00% in 2007.

21

The three primary reasons for this decline in earnings are an increase in provision for loan loss expense, a slight decrease in net interest income and an increase in noninterest expenses.  We recorded a $2.4 million provision for loan loss expense in 2007, while we did not incur a provision for loan loss expense in 2006.  During 2007, our net interest income decreased $1.5 million, from $44.0 million in 2006 to $42.5 million in 2007, and our net interest margin declined 50 basis points from 4.43% in 2006 to 3.93% in 2007.  Our noninterest expenses increased 5.05%, from $28.2 million in 2006 to $29.6 million in 2007.  This increase in noninterest expenses is partially attributable to our de novo branch expansion efforts in the Snellville and Cumming, Georgia markets and the Jacksonville, Florida market.  Additional discussion regarding our earnings for 2007 and our outlook for 2008 are outlined in the section titled “Results of Operations” below.  The following table summarizes our net income, EPS, ROA, and ROE for the past five years.

Year	Net Income		EPS		ROA			ROE
	(In Thousands)
2003		7,126		0.74		0.97	%		9.60	%
2004		8,518		0.88		1.11	%		10.71	%
2005		12,453		1.28		1.31	%		14.58	%
2006		13,736		1.41		1.29	%		14.99	%
2007		10,786		1.13		0.93	%		11.00	%

Loan and Deposit Growth

Total assets increased $77.9 million, or 7.0%, from $1.12 billion at the end of 2006 to $1.20 billion at the end of 2007.  Total loans increased $101.0 million, or 12.3%, and total deposits increased $71.7 million, or 7.9%, during 2007.  In our South Georgia market, loans increased 7.3% in 2007 due primarily to an increase in residential mortgages while deposits only increased 2.3%.  In our North Georgia market, loans increased 9.5% due primarily to an increase in construction and development loans and commercial lending, and deposits increased 21.1% due to successful money market program and CD marketing campaigns.  In our Florida market, loans increased 46.5% due to an increase in residential mortgages and deposits increased 24.6% due to CD marketing campaigns.

A breakdown of loans and deposits for each region as of December 31, 2007 and 2006 and the percentage of net growth (or contraction) during 2007 is provided in the table below.

Market/	# of		Total Loans						Total Deposits
County	Offices		2007		2006		% Chg		2007		2006		% Chg
			(Dollars in Thousands)
South Georgia		13	$	369,110	$	343,844		7.3	$	605,070	$	591,682		2.3
% of Total				40.1		41.9				61.7		65.1
North Georgia		7	$	438,767	$	400,616		9.5	$	159,723	$	131,907		21.1
% of Total				47.6		48.9				16.3		14.5
Florida		3	$	97,617	$	66,644		46.5	$	173,487	$	139,195		24.6
% of Total				10.6		8.1				17.7		15.3
Treasury		-	$	15,855	$	9,200		72.3	$	41,869	$	45,699		(8.4)
% of Total				1.7		1.1				4.3		5.1
Total			$	921,349	$	820,304		12.3	$	980,149	$	908,483		7.9

In addition to the geographic concentrations noted in the tables above, we had approximately $80.4 million in loans secured by real estate in Florida to customers of our South Georgia, North Georgia and Treasury offices.

22

In the fourth quarter of 2006, we opened full service branches in the Athens (Georgia) MSA and the Jacksonville (Florida) MSA.  In the first quarter of 2007, we opened a full service branch at a second location in Gwinnett County and a loan production office in Forsyth County, both located in the Atlanta (Georgia) MSA.  We had intended to open 2-3 offices a year as part of our strategic plan to expand our presence in the higher growth markets in and around the Atlanta MSA and in north and central Florida.  However, we have decided to wait until economic conditions improve before opening another office.

A breakdown of loans and deposits by type as of December 31, 2007 and 2006 and the percentage of net growth (or contraction) during 2007 is provided in the table below.

	2007			2006			% Change
	(Dollars in Thousands)
Loans
Commercial and financial	$	78,730		$	66,376			18.6
Agricultural (including loans secured by farmland)		41,861			43,302			(3.3	)
Real estate - construction		352,732			295,246			19.5
Real estate - commercial		248,272			255,462			(2.8	)
Real estate - residential		174,157			142,501			22.2
Installment loans to individuals and others		26,011			18,414			41.3
		921,763			821,301			12.2
Deferred loan fees and unearned interest, net		(414	)		(997	)		(58.5	)
Total loans		921,349			820,304			12.3
Allowance for loan losses		(12,906	)		(11,006	)		17.3
Net loans	$	908,443		$	809,298			12.3
Deposits
Noninterest-bearing demand	$	89,423		$	100,911			(11.4	)
Interest-bearing demand and savings		354,743			328,828			7.9
Time less than $100,000		312,722			279,936			11.7
Time greater than or equal to $100,000		187,662			161,054			16.5
Brokered		35,599			37,754			(5.7	)
Total deposits	$	980,149		$	908,483			7.9

Overall, our construction and development loans increased $57.5 million, or 19.5%, and our residential mortgages increased $31.7 million, or 22.2%, during 2007 as compared to 2006.  However, beginning in the fourth quarter of 2006, we began to see a slowdown in the demand for new construction and development financing opportunities.  This slowdown became more severe in certain sections of the Atlanta and Jacksonville markets in the third and fourth quarters of 2007.  We expect this slowdown will hinder our loan growth opportunities over the next year.  Our construction and development loans increased $24.4 million, or 14.7% annualized, in the second half of 2007 primarily because the adverse market conditions forced many projects to get extended or stalled and loan payoffs did not occur as anticipated.

In an effort to diversify our loan portfolio from commercial real estate (which includes construction and development lending and commercial mortgages), we increased our efforts in non-real estate secured commercial lending and in residential mortgages.  Our commercial loans increased $12.4 million, or 18.6%, during 2007 as compared to 2006.  As a percentage of total loans, this segment of our portfolio increased from 8.1% at the end of 2006 to 8.6% at the end of 2007.

Real Estate Market Conditions on the south side of the Atlanta MSA

With approximately 22% of our loan portfolio concentrated in residential construction and development loans and an additional 19% of our loan portfolio in residential mortgages, we carefully monitor and evaluate trends in our residential real estate markets.  Our residential construction and development lending on the south side of the Atlanta MSA is significant to the Bank.  The majority of our residential builders construct houses in the $150,000 - $250,000 selling price range and carry inventories of lots for new construction projects one to two years out.  The decrease by mortgage companies of the extension of credit to buyers of new homes in the last half of 2007 further weakened a market already pressured by higher interest rates and an imbalance of housing supply relative to its demand.

23

During the second half of 2007, finished housing inventories increased but we believe within manageable levels given the growth projections for the market.  However, the supply of vacant, developed lots increased dramatically during the second half of 2007 as the number of new building permits and housing starts decreased.  We believe it may take three to four years for the market to fully absorb the lot inventories in some areas on the south side of the Atlanta MSA.

The table below summarizes, from data available to the Company, the inventory supply trends for housing and vacant developed lots for select counties on the south side of the Atlanta MSA where we have a significant presence in residential real estate construction and development loans and other real estate owned.

For the Quarter Ended	Dec-07		Dec-06		Dec-05		Dec-04
	(Number of Months Supply)
Housing Inventory:
Henry County		11.5		9.1		8.3		8.3
Clayton County		9.5		12.2		7.1		6.1
Newton County		11.1		7.4		8.3		8.5
South Fulton County		8.0		7.8		7.9		9.7
Vacant Developed Lots Inventory:
Henry County		86.0		27.0		25.0		25.0
Clayton County		53.0		26.0		23.0		14.0
Newton County		64.0		24.0		24.0		23.0
South Fulton County		57.0		23.0		22.0		21.0

The table below sets forth, based on data from the U.S. Census Bureau, the number of single family housing permits issued in  select counties on the south side of the Atlanta MSA over the past four years.

For the Year Ended	Dec-07		Dec-06		Dec-05		Dec-04
	(Number of Single Family Housing Permits Issued)
Housing Permits:
Henry County		1,650		2,992		3,697		3,552
Clayton County		1,238		2,226		2,103		2,047
Newton County		952		1,678		2,115		2,398

STATISTICAL DISCLOSURES

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

From June 2004 to June 2006, the Federal Open Market Committee of the Federal Reserve (“FOMC”) increased the federal funds rate seventeen consecutive times, in 25 basis point increments, from 1.00% to 5.25%.  The FOMC held the federal funds rate steady at 5.25% from June 2006 to September 2007.  From September 2007 to January 2008, the FOMC reduced the federal funds rate 5 times, in various increments, from 5.25% to 3.00%.  Being in an asset-sensitive interest rate position on our balance sheet (our earning assets reprice more frequently than our rate-sensitive liabilities), we benefited during the period of rising interest rates.  Conversely, all other factors remaining unchanged, we expect our earnings to decrease in a declining interest rate environment.  We discuss our interest rate risk in further detail in Item 7A.  Below, we have summarized the impact that changes in interest rates and changes in our balance sheet have had on our earnings over the past three years.

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Rate / Volume Analysis

The following table shows a summary of the changes in interest income and interest expense on a fully taxable equivalent basis resulting from changes in volume and changes in rates for each category of interest-earning assets and interest-bearing liabilities.  The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year.  The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding between years.  Thus, changes that are not solely due to volume have been consistently attributed to rate.

For the Years Ended December 31,	2007 vs. 2006									2006 vs. 2005
	Increase			Changes Due To						Increase		Changes Due To
	(Decrease)			Rate			Volume			(Decrease)		Rate		Volume
	(Dollars In Thousands)
Increase (decrease) in income from earning assets:
Loans	$	6,706		$	(1,035	)	$	7,741		$	15,549	$	9,222	$	6,327
Taxable securities		492			321			171			2,138		779		1,359
Nontaxable securities		450			44			406			783		-		783
Other short-term investments		(381	)		76			(457	)		-		506		(506	)
Total interest income		7,267			(594	)		7,861			18,470		10,507		7,963
Increase (decrease) in expense from interest-bearing liabilities:
Demand deposits		2,828			1,511			1,317			4,858		3,881		977
Savings deposits		38			67			(29	)		213		234		(21	)
Time deposits		5,566			3,353			2,213			6,909		4,693		2,216
FHLB advances		221			287			(66	)		794		995		(201	)
Notes payable		(294	)		(142	)		(152	)		282		152		130
Other short-term borrowings		295			107			188			102		119		(17	)
Total interest expense		8,654			5,183			3,471			13,158		10,074		3,084
Net interest income	$	(1,387	)	$	(5,777	)	$	4,390		$	5,312	$	433	$	4,879

During 2007, we had an average investment in impaired loans of $4.9 million.  If these impaired loans had remained current and on accrual status during 2007, we would have recorded an additional $753,000 of interest income.  This is compared to $262,000 of lost interest income on an average investment of $4.1 million of impaired loans during 2006.

25

Average Balances, Interest and Yields

The following table details the average balance of interest-earning assets and interest-bearing liabilities, the amount of interest earned and paid, and the average yields and rates realized for each of the last three years.  Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 35% Federal tax.  Loan average balances include loans on nonaccrual status.  Other short-term investments include federal funds sold and interest-bearing deposits in other banks.

For the Years Ended
December 31,	2007								2006								2005
	Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate			Average Balance			Interest Income/ Expense		Average Yield/ Rate
	(Dollars In Thousands)
ASSETS
Interest-earning assets:
Loans	$	883,334		$	74,060		8.38	%	$	792,278		$	67,354		8.50	%	$	706,052		$	51,805		7.34	%
Investment securities:
Taxable		159,510			8,211		5.15	%		156,059			7,719		4.95	%		125,491			5,581		4.45	%
Nontaxable		30,998			1,868		6.03	%		24,104			1,419		5.89	%		10,802			635		5.88	%
Other short-term investments		23,076			1,191		5.16	%		32,540			1,571		4.83	%		47,992			1,572		3.28	%
Total interest- earning assets		1,096,918			85,330		7.78	%		1,004,981			78,063		7.77	%		890,337			59,593		6.69	%
Noninterest-earning assets:
Cash		20,534								20,927								21,688
Allowance for loan losses		(11,264	)							(10,966	)							(10,283	)
Unrealized gain (loss) on securities available for sale		(1,993	)							(2,818	)							(930	)
Other assets		61,112								55,238								47,645
Total assets	$	1,165,307							$	1,067,362							$	948,457
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	309,037		$	11,049		3.58	%	$	266,374		$	8,221		3.09	%	$	206,418		$	3,363		1.63	%
Savings deposits		37,231			564		1.51	%		39,366			526		1.34	%		42,154			313		0.74	%
Time deposits		503,870			25,275		5.02	%		453,004			19,708		4.35	%		386,137			12,800		3.31	%
FHLB advances		88,569			4,069		4.59	%		90,115			3,848		4.27	%		96,467			3,053		3.16	%
Notes payable		10,310			727		7.05	%		12,118			1,021		8.42	%		10,310			739		7.17	%
Other short-term borrowings		12,392			526		4.25	%		6,843			232		3.39	%		7,868			130		1.65	%
Total interest- bearing liabilities		961,409			42,210		4.39	%		867,820			33,556		3.87	%		749,354			20,398		2.72	%
Noninterest-bearing liabilities and stockholders' equity:
Demand deposits		98,475								100,472								106,700
Other liabilities		7,368								7,459								6,972
Stockholders' equity		98,055								91,611								85,431
Total liabilities and stockholders’ equity	$	1,165,307							$	1,067,362							$	948,457
Interest rate spread							3.39	%							3.90	%							3.97	%
Net interest income				$	43,120							$	44,507							$	39,195
Net interest margin							3.93	%							4.43	%							4.40	%

26

Investment Portfolio

The book value of investment securities at the indicated dates are presented below.  Changes in the mix of our investment portfolio will vary over time in response to changes in market conditions and liquidity needs of the Bank.

As of December 31,	2007						2006						2005
	$ Amount			% to Total			$ Amount			% to Total			$ Amount			% to Total
	(Dollars in Thousands)
U. S. Government agency securities	$	70,235			36.1	%	$	82,294			44.7	%	$	70,635			44.9	%
State and municipal securities		32,332			16.6	%		28,892			15.7	%		14,063			8.9	%
Mortgage-backed securities		77,201			39.6	%		58,875			32.0	%		59,858			38.0	%
Corporate debt securities		6,507			3.3	%		4,528			2.5	%		3,580			2.3	%
Equity securities		8,519			4.4	%		9,504			5.1	%		9,319			5.9	%
Total investments	$	194,794			100.0	%	$	184,093			100.0	%	$	157,455			100.0	%
Total investments as a percentage of total assets		16.3	%					16.4	%					15.5	%

At December 31, 2007, the estimated fair market value of our investment portfolio was approximately $320,000, or 0.2%, above our amortized cost; however, market values may fluctuate significantly as interest rates change.

