**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





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





For
      the
      Fiscal Year Ended December 31, 2005





Commission
      File Number 00-25422












**PAB
      BANKSHARES, INC.**


(A
      Georgia Corporation)


IRS
      Employer Identification Number: 58-1473302





**3250
      North Valdosta Road, Valdosta, Georgia 31602**


**Telephone
      Number: (229) 241-2775**





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


NONE







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


**Common
      Stock, no par value**








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





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





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 T No *





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




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


Large
      accelerated filer * Accelerated filer T Non-accelerated filer *









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





The
      aggregate market value of voting common stock held by non-affiliates on June
      30,
      2005 was approximately $108.4 million (based on shares held by non-affiliates
      at
      $15.45 per share, the closing stock price on the American Stock Exchange on
      June 30, 2005).





As
      of
      February 28, 2006 (the latest practicable date), the registrant had 9,478,179
      shares of common stock outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders
      to be held on May 23, 2006 are incorporated by reference in answer to Part
      III
      of this Form 10-K.


2


**TABLE
      OF CONTENTS**





**Item**
            **Page**Cautionary
                Notice Regarding Forward-Looking
                Statements
            4**PART
                I**1.
            
            BUSINESSGeneral
            4Supervision
                and Regulation
            91A.
            
            RISK
                FACTORS
            141B.
            
            UNRESOLVED
                STAFF COMMENTS
            182.
            
            PROPERTIES
            193.
            
            LEGAL
                PROCEEDINGS
            194.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            19**PART
                II**5.
            
            MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
            196.
            
            SELECTED
                FINANCIAL DATA
            217.
            
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONSOverview
                of Key Financial, Strategic and Performance Factors
            22Statistical
                Disclosures
            25Liquidity
                and Capital Resources
            34Results
                of Operations
            367A.
            
            QUANTATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            418.
            
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATAQuarterly
                Financial Summary for 2005 and 2004
            43Management’s
                Report On Internal Control Over Financial Reporting
            44Auditor’s
                Attestation Report
            45Reports
                of Independent Public Accountants
            47Consolidated
                Balance Sheets at December 31, 2005 and 2004
            48Consolidated
                Statements of Income for the Three Years Ended December 31,
                2005
            49Consolidated
                Statements of Comprehensive Income for the Three Years Ended December
                31,
                2005
            50Consolidated
                Statements of Stockholders’ Equity for the Three Years Ended December 31,
                2005
            51Consolidated
                Statements of Cash Flows for the Three Years Ended December 31,
                2005
            52Notes
                to Consolidated Financial Statements
            549.
            
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            779A.
            
            CONTROLS
                AND PROCEDURES
            779B.
            
            OTHER
                INFORMATION
            77**PART
                III**10.
            
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT
            7711.
            
            EXECUTIVE
                CONPENSATION
            7712.
            
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            7813.
            
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS
            7814.
            
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            78**PART
                IV**15.
            
            EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES
            79**SIGNATURES**
            81


3
 *Table
          of Contents*


**CAUTIONARY
      NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





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





**PART
      I**





**ITEM
                1.**
            **BUSINESS**





**General**





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





*Our
      Founder*


As
      we
      celebrate the Bank’s 50 th anniversary in 2006, we want to take a moment and honor the lasting legacy
      of
      our founder, Mr. James L. Dewar, Sr. In 1956, using his personal savings, Mr.
      Dewar and his wife, Dorothy, opened a private bank in a small office on the
      corner of Park Avenue and North Ashley Street in Valdosta. With both having
      been
      teachers and he also having served as the Superintendent of Schools for Lowndes
      County, Mr. Dewar’s bank initially catered to the financial needs of teachers
      and educational administrators in the community.


4
 *Table
          of Contents*





Even
      after Mr. Dewar launched his second career in banking, he continued to support
      education in South Georgia through the generous giving of his talents and
      financial resources. From 1967 to 1973, Mr. Dewar served on the State Board
      of
      Education. From 1979 to 1994, Mr. Dewar served on the Valdosta State University
      (“VSU”) Foundation Board of Trustees. Over the years, the Dewars established
      endowments to fund two scholarships at VSU to assist students in pursuing their
      education degrees, and through the Bank, the Dewars established a third
      scholarship at VSU for business students. In 1998, VSU honored Mr. Dewar by
      awarding him an honorary Doctorate of Laws degree. Also in 1998, the Lowndes
      County Board of Education honored Mr. Dewar by naming their newest elementary
      school in his honor. In 2005, the Dewars, along with their son, James L. Dewar,
      Jr., and the Bank pledged an endowment to provide financial support for the
      VSU
      College of Education in its mission of training teachers and educational
      administrators. In 2006, VSU and the Board of Regents of the University System
      of Georgia announced that the VSU College of Education will be named the “James
      L. and Dorothy H. Dewar College of Education” as a lasting tribute to the Dewars
      for their dedication to teaching, teacher education programs, and service to
      educational organizations at the state and local levels.





As
      we
      reflect with pride on the accomplishments of Mr. and Mrs. Dewar, we are reminded
      of his vision for the Bank, “I want Park Avenue Bank to be known as a bank that
      cares about people.” It is this foundation of service to others that has
      propelled us from those humble beginnings in 1956 to the $1 billion,
      publicly-traded, multi-state financial institution of today.





*The
      Bank*


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





*Markets
      and Competition*


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





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


5
 *Table
          of Contents*


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





South
      Georgia


The
      Bank
      has a proud tradition of community banking in South Georgia spanning decades,
      and we have developed a large market share in many of these communities. As
      previously mentioned, we have been in Valdosta since 1956, but our roots run
      deeper in some of the financial institutions we acquired in other South Georgia
      communities. We have been in Adel (Cook County) since 1948, and we have been
      in
      both Bainbridge (Decatur County) and Baxley (Appling County) since 1934. We
      are
      also located in Statesboro (Bulloch County), Hazlehurst (Jeff Davis County),
      and
      Cairo (Grady County). Collectively, we refer to all of these seven communities
      as our “South Georgia” market in this Report. In 2001, we began consolidating
      the separate charters of our banks into one charter, The Park Avenue Bank.
      The
      charter consolidation was completed in April 2002, and all of our banking
      offices now operate under the “PAB” logo. Overall, we have a 2.65% market
      share 1  of the
      total deposits in the state’s southern tier 2 .
      Our
      branch network in South Georgia has allowed us to deliver retail banking
      services in these communities more effectively. Therefore, our focus in South
      Georgia is on providing traditional community banking products and services
      to
      consumers, businesses, and municipalities. The timber and farming industries
      and
      agricultural-related businesses are vital to the local economics in each of
      our
      South Georgia markets.





**Valdosta** and **Adel** are
      located off Interstate 75 in the middle of South Georgia. Valdosta is the county
      seat of Lowndes County and is 18 miles north of the Florida state line. The
      Valdosta Metropolitan Statistical Area (“MSA”) is comprised of Lowndes, Brooks,
      Berrien, and Echols Counties. Adel is in Cook County and is 21 miles north
      of
      Valdosta. We have 77 employees, five branches, and seven ATM’s serving our
      customers in these communities. The Company’s administrative and operational
      facilities and 102 additional employees are also located in Valdosta. Prior
      to
      its merger with the Bank in 2001, the Adel office operated under a separate
      bank
      charter called Farmers and Merchants Bank. Moody Air Force Base, Valdosta State
      University, and several transportation and distribution facilities of regional
      and national firms are some of the major economic factors to the area.




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




**Statesboro** ,
      161
      miles northeast of Valdosta, sits at the intersection of U.S. Highway 80 and
      U.S. Highway 301, off of Interstate 16, in Southeast Georgia. Statesboro is
      also
      53 miles west of the Savannah MSA. We have 27 employees, two branches, and
      three
      ATM’s serving our customers in this community. Prior to its merger with the Bank
      in 2002, the Statesboro offices had operated under the Eagle Bank and Trust
      charter. Georgia Southern University is located in Statesboro.




**Baxley** and **Hazlehurst** are both
      approximately 90 miles northeast of Valdosta. The two communities are located
      16
      miles apart along U.S. Highway 341 in Southeast Georgia. We have 19 employees,
      two branches, and two ATM’s serving our customers in these communities. Prior to
      its merger with the Bank in 2002, the Baxley and Hazlehurst offices operated
      under the Baxley Federal Savings Bank thrift charter. The Georgia Power
      Company’s Edwin I. Hatch Nuclear Power Plant located in Appling County is one of
      the area’s largest employers.





North
      Georgia


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


____________________________


1
              Based
                  on the FDIC/OTS Summary of Deposits report as of June 30,
                  2005.
 2
              Regions
                  9-12 as defined by the Georgia Department of Community Affairs
                  comprised
                  of 58 counties.


6
 *Table
          of Contents*


**McDonough** and **Stockbridge** are
      located along Interstate 75 in Henry County. Henry County is the southern-most
      county of the Atlanta MSA. McDonough is 30 miles south of Downtown Atlanta.
      We
      have 26 employees, two branches, and one ATM serving our customers in these
      communities. Our McDonough office opened in 2000 and our Stockbridge location
      opened in 2004. Henry County has consistently been ranked among the fastest
      growing counties in the nation over the past several years. We have been
      actively involved in financing several residential and commercial construction
      and development projects in Henry County, as we have also worked to increase
      our
      retail presence in the county.





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





**Athens** is 70
      miles east of Downtown Atlanta. Athens is part of a consolidated city/county
      government with Clarke County. The University of Georgia is located in Athens
      and is the single largest economic factor in the Athens-Clarke County MSA.
      With
      only a loan production office in the area, our focus has been on commercial
      lending. During the fourth quarter of 2005, we signed an option to acquire
      a
      commercial lot in Oconee County, Georgia, directly across the line from
      Athens-Clarke County, with the intent to build a full-service branch at that
      location in 2006.




Our **Cobb
      County** office
      is 12 miles northwest of Downtown Atlanta. We opened a commercial loan
      production office near Vinings just inside the Interstate 285 loop around the
      city of Atlanta in April 2005.





**Snellville** is
      25
      miles northeast of Downtown Atlanta along U.S. Highway 78 in Gwinnett County.
      We
      acquired an office condominium and opened a commercial loan production office
      in
      December 2005.





Florida


In
      December 2000, we acquired Friendship Community Bank in Ocala, Marion County,
      Florida. The acquired bank was merged into the Bank in 2001. In September 2003,
      we opened a loan production office in St. Augustine, St. Johns County, Florida.
      Our offices in Ocala and St. Augustine are collectively referred to as our
      “Florida” market.





Our **Ocala** office
      is near several retirement communities and has served primarily as a deposit
      gathering facility for the Bank. Ocala is located in Central Florida, 130 miles
      south of Valdosta along Interstate 75. We have nine employees, one branch,
      and one ATM serving our customers in this community. With over $4.4 billion
      in
      deposits 3 ,
      Marion
      County is the largest deposit market in which we have a deposit branch. Ocala
      is
      known for its equestrian training facilities and retirement communities due
      to
      its mild year-round climate.





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


____________________________


3
            Based
                on the FDIC/OTS Summary of Deposits report as of June 30,
                2005.


7
 *Table
          of Contents*





The
      table
      below provides basic information and summary demographic data on each of our
      markets.





**Market/**
              County
            
            #
                of
              Offices
            
            Total
              Loans4
            
            Total
              Deposits4
            
            Market
              Share
                (%)5
            
            Population6
            
            Population
              Growth
                (%)7
            
            Employment
              Growth
                (%)8
            
            Unemployment
              Rate
                (%)9**South
                Georgia**Lowndes
            
            
            4
            
            $
            179,001
            
            $
            238,829
            
            
            18.2
            
            
            95,787
            
            
            4.0
            
            
            1.8
            
            
            4.1Cook
            
            
            1
            
            
            9,248
            
            
            39,053
            
            
            21.8
            
            
            16,255
            
            
            3.1
            
            
            2.5
            
            
            5.7Decatur
            
            
            3
            
            
            42,650
            
            
            92,851
            
            
            31.4
            
            
            28,615
            
            
            1.3
            
            
            2.2
            
            
            6.0Grady
            
            
            1
            
            
            12,923
            
            
            18,511
            
            
            7.5
            
            
            24,280
            
            
            2.6
            
            
            2.3
            
            
            4.1Appling
            
            
            1
            
            
            24,606
            
            
            40,544
            
            
            25.7
            
            
            17,966
            
            
            3.2
            
            
            2.1
            
            
            5.6Jeff
                Davis
            
            
            1
            
            
            8,138
            
            
            39,500
            
            
            24.3
            
            
            12,820
            
            
            1.1
            
            
            2.4
            
            
            5.7Bulloch
            
            
            2
            
            
            45,809
            
            
            61,431
            
            
            7.1
            
            
            60,344
            
            
            7.8
            
            
            2.7
            
            
            4.2$
            322,375
            
            $
            530,719**North
                Georgia**Henry
            
            
            2
            
            $
            206,467
            
            $
            81,804
            
            
            3.0
            
            
            159,506
            
            
            33.6
            
            
            1.9
            
            
            5.3Hall
            
            
            1
            
            
            80,219
            
            
            23,775
            
            
            0.7
            
            
            160,925
            
            
            15.5
            
            
            2.1
            
            
            4.1Clarke
            
            
            1
            
            
            41,904
            
            
            755
            
            
            -
            
            
            103,951
            
            
            2.4
            
            
            1.8
            
            
            4.0Cobb
            
            
            1
            
            
            25,098
            
            
            3,739
            
            
            -
            
            
            654,005
            
            
            7.6
            
            
            1.9
            
            
            4.5Gwinnett
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            700,794
            
            
            19.1
            
            
            1.9
            
            
            4.4$
            353,688
            
            $
            110,073**Florida**Marion
            
            
            1
            
            $
            10,742
            
            $
            125,579
            
            
            2.4
            
            
            291,322
            
            
            12.5
            
            
            3.6
            
            
            3.2St.
                Johns
            
            
            1
            
            
            52,605
            
            
            673
            
            
            -
            
            
            152,473
            
            
            23.8
            
            
            3.6
            
            
            2.7$
            63,347
            
            $
            126,252





*Employees*


On
      December 31, 2005, we had a total of 286 full-time and 28 part-time employees.
      We consider our relationship with our employees to be excellent. We offer a
      competitive compensation and benefits package to our employees.





Attracting
      and retaining excellent employees is important to us. We face strong
      competition for experienced production, support, and managerial talents. On
      the
      production side, we were fortunate to hire 16 new lenders, or 25% of our total
      production staff, during 2005. However, six lenders (9% turnover) left us
      during 2005 for various reasons. We also hired 83 administrative, service,
      and
      support personnel to our existing staff during 2005, and as with most financial
      institutions, we had higher turnover (71 departures, or 28%) in the non-lending
      staff during the year. We were able to attract two executive officers and
      several key senior officers during 2005. We believe that the additional depth
      of
      talent and managerial experience should benefit us in the future.




____________________________


4
            Dollar
                amounts are presented in thousands as of December 31, 2005. Amounts
                exclude $13.5 million in loans and $48.6 million in deposits assigned
                to
                the “Treasury” that are not allocated to any particular market (i.e.
                participation loans, employee and director accounts, brokered deposits,
                official checks, etc.).


5
            Based
                on the FDIC/OTS Summary of Deposits report as of June 30,
                2005.


6
            Estimated
                July 1, 2004 population provided by the U.S. Census
                Bureau.


7
            Estimated
                percentage population change from April 1, 2000 to July 1, 2004 provided
                by the U.S. Census Bureau.


8
            Total
                employment growth (not seasonally adjusted) for the Fourth Quarter
                2005
                Year-To-Date percentage change from the prior year’s Year-To-Date data
                provided by the Bureau of Labor Statistics Household
                Survey.


9
            Unemployment
                rate (not seasonally adjusted) for the Fourth Quarter 2005 provided
                by the
                Bureau of Labor Statistics.


8
 *Table
          of Contents*


*Availability
      of Information*


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





**Supervision
      and Regulation**





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





·
            How,
                when and where we may expand
                geographically;


·
            Into
                what product or service market we may
                enter;


·
            How
                we must manage our assets; and


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





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





*General*


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





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





On
      May
      20, 2002, the Company’s Board of Directors adopted a Resolution required by the
      Federal Reserve (the “Resolution”), which, among other things, restricted us
      from redeeming our capital stock, paying dividends, modifying existing debt
      agreements, or incurring additional debt without the prior approval of our
      banking regulators. The Resolution was the result of an examination that found
      the Bank to be in less than satisfactory condition due primarily to serious
      weaknesses identified in the asset quality of the Bank’s loan portfolio. The
      Resolution was terminated by the Federal Reserve on August 25, 2003, after
      the
      regulators determined that the Bank’s condition had improved.





*Acquisitions*


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





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


9
 *Table
          of Contents*


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





*Activities*


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





*Gramm-Leach-Bliley
      Act*


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





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





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





*Payment
      of Dividends*


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


10
 *Table
          of Contents*


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





As
      previously mentioned, pursuant to a Resolution entered into with our federal
      and
      state regulatory agencies on May 20, 2002, neither the Bank nor PAB could
      declare a dividend without obtaining prior governmental approvals. While under
      the Resolution, in March 2003, we requested and received approval from the
      Federal Reserve for the payment of a First Quarter 2003 dividend in the amount
      of $.03 per share to stockholders of record on March 31, 2003. Again, in May
      2003, we requested and received approval from the Federal Reserve for the
      payment of a Second Quarter 2003 dividend in the amount of $.03 per share to
      stockholders of record on June 30, 2003. The Resolution was terminated by the
      regulators on August 25, 2003, and the dividend restrictions were removed.





During
      2005, PAB paid $.475 per share in aggregate dividends to its stockholders.
      At
      December 31, 2005, the Bank could declare approximately $19.9 million in
      dividends to PAB without further regulatory approval.





*Capital
      Adequacy*


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





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





The
      minimum guideline for the ratio of Total Capital to risk-weighted assets
      (including certain off-balance-sheet items, such as standby letters of credit)
      is 8.0%. Total Capital consists of Tier 1 Capital, which is comprised of common
      stock, undivided profits, minority interests in the equity accounts of
      consolidated subsidiaries and non-cumulative perpetual preferred stock, less
      goodwill and certain other intangible assets, and Tier 2 Capital, which consists
      of subordinated debt, other preferred stock, and a limited amount of loan loss
      reserves. At December 31, 2005, our consolidated Total Capital Ratio and
      our Tier 1 Capital Ratio were 12.4% and 11.1%, respectively.





In
      addition, the Federal Reserve has established minimum leverage ratio guidelines
      for bank holding companies. These guidelines provide for a minimum ratio (the
      “Leverage Ratio”) of Tier 1 Capital to average assets, less goodwill and certain
      other intangible assets, of 3.0% for bank holding companies that meet certain
      specified criteria, including those having the highest regulatory rating. All
      other bank holding companies generally are required to maintain a Leverage
      Ratio
      of at least 3.0%, plus an additional cushion of 100 to 200 basis points. Our
      Leverage Ratio at December 31, 2005 was 9.21%. The guidelines also provide
      that bank holding companies experiencing internal growth or making acquisitions
      will be expected to maintain strong capital positions substantially above the
      minimum supervisory levels without significant reliance on intangible assets.
      Furthermore, the Federal Reserve has indicated that it will consider a “tangible
      Tier 1 Capital Leverage Ratio” (deducting all intangibles) and other indicators
      of capital strength in evaluating proposals for expansion or new
      activities.





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





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


11
 *Table
          of Contents*


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





*Support
      of Subsidiary Institutions*


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





*Prompt
      Corrective Action*


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





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





At
      December 31, 2005, the Bank had the requisite capital level to qualify as
“well capitalized” under the regulatory framework for prompt corrective
      action.





*FDIC
      Insurance Assessments*


The
      FDIC
      has adopted a risk-based assessment system for insured depository institutions
      that takes into account the risks attributable to different categories and
      concentrations of assets and liabilities. The system assigns an institution
      to
      one of three capital categories: (i) well capitalized; (ii) adequately
      capitalized; and (iii) undercapitalized. These three categories are
      substantially similar to the prompt corrective action categories described
      above, with the “undercapitalized” category including institutions that are
      undercapitalized, significantly undercapitalized, and critically
      undercapitalized for prompt corrective action purposes. The FDIC also assigns
      an
      institution to one of three supervisory subgroups within each capital group.
      The
      supervisory subgroup to which an institution is assigned is based on a
      supervisory evaluation that the institution's primary federal regulator provides
      to the FDIC and information that the FDIC determines to be relevant to the
      institution's financial condition and the risk posed to the deposit insurance
      funds. The FDIC then determines an institution's insurance assessment rate
      based
      on the institution's capital category and supervisory category. Under the
      risk-based assessment system, there are nine combinations of capital groups
      and
      supervisory subgroups to which different assessment rates are applied.
      Assessments range from 0 to 27 cents per $100 of deposits, depending on the
      institution's capital group and supervisory subgroup.





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


12
 *Table
          of Contents*


*Safety
      and Soundness Standards*


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





*Community
      Reinvestment Act*


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





*Privacy*


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





*Monetary
      Policy*


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





*USA
      Patriot Act of 2001*


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





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


13
 *Table
          of Contents*


*Georgia
      Fair Lending Act*


The
      Georgia Fair Lending Act (the “GFLA”) became initially effective on October 1,
      2002 and establishes a number of prohibitions for loans that are “covered” by
      the statute. Generally, a loan is “covered” by the GFLA if it has an annual
      interest rate that exceeds the prime rate or comparable yield on treasury
      securities by an amount specified by the statute or if its points and fees
      exceed a specified percentage of the total loan amount. The GFLA has a broad
      definition of points and fees. Any creditor who violates the GFLA may be liable
      to the borrower for actual damages; statutory damages equal to two times the
      interest paid under the loan; forfeiture of interest; punitive damages; costs;
      and/or reasonable attorney’s fees. For any violation for which statutory damages
      may be awarded, the GFLA provides the borrower with a right of rescission. On
      July
      31, 2003, the Office of the Comptroller of the Currency issued a Preemption
      Determination and Order declaring most of the GFLA preempted by federal law
      and,
      therefore, inapplicable to nationally chartered banks. The Georgia Department
      issued a complying Declaratory Ruling on August 5, 2003. The order purported
      to
      preempt all of the GFLA, and even though there may be several parts of the
      GFLA
      that remain effective as to national banks, those non-preempted parts are likely
      inapplicable or moot due to the articulated preemption of most other operative
      parts of the GFLA. The preemption-parity provisions of the GFLA level the
      playing field for state-chartered banks in that aspects of GFLA preempted by
      federal law become inapplicable to state-chartered as well as
      nationally-chartered banks.





*Check
      21*


On
      October 28, 2003, President Bush signed into law the Check Clearing for the
      21st
      Century Act, also known as Check 21. Check 21 gives “substitute checks,” such as
      a digital image of a check and copies made from that image, the same legal
      standing as the original paper check. Some of the major provisions of Check
      21
      include:





·
            allowing
                check truncation without making it mandatory;


·
            demanding
                that every financial institution communicate to accountholders in
                writing
                a description of its substitute check processing program and their
                rights
                under the law;


·
            legalizing
                substitutions for and replacements of paper checks without agreement
                from
                consumers;


·
            retaining
                in place the previously mandated electronic collection and return
                of
                checks between financial institutions only when individual agreements
                are
                in place;


·
            requiring
                that when accountholders request verification, financial institutions
                produce the original check (or a copy that accurately represents
                the
                original) and demonstrate that the account debit was accurate and
                valid;
                and


·
            requiring
                recrediting of funds to an individual’s account on the next business day
                after a consumer proves that the financial institution has erred.





