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, 2010 – 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 o Non-accelerated filer o Smaller reporting company x

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 29, 2010 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 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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	53

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Submission of Matters to a Vote of Security Holders	53
Item 5.	Other Information	53
Item 6.	Exhibits	54

SIGNATURES		54

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009


	September 30, 2010			December 31, 2009
	(UNAUDITED)
ASSETS
Cash and due from banks	$	9,431,780		$	16,641,978
Interest-bearing deposits in other banks		151,097,302			169,732,493
Federal funds sold		431,205			103,825
Investment securities		169,100,503			111,541,113
Restricted equity securities		8,487,200			9,459,600

Loans		597,721,702			805,313,687
Allowance for loan losses		(26,918,015	)		(29,314,145	)
Net loans		570,803,687			775,999,542

Premises and equipment, net		13,881,692			18,609,472
Cash value of bank-owned life insurance policies		13,230,056			12,874,651
Foreclosed assets		100,261,240			92,117,123
Other assets		7,475,759			24,864,778

Total assets	$	1,044,200,424		$	1,231,944,575

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	89,346,580		$	100,458,230
Interest-bearing demand and savings		171,990,787			250,232,355
Time		634,126,558			694,524,617
Total deposits		895,463,925			1,045,215,202

Federal funds purchased and securities sold under agreements to repurchase		2,496,933			10,011,024
Advances from the Federal Home Loan Bank of Atlanta		89,646,031			90,139,501
Guaranteed preferred beneficial interests in debentures (trust preferred securities)		10,310,000			10,310,000
Other borrowings		20,000,000			20,000,000
Other liabilities		5,854,510			5,682,200
Total liabilities		1,023,771,399			1,181,357,927

Stockholders' equity:
Preferred stock, no par value; 10,000,000 and 1,500,000 shares authorized; no shares issued		-			-

Common stock, no par value; 300,000,000 and 98,500,000 shares authorized;13,795,040 shares issued and outstanding		1,217,065			1,217,065
Additional paid-in capital		37,666,448			37,348,508
Retained earnings (deficit)		(19,587,433	)		11,295,000
Accumulated other comprehensive income		1,132,945			726,075
Total stockholders' equity		20,429,025			50,586,648

Total liabilities and stockholders' equity	$	1,044,200,424		$	1,231,944,575

See accompanying notes to consolidated financial statements.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Interest income
Interest and fees on loans	$	8,219,337		$	13,119,681		$	27,005,982		$	41,098,368
Interest and dividends on investment securities:
Taxable		1,666,211			1,487,428			4,331,282			5,212,782
Nontaxable		63,626			129,340			255,145			513,142
Other interest income		103,109			79,862			307,074			232,881
Total interest income		10,052,283			14,816,311			31,899,483			47,057,173

Interest expense
Interest on deposits		4,172,497			6,199,294			14,202,804			20,585,898
Interest on Federal Home Loan Bank advances		873,223			1,052,374			2,597,957			3,203,873
Interest on other borrowings		262,265			310,727			774,847			835,076
Total interest expense		5,307,985			7,562,395			17,575,608			24,624,847

Net interest income		4,744,298			7,253,916			14,323,875			22,432,326

Provision for loan losses		3,100,000			31,437,987			20,214,000			35,187,987
Net interest income (expense) after provision for loan losses		1,644,298			(24,184,071	)		(5,890,125	)		(12,755,661	)

Other income
Service charges on deposit accounts		565,572			943,908			2,011,819			2,625,886
Other fee income		541,914			483,568			1,607,537			1,512,299
Securities transactions, net		2,405,294			92,742			3,235,624			865,243
Loss on sale and write-down of other assets		(1,938,565	)		(754,918	)		(7,196,298	)		(1,276,488	)
Gain (loss) on derivative instruments		-			(143,189	)		162,649			1,025,722
Other noninterest income		277,855			267,004			759,899			728,760
Total other income		1,852,070			889,115			581,230			5,481,422

Other expenses
Salaries and employee benefits		2,854,235			3,631,008			9,049,701			12,306,131
Occupancy expense of premises		418,379			569,441			1,436,205			1,756,721
Furniture and equipment expense		457,716			502,080			1,457,518			1,504,201
Other noninterest expense		4,224,690			2,581,902			13,535,468			7,944,786
Total other expenses		7,955,020			7,284,431			25,478,892			23,511,839
Loss before income tax expense (benefit)		(4,458,652	)		(30,579,387	)		(30,787,787	)		(30,786,078	)
Income tax expense (benefit)		-			(10,622,932	)		94,646			(10,876,475	)

Net loss	$	(4,458,652	)	$	(19,956,455	)	$	(30,882,433	)	$	(19,909,603	)

Loss per common share
Basic	$	(0.32	)	$	(1.93	)	$	(2.24	)	$	(2.06	)
Diluted	$	(0.32	)	$	(1.93	)	$	(2.24	)	$	(2.06	)

See accompanying notes to consolidated financial statements.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Net loss	$	(4,458,652	)	$	(19,956,455	)	$	(30,882,433	)	$	(19,909,603	)

Other comprehensive income (loss):
Unrealized loss on cash flow hedge during the period, net of tax benefit of $13,058 and $44,859 for the quarter and $67,940 and $614,502 for the year to date		(25,346	)		(87,080	)		(131,891	)		(1,192,854	)
Reclassification adjustment for (gains) losses on cash flow hedge included in net loss, net of tax (benefit) of $0 and ($48,684)for the quarter and $55,301 and $348,745 for the year to date		-			94,505			(107,348	)		(676,977	)
Unrealized holding gains on securities available for sale arising during the period, net of tax of $416,742 and $1,025,652 for the quarter and $1,432,956 and $510,612 for the year to date		808,968			1,988,737			2,781,621			991,676
Reclassification adjustment for gains on securities available for sale included in net loss, net of tax of $817,800 and $32,460for the quarter and $1,100,112 and $294,183 for the year to date		(1,587,494	)		(60,283	)		(2,135,512	)		(571,060	)
		(803,872	)		1,935,879			406,870			(1,449,215	)
Comprehensive loss	$	(5,262,524	)	$	(18,020,576	)	$	(30,475,563	)	$	(21,358,818	)

