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, 2003 - Commission File Number 1-11823
 _____________
 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:
  Title of each class
Name of each exchange on which registeredCommon Stock, no par value
American Stock Exchange________________________
________________________
 
 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
 
 
 As of January 30, 2004, the registrant had 9,485,160 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates on January 30, 2004 was approximately $106.6 million.
 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes [X] No [ ]
 
 
 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. [X]
 
 
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)
 Yes [X] No [ ]
 
 
 As of June 30, 2003, the registrant had 9,434,813 shares of common stock outstanding. The aggregate market value of common stock held by non-affiliates on June 30, 2003 was approximately $92.9 million.
 
 
 DOCUMENTS INCORPORATED BY REFERENCE
 
 
 Portions of the registrants definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the registrants fiscal year end is incorporated by reference in answer to Part III of this Form 10-K.
 
    TABLE OF CONTENTS
   PagePART ICautionary Notice Regarding Forward-Looking Statements
31.
BUSINESSGeneral
3Supervision and Regulation
62.
PROPERTIES
113.
LEGAL PROCEEDINGS
114.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
11PART II5.
MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
126.
SELECTED FINANCIAL DATA
137.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOverview of Key Financial, Strategic and Performance Factors
14Statistical Disclosures
16Liquidity and Capital Resources
25Results of Operations
277A.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
318.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAQuarterly Financial Summary for 2003 and 2002
33Managements Responsibility For Financial Reporting
34Reports of Independent Public Accountants
35Consolidated Balance Sheets at December 31, 2003 and 2002
36Consolidated Statements of Income for the Three Years Ended December 31, 2003
37Consolidated Statements of Comprehensive Income (Loss) for the Three Years Ended December 31, 2003
38Consolidated Statements of Stockholders Equity for the Three Years Ended December 31, 2003
39Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2003
40Notes to Consolidated Financial Statements
429.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
669A.
CONTROLS AND PROCEDURES
66PART III10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
6611.
EXECUTIVE COMPENSATION
6612.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
6613.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
6614.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
66PART IV15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
67SIGNATURES

69




2




PART I
 
 
 CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
 
 
 Some of the statements in this Report, 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 may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act). Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into higher growth markets, our other business strategies and other statements that are not historical facts. When we use words like anticipate, believe, intend, plan, expect, estimate, could, should, will, and similar expressions, you should consider them as identifying forward-looking statements. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions 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, 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 us; (6) adverse changes may occur in the bond and equity markets; (7) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and (8) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals. Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise.
 
 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 we have since 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 thirteen branches located in seven counties in South Georgia; two branches and a loan production office located in three counties in North Georgia; and one branch and a loan production office located in two counties in Florida. Additional information on each of the markets that we serve is provided below under Markets and Competition.


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.
 
 3 
 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- to mid-sized commercial businesses and to individual consumers. In addition, over the past few years, we have upgraded and invested in systems and support to provide a product line that is comparable to the larger regional banks and gives us a competitive edge over many of the smaller financial institutions in our markets.
   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 the process of consolidating the separate charters of our banks into one charter, The Park Avenue Bank. The charter consolidation process was completed in April 2002, and all of our banking offices now operate under the PAB logo. Overall, we have a 2.7% market share 1 of the total deposits in the states southern tier 2 .
   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. Henry County was recently ranked by the U.S. Census Bureau as the fastest growing county in the Southeastern United States from 2000 to 2003. At the end of 2000, we acquired a bank in Ocala, Marion County, Florida. 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 2002, we opened a loan production office in Duluth, Gwinnett County, Georgia. However, due to personnel changes, the Gwinnett office was closed (at least temporarily) in April 2003. In September 2003, we opened a loan production office in St. Augustine, St. Johns County, Florida, where we will focus on the South Jacksonville, St. Augustine, Palm Coast and Daytona markets. In October 2003, we opened a loan production office in Athens, Clarke County, Georgia.
   Our offices in Henry, Hall, Gwinnett, and Clarke counties are also referred to collectively as our North Georgia market in this Report. Due to our relative newness and the lack of a branch network, we do not have a significant retail presence or market share in the North Georgia market. We have primarily catered to residential and commercial developers and small- to medium-sized commercial operations in the North Georgia market. Our offices in Ocala and St. Augustine are collectively referred to as our Florida market.
  1 Based on the FDIC/OTS Summary of Deposits report as of June 30, 2003.
 2  Regions 9-12 as defined by the Georgia Department of Community Affairs and is comprised of 58 counties.
  4
  The table below provides summary demographic data on each of our markets.
 Market
# of
Total
Total
Market

Pop. %
Employment
UnemploymentCounty
Offices
Loans3
Deposits4
Share4
Population5
Growth6
Growth7
Rate8South GeorgiaLowndes
4
117,462
189,473
16.9%
93,658
1.7%
2.4%
3.3%Cook
1
11,934
33,256
22.6%
16,122
2.2%
2.7%
5.0%Decatur
3
53,246
100,190
38.4%
28,243
-
4.2%
6.2%Grady
1
12,289
10,610
4.7%
23,838
0.8%
5.9%
5.4%Appling
1
36,522
42,614
22.3%
17,650
1.3%
3.1%
7.8%Jeff Davis
1
8,975
33,644
24.8%
12,910
1.8%
5.2%
8.7%Bulloch
2
45,981
58,709
9.7%
57,307
2.4%
1.7%
3.3%286,409
468,496North GeorgiaHenry
1
118,686
23,301
1.9%
139,699
17.1%
2.4%
4.4%Hall
1
54,824
4,447
0.2%
152,235
9.3%
2.9%
3.6%Clarke
1
6,270
-
-
103,881
2.4%
2.8%
3.3%179,780
27,748FloridaMarion
1
24,670
54,299
1.7%
272,553
5.3%
0.2%
4.7%St. Johns
1
17,319
-
-
136,038
10.5%
-0.3%
3.9%41,989
54,299   
 Employees
   Availability of Information
 www.pabbankshares.com www.parkavebank.com www.sec.gov
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  5
 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; andUnder what circumstances money may or must flow between and among 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.
   6 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 the subsidiary bank to PAB, as well as by PAB to its stockholders.
   7 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. As of December 31, 2003, the Bank is able to pay $3,883,000 in dividends to the Holding Company.
   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 noncumulative 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, 2003, our consolidated Total Capital Ratio and our Tier 1 Capital Ratio were 15.1% and 13.9%, 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, 2003 was 11.0%. 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.
   8 
 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, 2003, 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.
   9 
 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 has 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 establishes 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.
   10 
 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.
   The GFLA is a controversial law because of provisions such as those creating potential liability for assignees and holders of covered loans. As a result, the GFLA was amended, effective March 7, 2003, by the Georgia legislature in an effort to address a number of those provisions. We have implemented procedures to comply with the GFLA requirements.
    ITEM 2. PROPERTIES
   We currently operate 16 bank branches, two loan production offices, an operations center, and an administrative building. With the exception of one branch office in Ocala, Florida, 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 loan production offices operate out of leased office space in those markets. In addition, we own a three-story 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. However, we are holding approximately $1.5 million in properties that were former banking offices, or are investments for possible future expansion.
    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 2003.
     11 
 PART II
   ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Our common stock has been listed for quotation on the American Stock Exchange (AMEX) under the symbol PAB since July 9, 1996. On January 30, 2004, there were 2,350 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 intention to pay out 30-40% of our net earnings in the form of cash dividends to our stockholders on a quarterly basis; provided, however, there is no assurance that we will do so in the future.
   The following table sets forth, for the indicated periods, the high and low closing sales prices for our common stock as reported by AMEX, the cash dividends declared, and the diluted earnings per share.
 Sales PriceCalendar Period

High
Low
Dividends
Earnings2002First Quarter

$
11.30

$
9.21

$
0.11

$
0.18Second Quarter


10.01


8.15


-


0.18Third Quarter


8.83


7.70


-


0.18Fourth Quarter


9.00


8.00


-


0.132003First Quarter

$
9.48

$
8.10

$
0.03

$
0.19Second Quarter


13.95


9.07


0.03


0.18Third Quarter


13.81


12.70


0.05


0.18Fourth Quarter


15.75


13.69


0.07


0.19
 Equity Compensation Plan Information
 The following table summarizes the Companys equity compensation plans as of December 31, 2003.
 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 Plans Approved by Security Holders
405,987
$11.34
479,483Equity Compensation Plans Not Approved 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.
  12 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)

2003
2002
2001
2000
1999Summary of Operations:Interest income

$
40,040

$
48,079

$
62,715

$
57,526

$
49,495Interest expense


12,467


19,989


35,600


28,674


22,906Net interest income


27,573


28,090


27,115


28,852


26,589Provision for loan losses


-


2,575


12,220


4,099


985Other income


8,616


8,013


11,923


5,756


6,060Other expense


25,702


24,368


26,921


21,874


18,966Income (loss) before income tax expense


10,487


9,160


(103
)

8,635


12,698Income tax expense (benefit)


3,361


2,813


(251
)

2,909


4,005Net income

$
7,126

$
6,347

$
148

$
5,726

$
8,693Net interest income on a taxable-equivalent basis

$
27,759

$
28,225

$
27,216

$
28,968

$
26,718Selected Average Balances:Total assets

$
736,367

$
779,958

$
847,100

$
694,674

$
629,634Earnings assets


676,372


719,352


780,120


640,889


576,729Loans


537,223


586,712


616,156


534,340


467,149Deposits


563,836


641,449


694,219


548,276


500,582Stockholders equity


75,906


67,975


72,268


70,706


68,161Selected Year End Balances:Total assets

$
730,741

$
747,911

$
859,143

$
794,907

$
664,969Earnings assets


666,488


683,456


790,546


722,490


606,464Loans


538,644


555,238


637,825


580,737


494,417Allowance for loan losses


10,139


12,097


15,765


8,185


5,037Deposits


556,917


606,730


720,398


637,180


516,204Stockholders equity


76,062


71,265


65,372


70,780


69,611Common Share Data:Outstanding at year end


9,484,660


9,430,413


9,409,913


9,501,947


9,617,406Weighted average outstanding


9,476,158


9,426,761


9,482,709


9,528,387


9,612,634Diluted weighted average outstanding


9,686,617


9,459,768


9,550,080


9,598,790


9,749,162Per Share Ratios:Net income - basic

$
0.75

$
0.67

$
0.02

$
0.60

$
0.90Net income - diluted


0.74


0.67


0.02


0.60


0.89Dividends declared


0.18


0.11


0.44


0.43


0.39Book value


8.02


7.56


6.95


7.45


7.24Profitability Ratios:Return on average assets ("ROA")


0.97
%

0.81
%

0.02
%

0.82
%

1.38
%Return on average equity ("ROE")


9.60
%

9.34
%

0.20
%

8.10
%

12.75
%Net interest margin


4.11
%

3.92
%

3.49
%

4.52
%

4.63
%Efficiency ratio (excluding certain non-recurring items)