This
      legislation will likely affect bank capital spending as many financial
      institutions assess whether technological or operational changes are necessary
      to stay competitive and take advantage of the new opportunities presented by
      Check 21.





**ITEM
                1A.**
            **RISK
                FACTORS**





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


14
 *Table
          of Contents*


*We
      face strong competition from other financial services providers.*


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





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


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





In
      addition, the market value of the real estate securing loans as collateral
      could
      be adversely affected by unfavorable changes in market and economic conditions.
      As of December 31, 2005, approximately 90% of our total loans were secured
      by
      real estate. Any sustained period of increased payment delinquencies,
      foreclosures or losses caused by adverse market or economic conditions in our
      market areas could adversely affect the value of our assets, our revenues,
      results of operations and financial condition.





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


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





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


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


15
 *Table
          of Contents*





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


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





In
      addition, federal and state regulators periodically review our allowance for
      loan losses and may require us to increase our allowance for loan losses or
      recognize further loan charge-offs, based on judgments different than those
      of
      our management. Higher charge-off rates and an increase in our allowance for
      loan losses may hurt our overall financial performance may increase our cost
      of
      funds.





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


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





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


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





·
            entry
                into new markets where we lack
                experience;


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


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


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


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





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


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





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


16
 *Table
          of Contents*


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


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





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


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




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





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


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





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


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





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


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


17
 *Table
          of Contents*


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


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





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


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





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


Our
      directors and executive officers, as a group, beneficially owned approximately
      25% of our outstanding common stock as of December 31, 2005. As a result of
      their ownership, the directors and executive officers will have the ability,
      by
      voting their shares in concert, to significantly influence the outcome of all
      matters submitted to our shareholders for approval, including the election
      of
      directors.





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


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





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





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


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




**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**





None


18
 *Table
          of Contents*





**ITEM
                2.**
            **PROPERTIES**





We
      currently operate 17 bank branches, four loan production offices, an operations
      center, an executive office suite, and an administrative building. With the
      exception of one branch office in Ocala, Florida and one branch office in
      Stockbridge, Georgia, we own all of the real property and/or buildings in which
      our bank branch offices are located. The Ocala office is under a five-year
      operating lease that expires in December 2008. The Stockbridge office is under
      a
      five-year operating lease that expires in May 2009. We own the real property
      where our Snellville, Georgia loan production office is located. The other
      three
      loan production offices and a 1,550 square-foot executive office suite in
      McDonough, Georgia are located in leased office space. In addition, we own
      a
      three-story, 10,000 square-foot administrative building, which houses our
      corporate offices, and a 12,000 square-foot operations center in Valdosta,
      Georgia. All of the properties are in a good state of repair and are
      appropriately designed for the purposes for which they are used.





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





**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





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




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





No
      matters were submitted to a vote of our stockholders during the fourth quarter
      of 2005.





**PART
      II**





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





Our
      common stock has been traded on NASDAQ under the symbol “PABK” since November 1,
      2005. From July 9, 1996 to October 31, 2005, our common stock was listed for
      quotation on the American Stock Exchange (“AMEX”) under the symbol “PAB”. On
      February 28, 2006, there were 2,239 holders of record of our common
      stock.





Our
      ability to pay dividends is primarily dependent on earnings from operations,
      the
      adequacy of capital and the availability of liquid assets for distribution.
      Our
      ability to generate liquid assets for distribution is primarily dependent on
      the
      ability of the Bank to pay dividends up to the parent holding company. The
      payment of dividends is an integral part of our goal to retain sufficient
      capital to support future growth and to meet regulatory requirements while
      providing a competitive return on investment to our stockholders. When possible,
      it is our current intent to pay out 35-45% of our net earnings in the form
      of
      cash dividends to our stockholders on a quarterly basis; however, there is
      no assurance that we will do so in the future.


19
 *Table
          of Contents*


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





Sales
                PriceCalendar
                Period
            
            High
            
            Low
            
            Dividends
            
            Earnings2004First
                Quarter
            
            $
            15.80
            
            $
            12.65
            
            $
            0.07
            
            $
            0.22Second
                Quarter
            
            
            14.15
            
            
            11.44
            
            
            0.07
            
            
            0.22Third
                Quarter
            
            
            13.00
            
            
            11.83
            
            
            0.10
            
            
            0.21Fourth
                Quarter
            
            
            13.75
            
            
            12.90
            
            
            0.10
            
            
            0.232005First
                Quarter
            
            $
            14.50
            
            $
            13.11
            
            $
            0.11
            
            $
            0.26Second
                Quarter
            
            
            15.70
            
            
            14.03
            
            
            0.12
            
            
            0.32Third
                Quarter
            
            
            17.25
            
            
            15.38
            
            
            0.12
            
            
            0.36Fourth
                Quarter
            
            
            18.65
            
            
            15.45
            
            
            0.125
            
            
            0.34








*Stock
      Buyback Plan*


A
      summary
      of our purchases of PAB common stock during the fourth quarter ended December
      31, 2005 follows.





Total
                number
              of
                shares
              purchased
            
            Average
              price
                paid
              per
                share
            
            Number
                of shares
              purchased
                as part of
              publicly
                announced plansor
                programs
            
            Maximum
                number of
              shares
                that may yet be
              purchased
                under the plansor
                programs1October
            
            
            17,000
            
            $
            15.71
            
            
            17,000
            
            
            383,000November
            
            
            35,778
            
            
            17.99
            
            
            35,778
            
            
            347,222December
            
            
            17,013
            
            
            18.10
            
            
            17,013
            
            
            330,209Total
            
            
            69,791
            
            $
            17.46
            
            
            69,791
            
            
            330,209





1
            On
                May 25, 2005, the Board of Directors renewed its annual plan to purchase
                up to 400,000 shares of the Company's common stock over a 12 month
                period.


20
 *Table
          of Contents*


**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**


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





(In
                thousands, except per share and other data)
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Summary
                of Operations:Interest
                income
            
            $
            59,371
            
            $
            40,597
            
            $
            40,040
            
            $
            48,079
            
            $
            62,715Interest
                expense
            
            
            20,398
            
            
            10,624
            
            
            12,467
            
            
            19,989
            
            
            35,600Net
                interest income
            
            
            38,973
            
            
            29,973
            
            
            27,573
            
            
            28,090
            
            
            27,115Provision
                for loan losses
            
            
            1,189
            
            
            600
            
            
            -
            
            
            2,575
            
            
            12,220Other
                income
            
            
            5,813
            
            
            6,344
            
            
            8,616
            
            
            8,013
            
            
            11,923Other
                expense
            
            
            24,778
            
            
            23,055
            
            
            25,702
            
            
            24,368
            
            
            26,921Income
                (loss) before income tax expense
            
            
            18,819
            
            
            12,662
            
            
            10,487
            
            
            9,160
            
            
            (103
            )Income
                tax expense (benefit)
            
            
            6,366
            
            
            4,144
            
            
            3,361
            
            
            2,813
            
            
            (251
            )Net
                income
            
            $
            12,453
            
            $
            8,518
            
            $
            7,126
            
            $
            6,347
            
            $
            148Net
                interest income on a taxable-equivalent basis
            
            $
            39,195
            
            $
            30,148
            
            $
            27,759
            
            $
            28,225
            
            $
            27,216Selected
                Average Balances:Total
                assets
            
            $
            948,457
            
            $
            765,016
            
            $
            736,367
            
            $
            779,958
            
            $
            847,100Earning
                assets
            
            
            890,337
            
            
            704,345
            
            
            675,718
            
            
            719,352
            
            
            780,120Loans
            
            
            706,052
            
            
            569,858
            
            
            540,787
            
            
            586,712
            
            
            616,156Deposits
            
            
            741,409
            
            
            575,767
            
            
            576,871
            
            
            641,448
            
            
            694,219Stockholders’
                equity
            
            
            85,431
            
            
            74,227
            
            
            74,229
            
            
            67,975
            
            
            72,268Selected
                Year End Balances:Total
                assets
            
            $
            1,017,326
            
            $
            868,975
            
            $
            730,741
            
            $
            747,911
            
            $
            859,143Earning
                assets
            
            
            957,918
            
            
            808,886
            
            
            666,488
            
            
            683,456
            
            
            790,546Loans
            
            
            752,938
            
            
            646,149
            
            
            538,644
            
            
            555,238
            
            
            637,825Allowance
                for loan losses
            
            
            11,079
            
            
            9,066
            
            
            10,139
            
            
            12,097
            
            
            15,765Deposits
            
            
            815,681
            
            
            657,550
            
            
            556,917
            
            
            606,730
            
            
            720,398Stockholders’
                equity
            
            
            87,001
            
            
            81,000
            
            
            76,062
            
            
            71,265
            
            
            65,372Common
                Share Data:Outstanding
                at year end
            
            
            9,469,017
            
            
            9,495,320
            
            
            9,484,660
            
            
            9,430,413
            
            
            9,409,913Weighted
                average outstanding
            
            
            9,514,775
            
            
            9,499,709
            
            
            9,476,158
            
            
            9,426,761
            
            
            9,482,709Diluted
                weighted average outstanding
            
            
            9,686,894
            
            
            9,642,065
            
            
            9,686,617
            
            
            9,459,768
            
            
            9,550,080Per
                Share Ratios:Net
                income - basic
            
            $
            1.31
            
            $
            0.89
            
            $
            0.75
            
            $
            0.67
            
            $
            0.02Net
                income - diluted
            
            
            1.28
            
            
            0.88
            
            
            0.74
            
            
            0.67
            
            
            0.02Dividends
                declared
            
            
            0.475
            
            
            0.34
            
            
            0.18
            
            
            0.11
            
            
            0.44Book
                value
            
            
            9.19
            
            
            8.53
            
            
            8.02
            
            
            7.56
            
            
            6.95Profitability
                Ratios:Return
                on average assets
            
            
            1.31
            %
            
            1.11
            %
            
            0.97
            %
            
            0.81
            %
            
            0.02
            %Return
                on average equity
            
            
            14.58
            %
            
            10.71
            %
            
            9.60
            %
            
            9.34
            %
            
            0.20
            %Net
                interest margin
            
            
            4.40
            %
            
            4.28
            %
            
            4.11
            %
            
            3.92
            %
            
            3.49
            %Efficiency
                ratio
            
            
            54.94
            %
            
            63.18
            %
            
            68.90
            %
            
            67.04
            %
            
            74.02
            %Liquidity
                Ratios:Total
                loans to total deposits
            
            
            92.31
            %
            
            98.27
            %
            
            96.72
            %
            
            91.51
            %
            
            88.54
            %Average
                loans to average earning assets
            
            
            79.30
            %
            
            80.91
            %
            
            80.03
            %
            
            81.56
            %
            
            78.98
            %Noninterest-bearing
                deposits to total deposits
            
            
            13.23
            %
            
            15.15
            %
            
            17.04
            %
            
            14.45
            %
            
            11.31
            %Capital
                Adequacy Ratios:Average
                equity to average assets
            
            
            9.01
            %
            
            10.39
            %
            
            10.08
            %
            
            8.72
            %
            
            8.53
            %Dividend
                payout ratio
            
            
            36.29
            %
            
            37.93
            %
            
            23.89
            %
            
            16.39
            %
            
            2855.42
            %Asset
                Quality Ratios:Net
                charge-offs to average loans
            
            
            -0.12
            %
            
            0.29
            %
            
            0.36
            %
            
            1.06
            %
            
            0.75
            %Nonperforming
                loans to total loans
            
            
            1.04
            %
            
            0.54
            %
            
            1.53
            %
            
            2.09
            %
            
            1.91
            %Nonperforming
                assets to total assets
            
            
            0.78
            %
            
            0.40
            %
            
            1.75
            %
            
            1.72
            %
            
            1.57
            %Allowance
                for loan losses to total loans
            
            
            1.47
            %
            
            1.40
            %
            
            1.88
            %
            
            2.18
            %
            
            2.47
            %Allowance
                for loan losses to nonperforming loans
            
            
            140.98
            %
            
            261.04
            %
            
            123.41
            %
            
            104.33
            %
            
            129.44
            %


21
 *Table
          of Contents*


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





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





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








**OVERVIEW
      OF KEY FINANCIAL, STRATEGIC AND PERFORMANCE FACTORS**





Our
      operating subsidiary, The Park Avenue Bank, is a $1.02 billion community bank
      with 17 branches and four loan production offices in Georgia and Florida. We
      have offices in both smaller, rural communities as well as larger, metropolitan
      communities. We provide traditional banking products and services to both
      commercial and individual customers in our markets. For additional information
      on our markets, see the *“* *Markets
      and Competition”* section
      in Part I of this Report. As a bank, we operate in a highly regulated and
      competitive environment. Our primary objective is to increase the return on
      our
      stockholders' investment by accepting deposits and borrowing additional
      funds as needed at low costs and investing those proceeds in a safe and
      sound manner in loans and investments at a higher yield. Competition,
      regulation, credit risk, and interest rate risk are the primary factors that
      we
      must manage in order to be successful.





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





We
      posted
      record earnings in 2005. Our net income increased 46.2% from $8.52 million
      in
      2004 to $12.45 million in 2005. Our diluted earnings per share increased 45.5%
      from $0.88 in 2004 to $1.28 in 2005. Our total revenues (which is net interest
      income plus noninterest income) increased 23.3% from $36.32 million in 2004
      to
      $44.79 million in 2005. Our return on average assets (“ROA”) and return on
      average equity (“ROE”) for 2005 was 1.31% and 14.58%, respectively, both an
      increase compared to the 1.11% ROA and 10.71% ROE posted in 2004. The primary
      reasons for our improved profitability are outlined in the section titled
“Results of Operations” below. The following table summarizes our net income,
      diluted earnings per share (“EPS”), ROA, and ROE for the past five
      years.




Year
              
              Net
                  Income
              
              EPS
              
              ROA
              
              ROE(In
                  Thousands)2001
              
              $
              148
              
              $
              0.02
              
              
              0.02
              %
              
              0.20
              %2002
              
              
              6,347
              
              
              0.67
              
              
              0.81
              %
              
              9.34
              %2003
              
              
              7,126
              
              
              0.74
              
              
              0.97
              %
              
              9.60
              %2004
              
              
              8,518
              
              
              0.88
              
              
              1.11
              %
              
              10.71
              %2005
              
              
              12,453
              
              
              1.28
              
              
              1.31
              %
              
              14.58
              %




For
      the
      first time in our Company's history, we surpassed the billion-dollar
      threshold in total assets in 2005. We achieved double-digit asset growth for
      six
      consecutive quarters to reach this milestone. Total assets increased 17.1%
      from
      $868.9 million at the end of 2004 to $1,017.3 million at the end of 2005.





In
      2005,
      our total loans increased $106.8 million, or 16.5%, from $646.1 million at
      December 31, 2004 to $752.9 million at December 31, 2005. This loan growth
      was
      consistent across all of our markets, as loans in our South Georgia market
      increased 12.5%, loans in our North Georgia market increased 26.7% and loans
      in
      our Florida market increased 16.6%.


22
 *Table
          of Contents*


The
      majority of our loan growth was in construction and development lending. Our
      construction and development loan portfolio increased $101.2 million, or 61.0%,
      from $166.9 million at December 31, 2004 to $268.6 million at December 31,
      2005.
      As a percentage of total loans, this portfolio increased from 25.8% at the
      end
      of 2004 to 35.7% at the end of 2005.





Loan
      growth, combined with our desire to limit our reliance on borrowings from other
      funding sources, generated the need to grow deposits. We were successful at
      increasing deposits in eight out of the ten counties where we had deposit
      branches in 2005.  The
      total
      increase in deposits for 2005 was $158.1 million, or 24.0%. We increased
      interest bearing demand and savings $59.3 million, or 26.4%. Time deposits
      grew
      $90.6 million, or 27.2%, net of a reduction in brokered deposits of $4.8
      million.





A
      breakdown of loans and deposits as of December 31, 2005 and 2004 and the
      percentage of net growth (or contraction) in 2005 for each market is provided
      in
      the table below.





**Market/**
            
            #
                of
            
            Total
                Loans
            
            
            
            
            Total
                DepositsCounty
            
            Offices
            
            2005
            
            2004
            
            %
                Chg
            
            
            2005
            
            2004
            
            %
                Chg(Dollars
                in Thousands)**South
                Georgia**Lowndes
            
            
            4
            
            $
            179,001
            
            $
            134,138
            
            
            33.4
            
            
            $
            238,829
            
            $
            200,034
            
            
            19.4Cook
            
            
            1
            
            
            9,248
            
            
            10,321
            
            
            (10.4
            )
            
            
            39,053
            
            
            35,497
            
            
            10.0Decatur
            
            
            3
            
            
            42,650
            
            
            48,697
            
            
            (12.4
            )
            
            
            92,851
            
            
            96,644
            
            
            (3.9
            )Grady
            
            
            1
            
            
            12,923
            
            
            13,867
            
            
            (6.8
            )
            
            
            18,511
            
            
            11,231
            
            
            64.8Appling
            
            
            1
            
            
            24,606
            
            
            29,950
            
            
            (17.8
            )
            
            
            40,544
            
            
            42,979
            
            
            (5.7
            )Jeff
                Davis
            
            
            1
            
            
            8,138
            
            
            8,453
            
            
            (3.7
            )
            
            
            39,500
            
            
            35,747
            
            
            10.5Bulloch
            
            
            2
            
            
            45,809
            
            
            40,995
            
            
            11.7
            
            
            
            61,431
            
            
            57,514
            
            
            6.8$
            322,375
            
            $
            286,421
            
            
            12.6
            
            
            $
            530,719
            
            $
            479,646
            
            
            10.6**North
                Georgia**Henry
            
            
            2
            
            $
            206,467
            
            $
            186,628
            
            
            10.6
            
            
            $
            81,804
            
            $
            28,311
            
            
            188.9Hall
            
            
            1
            
            
            80,219
            
            
            75,773
            
            
            5.9
            
            
            
            23,775
            
            
            11,983
            
            
            98.4Clarke
            
            
            1
            
            
            41,904
            
            
            16,826
            
            
            149.0
            
            
            
            755
            
            
            -
            
            
            -Cobb
            
            
            1
            
            
            25,098
            
            
            -
            
            
            -
            
            
            
            3,739
            
            
            -
            
            
            -Gwinnett
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            
            -
            
            
            -
            
            
            -$
            353,688
            
            $
            279,227
            
            
            26.7
            
            
            $
            110,073
            
            $
            40,294
            
            
            173.2**Florida**Marion
            
            
            1
            
            $
            10,742
            
            $
            14,751
            
            
            (27.2
            )
            
            $
            125,579
            
            $
            79,503
            
            
            58.0St.
                Johns
            
            
            1
            
            
            52,605
            
            
            39,564
            
            
            33.0
            
            
            
            673
            
            
            4,704
            
            
            (85.7
            )$
            63,347
            
            $
            54,315
            
            
            16.6
            
            
            $
            126,252
            
            $
            84,207
            
            
            49.9**Treasury**
            
            
            -
            
            $
            13,528
            
            $
            26,186
            
            
            (48.3
            )
            
            $
            48,637
            
            $
            53,403
            
            
            (8.9
            )Total
            
            
            
            
            $
            752,938
            
            $
            646,149
            
            
            16.5
            
            
            $
            815,681
            
            $
            657,550
            
            
            24.0






In
      2005,
      we opened loan production offices in Cobb and Gwinnett Counties located in
      the
      Atlanta MSA. We intend to continue to expand our presence in the higher growth
      markets in North Georgia and Florida, seek opportunities to enter new growth
      markets, and recapture lost market share in our South Georgia markets.





Total
      stockholders’ equity increased $6.0 million, or 7.4%, during 2005. Equity was
      increased primarily from the contribution of $12.5 million from 2005 earnings
      net of $4.5 million in dividends paid. As a percentage of total assets, equity
      represented 8.6% at end of 2005, compared to 9.3% at the beginning of 2005,
      as
      the pace of asset growth exceeded the net increase in equity.





23
 *Table
            of Contents*




*Asset
      Quality Issues in 2001*


To
      truly appreciate the Company's accomplishments of
      2005 and 2004, one must understand what we endured in preceeding years.
      A summary of the events in 2001 and our subsequent progression
      follows.




In
      2001,
      we initiated several strategic changes: we had changes in senior management,
      we
      began the process of consolidating our six separate bank charters into one,
      we
      engaged a new audit firm, and we switched our primary federal bank regulator
      from the FDIC to the Federal Reserve. Problems with our credit quality and
      weaknesses in our credit administration began to surface as we implemented
      these
      changes. In addition, as these changes were being made, the economy was in
      the
      midst of a recession and terrorists had attacked our country, further stressing
      the environment that we operated within. Our nonperforming loans rose from
      $7.4
      million at the beginning of 2001 to $12.2 million at the end of that year.
      During the fourth quarter of 2001, the Federal Reserve began an examination
      of
      the Bank that led to the identification of many of these problems. As a result,
      we provided $11.2 million to the allowance for loan losses during the fourth
      quarter of 2001 that basically negated our earnings for the entire
      year.





After
      the
      conclusion of their examination, on May 20, 2002, the Federal Reserve required
      our Board of Directors to adopt the Resolution to improve the financial
      condition of the Bank and correct the weaknesses identified in their
      examination. In addition, the Resolution restricted us from redeeming our
      capital stock, paying dividends, modifying existing debt agreements, or
      incurring additional debt without prior regulatory approval. Over the next
      15
      months, little was accomplished that did not relate to addressing the provisions
      of the Resolution. On August 25, 2003, the Federal Reserve terminated the
      Resolution with the Company.





From
      the
      third quarter of 2001, when our credit problems began to surface, to the third
      quarter of 2003, when our Resolution with the Federal Reserve was terminated,
      our balance sheet was in a period of contraction. While part of the decline
      was
      due to the work out or charge-off of certain loans, we also lost some business
      to former lenders and our competitors while our attention was diverted from
      business development. In addition, we saw a decline in overall demand for loans
      with the down turn in the economy.





Without
      the loan demand, we had to reduce our level of rate-sensitive deposits in order
      to stabilize our earnings. From the third quarter of 2001 to the third quarter
      of 2004, our quarterly average balance of time deposits declined $192.1 million,
      or 43.2%. During the same period of time, our quarterly average balance of
      demand and savings deposit accounts increased $67.1 million, or 27.6%, as we
      focused on retaining and attracting core, in-market customer relationships.
      We
      realize that some portion of that increase is possibly the result of our
      customers temporarily “parking” their excess liquidity due to lower interest
      rates and an overall lack of investment and capital spending in the economy
      during this period of time.





The
      table
      below shows our total loans and deposits at the end of each quarter since the
      end of the third quarter of 2001 as well as our net interest income and net
      interest margin for each of those quarters.





