pab bankshares, inc. - SNL Financial

Difficult market conditions and economic trends have adversely affected our industry and our business and may
continue to do so.
Our business has been directly affected by market conditions, trends in industry and finance, legislative and regulatory
changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control.
Beginning in the second half of 2007 and continuing through 2010, the financial markets were highlighted by significant
volatility associated with subprime mortgages, including adverse impacts on credit quality and liquidity within the
financial markets. As a result of this significant downturn, we have experienced dramatic declines in the housing market
with decreasing home prices and increasing delinquencies and foreclosures, which have negatively impacted the credit
performance of our loans and resulted in increases in the level of our nonperforming assets and charge-offs of problem
loans. At the same time, competition among depository institutions for deposits has increased significantly. Bank and
bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies
to raise capital or borrow in the debt markets compared to recent years. These market conditions and the tightening of
credit have led to increased deficiencies in our loan portfolio, increased market volatility and widespread reduction in
general business activity.
As a result of the negative developments in the financial industry, new federal and state laws and regulations regarding
lending and funding practices and liquidity standards have been enacted, and bank regulatory agencies have been, and are
expected to continue to be, aggressive in responding to concerns and trends identified in examinations. Difficult market
conditions and the impact of the new legislation in response to those developments could restrict our business operations,
including our ability to originate loans. If the communities in which we operate do not recover and grow as anticipated or
if prevailing economic conditions locally or nationally do not improve, our business may continue to be negatively
impacted. The current economic downturn, increase in unemployment, and other events that have negatively affected
household and/or corporate incomes both nationally and locally have decreased the demand for loans and our other
products and services and have increased the number of customers who fail to pay interest or principal on their loans.
Furthermore, if the economy improves in the future, we may not benefit from any market growth or favorable economic
conditions in our market areas if they do occur.
Due to our high concentration of loans secured by real estate, deteriorating conditions in our North Georgia and
Florida markets have adversely affected us and may continue to do so, leading to higher loan charge-offs or an
increase in our provision for loan losses.
As of December 31, 2009, approximately 86% of our total loans were secured by real estate. In 2007, the housing and real
estate sectors in our markets experienced an economic downturn that accelerated through 2009 and has continued in 2010.
The downturn has most affected us in our North Georgia market, particularly on the south side of Atlanta, and in our
Florida market. We had a significant presence in residential construction and development lending in both of these
markets. At December 31, 2009, approximately 51% of our residential construction and development loans, 25% of our
residential mortgages and approximately 59% of our nonperforming assets were in our North Georgia markets, while 15%
of our residential construction and development loans, 5% of our residential mortgages and approximately 23% of our
nonperforming assets were in our Florida market. The majority of our customers who were residential builders carried
inventories of lots for new construction. The supply of vacant, developed lots has increased dramatically as the number of
new building permits and housing starts decreased. In addition, between August 2008 and February 2010, the FDIC
placed over 50 Georgia- and Florida-based financial institutions into receivership, and we believe that others will be placed
in receivership in the future. The subsequent sale of the assets of these financial institutions at depressed prices could
continue to negatively affect the value of our real estate collateral and other real estate owned. We believe that it may take
more than five years for the market to fully absorb the existing lot inventories in some areas on the south side of the
Atlanta market. If economic conditions continue to worsen or deteriorate, it could lead to additional charge-offs and
further increases in our allowance for loan losses.
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