68.90
%

67.04
%

74.02
%

60.39
%

57.12
%Liquidity Ratios:Total loans to total deposits


95.53
%

91.51
%

88.54
%

91.14
%

95.78
%Average loans to average earning assets


80.03
%

81.56
%

78.98
%

83.37
%

81.00
%Noninterest-bearing deposits to total deposits


17.04
%

14.45
%

11.31
%

11.09
%

12.58
%Capital Adequacy Ratios:Average equity to average assets


10.08
%

8.72
%

8.53
%

10.18
%

10.83
%Dividend payout ratio


23.89
%

16.39
%

2855.42
%

72.08
%

43.54
%Asset Quality Ratios:Net charge-offs to average loans


0.36
%

1.06
%

0.75
%

0.26
%

0.24
%Nonperforming loans to total loans


1.53
%

2.09
%

1.91
%

1.27
%

0.54
%Nonperforming assets to total assets


1.75
%

1.72
%

1.57
%

0.99
%

0.52
%Allowance for loan losses to total loans


1.88
%

2.18
%

2.47
%

1.41
%

1.02
%Allowance for loan losses to nonperforming loans


123.41
%

104.33
%

129.44
%

111.03
%

188.79
% 
 13
 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 $725 million community bank with 18 locations 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 accept deposits and borrow additional funds as needed at low costs and invest those funds in a safe and sound manner in loans and investments at a higher yield in order to increase the return on our stockholders investment. Competition, regulation, credit risk, and interest rate risk are the primary factors that we must manage in order to be successful.
   In terms of profitability, our return on average assets (ROA) and return on average equity (ROE) for 2003 was 0.97% and 9.60%, respectively. This is an improvement over 2002 when we recorded an ROA of 0.81% and an ROE of 9.34%. For 2003, our net income was $7.13 million, or $0.74 per diluted share, compared to $6.35 million, or $0.67 per diluted share, recorded in 2002. The primary reasons for the improvement in our profitability are discussed more fully under Results of Operations below.
   During 2003, we entered into new markets in Athens, Georgia, and St. Augustine, Florida by opening loan production offices. We believe we have opportunities to grow in these two markets. We also reinstated our quarterly dividend payments to our stockholders in 2003. This was an important step for us as it was a statement of our belief that we had stabilized our earnings and of our positive outlook for the future. We have improved our credit quality and our infrastructure to control the lending function. We now have more than $100 million in loans outstanding in Henry County after being in that market for only three years. Likewise, we now have more than $50 million in loans outstanding in Hall County after only two years there. We were voted The Best Bank in South Georgia by readers of the Valdosta Daily Times in 2003. This vote of confidence was a great boost in the morale of our employees in the Valdosta market following nearly two years of high employee turnover, high credit losses, and low earnings from the flagship bank in our organization. Finally, and most importantly, we were also able to clear a major regulatory hurdle over the credit problems that surfaced in 2001 when the Federal Reserve terminated the Resolution in August 2003.
   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.
   14 
 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 fifteen 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.
   Since the end of 2001, when our credit problems began to surface, our balance sheet has been 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. 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 deposits in order to stabilize our earnings. 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 for each of those quarters.
 Net Interest

Net InterestQuarter Ended

Loans

Deposits

Income *

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%* shown on a taxable-equivalent basis
   Although our loan portfolio has declined $105.5 million, or 16.4%, and interest rates have dropped another 200 basis points over the past nine quarters, we have been able to hold our net interest income stable and improve our net interest margin through reductions in interest expense.
   Loan growth has been positive in our North Georgia and Florida markets, but not at a pace to replenish the contraction in our South Georgia market. During 2003, loans in North Georgia increased $57.1 million and loans in Florida increased $9.2 million, while loans in South Georgia and the Treasury (mainly out-of-market participations purchased) decreased $82.9 million.
   Without any net new loans driving asset growth in 2003, we have reduced the liability side of our balance sheet by allowing time deposits to either roll off the balance sheet or into other deposit accounts at maturity. Time deposits have declined by a net $45.8 million, or 15%, since December 31, 2002. At the same time, we have continued to focus on building customer relationships and seeking core deposits. Balances in demand and savings accounts (excluding $6.3 million in public tax deposits temporarily on the books at December 31, 2002) remained constant, increasing $2.3 million, or less than 1%, during 2003.
   With the decline in time deposits, we used secured, short-term repurchase agreements as an alternative funding source. Our balance due in repurchase agreements increased $19.4 million, from $17.5 million at December 31, 2002 to $36.9 million at year end. We intend to gradually convert these short-term borrowings back into time deposits or FHLB advances as we see the demand for loans improve.
   Total stockholders equity increased $4.8 million, or 6.73%, during 2003. Equity was increased primarily from the contribution of $7.1 million from 2003 earnings net of $1.7 million in dividends paid. As a percentage of total assets, equity represented 10.4% at end of 2003, compared to 9.5% at the beginning of 2003, with the increase resulting from an increase in equity and a decline in assets during the year.
   15 
 STATISTICAL DISCLOSURES
   Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential
  Interest rates remained at near-historic lows throughout all of 2003. While the lower rate environment resulted in downward repricing of our earning assets, we were also able to continue to reduce the cost of funding those earning assets during the year. The next two tables illustrate the effects of the decline in interest rates and a decrease in the volume of loans and other earning assets on our interest income during 2003. The impact of interest rates and volume on our earnings are more fully discussed under Results of Operations below.
   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,

2003 vs. 2002
2002 vs. 2001Changes Due To

Changes Due ToIncrease

Increase(Decrease)
Rate
Volume
(Decrease)
Rate
Volume(Dollars In Thousands)Increase (decrease) in income from earning assets:Loans

$
(7,628
)
$
(4,290
)
$
(3,338
)
$
(11,518
)
$
(8,930
)
$
(2,588
)Taxable securities


(104
)

(1,172
)

1,068


(830
)

(805
)

(25
)Nontaxable securities


149


(27
)

176


99


(2
)

101Other short-term investments


(404
)

(57
)

(347
)

(2,353
)

(934
)

(1,419
)Total interest income


(7,987
)

(5,546
)

(2,441
)

(14,602
)

(10,671
)

(3,931
)Increase (decrease) in expense from interest-bearing liabilities:Demand deposits


(926
)

(915
)

(11
)

(1,294
)

(1,978
)

684Savings deposits


(149
)

(162
)

13


(302
)

(382
)

80Time deposits


(5,791
)

(2,897
)

(2,894
)

(12,703
)

(7,052
)

(5,651
)FHLB advances


(543
)

(954
)

411


(1,199
)

(297
)

(902
)Notes payable


(103
)

(103
)

-


140


18


122Other short-term borrowings


(10
)

(158
)

148


(253
)

(368
)

115Total interest expense


(7,522
)

(5,189
)

(2,333
)

(15,611
)

(10,059
)

(5,552
)Net interest income

$
(465
)
$
(357
)
$
(108
)
$
1,009

$
(612
)
$
1,621  16 
 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 34% Federal tax rate. Loan average balances include loans on nonaccrual status.
 For the Years Ended December 31,

2003
2002
2001Interest
Average

Interest
Average

Interest
AverageAverage
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/Balance


Expense


Rate


Balance


Expense


Rate


Balance


Expense


Rate(Dollars In Thousands)ASSETSInterest-earning assets:Loans

$
540,787

$
35,018


6.48
%
$
586,712

$
42,645


7.27
%
$
616,156

$
54,163


8.79
%Investment securities:Taxable


114,343


4,534


3.96
%

92,942


4,638


4.99
%

93,377


5,468


5.86
%Nontaxable


8,875


546


6.15
%

6,157


398


6.46
%

4,607


299


6.49
%Other short-term investments


11,713


128


1.10
%

33,541


533


1.59
%

65,980


2,886


4.37
%Total interest-earning assets


675,718


40,226


5.95
%

719,352


48,214


6.70
%

780,120


62,816


8.05
%Noninterest-earning assets:Cash


20,629








22,541








23,329Allowance for loan losses


(11,146
)







(14,903
)







(8,429
)Unrealized gain on securities available for sale


675








1,095








2,340Other assets


50,491








51,873








49,740Total assets

$
736,367







$
779,958







$
847,100LIABILITIES AND STOCKHOLDERS' EQUITYInterest-bearing liabilities:Demand deposits

$
167,215

$
1,404


0.84
%
$
167,986

$
2,330


1.39
%
$
141,314

$
3,624


2.56
%Savings deposits


39,445


281


0.71
%

38,289


430


1.12
%

34,535


732


2.12
%Time deposits


279,767


8,518


3.04
%

350,697


14,309


4.08
%

443,486


27,012


6.09
%FHLB advances


44,387


1,471


3.31
%

36,863


2,014


5.46
%

51,248


3,213


6.27
%Notes payable


10,000


505


5.05
%

10,000


608


6.08
%

7,930


468


5.90
%Other short-term borrowings


25,243


288


1.14
%

16,870


298


1.77
%

13,958


551


3.95
%Total interest-bearing liabilities


566,057


12,467


2.20
%

620,705


19,989


3.22
%

692,471


35,600


5.14
%Noninterest-bearing liabilities and stockholders' equity:Demand deposits


90,444








84,476








74,884Other liabilities


5,637








6,802








7,477Stockholders' equity


74,229








67,975








72,268Total liabilities and stockholders' equity

$
736,367







$
779,958







$
847,100Interest rate spread








3.75
%







3.48
%







2.91
%Net interest income




$
27,759







$
28,225







$
27,216Net interest margin








4.11
%







3.92
%







3.49
%
  17 
 Investment Portfolio
   The fair value of investment securities at the indicated dates are presented below. Changes in the mix of our investment portfolio will vary over time given changes in market conditions and liquidity needs of the Bank.
   As of December 31,

2003
2002
2001(Dollars in Thousands)U. S. Government agency securities

$
57,328

$
25,622

$
56,504State and municipal securities


9,400


8,614


4,999Mortgage-backed securities


50,296


32,066


32,199Corporate debt securities


4,354


12,397


8,389Equity securities


5,447


19,327


11,363$
126,825

$
98,026

$
113,454
  
 At December 31, 2003, the estimated fair market value of our investment portfolio was approximately $183,000, or 0.1%, below our amortized cost; however, market values vary significantly as interest rates change. Of the investments in U.S. Government agency securities maturing after one year, approximately $43.9 million, or 93%, are potentially callable at par value within one year.
   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, 2003 and the weighted-average yields (on a fully taxable basis assuming a 34% 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.
   StateU.S. Government
and Municipal
Corporate Debt
Mortgage-BackedAgency Securities
Securities
Securities
SecuritiesAs of December 31, 2003

Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield(Dollars in Thousands)Due in one year or less

$
10,509


4.00
%
$
751


5.53
%
$
-


0.00
%
$
102


-0.05
%Due after one year through five years


9,699


5.11
%

3,369


5.35
%

2,184


3.98
%

46,681


3.69
%Due after five years through ten years


22,046


4.32
%

2,191


5.39
%

2,170


6.04
%

3,513


5.43
%Due after ten years


15,074


5.65
%

3,089


6.53
%

-


0.00
%

-


0.00
%Total

$
57,328


4.75
%
$
9,400


5.76
%
$
4,354


5.01
%
$
50,296


3.80
%
   
 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.
   18 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,