Quarter
              Ended
            
            Loans
            
            Deposits
            
            Net
                Interest
              Income*
            
            Net
                Interest
              Margin*(Dollars
                In Thousands)09/30/01
            
            $
            644,101
            
            $
            709,130
            
            $
            6,602
            
            
            3.36
            %12/31/01
            
            
            637,825
            
            
            720,398
            
            
            6,686
            
            
            3.32
            %03/31/02
            
            
            607,707
            
            
            672,337
            
            
            6,946
            
            
            3.67
            %06/30/02
            
            
            590,344
            
            
            628,927
            
            
            6,993
            
            
            3.89
            %09/30/02
            
            
            553,458
            
            
            615,415
            
            
            7,032
            
            
            3.98
            %12/31/02
            
            
            555,238
            
            
            606,730
            
            
            7,254
            
            
            4.18
            %03/31/03
            
            
            547,785
            
            
            587,719
            
            
            6,867
            
            
            4.15
            %06/30/03
            
            
            529,230
            
            
            573,230
            
            
            6,866
            
            
            4.13
            %09/30/03
            
            
            531,551
            
            
            563,412
            
            
            6,968
            
            
            4.02
            %12/31/03
            
            
            538,644
            
            
            556,917
            
            
            7,058
            
            
            4.14
            %03/31/04
            
            
            549,149
            
            
            556,853
            
            
            7,202
            
            
            4.34
            %06/30/04
            
            
            554,524
            
            
            565,613
            
            
            7,214
            
            
            4.28
            %09/30/04
            
            
            600,450
            
            
            575,775
            
            
            7,760
            
            
            4.35
            %12/31/04
            
            
            646,149
            
            
            657,550
            
            
            7,971
            
            
            4.15
            %03/31/05
            
            
            679,608
            
            
            701,041
            
            
            8,615
            
            
            4.19
            %06/30/05
            
            
            719,634
            
            
            726,921
            
            
            9,648
            
            
            4.49
            %09/30/05
            
            
            731,545
            
            
            787,664
            
            
            10,284
            
            
            4.45
            %12/31/05
            
            
            752,938
            
            
            815,681
            
            
            10,648
            
            
            4.45
            %


*
      shown
      on a taxable-equivalent basis


24
 *Table
          of Contents*


**STATISTICAL
      DISCLOSURES**





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





From
      June
      2004 to December 2005, the Federal Open Market Committee of the Federal Reserve
      increased the federal funds rate thirteen consecutive times, in 25 basis point
      increments, from 1.00% to 4.25%. Being in an asset-sensitive interest rate
      position on our balance sheet (our earning assets reprice more frequently than
      our rate-sensitive liabilities), we have benefited during this period of rising
      interest rates. Conversely, all other factors remaining unchanged, we would
      expect our earnings to decrease from current levels in a declining interest
      rate
      environment. We discuss our interest rate risk in further detail in Item 7A.
      Below, we have summarized the impact that changes in interest rates and changes
      in our balance sheet have had on our earnings over the past three
      years.





The
      next
      two tables illustrate the effects of the continued repricing in interest rates
      and the changes in the volume of loans and deposits on our net interest
      income.





*Rate
      / Volume Analysis*


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





For
                the Years Ended December 31,
            
            2005
                vs. 2004
            
            2004
                vs. 2003Increase
            
            Changes
                Due To
            
            Increase
            
            Changes
                Due To(Decrease)
            
            Rate
            
            Volume
            
            (Decrease)
            
            Rate
            
            Volume(Dollars
                In Thousands)Increase
                (decrease) in income from earning assets:Loans
            
            $
            16,709
            
            $
            8,321
            
            $
            8,388
            
            $
            79
            
            $
            (1,803
            )
            $
            1,882Taxable
                securities
            
            
            558
            
            
            137
            
            
            421
            
            
            489
            
            
            432
            
            
            57Nontaxable
                securities
            
            
            121
            
            
            (7
            )
            
            128
            
            
            (32
            )
            
            (18
            )
            
            (14
            )Other
                short-term investments
            
            
            1,433
            
            
            908
            
            
            525
            
            
            10
            
            
            28
            
            
            (18
            )Total
                interest income
            
            
            18,821
            
            
            9,359
            
            
            9,462
            
            
            546
            
            
            (1,361
            )
            
            1,907Increase
                (decrease) in expense from interest-bearing liabilities:Demand
                deposits
            
            
            2,163
            
            
            1,936
            
            
            227
            
            
            (204
            )
            
            (257
            )
            
            53Savings
                deposits
            
            
            79
            
            
            79
            
            
            -
            
            
            (47
            )
            
            (66
            )
            
            19Time
                deposits
            
            
            6,048
            
            
            2,932
            
            
            3,116
            
            
            (1,766
            )
            
            (1,293
            )
            
            (473
            )FHLB
                advances
            
            
            1,518
            
            
            836
            
            
            682
            
            
            64
            
            
            (678
            )
            
            742Notes
                payable
            
            
            172
            
            
            172
            
            
            -
            
            
            62
            
            
            46
            
            
            16Other
                short-term borrowings
            
            
            (206
            )
            
            34
            
            
            (240
            )
            
            48
            
            
            23
            
            
            25Total
                interest expense
            
            
            9,774
            
            
            5,989
            
            
            3,785
            
            
            (1,843
            )
            
            (2,225
            )
            
            382Net
                interest income
            
            $
            9,047
            
            $
            3,370
            
            $
            5,677
            
            $
            2,389
            
            $
            864
            
            $
            1,525


25
 *Table
          of Contents*


*Average
      Balances, Interest and Yields*


The
      following table details the average balance of interest-earning assets and
      interest-bearing liabilities, the amount of interest earned and paid, and the
      average yields and rates realized for each of the last three years. Federally
      tax-exempt income is presented on a taxable-equivalent basis assuming a 35%
      Federal tax rate in 2005 and a 34% Federal tax rate for 2004 and 2003. Loan
      average balances include loans on nonaccrual status. Other short-term
      investments include federal funds sold and interest-bearing deposits in other
      banks.


For
                  the Years Ended
                December
                  31,
              
              2005
              
              2004
              
              2003Average
                Balance
              
              Interest
                Income/
                Expense
              
              Average
                Yield/
                Rate
              
              Average
                Balance
              
              Interest
                Income/
                Expense
              
              Average
                Yield/
                Rate
              
              Average
                Balance
              
              Interest
                Income/
                Expense
              
              Average
                Yield/
                Rate(Dollars
                  In Thousands)ASSETSInterest-earning
                  assets:Loans
              
              $
              706,052
              
              $
              51,805
              
              
              7.34
              %
              $
              569,858
              
              $
              35,096
              
              
              6.16
              %
              $
              540,787
              
              $
              35,017
              
              
              6.48
              %Investment
                  securities:Taxable
              
              
              125,491
              
              
              5,581
              
              
              4.45
              %
              
              115,781
              
              
              5,023
              
              
              4.34
              %
              
              114,343
              
              
              4,534
              
              
              3.96
              %Nontaxable
              
              
              10,802
              
              
              635
              
              
              5.88
              %
              
              8,645
              
              
              514
              
              
              5.95
              %
              
              8,875
              
              
              546
              
              
              6.15
              %Other
                  short-term investments
              
              
              47,992
              
              
              1,572
              
              
              3.28
              %
              
              10,061
              
              
              139
              
              
              1.38
              %
              
              11,713
              
              
              129
              
              
              1.10
              %Total
                  interest-earning assets
              
              
              890,337
              
              
              59,593
              
              
              6.69
              %
              
              704,345
              
              
              40,772
              
              
              5.79
              %
              
              675,718
              
              
              40,226
              
              
              5.95
              %Noninterest-earning
                  assets:Cash
              
              
              21,688
              
              
              
              
              
              
              
              
              20,258
              
              
              
              
              
              
              
              
              20,629Allowance
                  for loan losses
              
              
              (10,283
              )
              
              
              
              
              
              
              
              (9,586
              )
              
              
              
              
              
              
              
              (11,146
              )Unrealized
                  gain (loss) on securities available for sale
              
              
              (930
              )
              
              
              
              
              
              
              
              (352
              )
              
              
              
              
              
              
              
              675Other
                  assets
              
              
              47,645
              
              
              
              
              
              
              
              
              50,351
              
              
              
              
              
              
              
              
              50,491Total
                  assets
              
              $
              948,457
              
              
              
              
              
              
              
              $
              765,016
              
              
              
              
              
              
              
              $
              736,367LIABILITIES
                  AND STOCKHOLDERS' EQUITYInterest-bearing
                  liabilities:Demand
                  deposits
              
              $
              206,418
              
              $
              3,363
              
              
              1.63
              %
              $
              173,555
              
              $
              1,200
              
              
              0.69
              %
              $
              167,215
              
              $
              1,404
              
              
              0.84
              %Savings
                  deposits
              
              
              42,154
              
              
              313
              
              
              0.74
              %
              
              42,137
              
              
              234
              
              
              0.56
              %
              
              39,445
              
              
              281
              
              
              0.71
              %Time
                  deposits
              
              
              386,137
              
              
              12,800
              
              
              3.31
              %
              
              264,216
              
              
              6,752
              
              
              2.56
              %
              
              279,767
              
              
              8,518
              
              
              3.04
              %FHLB
                  advances
              
              
              96,467
              
              
              3,053
              
              
              3.16
              %
              
              66,787
              
              
              1,535
              
              
              2.30
              %
              
              44,387
              
              
              1,471
              
              
              3.31
              %Notes
                  payable
              
              
              10,310
              
              
              739
              
              
              7.17
              %
              
              10,310
              
              
              567
              
              
              5.50
              %
              
              10,000
              
              
              505
              
              
              5.05
              %Other
                  short-term borrowings
              
              
              7,868
              
              
              130
              
              
              1.65
              %
              
              27,408
              
              
              336
              
              
              1.23
              %
              
              25,243
              
              
              288
              
              
              1.14
              %Total
                  interest-bearing liabilities
              
              
              749,354
              
              
              20,398
              
              
              2.72
              %
              
              584,413
              
              
              10,624
              
              
              1.82
              %
              
              566,057
              
              
              12,467
              
              
              2.20
              %Noninterest-bearing
                  liabilities and stockholders' equity:Demand
                  deposits
              
              
              106,700
              
              
              
              
              
              
              
              
              95,859
              
              
              
              
              
              
              
              
              90,444Other
                  liabilities
              
              
              6,972
              
              
              
              
              
              
              
              
              5,245
              
              
              
              
              
              
              
              
              5,637Stockholders'
                  equity
              
              
              85,431
              
              
              
              
              
              
              
              
              79,499
              
              
              
              
              
              
              
              
              74,229Total
                  liabilities and stockholders' equity
              
              $
              948,457
              
              
              
              
              
              
              
              $
              765,016
              
              
              
              
              
              
              
              $
              736,367Interest
                  rate spread
              
              
              
              
              
              
              
              
              3.97
              %
              
              
              
              
              
              
              
              3.97
              %
              
              
              
              
              
              
              
              3.75
              %Net
                  interest income
              
              
              
              
              $
              39,195
              
              
              
              
              
              
              
              $
              30,148
              
              
              
              
              
              
              
              $
              27,759Net
                  interest margin
              
              
              
              
              
              
              
              
              4.40
              %
              
              
              
              
              
              
              
              4.28
              %
              
              
              
              
              
              
              
              4.11
              %


26
 *Table
          of Contents*


**Investment
      Portfolio**





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





As
                of December 31,
            
            2005
            
            2004
            
            2003(Dollars
                in Thousands)U.
                S. Government agency securities
            
            $
            70,635
            
            $
            52,519
            
            $
            57,328State
                and municipal securities
            
            
            14,063
            
            
            8,738
            
            
            9,400Mortgage-backed
                securities
            
            
            59,858
            
            
            54,997
            
            
            50,296Corporate
                debt securities
            
            
            3,580
            
            
            4,318
            
            
            4,354Equity
                securities
            
            
            9,319
            
            
            8,112
            
            
            5,447$
            157,455
            
            $
            128,684
            
            $
            126,825





At
      December 31, 2005, the estimated fair market value of our investment portfolio
      was approximately $1,868,000, or 1.17%, below our amortized cost; however,
      market values may fluctuate significantly as interest rates change.





Our
      investment portfolio policy stresses quality and liquidity. The bonds which
      are
      purchased as investments carry an “A” rating or better by either Standard and
      Poor’s or Moody’s Investors Service, Inc. or have been reviewed for credit and
      market risk and deemed appropriate for the Bank’s portfolio by management. The
      portfolio is monitored to assure there is no unreasonable concentration of
      securities in the obligations of a single debtor.





The
      following table shows the maturities of non-equity investment securities at
      December 31, 2005 and the weighted-average yields (on a fully taxable basis
      assuming a 35% tax rate) on such securities. The maturities presented for
      mortgage-backed securities are based on the average lives of those bonds at
      the
      then projected prepayment speeds. Actual maturities usually differ from
      contractual maturities because certain security issuers have the right to call
      or prepay obligations with or without call or prepayment penalties. Of the
      investments in U.S. Government agency securities maturing after one year,
      approximately $25.3 million, or 38%, are potentially callable at par value
      within one year.





U.S.
                  Government
              Agency
                Securities
            
            State
                  and Municipal
              Securities
            
            Mortgage-Backed
              Securities
            
            Corporate
                  Debt
              SecuritiesAs
                of December 31, 2005
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield
            
            Amount
            
            Yield(Dollars
                in Thousands)Due
                in one year or less
            
            $
            3,407
            
            
            4.40
            %
            $
            355
            
            
            4.44
            %
            $
            -
            
            
            -
            
            $
            -
            
            
            -Due
                after one year through five years
            
            
            24,083
            
            
            4.62
            %
            
            5,948
            
            
            4.95
            %
            
            55,229
            
            
            4.33
            %
            
            2,033
            
            
            6.60
            %Due
                after five years through ten years
            
            
            27,554
            
            
            4.68
            %
            
            4,552
            
            
            5.69
            %
            
            4,629
            
            
            4.70
            %
            
            1,547
            
            
            6.00
            %Due
                after ten years
            
            
            15,591
            
            
            5.56
            %
            
            3,208
            
            
            6.26
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            70,635
            
            
            4.84
            %
            $
            14,063
            
            
            5.48
            %
            $
            59,858
            
            
            4.36
            %
            $
            3,580
            
            
            6.34
            %


27
 *Table
          of Contents*


**Loan
      Portfolio**





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





*Types
      of Loans*


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





As
                of December 31,
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001(Dollars
                in Thousands)Commercial
                and financial
            
            $
            50,860
            
            $
            59,703
            
            $
            53,849
            
            $
            62,653
            
            $
            80,493Agricultural
                (including loans secured by farmland)
            
            
            55,830
            
            
            26,704
            
            
            24,071
            
            
            21,777
            
            
            26,428Real
                estate - construction
            
            
            268,629
            
            
            166,854
            
            
            100,150
            
            
            83,836
            
            
            63,486Real
                estate - commercial
            
            
            231,601
            
            
            239,032
            
            
            203,465
            
            
            193,298
            
            
            205,354Real
                estate - residential
            
            
            127,326
            
            
            136,190
            
            
            128,539
            
            
            145,470
            
            
            185,308Installment
                loans to individuals and other
            
            
            20,380
            
            
            19,552
            
            
            29,366
            
            
            48,934
            
            
            64,806754,626
            
            
            648,035
            
            
            539,440
            
            
            555,461
            
            
            638,201Deferred
                loan fees and unearned interest, net
            
            
            (1,688
            )
            
            (1,886
            )
            
            (796
            )
            
            (223
            )
            
            (376
            )752,938
            
            
            646,149
            
            
            538,644
            
            
            555,238
            
            
            637,825Allowance
                for loans losses
            
            
            (11,079
            )
            
            (9,066
            )
            
            (10,139
            )
            
            (12,097
            )
            
            (15,765
            )Loans,
                net
            
            $
            741,859
            
            $
            637,083
            
            $
            528,505
            
            $
            543,141
            
            $
            622,060








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





As
                of December 31,
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Commercial
                and financial
            
            
            6.75
            %
            
            9.24
            %
            
            10.00
            %
            
            11.28
            %
            
            14.46
            %Agricultural
                (including loans secured by farmland)
            
            
            7.41
            %
            
            4.13
            %
            
            4.47
            %
            
            3.92
            %
            
            3.95
            %Real
                estate - construction
            
            
            35.68
            %
            
            25.82
            %
            
            18.59
            %
            
            15.10
            %
            
            10.15
            %Real
                estate - commercial
            
            
            30.76
            %
            
            36.99
            %
            
            37.78
            %
            
            34.82
            %
            
            32.20
            %Real
                estate - residential
            
            
            16.91
            %
            
            21.08
            %
            
            23.86
            %
            
            26.20
            %
            
            29.05
            %Installment
                loans to individuals and other
            
            
            2.71
            %
            
            3.03
            %
            
            5.45
            %
            
            8.72
            %
            
            10.25
            %100.22
            %
            
            100.29
            %
            
            100.15
            %
            
            100.04
            %
            
            100.06
            %Deferred
                loan fees and unearned interest, net
            
            
            -0.22
            %
            
            -0.29
            %
            
            -0.15
            %
            
            -0.04
            %
            
            -0.06
            %100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %
            
            100.00
            %Allowance
                for loans losses
            
            
            -1.47
            %
            
            -1.40
            %
            
            -1.88
            %
            
            -2.18
            %
            
            -2.47
            %Loans,
                net
            
            
            98.53
            %
            
            98.60
            %
            
            98.12
            %
            
            97.82
            %
            
            97.53
            %








Overall,
      the loan portfolio increased $106.8 million, or 16.5%, from $646.1 million
      at
      the beginning of the year to $752.9 million at year end. In 2005,
      the composition of the loan portfolio continued to shift as loans secured
      by real estate increased to represent 90.37% of the total portfolio at the
      end
      of 2005 from 86.76% at the end of 2004 and 82.99% at the end of 2003. At the
      end
      of 2001, Installment loans to individuals represented 10.25% of our loan
      portfolio, while it only represented 2.71% of our portfolio at the end of 2005.
      Commercial and financial loans decreased from 14.46% of our portfolio to 6.75%
      of our portfolio during that same time. Residential real estate mortgages
      decreased from 29.05% of our portfolio in 2001 to 16.91% of our portfolio in
      2005.





Our
      residential construction and land development loans increased from 10.15% of
      our
      portfolio in 2001 to 35.68% of our portfolio in 2005. Growth in all of our
      markets contributed to the $101.8 million increase in real estate construction
      loans; however, the majority of our construction and development loans are
      in
      our North Georgia market. Of the $268.6 million in construction and development
      loans outstanding at the end of 2005, $142.9 million, or 53.1%, originated
      in
      our Henry County offices.


28
 *Table
          of Contents*


Because
      we have a significant concentration in construction and development loans and
      commercial real estate loans we must monitor and estimate trends in our real
      estate markets. We will adjust our strategies or underwriting requirements
      in an
      effort to manage the risks associated with these types of lending. Below is
      a
      table showing the collateral distribution of our construction and commercial
      real estate loans as of December 31, 2005.




Construction
              
              %
                  of Total
              
              
              
              Commercial
              
              %
                  of Total(Dollars
                  in Thousands)Acquisition
                  and Development:
              
              
              
              
              
              Owner-occupied:1-4
                  family residential
              
              $
              116,799
              
              
              43.48
              %
              
              Office
              
              $
              41,254
              
              
              17.81
              %Commercial
                  and multi-family
              
              
              73,748
              
              
              27.45
              %
              
              Retail
              
              
              30,329
              
              
              13.10
              %Construction:
              
              
              
              
              
              
              
              
              Other
              
              
              44,971
              
              
              19.41
              %1-4
                  family residential spec
              
              
              26,135
              
              
              9.73
              %
              Not
                owner-occupied:1-4
                  family residential pre-sold
              
              
              7,086
              
              
              2.64
              %
              
              Office
              
              
              17,407
              
              
              7.51
              %1-4
                  family residential other
              
              
              9,850
              
              
              3.67
              %
              
              Retail
              
              
              19,167
              
              
              8.28
              %Commercial
                  owner-occupied
              
              
              13,551
              
              
              5.04
              %
              
              Other
              
              
              14,487
              
              
              6.26
              %Commercial
                  not owner-occupied
              
              
              10,008
              
              
              3.73
              %
              Other:Hotel/motel
              
              
              1,371
              
              
              0.51
              %
              
              Hotel/motel
              
              
              17,812
              
              
              7.69
              %Industrial
              
              
              483
              
              
              0.18
              %
              
              Industrial
              
              
              2,082
              
              
              0.90
              %Multi-family
                  properties
              
              
              8,641
              
              
              3.22
              %
              
              Multi-family
                  properties
              
              
              12,774
              
              
              5.52
              %Special
                  purpose property
              
              
              735
              
              
              0.27
              %
              
              Special
                  purpose property
              
              
              30,574
              
              
              13.20
              %Other
              
              
              222
              
              
              0.08
              %
              
              Other
              
              
              744
              
              
              0.32
              %Total
                  Construction and Development
              
              $
              268,629
              
              
              100.00
              %
              Total
                Commercial Real Estate
              
              $
              231,601
              
              
              100.00
              %





A
      summary
      of loans from each market outstanding at December 31, 2005 is presented in
      the
      following table.





South
                Georgia
              Market
            
            North
                  Georgia
              Market
            
            Florida
              Market
            
            Treasury
            
            Total(Dollars
                in Thousands)Commercial
                and financial
            
            $
            33,425
            
            $
            13,112
            
            $
            4,241
            
            $
            82
            
            $
            50,860Agricultural
                (including loans secured by farmland)
            
            
            47,137
            
            
            5,950
            
            
            2,743
            
            
            -
            
            
            55,830Real
                estate - construction
            
            
            45,169
            
            
            187,053
            
            
            36,279
            
            
            128
            
            
            268,629Real
                estate - commercial
            
            
            86,018
            
            
            119,726
            
            
            16,006
            
            
            9,851
            
            
            231,601Real
                estate - residential
            
            
            93,825
            
            
            27,204
            
            
            4,735
            
            
            1,562
            
            
            127,326Installment
                loans to individuals and others
            
            
            16,941
            
            
            1,396
            
            
            143
            
            
            1,900
            
            
            20,380322,515
            
            
            354,441
            
            
            64,147
            
            
            13,523
            
            
            754,626Deferred
                loan fees and unearned interest, net
            
            
            (140
            )
            
            (753
            )
            
            (800
            )
            
            5
            
            
            (1,688
            )322,375
            
            
            353,688
            
            
            63,347
            
            
            13,528
            
            
            752,938Allowance
                for loan losses
            
            
            (4,436
            )
            
            (5,377
            )
            
            (848
            )
            
            (418
            )
            
            (11,079
            )$
            317,939
            
            $
            348,311
            
            $
            62,499
            
            $
            13,110
            
            $
            741,859








In
      addition to the geographic concentrations noted in the tables above, we had
      approximately $52.1 million in loans secured by real estate in Florida to
      customers of our South Georgia, North Georgia and Treasury offices.





In
      2005,
      loans in our North Georgia market increased 26.7% and loans in our Florida
      market increased 16.64%. While these are relatively new markets for us and
      some
      level of growth is expected, the growth that we have experienced from these
      markets is attributed to the addition of experienced lenders with contacts
      in these markets, and strong local economic activity. Our ability to continue
      to
      grow in these markets is dependent upon a continuation of these favorable
      attributes.