Our investment portfolio policy stresses quality and liquidity.  The bonds which are purchased as investments carry an “A” rating or better by either Standard and Poor’s or Moody’s Investors Service, Inc. or have been reviewed for credit and market risk and deemed appropriate for the Bank’s portfolio by management.  The portfolio is monitored to assure there is no unreasonable concentration of securities in the obligations of a single issuer.  We do not carry  any "sub-prime" mortgages, structured investment vehicles, or collateralized debt obligations in our portfolio.  We also monitor the insurers of our state and municipal securities, and the distribution of such securities among the insurers.  At December 31, 2007, nine different carriers, with no one carrier insuring more than 22% of the total, insured our state and municipal securities.  The table below shows the distribution by insurer of our state and municipal securities as of December 31, 2007.

As of December 31, 2007	$ Amount		% to Total
	(Dollars in Thousands)
Ambac Assurance Corp (AMBAC)	$	7,070		21.9	%
Financial Security Assurance Inc. (FSA)		6,077		18.8	%
XL Capital Assurance Inc. (XLCA)		5,021		15.5	%
MBIA Corporation (MBIA)		3,209		9.9	%
CDC IXIS Financial Guaranty (CIFG)		2,150		6.6	%
Financial Guaranty Insurance Company (FGIC)		2,031		6.3	%
Other		2,765		8.6	%
Uninsured		4,009		12.4	%
Total state and municipal securities	$	32,332		100.00	%

The following table shows the maturities of non-equity investment securities at December 31, 2007 and the weighted-average yields (on a fully taxable basis assuming a 35% tax rate) on such securities.  The maturities presented for mortgage-backed securities are based on the average lives of those bonds at the then projected prepayment speeds.  Actual maturities usually differ from contractual maturities because certain security issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Of the investments in U.S. Government agency securities maturing after one year, approximately $40.7 million, or 60%, are potentially callable at par value within one year.

	U.S. Government					State and Municipal					Mortgage-Backed					Corporate Debt
	Agency Securities					Securities					Securities					Securities
As of December 31, 2007	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in Thousands)
Due in one year or less	$	2,987		4.07	%	$	1,670		5.04	%	$	94		4.85	%	$	3,041		7.70	%
Due after one year through five years		26,818		4.64	%		6,069		5.08	%		63,311		5.06	%		1,527		6.00	%
Due after five years through ten years		11,926		5.36	%		9,176		5.72	%		11,060		5.27	%		1,939		5.52	%
Due after ten years		28,504		5.61	%		15,417		5.86	%		2,736		5.34	%		-		-
Total	$	70,235		5.13	%	$	32,332		5.63	%	$	77,201		5.10	%	$	6,507		6.65	%

27

Loan Portfolio

We make both secured and unsecured loans to individuals, corporations, and other entities with the goals of safety, soundness, profitability and responsiveness to community needs.  Our loan portfolio contains no foreign or energy-related loans or significant concentrations in any one industry or loan type, with the exception of loans secured by residential and commercial real estate in our market areas.

Types of Loans

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

As of December 31,	2007			2006			2005			2004			2003
	(Dollars in Thousands)
Commercial and financial	$	78,730		$	66,376		$	50,860		$	59,703		$	53,849
Agricultural (including loans secured by farmland)		41,861			43,302			55,830			26,704			24,071
Real estate - construction		352,732			295,246			268,629			166,854			100,150
Real estate – commercial		248,272			255,462			231,601			239,032			203,465
Real estate - residential		174,157			142,501			127,326			136,190			128,539
Installment loans to individuals and other		26,011			18,414			20,380			19,552			29,366
		921,763			821,301			754,626			648,035			539,440
Deferred loan fees and unearned interest, net		(414	)		(997	)		(1,688	)		(1,886	)		(796	)
		921,349			820,304			752,938			646,149			538,644
Allowance for loans losses		(12,906	)		(11,006	)		(11,079	)		(9,066	)		(10,139	)
Loans, net	$	908,443		$	809,298		$	741,859		$	637,083		$	528,505

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

As of December 31,	2007			2006			2005			2004			2003
Commercial and financial		8.55	%		8.09	%		6.75	%		9.24	%		10.00	%
Agricultural (including loans secured by farmland)		4.54	%		5.28	%		7.41	%		4.13	%		4.47	%
Real estate – construction		38.28	%		35.99	%		35.68	%		25.82	%		18.59	%
Real estate - commercial		26.95	%		31.14	%		30.76	%		36.99	%		37.78	%
Real estate - residential		18.90	%		17.37	%		16.91	%		21.08	%		23.86	%
Installment loans to individuals and other		2.82	%		2.24	%		2.71	%		3.03	%		5.45	%
		100.04	%		100.12	%		100.22	%		100.29	%		100.15	%
Deferred loan fees and unearned interest, net		-0.04	%		-0.12	%		-0.22	%		-0.29	%		-0.15	%
		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%
Allowance for loans losses		-1.40	%		-1.34	%		-1.47	%		-1.40	%		-1.88	%
Loans, net		98.60	%		98.66	%		98.53	%		98.60	%		98.12	%

Overall, the loan portfolio increased $101.0 million, or 12.3%, from $820.3 million at the beginning of the year to $921.3 million at year end.  In 2007, the composition of the loan portfolio continued to shift slightly as loans secured by real estate represented 88.3% of the total portfolio at the end of 2007, as compared to 83.0% at the end of 2003.  At the end of 2003, installment loans to individuals represented 5.5% of our loan portfolio, while it only represented 2.8% at the end of 2007.  Residential real estate mortgages decreased from 23.9% of our portfolio in 2003 to 18.9%  in 2007, and commercial and financial loans decreased from 10.0% of our portfolio to 8.6% of our portfolio during that same time.  However, since 2005, we have increased our positions in both residential real estate mortgages and commercial and financial loans.

Our construction and land development loans increased from 18.6% of our portfolio in 2003 to 38.3%  in 2007.  Growth in all of our markets contributed to the $57.5 million increase in construction loans; however, the majority of our construction and development loans are in our North Georgia market.  Of the $352.7 million in construction and development loans outstanding at the end of 2007, $218.5 million, or 61.9%, originated in our North Georgia offices.

28

With a total of 65.2% of our loan portfolio concentrated in construction and development and commercial real estate loans, we monitor and evaluate trends in our residential real estate markets and periodically adjust our strategies and underwriting requirements in an attempt to manage the risks associated with these types of loans.

Below is a table showing the collateral distribution of our construction and development and commercial real estate loan portfolios as of December 31, 2007, 2006 and 2005.

	2007						2006						2005
	$ Amount			% to Total			$ Amount			% to Total			$ Amount			% to Total
	(Dollars in Thousands)
Construction and development:
Acquisition and development:
1-4 family residential	$	130,097			36.9	%	$	134,559			45.6	%	$	116,799			43.5	%
Commercial and multi-family		105,718			30.0	%		78,611			26.6	%		73,748			27.5	%
Construction
1-4 family residential spec		40,392			11.4	%		34,347			11.6	%		26,135			9.7	%
1-4 family residential pre-sold		1,604			0.4	%		1,930			0.6	%		7,086			2.6	%
1-4 family residential other		26,694			7.6	%		7,273			2.5	%		9,850			3.7	%
Commercial owner-occupied		5,685			1.6	%		6,685			2.3	%		13,551			5.0	%
Commercial not owner-occupied		17,497			5.0	%		8,831			3.0	%		10,008			3.7	%
Hotel/motel		12,909			3.7	%		7,683			2.6	%		1,371			0.5	%
Industrial		-			0.0	%		-			0.0	%		483			0.2	%
Multi-family properties		7,789			2.2	%		10,362			3.5	%		8,641			3.2	%
Special purpose property		2,337			0.6	%		1,050			0.4	%		735			0.3	%
Other		2,010			0.6	%		3,915			1.3	%		222			0.1	%
Total construction and development loans	$	352,732			100.0	%	$	295,246			100.0	%	$	268,629			100.0	%
% of total loans		38.3	%					36.0	%					35.7	%

	2007						2006						2005
	$ Amount			% to Total			$ Amount			% to Total			$ Amount			% to Total
Commercial real estate:
Owner-occupied:
Office	$	34,291			13.8	%	$	31,210			12.2	%	$	41,254			17.8	%
Retail		22,114			8.9	%		23,117			9.1	%		30,329			13.1	%
Other		34,263			13.8	%		38,151			14.9	%		44,971			19.4	%
Not owner-occupied:
Office		29,210			11.8	%		28,686			11.2	%		17,407			7.5	%
Retail		36,780			14.8	%		31,503			12.3	%		19,167			8.3	%
Other		27,418			11.0	%		26,072			10.2	%		14,487			6.3	%
Other:
Hotel/motel		11,399			4.6	%		16,131			6.3	%		17,812			7.7	%
Industrial		2,626			1.1	%		3,246			1.3	%		2,082			0.9	%
Multi-family properties		14,894			6.0	%		19,379			7.6	%		12,774			5.5	%
Special purpose property		34,876			14.0	%		37,938			14.9	%		30,574			13.2	%
Other		401			0.2	%		29			0.0	%		744			0.3	%
Total commercial real estate loans	$	248,272			100.0	%	$	255,462			100.0	%	$	231,601			100.0	%
% of total loans		26.9	%					31.1	%					30.8	%

29

A summary of loans from each market outstanding at December 31, 2007 is presented in the following table.

	South Georgia			North Georgia			Florida
	Market			Market			Market			Treasury			Total
	(Dollars in Thousands)
Commercial and financial	$	33,519		$	43,942		$	1,230		$	39		$	78,730
Agricultural (including loans secured by farmland)		29,398			4,398			8,065			-			41,861
Real estate - construction		78,079			218,479			55,662			512			352,732
Real estate – commercial		83,139			137,115			23,432			4,586			248,272
Real estate - residential		130,477			29,708			9,454			4,518			174,157
Installment loans to individuals and others		14,158			5,491			148			6,214			26,011
		368,770			439,133			97,991			15,869			921,763
Deferred loan fees and unearned interest, net		340			(367	)		(374	)		(13	)		(414	)
		369,110			438,766			97,617			15,856			921,349
Allowance for loan losses		(4,608	)		(8,085	)		(1,268	)		1,055			(12,906	)
	$	364,502		$	430,681		$	96,349		$	16,911		$	908,443

Maturities and Sensitivities of Loans to Changes in Interest Rates

A schedule of loans maturing, based on contractual terms, is presented in the following table for selected loan types.

As of December 31, 2007	Commercial & Financial		Agricultural		Real Estate - Construction		Real Estate - Commercial		Real Estate - Residential		All Other Loans		Total
	(Dollars in Thousands)
Due in one year or less	$	56,209	$	28,555	$	277,080	$	62,991	$	38,286	$	16,943	$	480,064
Due after one year through five years		21,065		12,032		72,206		141,262		77,312		7,091		330,968
Due after five years		1,456		1,274		3,446		44,019		58,559		1,977		110,731
Total	$	78,730	$	41,861	$	352,732	$	248,272	$	174,157	$	26,011	$	921,763
Of the above loans maturing after one year,
those with predetermined fixed rates	$	12,337	$	9,883	$	24,734	$	144,861	$	101,711	$	6,763	$	300,289
those with floating or adjustable rates		10,184		3,423		50,918		40,420		34,160		2,305		141,410
Total maturing after one year	$	22,521	$	13,306	$	75,652	$	185,281	$	135,871	$	9,068	$	441,699

We have historically preferred to offer loans to our commercial customers on a floating rate basis, usually tied to a prime interest rate.  This preference has contributed to our asset-sensitive interest rate risk position.  During 2006 and 2007, we moderated our preferences and began competing for more fixed-rate commercial and residential mortgages.  At December 31, 2007, approximately 63% of our loan portfolio will either mature or reprice within the next 12 months, an 8% decrease compared to 71% of our loan portfolio maturing or repricing within one year at December 31, 2005.

Nonaccrual, Past Due and Restructured Loans

The amount of nonperforming loans outstanding at the indicated dates is presented in the following table by category.

As of December 31,	2007		2006		2005		2004		2003
	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis	$	11,405	$	4,013	$	7,856	$	1,417	$	7,048
Accruing loans which are contractually past due 90 days or more as to principal or interest payments		37		34		2		11		-
Troubled debt restructurings not included above		-		-		-		2,045		1,168
Total nonperforming loans	$	11,442	$	4,047	$	7,858	$	3,473	$	8,216
Ratio of nonperforming loans to total loans (%)		1.24		0.49		1.04		0.54		1.53
Allowance for loan losses to nonperforming loans (%)		112.79		271.95		140.98		261.04		123.41

30

During the fourth quarter of 2007, a residential land loan was placed on nonaccrual status, which had an outstanding principal balance of $6.1 million, or 53% of our total nonperforming loans as of December 31, 2007.  Although the loan is secured by approximately 229 acres in northwest Florida, we have allocated a specific reserve of approximately $1.1 million to this impaired loan.

Our foreclosed assets increased $5.4 million in 2007, from $988,000 at December 31, 2006 to $6.4 million at December 31, 2007.  Due to economic conditions in the Atlanta area, some builders and developers have been unable to satisfy their obligations to us and we have foreclosed on their collateral.  However, we have decided to select certain parcels of foreclosed assets to hold rather than to force distressed sales of these properties in this market.  The foreclosed properties held at December 31, 2007 include $2.8 million in commercial properties, $2.6 million in residential homes and $1.0 million in residential lots.

At December 31, 2007, we had $17.7 million in total delinquent loans (loans past due 30 days or more) and still accruing interest, or 1.92% of total loans, representing a significant increase from 0.28% at December 31, 2006.

The accrual of interest on loans is discontinued when, in our judgment, the borrower may be unable to meet payments as they become due, unless the loan is well secured.  All interest accrued for loans that are placed on nonaccrual status is reversed against interest income.  Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received or until the loan is returned to accrual status.  For the year ended December 31, 2007, the gross interest income that would have been recorded if our nonperforming loans had been current in accordance with their original terms was approximately $753,000.  The amount of interest income on the above nonperforming loans that was included in net income for the year ended December 31, 2007 was approximately $34,000.  The allowance for loan losses related to our nonperforming loans amounted to approximately $2.0 million and $602,000 at December 31, 2007 and 2006, respectively.

Potential Problem Loans

In addition to our nonperforming loans discussed above, we have identified $12.6 million in potential problem loans as of December 31, 2007.  These are construction and land development loans that were past due 30 to 89 days at year-end.  Potential problem loans are loans where known credit problems of the borrowers causes management to doubt the ability of such borrowers to comply with the present repayment terms. This may result in disclosure of such loans as nonperforming in future periods.

Allowance For Loan Losses

At December 31, 2007, our allowance for loan losses as a percentage of total loans was 1.40%, compared to 1.34% at December 31, 2006.  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.  The lenders are primarily responsible for assigning a risk grade to each loan in their portfolio.  Their assessments are supplemented with independent reviews conducted by our internal audit department and external loan review consultants.  All loans in excess of $100,000 that have been identified for potential credit weakness are reviewed quarterly by a management committee, which further enhances the process for timely recognition of losses and for determining appropriate reserves.

We have a comprehensive methodology for determining the adequacy of our allowance for loan losses.  We perform an allowance analysis quarterly that is broken down into the following three components: (1) specific allowances for individual loans, (2) allowances for pools of loans identified by credit risk grades or delinquency status, and (3) general allowances for all other loans pooled by loan type.  A management committee has the responsibility for assessing the risk elements, determining the specific allowance valuations, and affirming the methodology used.  The Board of Directors reviews management’s assessment and affirms the amount recorded.