2003
2002
2001
2000
1999(Dollars in Thousands)Commercial and financial

$
53,849

$
62,653

$
80,493

$
72,942

$
59,328Agricultural (including loans secured by farmland)


24,071


21,777


26,428


23,064


8,197Real estate - construction


100,150


83,836


63,486


40,130


31,858Real estate - mortgage (commercial and residential)


332,004


338,261


402,988


376,000


332,008Installment loans to individuals and other


29,366


48,934


64,806


68,880


63,424539,440


555,461


638,201


581,016


494,815Deferred loan fees and unearned interest, net


(796
)

(223
)

(376
)

(279
)

(398
)538,644


555,238


637,825


580,737


494,417Allowance for loans losses


(10,139
)

(12,097
)

(15,765
)

(8,185
)

(5,037
)Loans, net

$
528,505

$
543,141

$
622,060

$
572,552

$
489,380 
 
 The percentage of loans outstanding at the indicated dates is presented in the following table according to type of loan.
   As of December 31,

2003
2002
2001
2000
1999(Dollars in Thousands)Commercial and financial


10.00
%

11.28
%

12.62
%

12.56
%

12.00
%Agricultural (including loans secured by farmland)


4.47
%

3.92
%

4.15
%

3.97
%

1.66
%Real estate - construction


18.59
%

15.10
%

9.95
%

6.91
%

6.44
%Real estate - mortgage (commercial and residential)


61.64
%

60.93
%

63.18
%

64.75
%

67.15
%Installment loans to individuals and other


5.45
%

8.81
%

10.16
%

11.86
%

12.83
%100.15
%

100.04
%

100.06
%

100.05
%

100.08
%Deferred loan fees and unearned interest, net


-0.15
%

-0.04
%

-0.06
%

-0.05
%

-0.08
%100.00
%

100.00
%

100.00
%

100.00
%

100.00
%Allowance for loans losses


-1.88
%

-2.18
%

-2.47
%

-1.41
%

-1.02
%Loans, net


98.12
%

97.82
%

97.53
%

98.59
%

98.98
%  
 The mix of the loan portfolio continued to shift in 2003 as loans secured by real estate increased to represent 82.99% of the total portfolio and installment loans to individuals and other loans decreased to 5.45% of the portfolio. Overall, the loan portfolio decreased $16.6 million, or 2.9%, from $555.2 million at the beginning of the year to $538.6 million at year end. The largest category in our portfolio, commercial and residential real estate loans, has held at approximately the same level as a percentage of the total portfolio since the end of 2002. However, the breakdown within this category between commercial real estate and residential mortgages has changed. Commercial real estate loans increased $9.95 million, or 5.57%, during 2003, while residential mortgages decreased $16.21 million, or 10.15%, during the year. At the end of 2003, loans secured by commercial real estate represented 56.8% of the category, compared to 52.81% of the category one year earlier. Our growth in residential construction lending in Henry County and its surrounding counties was the primary reason for the $16.3 million increase our construction and development loans during 2003. At the end of 2003, we had $64.8 million in residential construction loans outstanding that were originated from the Henry County office.
   19  A summary of loans from each market outstanding at December 31, 2003 is presented in the following table.
   South Georgia
North Georgia
FloridaMarket
Market
Market
Treasury
Total(Dollars in Thousands)Commercial and financial

$
36,019

$
13,310

$
4,444

$
76

$
53,849Agricultural (including loans secured by farmland)


22,454


1,258


-


359


24,071Real estate - construction


15,709


71,597


5,045


7,799


100,150Real estate - mortgage (commercial and residential)


189,834


92,388


32,638


17,144


332,004Installment loans to individuals and others


22,555


1,307


400


5,104


29,366286,571


179,860


42,527


30,482


539,440Deferred loan fees and unearned interest, net


(162
)

(80
)

(537
)

(17
)

(796
)286,409


179,780


41,990


30,465


538,644Allowance for loan losses


(6,584
)

(2,375
)

(749
)

(431
)

(10,139
)Loans, net

$
279,825

$
177,405

$
41,241

$
30,034

$
528,505   
 In addition to the geographic concentrations noted in the tables above, we had approximately $7.6 million in loans secured by real estate in the Florida panhandle to customers of our South Georgia market.
   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.
   Commercial

Real Estate -
Real Estate -
All OtherAs of December 31, 2003

& Financial
Agricultural
Construction
Mortgage
Loans(Dollars in Thousands)Due in one year of less

$
24,645

$
12,027

$
91,326

$
92,591

$
17,414Due after one year through five years


20,088


11,752


7,192


184,243


10,573Due after five years


9,116


292


1,632


55,170


1,379Total

$
53,849

$
24,071

$
100,150

$
332,004

$
29,366Of the above loans maturing after one year,those with predetermined fixed rates

$
8,837

$
3,526

$
12

$
84,058

$
11,389those with floating or adjustable rates


20,367


8,518


8,812


155,355


563Total maturing after one year

$
29,204

$
12,044

$
8,824

$
239,413

$
11,952  
 While we do make some long-term, fixed rate commercial real estate loans, with interest rates near forty 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.
   20 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,

2003
2002
2001
2000
1999(Dollars in Thousands)Loans accounted for on a nonaccrual basis

$
7,048

$
10,378

$
10,581

$
2,430

$
2,395Accruing loans which are contractually past due90 days or more as to principal or interest payments


-


-


1,598


509


273Troubled debt restructurings not included above


1,168


1,217


-


-


-Other impaired loans


-


-


-


4,433


-Total nonperforming loans

$
8,216

$
11,595

$
12,179

$
7,372

$
2,668
   
 Total nonperforming loans decreased $3.4 million, or 29.1%, during 2003, with most of the decrease coming by way of foreclosure on a $2.7 million real estate and golf course development loan in August. Included in the group of nonperforming loans left at December 31, 2003, are loans totaling $3.2 million, or 39.3% of the total, that are due from three separate borrowers. Two of the three borrowers, whose debts with the Bank total $1.6 million, are farmers whose loans are secured by farmland and agricultural equipment. The other borrower is in bankruptcy and owes the Bank $1.6 million. The $1.2 million troubled debt restructuring included in the table above is due from one customer whose loans were restructured through bankruptcy. The loans are secured by commercial real estate and have been performing under the restructured terms.
   Included in nonperforming loans at the beginning of 2002, were loans totaling $3.3 million due from one commercial borrower. These loans were partially guaranteed by the U. S. Department of Agriculture (the USDA). We wrote-off the unguaranteed portions of these loans in December 2000 when it became apparent the borrower could no longer adequately service the debt. In September 2002, after an unsuccessful effort to collect the loans from the borrower, the remaining balance of these loans were charged-off and a formal claim was filed with the USDA for a recovery of the guaranteed portion plus uncollected interest and legal and collection fees. Our claim was officially denied by the USDA in the fourth quarter of 2003, and to date, attempts to settle our claim through mediation have been unsuccessful. We may continue to pursue a recovery through the courts if necessary, but at this time, we can provide no assurances as to the timing or amount of a recovery, if any. Through the end of 2003, we have spent approximately $152,000 in legal fees on this matter.
   At December 31, 2003, we had $5.59 million in total delinquent loans (loans past due 30 days or more), or 1.04% of total loans. This is a significant decrease from 1.72% one year ago and a high of 4.33% at March 31, 2002.
   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 but not collected 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 until the loan is returned to accrual status. For the year ended December 31, 2003, the gross interest income that would have been recorded if our nonperforming loans had been current in accordance with their original terms was approximately $768,000. The amount of interest income on the above nonperforming loans that was included in net income for the year ended December 31, 2003 was approximately $143,000.
   The allowance for loan losses as a percentage of nonperforming loans was 123.4% at December 31, 2003, compared to 104.3% at December 31, 2002. The allowance for loan losses related to our nonperforming loans amounted to $2.4 million and $2.6 million at December 31, 2003 and 2002, respectively.
   21 
 Allowance For Loan Losses
   At December 31, 2003, the allowance as a percent of total loans was 1.88%, compared to 2.18% at December 31, 2002. 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 $200,000 that have been identified for potential credit weakness are reviewed quarterly by a management committee to further enhance 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 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 SFAS No. 114. Individual loans with amounts due in excess of $500,000 that have been identified for potential credit weakness are 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, 2003, we had $1.58 million in specific reserves on $4.75 million in individually evaluated impaired loans. That is a slight increase over the $1.39 million in specific reserves assessed on $5.67 million in identified impaired loans at December 31, 2002.
   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, 2003, we had $4.03 million in general reserves allocated to $73.30 million rated and delinquent loans. This is a $2.56 million decrease from the $6.59 million reserved on $71.30 million rated and delinquent loans at December 31, 2002. The decrease is due to improvement in the more severe rating categories over the past twelve months.
   The third component 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; andeffects of changes in credit concentrations.  22 
 The quantitative risk factors used in determining these general reserves require a high degree of management judgment. At December 31, 2003, we had $4.53 million in general reserves compared to $4.12 million one year ago. While we have seen improving trends in may of the environmental factors, the general reserve increased slightly over last year primarily due to additional caution taken into consideration for our increased concentration in residential construction lending and our entering into new markets.
   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.
   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,

2003
2002
2001
2000
1999(Dollars in Thousands)Balance at beginning of year

$
12,097

$
15,765

$
8,185

$
5,037

$
5,172Charge-offs:Commercial, financial and agricultural


365


3,771


1,619


680


444Real estate - construction


9


-


2,001


110


13Real estate - mortgage (commercial and residential)


1,167


1,752


538


393


191Installment loans to individuals and other loans


1,578


1,079


675


401


5683,119


6,602


4,833


1,584


1,216Recoveries:Commercial, financial and agricultural


673


89


55


59


10Real estate - construction


-


-


-


-


-Real estate - mortgage (commercial and residential)


180


119


72


72


-Installment loans to individuals and other loans


308


151


66


51


861,161


359


193


182


96Net charge-offs


1,958


6,243


4,640


1,402


1,120Additions provided to the allowancecharged to operations


-


2,575


12,220


4,099


985Allowance for loan losses of acquired bank


-


-


-


451


-Balance at end of year

$
10,139

$
12,097

$
15,765

$
8,185

$
5,037Average balance of loans outstanding

$
540,787

$
586,712

$
616,156

$
534,340

$
467,149Ratio of net charge-offs during the year to averageloans outstanding during the year


0.36
%

1.06
%

0.75
%

0.26
%

0.24
%  
 Our level of net charge-offs decreased from a five-year high of 1.06% in 2002 to 0.36% in 2003. While we still had a high level of charge-offs in 2003, an increase in recoveries helped to offset the losses in the year.
   23 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,

