Summary of PAB BANKSHARES INC

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

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

Our operating subsidiary, The Park Avenue Bank, is a $1.28 billion community bank with 18 branches and two loan production offices in Georgia and Florida. We have offices in both smaller, rural communities as well as larger, metropolitan areas. We provide traditional banking products and services to commercial and individual customers in our markets. Competition, regulation, credit risk and interest rate risk are the primary factors that we must manage in order to be successful.

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

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

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

        South Georgia
        Lowndes                 4     $ 240,280     $  264,221            19.4           2
        Cook                    1        12,575         47,888            26.2           2
        Decatur                 3        47,244        109,033            32.2           1
        Grady                   1        13,328         25,468             6.7           5
        Appling                 1        14,879         39,294            16.0           4
        Jeff Davis              1         9,791         52,561            28.0           2
        Bulloch                 2        34,160         59,964             4.6           6
                               13     $ 372,257     $  598,429
        North Georgia
        Henry                   2     $ 221,844     $   68,570             3.5           8
        Hall                    1        91,297         28,582             1.0          14
        Oconee                  1        46,227         13,476             1.8           8
        Forsyth                 1        54,663         11,877               -           -
                                5     $ 414,031     $  122,505

           Florida
        Marion                  1     $  30,433     $  163,152             3.4           7
        St. Johns               1        68,467          1,064               -           -
                                2     $  98,900     $  164,216

1 Dollar amounts are presented in thousands as of June 30, 2009. Amounts exclude $34.5 million in loans and $151.2 million in deposits assigned to the "Treasury" that are not allocated to any particular market (i.e. participation loans, employee and director accounts, brokered deposits, official checks, etc.).

2 Based on the FDIC/OTS Summary of Deposits report as of June 30, 2008.

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                                                                                                          Median 2008
            Market/                   Total          Population       Employment       Unemployment        Household
            County                 Population1      Growth (%)2      Growth (%)3        Rate (%)4         Income ($)5

Selected Georgia Counties:
        South Georgia:
            Appling                      17,975             3.19             (5.0 )              9.2            36,331
            Bulloch                      67,245            20.12             (5.1 )              8.3            36,805
             Cook                        16,662             5.65             (5.1 )             12.2            33,143
            Decatur                      29,732             5.28             (5.1 )             11.9            35,282
             Grady                       25,305             6.96             (5.1 )              9.2            34,959
          Jeff Davis                     13,235             4.34             (5.2 )             13.2            32,660
            Lowndes                     104,738            13.70             (5.2 )              7.8            41,368
        North Georgia:
            Forsyth                     175,192            78.03             (5.3 )              7.8            95,141
             Hall                       186,789            34.11             (5.2 )              8.6            57,026
             Henry                      202,104            69.35             (5.3 )              8.7            73,113
            Oconee                       34,510            31.59             (5.1 )              5.6            67,570

       State of Georgia               9,932,949            21.33             (5.3 )              9.1            56,752

Selected Florida Counties:
            Marion                      341,870            32.04             (5.2 )             12.0            39,870
           St. Johns                    188,194            52.84             (5.2 )              8.1            66,135

       State of Florida              19,021,613            19.02             (4.3 )              9.3            50,509

        National Total              309,731,508            10.06             (3.5 )              8.8            54,749

FINANCIAL CONDITION

During the six months ended June 30, 2009, our total assets decreased $73.0 million, or 10.9% on an annualized basis, to $1.28 billion. Our loan portfolio decreased $37.0 million, or 7.8% on an annualized basis, to $919.7 million at June 30, 2009 from $956.7 million at December 31, 2008. Total deposits decreased $87.3 million, or 15.7% on an annualized basis, to $1.036 billion at June 30, 2009 from $1.124 billion at December 31, 2008. The decrease in total deposits is primarily the result of a $72.5 million decrease in brokered deposits, a $26.0 million dollar decrease in retail-in-market time deposits and a $6.7 million decrease in interest-bearing demand and savings accounts, offset by a $17.2 million increase in noninterest-bearing deposits. During the first quarter of 2009, the Bank issued $20 million of 3-year unsecured debt under the FDIC's Temporary Liquidity Guarantee Program.

