UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________

FORM 10-Q

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

Securities Exchange Act of 1934

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

_____________

PAB BANKSHARES, INC.

(A Georgia Corporation)

IRS Employer Identification Number: 58-1473302

3250 North Valdosta Road, Valdosta, Georgia 31602

Telephone Number: (229) 241-2775

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

Yes x No o

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

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

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

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

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

TABLE OF CONTENTS

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

i

PART I.  FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

	September 30,			December 31,
	2009			2008
	(UNAUDITED)
ASSETS
Cash and due from banks	$	11,633,433		$	18,104,521
Interest-bearing deposits in other banks		125,848,537			118,244,771
Federal funds sold		203,848			1,054,719
Investment securities		137,834,224			185,773,315
Loans		891,981,314			956,687,391
Allowance for loan losses		(40,000,000	)		(19,373,625	)
Net loans		851,981,314			937,313,766
Premises and equipment, net		19,002,420			19,984,288
Goodwill		5,984,604			5,984,604
Cash value of bank-owned life insurance policies		12,732,441			12,302,586
Foreclosed assets		55,195,128			25,268,901
Other assets		30,803,085			26,071,460
Total assets	$	1,251,219,034		$	1,350,102,931
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	106,572,611		$	91,114,337
Interest-bearing demand and savings		241,074,276			252,122,046
Time		681,991,559			780,466,875
Total deposits		1,029,638,446			1,123,703,258
Federal funds purchased and securities sold under agreements to repurchase		12,773,682			8,954,253
Advances from the Federal Home Loan Bank of Atlanta		90,295,470			109,703,917
Guaranteed preferred beneficial interests in debentures (trust preferred securities)		10,310,000			10,310,000
Other borrowings		20,000,000			-
Other liabilities		4,961,998			5,830,761
Total liabilities		1,167,979,596			1,258,502,189
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; 13,795,040 and 9,324,407 shares issued and outstanding		1,217,065			1,217,065
Additional paid-in capital		37,222,921			24,225,407
Retained earnings		42,557,397			62,467,000
Accumulated other comprehensive income		2,242,055			3,691,270
Total stockholders' equity		83,239,438			91,600,742
Total liabilities and stockholders' equity	$	1,251,219,034		$	1,350,102,931

See accompanying notes to consolidated financial statements.

1

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

See accompanying notes to consolidated financial statements.

2

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

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

See accompanying notes to consolidated financial statements.

3

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

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

See accompanying notes to consolidated financial statements.

4

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

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

5

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

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

See accompanying notes to consolidated financial statements.

6

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. NATURE OF BUSINESS

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

Banking Locations	Number of Banking Offices
South Georgia Market:
Valdosta, Lowndes County		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
Cumming, Forsyth County		1 (loan production office)
Florida Market:
Ocala, Marion County		1
St. Augustine, St. Johns County		1 (loan production office)

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

NOTE 2. BASIS OF PRESENTATION

The accompanying consolidated financial information of the Company is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations.  The results of operations for the three months and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year.  These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

7

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2. BASIS OF PRESENTATION (Continued)

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

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

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

NOTE 3. INVESTMENT SECURITIES

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

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

8

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3. INVESTMENT SECURITIES (Continued)

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

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

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

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

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

9

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3.  INVESTMENT SECURITIES (Continued)

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

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

10

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 4.  LOSS PER COMMON SHARE

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

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

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

11

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS

Accounting Policy for Derivative Instruments and Hedging Activities

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

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

Risk Management Objective of Using Derivatives

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

12

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Fair Values of Derivative Instruments on the Balance Sheet

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

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

Cash Flow Hedges of Interest Rate Risk

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

13

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

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

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

Non-designated Hedges

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

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

14

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Effect of Derivative Instruments on the Income Statement

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

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

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

15

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Effect of Derivative Instruments on the Income Statement (Continued)

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

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

16

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6.  STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION

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

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

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

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

NOTE 7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES

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

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

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

17

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

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

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

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

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

Assets Measured at Fair Value on a Nonrecurring Basis

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

18

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

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

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

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

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

19

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

Off-Balance-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.

20

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7.  FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

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

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

NOTE 8.  SEGMENT REPORTING

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

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

21

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 8.  SEGMENT REPORTING (Continued)

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

22

PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9.  SUBSEQUENT EVENTS

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

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

23

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements set forth in this Report or incorporated herein by reference, including, without limitation, matters discussed in Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operation” are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding our outlook on asset quality, our capital position, our plans regarding our nonperforming assets, the interest rate environment and economic conditions, and are based upon management’s beliefs as well as assumptions made based on data currently available to management.  In this Report, the terms “PAB”, “the Company”, “we”, “us” or “our” refer to PAB Bankshares, Inc.  When words like “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions are used, you should consider them as identifying forward-looking statements.  These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements.  Many of these factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements.  The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements: (1) general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values; (2) the general decline in the real estate and lending market, particularly the market areas surrounding metropolitan Atlanta; (3)our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen; (4) restrictions or conditions imposed by our regulators on our operations, including the terms of our written agreement with the Federal Reserve Board, may make it more difficult for us to achieve our goals; (5) legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged; (6) competitive pressures among depository and other financial institutions may increase significantly; (7) changes in the interest rate environment may reduce margins or the volumes or values of loans made by us; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than we can; (9) our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry; (10) adverse changes may occur in the bond and equity markets; (11) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; (12) economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate; and (13) the risk factors discussed from time to time in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), including but not limited to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  We undertake no obligation to, and we do not intend to, update or revise these statements following the date of this filing, whether as a result of new information, future events or otherwise, except as may be required by law.