2003
2002
2001
2000
1999Percent of

Percent of

Percent of

Percent of

Percent ofLoans in

Loans in

Loans in

Loans in

Loans inCategory

Category

Category

Category

Categoryto Total

to Total

to Total

to Total

to TotalAmount
Loans
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans(Dollars in Thousands)Commercial, financialand agricultural

$
2,312


14.4
%
$
2,422


15.2
%
$
2,823


16.7
%
$
1,203


16.5
%
$
687


13.7
%Real estate -construction


1,168


18.6
%

1,293


15.1
%

1,572


9.9
%

973


6.9
%

324


6.4
%Real estate -mortgage


5,349


61.6
%

7,660


60.9
%

9,244


63.2
%

4,779


64.7
%

3,380


67.1
%Installment loans toindividuals


549


5.4
%

722


8.8
%

2,126


10.2
%

1,230


11.9
%

646


12.8
%Unallocated


761





-





-





-





-Total

$
10,139


100.0
%
$
12,097


100.0
%
$
15,765


100.0
%
$
8,185


100.0
%
$
5,037


100.0
%
   
 Deposits
   The following table summarizes average deposits and related weighted average rates of interest paid for each of the three years presented.
 2003
2002
2001For the Year Ended December 31,

Amount
Rate
Amount
Rate
Amount
Rate(Dollars in Thousands)Noninterest-bearing demand

$
90,444


-

$
84,476


-

$
74,884


-Interest-bearing demand


167,215


0.84
%

167,986


1.39
%

141,314


2.56
%Savings


39,445


0.71
%

38,289


1.12
%

34,535


2.12
%Time


279,768


3.04
%

350,697


4.08
%

443,486


6.09
%Total

$
576,872


1.77
%
$
641,448


2.66
%
$
694,219


4.52
%  
 The maturities of time deposits of $100,000 or more as of December 31, 2003 are summarized below.
   Amount (in thousands)Three months or less

$
20,224Over three through six months


38,291Over six months through one year


19,666Over one year


4,651Total

$
82,832
   
 24
 With a continued decline in loan volume in 2003, we elected not to compete aggressively for time deposits of $100,000 or more. Within our portfolio of time deposits, those with balances of $100,000 or more decreased by $15.9 million, or 16%, during the year. Other time deposits also declined as we continued to lower our offering rates during the year and depositors moved into interest-bearing demand and savings accounts. Along with the decrease in volume, the average rate paid on time deposits dropped 104 basis points from 4.08% in 2002 to 3.04% in 2003. The decrease in both volume and rate on these deposits allowed us to improve our net interest margin and keep our net interest income from falling to a less profitable level.
    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, 2003, our liquidity ratio was 19.27% and our net noncore funding dependency ratio was 23.53%. Our liquidity and funding policy provides that we should 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%. Since year end we are aware of no trends or events likely to result in a material change in our ability to meet the borrowing needs and deposit withdrawal requirements of our customers.
   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. Contractual investment securities that mature within one year total $11.2 million. However, 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.
   Our liquidity from investments is somewhat limited since we pledge certain investments to secure public deposits, certain borrowing arrangements, and for other purposes. At December 31, 2003, approximately 56.1% of our $126.8 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. Since our loan volume has been down, we have not been aggressive in retaining time deposits. As a result, time deposits in total have decreased $45.8 million, or 15%, since December 31, 2002 and we have repaid $12.7 million in advances from the Federal Home Loan Bank of Atlanta (the FHLB) as they matured. In addition, we repaid $14.5 million in FHLB advances in the third quarter of 2003 that had a remaining average life to maturity of over five years and incurred a $1.44 million prepayment penalty. The average rate on these advances was 434 basis points higher than the current federal funds rate that we purchased to retire the advances. Our calculations indicate that we should achieve a significant savings in interest expense over the next five years due to paying off these advances.
   During the second quarter of 2003, we executed two leverage strategies totaling $45 million to take advantage of low short-term interest rates and provide attractive margins even as we expect to move into a tightening cycle later in 2004. The first $35 million was used in an amortizing leverage strategy where we acquired mortgage-backed securities with $35 million in advances from the FHLB. The remaining $10 million was used in a liability-sensitive leverage strategy where we purchased a callable agency bond with a $10 million repurchase agreement.
   25 
 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 4.98%) 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.
   At December 31, 2003, we had $28.5 million in an available credit line with the FHLB and an additional $19.7 million in unsecured Fed Funds lines of credit available with correspondent banks.
   Contractual Obligations
 Summarized below are our contractual obligations as of December 31, 2003.
 Less than
1 to 3
3 to 5
More thanContractual Obligations

Total
1 year
years
years
5 years(Dollars in Thousands)FHLB Advances

$
44,714

$
387

$
3,859

$
10,323

$
30,145Operating Lease Obligations


518


132


205


181


-Guaranteed Preferred Beneficial Interestsin Debentures (trust preferred securities)


10,000


-


-


-


10,000$
55,232

$
519

$
4,064

$
10,504

$
40,145  
 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, 2003, we had outstanding commitments to extend credit through open lines of credit of approximately $84.5 million and outstanding standby letters of credit of approximately $2.8 million.
   Commitments of Capital
 At December 31, 2003, there are no binding commitments for material capital expenditures outstanding.
   Stockholders Equity
 We are required to comply with capital adequacy standards established by our regulatory agencies. See the section titled Capital Adequacy under Supervision and Regulation in Item 1 of this document for more information on the regulatory capital adequacy standards.
   The following table summarizes our consolidated regulatory capital ratios at December 31, 2003, 2002 and 2001.
 MinimumRegulatory2003
2002
2001
RequirementTotal Capital to Risk Weighted Assets


15.1
%

14.0
%

12.0
%

8.0
%Tier 1 Capital to Risk Weighted Assets


13.9
%

12.7
%

10.7
%

4.0
%Tier 1 Capital to Average Assets (Leverage Ratio)


11.0
%

10.0
%

8.0
%

4.0
%
   
 26
 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 2003, on a tax equivalent basis, decreased by $466,000, or 1.7%, over 2002. Interest income decreased $8.0 million, or 16.7%, while interest expense decreased by $7.5 million, or 37.6%, during 2003. The decrease in interest income is primarily the result of a 75 basis point drop in the average yield on earning assets during the year, from 6.70% in 2002 to 5.95% in 2003. The majority of the decrease in interest expense is also the result of a decline in rates. The average rates paid on interest-bearing liabilities decreased 102 basis points, from 3.22% in 2002 to 2.20% in 2003.
   Net interest income, on a tax equivalent basis, for 2002 increased by $1 million, or 3.7%, over 2001. The increase in 2002 from 2001 was the result of the combination of both a $60.8 million decrease in the volume of average earning assets, accompanied by the 135 basis point drop in the average yield on those earning assets for the same period and a $71.8 million, or 10.4% decrease in the volume of average earning liabilities, accompanied by the 192 basis point decrease in the average rate paid on those funds.
   The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin increased from 3.92% in 2002 to 4.11% in 2003, a 19 basis point improvement. Although our net interest margin improved during 2003, our ability to continue to improve our net interest margin going forward will be a challenge as long as interest rates hold at or slide even lower than the current levels.
   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, 2003, there was no provision for loan losses recorded, compared to $2.6 million for the same period in 2002. The decline is due to a shrinking loan portfolio, an improvement in the level of total nonperforming loans, and an improvement in several environmental factors previously discussed. Based on our assessments of the allowance for loan losses during 2003, no provision was needed.
   27 
 Noninterest Income
   The following table summarizes noninterest income during the last three years.
 For the Year Ended December 31,

2003

2002

2001Percent

PercentChange

ChangeAmount
2003 vs. 2002
Amount
2002 vs. 2001
AmountService charges on deposit accounts

$
4,926


-7.0
%
$
5,295


-5.0
%
$
5,575Mortgage origination fees


715


-14.7
%

838


19.4
%

702Brokerage commissions and fees


469


-3.3
%

485


58.5
%

306ATM / debit card fee income


357


8.5
%

329


149.2
%

132Other commissions and fees


253


8.6
%

233


1.3
%

385Securities transactions, net *


1,416


442.5
%

261


-85.0
%

1,741Earnings of bank-owned life insurance


472


-1.3
%

478


-2.8
%

492Earnings of unconsolidated subsidiary


-


-


-


-


590Gain on sale of unconsolidated subsidiary *


-


-


-


-


1,462Loss on disposal / write-down of assets *


(258
)

-5.1
%

(272
)

-2.8
%

(1
)Other noninterest income


266


-27.3
%

366


-32.1
%

539Total Noninterest Income

$
8,616


7.5
%
$
8,013


-32.8
%
$
11,923* Non-recurring items for discussion purposes
 
 Noninterest income increased 7.5% in 2003, from $8 million in 2002 to $8.6 million in 2003. As a percentage of average assets, noninterest income, excluding securities transactions and other non-recurring gains and losses, has been approximately 1.01%, 1.03%, and 1.03% for each of the last three years ending December 31, 2003, 2002 and 2001, respectively.
   Service charges on deposit accounts dropped slightly from 2002 to 2003 as we continued to promote a free checking product, thus reducing the monthly service fees. The fee income generated from an overdraft privilege product that was launched in March 2001 and resulted in an increase in revenues that year also tapered off in both 2002 and 2003.
   Mortgage origination fees dropped 14.7% in 2003 due to a decrease in the refinancing activity during the year. If the demand for refinancing slows during 2004, we expect our mortgage origination fee income to decline as well.
   Brokerage income decreased 3.3% in 2003 during the fourth year of that operation. In February 2004, the Bank entered into a new agreement with a third party to provide brokerage services for our customers. Under this new agreement, the Banks brokerage income will decrease; however, the brokerage expenses associated with providing these services under the old agreement will no longer be incurred. We had $430,000, $641,000, and $366,000 in brokerage expenses that is included in noninterest expense in 2003, 2002 and 2001, respectively.
   Fee income from ATM and debit cards increased 8.5% in 2003 as the volume of point-of-sale transactions has continued to increase from previous years.
   Gains on securities transactions increased nearly $1.2 million in 2003. There was a $1.0 million gain on the sale of stock in Community Financial Services, Inc. in 2003.
   No earnings were recorded from our equity investment in an unconsolidated subsidiary in 2002 or 2003 because we sold our 50% equity interest in December 2001 for a gain of approximately $1.5 million. In 2002 we recorded a $100,000 gain on the sale of our branch office in Richmond Hill, Georgia. Also in 2002, we recognized a $372,000 write-down on the impairment of a branch office in Ocala, Florida based on an updated appraisal, which failed to support the carrying value.
   28
 Noninterest Expense


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

For the Year Ended December 31,

2003

2002

2001Percent

PercentChange

ChangeAmount
2003 vs. 2002
Amount
2002 vs. 2001
AmountSalaries and wages

$
12,136


0.3
%
$
12,097


-10.6
%
$
13,535Deferred loan cost


(436
)

-62.9
%

(1,176
)