31

The first component of the allowance for loan loss methodology covers the measurement of specific allowances for individual impaired loans as required by Financial Accounting Standards Board (“FASB”) Statement No. 114, Accounting by Creditors for Impairment of a Loan.  Each loan relationship with amounts due in excess of $500,000 that has been identified for potential credit weakness is evaluated for impairment.  A loan is impaired when, based on current information and events, it is probable that the borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.  By definition, we consider all loans on nonaccrual status and all loans whose terms have been modified in a troubled debt restructuring as impaired.  If impairment is determined, a specific valuation is assessed on that loan based on realizable collateral values (if collateral dependent), discounted cash flows, or observable market values.  At December 31, 2007, we had $2.31 million in specific reserves on $16.30 million in individually evaluated impaired and other significant potential problem loans.  We did not have any specific reserves on any individually evaluated loans at December 31, 2006.

The second component of the allowance for loan loss methodology addresses all loans not individually evaluated for impairment but are either internally rated, criticized by our banking examiners, or past due 30 days or more.  The allowance factors are based on industry standards and supported by our own historical loss analysis.  At December 31, 2007, we had $4.00 million in general reserves allocated to $119.7 million rated and delinquent loans.  This is an increase from the $3.22 million reserved on a lower balance of $85.0 million rated and delinquent loans at December 31, 2006.  We had a significant increase in the less severe internal loan rating categories over the past 12 months.

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

· 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.

The quantitative risk factors used in determining these general reserves require a high degree of management judgment.  At December 31, 2007, we had $6.57 million in general reserves compared to $6.89 million one year ago.  This 4.7% decrease in the general reserve is primarily due to a re-allocation of the general reserves into the reserves for loans that are internally rated, criticized by our banking examiners, or past due 30 days or more.  The general reserves on construction and development loans increased 5.8% and our general reserves on residential real estate increased 71.4%.  These increases were offset by a 27.7% decrease in our general reserves on our commercial real estate loans and a 46.0% decrease in our general reserves on our commercial (non real estate) loans.

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.

32

Allocation of the Allowance for Loan Losses

We have allocated the allowance for credit losses according to the amount deemed to be reasonably necessary at each year end to provide for the possibility of losses being incurred within the categories of loans set forth in the table below.  The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.  The components of the allowance for credit losses for each of the past five years are presented below.

As of December 31,	2007					2006					2005					2004					2003
			Percentage of					Percentage of					Percentage of					Percentage of					Percentage of
			Loans in					Loans in					Loans in					Loans in					Loans in
			Category					Category					Category					Category					Category
			to Total					to Total					to Total					to Total					to Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
	(Dollars in Thousands)
Commercial and financial	$	229		8.6	%	$	972		8.1	%	$	2,670		6.7	%	$	1,167		8.9	%	$	1,570		9.8	%
Agricultural (including loans secured by farmland)		1,029		4.5	%		1,184		5.3	%		323		7.4	%		490		4.2	%		741		4.5	%
Real estate - construction		8,383		38.2	%		4,875		35.9	%		4,427		35.5	%		2,211		25.8	%		1,169		18.6	%
Real estate – commercial		2,008		27.0	%		2,276		31.1	%		2,280		30.8	%		3,514		37.0	%		3,793		37.8	%
Real estate - residential		815		18.9	%		547		17.4	%		208		16.9	%		1,337		21.1	%		1,557		23.9	%
Consumer and other loans		215		2.8	%		255		2.2	%		512		2.7	%		335		3.0	%		548		5.4	%
Unallocated		227					897					659					12					761
Total	$	12,906		100.0	%	$	11,006		100.0	%	$	11,079		100.0	%	$	9,066		100.0	%	$	10,139		100.0	%

Summary of Loan Loss Experience

The following table summarizes the activity in the allowance for loan losses, the average balance of loans outstanding, and the ratio of net losses experienced for each of the last five years.

For the Years Ended December 31,	2007		2006		2005			2004		2003
	(Dollars in Thousands)
Balance at beginning of year	$	11,006	$	11,079	$	9,066		$	10,139	$	12,097
Charge-offs:
Commercial and financial		66		115		31			511		365
Agricultural (including loans secured by farmland)		10		-		-			24		890
Real estate - construction		324		24		-			-		9
Real estate - commercial		257		314		7			1,228		443
Real estate - residential		65		208		43			467		401
Installment loans to individuals and other loans		146		160		200			343		1,011
		868		821		281			2,573		3,119
Recoveries:
Commercial and financial		55		118		111			117		673
Agricultural (including loans secured by farmland)		56		41		247			151		14
Real estate - construction		-		-		-			-		-
Real estate - commercial		28		335		394			268		137
Real estate - residential		108		87		148			52		43
Installment loans to individuals and other loans		121		167		205			312		294
		368		748		1,105			900		1,161
Net charge-offs (recoveries)		500		73		(824	)		1,673		1,958
Additions provided to the allowance charged to operations		2,400		-		1,189			600		-
Balance at end of year	$	12,906	$	11,006	$	11,079		$	9,066	$	10,139
Average balance of loans outstanding	$	883,334	$	792,278	$	706,052		$	569,858	$	540,787
Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year (%)		0.06		0.01		(0.12	)		0.29		0.36

33

Deposits

The following table summarizes average balances of deposits and related weighted average rates of interest paid for each of the three years presented.

For the Year Ended December 31,	2007					2006					2005
	Average Balance		Rate			Average Balance		Rate			Average Balance		Rate
	(Dollars in Thousands)
Noninterest-bearing demand	$	98,475		-		$	100,472		-		$	106,700		-
Interest-bearing demand		309,037		3.58	%		266,374		3.09	%		206,418		1.63	%
Savings		37,231		1.51	%		39,366		1.34	%		42,154		0.74	%
Retail time deposits < $100,000		300,618		5.06	%		265,627		4.37	%		221,861		3.29	%
Retail time deposits > $100,000		168,842		4.94	%		147,193		4.30	%		118,398		3.38	%
Brokered time deposits > $100,000		34,410		5.03	%		40,184		4.42	%		45,878		3.25	%
Total	$	948,613		3.89	%	$	859,216		3.31	%	$	741,409		2.22	%

Our total deposit portfolio grew $71.7 million, or 7.9%, in 2007.  Of this increase, $57.2 million is from time deposits.  The average rate paid on time deposits increased 67 basis points from 4.35% in 2006 to 5.02% in 2007.  As with most community banks, loan volume is the driver for the remainder of our balance sheet.  When we have strong loan demand, we will be more competitive for retail time deposits within our markets.  We do not intend to be aggressively competitive for retail time deposits in 2008.

The maturities of time deposits as of December 31, 2007 are summarized below.

	Retail time deposits < $100,000		Retail time deposits > $100,000		Brokered time deposits  > $100,000		Total time deposits
	(Dollars in Thousands)
Three months or less	$	69,729	$	51,562	$	9,522	$	130,813
Over three through six months		76,540		46,449		6,209		129,198
Over six months through twelve months		92,111		52,583		2,000		146,694
Over twelve months		74,342		37,068		17,868		129,278
Total	$	312,722	$	187,662	$	35,599	$	535,983

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 December 31, 2007, our liquidity position, which is an internally-calculated ratio of short-term funds available to short-term and potentially volatile liabilities, was 15.76%.  Our net noncore funding dependency ratio, which is the difference between regulatory defined non-core liabilities and short-term investments, divided by long-term assets, was 28.73%.  Our liquidity and funding policy provides that we maintain a liquidity position of greater than or equal to 15% and a net noncore funding dependency ratio of less than or equal to 35%.

34

Investment Portfolio

The Bank’s investment portfolio is another primary source of liquidity.  Maturities of securities provide a constant flow of funds that are available for cash needs.  In addition, mortgage-backed securities and securities with call provisions create cash flows earlier than the contractual maturities.  Estimates of prepayments on mortgage-backed securities and call provisions on Federal agency and state and municipals increase the forecasted cash flows from the investment portfolio.  The following table summarizes the differences between the contractual maturities and the expected available cash flows from our non-equity investments.

As of December 31, 2007	Contractual Maturities		Expected Cash Flows		Difference
	(Dollars in Thousands)
Due in one year or less	$	7,792	$	39,534	$	31,742
Due after one year through five years		97,725		87,383		(10,342	)
Due after five years through ten years		34,101		44,876		10,775
Due after ten years		46,657		14,482		(32,175	)
Total	$	186,275	$	186,275	$	-

Our liquidity from investments is somewhat limited since we pledge certain investments to secure public deposits and certain borrowing arrangements.  At December 31, 2007, approximately 53.1% of our $194.8 million investment portfolio was pledged as collateral to others.

Borrowings

As a result of an increase in our in-market deposits, we were able to reduce our reliance on brokered deposits to fund our loan growth in 2007.  Our brokered deposits decreased 5.7% from $37.8 million at December 31, 2006 to $35.6 million at December 31, 2007.  We also decreased our advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) by 4.3%, from $90.2 million at December 31, 2006 to $86.3 million at December 31, 2007.

On October 5, 2006, PAB Bankshares Capital Trust II (“PAB Trust II”) issued $10 million of Floating Rate Capital Securities, also referred to as “trust preferred securities”.  We formed PAB Trust II, a statutory business trust created under the laws of the State of Delaware, for the sole purpose of issuing the trust preferred securities and investing the proceeds in Floating Rate Junior Subordinated Debentures (the “Debentures”) issued by us.  The interest rates on both the trust preferred securities and the Debentures are reset quarterly at the three-month London Interbank Offered Rate (“LIBOR”) plus 1.63% (6.46% at December 31, 2007).  We entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of PAB Trust II’s obligations under the trust preferred securities.  PAB Trust II’s sole asset is the Debentures issued by us.  The Debentures will mature on December 31, 2036, but are callable at par at our option in whole or in part anytime on or after December 31, 2011.  The proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital under the risk-based capital guidelines established by the Federal Reserve.

On November 28, 2001, PAB Bankshares Capital Trust I (“PAB Trust I”) issued $10 million of Floating Rate Capital Securities, also referred to as “trust preferred securities”.  We formed PAB Trust I, a statutory business trust created under the laws of the State of Delaware, for the sole purpose of issuing the trust preferred securities and investing the proceeds in Floating Rate Junior Subordinated Debentures issued by us.  The interest rates on both the trust preferred securities and the debentures were reset semi-annually at LIBOR plus 3.75% with a rate cap of 11.0% through December 8, 2006.  We entered into agreements which, taken collectively, fully, irrevocably and unconditionally guaranteed, on a subordinated basis, all of PAB Trust I’s obligations under the trust preferred securities.  PAB Trust I’s sole asset were the debentures issued by us.  The debentures were scheduled to mature on December 8, 2031, but were callable at par at our option in whole or in part anytime on or after December 8, 2006.  We exercised our call option on the Debentures and redeemed the Debentures and the trust preferred securities on December 8, 2006.

During the first quarter of 2004, the Company adopted 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 Trust I and PAB Trust II.  The interpretation did not have a material effect on the Company’s financial condition or results of operations.

At December 31, 2007, we had $3.6 million in an available secured credit line with the FHLB and an additional $45.6 million in unsecured Fed Funds lines of credit available with correspondent banks.

35

Contractual Obligations

Summarized below are our contractual obligations as of December 31, 2007.

			1 year		Over 1		Over 3		More than
Contractual Obligations	Total		or less		to 3 years		to 5 years		5 years
	(Dollars in Thousands)
FHLB Advances	$	86,298	$	7,594	$	20,222	$	35,745	$	22,737
Operating Lease Obligations		1,593		367		497		321		408
Guaranteed Preferred Beneficial Interests in Debentures		10,310		-		-		-		10,310
	$	98,201	$	7,961	$	20,719	$	36,066	$	33,455

Off-Balance-Sheet Financing

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.  These financial instruments are included in the financial statements when funds are distributed or the instruments become payable.  We use the same credit policies in making these commitments as we do for on-balance-sheet instruments.  Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented by the contractual amount of those instruments. At December 31, 2007, we had outstanding commitments to extend credit through open lines of credit of approximately $154.1 million and outstanding standby letters of credit of approximately $4.2 million.

In June 2006, we entered into a $50 million notional amount, 3-year, 8.25% Prime rate floor contract to hedge against interest rate risk in a declining rate environment.  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 December 31, 2007 was not material.

Commitments of Capital

At December 31, 2007, there were no binding commitments for material capital expenditures outstanding.

Stockholders’ Equity

We are required to comply with capital adequacy standards established by our regulatory agencies.  See the section titled “Capital Adequacy” under the caption “Supervision and Regulation” in Item 1 of this Report for more information on the regulatory capital adequacy standards.

The following table summarizes our consolidated regulatory capital ratios at December 31, 2007, 2006 and 2005.

										Minimum
										Regulatory
	2007			2006			2005			Requirement
Total Capital to Risk Weighted Assets		11.3	%		12.3	%		12.4	%		8.0	%
Tier 1 Capital to Risk Weighted Assets		10.0	%		11.1	%		11.1	%		4.0	%
Tier 1 Capital to Average Assets (Leverage Ratio)		8.5	%		9.1	%		9.2	%		4.0	%

Total stockholders’ equity increased $2.4 million, or 2.5%, during 2007.  Stockholders’ equity increased primarily from the retention of $5.4 million in earnings (net income of $10.8 million less $5.4 million in dividends paid), other comprehensive income of $1.8 million and the issuance of $691,000 in stock, offset by stock buy-back transactions of $5.9 million in 2007.  As a percentage of total assets, stockholders’ equity represented 8.2% at the end of 2007, compared to 8.5% at the end of 2006, as the pace of asset growth slightly exceeded the net increase in equity.

36

RESULTS OF OPERATIONS

Net income for the year ended December 31, 2007 was $10.8 million, or $1.13 per diluted share, as compared to $13.7 million, or $1.41 per diluted share, during the same period in 2006.  The $2.9 million, or 21.5%, decrease in net income is the net result of a $1.5 million decrease in net interest income (or $1.4 million on a taxable-equivalent basis), a $2.4 million increase in the provision for loan losses and a $1.4 million increase in other expenses, offset by a $611,000 increase in other income and a $1.8 million decrease in income tax expense.  The impact on our year to date earnings from our three de novo branches and the loan production office opened between October 2006 and February 2007 was approximately $1.5 million, or approximately $0.16 per diluted share.  Our return on average assets (“ROA”) and return on average equity (“ROE”) for the year ended December 31, 2007 were 0.93% and 11.00%, respectively, compared to a 1.29% ROA and a 14.99% ROE for 2006.

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

Net Interest Income

The primary component of a financial institution’s profitability is net interest income, or the difference between the interest income earned on assets, primarily loans and investments, and interest paid on liabilities, primarily deposits and other borrowed funds.  Our net interest income for 2007, on a tax equivalent basis, decreased by $1.39 million, or 3.2%, over 2006.  Interest income (on a tax equivalent basis) increased $7.27 million, or 9.3%, and interest expense increased by $8.65 million, or 25.8%, during 2007.  The growth in interest income is the result of a $91.9 million increase in the average balance of our earning assets and a one basis point improvement in the average yield on those earning assets during the year, from 7.77% in 2006 to 7.78% in 2007.  The increase in interest expense is the result of a $93.6 million increase in the average balance of our interest-bearing liabilities and a 52 basis point rise in the average rate paid on those interest-bearing liabilities from 3.87% in 2006 to 4.39% in 2007.