See accompanying notes to consolidated financial statements.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2009


	Common Stock				Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
	Shares		Par Value		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income			Total Stockholders’ Equity

Balance, December 31, 2008		9,324,407	$	1,217,065	$	24,225,407	$	62,467,000		$	3,691,270		$	91,600,742
Net loss		-		-		-		(51,172,000	)		-			(51,172,000	)
Other comprehensive loss		-		-		-		-			(2,965,195	)		(2,965,195	)
Proceeds from private placement of capital		4,470,633		-		12,772,471		-			-			12,772,471
Stock-based compensation		-		-		350,630		-			-			350,630
Balance, December 31, 2009		13,795,040		1,217,065		37,348,508		11,295,000			726,075			50,586,648
Net loss		-		-		-		(30,882,433	)		-			(30,882,433	)
Other comprehensive income		-		-		-		-			406,870			406,870
Stock-based compensation		-		-		317,940		-			-			317,940
Balance, September 30, 2010		13,795,040	$	1,217,065	$	37,666,448	$	(19,587,433	)	$	1,132,945		$	20,429,025

See accompanying notes to consolidated financial statements.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)


	Nine Months Ended September 30,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(30,882,433	)	$	(19,909,603	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, amortization and accretion, net		1,258,201			1,079,601
Provision for loan losses		20,214,000			35,187,987
Net realized gain on securities transactions		(3,235,624	)		(865,243	)
Loss on disposal of assets		7,889,543			1,276,488
Gain on sale of branches		(693,241	)		-
Gain on derivative instruments		(162,649	)		(1,025,722	)
Stock-based compensation expense		317,940			225,043
Increase in cash value of bank-owned life insurance		(355,405	)		(429,855	)
Increase in deferred compensation accrual		152,859			180,156
Net change in taxes receivable and taxes payable		15,416,982			(6,916,603	)
Decrease in interest receivable		2,054,043			526,184
Decrease in interest payable		(303,516	)		(468,843	)
Net increase in prepaid expenses and other assets		(422,230	)		(1,556,006	)
Net increase (decrease) in accrued expenses and other liabilities		3,348,407			(580,075	)
Net cash provided by operating activities		14,596,877			6,723,509

CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in other banks		18,635,191			(7,603,766	)
(Increase) decrease in federal funds sold		(327,380	)		850,871
Purchase of debt securities		(166,501,990	)		(44,313,619	)
Proceeds from sales of debt securities		87,556,203			58,435,008
Proceeds from calls of debt securities		9,520,000			15,532,000
Proceeds from maturities and paydowns of debt securities		18,581,980			19,866,109
Purchase of restricted equity investments		-			(288,023	)
Redemption of restricted equity investments		972,400			94,700
Proceeds from sales of loans unrelated to branch sale		24,822,219			-
Net decrease in loans		68,365,397			11,541,262
Purchase of premises and equipment		(50,553	)		(587,323	)
Proceeds from disposal of assets		18,087,383			7,882,599
Net cash paid in branch sale		(40,562,248	)		-
Net cash provided by investing activities		39,098,602			61,409,818

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PAB BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)


	Nine Months Ended September 30,
	2010			2009

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(52,898,116	)		(94,064,812	)
Net (decrease) increase in federal funds purchased and securities sold under repurchase agreements		(7,514,091	)		3,819,429
Proceeds from the Federal Home Loan Bank advances		5,000,000			-
Payments on Federal Home Loan Bank advances		(5,493,470	)		(19,408,447	)
Proceeds from issuance of long-term debt		-			20,000,000
Proceeds from termination of cash flow hedge derivative		-			2,276,944
Proceeds from private placement of capital		-			12,772,471
Net cash used in financing activities		(60,905,677	)		(74,604,415	)


Net decrease in cash and due from banks	$	(7,210,198	)	$	(6,471,088	)

Cash and due from banks at beginning of period		16,641,978			18,104,521

Cash and due from banks at end of period	$	9,431,780		$	11,633,433


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest	$	17,879,124		$	25,093,690
Taxes	$	(15,322,336	)	$	(3,959,872	)


NONCASH INVESTING AND FINANCING TRANSACTIONS
Increase in unrealized gains on securities available for sale	$	978,953		$	637,045
Decrease in unrealized gain on cash flow hedge	$	(368,204	)	$	(2,827,354	)
Transfer of loans to foreclosed assets	$	33,815,810		$	38,603,204

See accompanying notes to consolidated financial statements.

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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
Bainbridge, Decatur County	3
Cairo, Grady County	1
North Georgia Market:
McDonough, Henry County	1
Stockbridge, Henry County	1
Oakwood, Hall County	1
Athens, Oconee County	1
Florida Market:
Ocala, Marion County	1

The Company also owns PAB Bankshares Capital Trust II, a Delaware statutory business trust. This non-operating subsidiary was created in 2006 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company.

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, 2010 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, 2009.

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 and the valuation of foreclosed assets.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 3. RECENT ACCOUNTING STANDARDS

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements. This ASU requires new investment fair market disclosures in order to increase the transparency in the financial reporting of investments. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU in 2010 did not have a material impact on the Company’s consolidated financial statements.

On July 21, 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010 and the related disclosures will be included in the Company’s notes to the consolidated financial statements beginning in the fourth quarter of 2010.