32.6
%

(887
)Employee benefits


3,196


8.0
%

2,958


8.9
%

2,716Net occupancy expense of premises


1,799


4.8
%

1,716


8.6
%

1,580Furniture and equipment expense


2,355


-1.7
%

2,396


-6.1
%

2,553Amortization of intangible assets


-


-


-


-


409Advertising and business development


433


-15.4
%

512


-14.8
%

601Supplies and printing


544


-14.7
%

638


-33.1
%

953Telephone and internet charges


455


-28.7
%

638


15.0
%

555Postage and courier


563


-12.6
%

644


5.1
%

613Legal and accounting fees


528


-40.2
%

883


97.5
%

447Conversion and consolidation costs


-


-


-


-


313Service charges and fees


484


-19.7
%

603


-6.4
%

644Loss on early retirement of debt


1,438


-


-


-


-Other noninterest expense


2,207


-10.2
%

2,459


-14.9
%

2,889Total Noninterest Expense

$
25,702


5.5
%
$
24,368


-9.5
%
$
26,921
 
 As a percentage of average assets, noninterest expense was approximately 3.49%, 3.12%, and 3.18% for each of the last three years ending December 31, 2003, 2002 and 2001, respectively. During 2003, we incurred a $1.44 million loss on early retirement of debt in order to pay off higher rate FHLB borrowings, saving significant interest expense over the next few years. Excluding this loss, noninterest expense would have totaled $24.3 million, or 3.30% of average assets for 2003.
   The 0.3% increase in salaries and wages is the net result of annual raises and promotions offset by a decline in the number of employees from 314 (full time equivalents) at the end of 2002 to 281 at the end of 2003. Deferred loan cost, a credit against salaries and wages, decreased 62.9%, from 2002 and resulted in an increase in expense reported during 2003, compared to the period ending December 31, 2002. The decline in the deferral of loan costs is due to a decline in loan volume experienced during 2003 compared to 2002. Employee benefits increased 8.0% due primarily to an increase in health insurance premiums.
   Occupancy expense increased 4.8% in 2003 due to the addition of new facilities and an increase in property taxes, insurance, and utilities. Furniture and equipment expense decreased 1.7% in 2003 due primarily to a $70,000 decrease in depreciation expense.
   Legal and accounting fees decreased by 40.2% in 2003. During 2002 we experienced an increase in legal fees for the collection and recovery of problem loans and regulatory matters.
   All other major expense categories have decreased due to efficiencies gained from the charter consolidation process, the utilization of technology, and tighter budgeting and cost control measures.
   Income Taxes
   The provision for income tax expense as a percentage of pre-tax income was 32.1%, 30.7% and 242.2% for 2003, 2002 and 2001, respectively. The difference between the effective rate and the statutory federal rate of 34% 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. The calculation for 2001 is affected by the pre-tax operating loss of $103,000, which resulted in a net tax benefit of $251,000.
  29
    Fourth Quarter Results
   For the fourth quarter of 2003, our net income was $1.9 million, or $0.19 per diluted share, compared to net income of $1.3 million, or $0.13 per share, in the fourth quarter of 2002. In the fourth quarter of 2002, we provided $1.1 million to the allowance for loan losses, compared to no provision in 2003. Our net interest margin for the fourth quarter of 2003 was 4.14% compared to 4.18% in 2002. The average yield on earning assets fell 88 basis points to 5.69% in the fourth quarter of 2003 from 6.57% in 2002. However, the average rate paid on interest-bearing liabilities improved 94 basis points to 1.87% in 2003 from 2.81% in 2002.
   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 effect 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.
   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.
   30
 
 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, 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, 2003. 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 do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities, which are commonly held pass through 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. However, with interest rates at historic lows and the shape of the interest rate curve, the Company has exceeded policy limits by adjusting the balance sheet to a more asset-sensitive position. At December 31, 2003, our one-year management-adjusted gap ratio of 1.36 was outside of our policy guidelines due to our preference to offer floating rate loans over fixed rate loans at this time. This exception to policy, while monitored closely, is an acceptable risk that positions our financial condition to benefit from an increase in interest rates.
   31
 
 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 DefinedRate Sensitive Assets (RSA)

$
361,839

$
380,434

$
419,826Rate Sensitive Liabilities (RSL)


324,962


386,615


454,417RSA minus RSL (Gap)

$
36,877

$
(6,181
)
$
(34,591
)Gap Ratio (RSA/RSL)


1.11


0.98


0.92Management-AdjustedRate Sensitive Assets (RSA)

$
373,609

$
403,973

$
466,164Rate Sensitive Liabilities (RSL)


140,546


202,200


343,739RSA minus RSL (Gap)

$
233,063

$
201,773

$
122,425Gap Ratio (RSA/RSL)


2.66


2.00


1.36
   
 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. As of year end, the simulation model projected net interest income would increase 16.43% over the next year if market rates immediately rose by 200 basis points. On the other hand, the model projected net interest income to decrease 31.35% over the next year if market rates immediately fell by 200 basis points. The high volatility in our results 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, and technically, we were outside of policy guidelines at year end. However, this exception was mitigated because a further 200 basis point drop was not realistic given that the federal funds rate stood at 1.00%. If market rates immediately fell by 100 basis points, a more plausible but still unlikely scenario, our model projected net interest income to decrease 14.92% over the next year.
   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.
 
 Effect on Net Interest IncomeMarketRate Change

Gradual

Immediate+300 bps

8.17%

24.66%+200 bps

7.14%

16.43%+100 bps

4.56%

8.21%-100 bps

-10.34%

-14.92%
   
 32
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   Quarterly Financial Summary for 2003 and 2002
 (The sum of the quarterly results presented may not agree with the results for the full year due to rounding.)
   Quarterly Period EndingMarch 31
June 30
September 30
December 31Year ended December 31, 2003:Interest income

$
10,416

$
10,075

$
9,892

$
9,657Interest expense


3,593


3,254


2,972


2,648Net interest income


6,823


6,821


6,920


7,009Provision for loan losses


-


-


-


-Net interest income after provision for loan losses


6,823


6,821


6,920


7,009Other income


2,161


1,887


2,865


1,702Other expenses


6,305


6,225


7,343


5,829Income before income taxes


2,679


2,483


2,442


2,882Income tax


854


751


760


995Net income

$
1,825

$
1,732

$
1,682

$
1,887Basic earnings per share

$
0.19

$
0.18

$
0.19

$
0.19Diluted earnings per share

$
0.19

$
0.18

$
0.18

$
0.19Year ended December 31, 2002:Interest income

$
12,990

$
12,116

$
11,619

$
11,354Interest expense


6,069


5,150


4,627


4,142Net interest income


6,921


6,966


6,992


7,212Provision for loan losses


456


519


513


1,088Net interest income after provision for loan losses


6,465


6,447


6,479


6,124Other income


2,186


1,973


2,012


1,842Other expenses


6,113


5,951


6,107


6,197Income before income taxes


2,538


2,469


2,384


1,769Income tax


800


769


734


511Net income

$
1,738

$
1,700

$
1,650

$
1,258Basic earnings per share

$
0.18

$
0.18

$
0.18

$
0.13Diluted earnings per share

$
0.18

$
0.18

$
0.18

$
0.13
 33
 
 Managements Responsibility For Financial Reporting
 We are responsible for the preparation of the financial statements, related financial data and other information in this Annual Report. The financial statements are prepared in accordance with accounting principles generally accepted in the United States and include amounts based on managements estimates and judgment where appropriate. Financial information appearing throughout this Report is consistent with the financial statements.
   Our accounting system, which records, summarizes and reports financial transactions, is supported by an internal control structure which provides reasonable assurance that assets are safeguarded and that transactions are recorded in accordance with our policies and established accounting procedures. As an integral part of the internal control structure, we maintain a professional staff of internal auditors who monitor compliance with and assess the effectiveness of the internal control structure.
   The Audit Committee of the Board of Directors, composed solely of outside directors, meets regularly with management, internal auditors and independent public accountants to review matters relating to financial reporting, internal control structure and the nature, extent and results of the audit effort. The independent public accountants and the internal auditors have access to the Audit Committee with or without management present.
   The financial statements have been audited by Mauldin & Jenkins, LLC, independent public accountants, who rendered an independent opinion on our financial statements. Their appointment was recommended by the Audit Committee and approved by the Board of Directors. Their examination provides an objective assessment of the degree to which we meet our responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include reviewing the internal control structure to determine the timing and scope of audit procedures and performing selected tests of transactions and records as they deem appropriated. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are fairly presented in all material respects.
 
 /s/ Michael E. Ricketson

/s/ Donald J. Torbert, Jr.

/s/ Laura A. HancockMichael E. Ricketson

Donald J. Torbert, Jr., CPA

Laura A. Hancock, CPAPresident and

Executive Vice President and

Senior Vice President andChief Executive Officer

Chief Financial Officer

Controller




34














INDEPENDENT AUDITOR'S REPORT
   To the Board of Directors
 PAB Bankshares, Inc.
 Valdosta, Georgia
 
 
 We have audited the accompanying consolidated balance sheets of PAB Bankshares, Inc. and subsidiariesas of December 31, 2003 and 2002, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
 
 We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PAB Bankshares, Inc. and subsidiaries, as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
 
  
 
 
 
 Albany, Georgia
 January 30, 2004
 
 
  2303 DAWSON ROAD  POST OFFICE BOX 71549  ALBANY, GEORGIA 31708-1549  229-446-3600  FAX 229-446-3664  www.mjcpa.com
 MEMBERS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS  RSM INTERNATIONAL




35




PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2003 AND DECEMBER 31, 20022003


2002ASSETSCash and due from banks

$
22,920,218

$
25,199,278Interest-bearing deposits in other banks


505,409


974,848Federal funds sold


330,187


30,784,000Investment securities


126,825,013


98,025,604Loans


538,643,842


555,238,242Allowance for loan losses


(10,139,114
)

(12,096,988
)Net loans


528,504,728


543,141,254Premises and equipment, net


20,047,375


22,555,234Goodwill


5,984,604


5,984,604Cash value of bank-owned life insurance policies


10,422,078


9,950,135Foreclosed assets


4,577,824


1,284,487Other assets


10,623,956


10,011,854Total assets

$
730,741,392

$
747,911,298LIABILITIES AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing demand

$
94,882,871

$
87,667,055Interest-bearing demand and savings


202,753,493


213,981,795Time


259,280,172


305,081,383Total deposits


556,916,536


606,730,233Federal funds purchased and securities sold under agreements to repurchase


36,919,790


17,520,242Advances from the Federal Home Loan Bank of Atlanta


44,714,043


36,144,910Guaranteed preferred beneficial interests in debentures (trust preferred securities)


10,000,000


10,000,000Other liabilities


6,128,857


6,251,175Total liabilities


654,679,226


676,646,560Stockholders' equity:Preferred stock, no par value; 1,500,000 shares authorized; no shares issued


-


-Common stock, no par value; 98,500,000 shares authorized;9,484,660 and 9,430,413 shares issued


1,217,065


1,217,065Additional paid-in capital


29,314,700


28,785,476Retained earnings


45,651,500


40,228,327Accumulated other comprehensive income (loss)


(121,099
)

1,033,870Total stockholders' equity


76,062,166


71,264,738Total liabilities and stockholders' equity

$
730,741,392

$
747,911,298See accompanying notes to consolidated financial statements.