Our net interest income for 2006, on a tax equivalent basis, increased by $5.31 million, or 13.6%, over 2005.  Interest income (on a tax equivalent basis) increased $18.47 million, or 31.0%, and interest expense increased by $13.16 million, or 64.5%, during 2006.  The growth in interest income was the result of a $114.6 million increase in the average balance of our earning assets and a 108 basis point improvement in the average yield on those earning assets during the year, from 6.69% in 2005 to 7.77% in 2006.  The increase in interest expense was the result of a $118.5 million increase in the average balance of our interest-bearing liabilities and a 115 basis point rise in the average rate paid on those interest-bearing liabilities from 2.72% in 2005 to 3.87% in 2006.

The net interest margin is net interest income expressed as a percentage of average earning assets.   Our net interest margin decreased from 4.43% in 2006 to 3.93% in 2007, a 50 basis point decline.  The reduction in short-term interest rates during the third and fourth quarters of 2007 caused our earning assets to re-price downwards faster than our interest-bearing liabilities re-priced downwards.  Our ability to improve our net interest margin in 2008 is not expected considering the interest rate environment and narrowing spreads on our earning assets.

Provision for Loan Losses

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses.  Through the provision, we maintain an allowance for loan losses that we believe is adequate to absorb losses inherent in our loan portfolio.  However, future additions to the allowance may be necessary based on growth in the loan portfolio, changes in economic conditions and other internal and external environmental factors.  In addition, various regulatory agencies, as an integral part of their examination procedures, periodically review our allowance for loan losses.  Based on their judgments about information available to them at the time of their examination, such agencies may require us to recognize additions to the allowance for loan losses.

For the year ended December 31, 2007, we recorded $2.4 million as a provision for loan losses, while we did not incur a provision for loan losses in 2006.  The increase is due to a growing loan portfolio, as well as a significant increase in the level of nonperforming loans at December 31, 2007.  We recorded $868,000 in loan charge-offs against the allowance for loan losses in 2007, a 5.7% increase compared to $821,000 in charge-offs in 2006.  However, we recovered $368,000 in previously charged-off loans during 2007, bringing our net charge-offs to $500,000, or 0.06% of average loans, for the year.

37

Noninterest Income

The following table summarizes noninterest income during the last three years.

For the Year Ended December 31,	2007					2006						2005
			Percentage						Percentage
			Change						Change
	Amount		2007 vs. 2006			Amount			2006 vs. 2005			Amount
	(Dollars In Thousands)
Service charges on deposit accounts	$	3,617		-6.7	%	$	3,875			-3.5	%	$	4,017
Mortgage origination fees		405		-18.8	%		499			-17.0	%		601
Brokerage commissions and fees		13		30.0	%		10			-23.1	%		13
ATM / debit card fee income		643		14.6	%		561			19.4	%		470
Other commissions and fees		221		-10.2	%		246			3.8	%		237
Securities transactions, net		313		-157.7	%		(542	)		4827.3	%		(11	)
Earnings of bank-owned life insurance		406		3.0	%		394			14.5	%		344
Gain (loss) on disposal / write-down of assets		81		252.2	%		23			-129.1	%		(79	)
Other noninterest income		292		-7.0	%		314			42.1	%		221
Total Noninterest Income	$	5,991		11.4	%	$	5,380			-7.4	%	$	5,813

Noninterest income increased 11.4% in 2007.  As a percentage of average assets, noninterest income, excluding securities transactions and other non-recurring gains and losses, has been 0.49%, 0.55% and 0.62% for each of the last three years ended December 31, 2007, 2006 and 2005, respectively.

Service charges on deposit accounts have declined over the past three years due to competitive pricing issues and the introduction of a free checking product with no monthly service fees.  Our NSF fees have also gradually decreased over the past few years, while overdraft fees have remained constant as we continue to offer overdraft protection on many of our deposit products.

Mortgage origination fees have decreased since 2005 due to a decrease in refinancing activity because of the interest rate environment and due to turnover in mortgage originators during 2006 and 2007.

Fee income from ATM and debit cards increased in 2006 and 2007 as the volume of point-of-sale transactions has continued to increase from previous years.  We also placed three additional ATMs in service during the fourth quarter of 2006.  However, we are offering a no-fee ATM deposit product in selective markets for competitive reasons, which may reduce our ATM fee income opportunities going forward.

We incurred a net $313,000 gain on security transactions during 2007, compared to a $542,000 net loss in 2006.  During 2007, we recorded a $372,000 gain on the sale of equity securities and a $59,000 net loss on the sale of various debt securities.  During the first quarter of 2006, we sold $12.0 million in lower-yielding, cash flow bonds and replaced them with higher-yielding, call protected bonds to protect us in a declining interest rate environment.  During the third quarter of 2006, we sold a $5.0 million 4.0% Agency bond and replaced it with a 6.0% Agency bond.  We incurred a net loss of $707,000 on these large securities transactions that we expect to recover in the form of an increase in interest income over the next few years.  These losses were partially offset by a $167,000 gain on sale of equity securities during the fourth quarter of 2006.

We recorded a net gain on the sale of foreclosed assets in 2007 of $94,000, offset by a write-down of obsolete equipment of $13,000.  This is compared to a net gain on the sale of foreclosed assets in 2006 of $23,000.  In 2005, the $79,000 loss on disposal of assets was due primarily to the write-down of obsolete equipment.

38

Noninterest Expense

The following table summarizes noninterest expense during the last three years.

For the Year Ended December 31,	2007						2006						2005
				Percentage						Percentage
				Change						Change
	Amount			2007 vs. 2006			Amount			2006 vs. 2005			Amount
	(Dollars In Thousands)
Salaries and wages	$	16,431			6.7	%	$	15,396			15.6	%	$	13,322
Deferred loan cost		(1,969	)		11.0	%		(1,774	)		10.3	%		(1,609	)
Employee benefits		4,119			-6.3	%		4,396			29.4	%		3,398
Net occupancy expense of premises		2,374			18.4	%		2,005			2.1	%		1,963
Furniture and equipment expense		2,279			3.4	%		2,203			5.8	%		2,082
Advertising and business development		626			9.2	%		573			5.9	%		541
Supplies and printing		463			-6.7	%		496			-5.9	%		527
Telephone and internet charges		635			34.8	%		471			28.3	%		367
Postage and courier		645			13.4	%		569			-6.4	%		608
Legal and accounting fees		559			25.1	%		447			7.5	%		416
Consulting fees		209			-31.9	%		307			-25.7	%		413
Director fees and expenses		398			-8.5	%		435			5.6	%		412
Service charges and fees		622			23.4	%		504			0.0	%		504
Other noninterest expense		2,199			2.8	%		2,139			16.6	%		1,834
Total Noninterest Expense	$	29,590			5.1	%	$	28,167			13.7	%	$	24,778

Noninterest expense increased 5.1% in 2007, from $28.2 million in 2006 to $29.6 million in 2007.  As a percentage of average assets, noninterest expense was 2.54%, 2.64% and 2.61% in 2007, 2006 and 2005, respectively.  Our overhead efficiency ratio, a measure of noninterest expense as a percentage of net interest income plus other noninterest income, increased from 55.88% in 2006 to 60.74% in 2007.

The 6.7% increase in salaries and wages is the result of new hires, annual raises and promotions.  We increased our number of full time employees by 1.6%, from 311 at December 31, 2006 to 316 at December 31, 2007.  Deferred loan cost, which is a credit against salaries and wages, increased 11.0% from 2006 and resulted in a decrease in expense reported during 2007, compared to 2006.  The increase in the deferral of loan costs is due to an increase in most standard loan costs during 2007.

Employee benefits decreased due to an 8% decrease in health insurance costs and a 71% decrease in employee relocation and other qualified moving expenses.  During 2006, we expensed non-recurring moving expenses for several members of our management team.

Occupancy expense and furniture and equipment expense increased significantly in 2007 due to a 53% increase in lease expense for additional office space and equipment.  We also incurred an 18% increase in real and personal property taxes paid during 2007, compared to 2006.

Telephone and internet charges continued to increase significantly during 2007 due to the opening of new offices, additional lines needed for data transmission, the addition of redundant communication lines for contingencies and increased telecommunications rates and fees.

The 25.1% increase in legal and accounting fees is related to a 67% increase in our legal consultation and litigation fees.  Our accounting and audit fees only increased 5% from 2006.

Consulting fees continued to decrease in 2007, due primarily to the reduction of pre-employment and recruiting costs paid to outside consultants and recruiters.  During 2006, the Company employed a recruiter to work exclusively for the Company.

The 8.5% decrease in director fees is attributable to the reduction of our Board of Directors from 14 to 13 members in May 2007 and fewer committee meetings throughout the year.

39

Income Taxes

The provision for income tax expense as a percentage of pre-tax income was 34.5%, 35.3% and 33.8% for 2007, 2006 and 2005, respectively.  Since the first quarter of 2006, we have invested in several affordable housing projects to receive State of Georgia low income housing tax credits to help reduce our state income tax expense.  There is also a difference between the effective rate and the statutory federal rate of 35% due to income earned on tax-exempt municipalities, earnings on the cash value of our bank-owned life insurance and state income taxes.  During 2006, we incurred additional Georgia income tax expense as a result of filing unconsolidated 2005 tax returns with our banking subsidiary, The Park Avenue Bank.

Fourth Quarter Results

For the fourth quarter of 2007, our net income was $1.6 million, or $0.18 per diluted share, compared to net income of $3.3 million, or $0.34 per share, posted in the fourth quarter of 2006.  In the fourth quarter of 2007, we provided $1.8 million to the allowance for loan losses, while we did not record a provision for loan losses in the fourth quarter of 2006.  Our net interest margin for the fourth quarter of 2007 was 3.61% compared to 4.09% in 2006.  The average yield on earning assets decreased 29 basis points to 7.48% in the fourth quarter of 2007 from 7.77% in 2006.  However, the average rate paid on interest-bearing liabilities increased 13 basis points, from 4.24% in 2006 to 4.36% in the fourth quarter of 2007.

Impact of Inflation

Inflation impacts the growth in total assets in the banking industry and causes a need to increase equity capital at higher than normal rates to meet capital adequacy requirements.  We cope with the effects of inflation through managing our interest rate sensitivity gap position, by periodically reviewing and adjusting our pricing of services to consider current costs, and through managing our dividend payout policy relative to our level of income.  There has been minimal inflation experienced in the last three years.

Critical Accounting Policies

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

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of losses inherent in the existing loan portfolio.  The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries.  The allowance for loan losses is determined based on management’s assessment of several factors including, but not limited to, reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on segments of the loan portfolio, historical loan loss experiences and the level of classified and nonperforming loans.

40

Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan.  In measuring the fair value of the collateral, management uses assumptions (e.g., discount rate) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties.

Management’s assessment is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.  Changes in various internal and external environmental factors including, but not limited to, the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the allowance for loan losses and the associated provision for loan losses.  Should these environmental factors change, a different amount may be reported for the allowance for loan losses and the associated provision for loan losses.

Estimates of Fair Value

The estimation of fair value is significant to a number of the Company’s assets, including, but not limited to, investment securities, goodwill, other real estate owned, and other repossessed assets.  These are all recorded at either fair value or at the lower of cost or fair value.  Fair values are volatile and may be influenced by a number of factors.  Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates.  Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

Fair values for most investment securities are based on quoted market prices.  If quoted market prices are not available, fair values are based on the quoted prices of similar instruments.  The fair values of other real estate owned are typically determined based on appraisals by third parties, less estimated costs to sell.

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

Recent Accounting Pronouncements

In management’s opinion, there are no recent accounting pronouncements that have had a material impact on PAB’s earnings or financial position as of or for the year ended December 31, 2007.  For more detailed disclosure on recent accounting developments, see Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rates play a major part in the net interest income of a financial institution.  The sensitivity to rate changes is known as “interest rate risk.”  The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income.  As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as gap management.  It is our policy to maintain a gap ratio in the one-year time horizon between 0.80 and 1.20.  At December 31, 2007, our one-year management-adjusted gap ratio of 0.98 was within our policy guidelines.  Although we are now showing a slightly liability-sensitive balance sheet gap position in the one-year time horizon, we still consider ourselves asset-sensitive relative to the impact on our earnings in a changing rate environment as evidenced by our three-month gap ratio of 1.13 at year-end.

We have reduced the level of asset-sensitivity on the Company’s balance sheet in an effort to better mitigate our interest rate risk in an interest rate decline.  We have accomplished this by conscientiously lengthening the duration of our earning assets and shortening the duration of our deposits and other borrowings.  Also, in June 2006, we entered into a $50 million 3-year 8.25% Prime rate floor contract to further hedge our interest rate risk in a declining interest rate environment.

41

The table below has two measures of gap: regulatory and management-adjusted.  The regulatory gap considers only contractual maturities or repricings.  The management-adjusted gap 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 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.

Cumulative Repricing Gap Analysis
	3-Month		6-Month			1-Year
	(Dollars in Thousands)
Regulatory Defined
Rate Sensitive Assets (RSA)	$	572,541	$	604,014		$	686,218
Rate Sensitive Liabilities (RSL)		536,090		673,616			826,839
RSA minus RSL (Gap)	$	36,451	$	(69,602	)	$	(140,621	)
Gap Ratio (RSA/RSL)		1.07		0.90			0.83
Management-Adjusted
Rate Sensitive Assets (RSA)	$	614,721	$	685,701		$	837,686
Rate Sensitive Liabilities (RSL)		543,327		687,465			852,246
RSA minus RSL (Gap)	$	71,394	$	(1,764	)	$	(14,560	)
Gap Ratio (RSA/RSL)		1.13		1.00			0.98

We use simulation analysis to monitor changes in net interest income due to changes in market interest rates.  The simulation of rising, declining, and flat interest rate scenarios allows us to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings.  The analysis of the impact on net interest income over a twelve-month period is subjected to increases or decreases in market rates on net interest income and is monitored on a quarterly basis.  Our policy states that net interest income cannot be reduced by more than 10% using this analysis.  As of December 31, 2007, the simulation model projected net interest income would increase 2.00% over the next year if market rates immediately rose by 200 basis points and the model projected net interest income to decrease 8.37% over the next year if market rates immediately fell by 200 basis points.  These projections are a significant change from a 13.54% increase projected at December 31, 2005 if market rates had increased by 200 basis points and a 15.37% decrease projected at December 31, 2005 if market rates had fallen by 200 basis points.  The lower volatility in our results is due primarily to our efforts to neutralize our asset-sensitive balance sheet mix, to improve our asset/liability modeling with updated behavioral assumptions for repricing and prepayment speeds and to implement an off-balance sheet derivative hedging program.