NOTE 4. BRANCH SALE

On May 24, 2010, the Bank sold five branches in a previously reported transaction to HeritageBank of the South (“Heritage”), a subsidiary of Albany, Georgia-based Heritage Financial Group. The five branches included two branches located in Statesboro (Bulloch County, Georgia), one branch in Baxley (Appling County, Georgia), one branch in Hazlehurst (Jeff Davis County, Georgia), and one branch in Adel (Cook County, Georgia.) The sale resulted in the transfer of approximately $51.5 million in loans (at a net discount of $430,000); $4.6 million in other assets, including real estate, automated teller machines and furniture, fixtures and equipment; $75.4 million in demand deposits, savings and money market accounts (at a net premium of $1.1 million); and $21.5 million in certificates of deposit. Because the amount of liabilities assumed by Heritage exceeded the value of the assets purchased, the Bank also transferred approximately $39.4 million in cash to Heritage in connection with the closing of the transaction. As a result of this transaction, the Bank recorded a $693,000 gain on the sale of the five branches.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5. REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, LIQUIDITY AND MANAGEMENT’S PLANS

Regulatory Oversight

The Company and the Bank are currently operating under heightened regulatory scrutiny and entered into a Written Agreement with the Federal Reserve Bank of Atlanta (the "Federal Reserve") and the Georgia Department of Banking and Finance (the "Georgia Department") on July 14, 2009 (the “Written Agreement”). The Written Agreement places certain requirements and restrictions on the Bank. Under the terms of the Written Agreement, the Bank is required to prepare and submit written plans and reports to the regulators that address 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. The Company initially submitted the requested plans to the regulators for their review on August 26, 2009. The Company continues to supplement these plans and reports on a monthly basis and as needed in response to comments and requests from our regulators. While the Written Agreement remains in place, the Company may not pay dividends and may not increase debt or redeem any shares of stock without the prior written consent of the regulators.

Since the Bank entered into the Written Agreement, it has aggressively taken steps to address the components of the Written Agreement. The Bank has taken an active role in working with the Federal Reserve and the Georgia Department to improve its financial condition and is addressing the items included in the Written Agreement on a continuing basis, including establishing new commercial real estate loan concentration limits, new policies on the use of interest reserves, and comprehensive underwriting criteria for commercial credit analysis. The Bank has also developed plans to strengthen its problem asset management function and to reduce the level of problem assets on its balance sheet over a period of time. The Bank is in ongoing dialogue with its regulators to remain in compliance with the terms of the Written Agreement. Failure to adequately address the Written Agreement may result in actions by the banking regulators, including the eventual appointment of a receiver or conservator of the Bank’s assets.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of the Bank not having adequate capital or liquidity to continue to operate or from any extraordinary regulatory action, either of which would affect its ability to continue as a going concern. Management of the Company has taken certain steps in an effort to continue with safe and sound banking practices.

Capital Adequacy

As of September 30, 2010, the Bank was considered “significantly undercapitalized” under applicable regulatory guidelines. Management is pursuing a number of strategic alternatives to improve the capital ratios of the Bank and to reduce the level of classified assets. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Bank’s high level of non-performing assets are potential barriers to the success of these strategies. If current adverse market factors continue for a prolonged period of time, new adverse market factors emerge, and/or the Bank does not successfully execute its plans or adequately address regulatory concerns in a sufficiently timely manner, it could have a material adverse effect on the Bank’s business, results of operations and financial position (see section entitled, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES – Stockholders’ Equity).

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5. REGULATORY OVERSIGHT, CAPITAL ADEQUACY, OPERATING LOSSES, LIQUIDITY AND MANAGEMENT’S PLANS (Continued)

Operating Losses

The Company incurred a net loss of $30.9 million for the nine months ended September 30, 2010. This loss was largely the result of increases in non-performing assets, which caused the Company to record increased provisions for loan losses, carrying costs on foreclosed properties and losses on the sale of foreclosed properties. Carrying costs on foreclosed assets are expected to remain elevated during the remainder of 2010 as the Company works towards liquidation of these non-performing assets. Margin compression also contributed to the net loss for the first nine months of 2010.

Liquidity

The Bank’s primary sources of liquidity are provided by its deposits, the scheduled repayments on its loans, and interest and maturities of its investments. Cash and amounts due from banks and federal funds sold can also be utilized to meet liquidity needs. At September 30, 2010, the Bank had approximately $149.6 million, or approximately 14% of its total assets, in cash balances on account at the Federal Reserve. All securities have been classified as available for sale, which means they are carried at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of other comprehensive income. If necessary, the Bank has the ability to sell its unpledged investment securities to manage its interest rate sensitivity or liquidity. Unpledged securities totaled $51.6 million at September 30, 2010. Since the Bank is not considered “well capitalized” as of September 30, 2010, it is unable to accept, rollover, or renew any brokered deposits without prior regulatory approval. Approximately $7.1 million, or 8%, of the Bank’s existing brokered deposits are scheduled to mature in the remainder of 2010. Based on current and expected liquidity needs and sources, the Company expects to be able to meet its obligations through September 30, 2011.

NOTE 6. INVESTMENT SECURITIES

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

Available for Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2010:
Debt securities:
State and municipal securities	$	3,370,000	$	66,399	$	(98,182	)	$	3,338,217
Corporate		9,000,000		-		(71,438	)		8,928,562
Mortgage-backed GSE residential *		155,056,662		1,919,989		(142,927	)		156,833,724
Total securities available for sale	$	167,426,662	$	1,986,388	$	(312,547	)	$	169,100,503

* Government-sponsored enterprises (GSE)

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(UNAUDITED)

NOTE 6. INVESTMENT SECURITIES (Continued)

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2009:
Debt securities:
U.S. Government-sponsored enterprises (GSEs)	$	30,452,647	$	262,292	$	(247,182	)	$	30,467,757
State and municipal securities		9,997,494		117,577		(393,701	)		9,721,370
Corporate		4,027,832		-		(198,492	)		3,829,340
Mortgage-backed GSE residential		65,585,084		1,379,928		(217,795	)		66,747,217
Private-label residential		606,719		-		(5,271	)		601,448
Private-label commercial		176,449		-		(2,468	)		173,981
Total securities available for sale	$	110,846,225	$	1,759,797	$	(1,064,909	)	$	111,541,113

The amortized cost and fair value of investment securities as of September 30, 2010, 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. Therefore, 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		1,000,000		928,562
Due from five to ten years		345,000		332,218
Due after ten years		11,025,000		11,005,999
Mortgage-backed securities		155,056,662		156,833,724
	$	167,426,662	$	169,100,503

Securities with a carrying value of $117.5 million and $91.3 million at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits, certain borrowing arrangements and for other purposes.