36








|PAB BANKSHARES, INC. AND SUBSIDIARIES                       
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                           
|YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001                
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income:                                            
|Interest and fees on loans                                  
|Interest and dividends on investment securities:            
|Taxable                                                     
|Nontaxable                                                  
|Other interest income                                       
|                                                            
|Total interest income                                       
|                                                            
|                                                            
|Interest expense:                                           
|Interest on deposits                                        
|Interest on Federal Home Loan Bank advances                 
|Interest on other borrowings                                
|Total interest expense                                      
|                                                            
|Net interest income                                         
|                                                            
|                                                            
|Provision for loan losses                                   
|Net interest income after provision for loan losses         
|                                                            
|Other income:                                               
|Service charges on deposit accounts                         
|Other fee income                                            
|Securities transactions, net                                
|Equity in earnings of unconsolidated subsidiary             
|Other noninterest income                                    
|                                                            
|Total other income                                          
|                                                            
|                                                            
|Other expenses:                                             
|Salaries and employee benefits                              
|Occupancy expense of premises                               
|Furniture and equipment expense                             
|Amortization of goodwill and intangible assets              
|Loss on early retirement of debt                            
|Other noninterest expense                                   
|                                                            
|Total other expenses                                        
|                                                            
|                                                            
|Income (loss) before income tax expense (benefit)           
|Income tax expense (benefit)                                
|                                                            
|                                                            
|Net income                                                  
|                                                            
|Earnings per common share:                                  
|Basic                                                       
|                                                            
|Diluted                                                     
|                                                            
|                                                            
|See accompanying notes to consolidated financial statements.



37










|PAB BANKSHARES, INC. AND SUBSIDIARIES                       
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)      
|YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001                
|                                                            
|                                                            
|                                                            
|                                                            
|                                                            
|Net income                                                  
|                                                            
|Other comprehensive income (loss):                          
|Unrealized holding gains (losses) arising during the period,
|net of tax (benefit) of ($113,679); $322,761; and $442,595  
|Reclassification adjustment for gains included in net       
|income, net of tax of $481,305; $88,801; and $591,845       
|                                                            
|                                                            
|                                                            
|                                                            
|Comprehensive income (loss)                                 
|                                                            
|                                                            
|See accompanying notes to consolidated financial statements.











|
|
|
|
|








PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001**Accumulated**Common Stock
Additional

OtherPaid-in
Retained
ComprehensiveShares


Par Value


Capital


Earnings


Income (Loss)


TotalBalance, December 31, 2000


9,501,947

$
1,217,065

$
29,754,284

$
38,939,722

$
869,409

$
70,780,480Net income


-


-


-


147,160


-


147,160Other comprehensive loss


-


-


-


-


(289,840
)

(289,840
)Cash dividends declared,$.44 per share


-


-


-


(4,168,984
)

-


(4,168,984
)Stock acquired and cancelledunder stock repurchase plan


(123,534
)

-


(1,293,808
)

-


-


(1,293,808
)Stock options exercised


31,500


-


196,875


-


-


196,875Balance, December 31, 2001


9,409,913

$
1,217,065

$
28,657,351

$
34,917,898

$
579,569

$
65,371,883Net income


-


-


-


6,346,839


-


6,346,839Other comprehensive income


-


-


-


-


454,301


454,301Cash dividends declared,$.11 per share


-


-


-


(1,036,410
)

-


(1,036,410
)Stock options exercised


20,500


-


128,125


-


-


128,125Balance, 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,$.18 per share


-


-


-


(1,702,345
)

-


(1,702,345
)Stock options exercised


54,247


-


529,224


-


-


529,224Balance, December 31, 2003


9,484,660

$
1,217,065

$
29,314,700

$
45,651,500

$
(121,099
)
$
76,062,166See accompanying notes to consolidated financial statements.















39






PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2003, 2002 AND 20012003


2002


2001CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
7,125,518

$
6,346,839

$
147,160Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation, amortization and accretion, net


3,574,422


3,112,790


2,674,847Provision for loan losses


-


2,575,000


12,220,250Provision for deferred taxes


879,072


1,180,948


(3,343,255
)Net realized gain on securities transactions


(1,415,603
)

(261,178
)

(1,740,720
)Net loss on disposal or write down of assets


257,770


271,909


839Gain on sale of interest in unconsolidated subsidiary


-


-


(1,461,739
)Equity in earnings of unconsolidated subsidiary


-


-


(590,370
)Dividends received from unconsolidated subsidiary


-


-


350,000Increase in cash value of bank-owned life insurance


(471,943
)

(478,199
)

(491,579
)Increase in deferred compensation accrual


138,055


88,063


1,156,175Increase (decrease) in retirement and severance accruals


(364,552
)

(402,362
)

1,436,388Decrease in interest receivable


373,253


2,870,401


443,054Increase (decrease) in interest payable


(475,207
)

(1,981,829
)

80,769(Increase) decrease in taxes receivable


(151,677
)

628,882


144,270Net change in other assets and other liabilities


(32,160
)

512,462


(1,574,011
)Net cash provided by operating activities


9,436,948


14,463,726


9,452,078CASH FLOWS FROM INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in other banks


469,439


14,965,267


(2,526,095
)(Increase) decrease in federal funds sold


30,453,813


(6,579,000
)

19,210,000Purchase of debt securities


(112,848,419
)

(76,717,640
)

(72,833,848
)Proceeds from sales and calls of debt securities


46,721,110


64,734,595


16,468,305Proceeds from maturities and paydowns of debt securities


34,350,382


27,114,382


30,620,307Purchase of equity securities


(1,444,700
)

(980,150
)

(1,637,600
)Redemption of equity securities


2,873,251


1,688,500


85,000Net (increase) decrease in loans


8,879,190


63,295,276


(63,674,464
)Purchase of premises and equipment


(903,987
)

(3,203,850
)

(3,332,730
)Proceeds from disposal of assets


2,078,292


2,218,559


1,799,167Proceeds from sale of interest in unconsolidated subsidiary


-


-


1,800,000Net proceeds from sale of branch office


-


7,748,200


-Proceeds from redemption of life insurance policies


-


-


60,998Net cash provided by (used in) investing activities


10,628,371


94,284,139


(73,960,960
)




40






PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2003, 2002 AND 20012003


2002


2001CASH FLOWS FROM FINANCING ACTIVITIESNet increase (decrease) in deposits


(49,813,697
)

(109,503,044
)

83,217,921Net increase in federal funds purchased and securities sold underrepurchase agreements


19,399,548


1,811,621


3,543,030Advances from Federal Home Loan Bank


36,269,500


331,000


700,000Payments on Federal Home Loan Bank advances


(27,700,367
)

(2,414,568
)

(21,172,804
)Cash paid to former stockholders on acquisition


-


-


(7,667,280
)Proceeds on issuance of guaranteed preferred beneficialinterest in debentures


-


-


10,000,000Dividends paid


(1,038,587
)

(2,071,500
)

(4,179,108
)Proceeds from the exercise of stock options


529,224


128,125


196,875Issuance of preferred stock in REIT subsidiaries


15,000


-


-Repurchase of preferred stock in REIT subsidiaries


(5,000
)

(19,000
)

-Acquisition of stock under stock repurchase plans


-


-


(1,293,808
)Costs capitalized on issuance of guaranteed preferredbeneficial interest in debentures


-


-


(344,500
)Net cash provided by (used in) financing activities


(22,344,379
)

(111,737,366
)

63,000,326Net decrease in cash and due from banks

$
(2,279,060
)
$
(2,989,501
)
$
(1,508,556
)Cash and due from banks at beginning of period


25,199,278


28,188,779


29,697,335Cash and due from banks at end of period

$
22,920,218

$
25,199,278

$
28,188,779SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
12,942,498

$
21,970,490

$
35,519,610Taxes

$
2,633,649

$
1,003,124

$
2,948,358NONCASH INVESTING AND FINANCING TRANSACTIONSIncrease (decrease) in unrealized gains on securities available for sale

$
(1,749,951
)
$
688,114

$
(438,972
)Transfer of premises and equipment to other assets

$
1,323,821

$
-

$
-Transfer of loans to foreclosed assets

$
5,514,057

$
2,280,526

$
1,945,908See accompanying notes to consolidated financial statements.






41





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 primarily conducted 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 originally 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 in the local market areas listed below. The Company and the Bank are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.
   Banking Locations

Number of OfficesSouth 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

1North Georgia Market:McDonough, Henry County, Georgia

1Oakwood, Hall County, Georgia

1Athens, Clarke County, Georgia

1 (loan production office)Florida Market:Ocala, Marion County, Florida

1St. Augustine, St. Johns County, Florida

1 (loan production office)
    In addition to the banking products and services, the Bank offers brokerage, insurance, annuity, and investment planning services to its customers from its office in Valdosta, Georgia.
   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.
 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.
   42 
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  Cash, Due from Banks and Cash Flows
   For purposes of reporting cash flows, cash and 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, including restricted equity securities, without a readily determinable fair value are recorded at cost and 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.
   The amortization of purchase premiums and accretion of discounts are recognized in interest income using the interest method over the life of the securities. Realized gains and losses, 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.
   Loans
  Loans are reported at their outstanding principal balances less unearned income, net deferred fees, 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 of the related loan yield over the life of the loan using a method which approximates a level yield.
   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. 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 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.
   43
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
   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 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. 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 to 10 years for furnature, fixtures and equipment.
   Goodwill
 
 Goodwill represents the excess of cost over the fair value of the net assets purchased in a business combination. 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, 2003.
   There were no changes in the carrying amount of goodwill during the year ended December 31, 2003.
   A summary of net income and earnings per share that would have been reported exclusive of amortization expense recognized related to goodwill for the years ended December 31, 2003, 2002 and 2001 follows.
   2003


2002


2001Net income, as reported

$
7,125,518

$
6,346,839

$
147,160Add back:Goodwill amortization


-


-


351,635Pro forma net income

$
7,125,518

$
6,346,839

$
498,795Earnings per share:Basic- as reported

$
0.75

$
0.67

$
0.02Basic- pro forma

$
0.75

$
0.67

$
0.05Diluted- as reported

$
0.74

$
0.67

$
0.02Diluted- pro forma

$
0.74

$
0.67

$
0.05
  44
  
 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. 1
   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.
   Real Estate Investment Trusts
   In 1999, the Company formed two real estate investment trusts (REITs) and two intermediate REIT holding companies as subsidiaries of the Bank. The REITs 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 REITs. To comply with Federal tax law, a minority interest in the non-voting, cumulative preferred stock of the REITs was issued to certain directors, officers and employees of the Company. The $500 par value preferred stock pays an 8% annual dividend. The total minority interest of the REITs included in other liabilities was $117,000 and $107,000 as of December 31, 2003 and 2002, respectively.
   Stock Based Compensation Plans
 
  At December 31, 2003 the Company had two stock-based employee compensation plans, which are described in more detail in Note 18. 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.
 