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

Market	Effect on Net Interest Income
Rate Change	Gradual	Immediate
+300 bps	4.29%	3.08%
+200 bps	3.43%	2.00%
+100 bps	1.23%	0.58%
-100 bps	-3.51%	-4.02%
-200 bps	-6.37%	-8.37%
-300 bps	-7.48%	-13.77%

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Financial Summary for 2007 and 2006

(The sum of the quarterly results presented may not agree with the results for the full year due to rounding.)

	Quarterly Period Ended
	March 31		June 30		September 30		December 31
Year ended December 31, 2007:
Interest income	$	20,451	$	21,345	$	21,866	$	21,013
Interest expense		9,783		10,386		11,084		10,956
Net interest income		10,668		10,959		10,782		10,057
Provision for loan losses		-		200		400		1,800
Net interest income after provision for loan losses		10,668		10,759		10,382		8,257
Other income		1,478		1,359		1,471		1,682
Other expenses		7,470		7,209		7,471		7,440
Income before income taxes		4,676		4,909		4,382		2,499
Income tax		1,612		1,688		1,523		858
Net income	$	3,064	$	3,221	$	2,859	$	1,641
Basic earnings per share	$	0.32	$	0.34	$	0.30	$	0.18
Diluted earnings per share	$	0.32	$	0.33	$	0.30	$	0.18
Year ended December 31, 2006:
Interest income	$	17,848	$	19,306	$	20,173	$	20,239
Interest expense		6,956		8,006		8,936		9,658
Net interest income		10,892		11,300		11,237		10,581
Provision for loan losses		-		-		-		-
Net interest income after provision for loan losses		10,892		11,300		11,237		10,581
Other income		1,041		1,557		1,204		1,578
Other expenses		6,756		7,182		7,000		7,230
Income before income taxes		5,177		5,675		5,441		4,929
Income tax		1,865		2,083		1,908		1,632
Net income	$	3,312	$	3,592	$	3,533	$	3,297
Basic earnings per share	$	0.35	$	0.38	$	0.37	$	0.35
Diluted earnings per share	$	0.34	$	0.37	$	0.36	$	0.34

43

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of PAB Bankshares, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting.  This internal control system has been designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of the Company’s published financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

The management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.  To make this assessment, we used the criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our assessment, we believe that, as of December 31, 2007, the Company’s internal control over financial reporting was effective.

Our independent auditors have issued an attestation report on our assessment of the Company’s internal control over financial reporting.  A copy of the auditor’s attestation report is included in this Annual Report on Form 10-K.

PAB BANKSHARES, INC.
/s/ M. Burke Welsh, Jr	/s/ Donald J. Torbert, Jr.
M. Burke Welsh, Jr.	Donald J. Torbert, Jr.
President and	Executive Vice President and
Chief Executive Officer	Chief Financial Officer
February 26, 2008	February 26, 2008
Date	Date

44

Certified Public Accountants, LLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

PAB Bankshares, Inc.

Valdosta, Georgia

We have audited PAB Bankshares, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  PAB Bankshares, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting.”  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

45

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PAB Bankshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PAB Bankshares, Inc. and subsidiaries, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows of PAB Bankshares, Inc., and our report dated, February 18, 2008, expressed an unqualified opinion.

/s/ Mauldin & Jenkins, LLC

Albany, Georgia

February 18, 2008

46

Certified Public Accountants, LLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

PAB Bankshares, Inc.

Valdosta, Georgia

We have audited the accompanying balance sheets of PAB Bankshares, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PAB Bankshares, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PAB Bankshares and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based oncriteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 18, 2008, expressed an unqualified opinion.

/s/ Mauldin & Jenkins, LLC

Albany, Georgia

February 18, 2008

47

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

	2007			2006
ASSETS
Cash and balances due from banks	$	29,451,700		$	26,712,252
Interest-bearing deposits in other banks		393,276			550,307
Federal funds sold		559,444			41,612,728
Investment securities		194,794,481			184,092,858
Loans		921,348,906			820,304,092
Allowance for loan losses		(12,905,938	)		(11,006,097	)
Net loans		908,442,968			809,297,995
Premises and equipment, net		20,177,671			20,779,587
Goodwill		5,984,604			5,984,604
Cash value of bank-owned life insurance policies		11,881,384			11,474,964
Foreclosed assets		6,360,258			987,814
Other assets		20,625,156			19,310,677
Total assets	$	1,198,670,942		$	1,120,803,786
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	89,423,571		$	100,910,593
Interest-bearing demand and savings		354,742,862			328,828,309
Time		535,982,585			478,744,090
Total deposits		980,149,018			908,482,992
Federal funds purchased and securities sold under agreements to repurchase		16,175,370			7,648,664
Advances from the Federal Home Loan Bank of Atlanta		86,297,705			90,190,702
Guaranteed preferred beneficial interests in debentures (trust preferred securities)		10,310,000			10,310,000
Other liabilities		8,062,877			8,855,694
Total liabilities		1,100,994,970			1,025,488,052
Commitments and contingencies
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; 9,223,217 and 9,504,969 shares issued and outstanding		1,217,065			1,217,065
Additional paid-in capital		22,792,940			27,584,852
Retained earnings		72,822,852			67,476,178
Accumulated other comprehensive income (loss)		843,115			(962,361	)
Total stockholders' equity		97,675,972			95,315,734
Total liabilities and stockholders' equity	$	1,198,670,942		$	1,120,803,786

See accompanying notes to consolidated financial statements.

48

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007		2006			2005
Interest income:
Interest and fees on loans	$	74,060,094	$	67,353,896		$	51,804,646
Interest and dividends on investment securities:
Taxable		8,210,696		7,718,646			5,580,856
Nontaxable		1,214,213		922,097			413,026
Other interest income		1,190,678		1,571,446			1,572,029
Total interest income		84,675,681		77,566,085			59,370,557
Interest expense:
Interest on deposits		36,887,599		28,455,480			16,475,739
Interest on Federal Home Loan Bank advances		4,068,962		3,847,529			3,053,155
Interest on other borrowings		1,253,271		1,252,427			868,954
Total interest expense		42,209,832		33,555,436			20,397,848
Net interest income		42,465,849		44,010,649			38,972,709
Provision for loan losses		2,400,000		-			1,188,600
Net interest income after provision for loan losses		40,065,849		44,010,649			37,784,109
Other income:
Service charges on deposit accounts		3,616,552		3,874,908			4,017,244
Other fee income		1,282,167		1,315,441			1,320,987
Securities transactions, net		312,988		(542,253	)		(11,464	)
Other noninterest income		779,560		731,544			485,783
Total other income		5,991,267		5,379,640			5,812,550
Other expenses:
Salaries and employee benefits		18,581,881		18,017,713			15,110,181
Occupancy expense of premises		2,373,917		2,004,599			1,962,923
Furniture and equipment expense		2,278,600		2,202,592			2,081,575
Other noninterest expense		6,355,767		5,942,224			5,623,480
Total other expenses		29,590,165		28,167,128			24,778,159
Income before income tax expense		16,466,951		21,223,161			18,818,500
Income tax expense		5,681,236		7,487,944			6,365,777
Net income	$	10,785,715	$	13,735,217		$	12,452,723
Earnings per common share:
Basic	$	1.14	$	1.45		$	1.31
Diluted	$	1.13	$	1.41		$	1.28

See accompanying notes to consolidated financial statements.

49

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006			2005
Net income	$	10,785,715		$	13,735,217		$	12,452,723
Other comprehensive income (loss):
Unrealized gain on cash flow hedge during the period,net of tax of $281,360; $60,703; and $0		506,137			129,124			-
Unrealized holding gains (losses) on securities available for sale arising during the period, net of tax (benefit) of $809,190; ($123,554); and ($504,222)		1,502,781			(229,456	)		(923,493	)
Reclassification adjustment for (gains) losses on securities available for sale included in net income, net of tax (benefit) of $109,546; ($189,789); and ($4,012)		(203,442	)		352,464			7,452
		1,805,476			252,132			(916,041	)
Comprehensive income	$	12,591,191		$	13,987,349		$	11,536,682

See accompanying notes to consolidated financial statements.

50

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

												Accumulated
						Additional						Other
	Common Stock					Paid-in			Retained			Comprehensive
	Shares			Stated Value		Capital			Earnings			Income (Loss)			Total
Balance, December 31, 2004		9,495,320		$	1,217,065	$	29,143,017		$	50,938,254		$	(298,452	)	$	80,999,884
Net income		-			-		-			12,452,723			-			12,452,723
Other comprehensive loss		-			-		-			-			(916,041	)		(916,041	)
Cash dividends declared,$.475 per share		-			-		-			(4,518,798	)		-			(4,518,798	)
Stock acquired and cancelled under stock repurchase plan		(87,483	)		-		(1,468,714	)		-			-			(1,468,714	)
Stock options exercised		61,180			-		451,729			-			-			451,729
Balance, December 31, 2005		9,469,017			1,217,065		28,126,032			58,872,179			(1,214,493	)		87,000,783
Net income		-			-		-			13,735,217			-			13,735,217
Other comprehensive income		-			-		-			-			252,132			252,132
Cash dividends declared,$.54 per share		-			-		-			(5,131,218	)		-			(5,131,218	)
Stock acquired and cancelled under stock repurchase plan		(124,559	)		-		(2,503,298	)		-			-			(2,503,298	)
Stock-based compensation		-			-		290,245			-			-			290,245
Stock options exercised		160,511			-		1,671,873			-			-			1,671,873
Balance, December 31, 2006		9,504,969			1,217,065		27,584,852			67,476,178			(962,361	)		95,315,734
Net income		-			-		-			10,785,715			-			10,785,715
Other comprehensive income		-			-		-			-			1,805,476			1,805,476
Cash dividends declared,$.58 per share		-			-		-			(5,439,041	)		-			(5,439,041	)
Stock acquired and cancelled under stock repurchase plan		(344,492	)		-		(5,894,104	)		-			-			(5,894,104	)
Stock-based compensation		-			-		410,851			-						410,851
Stock options exercised		62,740			-		691,341			-			-			691,341
Balance, December 31, 2007		9,223,217		$	1,217,065	$	22,792,940		$	72,822,852		$	843,115		$	97,675,972

See accompanying notes to consolidated financial statements.

51

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,785,715		$	13,735,217		$	12,452,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		1,716,530			1,668,092			2,190,391
Provision for loan losses		2,400,000			-			1,188,600
Provision for deferred taxes		(644,268	)		303,268			(940,628	)
Net realized (gain) loss on securities transactions		(312,988	)		542,253			11,464
Net (gain) loss on disposal or write down of assets		(70,860	)		(26,048	)		79,309
Stock-based compensation expense		410,851			290,245			-
Increase in cash value of bank-owned life insurance		(406,420	)		(394,242	)		(343,518	)
Increase (decrease) in deferred compensation accrual		(226,951	)		223,709			(14,727	)
Decrease in retirement and severance accruals		(159,799	)		(232,441	)		(357,508	)
(Increase) decrease in interest receivable		8,761			(1,372,405	)		(1,762,178	)
Increase in interest payable		78,775			397,514			460,375
Increase in taxes receivable		(957,764	)		(730,032	)		(1,149,243	)
Net change in other assets and other liabilities		(485,914	)		254,635			622,312
Net cash provided by operating activities		12,135,668			14,659,765			12,437,372
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in other banks		157,031			2,527,593			(2,093,163	)
(Increase) decrease in federal funds sold		41,053,284			966,121			(9,962,728	)
Purchase of debt securities		(43,392,095	)		(69,673,261	)		(59,463,549	)
Proceeds from sales and calls of debt securities		22,537,742			22,802,388			12,794,845
Proceeds from maturities and paydowns of debt securities		11,734,367			20,456,192			16,447,139
Purchase of equity securities		(65,858	)		(887,783	)		(802,300	)
Redemption of equity securities		886,151			338,600			418,800
Net increase in loans		(108,962,052	)		(74,742,227	)		(106,135,736	)
Purchase of premises and equipment		(1,243,446	)		(5,344,196	)		(1,490,608	)
Proceeds from disposal of fixed assets and foreclosed assets		2,234,053			6,398,818			164,059
Net cash used in investing activities		(75,060,823	)		(97,157,755	)		(150,123,241	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		71,666,026			92,802,250			158,130,306
Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements		8,526,706			1,331,529			(7,850,963	)
Advances from Federal Home Loan Bank		47,500,000			45,000,000			38,318,600
Payments on advances from Federal Home Loan Bank		(51,392,997	)		(44,852,896	)		(47,276,127	)
Dividends paid		(5,432,369	)		(4,984,149	)		(4,284,703	)
Proceeds from the exercise of stock options		691,341			1,671,873			451,729
Proceeds from the issuance of trust preferred securities		-			10,000,000			-
Redemption of trust preferred securities		-			(10,000,000	)		-
Purchase of cash flow hedge derivative instrument		-			(451,250	)		-
Repurchase of preferred stock in REIT subsidiaries		-			-			(8,000	)
Liquidating distribution of preferred stock in REIT subsidiaries		-			-			(107,000	)
Acquisition of stock under stock repurchase plans		(5,894,104	)		(2,503,298	)		(1,468,714	)
Net cash provided by financing activities		65,664,603			88,014,059			135,905,128

52

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007		2006		2005
Net increase (decrease) in cash and balances due from banks	$	2,739,448	$	5,516,069	$	(1,780,741	)
Cash and balances due from banks at beginning of period		26,712,252		21,196,183		22,976,924
Cash and balances due from banks at end of period	$	29,451,700	$	26,712,252	$	21,196,183
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	42,131,057	$	33,157,922	$	19,937,473
Taxes	$	5,770,337	$	7,532,047	$	8,455,648
NONCASH INVESTING AND FINANCING TRANSACTIONS
(Increase) decrease in unrealized losses on securities available for sale	$	1,998,983	$	189,243	$	(1,416,251	)
Increase in unrealized gain on cash flow hedge	$	787,496	$	189,827	$	-
Transfer of loans to foreclosed assets	$	7,417,079	$	7,303,184	$	170,958

See accompanying notes to consolidated financial statements.

53

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.  The following is a listing of the Bank’s offices as of December 31, 2007:

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

The Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business trust.  This non-operating subsidiary was created in 2006 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company, all of which are described more fully in Note 9.  The Company previously owned PAB Bankshares Capital Trust I, a Delaware statutory business trust, which was created in 2001 for the same purpose, and was dissolved in December 2006.  The Company has determined that Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (Revised December 2003), Consolidation of Variable Interest Entities requires deconsolidation of both PAB Bankshares Capital Trust I and II.

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of Presentation and Accounting Estimates

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 accordance 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.

Cash and Balances Due from Banks and Cash Flows

For purposes of reporting cash flows, cash and balances due from banks include cash on hand, cash items in process of collection and amounts due from banks.  Cash flows from loans, federal funds sold, interest bearing deposits in other banks, federal funds purchased and securities sold under repurchase agreements and deposits are reported net.  At various times throughout the year, cash balances held at other financial institutions will exceed federally insured limits.

Interest Bearing Deposits in Other Banks

Interest-bearing deposits in other banks are primarily overnight funds or funds which mature within one year and are carried at cost.