Gains and losses on sales and calls of investment securities for the three and nine month periods ended September 30, 2010 and 2009 consist of the following:

	Three Months ended September 30,					Nine Months ended September 30,
	2010			2009		2010			2009
Gross gains on securities transactions	$	2,535,383		$	92,742	$	3,400,972		$	1,491,505
Gross losses on securities transactions		(130,089	)		-		(165,348	)		(626,262	)
Net realized gain onsecurities transactions	$	2,405,294		$	92,742	$	3,235,624		$	865,243

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(UNAUDITED)

NOTE 6. INVESTMENT SECURITIES (Continued)

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2010 and December 31, 2009.

Available for sale securities that have been in a continuous unrealized loss position are as follows:

	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value			Total Unrealized Losses

Available for Sale Securities
September 30, 2010:
Debt securities:
State and municipal securities	$	41,917	$	1,303,083	$	56,265		$	443,735	$	98,182
Corporate		71,438		928,562		-			-		71,438
Mortgage-backed GSE residential*		142,927		27,307,814		-			-		142,927
Total securities available for sale	$	256,282	$	29,539,459	$	56,265		$	443,735	$	312,547

Available for Sale Securities
December 31, 2009:
Debt securities:
U.S. Government-sponsored enterprises (GSEs)	$	247,182	$	16,526,513	$	-		$	-	$	247,182
State and municipal securities		8,504		584,492		385,197			4,917,796		393,701
Corporate		143,160		856,840		55,332			972,500		198,492
Mortgage-backed GSE residential		217,795		15,005,641		-			-		217,795
Private-label residential		-		-		5,271			601,448		5,271
Private-label commercial		-		-		2,468			173,981		2,468
Total securities available for sale	$	616,641	$	32,973,486	$	448,268		$	6,665,725	$	1,064,909

* Government-sponsored enterprises (GSE)

Management evaluates securities for other-than-temporary impairment at least on an annual basis, and more frequently when economic or market conditions warrant such evaluation.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 7. LOSSES PER COMMON SHARE

Basic losses per share are computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the year. Diluted losses 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 and warrants.

The components used to calculate basic and diluted losses per share for the three months and nine months ended September 30, 2010 and 2009 follow:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Basic losses per share:
Net loss	$	(4,458,652	)	$	(19,956,455	)	$	(30,882,433	)	$	(19,909,603	)

Weighted average common shares outstanding		13,795,040			10,344,878			13,795,040			9,668,302

Losses per common share	$	(0.32	)	$	(1.93	)	$	(2.24	)	$	(2.06	)

Diluted loss per share:
Net loss	$	(4,458,652	)	$	(19,956,455	)	$	(30,882,433	)	$	(19,909,603	)

Weighted average common shares outstanding		13,795,040			10,344,878			13,795,040			9,668,302
Effect of dilutive stock options and warrants		-			-			-			-
Weighted average diluted common shares outstanding		13,795,040			10,344,878			13,795,040			9,668,302

Losses per common share	$	(0.32	)	$	(1.93	)	$	(2.24	)	$	(2.06	)

As of September 30, 2010 and 2009, total options and warrants to purchase common shares of 1,872,756 and 986,511, respectively, were outstanding but not included in the computation of diluted losses per share because they were determined to be anti-dilutive.

NOTE 8. STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION

At September 30, 2010, 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, 2010, there were 31,518 options outstanding that were granted under the 1994 Employee Stock Option Plan.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 8. STOCK PLANS AND STOCK-BASED EMPLOYEE COMPENSATION (Continued)

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. At September 30, 2010, there were 505,085 shares available for grant and there were 768,278 options outstanding that were granted under the 1999 Stock Option Plan.

At September 30, 2010, there was approximately $560,194 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 2.68 years.

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS

Accounting Policy for Derivative Instruments and Hedging Activities

FASB ASC 815, Derivatives and Hedging (“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 the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as 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 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. 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.

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.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9. 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, 2010 and December 31, 2009.

	Asset Derivatives						Liability Derivatives
	As of September 30, 2010			As of December 31, 2009			As of September 30, 2010			As of December 31, 2009
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		BalanceSheet Location	Fair Value		Balance Sheet Location	FairValue
Interest Rate Products	Other Assets	$	-	Other Assets	$	-	Other Liabilities	$	-	Other Liabilities	$	-

Total derivatives designated as hedging instruments under FASB ASC 815		$	-		$	-		$	-		$	-

Derivatives not designated as hedging instruments under FASB ASC 815:

Interest Rate Products	Other Assets	$	-	Other Assets	$	13,757	Other Liabilities	$	-	Other Liabilities	$	-

Total derivatives not designated as hedging instruments under FASB ASC 815		$	-		$	13,757		$	-		$	-

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 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. During 2009, such derivatives were used to hedge the variable cash outflows and inflows associated with the Company’s floating rate deposit accounts and prime-based floating-rate loans.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

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 portion of the change in fair value of the derivatives is recognized directly in earnings as a component of other non-interest income/expense. As of September 30, 2010, the Company had one outstanding interest rate cap with a notional amount of $25 million that had failed to qualify for hedge accounting due to a mismatch between the cap notional and the aggregate principal amount of floating-rate deposit accounts. The interest rate cap failed to qualify for hedge accounting as of September 30, 2009, and accordingly all changes in value subsequent to June 30, 2009 were recognized directly in earnings. During 2009, the Company also had interest rate floors and collars associated with existing pools prime-based floating-rate loans. One of the Company’s interest rate collars failed to qualify for hedge accounting as of March 31, 2009 due to a mismatch between the collar notional and the aggregate principal amount of the designated loan pools. All changes in value subsequent to December 31, 2008 were recognized directly in earnings through the date of termination. Refer to amounts disclosed under the sections entitled “Derivatives Not Designated as Hedging Instruments under FASB ASC 815” throughout this footnote for information regarding changes in value for derivatives which failed to qualify in hedging relationships. During the three and nine months ended September 30, 2010, the Company did not recognize any hedge ineffectiveness. During the three and nine months ended September 30, 2009, the Company recognized a net loss of $722 and $22,076, respectively, due to hedge ineffectiveness.