 _______________
 1  As of December 31, 2003 and 2002, the total amount in forclosed assets was $4,577,824 and $1,284,487, respectively.
 
  45
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
   Stock Based Compensation Plans, Continued
 
  The following table illustrates the effect on net income and earnings per share for the years ended December 31, 2003, 2002 and 2001 if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
   2003


2002


2001Net income, as reported

$
7,125,518

$
6,346,839

$
147,160Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(230,257
)

(229,407
)

(214,379
)Pro forma net income (loss)

$
6,895,261

$
6,117,432

$
(67,219
)Earnings (loss) per share:Basic - as reported

$
0.75

$
0.67

$
0.02Basic - pro forma

$
0.73

$
0.65

$
(0.01
)Diluted - as reported

$
0.74

$
0.67

$
0.02Diluted - pro forma

$
0.72

$
0.65

$
(0.01
)
   
 Earnings Per Share
   Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. 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 potential common shares. Potential common shares consist of stock options.
   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.
  46
 
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
   Recent Accounting Standards
   In November 2002, the Financial Accounting Stantdards Board (FASB) issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34". The interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. It also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the interpretation did not have a material effect on the Companys financial condition or results of operations.
   In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123". The Statement amends Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect on reported results of operations. The disclosure requirements of the statement are required for fiscal years ending after December 15, 2002 and interim periods beginning after December 15, 2002. The Company has not adopted Statement No. 123 for accounting for stock-based compensation as of December 31, 2003; however all required disclosures of Statement No. 148 are included above under the heading Stock-Based Compensation.
   In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51", and on December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities which replaced FIN 46. The interpretation addresses consolidation by business enterprises of variable interest entities. A variable interest entity is defined as an entity subject to consolidation according to the provisions of the interpretation. The revised interpretation provided for special effective dates for entities that had fully or partially applied the original interpretation as of December 24, 2003. Otherwise, application of the interpretation is required in financial statements of public entities that have interests in special-purpose entities, or SPE's, for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities (i.e., non-SPEs) is required in financial statements for periods ending after March 15, 2004. Application by small business issuers to variable interest entities other than SPEs and by nonpublic entities to all types of variable interest entities is required at various dates in 2004 and 2005. The interpretations have not had a material effect on the Companys financial condition or results of operations.
 
  In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Mandatorily redeemable financial instruments of nonpublic entities are subject to the provisions of the statement for the first fiscal period beginning after December 15, 2003. The adoption of the statement did not have a material effect on the Companys financial condition or results of operations.
  47
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
   The Bank is required to maintain reserve balances in cash or on deposit with correspondent banks and the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $6,374,000 and $6,341,000 at December 31, 2003 and 2002, respectively.
 
 NOTE 3. INVESTMENT SECURITIES
   The amortized cost and approximate fair value of the investment portfolio follows.
   AmortizedCost


GrossUnrealizedGains


GrossUnrealizedLosses


FairValueDecember 31, 2003:U.S. Government agencies

$
57,811,675

$
166,085

$
(649,092
)
$
57,328,668State and municipal securities


9,144,801


274,842


(19,855
)

9,399,788Mortgage-backed securities


50,240,697


354,708


(299,442
)

50,295,963Corporate debt securities


4,364,624


29,012


(39,741
)

4,353,895Equity securities


5,446,699


-


-


5,446,699$
127,008,496

$
824,647

$
(1,008,130
)
$
126,825,013December 31, 2002:U.S. Government agencies

$
25,162,657

$
458,854

$
-

$
25,621,511State and municipal securities


8,462,575


165,692


(13,791
)

8,614,476Mortgage-backed securities


31,316,547


750,493


(1,411
)

32,065,629Corporate debt securities


12,189,928


209,350


(2,719
)

12,396,559Equity securities


19,327,429


-


-


19,327,429$
96,459,136

$
1,584,389

$
(17,921
)
$
98,025,604


48
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 3. INVESTMENT SECURITIES (Continued)
   The amortized cost and fair value of debt securities as of December 31, 2003 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.
   AmortizedCost


FairValueDue in one year or less

$
11,240,287

$
11,259,748Due from one year to five years


15,190,232


15,252,774Due from five to ten years


26,824,716


26,407,082Due after ten years


18,065,865


18,162,747Mortgage-backed securities


50,240,697


50,295,963Equity securities


5,446,699


5,446,699$
127,008,496

$
126,825,013
  
 Securities with a carrying value of approximately $71,249,000 and $48,721,000 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits, certain borrowing arrangements, and for other purposes.
   Gains and losses on sales and calls of investment securities for the years ended December 31, 2003, 2002 and 2001 consist of the following:
   2003


2002


2001Gross gains on securities transactions

$
1,429,011

$
533,742

$
1,740,846Gross losses on securities transactions


(13,408
)

(272,564
)

(126
)Net realized gain on securities transactions

$
1,415,603

$
261,178

$
1,740,720
  
 The following table shows the gross unrealized losses and fair value of securities, aggregated by category, none of which have been in a continuous unrealized loss position for more than twelve months, at December 31, 2003. These unrealized losses are considered temporary because of acceptable investment grades on each security.
   FairValue


UnrealizedLossesU.S. Government agencies

$
27,990,205

$
649,092State and municipal securities


1,742,080


19,855Mortgage-backed securities


38,404,930


299,442Corporate debt securities


2,169,495


39,741Total temporarily impaired securities

$
70,306,710

$
1,008,130
  49
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
   The composition of the loan portfolio as of December 31, 2003 and 2002 follows.
  
 2003


2002Commercial and financial

$
53,849,024

$
62,652,455Agricultural


24,071,141


21,777,425Real estate - Construction


100,150,095


83,836,152Real estate - Mortgage


332,003,534


338,261,422Installment loans to individuals and others


29,189,686


48,682,920Overdrafts


176,240


250,764539,439,720


555,461,138Deferred loan fees and unearned interest, net


(795,878
)

(222,896
)538,643,842


555,238,242Allowance for loan losses


(10,139,114
)

(12,096,988
)$
528,504,728

$
543,141,254
    
 Changes in the allowance for loan losses for the years ended December 31, 2003, 2002 and 2001 follows.
   2003


2002


2001Balance, beginning of year

$
12,096,988

$
15,765,373

$
8,184,641Provision charged to operations


-


2,575,000


12,220,250Loans charged-off


(3,118,821
)

(6,602,334
)

(4,832,799
)Recoveries


1,160,947


358,949


193,281Balance, end of year

$
10,139,114

$
12,096,988

$
15,765,373
   
 At December 31, 2003 and 2002, the total recorded investment in impaired loans amounted to approximately $8,216,000 and $11,595,000, respectively. These loans had a related allowance for loan losses of approximately $2,350,000 and $2,579,000 at December 31, 2003 and 2002, respectively. The average recorded investment in impaired loans during 2003, 2002 and 2001 was approximately $9,894,000, $13,207,000 and $8,839,000, respectively. Interest income recognized on impaired loans for cash payments received in 2003, 2002 and 2001 was approximately $143,000, $199,000 and $59,500, respectively.
   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, 2003 follows.
    Balance, beginning of year

$
9,205,942Advances


9,658,273Repayments


(10,817,632
)Transactions due to changes in related parties


(287,848
)Balance, end of year

$
7,758,735
   
 50
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 5. PREMISES AND EQUIPMENT
   Premises and equipment as of December 31, 2003 and 2002 follows.
   2003


2002Land

$
4,229,408

$
4,995,677Buildings and improvements


16,752,623


16,483,250Furniture, fixtures and equipment


10,775,647


10,677,759Construction in progress


33,454


576,94431,791,132


32,733,630Less accumulated depreciation


(11,743,757
)

(10,178,396
)$
20,047,375

$
22,555,234
   
 Depreciation expense amounted to $2,047,623, $2,110,353 and $2,190,192, for the years ended December 31, 2003, 2002 and 2001, respectively.
 
  The Company leases office space at five locations. One of these locations is leased on a month to month basis. The other locations are under agreements with minimum contractual obligations as of December 31, 2003 as follows:
 
  Year

Amount2004

$
131,5972005


110,6262006


94,4822007


94,4822008


86,609Later


-$
517,796
     The Company also has commitments on various short-term operating leases for equipment. Total lease expense amounted to $246,360, $203,984 and $151,195 for the years ended December 31, 2003, 2002 and 2001 respectively.
  51
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 6. DEPOSITS
   A summary of interest-bearing deposits as of December 31, 2003 and 2002 follows.
  2003


2002Interest-bearing demand

$
162,844,995

$
176,781,620Savings


39,908,498


37,200,175Time, $100,000 and over


82,831,847


98,776,734Other time


176,448,325


206,304,649$
462,033,665

$
519,063,178
    Interest expense on deposits for the years ended December 31, 2003, 2002 and 2001 follows.
  2003


2002


2001Interest-bearing demand

$
1,404,086

$
2,223,595

$
3,623,765Savings


281,552


536,610


732,517Time, $100,000 and over


2,673,927


4,730,549


8,875,059Other time


5,843,843


9,578,148


18,137,237$
10,203,408

$
17,068,902

$
31,368,578
   
 The scheduled maturities of time deposits at December 31, 2003 follow.
   Year

Amount2004

$
182,764,3782005


50,716,6282006


10,195,3062007


7,965,9672008


6,823,187Thereafter


814,706$
259,280,172
     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, 2003 and 2002 were $35,136,790 and $17,520,242, respectively.
  52
  
 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 (FHLB) as of December 31, 2003 and 2002.
   2003


2002Adjustable rate advances with a weighted-average rate of 1.17% at December 31, 2003

$
3,941,580

$
5,541,580Fixed rate advances with a weighted-average rate of 5.15% at December 31, 2003


3,172,463


3,503,330Convertible advances with a weighted-average rate of 2.08% at December 31, 2003


37,600,000


27,100,000$
44,714,043

$
36,144,910
    The Bank has pledged $47,098,907 in qualifying residential real estate mortgage loans, $23,892,328 in investment securities and $2,247,300 in FHLB stock as collateral on the advances from the FHLB.
   Contractual maturities of the advances from the FHLB at December 31, 2003 follow.
  Year

Amount2004

$
386,8022005


2,913,5212006


945,3592007


171,4892008


10,151,423Thereafter


30,145,449$
44,714,043
    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 rate on both the trust preferred securities and the Debentures is reset semi-annually at LIBOR plus 3.75% (currently 4.98%) 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.
  53
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE ­­10. INCOME TAXES
   The components of income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 follow.
  2003


2002


2001Current

$
2,481,972

$
1,632,006

$
3,092,629Deferred


879,072


1,180,948


(3,343,255
)$
3,361,044

$
2,812,954

$
(250,626
)
     The Company's income tax expense (benefit) 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, 2003, 2002 and 2001 follows.
   2003