Investment Securities

All debt securities are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss), net of the related deferred tax effect.  Equity securities are comprised of marketable equity securities recorded at fair value, restricted equity securities, which are the Bank’s required investments in the Federal Reserve Bank of Atlanta and the Federal Home Loan Bank of Atlanta, recorded at cost, and other equity securities, which consists of an investment in the common stock of a non-publicly traded correspondent bank.  The restricted and other equity securities without readily determinable fair values are periodically evaluated for impairment.  At December 31, 2007, there were no known events that have occurred to require an impairment evaluation for these investments.

The amortization of purchase premiums and accretion of discounts are recognized in interest income using the interest method over the lives of the securities.  Realized gains and losses on securities transactions, determined using the specific identification method, are included in earnings on the settlement date.  Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.  In determining other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans are reported at their outstanding principal balances less unearned income, net deferred fees and costs on originated loans, and the allowance for loan losses.  Interest income is accrued on the outstanding principal balance.  Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment to the related loan yield over the life of the loan using the interest method except for loans which provide no scheduled payment terms or revolving lines of credit, which are recognized on the straight-line method.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans, continued

The accrual of interest on loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.  All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral.  Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loan is returned to accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement.  Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.  The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.  Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense.  Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses in the loan portfolio.  The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, various internal and external environmental factors, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  While management uses 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 risk factors.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

Premises and Equipment

Land is carried at cost.  Buildings and equipment are stated at cost less accumulated depreciation computed principally by the straight-line method over the estimated useful lives of the assets, ranging from 10-40 years for buildings and improvements, and 3-10 years for furniture, fixtures and equipment.  Generally, furniture, fixtures and equipment with a cost per unit of less than $1,000 are expensed as incurred and are not capitalized.

Goodwill

Goodwill represents the excess of cost over the fair value of the net assets purchased in business combinations.  Goodwill is required to be tested annually for impairment, or whenever events occur that may indicate that the recoverability of the carrying amount is not probable.  In the event of impairment, the amount by which the carrying amount exceeds the fair value would be charged to earnings.  The Company performed its annual test of impairment in the fourth quarter and determined that there was no impairment of the carrying value as of November 30, 2007.

There were no changes in the carrying amount of goodwill during the years ended December 31, 2007, 2006 and 2005.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed Assets

Foreclosed assets represent other real estate owned and other repossessions acquired through, or in lieu of, loan foreclosure or other proceedings.  Foreclosed assets are held for sale and are carried at the lower of cost or fair value less estimated disposal costs.  Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses.  Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Stock Based Compensation Plans

At December 31, 2007, the Company had options outstanding under two stock-based employee compensation plans, which are described in more detail in Note 17.  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.

The following table illustrates the effect on net income and earnings per share for the year ended December 31, 2005 if the Company had applied the fair value recognition provisions of FASB No. 123 to stock-based employee compensation.

	2005
Net income, as reported	$	12,452,723
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects		(265,594	)
Pro forma net income	$	12,187,129
Earnings per share:
Basic – as reported	$	1.31
Basic – pro forma	$	1.29
Diluted – as reported	$	1.28
Diluted – pro forma	$	1.26

Earnings Per 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 only of stock options.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and cash flow hedge derivative instruments, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Recent Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.  The Statement provides guidance for using fair value to measure assets and liabilities.  It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement.  Under the Statement, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.  It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, the Statement establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under the Statement, fair value measurements would be separately disclosed by level within the fair value hierarchy.  Statement No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.  The Statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates.  A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable (unless a new election date occurs) and is applied only to entire instruments and not to portions of instruments.  Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities.  Statement No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations.  The Statement will significantly change the accounting for business combinations, as an acquiring entity will be required to recognize all the assets and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  The Statement changes the accounting treatment for several specific items, such as acquisition costs, noncontrolling interests (formerly referred to as minority interests), contingent liabilities, restructuring costs and changes in deferred tax asset valuation allowances.  The Statement also includes a substantial number of new disclosure requirements.  Statement No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Early adoption is prohibited.  The Company is currently evaluating the impact the adoption of this statement will have on the accounting for future acquisitions and business combinations.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.  The Statement establishes new accounting and reporting standards for the noncontrolling interest (formerly referred to as minority interests) in a subsidiary and for the deconsolidation of a subsidiary.  Statement No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Early adoption is prohibited.  The Company currently does not have any noncontrolling interests and is evaluating the impact the adoption of this statement will have on the accounting for future business combinations.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. RESTRICTIONS ON CASH AND BALANCES DUE FROM BANKS

The Bank is required to maintain reserve balances in cash or on deposit with correspondent banks and the Federal Reserve Bank of Atlanta, based on a percentage of deposits.  The total of those reserve balances was approximately $5,607,000 and $7,533,000 at December 31, 2007 and 2006, respectively.

NOTE 3. INVESTMENT SECURITIES

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

	Amortized  Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2007
U.S. Government sponsored agencies	$	69,787,616	$	512,362	$	(64,692	)	$	70,235,286
State and municipal securities		32,480,766		204,241		(352,938	)		32,332,069
Mortgage-backed securities		77,152,178		379,068		(330,401	)		77,200,845
Corporate debt securities		6,537,841		10,655		(41,123	)		6,507,373
Equity securities		8,516,305		2,603		-			8,518,908
	$	194,474,706	$	1,108,929	$	(789,154	)	$	194,794,481
December 31, 2006
U.S. Government sponsored agencies	$	83,494,688	$	34,135	$	(1,235,002	)	$	82,293,821
State and municipal securities		28,939,069		255,044		(302,374	)		28,891,739
Mortgage-backed securities		59,806,549		46,967		(978,046	)		58,875,470
Corporate debt securities		4,566,769		-		(38,519	)		4,528,250
Equity securities		8,964,991		542,755		(4,168	)		9,503,578
	$	185,772,066	$	878,901	$	(2,558,109	)	$	184,092,858

The amortized cost and fair value of investment securities as of December 31, 2007, by contractual maturity, are shown below.  Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties.  Equity securities have a perpetual life and no stated maturity; therefore, these securities and the mortgage-backed securities are shown separately from the other debt securities in the following maturity summary.

	Amortized Cost		Fair Value
Due in one year or less	$	3,588,376	$	3,584,330
Due from one to five years		29,838,652		29,923,193
Due from five to ten years		22,913,643		23,003,384
Due after ten years		52,465,552		52,563,821
Mortgage-backed securities		77,152,178		77,200,845
Equity securities		8,516,305		8,518,908
	$	194,474,706	$	194,794,481

Securities with a carrying value of $103,509,033 and $116,802,664 at December 31, 2007 and 2006, respectively, were pledged to secure public deposits, certain borrowing arrangements and for other purposes.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. INVESTMENT SECURITIES (Continued)

Gains and losses on sales and calls of investment securities for the years ended December 31, 2007, 2006 and 2005 consist of the following:

	2007			2006			2005
Gross gains on securities transactions	$	434,217		$	167,187		$	14,834
Gross losses on securities transactions		(121,229	)		(709,440	)		(26,298	)
Net realized gain (loss) on securities transactions	$	312,988		$	(542,253	)	$	(11,464	)

The following table shows the gross unrealized losses and fair value of securities, aggregated by category, at December 31, 2007 and 2006.  At December 31, 2007 there are three U.S. Government sponsored agency debt issues, fourteen mortgage-backed securities issued by U.S. Government sponsored agencies, twenty-three municipal securities and one corporate debt security in the investment portfolio that have been in a continuous unrealized loss position for twelve months or longer.  As management has the intent and ability to hold the securities until maturity, or the foreseeable future, and due to the fact that the unrealized losses relate primarily to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer, none of the declines in value are deemed to be other than temporary.

	Less than Twelve Months				Twelve Months or Longer
December 31, 2007	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government sponsored agencies	$	11,293,466	$	23,169	$	11,444,150	$	41,523
State and municipal securities		7,933,083		53,094		10,007,484		299,844
Mortgage-backed securities		10,618,640		7,273		26,792,785		323,128
Corporate debt securities		968,300		31,606		526,950		9,517
Equity securities		-		-		-		-
Total temporarily impaired securities	$	30,813,489	$	115,142	$	48,771,369	$	674,012
December 31, 2006
U.S. Government sponsored agencies	$	22,734,105	$	127,554	$	42,693,288	$	1,107,448
State and municipal securities		6,184,828		52,529		6,863,926		249,845
Mortgage-backed securities		13,860,017		106,937		34,803,122		871,109
Corporate debt securities		2,996,700		23,101		531,550		15,418
Equity securities		517,773		4,168		-		-
Total temporarily impaired securities	$	46,293,423	$	314,289	$	84,891,886	$	2,243,820

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio as of December 31, 2007 and 2006 follows.

	2007			2006
Commercial and financial	$	78,729,774		$	66,376,066
Agricultural		41,860,681			43,302,385
Real estate – construction		352,731,985			295,245,619
Real estate – commercial		248,271,663			255,461,494
Real estate – residential		174,157,534			142,501,330
Installment loans to individuals and others		25,825,467			18,290,234
Overdrafts		186,155			124,073
		921,763,259			821,301,201
Deferred loan fees and unearned interest, net		(414,353	)		(997,109	)
		921,348,906			820,304,092
Allowance for loan losses		(12,905,938	)		(11,006,097	)
	$	908,442,968		$	809,297,995

Changes in the allowance for loan losses for the years ended December 31, 2007, 2006 and 2005 follows.

	2007			2006			2005
Balance, beginning of year	$	11,006,097		$	11,079,193		$	9,066,566
Provision charged to operations		2,400,000			-			1,188,600
Loans charged-off		(868,201	)		(821,214	)		(281,331	)
Recoveries		368,042			748,118			1,105,358
Balance, end of year	$	12,905,938		$	11,006,097		$	11,079,193

A summary of information pertaining to impaired loans as of December 31, 2007 and 2006 follows.

	2007		2006
Loans accounted for on a nonaccrual basis	$	11,404,832	$	4,013,477
Loans past due 90 days or more and still accruing		37,378		33,688
Total impaired loans	$	11,442,210	$	4,047,165
Valuation allowance related to impaired loans	$	1,965,439	$	601,564

Additional information on impaired loans for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Average recorded investment in impaired loans	$	4,883,934	$	4,081,837	$	5,864,878
Approximate amount of interest income that would have been recorded if the impaired loans had remained current and on an accrual status	$	753,000	$	261,600	$	412,200
Interest income recognized on a cash basis on impaired loans	$	33,658	$	52,377	$	12,992

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

In the ordinary course of business, the Company has granted loans to certain related parties, including executive officers, directors and their affiliates.  The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan.  Changes in related party loans for the year ended December 31, 2007 follows.

Balance, beginning of year	$	13,236,211
Advances		25,860,998
Repayments		(18,271,937	)
Transactions due to changes in related parties		9,419,887
Balance, end of year	$	30,245,159

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment as of December 31, 2007 and 2006 follows.

	2007			2006
Land	$	6,201,540		$	6,227,080
Buildings and improvements		18,489,560			17,861,267
Furniture, fixtures and equipment		9,935,865			9,942,429
Construction in progress		-			210,112
		34,626,965			34,240,888
Less accumulated depreciation		(14,449,294	)		(13,461,301	)
	$	20,177,671		$	20,779,587

Depreciation expense amounted to $1,701,263, $1,615,825 and $1,715,036, for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company leases office space at seven locations.  One location is leased on a month-to-month basis.  The other locations are under agreements with minimum contractual obligations as of December 31, 2007 follows.

Year	Amount
2008	$	367,360
2009		257,545
2010		238,917
2011		223,095
2012		98,221
Later		407,606
	$	1,592,744

The Company also has commitments on various short-term operating leases for equipment.  Total lease expense amounted to $611,836, $401,090 and $304,781 for the years ended December 31, 2007, 2006 and 2005, respectively.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. DEPOSITS

A summary of interest-bearing deposits as of December 31, 2007 and 2006 follows.

	2007		2006
Interest-bearing demand	$	319,512,641	$	291,693,803
Savings		35,230,221		37,134,506
Time, $100,000 and over		223,260,805		198,807,994
Other time		312,721,780		279,936,096
	$	890,725,447	$	807,572,399

The Company had $35,599,000 and $37,754,000 in brokered deposits included in time deposits $100,000 and over as of December 31, 2007 and 2006, respectively.

Interest expense on deposits for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Interest-bearing demand	$	11,049,142	$	8,221,174	$	3,363,143
Savings		563,840		525,973		313,214
Time, $100,000 and over		10,064,962		8,111,150		5,491,811
Other time		15,209,655		11,597,183		7,307,571
	$	36,887,599	$	28,455,480	$	16,475,739

The scheduled maturities of time deposits at December 31, 2007 follow.

Year	Amount
2008	$	406,704,862
2009		68,381,792
2010		48,677,903
2011		8,629,501
2012		3,451,795
Later		136,732
	$	535,982,585

NOTE 7. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Federal funds purchased represent unsecured borrowings from other banks and generally mature daily.  The Company has $50,000,000 in unsecured Federal funds lines of credit with correspondent banks.  At December 31, 2007, the Company had $4,401,500 in Federal funds purchased under these lines of credit.

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one day to 90 days from the transaction date.  Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions.  The Company may be required to provide additional collateral based on the fair value of the underlying securities.  The Company monitors the fair value of the underlying securities on a weekly basis.  Securities sold under repurchase agreements at December 31, 2007 and 2006 were $11,773,870 and $7,648,664, respectively.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. ADVANCES FROM THE FEDERAL HOME LOAN BANK

Listed below is a summary of the advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) as of December 31, 2007 and 2006.

	2007		2006
Adjustable rate advances due at various dates through September 30, 2009 with a weighted-average rate of 4.94% at December 31, 2007	$	10,941,580	$	35,941,580
Fixed rate advances due at various dates through February 26, 2024 with a weighted-average rate of 4.53% at December 31, 2007		14,356,125		15,249,122
Convertible advances due at various dates through      May 19, 2015 with a weighted-average rate of 4.29% at December 31, 2007		61,000,000		39,000,000
	$	86,297,705	$	90,190,702

The Bank has pledged $62,846,965 in qualifying residential and commercial real estate mortgage loans and $27,880,460 in investment securities as collateral on the advances from the FHLB.

Contractual maturities of the advances from the FHLB at December 31, 2007 follow.  Actual maturities may differ from contractual maturities because of the conversion option of the convertible advances.

Year	Amount
2008	$	7,593,789
2009		4,564,416
2010		15,657,456
2011		10,263,803
2012		25,481,173
Later		22,737,068
	$	86,297,705

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN DEBENTURES

On October 5, 2006, PAB Bankshares Capital Trust II (“PAB Trust II”) issued $10 million of Floating Rate Capital Securities (“trust preferred securities”).  The Company formed PAB Trust II, a statutory business trust created under the laws of the State of Delaware, for the sole purpose of issuing the trust preferred securities and investing the proceeds in Floating Rate Junior Subordinated Debentures (the “Debentures”) issued by the Company.  The interest rates on both the trust preferred securities and the Debentures are reset quarterly at the three-month London Interbank Offered Rate (“LIBOR”) plus 1.63% (currently 6.46%).  The Company entered into agreements which, taken collectively, fully, irrevocably and unconditionally guarantee, on a subordinated basis, all of PAB Trust II’s obligations under the trust preferred securities.  PAB Trust II’s sole asset is the Debentures issued by the Company.  The Debentures will mature on December 31, 2036, but are callable at par by the Company in whole or in part anytime after December 31, 2011.  The proceeds from the issuance of these trust preferred securities qualify as Tier 1 capital under the risk-based capital guidelines established by the Federal Reserve.