1 Estimated 2009 poulation provided by SNL Financial.

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

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

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

5 Based on actual 2008 market demographics provided by SNL Financial.

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

                                    South         North
As of June 30, 2009                Georgia       Georgia       Florida      Treasury         Total
                                                        (Dollars in Thousands)
Loans
Commercial and financial          $  30,994     $  45,485     $   2,024     $   6,096     $    84,599
Agricultural (including loans
secured by farmland)                 35,931         3,360         6,483             -          45,774
Real estate - construction           74,154       158,161        56,024         2,610         290,949
Real estate - commercial             93,038       157,735        25,062         9,896         285,731
Real estate - residential           126,164        43,651         9,334         3,925         183,074
Installment loans to
individuals and other loans          11,795         5,799           137        12,059          29,790
                                    372,076       414,191        99,064        34,586         919,917
Deferred loan fees and unearned
interest, net                           181          (160 )        (164 )         (76 )          (219 )
                                    372,257     $ 414,031     $  98,900     $  34,510     $   919,698
Allowance for loan losses            (5,143 )     (10,917 )      (3,229 )        (430 )       (19,719 )
Net loans                         $ 367,114       403,114        95,671        34,080         899,979
Percentage of total                    40.8 %        44.8 %        10.6 %         3.8 %         100.0 %

Deposits
Noninterest-bearing demand        $  71,983     $  18,579     $   3,517     $  14,894     $   108,973
Interest-bearing demand and
savings                             194,395        25,803        24,496           765         245,459
Retail time less than $100,000      180,185        46,699        93,479           471         320,834
Retail time greater than or
equal to $100,000                   121,188        27,730        42,724           210         191,852
Retail time placed in CDARs
program                              30,678         3,694             -           818          35,190
Brokered                                  -             -             -       134,074         134,074
Total deposits                    $ 598,429     $ 122,505     $ 164,216     $ 151,232     $ 1,036,382
Percentage of total                    57.7 %        11.8 %        15.9 %        14.6 %         100.0 %

In addition to the geographic concentrations noted in the tables above, we had approximately $76.7 million in loans secured by real estate in Florida to customers of our South Georgia, North Georgia and Treasury offices.

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With approximately 17% of our loan portfolio concentrated in residential construction and development loans and an additional 20% of our loan portfolio in residential mortgages, we continuously monitor and evaluate economic trends in our residential real estate markets. Since the second half of 2007, finished housing inventories and the supply of vacant developed lots have continued to increase in several of our markets in the Atlanta MSA as the number of home sales, new building permits and housing starts have decreased. The table below summarizes, from data available to the Company, the inventory supply trends for housing and vacant developed lots for select counties on the south side of the Atlanta MSA where we have a significant presence in residential real estate construction and development loans and other real estate owned. These statistics are based on estimated absorption rates using actual house sales compared to the number of houses for sale and housing starts and/or building permits compared to the number of vacant developed lots available. The actual absorption periods may differ from these estimates given changes in the future volume of home sales and housing starts.

For the
Quarter
Ended           Jun-09        Mar-09        Dec-08        Sep-08        June-08         Jun-07         Jun-06
                                                  (Number of Months Supply)
Housing
Inventory:
Henry County        11.9          12.7          14.0          13.8           13.1           10.1            8.4
Clayton
County              18.5          16.7          15.1          11.5            9.9           13.1           10.2
Newton
County              10.4          12.9          14.5          15.3           13.9            8.6            9.0
South Fulton
County               8.7           9.7           9.5           9.3            9.2            8.4            8.4

Vacant
Developed
Lots
Inventory:
Henry County       362.9         348.8         291.0         207.0          153.0           46.0           27.0
Clayton
County             436.8         273.9         169.0         122.0           91.0           30.0           25.0
Newton
County             410.3         399.9         326.0         210.0          142.0           36.0           22.0
South Fulton
County             192.7         161.7         126.0          96.0           83.0           35.0           19.0

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

As of Quarter End                  Jun-09        Mar-09        Dec-08        Sep-08        Jun-08
                                                       (Dollars in Thousands)
Commercial and financial          $  84,599     $  82,534     $  87,530     $  91,401     $  82,087
Agricultural (including loans
secured by farmland)                 45,774        44,671        48,647        49,227        46,891
Real estate - construction          290,949       314,863       315,786       332,901       344,393
Real estate - commercial            285,731       274,338       276,645       281,781       275,962
Real estate - residential           183,074       191,388       196,306       195,439       181,169
Installment loans to
individuals and other loans          29,790        32,740        32,084        32,075        33,237
                                    919,917       940,534       956,998       982,824       963,739

Deferred loan fees and unearned
interest, net                          (219 )        (255 )        (310 )        (253 )        (239 )
                                    919,698       940,279       956,688       982,571       963,500
Allowance for loan losses           (19,719 )     (20,403 )     (19,374 )     (20,240 )     (14,303 )
                                  $ 899,979     $ 919,876     $ 937,314     $ 962,331     $ 949,197