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 $55,631 will be reclassified as an increase to interest income and $10,599 will be reclassified as an increase to interest expense. During 2010 and 2009, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result a portion of the hedged forecasted transactions related to the Company’s interest rate cap and two interest rate collars becoming probable not to occur. There was no accelerated amount for the three months ended September 30, 2010 and there was a gain of $182,052 for the nine months ended September 30, 2010. The accelerated amount for the three and nine months ended September 30, 2009 was a gain (loss) of $(127,373) and $1,168,000, respectively.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9. 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, 2010 and 2009.

Derivatives in FASB ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or Loss Reclassified from Accumulated OCI into Income (Effective Portion)					Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended September 30,						Three Months Ended September 30,						Three Months Ended September 30,
	2010		2009				2010		2009				2010		2009

Interest Rate Products	$	-	$	(13,338	)	Interest Income	$	38,327	$	102,805		Other Income	$	-	$	(722	)
						Other Income		-		(127,393	)
Total	$	-	$	(13,338	)		$	38,327	$	(24,588	)		$	-	$	(722	)

Derivatives in FASB ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)				Location of Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Nine Months Ended September 30,						Nine Months Ended September 30,					Nine Months Ended September 30
	2010		2009				2010		2009			2010		2009

Interest Rate Products	$	-	$	(141,100	)	Interest Income	$	186,074	$	1,423,993	Other Income	$	-	$	(22,076	)
						Other Income		182,052		1,168,000
Total	$	-	$	(141,100	)		$	368,126	$	2,591,993		$	-	$	(22,076	)

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

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, 2010, the Company had one outstanding derivative, a $25 million cap, which failed to qualify for hedge accounting as of September 30, 2009 due to a mismatch between the cap notional and the money market account balances being hedged. All changes in fair value of the cap subsequent to June 30, 2009 are recognized directly in earnings. The Company did not recognize a gain or loss during the three months ended September 30, 2010 related to the changes in fair value of the cap. During the nine months ended September 30, 2010, the Company recognized a loss of $13,682 related to the changes in fair value of the cap.

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 three and nine months ended September 30, 2009 of $15,074 and $152,225, respectively, have been recognized directly in earnings as a loss.

Effect of Derivative Instruments on the Income Statement (Continued)

		Amount of Loss Recognized in Income on Derivative Three Months Ended September 30,
Derivatives Not Designated as Hedging Instruments Under FASB ASC 815	Location of Loss Recognized in Income on Derivative	2010		2009

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 Under FASB ASC 815	Location of Gain or (Loss) Recognized in Income on Derivative	2010			2009

Interest Rate Products	Other Income / Expense	$	(13,682	)	$	(152,225	)

Total		$	(13,682	)	$	(152,225	)

NOTE 10. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

ASC 820 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, ASC 820 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.

Assets Measured at Fair Value on a Recurring Basis

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

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

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. To comply with the provisions of ASC 820, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

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, 2010 and December 31, 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 does not have any fair value measurements using significant unobservable inputs (Level 3) as of September 30, 2010 and December 31, 2009.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

As of September 30, 2010:	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	$	-	$	169,100,503	$	-	$	169,100,503
Derivative financial instruments		-		-		-		-
Total assets at fair value	$	-	$	169,100,503	$	-	$	169,100,503

As of December 31, 2009:	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	$	-	$	111,541,113	$	-	$	111,541,113
Derivative financial instruments		-		13,757		-		13,757
Total fair value of assets on a recurring basis	$	-	$	111,554,870	$	-	$	111,554,870

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10. 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. As of September 30, 2010, certain impaired loans were partially charged-off or re-evaluated for impairment resulting in a remaining balance for these loans, net of specific allowances, of $112,393,000. 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 quarter ended September 30, 2010 and the year ended December 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Carrying value at September 30, 2010
	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, 2010			Total losses for the nine months ended September 30, 2010

Nonperforming loans	$	-	$	-	$	112,393,182	$	112,393,182	$	(9,369,675	)	$	(20,774,875	)
Foreclosed assets		-		794,610		1,455,027		2,249,637		(1,902,209	)		(7,880,013	)
Total fair value of assets on a non recurring basis	$	-	$	794,610	$	113,848,209	$	114,642,819	$	(11,271,884	)	$	(28,654,888	)

	Carrying value at December 31, 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

Nonperforming loans	$	-	$	-	$	80,723,630	$	80,723,630	$	(621,580	)	$	(5,842,688	)
Foreclosed assets		-		20,313,388		71,803,735		92,117,123		(752,913	)		(1,268,141	)
Total fair value of assets on a non recurring basis	$	-	$	20,313,388	$	152,527,365	$	172,840,753	$	(1,374,493	)	$	(7,110,829	)

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10. 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.

Derivatives: The carrying amount of derivatives approximates fair value. The fair value is defined as the amount the Company would receive or pay to terminate the contracts at the reporting date.

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, Securities Sold Under Agreements to Repurchase, Advances from Federal Home Loan Bank 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.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 10. FAIR VALUE MEASUREMENTS AND DISCLOSURES (Continued)

The carrying amounts and estimated fair value of the Company's financial instruments as of September 30, 2010 and December 31, 2009 are summarized below. All dollar amounts have been rounded to the nearest thousand.