On November 28, 2001, PAB Bankshares Capital Trust I (“PAB Trust I”) issued $10 million of Floating Rate Capital Securities (“trust preferred securities”).  The Company formed PAB Trust I, a statutory business trust created under the laws of the State of Delaware, for the sole purpose of issuing the trust preferred securities and investing the proceeds in Floating Rate Junior Subordinated Debentures (the “Debentures”) issued by the Company.  The interest rates on both the trust preferred securities and the Debentures were reset semi-annually at LIBOR plus 3.75% with a rate cap of 11.0% through December 8, 2006.  The Company entered into agreements which, taken collectively, fully, irrevocably and unconditionally guaranteed, on a subordinated basis, all of PAB Trust I’s obligations under the trust preferred securities.  PAB Trust I’s sole asset was the Debentures issued by the Company.  The Debentures were scheduled to mature on December 8, 2031, but were callable at par by the Company in whole or in part anytime after December 8, 2006.  The Company exercised its call option on the Debentures and redeemed the Debentures and the trust preferred securities on December 8, 2006.

As discussed in Note 1, the Company adopted FASB Interpretation No. 46R (Revised December 2003), Consolidation of Variable Interest Entities, during the first quarter of 2004.  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 determined that the revised provisions required deconsolidation of PAB Trust I and II.  The Company recorded $310,000 in other assets in the consolidated balance sheet at December 31, 2007 and 2006, respectively, for common capital securities issued by the issuer trusts.

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. INCOME TAXES

The components of income tax expense for the years ended December 31, 2007, 2006 and 2005 follow.

	2007			2006		2005
Current	$	6,325,504		$	7,184,676	$	7,306,405
Deferred		(644,268	)		303,268		(940,628	)
	$	5,681,236		$	7,487,944	$	6,365,777

The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes.  A reconciliation of the differences for the years ended December 31, 2007, 2006 and 2005 follows.

	2007			2006			2005
Tax at statutory rate	$	5,763,433		$	7,428,106		$	6,586,475
Increase (decrease) resulting from:
State income tax, net of federal tax benefit		96,846			352,316			57,109
Amortization of investment tax credits		288,600			167,422			66,781
Tax exempt income, net		(370,499	)		(290,545	)		(150,942	)
Increase in cash value of bank- owned life insurance policies		(142,247	)		(137,985	)		(120,231	)
Deferred tax adjustment		-			(3	)		11
Stock based compensation		35,493			(47,686	)		-
Other items, net		9,610			16,319			(73,426	)
Income tax expense	$	5,681,236		$	7,487,944		$	6,365,777

The components of deferred income taxes at December 31, 2007 and 2006 follow.

	2007			2006
Deferred tax assets and (liabilities):
Accrued severance payable	$	-		$	55,930
Allowance for loan losses		4,517,078			3,852,134
Deferred compensation		710,434			789,867
Deferred loan origination cost		(520,786	)		(444,455	)
Deferred loan origination fees		665,893			778,234
Impaired loan interest		231,431			78,558
Other assets		21,179			25,934
Premises and equipment		(525,574	)		(638,872	)
Nonqualified stock options		76,837			34,894
Unrealized gain on cash flow hedge derivative instrument		(342,063	)		(60,703	)
Unrealized (gain) loss on securities available for sale		(111,921	)		587,724
Net deferred tax assets	$	4,722,508		$	5,059,245

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. INCOME TAXES (Continued)

The Company has invested in affordable housing projects to receive State of Georgia low income housing tax credits to help reduce state income tax expense.  The investment in these credits totaled $2,632,556 and $1,403,225 at December 31, 2007 and 2006, respectively.  The projected availability of the unused credits follows:

Year of projected availability:	Amount
2008	$	797,521
2009		797,521
2010		797,521
2011		797,521
2012		797,521
Later		2,390,468
Total	$	6,378,073

NOTE 11. EMPLOYEE BENEFIT PLANS

The Company provides an employee 401(k) plan for qualified employees.  The 401(k) plan allows participants to defer a portion of their compensation and provides that the Company may match a portion of the participants’ deferred compensation.  The plan also provides for non-elective and discretionary profit sharing contributions to be made by the Company at the sole discretion of the Board of Directors.  Approximately 3.0%, 3.5%, and 4.5% of the participants’ eligible compensation was accrued as the discretionary profit sharing contributions for 2007, 2006 and 2005, respectively.  The employer contributions are on a five-year vesting schedule.  All full-time and part-time employees are eligible to participate in the plan provided they have met the eligibility requirements. Generally, a participant must have completed one month of employment to become eligible, with employer contributions beginning after six months of employment.  Aggregate expense under the plan charged to salaries and employee benefits expense during 2007, 2006 and 2005 amounted to $862,419, $705,675 and $756,288, respectively.

NOTE 12. DEFERRED COMPENSATION AND RETIREMENT PLANS

Under separate deferred compensation agreements executed in prior years with certain officers, deferred compensation is to be payable over a fifteen-year period beginning at the earlier of age 65, death, or disability of each officer.  Annual accruals were made based on actuarial assumptions for the present value of the future obligations.  In 2001, the Board of Directors elected to terminate these plans.  At that time, the Company recorded an expense and an accrual of approximately $898,000 for the net present value of the liability covering two executive officers that were retiring at the end of 2001.  The total accrued liability for these deferred compensation plans was $2,029,812 and $2,256,763 at December 31, 2007 and 2006, respectively.  On an annual basis, the Company re-evaluates the net present value of these future obligations and records an additional expense to account for the accrual.  The expense for these deferred compensation plans charged to salaries and employee benefits expense were $99,457, $388,796, and $150,360 during 2007, 2006 and 2005, respectively.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. OTHER INCOME AND EXPENSES

Other fee income for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Mortgage origination fees	$	404,749	$	498,727	$	600,615
Brokerage commissions and fees		13,487		9,831		13,467
ATM and debit card fee income		642,685		560,906		470,421
Insurance premiums		29,215		38,793		47,379
Other fee income		192,031		207,184		189,105
Total other fee income	$	1,282,167	$	1,315,441	$	1,320,987

Other noninterest income for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Earnings on bank-owned life insurance	$	406,419	$	394,242	$	343,518
Gain (loss) on disposal and write-down of assets		80,851		22,616		(79,310	)
Check order revenue		217,778		230,606		142,587
Other noninterest income		74,512		84,080		78,988
Total other noninterest income	$	779,560	$	731,544	$	485,783

Other noninterest expense for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Advertising and business development	$	625,765	$	573,368	$	541,075
Supplies and printing		463,113		495,840		527,389
Telephone and internet charges		634,445		471,124		366,995
Postage and courier		644,774		569,309		607,987
Legal and accounting fees		559,417		446,842		416,006
Director fees and expenses		398,078		434,797		412,762
Service charges and fees		621,923		504,045		504,137
Other noninterest expenses		2,408,252		2,446,899		2,247,129
Total other noninterest expense	$	6,355,767	$	5,942,224	$	5,623,480

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. EARNINGS PER COMMON SHARE

The components used to calculate basic and diluted earnings per share for the years ended December 31, 2007, 2006 and 2005 follows.

	2007		2006		2005
Basic earnings per share:
Net income	$	10,785,715	$	13,735,217	$	12,452,723
Weighted average common shares outstanding		9,418,796		9,499,434		9,514,775
Earnings per common share	$	1.14	$	1.45	$	1.31
Diluted earnings per share:
Net income	$	10,785,715	$	13,735,217	$	12,452,723
Weighted average common shares outstanding		9,418,796		9,499,434		9,514,775
Effect of dilutive stock options		141,528		207,555		172,119
Weighted average diluted common shares outstanding		9,560,324		9,706,989		9,686,894
Earnings per common share	$	1.13	$	1.41	$	1.28

For the years ended December 31, 2007, 2006 and 2005, options to purchase 180,788, 59,896 and 101,983, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive.

NOTE 15. EMPLOYEE AND DIRECTOR STOCK PURCHASE PROGRAM

On July 1, 2002, the Board of Directors established an Employee and Director Stock Purchase Program to enable the Company and its participating subsidiaries to provide to their respective employees and directors a convenient means of purchasing for long term investment, and not for short term speculative gain, common stock of the Company and thereby promote interest in the Company’s continuing success, growth and development.  The program allows for an employee or director to purchase up to a maximum of $2,000 a year of the Company’s stock with the Company matching 50% of the participant’s purchase.  In order to be eligible, an employee must be full-time and have worked a full month.   During the years ended December 31, 2007, 2006 and 2005, the Company recorded $144,329, $138,458 and $114,354, respectively, of expense associated with this program.  The number of shares in the program at December 31, 2007 and 2006 was 98,544 and 84,838, respectively.

NOTE 16. DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN

In 1993, the Board of Directors approved a dividend reinvestment and common stock purchase plan.  The Board of Directors amended the plan in 2007.  The plan is designed to provide stockholders with a simple and convenient means to reinvest cash dividends and make additional cash purchases of the Company’s common stock.  The Company acquires shares in the open market as needed to fill orders for dividend reinvestment and stock purchases under the plan rather than issuing additional shares of common stock.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. STOCK PLANS AND STOCK-BASED COMPENSATION

The Company has 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 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.  It is the Company’s policy to issue new shares for stock option exercises.

Under the 1994 Employee Stock Option Plan, the Board of Directors could grant up to 400,000 stock options to employees of the Company as part of an incentive plan to attract and retain key personnel in the Company.  The 1994 Employee Stock Option Plan expired in 2004.  At December 31, 2007, there were 65,300 options outstanding that were granted under the 1994 Employee Stock Option Plan.

Under the 1999 Stock Option Plan, the Board of Directors can grant up to 600,000 stock options to directors, employees, consultants and advisors of the Company.  On February 28, 2006, the Company’s Board of Directors adopted an amendment to the 1999 Stock Option Plan to increase the maximum aggregate number of shares of common stock for which options may be granted from 600,000 shares to 1,400,000 shares and to extend the term of the Plan for ten years from the date of the adoption of these amendments.  This amendment was subsequently approved at the Company’s annual meeting of shareholders on May 23, 2006.  At December 31, 2007, there were 622,366 stock options available for grant and there were 629,446 options outstanding that were granted under the 1999 Stock Option Plan.

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

At December 31, 2007, there was approximately $932,000 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 3.69 years.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION (Continued)

A summary of the status of the two fixed plans at December 31, 2007, 2006 and 2005 and changes during the years ended on those dates follows.

	2007					2006					2005
	Number			Weighted- Average Exercise Price		Number			Weighted- Average Exercise Price		Number			Weighted- Average Exercise Price
Under option, beginning of year		659,286		$	13.85		703,597		$	11.91		651,777		$	11.03
Granted		108,500			16.49		121,500			20.55		122,500			14.57
Exercised		(62,740	)		11.02		(160,511	)		10.42		(61,180	)		7.38
Forfeited		(10,300	)		16.55		(5,300	)		13.58		(9,500	)		13.16
Under option, end of year		694,746		$	14.48		659,286		$	13.85		703,597		$	11.91
Exercisable at end of year		427,546		$	12.76		403,486		$	12.08		477,295		$	11.73
Weighted-average fair value per option of options granted during year				$	4.55				$	6.19				$	4.41
Total grant-date fair valueof options vested duringthe year				$	433,000				$	321,000				$	294,000
Total intrinsic value of options exercised during the year				$	468,000				$	1,520,000				$	439,000

The following table presents information on stock options outstanding for the periods shown, less estimated forfeitures.

	Year ended December 31, 2007		Year ended December 31, 2006
Stock options vested and expected to vest:
Number		636,320		612,723
Weighted average exercise price	$	14.23	$	13.55
Aggregate intrinsic value		645,000		4,763,000
Weighted average contractual term of options	5.52 years		5.62 years
Stock options vested and currently exercisable:
Number		427,546		403,486
Weighted average exercise price	$	12.76	$	12.08
Aggregate intrinsic value		631,000		3,729,000
Weighted average contractual term of options	4.04 years		4.17 years

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION (Continued)

A further summary of the options outstanding at December 31, 2007 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 - 8.41		70,800		4.69	$	7.82		67,600	$	7.81
	9.38 - 10.60		127,548		3.56		10.14		127,548		10.14
	10.71 - 13.31		74,100		3.72		12.68		63,500		12.62
	13.73 - 13.73		69,500		9.96		13.73		-		-
	13.75 - 14.32		70,250		6.81		14.02		30,650		13.99
	15.54 - 15.54		16,800		6.00		15.54		11,200		15.54
	16.25 - 16.25		72,000		1.80		16.25		72,000		16.25
	16.99 - 19.50		74,249		6.70		18.13		33,749		17.94
	21.32 - 21.32		26,000		9.01		21.32		4,000		21.32
	21.35 - 22.21		93,499		8.89		21.43		17,299		21.37
			694,746		5.80	$	14.48		427,546	$	12.76

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.

	2007	2006	2005
Risk-free interest rate	4.39% - 4.68%	4.39% - 4.86%	3.95% - 4.27%
Expected life of the options	7 - 10 years	7 - 10 years	7 - 10 years
Expected dividends (as a percent of the fair value of the stock)	2.63% - 3.50%	2.73% - 2.82%	3.05% - 3.08%
Weighted average expected dividends (as a percent of the fair value of the stock)	3.20%	2.80%	3.06%
Expected volatility	26.62% - 31.62%	30.73% - 32.19%	32.68% - 35.29%
Weighted-average expected volatility	28.23%	31.00%	34.02%

NOTE 18. STOCK REPURCHASE PLAN

In May 2007, 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.  In December 2007, the Company’s Board of Directors approved an additional plan to repurchase up to 200,000 shares of the Company’s common stock over the next twelve-month period.  During 2007 and 2006, the Company acquired and canceled 344,492 and 124,559 shares of common stock, for an annual cost of $5,894,104 and $2,503,298, respectively.  A balance of 212,250 shares remained available under the plans for repurchase at December 31, 2007.

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19. 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 a $50 million notional amount, 3-year, 8.25% Prime rate floor contract to hedge against interest rate risk in a declining rate environment.  The premium paid for this contract was $451,250.  The contract is classified as a hedge of an exposure to changes in the cash flows of a recognized asset (“cash flow hedge”).  As a cash flow hedge, the portion of a change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings.  The initial fair value of the premium paid is allocated and recognized in the same future period that the hedged forecasted transaction impacts earnings.  At December 31, 2007 and 2006, the Company reported a $635,000 gain, net of a $342,000 tax effect, and a $129,000 gain, net of a $61,000 tax effect, in other comprehensive income related to cash flow hedges, respectively.  For the twelve month period ended December 31, 2007, the Company recorded $102,000 of interest income on this derivative instrument.  The Company did not record any interest income on this derivative instrument for the twelve months ended December 31, 2006.  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 years ended December 31, 2007 and 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 December 31, 2007 and 2006 follows.