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

As of Quarter End                  Jun-09        Mar-09        Dec-08        Sep-08        Jun-08
Commercial and financial               9.20 %        8.78 %        9.15 %        9.30 %        8.52 %
Agricultural (including loans
secured by farmland)                   4.98 %        4.75 %        5.08 %        5.01 %        4.87 %
Real estate - construction            31.63 %       33.49 %       33.01 %       33.88 %       35.74 %
Real estate - commercial              31.07 %       29.18 %       28.92 %       28.68 %       28.64 %
Real estate - residential             19.90 %       20.35 %       20.52 %       19.89 %       18.80 %
Installment loans to
individuals and other loans            3.24 %        3.48 %        3.35 %        3.27 %        3.45 %
                                     100.02 %      100.03 %      100.03 %      100.03 %      100.02 %
Deferred loan fees and unearned
interest, net                         -0.02 %       -0.03 %       -0.03 %       -0.03 %       -0.02 %
Total loans                          100.00 %      100.00 %      100.00 %      100.00 %      100.00 %
Allowance for loan losses             -2.14 %       -2.17 %       -2.03 %       -2.06 %       -1.48 %
Net loans                             97.86 %       97.83 %       97.97 %       97.94 %       98.52 %

At June 30, 2009, our loan portfolio was $919.7 million compared to $956.7 million at December 31, 2008, a decrease of $37.3 million, or 4.0%. Since December 31, 2004, the composition of the loan portfolio has shifted as commercial real estate mortgages decreased from 36.9% of our portfolio in 2004 to 31.1% at June 30, 2009, and construction and land development loans increased from 25.8% of our portfolio to 31.6% of our portfolio during that same time. However, it should be noted that construction and land development loans have decreased from 38.3% of our portfolio at December 31, 2007. This increase in construction and land development lending was largely the result of our decision in 2000 to expand into our North Georgia markets. The more recent decrease in construction and development loans is due to management's conscious efforts to reduce the concentration risk in our loan portfolio. Of the $290.9 million in construction and development loans outstanding at June 30, 2009, $158.2 million, or 54.4%, were originated in our North Georgia offices.

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

                              June 30, 2009                 December 31, 2008                June 30, 2008
                        $ Amount       % to Total       $ Amount       % to Total      $ Amount       % to Total
                                                         (Dollars in Thousands)
Construction and
development:
Acquisition and
development:
1-4 family
residential             $ 119,476             41.1 %   $  129,412             41.0 %   $ 132,885             38.6 %
Commercial and
multi-family               95,245             32.7 %       95,934             30.4 %     103,772             30.1 %
Construction:
1-4 family
residential spec           12,547              4.3 %       19,182              6.1 %      32,985              9.6 %
1-4 family
residential pre-sold          162              0.1 %          112              0.1 %         965              0.3 %
1-4 family
residential other          20,701              7.1 %       23,423              7.4 %      29,165              8.5 %
Commercial
owner-occupied              2,007              0.7 %        3,340              1.0 %       5,123              1.5 %
Commercial not
owner-occupied             28,938              9.9 %       27,038              8.5 %      25,233              7.3 %
Hotel/motel                 4,080              1.4 %        7,949              2.5 %         496              0.1 %
Multi-family
properties                  5,066              1.7 %            -              0.0 %      12,540              3.6 %
Special purpose
property                    2,288              0.8 %        6,538              2.1 %       1,229              0.4 %
Other                         439              0.2 %        2,858              0.9 %           -              0.0 %
Total construction
and development loans   $ 290,949            100.0 %   $  315,786            100.0 %   $ 344,393            100.0 %
Percentage of total
loans                        31.6 %                          33.0 %                         35.7 %

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                              June 30, 2009                 December 31, 2008                June 30, 2008
                        $ Amount       % to Total       $ Amount       % to Total      $ Amount       % to Total
Commercial real
estate:
Owner-occupied:
Office                  $  41,945             14.7 %   $   41,617             15.0 %   $  37,100             13.4 %
Retail                     19,993              7.0 %       21,062              7.6 %      22,775              8.3 %
Other                      41,260             14.4 %       40,413             14.6 %      36,988             13.4 %
Not owner-occupied:
Office                     20,892              7.3 %       25,425              9.2 %      27,634             10.0 %
Retail                     44,896             15.7 %       36,085             13.1 %      34,629             12.5 %
Other                      24,937              8.7 %       24,656              8.9 %      26,883              9.7 %
Other:
Hotel/motel                21,887              7.7 %       15,812              5.7 %      21,197              7.7 %
Industrial                  4,502              1.6 %        4,677              1.7 %       4,716              1.7 %
Multi-family
properties                 23,043              8.1 %       22,685              8.2 %      26,655              9.7 %
Special purpose
property                   41,430             14.5 %       39,240             14.2 %      35,572             12.9 %
Other                         946              0.3 %        4,973              1.8 %       1,813              0.7 %
Total commercial real
estate loans            $ 285,731            100.0 %   $  276,645            100.0 %   $ 275,962            100.0 %
Percentage of total
loans                        31.1 %                          28.9 %                         28.6 %