29
 *Table
          of Contents*





*Maturities
      and Sensitivities of Loans to Changes in Interest Rates*


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





As
                of December 31, 2005
            
            Commercial
              &
                Financial
            
            Agricultural
            
            Real
                Estate -
              Construction
            
            Real
                Estate -
              Commercial
            
            Real
                Estate -
              Residential
            
            All
                Other
              Loans
            
            Total(Dollars
                in Thousands)Due
                in one year or less
            
            $
            29,954
            
            $
            40,323
            
            $
            194,502
            
            $
            48,171
            
            $
            36,383
            
            $
            11,469
            
            $
            360,802Due
                after one year through five years
            
            
            19,735
            
            
            13,089
            
            
            72,510
            
            
            137,122
            
            
            57,360
            
            
            7,466
            
            
            307,282Due
                after five years
            
            
            1,171
            
            
            2,418
            
            
            1,617
            
            
            46,308
            
            
            33,583
            
            
            1,445
            
            
            86,542Total
            
            $
            50,860
            
            $
            55,830
            
            $
            268,629
            
            $
            231,601
            
            $
            127,326
            
            $
            20,380
            
            $
            754,626Of
                the above loans maturing after one year, those with predetermined
                fixed
                rates
            
            $
            8,573
            
            $
            5,860
            
            $
            11,163
            
            $
            87,325
            
            $
            42,127
            
            $
            6,918
            
            $
            161,966those
                with floating or adjustable rates
            
            
            12,333
            
            
            9,647
            
            
            62,964
            
            
            96,105
            
            
            48,816
            
            
            1,993
            
            
            231,858Total
                maturing after one year
            
            $
            20,906
            
            $
            15,507
            
            $
            74,127
            
            $
            183,430
            
            $
            90,943
            
            $
            8,911
            
            $
            393,824








While
      we
      make some long-term, fixed rate commercial real estate loans with interest
      rates
      near 40 year lows, we have a preference to offer loans to our commercial
      customers on a floating rate basis, usually tied to a prime interest rate.
      This
      preference has contributed to our asset-sensitive interest rate risk position.
      At December 31, 2005, approximately 71% of our loan portfolio will either mature
      or reprice within the next 12 months.





*Nonaccrual,
      Past Due and Restructured Loans*


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





As
                of December 31,
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001(Dollars
                in Thousands)Loans
                accounted for on a nonaccrual basis
            
            $
            7,856
            
            $
            1,417
            
            $
            7,048
            
            $
            10,378
            
            $
            10,581Accruing
                loans which are contractually past due 90 days or more as to principal
                or
                interest payments
            
            
            2
            
            
            11
            
            
            -
            
            
            -
            
            
            1,598Troubled
                debt restructurings not included above
            
            
            -
            
            
            2,045
            
            
            1,168
            
            
            1,217
            
            
            -Other
                impaired loans
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming loans
            
            $
            7,858
            
            $
            3,473
            
            $
            8,216
            
            $
            11,595
            
            $
            12,179Ratio
                of nonperforming loans to total loans (%)
            
            
            1.04
            
            
            0.54
            
            
            1.53
            
            
            2.09
            
            
            1.91Allowance
                for loan losses to nonperforming loans (%)
            
            
            140.99
            
            
            261.04
            
            
            123.41
            
            
            104.33
            
            
            129.44








During
      the first quarter of 2005, a commercial real estate loan relationship was placed
      on nonaccrual status which had an outstanding principal balance equal to
      $6.96 million, or 88% of our total nonperforming assets as of December 31,
      2005.
      We believe that the value of the collateral securing the loans with this
      relationship is adequate, and we are working with a receiver and the borrower
      to
      market the collateral in an effort to repay those loans. Excluding
      this one impaired loan relationship, our nonperforming loans would have totaled
      $895,000, or 0.12% of total loans as of December 31, 2005.





At
      December 31, 2005, we had $1.29 million in total delinquent loans (loans past
      due 30 days or more) and still accruing interest, or 0.17% of total loans,
      representing an improvement from 0.54% one year ago.





The
      accrual of interest on loans is discontinued when, in our judgment, the borrower
      may be unable to meet payments as they become due, unless the loan is well
      secured. All interest accrued for loans that are placed on nonaccrual status
      is
      reversed against interest income. Interest income on nonaccrual loans is
      subsequently recognized only to the extent cash payments are received or until
      the loan is returned to accrual status. For the year ended December 31, 2005,
      the gross interest income that would have been recorded if our nonperforming
      loans had been current in accordance with their original terms was approximately
      $412,000. The amount of interest income on the above nonperforming loans that
      was included in net income for the year ended December 31, 2005 was
      approximately $13,000. The allowance for loan losses related to our
      nonperforming loans amounted to approximately $1.2 million and $510,000 at
      December 31, 2005 and 2004, respectively, due to an increase in specific
      reserves on loans individually evaluated for impairment.


30
 *Table
          of Contents*


**Allowance
      For Loan Losses**





At
      December 31, 2005, the allowance as a percentage of total loans was 1.47%,
      compared to 1.40% at December 31, 2004. We consider the current level of the
      allowance for loan losses adequate to absorb losses from loans in the portfolio.
      As an integral part of our credit risk management process, we regularly review
      loans in our portfolio for credit quality and documentation of collateral.
      The
      lenders are primarily responsible for assigning a risk grade to each loan in
      their portfolio. Their assessments are supplemented with independent reviews
      conducted by our internal audit department and external loan review consultants.
      All loans in excess of $100,000 that have been identified for potential credit
      weakness are reviewed quarterly by a management committee, which further
      enhances the process for timely recognition of losses and for determining
      appropriate reserves.





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





The
      first
      component of the allowance for loan loss methodology covers the measurement
      of
      specific allowances for individual impaired loans as required by Financial
      Accounting Standards Board (“FASB”) Statement No. 114, *Accounting
      by Creditors for Impairment of a Loan* .
      Each
      loan relationship with amounts due in excess of $500,000 that has been
      identified for potential credit weakness is evaluated for impairment. A loan
      is
      impaired when, based on current information and events, it is probable that
      the
      borrower will be unable to pay all amounts due according to the contractual
      terms of the loan agreement. By definition, we consider all loans on nonaccrual
      status and all loans whose terms have been modified in a troubled debt
      restructuring as impaired. If impairment is determined, a specific valuation
      is
      assessed on that loan based on realizable collateral values (if collateral
      dependent), discounted cash flows, or observable market values. At December
      31,
      2005, we had $1.16 million in specific reserves on $7.28 million in individually
      evaluated impaired and other significant potential problem loans. This is an
      increase from the $1.08 million in specific reserves on $7.46 million in
      individually evaluated loans at December 31, 2004.





The
      second component of the allowance for loan loss methodology addresses all loans
      not individually evaluated for impairment but are either internally rated,
      criticized by our banking examiners, or past due 30 day or more. The allowance
      factors are based on industry standards and supported by our own historical
      loss
      analysis. At December 31, 2005, we had $2.78 million in general reserves
      allocated to $74.0 million rated and delinquent loans. This is a slight decrease
      from the $2.79 million reserved on a lower balance of $67.5 million rated and
      delinquent loans at December 31, 2004. We had an improvement in the more severe
      internal loan rating categories over the past 12 months.





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





·
            levels
                of and trends in delinquencies and impaired
                loans;


·
            levels
                of and trends in charge-offs and
                recoveries;


·
            trends
                in volume and terms of loans;


·
            effects
                of any changes in risk selection and underwriting standards and other
                changes in lending policies, procedures, and
                practices;


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


·
            national
                and local economic trends and
                conditions;


·
            industry
                conditions; and


·
            effects
                of changes in credit
                concentrations.





The
      quantitative risk factors used in determining these general reserves require
      a
      high degree of management judgment. At December 31, 2005, we had $6.49 million
      in general reserves compared to $5.19 million one year ago. This 25.3% increase
      in the general reserve over last year is primarily due to loan growth and
      additional caution taken into consideration for our increased concentration
      in
      construction and development lending.


31
 *Table
          of Contents*


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





*Allocation
      of the Allowance for Loan Losses*


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





As
                of December 31,
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Amount
            
            Percentage
                of
              Loans
                in
              Category
              to
                Total
              Loans
            
            Amount
            
            Percentage
                of
              Loans
                in
              Category
              to
                Total
              Loans
            
            Amount
            
            Percentage
                of
              Loans
                in
              Category
              to
                Total
              Loans
            
            Amount
            
            Percentage
                of
              Loans
                in
              Category
              to
                Total
              Loans
            
            Amount
            
            Percentage
                of
              Loans
                in
              Category
              to
                Total
              Loans(Dollars
                in Thousands)Commercial
                and financial
            
            $
            2,670
            
            
            6.7
            %
            $
            1,167
            
            
            8.9
            %
            $
            1,570
            
            
            9.8
            %
            $
            1,063
            
            
            11.3
            %
            $
            2,119
            
            
            14.4
            %Agricultural
                (including loans secured by farmland)
            
            
            323
            
            
            7.4
            %
            
            490
            
            
            4.2
            %
            
            741
            
            
            4.5
            %
            
            1,357
            
            
            3.9
            %
            
            760
            
            
            3.9
            %Real
                estate - construction
            
            
            4,427
            
            
            35.5
            %
            
            2,211
            
            
            25.8
            %
            
            1,169
            
            
            18.6
            %
            
            1,293
            
            
            15.1
            %
            
            1,709
            
            
            10.2
            %Real
                estate - commercial
            
            
            2,280
            
            
            30.8
            %
            
            3,514
            
            
            37.0
            %
            
            3,793
            
            
            37.8
            %
            
            4,741
            
            
            34.8
            %
            
            6,075
            
            
            32.2
            %Real
                estate - residential
            
            
            208
            
            
            16.9
            %
            
            1,337
            
            
            21.1
            %
            
            1,557
            
            
            23.9
            %
            
            2,919
            
            
            26.2
            %
            
            2,859
            
            
            29.1
            %Consumer
                and other loans
            
            
            512
            
            
            2.7
            %
            
            335
            
            
            3.0
            %
            
            548
            
            
            5.4
            %
            
            724
            
            
            8.7
            %
            
            1,329
            
            
            10.2
            %Unallocated
            
            
            659
            
            
            
            
            
            12
            
            
            
            
            
            761
            
            
            
            
            
            -
            
            
            
            
            
            914Total
            
            $
            11,079
            
            
            100.0
            %
            $
            9,066
            
            
            100.0
            %
            $
            10,139
            
            
            100.0
            %
            $
            12,097
            
            
            100.0
            %
            $
            15,765
            
            
            100.0
            %


32
 *Table
          of Contents*





*Summary
      of Loan Loss Experience*


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





For
                the Years Ended December 31,
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001(Dollars
                in Thousands)Balance
                at beginning of year
            
            $
            9,066
            
            $
            10,139
            
            $
            12,097
            
            $
            15,765
            
            $
            8,185Charge-offs:Commercial
                and financial
            
            
            31
            
            
            511
            
            
            365
            
            
            3,771
            
            
            1,619Agricultural
                (including loans secured by farmland)
            
            
            -
            
            
            24
            
            
            890
            
            
            6
            
            
            -Real
                estate - construction
            
            
            -
            
            
            -
            
            
            9
            
            
            -
            
            
            2,001Real
                estate - commercial
            
            
            7
            
            
            1,228
            
            
            443
            
            
            1,595
            
            
            255Real
                estate - residential
            
            
            43
            
            
            467
            
            
            401
            
            
            157
            
            
            283Installment
                loans to individuals and other loans
            
            
            200
            
            
            343
            
            
            1,011
            
            
            1,073
            
            
            675281
            
            
            2,573
            
            
            3,119
            
            
            6,602
            
            
            4,833Recoveries:Commercial
                and financial
            
            
            111
            
            
            117
            
            
            673
            
            
            89
            
            
            55Agricultural
                (including loans secured by farmland)
            
            
            247
            
            
            151
            
            
            14
            
            
            6
            
            
            -Real
                estate - construction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Real
                estate - commercial
            
            
            394
            
            
            268
            
            
            137
            
            
            93
            
            
            60Real
                estate - residential
            
            
            148
            
            
            52
            
            
            43
            
            
            26
            
            
            12Installment
                loans to individuals and other loans
            
            
            205
            
            
            312
            
            
            294
            
            
            145
            
            
            661,105
            
            
            900
            
            
            1,161
            
            
            359
            
            
            193Net
                charge-offs (recoveries)
            
            
            (824
            )
            
            1,673
            
            
            1,958
            
            
            6,243
            
            
            4,640Additions
                provided to the allowance charged to operations
            
            
            1,189
            
            
            600
            
            
            -
            
            
            2,575
            
            
            12,220Allowance
                for loan losses of acquired bank
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at end of year
            
            $
            11,079
            
            $
            9,066
            
            $
            10,139
            
            $
            12,097
            
            $
            15,765Average
                balance of loans outstanding
            
            $
            706,052
            
            $
            569,858
            
            $
            540,787
            
            $
            586,712
            
            $
            616,156Ratio
                of net charge-offs during the year to average loans outstanding during
                the
                year (%)
            
            
            (0.12
            )
            
            0.29
            
            
            0.36
            
            
            1.06
            
            
            0.75


33
 *Table
          of Contents*


**Deposits**





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





2005
            
            2004
            
            2003For
                the Year Ended December 31,
            
            Average
                Balance
            
            Rate
            
            Average
                Balance
            
            Rate
            
            Average
                Balance
            
            Rate(Dollars
                in Thousands)Noninterest-bearing
                demand
            
            $
            106,700
            
            
            -
            
            $
            95,859
            
            
            -
            
            $
            90,444
            
            
            -Interest-bearing
                demand
            
            
            206,418
            
            
            1.63
            %
            
            173,555
            
            
            0.69
            %
            
            167,215
            
            
            0.84
            %Savings
            
            
            42,154
            
            
            0.74
            %
            
            42,137
            
            
            0.56
            %
            
            39,445
            
            
            0.71
            %Time
            
            
            386,137
            
            
            3.31
            %
            
            264,216
            
            
            2.56
            %
            
            279,767
            
            
            3.04
            %Total
            
            $
            741,409
            
            
            2.22
            %
            $
            575,767
            
            
            1.42
            %
            $
            576,871
            
            
            1.77
            %





Our
      total
      deposit portfolio grew $158.1 million, or 24.1%, in 2005. Of this increase,
      $90.6 million of the growth is from time deposits. The average rate paid on
      time deposits increased 75 basis points from 2.56% in 2004 to 3.31% in 2005.
      While we have historically enjoyed a relatively low cost of funds from our
      core
      deposits, with the current rising rate environment and our plan to grow the
      balance sheet, we expect our cost of funds to continue to increase thus adding
      pressure to our ability to maintain our net interest margin at or near the
      level posted in 2005.





The
      maturities of time deposits as of December 31, 2005 are summarized
      below.





Retail
                time deposits
              <
                $100,000
            
            Retail
                time deposits
              >$100,000
            
            Brokered
                time deposits
              >$100,000
            
            Total
                time deposits(Dollars
                in Thousands)Three
                months or less
            
            $
            41,915
            
            $
            16,584
            
            $
            3,726
            
            $
            62,225Over
                three through six months
            
            
            40,778
            
            
            28,238
            
            
            8,798
            
            
            77,814Over
                six months through twelve months
            
            
            65,555
            
            
            34,799
            
            
            11,500
            
            
            111,854Over
                twelve months
            
            
            102,003
            
            
            51,657
            
            
            18,085
            
            
            171,745Total
            
            $
            250,251
            
            $
            131,278
            
            $
            42,109
            
            $
            423,638








**LIQUIDITY
      AND CAPITAL RESOURCES**





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





At
      December 31, 2005, our liquidity ratio was 21.44% and our net noncore funding
      dependency ratio was 23.61%. Our liquidity and funding policy provides that
      we maintain a liquidity position of greater than or equal to 15% and a net
      noncore funding dependency ratio of less than or equal to 25%.


34
 *Table
          of Contents*


*Investment
      Portfolio*


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





As
                of December 31, 2005
            
            Contractual
              Maturities
            
            Expected
              Cash
                Flows
            
            Difference(Dollars
                in Thousands)Due
                in one year or less
            
            $
            3,762
            
            $
            16,650
            
            $
            12,888Due
                after one year through five years
            
            
            87,293
            
            
            83,251
            
            
            (4,042
            )Due
                after five years through ten years
            
            
            38,282
            
            
            40,099
            
            
            1,817Due
                after ten years
            
            
            18,799
            
            
            8,136
            
            
            (10,663
            )Total
            
            $
            148,136
            
            $
            148,136
            
            $
            -





Our
      liquidity from investments is somewhat limited since we pledge certain
      investments to secure public deposits and certain borrowing arrangements. At
      December 31, 2005, approximately 60.4% of our $157.5 million investment
      portfolio was pledged as collateral to others.





*Borrowings*


As
      with
      most community banks, loan volume is the driver for the remainder of our balance
      sheet. With the strong loan demand, we commenced a campaign to increase deposits
      during the latter part of the third quarter of 2004. As a result of this
      successful campaign, we have been able to reduce our reliance on brokered
      deposits and other borrowings to fund our loan growth. Our brokered deposits
      decreased 10.4% from $47.0 million at December 31, 2004 to $42.1 million at
      December 31, 2005. We have also reduced our advances from the Federal Home
      Loan
      Bank of Atlanta (the “FHLB”) by 9.05% from $99.0 million at December 31, 2004 to
      $90.0 million at December 31, 2005.





During
      2003, we incurred a $1.44 million prepayment penalty to repay $14.5 million
      in
      FHLB advances that had a remaining average life to maturity of over five years.
      The average rate on these advances was 5.54%, or 434 basis points higher than
      the federal funds rate (at that time) that we paid for funds purchased to retire
      the advances.





On
      November 28, 2001, PAB Bankshares Capital Trust I (“PAB Trust”) issued $10
      million of Floating Rate Capital Securities, also referred to as “trust
      preferred securities”. We formed PAB Trust, a statutory business trust created
      under the laws of the State of Delaware, for the sole purpose of issuing the
      trust preferred securities and investing the proceeds in Floating Rate Junior
      Subordinated Debentures issued by us. The interest rates on both the trust
      preferred securities and the debentures are reset semi-annually at LIBOR plus
      3.75% (currently 8.42%) with a rate cap of 11.0% through December 8, 2006.
      We
      entered into agreements which, taken collectively, fully, irrevocably and
      unconditionally guarantee, on a subordinated basis, all of PAB Trust’s
      obligations under the trust preferred securities. PAB Trust’s sole asset is the
      debentures issued by us. The debentures will mature on December 8, 2031, but
      are
      callable at par at our option in whole or in part anytime after December 8,
      2006. The proceeds from the issuance of the trust preferred securities qualify
      as Tier 1 Capital under the risk-based capital guidelines established by the
      Federal Reserve. In the fourth quarter of 2006, we intend to exercise our option
      to call these debentures using excess liquidity, proceeds from a new issue
      of
      trust preferred securities, or proceeds from other borrowings.





During
      the first quarter of 2004, the Company adopted FASB Interpretation No. 46R
      (Revised December 2003), *Consolidation
      of Variable Interest Entities* .
      This
      Interpretation addresses consolidation by business entities of variable interest
      entities and when such entities are subject to consolidation under the
      provisions of this Interpretation. The Company has determined that the revised
      provisions required deconsolidation of PAB Bankshares Capital Trust I. The
      interpretation did not have a material effect on the Company’s financial
      condition or results of operations.





At
      December 31, 2005, we had $14.3 million in an available secured credit line
      with
      the FHLB and an additional $45.0 million in unsecured Fed Funds lines of credit
      available with correspondent banks.


35
 *Table
          of Contents*





*Contractual
      Obligations*


Summarized
      below are our contractual obligations as of December 31, 2005.





Contractual
                Obligations
            
            Total
            
            1
                year
              or
                less
            
            Over
                1
              to
                3 years
            
            Over
                3
              to
                5 years
            
            More
                than
              5
                years(Dollars
                in Thousands)FHLB
                Advances
            
            $
            90,044
            
            $
            12,853
            
            $
            1,212
            
            $
            5,496
            
            $
            70,483Operating
                Lease Obligations
            
            
            564
            
            
            207
            
            
            341
            
            
            16
            
            
            -Guaranteed
                Preferred Beneficial Interests in Debentures
            
            
            10,310
            
            
            -
            
            
            -
            
            
            -
            
            
            10,310$
            100,918
            
            $
            13,060
            
            $
            1,553
            
            $
            5,512
            
            $
            80,793





*Off-Balance-Sheet
      Financing*


Our
      financial statements do not reflect various commitments and contingent
      liabilities that arise in the normal course of business. These off-balance-sheet
      financial instruments include commitments to extend credit and standby letters
      of credit. These financial instruments are included in the financial statements
      when funds are distributed or the instruments become payable. We use the same credit policies in making commitments as we do for on-balance-sheet
      instruments. Our
      exposure to credit loss in the event of nonperformance by the other party to
      the
      financial instrument for commitments to extend credit, standby letters of credit
      and credit card commitments is represented by the contractual amount of those
      instruments.  At
      December 31, 2005, we had outstanding commitments to extend credit through
      open
      lines of credit of approximately $144.7 million and outstanding standby letters
      of credit of approximately $9.8 million.





*Commitments
      of Capital*


In
      December 2005, we entered into an agreement to purchase 1.54 acres of land
      in
      Oconee County, Georgia, directly across the line from Athens-Clarke County,
      for
      $1.54 million. We plan to allocate $900,000 to build and furnish a full-service
      branch at this location in 2006. At year-end, we were also in the process of
      adding two additional ATM’s in the Valdosta market for a remaining cost of
      approximately $92,000.





*Stockholders’
      Equity*


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





The
      following table summarizes our consolidated regulatory capital ratios at
      December 31, 2005, 2004 and 2003.


2005
            
            2004
            
            2003
            
            Minimum
              Regulatory
              RequirementTotal
                Capital to Risk Weighted Assets
            
            
            12.4
            %
            
            13.5
            %
            
            15.1
            %
            
            8.0
            %Tier
                1 Capital to Risk Weighted Assets
            
            
            11.1
            %
            
            12.2
            %
            
            13.9
            %
            
            4.0
            %Tier
                1 Capital to Average Assets (Leverage Ratio)
            
            
            9.2
            %
            
            10.4
            %
            
            11.0
            %
            
            4.0
            %








**RESULTS
      OF OPERATIONS**





**Net
      Interest Income**





The
      primary component of a financial institution’s profitability is net interest
      income, or the difference between the interest income earned on assets,
      primarily loans and investments, and interest paid on liabilities, primarily
      deposits and other borrowed funds. Our net interest income for 2005, on a tax
      equivalent basis, increased by $9,047,000, or 30.01%, over 2004. Interest income
      increased $18,821,000, or 46.24%, and interest expense increased by $9,774,000,
      or 92.0%, during 2005. The growth in interest income is the result of a
      $186.0 million higher average balance in our earning assets and a 90 basis
      point
      improvement in the average yield on earning assets during the year, from 5.79%
      in 2004 to 6.69% in 2005. The increase in interest expense is the result of
      a
      $164.9 million higher average balance in our interest-bearing liabilities
      and a 90 basis point rise in the average rate paid on interest-bearing
      liabilities from 1.82% in 2004 to 2.72% in 2005.


36
 *Table
          of Contents*


Our
      net
      interest income, on a tax equivalent basis, for 2004 increased by $2,389,000,
      or
      8.61%, over 2003. Interest income increased $546,000, or 1.4%, while interest
      expense decreased by $1,843,000, or 14.8%, during 2004. The increase in interest
      income is the net result of an increase of $28.6 million in our average earning
      assets and a 16 basis point drop in the average yield on earning assets during
      the year, from 5.95% in 2003 to 5.79% in 2004. The majority of the decrease
      in
      interest expense is the result of a decline in rates. The average rates paid
      on
      interest-bearing liabilities decreased 38 basis points, from 2.20% in 2003
      to
      1.82% in 2004.