December 31, 2007	Notional amount		Floor rate			Maturity in months		Estimated fair value at December 31, 2007		Net unrealized gains (losses)
Derivatives Designated as CashFlow Hedges:
Hedging cash flows on prime-based floating rate loans	$	50,000,000		8.25	%		18	$	1,307,000	$	977,000
Total Derivative Instruments	$	50,000,000		8.25	%		18	$	1,307,000	$	977,000

December 31, 2006	Notional amount		Floor rate			Maturity in months		Estimated fair value at December 31, 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	%		30	$	625,000	$	190,000
Total Derivative Instruments	$	50,000,000		8.25	%		30	$	625,000	$	190,000

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20. COMMITMENTS AND CONTINGENT LIABILITIES

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.  The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.  A summary of the Bank's commitments as of December 31, 2007 and 2006 follows.

	2007		2006
Commitments to extend credit	$	154,113,000	$	154,450,000
Standby letters of credit	$	4,239,000	$	7,316,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  Collateral is required in instances which the Bank deems necessary.

In the normal course of business, the Company is involved in various legal proceedings.  In the opinion of management, any liability resulting from any such pending proceedings would not have a material adverse effect on the Company's financial statements.

NOTE 21. CONCENTRATIONS OF CREDIT

The Bank originates commercial, agricultural, residential and consumer loans to customers primarily in markets served by the Bank.  The ability of the majority of the Bank's customers to honor their contractual obligations is dependent on the local economies in the geographical areas served by the Bank.  The Bank, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Bank’s statutory capital, or approximately $15,000,000.

As of December 31, 2007, approximately 88% of the Bank's loan portfolio is concentrated in loans secured by real estate.  A substantial portion of these loans are in the Bank's primary market areas.  In addition, the Bank’s foreclosed assets are located in those same markets.  Accordingly, the ultimate collectibility of the Bank's loan portfolio and the recovery of the carrying amount of foreclosed assets are susceptible to changes in market conditions in the Bank's market areas.  The other significant concentrations of credit by type of loan are set forth in Note 4.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22. REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval.  At December 31, 2007, approximately $5,804,000 of the Bank’s retained earnings were available for dividend declaration without regulatory approval.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined.  Management believes, as of December 31, 2007 and 2006, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2007, the most recent notification from the regulatory authorities categorized the Bank as “Well Capitalized” under the regulatory framework for prompt corrective action.  To be categorized as “Well Capitalized”, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 22. REGULATORY MATTERS (Continued)

The Company and the Bank’s actual capital amounts and ratios are presented in the following table.  All dollar amounts have been rounded to the nearest thousand.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2007:
Total Capital to Risk   Weighted Assets:
Consolidated	$	113,471,000	11.3	%	$	80,515,000	8.0	%		- N/A -
Bank	$	112,073,000	11.2	%	$	80,429,000	8.0	%	$	100,536,000	10.0	%
Tier 1 Capital to Risk  Weighted Assets:
Consolidated	$	100,885,000	10.0	%	$	40,258,000	4.0	%		- N/A -
Bank	$	99,501,000	9.9	%	$	40,214,000	4.0	%	$	60,322,000	6.0	%
Tier 1 Capital to  Average Assets:
Consolidated	$	100,885,000	8.5	%	$	47,550,000	4.0	%		- N/A -
Bank	$	99,501,000	8.4	%	$	47,500,000	4.0	%	$	59,375,000	5.0	%
As of December 31, 2006:
Total Capital to Risk  Weighted Assets:
Consolidated	$	111,579,000	12.3	%	$	72,432,000	8.0	%		- N/A -
Bank	$	111,339,000	12.3	%	$	72,322,000	8.0	%	$	90,402,000	10.0	%
Tier 1 Capital to Risk  Weighted Assets:
Consolidated	$	100,330,000	11.1	%	$	36,216,000	4.0	%		- N/A -
Bank	$	100,333,000	11.1	%	$	36,161,000	4.0	%	$	54,241,000	6.0	%
Tier 1 Capital to  Average Assets:
Consolidated	$	100,330,000	9.1	%	$	44,291,000	4.0	%		- N/A -
Bank	$	100,333,000	9.2	%	$	43,661,000	4.0	%	$	54,576,000	5.0	%

NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques.  These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

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

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

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

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

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

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

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

The carrying amounts and estimated fair value of the Company's financial instruments as of December 31, 2007 and 2006 are summarized below.  All dollar amounts have been rounded to the nearest thousand.

	2007				2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and balances due from banks, interest-bearing deposits with other banks and federal funds sold	$	30,404,000	$	30,404,000	$	68,875,000	$	68,875,000
Investment securities		194,794,000		194,794,000		184,093,000		184,093,000
Loans, net		908,443,000		908,164,000		809,298,000		808,642,000
Cash flow hedge derivative instrument		1,307,000		1,307,000		625,000		625,000
Deposits		980,149,000		988,098,000		908,483,000		909,374,000
Federal funds purchased and securities sold under agreements to repurchase		16,175,000		16,175,000		7,649,000		7,649,000
Advances from the FHLB		86,298,000		85,422,000		90,191,000		90,550,000
Beneficial interest in debentures		10,310,000		10,310,000		10,310,000		10,310,000

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.  (PARENT COMPANY ONLY)

The following information presents the condensed financial statements for PAB Bankshares, Inc.

PAB BANKSHARES, INC.

CONDENSED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

	2007		2006
ASSETS
Cash on deposit with subsidiary bank	$	4,060,144	$	2,545,609
Investment securities		-		812,700
Investment in subsidiary		106,601,746		105,280,203
Other assets		825,703		653,573
Total assets	$	111,487,593	$	109,292,085
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interests in debentures (trust preferred securities)	$	10,310,000	$	10,310,000
Dividends payable		1,337,368		1,330,696
Other liabilities		2,164,253		2,335,655
Total liabilities		13,811,621		13,976,351
Stockholders' equity		97,675,972		95,315,734
Total liabilities and stockholders' equity	$	111,487,593	$	109,292,085

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC. (PARENT COMPANY ONLY) (Continued)

PAB BANKSHARES, INC.

CONDENSED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006		2005
Income
Dividends from subsidiaries	$	12,445,000		$	6,640,000	$	4,500,000
Interest and dividends on investment securities		21,862			118,500		22,226
Securities transactions, net		371,606			166,954		-
Other income		1,040			-		6
Total income		12,839,508			6,925,454		4,522,232
Expenses		1,605,380			2,134,953		1,342,311
Income before income tax benefit and equity in undistributed earnings of subsidiaries		11,234,128			4,790,501		3,179,921
Income tax benefit		388,311			695,010		484,711
Income before equity in undistributed earnings (distributions in excess of earnings) of subsidiaries		11,622,439			5,485,511		3,664,632
Equity in undistributed earnings (distributions in excess of earnings) of subsidiaries		(836,724	)		8,249,706		8,788,091
Net income	$	10,785,715		$	13,735,217	$	12,452,723

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC. (PARENT COMPANY ONLY) (Continued)

PAB BANKSHARES, INC.

CONDENSED STATEMENTS OF CASH FLOW

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	10,785,715		$	13,735,217		$	12,452,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, (accretion) and amortization		-			(24,650	)		68,900
Deferred tax provision		4,852			(30,815	)		9,936
Net realized gain on securities transactions		(371,606	)		(166,954	)		-
Distributions in excess of earnings (undistributed earnings) of subsidiaries		836,724			(8,249,705	)		(8,788,091	)
Increase (decrease) in deferred compensation accrual		(133,699	)		223,708			(14,727	)
Decrease in retirement accrual		-			-			(135,891	)
Stock-based compensation expense		410,851			290,245			-
Net change in other assets and liabilities		(24,721	)		(179,269	)		(70,080	)
Net cash provided by operating activities		11,508,116			5,597,777			3,522,770
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of debt securities		-			(9,999,191	)		-
Proceeds from maturities of debt securities		-			10,087,000			-
Redemption of equity securities		641,551			246,954			-
Net cash provided by investing activities		641,551			334,763			-
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid		(5,432,369	)		(4,984,149	)		(4,284,703	)
Proceeds from the issuance of trust preferred securities		-			10,000,000			-
Redemption of trust preferred securities		-			(10,000,000	)		-
Proceeds from the exercise of stock options		691,341			1,671,873			451,729
Acquisition of stock under stock repurchase plans		(5,894,104	)		(2,503,298	)		(1,468,714	)
Net cash used in financing activities		(10,635,132	)		(5,815,574	)		(5,301,688	)
Net increase (decrease) in cash		1,514,535			116,966			(1,778,918	)
Cash at beginning of period		2,545,609			2,428,643			4,207,561
Cash at end of period	$	4,060,144		$	2,545,609		$	2,428,643

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

There have been no changes in or disagreements with our accountants on accounting and financial disclosure matters in the past two fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The term "disclosure controls and procedures" (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within required time periods.   A review and evaluation was performed by the Company's management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report.  Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures, as designed and implemented, were effective as of the end of the period covered by this Annual Report.

Management's Report on Internal Control over Financial Reporting

Management's Report on Internal Control Over Financial Reporting appears on page 44.  The Report of Independent Registered Accounting Firm appears on page 45.  These reports are incorporated by reference into this Item 9A.

Changes in Internal Control over Financial Reporting

The term "internal control over financial reporting" (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in the Company's internal control over financial reporting that occurred during the fourth quarter ended December 31, 2007, and have concluded that there was no change to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

There was no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2007 that has not been reported.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information regarding our directors and executive officers, board committees, codes of ethics, and compliance with Section 16 of the Exchange Act will be included in our definitive Proxy Statement (the “2008 Proxy Statement”) relating to the 2008 annual meeting of shareholders of PAB and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will be included in the 2008 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding beneficial ownership of our common stock will be included in the 2008 Proxy Statement and is incorporated herein by reference.

Equity Compensation Plan Information

The following table summarizes the Company’s equity compensation plans as of December 31, 2007:

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans*
Equity Compensation Plans
Approved by Security Holders		694,746	$	14.48		622,366
Equity Compensation Plans Not
Approved by Security Holders		n/a		n/a		n/a

*excluding securities reflected in the first column

In addition to the equity compensation plans approved by our stockholders, we have the Employee and Director Stock Purchase Program (the “SPP”).  The Bank, serving as the SPP custodian, uses funds contributed from employees and directors up to an amount specified in the SPP, matched by the Company at a rate of 50%, to purchase shares of our common stock.  A participant may request a distribution of his or her entire account at any time.  A participant’s participation in the SPP terminates immediately upon termination of employment or director status.  The SPP is administered by a committee appointed by the Board of Directors.  We may amend or terminate the SPP or suspend the employer matching contributions at any time.  For more information about the SPP, see Note 15 in the accompanying Notes to the Consolidated Financial Statements in Item 8 of this Report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information regarding certain relationships and related transactions will be included in the 2008 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and services will be included in the 2008 Proxy Statement and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1. Financial Statements.

The consolidated financial statements, notes thereto and auditor's report thereon, filed as part hereof, are listed in the Index to Item 8 of this Report.

2. Financial Statement Schedules.

All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

3. Exhibits.

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(a) to the Registrant's Registration Statement on Form S-4 (No. 333-83907) filed with the Commission on October 14, 1999).
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated March 27, 2007).
4.1	Amended and Restated Trust Agreement among PAB Bankshares, Inc., as Depositor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein dated as of October 5, 2006 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated October 6, 2006).
4.2	Junior Subordinated Indenture between PAB Bankshares, Inc. and Wilmington Trust Company, as Trustee dated as of October 5, 2006 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated October 6, 2006).
4.3	Guarantee Agreement between PAB Bankshares, Inc., as Guarantor, and Wilmington Trust Company, as Guarantee Trustee dated as of October 5, 2006 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated October 6, 2006).
10.1	PAB Bankshares, Inc. Fourth Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan.
10.2	PAB Bankshares, Inc. 1994 Employee Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
10.3	Form of Executive Salary Continuation Agreement, with attached Schedule of Terms (incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
10.4	PAB Bankshares, Inc. 1999 Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 (No. 333-137316) filed with the Commission on September 14, 2006).
10.5	Employee Contract Termination Agreement, dated September 1, 2001, by and between C. Larry Wilkinson and the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
10.6	Rescission Agreement, dated December 31, 2001, by and between R. Bradford Burnette and the Registrant (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001).

83

10.7	PAB Bankshares, Inc. Employee and Director Stock Purchase Program, dated July 1, 2002 and amended March 25, 2003 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.8	Employment Agreement, dated January 1, 2003, by and between Michael E. Ricketson, the Registrant, and the Bank (incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.8.1	First Amendment to Employment Agreement, dated August 25, 2003, by and between Michael E. Ricketson, the Registrant, and the Bank (incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003).
10.9	Employment Agreement, dated January 1, 2003, by and between Milton Burke Welsh and the Bank (incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.10	Employment Agreement, dated January 1, 2003, by and between R. Wesley Fuller and the Bank (incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.11	Employment Agreement, dated January 1, 2003, by and between Donald J. Torbert, Jr. and the Bank (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.11.1	First Amendment to Employment Agreement, dated August 26, 2003, by and between Donald J. Torbert, Jr. and the Bank (incorporated by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003).
10.12	Employment Contract Termination Agreement, dated August 9, 2004, by and between Michael E. Ricketson, the Registrant, and the Bank (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004).
21.1	Subsidiaries of the Registrant.
23.1	Consent of Mauldin & Jenkins, LLC.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer.
32.2	Section 1350 Certification of Chief Financial Officer.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 17, 2008
	By:	/s/ M. Burke Welsh, Jr.
		M. Burke Welsh, Jr.
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ R. Bradford Burnette	Director	March 17, 2008
R. Bradford Burnette
/s/ Walter W. Carroll II	Director	March 17, 2008
Walter W. Carroll II
	Director, Chairman
James L. Dewar, Jr.
/s/ Michael H. Godwin	Director	March 17, 2008
Michael H. Godwin
/s/ James B. Lanier, Jr.	Director	March 17, 2008
James B. Lanier, Jr.
/s/ John E. Mansfield, Jr.	Director	March 17, 2008
John E. Mansfield, Jr.
/s/ Kennith D. McLeod	Director	March 17, 2008
Kennith D. McLeod, CPA
/s/ Douglas W. McNeill	Director, Vice Chairman	March 17, 2008
Douglas W. McNeill
/s/ Paul E. Parker	Director	March 17, 2008
Paul E. Parker
/s/ F. Ferrell Scruggs, Sr.	Director	March 17, 2008
F. Ferrell Scruggs, Sr.
/s/ Joe P. Singletary, Jr.	Director	March 17, 2008
Joe P. Singletary, Jr.
/s/ Donald J. Torbert, Jr.	Executive Vice President and	March 17, 2008
Donald J. Torbert, Jr., CPA	Chief Financial Officer (Principal
	Financial and Accounting Officer)
/s/ M. Burke Welsh, Jr.	Director, President and	March 17, 2008
M. Burke Welsh, Jr.	Chief Executive Officer
	(Principal Executive Officer)
/s/ David K. Williams	Director	March 17, 2008
David K. Williams

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