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                   Jun-09          Mar-09          Dec-08          Sep-08         Jun-08
                                                           (Dollars In Thousands)
Noninterest-bearing demand        $   108,973     $   111,472     $    91,114     $   101,417     $ 102,909
Interest-bearing demand and
savings                               245,459         250,325         252,122         262,723       336,359
Retail time less than $100,000        320,834         330,854         328,329         323,377       292,981
Retail time greater than or
equal to $100,000                     191,852         198,768         198,845         182,491       175,914
Retail time placed in CDARs
programs                               35,190          53,712          46,690          18,343             -
Brokered                              134,074         160,167         206,603         141,493        88,432
Total deposits                    $ 1,036,382     $ 1,105,298     $ 1,123,703     $ 1,029,844     $ 996,595

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

As of Quarter End                  Jun-09        Mar-09        Dec-08        Sep-08        Jun-08
Noninterest-bearing demand            10.51 %       10.09 %        8.11 %        9.85 %       10.33 %
Interest-bearing demand and
savings                               23.68 %       22.65 %       22.44 %       25.51 %       33.75 %
Retail time less than $100,000        30.96 %       29.93 %       29.22 %       31.40 %       29.40 %
Retail time greater than or
equal to $100,000                     18.51 %       17.98 %       17.69 %       17.72 %       17.65 %
Retail time placed in CDARs
program                                3.40 %        4.86 %        4.15 %        1.78 %           -
Brokered                              12.94 %       14.49 %       18.39 %       13.74 %        8.87 %
Total deposits                       100.00 %      100.00 %      100.00 %      100.00 %      100.00 %

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RESULTS OF OPERATIONS

Net income for the three months ended June 30, 2009 was $342,000, or $0.04 per diluted share, as compared to $1.5 million, or $0.15 per diluted share, during the same period in 2008. The $1.1 million, or 76.7%, decrease in net income is the net result of an $876,000 decrease in net interest income, a $950,000 increase in the provision for loan losses and a $910,000 increase in noninterest expense, offset by a $915,000 increase in other income and a $700,000 decrease in income tax expense. Our return on average assets ("ROA") and return on average equity ("ROE") for the three months ended June 30, 2009 were 0.10% and 1.51%, respectively, compared to a .49% ROA and a 5.96% ROE for the same period in 2008.

Net income for the six months ended June 30, 2009 was $47,000, or $0.01 per diluted share, as compared to $2.8 million, or $0.29 per diluted share, during the same period in 2008. The $2.7 million, or 98.3%, decrease in net income is the net result of a $3.0 million decrease in net interest income, a $1.5 million increase in the provision for loan losses and a $1.2 million increase in other expenses, offset by a $1.4 million increase in other income and a $1.6 million decrease in income tax expense. Our ROA and ROE for the six months ended June 30, 2009 were 0.01% and 0.10%, respectively, compared to a 0.46% ROA and a 5.60% ROE for the same period in 2008.

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

Net Interest Income
The primary component of our profitability is net interest income, or the difference between the interest income earned on assets, primarily loans and investments, and interest paid on liabilities, primarily deposits and other borrowed funds. For the three months ended June 30, 2009, our net interest income on a taxable-equivalent basis was $8.1 million, a 10.8% decrease from the $9.0 million in net interest income for the second quarter of 2008. The decrease in net interest income is due to a $1.4 million decrease in interest income, offset by a $500,000 decrease in interest expense. During the second quarter of 2009, our average earning assets were 7.4% higher compared to the same period in 2008, and the average balances of our interest-bearing liabilities increased by 9.4% to fund the asset growth. Because of economic conditions and illiquidity in our loan portfolio, we are carrying approximately $80 million in excess liquidity at a negative net spread that adversely impacted the net interest margin by 19 basis points during the second quarter of 2009. A portion of the decrease in interest income is due to an increase in nonaccrual loans, causing approximately $1.05 million in interest income to not be recognized during the second quarter of 2009, compared to $804,000 in interest income forgone during the same period in 2008. The average yield on our earning assets decreased 93 basis points from 6.24% for the second quarter of 2008, to 5.31% for the second quarter of 2009. However, the average rates paid for our funds only decreased 48 basis points from 3.43% for the second quarter of 2008, to 2.95% for the second quarter of 2009. As a result, our net interest spread declined by 45 basis . . .