The
      net
      interest margin is net interest income expressed as a percentage of average
      earning assets. Our net interest margin increased from 4.28% in 2004 to 4.40%
      in
      2005, a 12 basis point improvement. Although our net interest margin improved
      during 2005, our ability to continue to improve our net interest margin in
      2006
      will be a challenge considering the current flattening of the interest rate
      curve and our rising incremental cost of funds.





**Provision
      for Loan Losses**





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





For
      the
      year ended December 31, 2005, we recorded $1.189 million as a provision for
      loan
      losses, compared to $600,000 for the same period in 2004. The increase is due
      to
      a growing loan portfolio, balanced by continued improvement in the level of
      total nonperforming loans, and an improvement in several environmental factors
      previously discussed.





**Noninterest
      Income**





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





For
                the Year Ended December 31,
            
            2005
            
            
            
            2004
            
            
            
            2003Amount
            
            Percentage
              Change
              2005
                vs. 2004
            
            Amount
            
            Percentage
              Change
              2004
                vs. 2003
            
            Amount(Dollars
                In Thousands)Service
                charges on deposit accounts
            
            $
            4,017
            
            
            -9.1
            %
            $
            4,417
            
            
            -10.3
            %
            $
            4,926Mortgage
                origination fees
            
            
            601
            
            
            15.1
            %
            
            522
            
            
            -27.0
            %
            
            715Brokerage
                commissions and fees
            
            
            13
            
            
            -89.3
            %
            
            121
            
            
            -74.2
            %
            
            469ATM
                / debit card fee income
            
            
            470
            
            
            12.2
            %
            
            419
            
            
            17.4
            %
            
            357Other
                commissions and fees
            
            
            237
            
            
            5.3
            %
            
            225
            
            
            -11.1
            %
            
            253Securities
                transactions, net
            
            
            (11
            )
            
            -320.0
            %
            
            5
            
            
            -99.6
            %
            
            1,416Earnings
                of bank-owned life insurance
            
            
            344
            
            
            9.2
            %
            
            315
            
            
            -33.3
            %
            
            472Gain
                (loss) on disposal / write-down of assets
            
            
            (79
            )
            
            -166.4
            %
            
            119
            
            
            -146.1
            %
            
            (258
            )Other
                noninterest income
            
            
            221
            
            
            10.0
            %
            
            201
            
            
            -24.4
            %
            
            266Total
                Noninterest Income
            
            $
            5,813
            
            
            -8.4
            %
            $
            6,344
            
            
            -26.4
            %
            $
            8,616






Noninterest
      income decreased 8.4% in 2005. As a percentage of average assets, noninterest
      income, excluding securities transactions and other non-recurring gains and
      losses, has been 0.62%, 0.81%, and 1.01% for each of the last three years ended
      December 31, 2005, 2004 and 2003, respectively.





Service
      charges on deposit accounts have declined over the past three years as we
      continued to promote a free checking product, thus reducing the monthly service
      fees. In addition, the fee income generated from an overdraft privilege product
      that was launched in March 2001 and resulted in an increase in revenues in
      2001
      and 2002 has continued to decline since then.


37
 *Table
          of Contents*


Mortgage
      origination fees increased in 2005 due to an increase in the refinancing
      activity during the year.





Brokerage
      income declined due to the sale of that business unit in February 2004. We
      will
      continue to receive a small portion of the commissions earned on a select list
      of accounts held by employees and directors of the Bank going forward. In
      addition to the decline in commission revenue, we have had a greater decline
      in
      brokerage-related expenses. We did not incur any brokerage expenses in 2005;
      whereas, $96,799 and $430,136 were incurred in 2004 and 2003,
      respectively.





Fee
      income from ATM and debit cards increased in 2005 as the volume of point-of-sale
      transactions has continued to increase from previous years.





We
      incurred a net $11,000 loss on security transactions during 2005, compared
      to a
      $5,000 net gain in 2004. The loss in 2005 is attributed to the sale of a
      low-yielding corporate bond.





Earnings
      on bank-owned life insurance increased in 2005 due to the higher earnings credit
      on the policies resulting from the rising interest rate
      environment.





In
      2005,
      the $79,000 loss on disposal of assets is due primarily to the write-down of
      obsolete equipment. In 2004, we had a $200,000 gain on the sale of our brokerage
      services business unit. Also in 2004, we sold a former branch office facility
      in
      Ocala, Florida for $800,000, recording a gain of $27,000.


38
 *Table
          of Contents*


**Noninterest
      Expense**





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





For
                the Year Ended December 31,
            
            2005
            
            
            
            2004
            
            
            
            2003Amount
            
            Percentage
              Change
              2005
                vs. 2004
            
            Amount
            
            Percentage
              Change
              2004
                vs. 2003
            
            Amount(Dollars
                In Thousands)Salaries
                and wages
            
            $
            13,322
            
            
            9.2
            %
            $
            12,201
            
            
            0.5
            %
            $
            12,136Deferred
                loan cost
            
            
            (1,609
            )
            
            62.5
            %
            
            (990
            )
            
            127.1
            %
            
            (436
            )Employee
                benefits
            
            
            3,398
            
            
            18.7
            %
            
            2,862
            
            
            -10.5
            %
            
            3,196Net
                occupancy expense of premises
            
            
            1,963
            
            
            4.5
            %
            
            1,878
            
            
            4.4
            %
            
            1,799Furniture
                and equipment expense
            
            
            2,082
            
            
            -0.4
            %
            
            2,091
            
            
            -11.2
            %
            
            2,355Advertising
                and business development
            
            
            541
            
            
            9.1
            %
            
            496
            
            
            14.5
            %
            
            433Supplies
                and printing
            
            
            527
            
            
            24.3
            %
            
            424
            
            
            -22.1
            %
            
            544Telephone
                and internet charges
            
            
            367
            
            
            7.3
            %
            
            342
            
            
            -24.8
            %
            
            455Postage
                and courier
            
            
            608
            
            
            11.4
            %
            
            546
            
            
            -3.0
            %
            
            563Legal
                and accounting fees
            
            
            416
            
            
            36.8
            %
            
            304
            
            
            -42.4
            %
            
            528Consulting
                fees
            
            
            413
            
            
            120.9
            %
            
            187
            
            
            -3.6
            %
            
            194Director
                fees and expenses
            
            
            412
            
            
            47.7
            %
            
            279
            
            
            32.9
            %
            
            210Service
                charges and fees
            
            
            504
            
            
            16.4
            %
            
            433
            
            
            -10.5
            %
            
            484Loss
                on early retirement of debt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,438Other
                noninterest expense
            
            
            1,834
            
            
            -8.4
            %
            
            2,002
            
            
            11.0
            %
            
            1,803Total
                Noninterest Expense
            
            $
            24,778
            
            
            7.5
            %
            $
            23,055
            
            
            -10.3
            %
            $
            25,702





As
      a
      percentage of average assets, noninterest expense was 2.61%, 3.01%, and 3.49%
      in
      2005, 2004 and 2003, respectively. During 2003, we incurred a $1.44 million
      loss
      on the early retirement of debt with the FHLB, saving significant interest
      expense over the next several years. Excluding this loss, noninterest expense
      would have totaled $24.3 million, or 3.30% of average assets for
      2003.





The
      9.2%
      increase in salaries and wages is directly correlated to the 7.5% increase
      in
      the number of full time employees we have. We increased production staff as
      well
      as service staff during 2005. We added two new members to our executive
      management team - a new Regional President for our South Georgia and Florida
      markets and a new Regional President for our North Georgia markets. We also
      added employees to staff the two new loan production offices that we opened
      in
      2005, including several senior commercial lenders.





Deferred
      loan cost, which is a credit against salaries and wages, increased 62.5% from
      2004 and resulted in a decrease in expense reported during 2005, compared to
      2004. The increase in the deferral of loan costs is due to the growth in loan
      volume.





Employee
      benefits increased due to an increase in health insurance premiums and an
      increase in our profit sharing contribution from 3.5% to 4.5% in 2005.





Occupancy
      expense increased 4.5% in 2005 due to the addition of new facilities and the
      typical increases in property taxes, insurance, and utilities. Furniture and
      equipment expense remained fairly constant in 2005, compared to 2004.





The
      36.8%
      increase in legal and accounting fees during 2005 is attributable to several
      items. We had $35,000 more legal costs attributed to litigation in 2005 than
      2004. We also had $25,000 additional legal fees for various SEC and other
      regulatory matters. Our accounting and audit fees increased $53,000 in 2005,
      due
      to additional external audit contracts.





Consulting
      fees increased 120.9% in 2005. This increase is due primarily to increased
      pre-employment and recruiting costs as we hired additional senior officers
      and
      lenders in our markets. We also engaged an outside consulting firm to review
      our
      board and executive compensation plans, which increased our consulting fees
      in
      2005.





Director
      fees increased 47.7% from 2004 to 2005 due to an increase in the fee structure,
      including quarterly retainers paid to our directors. We also added two new
      directors to our Board in the first quarter of 2005.


39
 *Table
          of Contents*


During
      2005, we made significant charitable contributions including over $100,000
      to
      the hurricane relief efforts to assist those that suffered through the severe
      2005 hurricane season. We also contributed $175,000 to Valdosta State University
      for the endowment fund that will name the VSU College of Education after our
      founder, James L. Dewar, Sr. Most other major expense categories have increased
      due to our increased growth. However, our overhead efficiency ratio, a measure
      of noninterest expense as a percentage of net interest income plus other
      noninterest income, improved from 63.39% in 2004 to 54.94% in 2005.





**Income
      Taxes**





The
      provision for income tax expense as a percentage of pre-tax income was 33.8%,
      32.7%, and 32.1% for 2005, 2004 and 2003, respectively. Due to an increase
      in
      taxable income, we shifted into the highest corporate income tax bracket in
      2005. The difference between the effective rate and the statutory federal rate
      of 35% is due primarily to income earned on our investments in and loans to
      tax-exempt municipalities and earnings on the cash value of our bank-owned
      life
      insurance. During the fourth quarter of 2005, we liquidated and dissolved our
      REITs and our REIT holding companies, which had previously allowed us to realize
      state income tax benefits. We also invested in affordable housing during 2005
      to
      receive State of Georgia low income housing tax credits that will help reduce
      our state income tax expense in 2005 and the next nine years.





**Fourth
      Quarter Results**





For
      the
      fourth quarter of 2005, our net income was $3.3 million, or $0.34 per diluted
      share, compared to net income of $2.2 million, or $0.23 per share, in the fourth
      quarter of 2004. In the fourth quarter of 2005, we provided $300,000 to the
      allowance for loan losses, compared to $600,000 in the fourth quarter of 2004.
      Our net interest margin for the fourth quarter of 2005 was 4.45% compared to
      4.15% in 2004. The average yield on earning assets grew 129 basis points to
      7.11% in the fourth quarter of 2005 from 5.82% in 2004. Correspondingly, the
      average rate paid on interest-bearing liabilities also increased, from 1.99%
      in
      2004 to 3.14% in 2005, or 115 basis points.





**Impact
      of Inflation**





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





**Critical
      Accounting Policies**





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





*Allowance
      for Loan Losses*


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


40
 *Table
          of Contents*





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





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





*Estimates
      of Fair Value*


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





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





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





**Recent
      Accounting Pronouncements**





In
      management’s opinion, there are no recent accounting pronouncements that have
      had a material impact on PAB’s earnings or financial position as of or for the
      year ended December 31, 2005. For more detailed disclosure on recent accounting
      developments, see Note 1 to the Consolidated Financial Statements included
      in
      Item 8 of this Report.





**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**





We
      are
      subject to exposure from U.S. dollar interest rate changes and accordingly,
      we
      manage our exposure by considering the possible changes in the net interest
      margin. We do not engage in trading activity nor do we classify any portion
      of
      the investment portfolio as held for trading. We have not engaged in any
      off-balance sheet hedging activities or entered into any derivative instruments
      with a higher degree of risk than collateralized mortgage obligations and
      structured government agency notes, which are commonly held investment
      securities. Finally, we have no material direct exposure to foreign currency
      exchange rate risk, commodity price risk, and other market risks.





Interest
      rates play a major part in the net interest income of a financial institution.
      The sensitivity to rate changes is known as “interest rate risk.” The repricing
      of interest earning assets and interest-bearing liabilities can influence the
      changes in net interest income. As part of our asset/liability management
      program, the timing of repriced assets and liabilities is referred to as gap
      management. It is our policy to maintain a gap ratio in the one-year time
      horizon between 0.80 and 1.20. At December 31, 2005, our one-year
      management-adjusted gap ratio of 1.37 was outside of our policy guidelines.
      However, it is more neutral than our one-year gap position of 1.57 at December
      31, 2004. In 2002, after suffering through a period of rapidly declining
      interest rates that compressed our net interest margins by 103 basis points
      from
      4.52% in 2000 to 3.49% in 2001, we positioned the Company’s balance sheet to an
      even more asset-sensitive position anticipating the eventual rise in interest
      rates from those historic lows. In doing so, we have contributed to improving
      our net interest margin in each successive year. As we look forward,
      anticipating an eventual downturn in interest rates, we have begun to reduce
      the
      level of asset-sensitivity on the Company’s balance sheet. We are also
      considering the possibility of utilizing off-balance-sheet swaps and floors
      to
      hedge our interest rate risk in a falling rate environment.


41
 *Table
          of Contents*


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





Cumulative
                Repricing Gap Analysis3-Month
            
            6-Month
            
            1-Year(Dollars
                in Thousands)*Regulatory
                Defined*Rate
                Sensitive Assets (RSA)
            
            $
            569,647
            
            $
            606,813
            
            $
            646,942Rate
                Sensitive Liabilities (RSL)
            
            
            403,628
            
            
            481,531
            
            
            598,457RSA
                minus RSL (Gap)
            
            $
            166,019
            
            $
            125,282
            
            $
            48,485Gap
                Ratio (RSA/RSL)
            
            
            1.41
            
            
            1.26
            
            
            1.08*Management-Adjusted*Rate
                Sensitive Assets (RSA)
            
            $
            583,907
            
            $
            633,953
            
            $
            698,085Rate
                Sensitive Liabilities (RSL)
            
            
            260,535
            
            
            338,438
            
            
            510,003RSA
                minus RSL (Gap)
            
            $
            323,372
            
            $
            295,515
            
            $
            188,082Gap
                Ratio (RSA/RSL)
            
            
            2.24
            
            
            1.87
            
            
            1.37








We
      use
      simulation analysis to monitor changes in net interest income due to changes
      in
      market interest rates. The simulation of rising, declining, and flat interest
      rate scenarios allows us to monitor and adjust interest rate sensitivity to
      minimize the impact of market interest rate swings. The analysis of the impact
      on net interest income over a twelve-month period is subjected to increases
      or
      decreases in market rates on net interest income and is monitored on a quarterly
      basis. Using our financial data and assumptions as of December 31, 2005, our
      simulation model projected net interest income would increase 13.54% over the
      next twelve-month period if market rates immediately rose by 200 basis points.
      On the other hand, the model projected net interest income to decrease 15.37%
      over the next twelve-month period if market rates immediately fell by 200 basis
      points. This high degree of volatility in our earnings is due primarily to
      our
      asset-sensitive balance sheet mix and our behavioral assumptions for repricing
      and prepayment speeds. Our policy states that net interest income cannot be
      reduced by more than 10% using this analysis. However, as noted above, we
      positioned our balance sheet in order to benefit from the rising rate
      environment. We intend to reduce our earnings volatility to be in compliance
      with our policy limits over the next six-to-twelve months by reducing our
      asset-sensitivity and possibly through off-balance-sheet hedging
      instruments.





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




Market
              Effect
                  on Net Interest IncomeRate
                  Change
              Gradual
              Immediate+300
                  bps
              12.72%
              21.77%+200
                  bps
              10.59%
              13.54%+100
                  bps
              5.12%
              5.29%-100
                  bps
              -5.74%
              -6.20%-200
                  bps
              -11.11%
              -15.37%-300
                  bps
              -12.86%
              -20.82%


42
 *Table
          of Contents*


**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





**Quarterly
      Financial Summary for 2005 and 2004**


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





Quarterly
                Period EndedMarch
                31
            
            June
                30
            
            September
                30
            
            December
                31Year
                ended December 31, 2005:Interest
                income
            
            $
            12,467
            
            $
            14,180
            
            $
            15,783
            
            $
            16,941Interest
                expense
            
            
            3,894
            
            
            4,581
            
            
            5,556
            
            
            6,367Net
                interest income
            
            
            8,573
            
            
            9,599
            
            
            10,227
            
            
            10,574Provision
                for loan losses
            
            
            460
            
            
            154
            
            
            275
            
            
            300Net
                interest income after provision for loan losses
            
            
            8,113
            
            
            9,445
            
            
            9,952
            
            
            10,274Other
                income
            
            
            1,347
            
            
            1,459
            
            
            1,570
            
            
            1,437Other
                expenses
            
            
            5,765
            
            
            6,228
            
            
            6,259
            
            
            6,526Income
                before income taxes
            
            
            3,695
            
            
            4,676
            
            
            5,263
            
            
            5,185Income
                tax
            
            
            1,216
            
            
            1,549
            
            
            1,745
            
            
            1,856Net
                income
            
            $
            2,479
            
            $
            3,127
            
            $
            3,518
            
            $
            3,329Basic
                earnings per share
            
            $
            0.26
            
            $
            0.33
            
            $
            0.37
            
            $
            0.35Diluted
                earnings per share
            
            $
            0.26
            
            $
            0.32
            
            $
            0.36
            
            $
            0.34Year
                ended December 31, 2004:Interest
                income
            
            $
            9,587
            
            $
            9,552
            
            $
            10,328
            
            $
            11,129Interest
                expense
            
            
            2,430
            
            
            2,381
            
            
            2,611
            
            
            3,201Net
                interest income
            
            
            7,157
            
            
            7,171
            
            
            7,717
            
            
            7,928Provision
                for loan losses
            
            
            -
            
            
            -
            
            
            -
            
            
            600Net
                interest income after provision for loan losses
            
            
            7,157
            
            
            7,171
            
            
            7,717
            
            
            7,328Other
                income
            
            
            1,806
            
            
            1,490
            
            
            1,614
            
            
            1,434Other
                expenses
            
            
            5,726
            
            
            5,613
            
            
            6,287
            
            
            5,429Income
                before income taxes
            
            
            3,237
            
            
            3,048
            
            
            3,044
            
            
            3,333Income
                tax
            
            
            1,111
            
            
            928
            
            
            983
            
            
            1,122Net
                income
            
            $
            2,126
            
            $
            2,120
            
            $
            2,061
            
            $
            2,211Basic
                earnings per share
            
            $
            0.22
            
            $
            0.23
            
            $
            0.21
            
            $
            0.23Diluted
                earnings per share
            
            $
            0.22
            
            $
            0.22
            
            $
            0.21
            
            $
            0.23


43
 *Table
          of Contents*











**MANAGEMENT’S
      REPORT ON**


**INTERNAL
      CONTROL OVER FINANCIAL REPORTING**







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





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





The
      management of the Company has assessed the effectiveness of the Company’s
      internal control over financial reporting as of December 31, 2005. To make
      this
      assessment, we used the criteria for effective internal control over financial
      reporting described in *“Internal
      Control - Integrated Framework”* ,
      issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on our assessment, we believe that, as of December 31, 2005, the Company’s
      internal control over financial reporting was effective.





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





PAB
                BANKSHARES, INC.*/s/
                M. Burke Welsh, Jr*
            */s/
                Donald J. Torbert, Jr.*M.
                Burke Welsh, Jr.
            Donald
                J. Torbert, Jr.President
                and
            Executive
                Vice President andChief
                Executive Officer
            Chief
                Financial OfficerJanuary
                26, 2006
            January
                26, 2006Date
            Date


44
 *Table
          of Contents*




mjlogo
            CERTIFIED
                PUBLIC ACCOUNTANTS, LLC






**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








**To
      the Board of Directors**


**PAB
      Bankshares, Inc.**


**Valdosta,
      Georgia**





We
      have
      audited management's assessment, included in the accompanying management’s
      report on internal control over financial reporting, that PAB Bankshares, Inc.
      and subsidiaries maintained effective internal control over financial reporting
      as of December 31, 2005, based on criteria established in *Internal
      Control— Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      PAB Bankshares, Inc.'s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management's assessment, and an opinion on the
      effectiveness of the Company's internal control over financial reporting based
      on our audit.





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





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





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


45
 *Table
          of Contents*


In
      our
      opinion, management’s assessment that PAB Bankshares, Inc. and subsidiaries
      maintained effective internal control over financial reporting as of December
      31, 2005, is fairly stated, in all material respects, based on criteria
      established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Also, in our opinion, PAB Bankshares, Inc. and subsidiaries maintained, in
      all
      material respects, effective internal control over financial reporting as of
      December 31, 2005, based on criteria established in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of PAB
      Bankshares, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
      related consolidated statements of income, stockholders' equity and
      comprehensive income, and cash flows for each of the years in the three-year
      period ended December 31, 2005, and our report dated, January 26, 2006,
      expressed an unqualified opinion.





mjsign







Albany,
      Georgia


January
      26, 2006


46
 *Table
          of Contents*




mjlogo
            CERTIFIED
                PUBLIC ACCOUNTANTS, LLC







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








**To
      the Board of Directors**


**PAB
      Bankshares, Inc.**


**Valdosta,
      Georgia**








We
      have
      audited the accompanying balance sheets of PAB Bankshares, Inc. and subsidiaries
      as of December 31, 2005 and 2004, and the related statements of income,
      stockholders' equity and comprehensive income, and cash flows for each of the
      years in the three-year period ended December 31, 2005. Our


responsibility
      is to express an opinion on these financial statements based on our
      audits.








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








In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of PAB Bankshares, Inc. and
      subsidiaries as of December 31, 2005 and 2004, and the results of its operations
      and its cash flows for each of the years in the three-year period ended December
      31, 2005 in conformity with accounting principles generally accepted in the
      United States of America.








We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of PAB Bankshares and
      subsidiaries’ internal control over financial reporting as of December 31, 2005,
      based on criteria established in *Internal
      Control-Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (COSO)* and our
      report dated January 26, 2006, expressed an unqualified opinion on management’s
      assessment of the effectiveness of PAB Bankshares’ internal control over
      financial reporting and an unqualified opinion on the effectiveness of PAB
      Bankshares’ internal control over financial reporting.






mjsign








Albany,
      Georgia


January
      26, 2006


47
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**DECEMBER
      31, 2005 AND 2004**










**2005**
            
            **2004****ASSETS**Cash
                and balances due from banks
            
            $
            21,196,183
            
            $
            22,976,924Interest-bearing
                deposits in other banks
            
            
            3,077,900
            
            
            984,737Federal
                funds sold
            
            
            42,578,849
            
            
            32,616,121Investment
                securities
            
            
            157,454,725
            
            
            128,683,829Loans
            
            
            752,938,145
            
            
            646,149,340Allowance
                for loan losses
            
            
            (11,079,193
            )
            
            (9,066,566
            )Net
                loans
            
            
            741,858,952
            
            
            637,082,774Premises
                and equipment, net
            
            
            18,511,163
            
            
            18,812,209Goodwill
            
            
            5,984,604
            
            
            5,984,604Cash
                value of bank-owned life insurance policies
            
            
            11,080,722
            
            
            10,737,204Other
                assets
            
            
            15,583,269
            
            
            11,096,584Total
                assets
            
            $
            1,017,326,367
            
            $
            868,974,986**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
                demand
            
            $
            107,917,453
            
            $
            99,627,825Interest-bearing
                demand and savings
            
            
            284,125,557
            
            
            224,836,339Time
            
            
            423,637,732
            
            
            333,086,272Total
                deposits
            
            
            815,680,742
            
            
            657,550,436Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            6,317,135
            
            
            14,168,098Advances
                from the Federal Home Loan Bank of Atlanta
            
            
            90,043,598
            
            
            99,001,125Guaranteed
                preferred beneficial interests in debentures (trust preferred
                securities)
            
            
            10,310,000
            
            
            10,310,000Other
                liabilities
            
            
            7,974,109
            
            
            6,945,443Total
                liabilities
            
            
            930,325,584
            
            
            787,975,102Commitments
                and contingencies**Stockholders'
                equity:**Preferred
                stock, no par value; 1,500,000 shares authorized; no shares
                issued
            
            
            -
            
            
            -Common
                stock, no par value; 98,500,000 shares authorized; 9,469,017 and
                9,495,320
                shares issued and outstanding
            
            
            1,217,065
            
            
            1,217,065Additional
                paid-in capital
            
            
            28,126,032
            
            
            29,143,017Retained
                earnings
            
            
            58,872,179
            
            
            50,938,254Accumulated
                other comprehensive loss
            
            
            (1,214,493
            )
            
            (298,452
            )Total
                stockholders' equity
            
            
            87,000,783
            
            
            80,999,884Total
                liabilities and stockholders' equity
            
            $
            1,017,326,367
            
            $
            868,974,986





See
      accompanying notes to consolidated financial statements.