24

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

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

Our operating subsidiary, The Park Avenue Bank, is a $1.25 billion community bank with 18 branches and two loan production offices in Georgia and Florida.  We have offices in both smaller, rural communities as well as larger, metropolitan areas.  We provide traditional banking products and services to commercial and individual customers in our markets.  Competition, regulation, credit risk and interest rate risk are the primary factors that we must manage in order to be successful.

 We generally group our offices into three geographic regions for discussion purposes due to the varying demographics of each market.  Our offices in Lowndes, Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties are collectively referred to as our “South Georgia” market.  Our offices in Henry, Hall, Oconee, and Forsyth counties are collectively referred to as our “North Georgia” market.  Our offices in Marion and St. Johns counties are collectively referred to as our “Florida” market.  In addition, our corporate assets, correspondent bank account balances, investment portfolio, out-of-market participation loans, insider loans and insider deposits, borrowings, etc. are reported at the corporate level, in what we refer to as the “Treasury”.  In January 2009, we closed our branch and loan production office in Snellville, Georgia and our branch in Jacksonville, Florida due to the economic downturn and disappointing results from these markets.

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

Market/ County	Number of Offices		Total Loans1		Total Deposits1		Market Share (%)2		Market Share Rank2
South Georgia
Lowndes		4	$	244,553	$	260,654		20.3		2
Cook		1	$	12,198	$	47,757		26.0		2
Decatur		3		45,184		112,141		29.6		1
Grady		1		12,112		23,040		8.5		5
Appling		1	$	14,180	$	38,736		15.4		5
Jeff Davis		1	$	9,154	$	51,825		29.1		2
Bulloch		2		35,037		53,785		4.9		6
		13	$	372,418	$	587,938
North Georgia
Henry		2	$	214,055	$	68,355		3.5		9
Hall		1		91,321		29,587		1.6		13
Oconee		1		46,401		15,174		2.0		9
Forsyth		1		52,133		11,105		-		-
		5	$	403,910	$	124,221
Florida
Marion		1	$	29,842	$	172,763		3.4		6
St. Johns		1		51,276		831		-		-
		2	$	81,118	$	173,594

__________________________

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

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

25

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

FINANCIAL CONDITION

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

____________________________________

1 Estimated 2009 population provided by SNL Financial.

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

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

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

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

26

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

	South			North
As of September  30, 2009	Georgia			Georgia			Florida			Treasury			Total
	(Dollars in Thousands)
Loans
Commercial and financial	$	29,163		$	43,064		$	4,799		$	11,837		$	88,863
Agricultural (including loans secured by farmland)		35,010			2,986			6,474			-			44,470
Real estate - construction		77,130			148,204			39,929			4,541			269,804
Real estate - commercial		96,110			158,759			20,640			7,895			283,404
Real estate - residential		122,864			45,465			9,278			3,441			181,048
Installment loans to individuals and other loans		11,946			5,600			129			6,886			24,561
		372,223			404,078			81,249			34,600			892,150
Deferred loan fees and unearned interest, net		194			(168	)		(131	)		(64	)		(169	)
		372,417			403,910			81,118			34,536			891,981
Allowance for loan losses		(5,338	)		(21,937	)		(3,632	)		(9,093	)		(40,000	)
Net loans	$	367,079		$	381,973		$	77,486		$	25,443		$	851,981
Percentage of total		43.1	%		44.8	%		9.1	%		3.0	%		100.0	%
Deposits
Noninterest-bearing demand	$	78,616		$	17,184		$	6,510		$	4,263		$	106,573
Interest-bearing demand and savings		184,105			30,175			26,056			737			241,073
Retail time less than $100,000		174,463			46,932			95,826			1,795			319,016
Retail time greater than or equal to $100,000		111,184			27,844			45,201			17,711			201,940
Retail time placed in CDARs program		39,571			2,085			-			143			41,799
Brokered		-			-			-			119,237			119,237
Total deposits	$	587,939		$	124,220		$	173,593		$	143,886		$	1,029,638
Percentage of total		57.1	%		12.1	%		16.8	%		14.0	%		100.0	%