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and balances due from banks, interest-bearing deposits with other banks and federal funds sold	$	160,960,000	$	160,960,000	$	186,478,000	$	186,478,000
Investment securities		169,101,000		169,101,000		111,541,000		111,541,000
Restricted equity securities		8,487,000		8,487,000		9,460,000		9,460,000
Loans, net		570,804,000		576,543,000		776,000,000		777,400,000
Cash flow hedge derivative instrument		-		-		14,000		14,000
Deposits		895,464,000		907,795,000		1,045,215,000		1,057,778,000
Federal funds purchased and securities sold under agreements to repurchase		2,497,000		2,497,000		10,011,000		10,011,000
Advances from the FHLB		89,646,000		86,795,000		90,140,000		88,829,000
Other borrowings		20,000,000		22,131,000		20,000,000		22,489,000
Beneficial interest in debentures		10,310,000		10,310,000		10,310,000		10,310,000

NOTE 11. 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 current and former locations in Lowndes County, Appling County, Bulloch County, Cook County, Decatur County, Grady County, and Jeff Davis County. The North Georgia market includes the Company’s current and former locations in Henry County, Hall County, Gwinnett County, Forsyth County, Cobb County, Clarke County, and Oconee County. The Florida market includes the Company’s current and former locations in Marion County, Duval County, and St. Johns County. 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” segment. The Treasury segment also 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 inter-segment 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. All costs have been allocated to the reportable segments, therefore, combined segment amounts agree to the consolidated totals.

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PAB BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 11. SEGMENT REPORTING (Continued)

	South Georgia			North Georgia			Florida			Treasury			Total
	(In thousands)
Three Months ended September 30, 20101
Net interest income	$	2,843		$	1,587		$	19		$	295		$	4,744
Provision for loan losses		957			48			988			1,107			3,100
Noninterest income		372			(1,654	)		5			3,129			1,852
Noninterest expense		1,573			1,428			514			4,440			7,955
Income tax expense (benefit)		-			-			-			-			-
Net income (loss)		685			(1,543	)		(1,478	)		(2,123	)		(4,459	)
Total assets		273,466			322,173			72,965			375,596			1,044,200

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

Nine Months ended September 30, 20101
Net interest income		9,776			4,587			315			(354	)		14,324
Provision for loan losses		6,430			5,720			3,408			4,656			20,214
Noninterest income		1,589			(6,288	)		(783	)		6,063			581
Noninterest expense		5,654			5,832			2,181			11,812			25,479
Income tax expense (benefit)		-			-			-			95			95
Net loss		(719	)		(13,253	)		(6,057	)		(10,854	)		(30,883	)

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	)

1 See Note 4 concerning branch sale.

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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 as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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, 2009. 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.

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Item 2. Management’s Discussion and Analysis or Financial Condition and Results of Operation

OVERVIEW

During 2008, 2009 and the first nine months of 2010, turmoil within the financial services industry, the economy and the effect on real estate generally contributed to a substantial increase in the Company’s non-performing assets and a substantial decrease in the Company’s earnings. In response, the Company has proactively taken measures to address its credit quality, improve its capital position and preserve its liquidity. As of September 30, 2010, the Company and the Bank’s regulatory capital levels were considered “significantly undercapitalized” under the prompt corrective action rules of our regulators.

In addition, the Company and the Bank are currently operating under heightened regulatory scrutiny and entered into a Written Agreement with the Federal Reserve Bank of Atlanta and the Georgia Department of Banking and Finance on July 14, 2009 (the “Written Agreement”). The Written Agreement places certain requirements and restrictions on the Bank. Under the terms of the Written Agreement, the Bank is required to prepare and submit written plans and reports to the regulators that address 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. The Company initially submitted the requested plans to the regulators for their review on August 26, 2009. The Company continues to supplement these plans and reports on a quarterly basis and as needed in response to comments and requests from our regulators. While the Written Agreement remains in place, the Company may not pay dividends and may not increase debt or redeem any shares of stock without the prior written consent of the regulators.

Since the Bank entered into the Written Agreement, it has aggressively taken steps to address the components of the Written Agreement. The Bank is working with the Federal Reserve and the Georgia Department to improve its financial condition and is addressing the items included in the Written Agreement on a continuing basis, including establishing new commercial real estate loan concentration limits, new policies on the use of interest reserves, and comprehensive underwriting criteria for commercial credit analysis. The Bank is also strengthening its problem asset management function to reduce the level of problem assets on its balance sheet over a period of time. The Bank is in ongoing dialogue with its regulators to remain in compliance with the terms of the Written Agreement. Failure to adequately address the Written Agreement may result in actions by the banking regulators, including the eventual appointment of a receiver or conservator of the Bank’s assets.

In light of the foregoing, the Company is continuing its efforts to increase its capital ratios. As part of those efforts, the Company is continuing to review all strategic opportunities available to the Company and the Bank and is pursuing a variety of capital-raising and other strategic alternatives; however, there is no assurance that the Company’s efforts will be successful, particularly in the current economic environment. In the event we are unable to raise additional capital, our ability to continue to operate may be significantly impacted.

The following overview 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, 2009, 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 $1.04 billion community bank with 13 branches 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.

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We generally group our offices into three geographic regions for discussion purposes due to the varying demographics of each market. Our current and former offices in Lowndes, Appling, Bulloch, Cook, Decatur, Grady, and Jeff Davis counties are collectively referred to as our “South Georgia” market. Our current and former offices in Henry, Hall, Gwinnett, Forsyth, Cobb, Clarke and Oconee counties are collectively referred to as our “North Georgia” market. Our current and former offices in Marion, Duval, and St. Johns counties are 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 (Gwinnett County, Georgia) and our branch in Jacksonville (Duval County, Florida) due to the economic downturn and disappointing results from these markets. In January 2010, we closed our loan production offices in Forsyth County, Georgia and St. Johns County, Florida in a further effort to reduce expenses. On May 24, 2010, the Bank sold five branches to Heritage Bank of the South (“Heritage”), a subsidiary of Albany, Georgia-based Heritage Financial Group. The five branches included two branches located in Statesboro (Bulloch County, Georgia), one branch in Baxley (Appling County, Georgia), one branch in Hazlehurst (Jeff Davis County, Georgia), and one branch in Adel (Cook County, Georgia.)