48
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**








**2005**
            
            **2004**
            
            **2003****Interest
                income:**Interest
                and fees on loans
            
            $
            51,804,646
            
            $
            35,096,225
            
            $
            35,017,485Interest
                and dividends on investment securities:Taxable
            
            
            5,580,856
            
            
            5,022,307
            
            
            4,533,603Nontaxable
            
            
            413,026
            
            
            339,398
            
            
            360,476Other
                interest income
            
            
            1,572,029
            
            
            139,180
            
            
            128,854Total
                interest income
            
            
            59,370,557
            
            
            40,597,110
            
            
            40,040,418**Interest
                expense:**Interest
                on deposits
            
            
            16,475,739
            
            
            8,185,878
            
            
            10,203,408Interest
                on Federal Home Loan Bank advances
            
            
            3,053,155
            
            
            1,534,732
            
            
            1,470,649Interest
                on other borrowings
            
            
            868,954
            
            
            903,467
            
            
            793,234Total
                interest expense
            
            
            20,397,848
            
            
            10,624,077
            
            
            12,467,291Net
                interest income
            
            
            38,972,709
            
            
            29,973,033
            
            
            27,573,127**Provision
                for loan losses**
            
            
            1,188,600
            
            
            600,000
            
            
            -Net
                interest income after provision for loan losses
            
            
            37,784,109
            
            
            29,373,033
            
            
            27,573,127**Other
                income:**Service
                charges on deposit accounts
            
            
            4,017,244
            
            
            4,417,464
            
            
            4,925,500Other
                fee income
            
            
            1,320,987
            
            
            1,286,544
            
            
            1,794,684Securities
                transactions, net
            
            
            (11,464
            )
            
            5,164
            
            
            1,415,603Other
                noninterest income
            
            
            485,783
            
            
            634,912
            
            
            479,750Total
                other income
            
            
            5,812,550
            
            
            6,344,084
            
            
            8,615,537**Other
                expenses:**Salaries
                and employee benefits
            
            
            15,110,181
            
            
            14,072,903
            
            
            14,895,502Occupancy
                expense of premises
            
            
            1,962,923
            
            
            1,878,234
            
            
            1,799,467Furniture
                and equipment expense
            
            
            2,081,575
            
            
            2,090,497
            
            
            2,355,038Loss
                on early retirement of debt
            
            
            -
            
            
            -
            
            
            1,438,085Other
                noninterest expense
            
            
            5,623,480
            
            
            5,013,119
            
            
            5,214,010Total
                other expenses
            
            
            24,778,159
            
            
            23,054,753
            
            
            25,702,102Income
                before income tax expense
            
            
            18,818,500
            
            
            12,662,364
            
            
            10,486,562**Income
                tax expense**
            
            
            6,365,777
            
            
            4,144,279
            
            
            3,361,044Net
                income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518**Earnings
                per common share:**Basic
            
            $
            1.31
            
            $
            0.89
            
            $
            0.75Diluted
            
            $
            1.28
            
            $
            0.88
            
            $
            0.74





See
      accompanying notes to consolidated financial statements.


49
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**








**2005**
            
            **2004**
            
            **2003**Net
                income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Other
                comprehensive income (loss):Unrealized
                holding losses arising during the period, net of tax benefit of $504,222;
                $89,608; and $113,679
            
            
            (923,493
            )
            
            (173,945
            )
            
            (220,671
            )Reclassification
                adjustment for (gains) losses included in net income, net of tax
                (benefit)
                of ($4,012); $1,756; and $481,305
            
            
            7,452
            
            
            (3,408
            )
            
            (934,298
            )(916,041
            )
            
            (177,353
            )
            
            (1,154,969
            )Comprehensive
                income
            
            $
            11,536,682
            
            $
            8,340,732
            
            $
            5,970,549





See
      accompanying notes to consolidated financial statements.


50
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**








**Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Retained**
            
            **Accumulated**
              **Other**
              **Comprehensive****Shares**
            
            **Stated
                Value**
            
            **Capital**
            
            **Earnings**
            
            **Income
                (Loss)**
            
            **Total****Balance,
                December 31, 2002**
            
            
            9,430,413
            
            $
            1,217,065
            
            $
            28,785,476
            
            $
            40,228,327
            
            $
            1,033,870
            
            $
            71,264,738Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            7,125,518
            
            
            -
            
            
            7,125,518Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,154,969
            )
            
            (1,154,969
            )Cash
                dividends declared, $0.18 per share
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,702,345
            )
            
            -
            
            
            (1,702,345
            )Stock
                options exercised
            
            
            54,247
            
            
            -
            
            
            529,224
            
            
            -
            
            
            -
            
            
            529,224**Balance,
                December 31, 2003**
            
            
            9,484,660
            
            
            1,217,065
            
            
            29,314,700
            
            
            45,651,500
            
            
            (121,099
            )
            
            76,062,166Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            8,518,085
            
            
            -
            
            
            8,518,085Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (177,353
            )
            
            (177,353
            )Cash
                dividends declared, $0.34 per share
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,231,331
            )
            
            -
            
            
            (3,231,331
            )Stock
                acquired and cancelled under stock repurchase plan
            
            
            (46,300
            )
            
            -
            
            
            (576,198
            )
            
            -
            
            
            -
            
            
            (576,198
            )Stock
                options exercised
            
            
            56,960
            
            
            -
            
            
            404,515
            
            
            -
            
            
            -
            
            
            404,515**Balance,
                December 31, 2004**
            
            
            9,495,320
            
            
            1,217,065
            
            
            29,143,017
            
            
            50,938,254
            
            
            (298,452
            )
            
            80,999,884Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            12,452,723
            
            
            -
            
            
            12,452,723Other
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (916,041
            )
            
            (916,041
            )Cash
                dividends declared, $0.475 per share
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,518,798
            )
            
            -
            
            
            (4,518,798
            )Stock
                acquired and cancelled under stock repurchase plan
            
            
            (87,483
            )
            
            -
            
            
            (1,468,714
            )
            
            -
            
            
            -
            
            
            (1,468,714
            )Stock
                options exercised
            
            
            61,180
            
            
            -
            
            
            451,729
            
            
            -
            
            
            -
            
            
            451,729**Balance,
                December 31, 2005**
            
            
            9,469,017
            
            $
            1,217,065
            
            $
            28,126,032
            
            $
            58,872,179
            
            $
            (1,214,493
            )
            $
            87,000,783





See
      accompanying notes to consolidated financial statements.


51
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**








**2005**
            
            **2004**
            
            **2003****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation,
                amortization and accretion, net
            
            
            2,190,391
            
            
            2,558,296
            
            
            3,574,422Provision
                for loan losses
            
            
            1,188,600
            
            
            600,000
            
            
            -Provision
                for deferred taxes
            
            
            (940,628
            )
            
            (17,353
            )
            
            879,072Net
                realized loss (gain) on securities transactions
            
            
            11,464
            
            
            (5,164
            )
            
            (1,415,603
            )Net
                loss on disposal or write down of assets
            
            
            79,309
            
            
            81,314
            
            
            257,770Increase
                in cash value of bank-owned life insurance
            
            
            (343,518
            )
            
            (315,126
            )
            
            (471,943
            )Increase
                (decrease) in deferred compensation accrual
            
            
            (14,727
            )
            
            (3,157
            )
            
            138,055Increase
                (decrease) in retirement and severance accruals
            
            
            (357,508
            )
            
            225,274
            
            
            (364,552
            )(Increase)
                decrease in interest receivable
            
            
            (1,762,178
            )
            
            (294,422
            )
            
            373,253Increase
                (decrease) in interest payable
            
            
            460,375
            
            
            265,438
            
            
            (475,207
            )Increase
                in taxes receivable
            
            
            (1,149,243
            )
            
            (374,462
            )
            
            (151,677
            )Net
                change in other assets and other liabilities
            
            
            622,312
            
            
            (151,006
            )
            
            (32,160
            )Net
                cash provided by operating activities
            
            
            12,437,372
            
            
            11,087,717
            
            
            9,436,948**CASH
                FLOWS FROM INVESTING ACTIVITIES**(Increase)
                decrease in interest-bearing deposits in other banks
            
            
            (2,093,163
            )
            
            (479,328
            )
            
            469,439(Increase)
                decrease in federal funds sold
            
            
            (9,962,728
            )
            
            (32,285,934
            )
            
            30,453,813Purchase
                of debt securities
            
            
            (59,463,549
            )
            
            (34,315,807
            )
            
            (112,848,419
            )Proceeds
                from sales and calls of debt securities
            
            
            12,794,845
            
            
            17,638,840
            
            
            46,721,110Proceeds
                from maturities and paydowns of debt securities
            
            
            16,447,139
            
            
            17,569,214
            
            
            34,350,382Purchase
                of equity securities
            
            
            (802,300
            )
            
            (3,666,200
            )
            
            (1,444,700
            )Redemption
                of equity securities
            
            
            418,800
            
            
            600
            
            
            2,873,251Net
                (increase) decrease in loans
            
            
            (106,135,736
            )
            
            (109,835,353
            )
            
            8,879,190Purchase
                of premises and equipment
            
            
            (1,490,608
            )
            
            (754,628
            )
            
            (903,987
            )Proceeds
                from disposal of assets
            
            
            164,059
            
            
            6,047,535
            
            
            2,078,292Net
                cash provided by (used in) investing activities
            
            
            (150,123,241
            )
            
            (140,081,061
            )
            
            10,628,371**CASH
                FLOWS FROM FINANCING ACTIVITIES**Net
                increase (decrease) in deposits
            
            
            158,130,306
            
            
            100,633,900
            
            
            (49,813,697
            )Net
                increase (decrease) in federal funds purchased and securities sold
                under
                repurchase agreements
            
            
            (7,850,963
            )
            
            (22,751,692
            )
            
            19,399,548Advances
                from Federal Home Loan Bank
            
            
            38,318,600
            
            
            54,688,400
            
            
            36,269,500Payments
                on Federal Home Loan Bank advances
            
            
            (47,276,127
            )
            
            (401,318
            )
            
            (27,700,367
            )Dividends
                paid
            
            
            (4,284,703
            )
            
            (2,945,557
            )
            
            (1,038,587
            )Proceeds
                from the exercise of stock options
            
            
            451,729
            
            
            404,515
            
            
            529,224Issuance
                of preferred stock in REIT subsidiaries
            
            
            -
            
            
            -
            
            
            15,000Repurchase
                of preferred stock in REIT subsidiaries
            
            
            (8,000
            )
            
            (2,000
            )
            
            (5,000
            )Liquidating
                distribution of preferred stock in REIT subsidiaries
            
            
            (107,000
            )
            
            -
            
            
            -Acquisition
                of stock under stock repurchase plans
            
            
            (1,468,714
            )
            
            (576,198
            )
            
            -Net
                cash provided by (used in) financing activities
            
            
            135,905,128
            
            
            129,050,050
            
            
            (22,344,379
            )


52
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**








**2005**
            
            **2004**
            
            **2003**Net
                increase (decrease) in cash and balances due from banks
            
            $
            (1,780,741
            )
            $
            56,706
            
            $
            (2,279,060
            )Cash
                and balances due from banks at beginning of period
            
            
            22,976,924
            
            
            22,920,218
            
            
            25,199,278Cash
                and balances due from banks at end of period
            
            $
            21,196,183
            
            $
            22,976,924
            
            $
            22,920,218**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION**Cash
                paid during the period for:Interest
            
            $
            19,937,473
            
            $
            10,358,639
            
            $
            12,942,498Taxes
            
            $
            8,455,648
            
            $
            4,536,094
            
            $
            2,633,649**NONCASH
                INVESTING AND FINANCING TRANSACTIONS**Increase
                in unrealized losses on securities available for sale
            
            $
            (1,416,251
            )
            $
            (268,717
            )
            $
            (1,749,951
            )Transfer
                of premises and equipment to other assets
            
            $
            -
            
            $
            -
            
            $
            1,323,821Transfer
                of loans to foreclosed assets
            
            $
            170,958
            
            $
            657,307
            
            $
            5,514,057





See
      accompanying notes to consolidated financial statements.


53
 *Table
          of Contents*


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





**Nature
      of Business**





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





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





The
      Company also owns PAB Bankshares Capital Trust I, a Delaware statutory business
      trust. This non-operating subsidiary was created in 2001 for the sole purpose
      of
      issuing trust preferred securities and investing the proceeds in subordinated
      debt issued by the Company, all of which is described more fully in Note 9.
      During the first quarter of 2004, the Company adopted Financial Accounting
      Standards Board (“FASB”) Interpretation No. 46R (Revised December 2003), *Consolidation
      of Variable Interest Entities* .
      This
      interpretation addresses consolidation by business entities of variable interest
      entities and when such entities are subject to consolidation under the
      provisions of this interpretation. The Company has determined that the revised
      interpretation requires deconsolidation of PAB Bankshares Capital Trust I.
      The
      interpretation did not have a material effect on the Company’s financial
      condition or results of operations.





In
      1998,
      the Company formed two real estate investment trusts (each a “REIT”) and two
      intermediate REIT holding companies as subsidiaries of the Bank. The REITs
      were
      established to realize state income tax benefits and to provide the Bank with
      ready access to capital markets if additional capital were needed. The REIT
      holding companies were established to provide assistance in managing the
      Company’s investment in the REITs. To comply with federal tax law, a minority
      interest in the nonvoting, cumulative preferred stock of the REITs was issued
      to
      certain directors, officers and employees of the Company. The $500 par value
      preferred stock paid an 8% annual dividend. Both the REITs and the REIT holding
      companies were liquidated and dissolved as of December 31, 2005, thus
      eliminating the minority interest that had previously been included in other
      liabilities. The total minority interest of the REITs included in other
      liabilities at December 31, 2004 was $115,000.


54
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**




**Basis
      of Presentation and Accounting Estimates**





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





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





**Cash
      and Balances Due from Banks and Cash Flows**





For
      purposes of reporting cash flows, cash and balances due from banks include
      cash
      on hand, cash
      items in process of collection and amounts due from banks. Cash flows from
      loans, federal funds sold, federal funds purchased and securities sold under
      repurchase agreements, and deposits are reported net.





**Interest
      Bearing Deposits in Other Banks**





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





**Investment
      Securities**





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





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





**Loans**





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


55
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Loans,
      continued**





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





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





**Allowance
      for Loan Losses**





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





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





**Premises
      and Equipment**





Land
      is
      carried at cost. Buildings and equipment are stated at cost less accumulated
      depreciation computed principally by the straight-line method over the estimated
      useful lives of the assets, ranging from 10-39 years for buildings and
      improvements, and 3-10 years for furniture, fixtures and equipment. Generally,
      furniture, fixtures and equipment with a cost per unit of less than $1,000
      are
      expensed as incurred and are not capitalized.





**Goodwill**





Goodwill
      represents the excess of cost over the fair value of the net assets purchased
      in
      business combinations. Goodwill is required to be tested annually for
      impairment, or whenever events occur that may indicate that the recoverability
      of the carrying amount is not probable. In the event of an impairment the amount
      by which the carrying amount exceeds the fair value would be charged to
      earnings. The Company performed its annual test of impairment in the fourth
      quarter and determined that there was no impairment of the carrying value as
      of
      November 30, 2005.





There
      were no changes in the carrying amount of goodwill during the years ended
      December 31, 2005, 2004 and 2003.


56
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Foreclosed
      Assets**





Foreclosed
      assets represent other real estate owned and other repossessions acquired
      through, or in lieu of, loan foreclosure or other proceedings. Foreclosed assets
      are held for sale and are carried at the lower of cost or fair value less
      estimated disposal costs. Any write-down to fair value at the time of transfer
      to foreclosed assets is charged to the allowance for loan losses. Revenue and
      expenses from operations and changes in the valuation allowance are included
      in
      net expenses from foreclosed assets. The
      amount of foreclosed assets at December 31, 2005 and 2004 was approximately
      $42,000 and $30,000, respectively.





**Income
      Taxes**





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





**Stock
      Based Compensation Plans**





At
      December 31, 2005, the Company had options outstanding under two stock-based
      employee compensation plans, which are described in more detail in Note 17.
      The
      Company accounts for those plans under the recognition and measurement
      principles of Accounting Principles Board “APB” Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations. No stock-based employee compensation cost is reflected
      in net income, as all options granted under those plans had an exercise price
      equal to the market value of the underlying stock on the date of
      grant .





The
      following table illustrates the effect on net income and earnings per share
      for
      the years ended December 31, 2005, 2004 and 2003 if the Company had applied
      the
      fair value recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      stock-based employee compensation.





**2005**
            
            **2004**
            
            **2003**Net
                income, as reported
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Deduct:Total
                stock-based employee compensation expense determined under fair value
                based method for all awards, net of related tax effects
            
            
            (265,594
            )
            
            (216,551
            )
            
            (230,257
            )Pro
                forma net income
            
            $
            12,187,129
            
            $
            8,301,534
            
            $
            6,895,261Earnings
                per share:Basic
                - as reported
            
            $
            1.31
            
            $
            0.89
            
            $
            0.75Basic
                - pro forma
            
            $
            1.29
            
            $
            0.87
            
            $
            0.73Diluted
                - as reported
            
            $
            1.28
            
            $
            0.88
            
            $
            0.74Diluted
                - pro forma
            
            $
            1.26
            
            $
            0.86
            
            $
            0.72





**Earnings
      Per Share**





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


57
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Comprehensive
      Income (Loss)**





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





**Recent
      Accounting Standards**





In
      December 2004, the FASB issued Statement No. 123R, *Share-Based
      Payment* ,
      a
      revision of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* This
      Statement supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      its
      related implementation guidance. Statement 123R establishes standards for
      accounting for transactions in which an ** entity
      exchanges its equity instruments for goods or services. It also
      addresses ** transactions
      in which an entity incurs liabilities in exchange for goods or services
      that ** are
      based
      on the fair value of the entity’s equity instruments or that may be settled
      by ** the
      issuance of those equity instruments. The primary focus of this statement
      is ** accounting
      for transactions in which an entity obtains employee services in
      share-based ** payment
      transactions such as the issuance of stock options in exchange for employee
      services. A public entity must measure the cost of employee services ** received
      in exchange for an award of equity instruments based on the grant-date
      fair ** value
      of
      the award (with limited exceptions). That cost will be recognized over
      the ** period
      during which an employee is required to provide service in exchange for
      the ** award—the
      requisite service period (usually the vesting period). The grant-date fair
      value
      of employee share options and similar instruments will be estimated using
      option-pricing models adjusted for the unique characteristics of those
      instruments (unless observable market prices for the same or similar instruments
      are available). For public entities, such as the Company, this Statement is
      effective as of the beginning of the next fiscal year that begins after December
      15, 2005. This Statement applies to all awards granted after the required
      effective date and to awards outstanding as of the effective date that are
      modified, repurchased, or cancelled after that date. The Company plans to adopt
      the provisions of the Statement as of January 1, 2006. Based on the stock
      options outstanding at December 31, 2005, the after tax expense associated
      with
      the adoption of this Statement is expected to be $72,000 for the first quarter
      of 2006 and $274,000 for the year ended December 31, 2006.


58
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                2.**
            **RESTRICTIONS
                ON CASH AND BALANCES DUE FROM
                BANKS**





The
      Bank
      is required to maintain reserve balances in cash or on deposit with
      correspondent banks and the Federal Reserve Bank of Atlanta, based on a
      percentage of deposits. The total of those reserve balances was approximately
      $5,893,000 and $6,360,000 at December 31, 2005 and 2004,
      respectively.








**NOTE
                3.**
            **INVESTMENT
                SECURITIES**





The
      amortized cost and approximate fair value of investment securities, with gross
      unrealized gains and losses are summarized as follows.





**Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Fair**
              **Value****December
                31, 2005**U.S.
                Government agencies
            
            $
            71,825,255
            
            $
            5,162
            
            $
            (1,195,390
            )
            $
            70,635,027State
                and municipal securities
            
            
            14,244,616
            
            
            112,500
            
            
            (293,805
            )
            
            14,063,311Mortgage-backed
                securities
            
            
            61,167,446
            
            
            43,333
            
            
            (1,352,944
            )
            
            59,857,835Corporate
                debt securities
            
            
            3,590,060
            
            
            -
            
            
            (9,862
            )
            
            3,580,198Equity
                securities
            
            
            8,495,799
            
            
            822,555
            
            
            -
            
            
            9,318,354$
            159,323,176
            
            $
            983,550
            
            $
            (2,852,001
            )
            $
            157,454,725**December
                31, 2004**U.S.
                Government agencies
            
            $
            53,025,477
            
            $
            140,010
            
            $
            (646,483
            )
            $
            52,519,004State
                and municipal securities
            
            
            8,564,881
            
            
            194,822
            
            
            (22,039
            )
            
            8,737,664Mortgage-backed
                securities
            
            
            55,134,557
            
            
            253,969
            
            
            (391,434
            )
            
            54,997,092Corporate
                debt securities
            
            
            4,298,816
            
            
            18,955
            
            
            -
            
            
            4,317,771Equity
                securities
            
            
            8,112,298
            
            
            -
            
            
            -
            
            
            8,112,298$
            129,136,029
            
            $
            607,756
            
            $
            (1,059,956
            )
            $
            128,683,829





The
      amortized cost and fair value of investment securities as of December 31, 2005
      by contractual maturity are shown below. Maturities may differ from contractual
      maturities in mortgage-backed securities because the mortgages underlying the
      securities may be called or repaid without any penalties. Equity securities
      have
      a perpetual life and no stated maturity, therefore these securities and the
      mortgage-backed securities are shown separately from the other debt securities
      in the following maturity summary.





**Amortized**
              **Cost**
            
            **Fair**
              **Value**Due
                in one year or less
            
            $
            150,500
            
            $
            150,688Due
                from one year to five years
            
            
            22,066,185
            
            
            21,821,507Due
                from five to ten years
            
            
            38,967,241
            
            
            38,334,391Due
                after ten years
            
            
            28,476,005
            
            
            27,971,950Mortgage-backed
                securities
            
            
            61,167,446
            
            
            59,857,835Equity
                securities
            
            
            8,495,799
            
            
            9,318,354$
            159,323,176
            
            $
            157,454,725





Securities
      with a carrying value of $95,145,727 and $106,015,145 at December 31, 2005
      and
      2004, respectively, were pledged to secure public deposits, certain borrowing
      arrangements, and for other purposes.