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

27

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

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

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

As of Quarter End	Sep-09			Jun-09			Mar-09			Dec-08			Sep-08
	(Dollars in Thousands)
Commercial and financial	$	88,863		$	84,599		$	82,534		$	87,530		$	91,401
Agricultural (including loans secured by farmland)		44,470			45,774			44,671			48,647			49,227
Real estate - construction		269,804			290,949			314,863			315,786			332,901
Real estate - commercial		283,404			285,731			274,338			276,645			281,781
Real estate - residential		181,048			183,074			191,388			196,306			195,439
Installment loans to individuals and other loans		24,561			29,790			32,740			32,084			32,075
		892,150			919,917			940,534			956,998			982,824
Deferred loan fees and unearned interest, net		(169	)		(219	)		(255	)		(310	)		(253	)
		891,981			919,698			940,279			956,688			982,571
Allowance for loan losses		(40,000	)		(19,719	)		(20,403	)		(19,374	)		(20,240	)
	$	851,981		$	899,979		$	919,876		$	937,314		$	962,331

28

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

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

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

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

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

29

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

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

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

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

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

30

RESULTS OF OPERATIONS

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

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

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

Net Interest Income

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

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

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

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

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

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

Provision for Loan Losses

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

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

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

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

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

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

· lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices;

· changes in international, national, regional and local economic and business conditions that affect the collectibility of the portfolio;

· changes in the nature and volume of the loan portfolio;

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

· levels of and trends in delinquencies and impaired loans;

· changes in the quality of our loan review system;

· value of underlying collateral for collateral-dependent loans;

· existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

· other external factors such as competition and legal and regulatory requirements.

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

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

Allocation of the Allowance for Loan Losses

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

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Summary of Loan Loss Experience

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

	Nine months ended September 30, 2009			Year ended December 31, 2008
Balance at beginning of year	$	19,373		$	12,906
Charge-offs:
Commercial and financial		3,468			709
Agricultural (including loans secured by farmland)		-			-
Real estate – construction and development		5,108			8,023
Real estate – commercial		100			25
Real estate – residential		753			3,188
Installment loans to individuals and other loans		5,437			183
		14,866			12,128
Recoveries:
Commercial and financial		113			38
Agricultural (including loans secured by farmland)		38			38
Real estate – construction and development		4			2
Real estate – commercial		16			340
Real estate – residential		35			33
Installment loans to individuals and other loans		99			94
		305			545
Net charge-offs (recoveries)		14,561			11,583
Additions provided to the allowance charged to operations		35,188			18,050
Balance at end of period	$	40,000		$	19,373
Average balance of loans outstanding	$	930,502		$	955,253
Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year (annualized)		2.09	%		1.21	%

Nonaccrual, Past Due and Restructured Loans

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

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

Category	Net Carrying Value *	Collateral Description	Average Carrying Value*/ Unit
Construction and Development	$12.8 million	12 parcels of undeveloped land totaling 558 acres	$9,200 per residential acre and $56,200 per commercial acre
Construction and Development	$4.5 million	161 residential lots	$27,800 per lot
1-4 Family Residential	$5.5 million	74 houses	$75,000 per house
Commercial Real Estate	$19.4 million	22 commercial properties	$880,600 per property
Agriculture	$1.9 million	3 parcels of farm land totaling 373 acres	$5,000 per acre
Commercial and Industrial	$3.6 million	Non-real estate collateral	$297,000 per loan
Multi-Family Residential	$8.0 million	9 condominium units	$891,900 per unit
Consumer	$21,000	Non-real estate collateral	$3,000 per loan

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

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

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

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

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

Potential Problem Loans

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

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

Other Real Estate Owned

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

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

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

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Other Income

A summary of noninterest income follows:

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

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

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

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

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

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

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

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

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Other Expenses

A summary of noninterest expense follows:

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

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

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

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

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

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

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

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

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Income Tax Expense

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

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 2009, our ratio of liquid assets (defined as the sum of cash and due from bank balances, interest-bearing deposits in other banks, federal funds sold, and investment securities) to total assets was 22.0%, compared to 23.9% at December 31, 2008.  It is our policy to maintain a ratio of liquid assets to total assets of at least 15%.

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

Contractual Obligations

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

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

Off-Balance Sheet Arrangements

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

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

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

Stockholders’ Equity

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

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

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

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

							Minimum
	Company						Regulatory
	Consolidated			Bank			Requirement
Total Capital to Risk Weighted Assets		9.8	%		10.0	%		8.0	%
Tier 1 Capital to Risk Weighted Assets		8.5	%		8.7	%		4.0	%
Tier 1 Capital to Average Assets (Leverage Ratio)		6.2	%		6.4	%		4.0	%

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CRITICAL ACCOUNTING ESTIMATES

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

Allowance for Loan Losses

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

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

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

Estimates of Fair Value

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

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

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

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Recent Accounting Pronouncements

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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

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

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ITEM 4.  CONTROLS AND PROCEDURES

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

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

ITEM 1A.  RISK FACTORS

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

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

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

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

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

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

32.1  Section 1350 Certification of CEO.

32.2 Section 1350 Certification of CFO.

SIGNATURES

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

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

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