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

Market/ County	Number of Offices		Total Loans1		Total Deposits1		Market Share (%)2		Market Share Rank2

South Georgia
Lowndes		4	$	211,801	$	293,369		23.9		1
Decatur		3		39,256		98,365		27.6		1
Grady		1		10,396		20,979		6.7		5
		8	$	261,453	$	412,713
North Georgia
Henry		2	$	123,240	$	65,159		3.5		10
Hall		1		78,305		35,213		1.4		13
Oconee		1		46,242		22,260		3.1		7
		4	$	247,787	$	122,632

Florida
Marion		1	$	55,795	$	174,258		3.4		7
		1	$	55,795	$	174,258

Dollar amounts are presented in thousands as of September 30, 2010. Amounts exclude $32.7 million in loans and $185.9 million in deposits assigned to the “Treasury” that are not allocated to any particular market (i.e. participation loans, employee and director accounts, brokered deposits, official checks, etc.).

2	Based on the FDIC Summary of Deposits report as of June 30, 2010.

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Market/ County	Total Population1		Population Growth (%)2		Employment Growth (%)3		Unemployment Rate (%)4		Median 2010 Household Income ($)5

Selected Georgia Counties:
South Georgia:
Lowndes		106,350		15.5		-4.0		8.3	$	40,728
Decatur		29,705		5.2		-7.0		13.7		34,657
Grady		25,277		6.8		-5.7		9.1		34,574
North Georgia:
Hall		206,271		72.8		-3.5		10.1		72,468
Henry		191,332		37.4		-3.1		9.0		56,240
Oconee		35,118		33.9		-1.4		6.5		66,216

State of Georgia		10,014,045		22.3		-3.3		9.9		56,184

Selected Florida County:
Marion		343,804		32.8		-4.0		13.8		39,724

State of Florida		18,917,612		18.4		-1.7		11.3		49,910

National Total		311,212,863		10.6		-1.4		9.5		54,442

1	Estimated 2010 population from SNL Financial demographic data provided by Environmental Systems Research Institute (“ESRI”) based primarily on US Census data.

2	Estimated percentage population change from 2000 to 2010 from SNL Financial demographic data provided by ESRI based primarily on US Census data.

3	Total employment growth (not seasonally adjusted) for the Second Quarter 2010 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 2010 provided by the Bureau of Labor Statistics.

5	Estimated 2010 Median Household Income from SNL Financial demographic data provided by ESRI based primarily on US Census data.

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FINANCIAL CONDITION

During the nine months ended September 30, 2010, our total assets decreased $187.7 million, or 20.4% on an annualized basis, to $1.04 billion. One of the key strategic initiatives of the bank has been to shrink the balance sheet to reduce the pressure on the Bank’s capital base. Our loan portfolio decreased $207.6 million, or 34.5% on an annualized basis, to $597.7 million at September 30, 2010 from $805.3 million at December 31, 2009. Total deposits decreased $149.8 million, or 19.2% on an annualized basis, to $895.5 million at September 30, 2010 from $1.05 billion at December 31, 2009. The decrease in assets, loans, and deposits can be partially attributed to the branch sale that took place during the second quarter of 2010. On May 24, 2010, the Bank sold five of its branches to Heritage. The sale resulted in the transfer of approximately $52 million in loans (at a net discount of $430,000); $5 million in other assets, including real estate, automated teller machines, and furniture, fixtures, and equipment; $75 million in demand deposits, savings and money market accounts (at a net premium of $1.1 million); and $22 million in certificates of deposits. Because the amount of liabilities assumed by Heritage exceeded the value of the assets purchased, the Bank also transferred approximately $39 million in cash to Heritage in connection with the closing of the transaction.

The following table summarizes our loan and deposit portfolios classified by type and market as of September 30, 2010.

As of September 30, 2010	South Georgia			North Georgia			Florida			Treasury			Total
	(Dollars in Thousands)
Loans
Commercial and financial	$	22,157		$	34,780		$	1,641		$	17,301		$	75,879
Agricultural (including loans secured by farmland)		26,632			1,855			2,854			-			31,341
Real estate - construction		47,952			52,434			19,126			270			119,782
Real estate - commercial		79,524			125,219			21,192			2,408			228,343
Real estate - residential		78,516			33,106			10,893			6,529			129,044
Installment loans to individuals and other loans		6,605			467			206			6,190			13,468
		261,386			247,861			55,912			32,698			597,857
Deferred loan fees and unearned interest, net		67			(74	)		(117	)		(11	)		(135	)
		261,453			247,787			55,795			32,687			597,722
Allowance for loan losses		(7,072	)		(8,687	)		(1,876	)		(9,283	)		(26,918	)
Net loans	$	254,381		$	239,100		$	53,919		$	23,404		$	570,804
Percentage of total		44.6	%		41.9	%		9.4	%		4.1	%		100.0	%

Deposits
Noninterest-bearing demand	$	65,858		$	14,038		$	5,280		$	4,171		$	89,347
Interest-bearing demand and savings		113,904			28,870			28,818			399			171,991
Retail time less than $100,000		135,160			44,091			92,811			26			272,088
Retail time greater than or equal to $100,000		97,791			34,986			47,349			-			180,126
Retail time placed in CDARs program		-			647			-			-			647
Brokered time1		-			-			-			94,495			94,495
Internet time1		-			-			-			86,770			86,770
Total deposits	$	412,713		$	122,632		$	174,258		$	185,861		$	895,464
Percentage of total		46.1	%		13.7	%		19.5	%		20.7	%		100.0	%

1 Brokered time deposits are defined as bank deposits solicited by a third-party broker. Internet time deposits are defined as bank deposits solicited via multiple internet services.

In addition to the geographic concentrations noted in the tables above, we had approximately $47.6 million in loans secured by real estate in Florida to customers of our South Georgia, North Georgia and Treasury offices.