59
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                3.**
            **INVESTMENT
                SECURITIES (Continued)**





Gains
      and
      losses on sales and calls of investment securities for the years ended December
      31, 2005, 2004 and 2003 consist of the following:





**2005**
            
            **2004**
            
            **2003**Gross
                gains on securities transactions
            
            $
            14,834
            
            $
            7,132
            
            $
            1,429,011Gross
                losses on securities transactions
            
            
            (26,298
            )
            
            (1,968
            )
            
            (13,408
            )Net
                realized gain (loss) on securities transactions
            
            $
            (11,464
            )
            $
            5,164
            
            $
            1,415,603








The
      following table shows the gross unrealized losses and fair value of securities,
      aggregated by category, at December 31, 2005 and 2004. At
      December 31, 2005 there are four U.S. Government agency debt issues, fourteen
      mortgage-backed securities issued by U.S. Government agencies and six Municipal
      securities in the investment portfolio that have been in a continuous unrealized
      loss position for twelve months or longer. These unrealized losses are due
      to
      fluctuations in interest rates and are considered temporary because of
      acceptable investment grades on each security.





**Less
                than Twelve Months**
            
            **Twelve
                Months or Longer****December
                31, 2005**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Losses**
            
            **Fair**
              **Value**
            
            **Unrealized**
              **Losses**U.S.
                Government agencies
            
            $
            34,646,772
            
            $
            434,908
            
            $
            18,719,250
            
            $
            760,482State
                and municipal securities
            
            
            5,992,718
            
            
            248,924
            
            
            1,450,473
            
            
            44,881Mortgage-backed
                securities
            
            
            35,865,416
            
            
            642,374
            
            
            19,629,621
            
            
            710,570Corporate
                debt securities
            
            
            547,150
            
            
            9,862
            
            
            -
            
            
            -Total
                temporarily impaired securities
            
            $
            77,052,056
            
            $
            1,336,068
            
            $
            39,799,344
            
            $
            1,515,933**December
                31, 2004**U.S.
                Government agencies
            
            $
            13,498,803
            
            $
            246,262
            
            $
            13,087,800
            
            $
            400,221State
                and municipal securities
            
            
            3,022,852
            
            
            22,039
            
            
            -
            
            
            -Mortgage-backed
                securities
            
            
            33,232,400
            
            
            258,458
            
            
            9,509,301
            
            
            132,976Corporate
                debt securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                temporarily impaired securities
            
            $
            49,754,055
            
            $
            526,759
            
            $
            22,597,101
            
            $
            533,197


60
 *Table
          of Contents*





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                4.**
            **LOANS
                AND ALLOWANCE FOR LOAN
                LOSSES**





The
      composition of the loan portfolio as of December 31, 2005 and 2004
      follows.





**2005**
            
            **2004**Commercial
                and financial
            
            $
            50,860,445
            
            $
            59,703,499Agricultural
            
            
            55,829,963
            
            
            26,704,376Real
                estate - construction
            
            
            268,628,852
            
            
            166,853,760Real
                estate - commercial
            
            
            231,600,720
            
            
            239,032,099Real
                estate - residential
            
            
            127,326,239
            
            
            136,189,454Installment
                loans to individuals and others
            
            
            20,178,657
            
            
            19,381,324Overdrafts
            
            
            201,113
            
            
            170,806754,625,989
            
            
            648,035,318Deferred
                loan fees and unearned interest, net
            
            
            (1,687,844
            )
            
            (1,885,978
            )752,938,145
            
            
            646,149,340Allowance
                for loan losses
            
            
            (11,079,193
            )
            
            (9,066,566
            )$
            741,858,952
            
            $
            637,082,774





Changes
      in the allowance for loan losses for the years ended December 31, 2005, 2004
      and
      2003 follows.





**2005**
            
            **2004**
            
            **2003**Balance,
                beginning of year
            
            $
            9,066,566
            
            $
            10,139,114
            
            $
            12,096,988Provision
                charged to operations
            
            
            1,188,600
            
            
            600,000
            
            
            -Loans
                charged-off
            
            
            (281,331
            )
            
            (2,572,845
            )
            
            (3,118,821
            )Recoveries
            
            
            1,105,358
            
            
            900,297
            
            
            1,160,947Balance,
                end of year
            
            $
            11,079,193
            
            $
            9,066,566
            
            $
            10,139,114





A
      summary
      of information pertaining to impaired loans as of December 31, 2005 and 2004
      follows.





**2005**
            
            **2004**Loans
                accounted for on a nonaccrual basis
            
            $
            7,856,454
            
            $
            1,417,259Troubled
                debt restructurings not included above
            
            
            -
            
            
            2,045,358Loans
                past due 90 days or more and still accruing
            
            
            2,101
            
            
            10,637Total
                nonperforming loans
            
            $
            7,858,555
            
            $
            3,473,254Valuation
                allowance related to impaired loans
            
            $
            1,234,616
            
            $
            509,505





Additional
      information on impaired loans for the years ended December 31, 2005, 2004,
      and
      2003 follows.





**2005**
            
            **2004**
            
            **2003**Average
                recorded investment in impaired loans
            
            $
            5,864,878
            
            $
            6,505,508
            
            $
            9,894,628Approximate
                amount of interest income that would have been recorded if the impaired
                loans had remained current and on an accrual status
            
            $
            412,208
            
            $
            357,385
            
            $
            767,711Interest
                income recognized on a cash basis on impaired loans
            
            $
            12,992
            
            $
            314,585
            
            $
            143,360


61
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







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





In
      the
      ordinary course of business, the Company has granted loans to certain related
      parties, including executive officers, directors and their affiliates. The
      interest rates on these loans were substantially the same as rates prevailing
      at
      the time of the transaction and repayment terms are customary for the type
      of
      loan. Changes
      in related party loans for the year ended December 31, 2005
      follows.





Balance,
                beginning of year
            
            $
            11,413,726Advances
            
            
            26,185,919Repayments
            
            
            (26,358,407
            )Transactions
                due to changes in related parties
            
            
            2,904,422Balance,
                end of year
            
            $
            14,145,660








**NOTE
                5.**
            **PREMISES
                AND EQUIPMENT**





Premises
      and equipment as of December 31, 2005 and 2004 follows.





**2005**
            
            **2004**Land
            
            $
            4,604,748
            
            $
            4,597,398Buildings
                and improvements
            
            
            16,798,789
            
            
            16,507,046Furniture,
                fixtures and equipment
            
            
            9,860,183
            
            
            10,025,797Construction
                in progress; estimated cost to complete, $92,000
            
            
            52,092
            
            
            -31,315,812
            
            
            31,130,241Less
                accumulated depreciation
            
            
            (12,804,649
            )
            
            (12,318,032
            )$
            18,511,163
            
            $
            18,812,209





Depreciation
      expense amounted to $1,715,036, $1,838,412, and $2,047,623, for the years ended
      December 31, 2005, 2004 and 2003, respectively.





The
      Company leases office space at six locations. One location is leased on a
      month-to-month basis. The other locations are under agreements with minimum
      contractual obligations as of December 31, 2005 as follows:





**Year**
            
            **Amount**2006
            
            $
            206,5342007
            
            
            184,8682008
            
            
            156,3572009
            
            
            16,208Later
            
            
            -$
            563,967





The
      Company also has commitments on various short-term operating leases for
      equipment. Total lease expense amounted to $304,781, $284,326, and $246,360
      for
      the years ended December 31, 2005, 2004 and 2003 respectively.


62
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                6.**
            **DEPOSITS**





A
      summary
      of interest-bearing deposits as of December 31, 2005 and 2004
      follows.





**2005**
            
            **2004**Interest-bearing
                demand
            
            $
            244,359,693
            
            $
            183,608,828Savings
            
            
            39,765,864
            
            
            41,227,511Time,
                $100,000 and over
            
            
            173,387,423
            
            
            145,878,073Other
                time
            
            
            250,250,309
            
            
            187,208,199$
            707,763,289
            
            $
            557,922,611





The
      Company had $42,109,000 and $47,003,000 in brokered deposits included in time
      deposits $100,000 and over as of December 31, 2005 and 2004,
      respectively.





Interest
      expense on deposits for the years ended December 31, 2005, 2004 and 2003
      follows.





**2005**
            
            **2004**
            
            **2003**Interest-bearing
                demand
            
            $
            3,363,143
            
            $
            1,199,639
            
            $
            1,404,086Savings
            
            
            313,214
            
            
            234,512
            
            
            281,552Time,
                $100,000 and over
            
            
            5,491,811
            
            
            2,373,902
            
            
            2,673,927Other
                time
            
            
            7,307,571
            
            
            4,377,825
            
            
            5,843,843$
            16,475,739
            
            $
            8,185,878
            
            $
            10,203,408





The
      scheduled maturities of time deposits at December 31, 2005 follows.





**Year**
            
            **Amount**2006
            
            $
            251,892,8932007
            
            
            86,123,2062008
            
            
            32,206,6782009
            
            
            25,872,5182010
            
            
            27,528,922Later
            
            
            13,515$
            423,637,732





**NOTE
                7.**
            **SECURITIES
                SOLD UNDER REPURCHASE
                AGREEMENTS**





Securities
      sold under repurchase agreements, which are secured borrowings, generally mature
      within one day to 90 days from the transaction date. Securities sold under
      repurchase agreements are reflected at the amount of cash received in connection
      with the transactions. The Company may be required to provide additional
      collateral based on the fair value of the underlying securities. The Company
      monitors the fair value of the underlying securities on a weekly basis.
      Securities sold under repurchase agreements at December 31, 2005 and 2004 were
      $6,317,135 and $14,168,098, respectively.


63
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                8.**
            **ADVANCES
                FROM THE FEDERAL HOME LOAN
                BANK**





Listed
      below is a summary of the advances from the Federal Home Loan Bank of Atlanta
      (the “FHLB”) as of December 31, 2005 and 2004.





**2005**
            
            **2004**Adjustable
                rate advances due at various datesthrough
              September
                30, 2009 with a weighted-average rate of
              4.37%
                at December 31, 2005
            
            $
            15,441,580
            
            $
            15,441,580Fixed
                rate advances due at various dates through
              February
                26, 2024 with a weighted-average rate of
              4.64%
                at December 31, 2005
            
            
            16,602,018
            
            
            22,959,545Convertible
                advances due at various dates through
              May
                19, 2015 with a weighted-average rate of
              2.90%
                at December 31, 2005
            
            
            58,000,000
            
            
            60,600,000$
            90,043,598
            
            $
            99,001,125








The
      Bank
      has pledged $123,995,963 in qualifying residential and commercial real estate
      mortgage loans and $34,288,539 in investment securities as collateral on the
      advances from the FHLB.





Contractual
      maturities of the advances from the FHLB at December 31, 2005
      follow.





**Year**
            
            **Amount**2006
            
            $
            12,852,8962007
            
            
            603,0502008
            
            
            608,9872009
            
            
            4,839,1642010
            
            
            656,953Later
            
            
            70,482,548$
            90,043,598








**NOTE
                9.**
            **GUARANTEED
                PREFERRED BENEFICIAL INTERESTS IN
                DEBENTURES**





On
      November 28, 2001, PAB Bankshares Capital Trust I (“PAB Trust”) issued $10
      million of Floating Rate Capital Securities (“trust preferred securities”). The
      Company formed PAB Trust, a statutory business trust created under the laws
      of
      the State of Delaware, for the sole purpose of issuing the trust preferred
      securities and investing the proceeds in Floating Rate Junior Subordinated
      Debentures (the “Debentures”) issued by the Company. The interest rates on both
      the trust preferred securities and the Debentures are reset semi-annually at
      LIBOR plus 3.75% (currently 8.42%) with a rate cap of 11.0% through December
      8,
      2006. The Company entered into agreements which, taken collectively, fully,
      irrevocably and unconditionally guarantee, on a subordinated basis, all of
      PAB
      Trust’s obligations under the trust preferred securities. PAB Trust’s sole asset
      is the Debentures issued by the Company. The Debentures will mature on December
      8, 2031, but are callable at par by the Company in whole or in part anytime
      after December 8, 2006. The proceeds from the issuance of these trust preferred
      securities qualify as Tier 1 capital under the risk-based capital guidelines
      established by the Federal Reserve.





As
      discussed in Note 1, the Company adopted FASB Interpretation No. 46R (Revised
      December 2003), *Consolidation
      of Variable Interest Entities,* during
      the first quarter of 2004. This interpretation addresses consolidation by
      business entities of variable interest entities and when such entities are
      subject to consolidation under the provisions of this interpretation. The
      Company has determined that the revised provisions required deconsolidation
      of
      PAB Trust.


64
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                10.**
            **INCOME
                TAXES**





The
      components of income tax expense for the years ended December 31, 2005, 2004
      and
      2003 follow.





**2005**
            
            **2004**
            
            **2003**Current
            
            $
            7,306,405
            
            $
            4,161,632
            
            $
            2,481,972Deferred
            
            
            (940,628
            )
            
            (17,353
            )
            
            879,072$
            6,365,777
            
            $
            4,144,279
            
            $
            3,361,044





The
      Company's income tax expense differs from the amounts computed by applying
      the
      Federal income tax
      statutory rates to income before income taxes. A reconciliation of the
      differences for the years ended December
      31, 2005, 2004 and 2003 follows.





**2005**
            
            **2004**
            
            **2003**Tax
                at statutory rate
            
            $
            6,563,102
            
            $
            4,326,730
            
            $
            3,565,431Increase
                (decrease) resulting from:State
                income tax, net of Federal tax benefit
            
            
            30,751
            
            
            30,471
            
            
            16,172Tax
                exempt interest and dividend exclusion
            
            
            (169,116
            )
            
            (152,661
            )
            
            (181,127
            )Increase
                in cash value of bank-owned life insurance policies
            
            
            (120,231
            )
            
            (107,679
            )
            
            (160,542
            )Deferred
                tax adjustment
            
            
            11
            
            
            111
            
            
            116,257Other
                items, net
            
            
            61,260
            
            
            47,307
            
            
            4,853Income
                tax expense
            
            $
            6,365,777
            
            $
            4,144,279
            
            $
            3,361,044





The
      components of deferred income taxes at December 31, 2005 and 2004
      follow.





**2005**
            
            **2004**Deferred
                tax assets and (liabilities):Accrued
                severance payable
            
            $
            137,284
            
            $
            254,914Allowance
                for loan losses
            
            
            3,877,718
            
            
            3,082,632Deferred
                compensation
            
            
            711,569
            
            
            696,245Deferred
                loan origination cost
            
            
            (403,454
            )
            
            (322,622
            )Deferred
                loan origination fees
            
            
            931,965
            
            
            906,751Other
                assets
            
            
            331,202
            
            
            195,635Premises
                and equipment
            
            
            (750,792
            )
            
            (918,691
            )Unrealized
                loss on securities available for sale
            
            
            635,273
            
            
            153,748Net
                deferred tax assets
            
            $
            5,470,765
            
            $
            4,048,612


65
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                11.**
            **EMPLOYEE
                BENEFIT PLANS**





The
      Company provides an employee 401(k) plan for qualified employees. The 401(k)
      plan allows participants to defer a portion of their compensation and provides
      that the Company may match a portion of the participants’ deferred compensation.
      The plan also provides for non-elective and discretionary profit sharing
      contributions to be made by the Company at the sole discretion of the Board
      of
      Directors. Approximately 4.5% of the participants’ eligible compensation was
      accrued as the discretionary profit sharing contributions for 2005, and 3.5%
      of
      the participants’ eligible compensation was accrued as the discretionary profit
      sharing contributions for 2004 and 2003. The employer contributions are on
      a
      five-year vesting schedule. All full-time and part-time employees are eligible
      to participate in the plan provided they have met the eligibility requirements.
      Generally, a participant must have completed one month employment to become
      eligible, with employer contributions beginning after six months of employment.
      Aggregate expense under the plan charged to operations during 2005, 2004 and
      2003 amounted to $756,288, $705,747, and $711,102, respectively.








**NOTE
                12.**
            **DEFERRED
                COMPENSATION AND RETIREMENT
                PLANS**





Under
      separate deferred compensation agreements executed in prior years with certain
      officers, deferred compensation is to be payable over a fifteen-year period
      beginning at the earlier of age 65, death, or disability of each officer. Annual
      accruals were made based on actuarial assumptions for the present value of
      the
      future obligations. In 2001, the Board of Directors elected to terminate these
      plans. At that time, the Company incurred an expense of approximately $898,000
      for the accrual for the net present value of the liability covering two
      executive officers that were retiring at the end of 2001. The total accrued
      liability for these deferred compensation plans was $2,033,054 and $2,047,781
      at
      December 31, 2005 and 2004, respectively. Aggregate expense under the deferred
      compensation plans charged to salaries and employee benefits expense were
      $150,360, $85,085, and $138,055 during 2005, 2004 and 2003,
      respectively.





In
      August
      2004, the Company entered into a severance agreement with a retiring executive
      officer that effectively terminated his then existing employment agreement
      and
      committed to pay a three-year severance package beginning in September 2004.
      The
      Company accrued $685,645 representing the net present value of the severance
      payments with the expense included in salaries and employee benefits for the
      year ended December 31, 2004. The remaining liability in the severance plan
      payable as of December 31, 2005 was $392,240.


66
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                13.**
            **OTHER
                INCOME AND EXPENSES**





Other
      fee
      income for the years ended December 31, 2005, 2004 and 2003
      follows.





**2005**
            
            **2004**
            
            **2003**Mortgage
                origination fees
            
            $
            600,615
            
            $
            521,511
            
            $
            715,358Brokerage
                commissions and fees
            
            
            13,467
            
            
            121,017
            
            
            469,373ATM
                and debit card fee income
            
            
            470,421
            
            
            419,082
            
            
            357,235Insurance
                premiums
            
            
            47,379
            
            
            25,458
            
            
            773Other
                fee income
            
            
            189,105
            
            
            199,476
            
            
            251,945Total
                other fee income
            
            $
            1,320,987
            
            $
            1,286,544
            
            $
            1,794,684





Other
      noninterest income for the years ended December 31, 2005, 2004 and 2003
      follows.





**2005**
            
            **2004**
            
            **2003**Earnings
                on bank-owned life insurance
            
            $
            343,518
            
            $
            315,126
            
            $
            472,183Gain
                (loss) on disposal and write-down of assets
            
            
            (79,310
            )
            
            118,686
            
            
            (257,770
            )Other
                noninterest income
            
            
            221,575
            
            
            201,100
            
            
            265,337Total
                other noninterest income
            
            $
            485,783
            
            $
            634,912
            
            $
            479,750





Other
      noninterest expense for the years ended December 31, 2005, 2004 and 2003
      follows.





**2005**
            
            **2004**
            
            **2003**Advertising
                and business development
            
            $
            541,075
            
            $
            495,954
            
            $
            433,079Supplies
                and printing
            
            
            527,389
            
            
            423,724
            
            
            543,738Telephone
                and internet charges
            
            
            366,995
            
            
            342,084
            
            
            454,670Postage
                and courier
            
            
            607,987
            
            
            546,286
            
            
            563,156Legal
                and accounting fees
            
            
            416,006
            
            
            303,506
            
            
            528,493Service
                charges and fees
            
            
            504,137
            
            
            433,471
            
            
            483,769Other
                noninterest expenses
            
            
            2,659,891
            
            
            2,468,094
            
            
            2,207,105Total
                other noninterest expense
            
            $
            5,623,480
            
            $
            5,013,119
            
            $
            5,214,010


67
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                14.**
            **EARNINGS
                PER COMMON SHARE**





The
      components used to calculate basic and diluted earnings per share for the years
      ended December 31, 2005, 2004 and 2003 follows.




**2005**
            
            **2004**
            
            **2003**Basic
                earnings per share:Net
                income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Weighted
                average common shares outstanding
            
            
            9,514,775
            
            
            9,499,709
            
            
            9,446,142Earnings
                per common share
            
            $
            1.31
            
            $
            0.89
            
            $
            0.75Diluted
                earnings per share:Net
                income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Weighted
                average common shares outstanding
            
            
            9,514,775
            
            
            9,499,709
            
            
            9,446,142Effect
                of dilutive stock options
            
            
            172,119
            
            
            142,356
            
            
            141,045Weighted
                average diluted common shares outstanding
            
            
            9,686,894
            
            
            9,642,065
            
            
            9,587,187Earnings
                per common share
            
            $
            1.28
            
            $
            0.88
            
            $
            0.74








For
      the
      years ended December 31, 2005, 2004 and 2003, options to purchase 101,983,
      175,639, and 171,368, respectively, were outstanding but not included in the
      computation of earnings per share because they were anti-dilutive.








**NOTE
                15.**
            **EMPLOYEE
                AND DIRECTOR STOCK PURCHASE
                PROGRAM**




On
      July
      1, 2002, the Board of Directors established an Employee and Director Stock
      Purchase Program to enable the Company and its participating subsidiaries to
      provide to their respective employees and directors a convenient means of
      purchasing for long term investment, and not for short term speculative gain,
      common stock of the Company and thereby promote interest in the Company’s
      continuing success, growth and development. The program allows for an employee
      or director to purchase up to a maximum of $2,000 a year of the Company’s stock
      with the Company matching 50% of the participants purchase. In order to be
      eligible, an employee must be full-time and have worked a full month. During
      the
      years ended December 31, 2005, 2004 and 2003, the Company recorded $114,354,
      $105,077 and $89,256, respectively, of expense associated with this program.
      The
      number of shares in the program at December 31, 2005 and 2004 was 73,414 and
      56,302, respectively.








**NOTE
                16.**
            **DIVIDEND
                REINVESTMENT AND COMMON STOCK PURCHASE
                PLAN**





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


68
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                17.**
            **STOCK
                OPTION PLANS**





The
      Company has two fixed stock option plans under which it has granted options
      to
      its employees and directors to purchase common stock at the fair market price
      on
      the date of grant. Both plans provide for “incentive stock options” and
“non-qualified stock options”. The incentive stock options are intended to
      qualify under Section 422 of the Internal Revenue Code for favorable tax
      treatment. 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. Under the 1999 Stock Option Plan,
      the Board of Directors can grant up to 600,000 stock options to directors,
      employees, consultants and advisors of the Company. On December 31, 2005, there
      were 40,216 stock options available for grant under the 1999 Stock Option
      Plan.





A
      summary
      of the status of the two fixed plans at December 31, 2005, 2004 and 2003 and
      changes during the years ended on those dates follows.





**2005**
            
            **2004**
            
            **2003****Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Under
                option, beginning of year
            
            
            651,777
            
            $
            11.03
            
            
            695,367
            
            $
            10.60
            
            
            756,406
            
            $
            10.63Granted
            
            
            122,500
            
            
            14.57
            
            
            23,000
            
            
            14.94
            
            
            28,500
            
            
            9.56Exercised
            
            
            (61,180
            )
            
            7.38
            
            
            (56,960
            )
            
            7.10
            
            
            (54,247
            )
            
            9.76Forfeited
            
            
            (9,500
            )
            
            13.16
            
            
            (9,630
            )
            
            13.01
            
            
            (35,292
            )
            
            11.59Under
                option, end of year
            
            
            703,597
            
            $
            11.91
            
            
            651,777
            
            $
            11.03
            
            
            695,367
            
            $
            10.60Exercisable
                at end of year
            
            
            477,295
            
            $
            11.73
            
            
            461,013
            
            $
            11.45
            
            
            405,987
            
            $
            11.34Weighted-average
                fair value per option of options granted during year
            
            
            
            
            $
            4.41
            
            
            
            
            $
            5.41
            
            
            
            
            $
            3.31








A
      further
      summary of the options outstanding at December 31, 2005 follows.