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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-10			Jun-10			Mar-10			Dec-09			Sep-09
	(Dollars in Thousands)
Commercial and financial	$	75,879		$	77,874		$	78,395		$	84,771		$	88,863
Agricultural (including loans secured by farmland)		31,341			38,438			42,396			40,215			44,470
Real estate - construction		119,782			154,015			181,318			204,663			269,804
Real estate - commercial		228,343			237,006			264,341			275,927			283,404
Real estate - residential		129,044			136,096			171,843			174,879			181,048
Installment loans to individuals and other loans		13,468			11,234			19,542			24,949			24,561
		597,857			654,663			757,835			805,404			892,150

Deferred loan fees and unearnedinterest, net		(135	)		(138	)		(103	)		(90	)		(169	)
Total loans		597,722			654,525			757,732			805,314			891,981
Allowance for loan losses		(26,918	)		(34,518	)		(30,529	)		(29,314	)		(40,000	)
Net loans	$	570,804		$	620,007		$	727,203		$	776,000		$	851,981

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

As of Quarter End	Sep-10			Jun-10			Mar-10			Dec-09			Sep-09
Commercial and financial		12.69	%		11.90	%		10.35	%		10.53	%		9.96	%
Agricultural (including loans secured by farmland)		5.24	%		5.87	%		5.59	%		4.99	%		4.99	%
Real estate - construction		20.04	%		23.53	%		23.93	%		25.41	%		30.25	%
Real estate - commercial		38.20	%		36.21	%		34.88	%		34.26	%		31.77	%
Real estate - residential		21.60	%		20.79	%		22.68	%		21.72	%		20.30	%
Installment loans to individuals and other loans		2.25	%		1.72	%		2.58	%		3.10	%		2.75	%
		100.02	%		100.02	%		100.01	%		100.01	%		100.02	%

Deferred loan fees and unearnedinterest, net		-0.02	%		-0.02	%		-0.01	%		-0.01	%		-0.02	%
Total loans		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%
Allowance for loan losses		-4.50	%		-5.27	%		-4.03	%		-3.64	%		-4.48	%
Net loans		95.50	%		94.73	%		95.97	%		96.36	%		95.52	%

At September 30, 2010, our loan portfolio was $597.7 million compared to $805.3 million at December 31, 2009, a decrease of $207.6 million, or 25.8%. The composition of the loan portfolio has shifted as commercial real estate loans increased from 30.8% of our portfolio in 2005 to 38.2% at September 30, 2010, and construction and land development loans decreased from 35.7% to 20.0% of our portfolio over the same time frame. A large portion of our commercial real estate loans are in our North Georgia market. Of the $228.3 million in commercial real estate loans outstanding at September 30, 2010, $125.2 million, or 54.8%, were originated in our North Georgia offices.

Table of Contents

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, 2010						December 31, 2009						September 30, 2009
	$ Amount			% to Total			$ Amount			% to Total			$ Amount			% to Total
	(Dollars in Thousands)
Construction and development:
Acquisition and development:
1-4 family residential	$	55,300			46.2	%	$	83,868			41.0	%	$	109,941			40.7	%
Commercial and multi-family		37,782			31.5	%		58,477			28.6	%		79,370			29.4	%
Construction:
1-4 family residential spec		3,109			2.6	%		10,364			5.1	%		11,939			4.4	%
1-4 family residential pre-sold		1,145			1.0	%		304			0.1	%		261			0.1	%
1-4 family residential other		4,444			3.7	%		14,501			7.1	%		17,239			6.4	%
Commercial owner-occupied		539			0.4	%		704			0.3	%		2,506			0.9	%
Commercial not owner-occupied		16,081			13.4	%		27,994			13.7	%		32,533			12.1	%
Hotel/motel		221			0.2	%		2,427			1.2	%		5,558			2.1	%
Multi-family properties		973			0.8	%		4512			2.2	%		4,898			1.8	%
Special purpose property		188			0.2	%		1,512			0.7	%		1,840			0.7	%
Other		-			0.0	%		-			0.0	%		3,719			1.4	%
Total construction and development loans	$	119,782			100.0	%	$	204,663			100.0	%	$	269,804			100.0	%
Percentage of total loans		20.0	%					25.4	%					30.3	%

	September 30, 2010						December 31, 2009						September 30, 2009
	$ Amount			% to Total			$ Amount			% to Total			$ Amount			% to Total
Commercial real estate:
Owner-occupied:
Office	$	25,452			11.1	%	$	40,718			14.8	%	$	41,197			14.5	%
Retail		17,741			7.8	%		18,576			6.7	%		19,005			6.7	%
Other		25,232			11.1	%		39,783			14.4	%		40,220			14.2	%
Not owner-occupied:
Office		18,654			8.2	%		27,342			9.9	%		22,068			7.8	%
Retail		45,039			19.7	%		36,524			13.2	%		44,985			15.9	%
Other		14,836			6.5	%		24,035			8.7	%		25,487			9.0	%
Other:
Hotel/motel		28,191			12.3	%		25,756			9.3	%		22,186			7.8	%
Industrial		4,701			2.1	%		4,300			1.6	%		4,405			1.5	%
Multi-family properties		10,673			4.7	%		19,462			7.1	%		26,783			9.5	%
Special purpose property		37,824			16.5	%		38,748			14.0	%		37,068			13.1	%
Other		-			0.0	%		683			0.3	%		-			0.0	%
Total commercial real estate loans	$	228,343			100.0	%	$	275,927			100.0	%	$	281,781			100.0	%
Percentage of total loans		38.2	%					34.3	%					31.8	%

Table of Contents

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

As of Quarter End	Sep-10		Jun-10		Mar-10		Dec-09		Sep-09
	(Dollars In Thousands)
Noninterest-bearing demand	$	89,347	$	86,534	$	95,228	$	100,458	$	106,573
Interest-bearing demand and savings		171,991		181,530		252,662		250,232		241,073
Retail time less than $100,000		272,088		281,064		302,125		305,381		317,403
Retail time greater than or equal to $100,000		180,126		182,973		191,579		179,325		184,339
Retail time placed in CDARs programs		647		6,849		12,819		29,532		41,799
Brokered time1		94,495		97,120		113,701		133,012		119,237
Internet time1		86,770		117,344		99,093		47,275		19,214
Total deposits	$	895,464	$	953,414	$	1,067,207	$	1,045,215	$	1,029,638

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

As of Quarter End

Sep-10

Jun-10

Mar-10

Dec-09

Sep-09

Noninterest-bearing demand

9.98

PAB BANKSHARES INC 10-Q