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of**
              **Exercise**
              **Prices**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Contractual**
              **Life
                in Years**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$
                6.25 - 9.38
            
            
            163,710
            
            
            5.90
            
            $
            8.31
            
            
            103,180
            
            $
            8.4510.01
                - 10.60
            
            
            210,837
            
            
            4.14
            
            
            10.35
            
            
            180,365
            
            
            10.3510.71
                - 13.94
            
            
            147,900
            
            
            5.63
            
            
            12.97
            
            
            91,500
            
            
            12.6614.00
                - 17.67
            
            
            150,000
            
            
            6.55
            
            
            15.74
            
            
            75,600
            
            
            16.2217.81
                - 21.63
            
            
            31,150
            
            
            3.87
            
            
            17.94
            
            
            26,650
            
            
            17.96703,597
            
            
            5.36
            
            
            11.91
            
            
            477,295
            
            
            11.73


69
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                17.**
            **STOCK
                OPTION PLANS (Continued)**





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions:





**2005**
            
            **2004**
            
            **2003**Risk-free
                interest rate
            3.95%
                - 4.27%
            
            3.67%
                - 4.25%
            
            4.25%Expected
                life of the options
            7
                -
                10 years
            
            7
                -
                10 years
            
            10
                yearsExpected
                dividends (as a percent of the fair value of the stock)
            3.05%
                - 3.08%
            
            2.18%
                - 3.08%
            
            1.80%Expected
                volatility
            32.68%
                - 35.29%
            
            33.98%
                - 35.23%
            
            27.22%








**NOTE
                18.**
            **STOCK
                REPURCHASE PLAN**





In
      May
      2004, the Board of Directors approved a plan to repurchase shares of the
      Company’s common stock. During 2005 and 2004, the Company acquired and canceled
      87,483 and 46,300 shares of common stock, for an annual cost of $1,468,713
      and
      $576,198, respectively. A balance of 330,209 shares remained available under
      the
      plan for repurchase at December 31, 2005.








**NOTE
                19.**
            **COMMITMENTS
                AND CONTINGENT LIABILITIES**





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





The
      Bank's exposure to credit loss in the event of nonperformance by the other
      party
      to the financial instrument for commitments to extend credit and standby letters
      of credit is represented by the contractual amount of those instruments. The
      Bank uses the same credit policies in making commitments as it does for
      on-balance-sheet instruments. A
      summary of the Bank's commitments as of December 31, 2005 and 2004
      follows.





**2005**
            
            **2004**Commitments
                to extend credit
            
            $
            144,717,000
            
            $
            118,155,000Standby
                letters of credit
            
            $
            9,787,000
            
            $
            5,735,000





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





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





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


70
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                20.**
            **CONCENTRATIONS
                OF CREDIT**





The
      Bank
      originates commercial, agricultural, residential, and consumer loans to
      customers primarily in markets served by the Bank. The ability of the majority
      of the Bank's customers to honor their contractual obligations is dependent
      on
      the local economies in the geographical areas served by the Bank.





As
      of
      December 31, 2005 approximately 90% of the Bank's loan portfolio is concentrated
      in loans secured by real estate. A substantial portion of these loans are in
      the
      Bank's primary market areas. In addition, the other real estate owned is located
      in those same markets. Accordingly, the ultimate collectibility of the Bank's
      loan portfolio and the recovery of the carrying amount of other real estate
      owned are susceptible to changes in market conditions in the Bank's market
      areas. The other significant concentrations of credit by type of loan are set
      forth in Note 4.








**NOTE
                21.**
            **REGULATORY
                MATTERS**





The
      Bank
      is subject to certain restrictions on the amount of dividends that may be
      declared without prior regulatory approval. At December 31, 2005, approximately
      $19,931,000 of the Bank’s retained earnings were available for dividend
      declaration without regulatory approval.





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





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios of total and Tier
      I
      capital to risk-weighted assets, as defined, and of Tier I capital to average
      assets, as defined. Management believes, as of December 31, 2005 and 2004,
      the
      Company and the Bank met all capital adequacy requirements to which they are
      subject.





As
      of
      December 31, 2005, the most recent notification from the regulatory authorities
      categorized the Bank as “Well Capitalized” under the regulatory framework for
      prompt corrective action. To be categorized as “Well Capitalized”, the Bank must
      maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
      as set forth in the following table. There are no conditions or events since
      that notification that management believes have changed the Bank’s
      category.


71
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                21.**
            **REGULATORY
                MATTERS (Continued)**





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





**Actual**
            
            **For
                Capital Adequacy**
              **Purposes**
            
            **To
                Be Well Capitalized**
              **Under
                Prompt**
              **Corrective
                Action**
              **Provisions**As
                of December 31, 2005:Total
                Capital to Risk Weighted Assets:Consolidated
            
            $
            103,004,000
            
            
            12.4
            %
            $
            66,290,000
            
            
            8.0
            %
            
            -
                N/A -Bank
            
            $
            102,436,000
            
            
            12.4
            %
            $
            66,177,000
            
            
            8.0
            %
            $
            82,721,000
            
            
            10.0
            %Tier
                1 Capital to Risk Weighted Assets:Consolidated
            
            $
            92,267,000
            
            
            11.1
            %
            $
            33,145,000
            
            
            4.0
            %
            
            -
                N/A -Bank
            
            $
            92,087,000
            
            
            11.1
            %
            $
            33,088,000
            
            
            4.0
            %
            $
            49,633,000
            
            
            6.0
            %Tier
                1 Capital to Average Assets:Consolidated
            
            $
            92,267,000
            
            
            9.2
            %
            $
            40,059,000
            
            
            4.0
            %
            
            -
                N/A -Bank
            
            $
            92,087,000
            
            
            9.2
            %
            $
            39,968,000
            
            
            4.0
            %
            $
            49,960,000
            
            
            5.0
            %As
                of December 31, 2004:Total
                Capital to Risk Weighted Assets:Consolidated
            
            $
            94,223,000
            
            
            13.5
            %
            $
            56,025,000
            
            
            8.0
            %
            
            -
                N/A -Bank
            
            $
            92,156,000
            
            
            13.2
            %
            $
            55,918,000
            
            
            8.0
            %
            $
            69,898,000
            
            
            10.0
            %Tier
                1 Capital to Risk Weighted Assets:Consolidated
            
            $
            85,465,000
            
            
            12.2
            %
            $
            28,012,000
            
            
            4.0
            %
            
            -
                N/A -Bank
            
            $
            83,415,000
            
            
            11.9
            %
            $
            27,959,000
            
            
            4.0
            %
            $
            41,939,000
            
            
            6.0
            %Tier
                1 Capital to Average Assets:Consolidated
            
            $
            85,465,000
            
            
            10.4
            %
            $
            32,787,000
            
            
            4.0
            %
            
            -
                N/A -Bank
            
            $
            83,415,000
            
            
            10.2
            %
            $
            32,736,000
            
            
            4.0
            %
            $
            40,920,000
            
            
            5.0
            %








**NOTE
                22.**
            **FAIR
                VALUE OF FINANCIAL
                INSTRUMENTS**





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


72
 *Table
          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                22.**
            **FAIR
                VALUE OF FINANCIAL INSTRUMENTS
                (Continued)**





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





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





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





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





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





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





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





**Off-Balance-Sheet** **Instruments:** The
      carrying amount of commitments to extend credit and standby letters of credit
      approximates fair value. The carrying amount of the off-balance-sheet financial instruments is based on fees charged to enter into such agreements.




The
      carrying amounts and estimated fair value of the Company's financial instruments
      as of December 31, 2005 and 2004 are summarized below. All dollar amounts have
      been rounded to the nearest thousand.





**2005**
            
            **2004****Carrying**
              **Amount**
            
            **Fair**
              **Value**
            
            **Carrying**
              **Amount**
            
            **Fair**
              **Value**Cash
                and balances due from banks, interest-bearing deposits with other
                banks
                and federal funds sold
            
            $
            66,853,000
            
            $
            66,853,000
            
            $
            56,578,000
            
            $
            56,578,000Investment
                securities
            
            
            157,455,000
            
            
            157,455,000
            
            
            128,684,000
            
            
            128,684,000Loans,
                net
            
            
            741,859,000
            
            
            739,794,000
            
            
            637,083,000
            
            
            638,327,000Deposits
            
            
            815,681,000
            
            
            816,150,000
            
            
            657,550,000
            
            
            657,916,000Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            6,317,000
            
            
            6,317,000
            
            
            14,168,000
            
            
            14,168,000Advances
                from the FHLB
            
            
            90,044,000
            
            
            90,666,000
            
            
            99,001,000
            
            
            99,776,000Beneficial
                interest in debentures
            
            
            10,310,000
            
            
            10,310,000
            
            
            10,310,000
            
            
            10,310,000


73
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          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                23.**
            **CONDENSED
                FINANCIAL INFORMATION OF PAB BANKSHARES, INC. (PARENT COMPANY
                ONLY)**





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





**PAB
      BANKSHARES, INC.**


**CONDENSED
      BALANCE SHEETS**


**DECEMBER
      31, 2005 AND 2004**





**2005**
            
            **2004****ASSETS**Cash
                on deposit with subsidiary bank
            
            $
            2,428,643
            
            $
            4,207,561Investment
                securities
            
            
            1,172,500
            
            
            349,945Investment
                in subsidiary
            
            
            96,596,495
            
            
            89,259,106Other
                assets
            
            
            583,848
            
            
            976,817Total
                assets
            
            $
            100,781,486
            
            $
            94,793,429**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Guaranteed
                preferred beneficial interests in debentures (trust preferred
                securities)
            
            $
            10,310,000
            
            $
            10,310,000Dividends
                payable
            
            
            1,183,627
            
            
            949,532Other
                liabilities
            
            
            2,287,076
            
            
            2,534,013Total
                liabilities
            
            
            13,780,703
            
            
            13,793,545**Stockholders'
                equity**
            
            
            87,000,783
            
            
            80,999,884Total
                liabilities and stockholders' equity
            
            $
            100,781,486
            
            $
            94,793,429


74
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          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                23.**
            **CONDENSED
                FINANCIAL INFORMATION OF PAB BANKSHARES, INC. (PARENT COMPANY ONLY)
                (Continued)**





**PAB
      BANKSHARES, INC.**


**CONDENSED
      STATEMENTS OF INCOME**


**DECEMBER
      31, 2005, 2004 AND 2003**





**2005**
            
            **2004**
            
            **2003****Income**Dividends
                from subsidiaries
            
            $
            4,500,000
            
            $
            3,000,000
            
            $
            -Interest
                and dividends on investment securities
            
            
            22,226
            
            
            54,813
            
            
            90,000Other
                income
            
            
            6
            
            
            120
            
            
            4,541Total
                income
            
            
            4,522,232
            
            
            3,054,933
            
            
            94,541**Expenses**
            
            
            1,342,311
            
            
            1,047,898
            
            
            1,097,335Income
                (loss) before income tax benefit and equity in undistributed earnings
                of
                subsidiaries
            
            
            3,179,921
            
            
            2,007,035
            
            
            (1,002,794
            )**Income
                tax benefit**
            
            
            484,711
            
            
            326,567
            
            
            362,370Income
                (loss) before equity inundistributed
                earnings of subsidiaries
            
            
            3,664,632
            
            
            2,333,602
            
            
            (640,424
            )Equity
                in undistributed earnings of subsidiaries
            
            
            8,788,091
            
            
            6,184,483
            
            
            7,765,942**Net
                income**
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518


75
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          of Contents*


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**NOTE
                23.**
            **CONDENSED
                FINANCIAL INFORMATION OF PAB BANKSHARES, INC. (PARENT COMPANY ONLY)
                (Continued)**





**PAB
      BANKSHARES, INC.**


**CONDENSED
      STATEMENTS OF CASH FLOW**


**YEARS
      ENDED DECEMBER 31, 2005, 2004 AND 2003**





**2005**
            
            **2004**
            
            **2003****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Income
            
            $
            12,452,723
            
            $
            8,518,085
            
            $
            7,125,518Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            68,900
            
            
            68,899
            
            
            68,901Deferred
                tax provision
            
            
            9,936
            
            
            83,668
            
            
            57,487Undistributed
                earnings of subsidiaries
            
            
            (8,788,091
            )
            
            (6,184,483
            )
            
            (7,765,942
            )Increase
                (decrease) in deferred compensation accrual
            
            
            (14,727
            )
            
            85,085
            
            
            138,055Decrease
                in retirement accrual
            
            
            (135,891
            )
            
            (388,583
            )
            
            (364,552
            )Net
                change in other assets and liabilities
            
            
            (70,080
            )
            
            (66,952
            )
            
            (62,763
            )Net
                cash provided by (used in) operating activities
            
            
            3,522,770
            
            
            2,115,719
            
            
            (803,296
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Proceeds
                from call of equity securities
            
            
            -
            
            
            1,000,000
            
            
            -Net
                cash provided by investing activities
            
            
            -
            
            
            1,000,000
            
            
            -**CASH
                FLOWS USED IN FINANCING ACTIVITIES**Dividends
                paid
            
            
            (4,284,703
            )
            
            (2,945,557
            )
            
            (1,038,587
            )Proceeds
                from the exercise of stock options
            
            
            451,729
            
            
            404,515
            
            
            529,224Acquisition
                of stock under stock repurchase plans
            
            
            (1,468,714
            )
            
            (576,198
            )
            
            -Net
                cash used in financing activities
            
            
            (5,301,688
            )
            
            (3,117,240
            )
            
            (509,363
            )Net
                decrease in cash
            
            
            (1,778,918
            )
            
            (1,521
            )
            
            (1,312,659
            )Cash
                at beginning of period
            
            
            4,207,561
            
            
            4,209,082
            
            
            5,521,741Cash
                at end of period
            
            $
            2,428,643
            
            $
            4,207,561
            
            $
            4,209,082


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





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








**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





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





**Management's
      Report on Internal Control over Financial Reporting**





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





**Changes
      in Internal Control over Financial Reporting**





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








**ITEM
                9B.**
            **OTHER
                INFORMATION**





There
      was
      no information required to be disclosed in a report on Form 8-K during the
      fourth quarter of 2005 that has not been reported.








**PART
      III**








**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





Information
      regarding our directors and executive officers, board committees, codes of
      ethics, and compliance with Section 16 of the Exchange Act will be included
      in
      our definitive Proxy Statement (the “2006 Proxy Statement”) relating to the
      annual meeting of shareholders of PAB and is incorporated herein by
      reference.








**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





Information
      regarding executive compensation will be included in the 2006 Proxy Statement
      and is incorporated herein by reference.


77
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          of Contents*


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





Information
      regarding beneficial ownership of our common stock will be included in the
      2006
      Proxy Statement and is incorporated herein by reference.





*Equity
      Compensation Plan Information*


The
      following table summarizes the Company’s equity compensation plans as of
      December 31, 2005.




Plan
                Category
            Number
                of Securities to be Issued
              Upon
                Exercise of Outstanding
              Options,
                Warrants and Rights
            Weighted-Average
                Exercise Price
              of
                Outstanding Options, Warrants
              and
                Rights
            Number
                of Securities Remaining
              Available
                for Future Issuance Under
              Equity
                Compensation Plans*Equity
                Compensation PlansApproved
                by Security Holders
            477,295
            $11.73
            266,518Equity
                Compensation Plans NotApproved
                by Security Holders
            n/a
            n/a
            n/a





*excluding
      securities reflected in the first column





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








**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**





Information
      regarding certain relationships and related transactions will be included in
      the
      2006 Proxy Statement and is incorporated herein by reference.








**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





Information
      regarding principal accountant fees and services will be included in the 2006
      Proxy Statement and is incorporated herein by reference.


78
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          of Contents*


**PART
      IV**





**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**





**1.**
            **Financial
                Statements.**





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





**2.**
            **Financial
                Statement Schedules.**





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





**3.**
            **Exhibits.**





Exhibit
                No.
            Description3.1
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                to
                Exhibit 3(a) to the Registrant's Registration Statement on Form S-4
                (No.
                333-83907) filed with the Commission on October 14,
                1999).3.2
            Amended
                and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
                the
                Registrant’s Current Report on Form 8-K dated February 22,
                2005).4.1
            Indenture
                Agreement, dated November 28, 2001, by and between the Registrant
                and
                Wilmington Trust Company for the issuance of Floating Rate Junior
                Subordinated Debt Securities due 2031 (incorporated by reference
                to
                Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the fiscal
                year ended December 31, 2001).10.1.1
            PAB
                Bankshares, Inc. First Amendment to First Restated and Amended Dividend
                Reinvestment and Common Stock Purchase Plan (incorporated by reference
                to
                Exhibit 28.2 to the Registrant's Registration Statement on Form S-3
                (No.
                33-74080) filed with the Commission on April 8, 1997).10.1.2
            PAB
                Bankshares, Inc. Third Amended and Restated Dividend Reinvestment
                and
                Common Stock Purchase Plan (incorporated by reference to Exhibit
                28.1 to
                the Registrant's Registration Statement on Form S-3 (No. 33-74080)
                filed
                with the Commission on September 1, 1998).10.2
            PAB
                Bankshares, Inc. 1994 Employee Stock Option Plan, as amended (incorporated
                by reference to Exhibit 10.3 to the Registrant's Annual Report on
                Form
                10-K for the fiscal year ended December 31, 1998).10.3
            Form
                of Executive Salary Continuation Agreement, with attached Schedule
                of
                Terms (incorporated by reference to Exhibit 10.5 to the Registrant's
                Annual Report on Form 10-K for the fiscal year ended December 31,
                1998).10.4
            PAB
                Bankshares, Inc. 1999 Stock Option Plan (incorporated by reference
                to
                Exhibit 99 to the Registrant's Registration Statement on Form S-8
                (No.
                333-89527) filed with the Commission on March 22,
                1999).10.5
            Employee
                Contract Termination Agreement, dated September 1, 2001, by and between
                C.
                Larry Wilkinson and the Registrant (incorporated by reference to
                Exhibit
                10.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year
                ended December 31, 2001).10.6
            Rescission
                Agreement, dated December 31, 2001, by and between R. Bradford Burnette
                and the Registrant (incorporated by reference to Exhibit 10.10 to
                the
                Registrant’s Annual Report on Form 10-K for the fiscal year ended December
                31, 2001).


79
 *Table
          of Contents*





10.7
            PAB
                Bankshares, Inc. Employee and Director Stock Purchase Program, dated
                July
                1, 2002 and amended March 25, 2003 (incorporated by reference to
                Exhibit
                10.9 to the Registrant’s Annual Report on Form 10-K for the fiscal year
                ended December 31, 2002).10.8
            Employment
                Agreement, dated January 1, 2003, by and between Michael E. Ricketson,
                the
                Registrant, and the Bank (incorporated by reference to Exhibit 10.10
                to
                the Registrant’s Annual Report on Form 10-K for the fiscal year ended
                December 31, 2002).10.8.1
            First
                Amendment to Employment Agreement, dated August 25, 2003, by and
                between
                Michael E. Ricketson, the Registrant, and the Bank (incorporated
                by
                reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form
                10-Q for the fiscal quarter ended September 30, 2003).10.9
            Employment
                Agreement, dated January 1, 2003, by and between Milton Burke Welsh
                and
                the Bank (incorporated by reference to Exhibit 10.11 to the Registrant’s
                Annual Report on Form 10-K for the fiscal year ended December 31,
                2002).10.10
            Employment
                Agreement, dated January 1, 2003, by and between R. Wesley Fuller
                and the
                Bank (incorporated by reference to Exhibit 10.12 to the Registrant’s
                Annual Report on Form 10-K for the fiscal year ended December 31,
                2002).10.11
            Employment
                Agreement, dated January 1, 2003, by and between Donald J. Torbert,
                Jr.
                and the Bank (incorporated by reference to Exhibit 10.13 to the
                Registrant’s Annual Report on Form 10-K for the fiscal year ended December
                31, 2002).10.11.1
            First
                Amendment to Employment Agreement, dated August 26, 2003, by and
                between
                Donald J. Torbert, Jr. and the Bank (incorporated by reference to
                Exhibit
                10.15 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal
                quarter ended September 30, 2003).10.12
            Employment
                Contract Termination Agreement, dated August 9, 2004, by and between
                Michael E. Ricketson, the Registrant, and the Bank (incorporated
                by
                reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form
                10-Q for the fiscal quarter ended September 30, 2004).21.1
            Subsidiaries
                of the Registrant.23.1
            Consent
                of Mauldin & Jenkins, LLC.31.1
            Rule
                13a-14(a) Certification of Chief Executive Officer31.2
            Rule
                13a-14(a) Certification of Chief Financial Officer32.1
            Section
                1350 Certification of Chief Executive Officer32.2
            Section
                1350 Certification of Chief Financial
                Officer


80
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          of Contents*


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





**PAB
                BANKSHARES, INC.**Date:*March
                16, 2006*By:
            */s/
                M. Burke Welsh, Jr.*M.
                Burke Welsh, Jr.President
                and Chief Executive Officer





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





Signature
            
            Title
            Date*/s/
                R. Bradford Burnette*
            
            Director
            *March
                16, 2006*R.
                Bradford Burnette*/s/
                Walter W. Carroll II*
            
            Director
            *March
                16, 2006*Walter
                W. Carroll II*/s/
                James L. Dewar, Jr.*
            
            Director,
                Chairman
            *March
                16, 2006*James
                L. Dewar, Jr.*/s/
                Michael H. Godwin*
            
            Director
            *March
                16, 2006*Michael
                H. Godwin*/s/
                Bill J. Jones*
            
            Director
            *March
                16, 2006*Bill
                J. Jones*/s/
                James B. Lanier, Jr.*
            
            Director
            *March
                16, 2006*James
                B. Lanier, Jr.*/s/
                John E. Mansfield, Jr.*
            
            Director
            *March
                16, 2006*John
                E. Mansfield, Jr.*/s/
                Kennith D. McLeod*
            
            Director
            *March
                16, 2006*Kennith
                D. McLeod, CPA*/s/
              Douglas W. McNeil*
            
            Director
            *March
                16, 2006*Douglas W.
              McNeil*/s/
                Paul E. Parker*
            
            Director
            *March
                16, 2006*Paul
                E. Parker*/s/
                F. Ferrell Scruggs, Sr.*
            
            Director
            *March
                16, 2006*F.
                Ferrell Scruggs, Sr.*/s/
                John M. Simmons*
            
            Director
            *March
                16, 2006*John
                M. Simmons*/s/
                Joe P. Singletary, Jr.*
            
            Director
            *March
                16, 2006*Joe
                P. Singletary, Jr.*/s/
                Donald J. Torbert, Jr.*
            
            Executive
                Vice President and
            *March
                16, 2006*Donald
                J. Torbert, Jr., CPA
            Chief
                Financial Officer (PrincipalFinancial
                and Accounting Officer)*/s/
                M. Burke Welsh, Jr.*
            
            Director,
                President and
            *March
                16, 2006*M.
                Burke Welsh, Jr.
            Chief
                Executive Officer(Principal
                Executive Officer)




81