2002


2001Tax (benefit) at statutory rate

$
3,565,431

$
3,114,330

$
(35,178
)Increase (decrease) resulting from:State income tax, net of Federal tax benefit


16,172


37,894


-Tax exempt interest and dividend exclusion


(181,127
)

(163,775
)

(229,875
)Amortization of goodwill


-


-


118,681Increase in cash value of bank-owned life insurance policies


(160,542
)

(162,053
)

(162,369
)Deferred tax adjustment


116,257


(20,897
)

(36,847
)Prior year accrual differences


(12,861
)

(13,723
)

61,459Other items, net


17,714


21,178


33,503Income tax expense (benefit)

$
3,361,044

$
2,812,954

$
(250,626
)
   
 The components of deferred income taxes at December 31, 2003 and 2002 follow.
   2003


2002Deferred tax assets and (liabilities):Allowance for loan losses

$
3,447,299

$
4,112,975Deferred compensation


697,320


650,381Deferred loan origination fees


462,745


403,495Accrued severance payable


178,321


302,269Unrealized loss (gain) on securities available for sale


62,384


(532,600
)Other assets


362,637


499,647Premises and equipment


(1,025,409
)

(884,474
)Deferred loan origination cost


(245,402
)

(327,710
)Net deferred tax assets

$
3,939,895

$
4,223,983
    54
  
 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 will match a portion of the deferred compensation. The plan also provides for non-elective and discretionary profit sharing contributions to be made at the sole discretion of the Board of Directors. Approximately 3.5% of the participants eligible compensation was accrued as the discretionary profit sharing contributions for 2003, 2002 and 2001. 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 2003, 2002 and 2001 amounted to approximately $711,000, $676,000, and $553,000, respectively.
 
 NOTE 12. DEFERRED COMPENSATION AND RETIREMENT PLANS
   In years past, the Company entered into separate deferred compensation arrangements with certain officers. The agreements called for the deferred compensation 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 $2,051,000 and $1,913,000 at December 31, 2003 and 2002, respectively. Aggregate expense under the deferred compensation plans charged to salaries and employee benefits expense were approximately $138,000, $165,000, and $1,156,000 (including the $898,000 expense for the two retiring executive officers) during 2003, 2002 and 2001, respectively.
   In 2001, the Company entered into separate severance agreements with two retiring executive officers that effectively terminated their then existing employment agreements and committed to pay each officer a 3-year severance package beginning in January 2002. The Company accrued approximately $1,291,000 representing the net present value of the severance payments with the expense included in salaries and employee benefits for the year ended December 31, 2001. The remaining liability in the severance plans payable as of December 31, 2003 was $524,000.
  55
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 13. OTHER INCOME AND EXPENSES
   Other fee income for the years ended December 31, 2003, 2002 and 2001 follows.
   2003


2002


2001Mortgage origination fees

$
715,358

$
838,044

$
702,329Brokerage commissions and fees


469,373


485,401


306,322ATM and debit card fee income


357,235


329,100


131,544Insurance premiums


773


5,822


161,015Other fee income


251,945


226,518


223,699Total other fee income

$
1,794,684

$
1,884,885

$
1,524,909
    Other noninterest income for the years ended December 31, 2003, 2002 and 2001 follows.
   2003


2002


2001Earnings on bank-owned life insurance

$
472,183

$
478,199

$
491,579Loss on disposal / write-down of assets


(257,770
)

(271,909
)

(839
)Gain on sale of interest in unconsolidatedsubsidiary


-


-


1,461,739Other noninterest income


265,337


366,051


539,711Total other noninterest income

$
479,750

$
572,341

$
2,492,190
    Other noninterest expense for the years ended December 31, 2003, 2002 and 2001 follows.
   2003


2002


2001Advertising and business development

$
433,079

$
511,902

$
601,045Supplies and printing


543,738


638,240


953,385Telephone and internet charges


454,670


638,209


554,915Postage and courier


563,156


644,332


613,213Legal and accounting fees


528,493


882,765


447,038Conversion and consolidation costs


-


-


312,933Service charges and fees


483,769


603,011


644,387Other noninterest expenses


2,207,105


2,457,675


2,888,277Total other noninterest expense

$
5,214,010

$
6,376,134

$
7,015,193
  56
  
 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, 2003, 2002 and 2001 follows.
   
 2003


2002


2001Basic earnings per share:Net income

$
7,125,518

$
6,346,839

$
147,160Weighted average common shares outstanding


9,446,142


9,426,761


9,482,709Earnings per common share

$
0.75

$
0.67

$
0.02Diluted earnings per share:Net income

$
7,125,518

$
6,346,839

$
147,160Weighted average common shares outstanding


9,446,142


9,426,761


9,482,709Effect of dilutive stock options


141,045


33,007


67,371Weighted average diluted commonshares outstanding


9,587,187


9,459,768


9,550,080Earnings per common share

$
0.74

$
0.67

$
0.02
   
 For the years ended December 31, 2003, 2002, 2001, options to purchase 171,368, 592,001, and 266,732, 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, 2003 and 2002, the Company recorded $89,000 and $51,700, respectively, of expense associated with this program.
    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 in the plan rather than issuing additional shares of common stock.
      57
  
 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 Companys stockholders authorized the Board of Directors to 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. Under the 1999 Stock Option Plan, the Companys stockholders authorized the Board of Directors to grant up to 600,000 stock options to directors, employees, consultants and advisors of the Company.
   A summary of the status of the two fixed plans at December 31, 2003, 2002 and 2001 and changes during the years ended on those dates follows.
  
 2003
2002
2001Number


Weighted-AverageExercisePrice


Number


Weighted-AverageExercisePrice


Number


Weighted-AverageExercisePriceUnder option, beginning of year


756,406

$
10.63


731,635

$
11.22


523,650

$
11.58Granted


28,500


9.56


168,700


8.08


288,750


10.19Exercised


(54,247
)

9.76


(20,500
)

6.25


(31,500
)

6.25Forfeited


(35,292
)

11.59


(123,429
)

11.41


(49,265
)

12.25Under option, end of year


695,367

$
10.60


756,406

$
10.63


731,635

$
11.22Exercisable at end of year


405,987

$
11.34


366,546

$
11.41


355,290

$
11.13Weighted-average fair value per option of optionsgranted during year




$
3.31




$
3.84




$
2.69
  
 A further summary of the options outstanding at December 31, 2003 follows.
  Options Outstanding
Options ExercisableRange of Exercise Prices


Number


Weighted- Average Contractual Life in Years


Weighted-AverageExercisePrice


Number


Weighted-AverageExercisePrice$
6.25 - 7.70


183,200


5.92

$
7.10


88,000

$
6.458.00 - 10.06


187,380


5.92


9.53


103,820


9.8610.20 - 13.31


205,937


6.91


11.39


106,547


11.7013.75 - 21.63


118,850


5.67


16.33


107,620


16.40695,367


6.17


10.60


405,987


11.34
  
 58
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 18. 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:
   2003


2002


2001Risk-free interest rate


4.25
%

3.81
%

5.24
%Expected life of the options


10 years


10 years


10 yearsExpected dividends (as a percent of the fair value of the stock)


1.80
%

-


4.69
%Expected volatility


27.22
%

28.79
%

45.62
%
    NOTE 19.   STOCK REPURCHASE PLAN
  In January 2001, the Board approved the purchase and cancellation of 125,000 shares of the Companys common stock. During 2001, the Company acquired and canceled 123,534 shares of common stock for a total cost of $1,293,808. A balance of 6,850 shares remained available from the plans for repurchase at December 31, 2001. Those remaining 6,850 shares at December 31, 2001 were not repurchased and the plan expired January 31, 2002.
    NOTE 20.   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, 2003 and 2002 follows.
   2003


2002Commitments to extend credit

$
84,533,000

$
70,351,000Standby letters of credit

$
2,755,000

$
1,445,000
  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.
    59
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 20.   COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
   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.
    NOTE 21.   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, 2003, approximately 83% 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, a substantial portion of 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 22.   REGULATORY MATTERS
   On May 20, 2002, the Companys Board of Directors adopted a Resolution requested by the Federal Reserve Bank of Atlanta, which, among other things, restricts the Company from redeeming its capital stock, paying dividends, modifying existing debt agreements, or incurring additional debt without the prior approval of its 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. On August 25, 2003, the Federal Reserve terminated this Resolution with the Company.
 
 The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2003, approximately $3,883,000 of retained earnings was 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.
  60
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 22.   REGULATORY MATTERS (Continued)
   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, 2003 and 2002, the Company and the Bank met all capital adequacy requirements to which they are subject.
   As of December 31, 2003, 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.
   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 ProvisionsAmount


Ratio


Amount


Ratio


Amount


RatioAs of December 31, 2003:Total Capital to Risk Weighted Assets:Consolidated

$
87,624,000


15.1
%
$
46,311,000


8.0
%

- N/A -Bank

$
84,477,000


14.7
%
$
46,138,000


8.0
%
$
57,672,000


10.0
%Tier 1 Capital to Risk Weighted Assets:Consolidated

$
80,352,000


13.9
%
$
23,155,000


4.0
%

- N/A -Bank

$
77,232,000


13.4
%
$
23,069,000


4.0
%
$
34,603,000


6.0
%Tier 1 Capital to Average Assets:Consolidated

$
80,352,000


11.0
%
$
29,258,000


4.0
%

- N/A -Bank

$
77,232,000


10.6
%
$
29,200,000


4.0
%
$
36,501,000


5.0
%As of December 31, 2002:Total Capital to Risk Weighted Assets:Consolidated

$
81,738,000


14.0
%
$
46,888,000


8.0
%

- N/A -Bank

$
76,814,000


13.2
%
$
46,710,000


8.0
%
$
58,388,000


10.0
%Tier 1 Capital to Risk Weighted Assets:Consolidated

$
74,353,000


12.7
%
$
23,444,000


4.0
%

- N/A -Bank

$
69,456,000


11.9
%
$
23,355,000


4.0
%
$
35,033,000


6.0
%Tier 1 Capital to Average Assets:Consolidated

$
74,353,000


10.0
%
$
29,729,000


4.0
%

- N/A -Bank

$
69,456,000


9.4
%
$
29,684,000


4.0
%
$
37,105,000


5.0
%


61
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 23.   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. SFAS 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.
   The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
   Cash, Due From Banks, Interest-Bearing Deposits at Other Financial Institutions and Federal Funds Sold: The carrying amount of cash, due from banks, interest-bearing deposits at other financial institutions and federal funds sold approximates fair value.
   Investment Securities: Fair value of debt 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, savings deposits, and variable-rate certificates of deposit approximates fair value. The fair value of fixed- rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates 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.
 
  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.
 
 62
        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 23.   FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
   The carrying amounts and estimated fair value of the Company's financial instruments as of December 31, 2003 and 2002 are summarized below. All dollar amounts have been rounded to the nearest thousand.
  2003
2002CarryingAmount


FairValue


CarryingAmount


FairValueCash and due from banks, interest-bearing deposits with other banks, and federal funds sold

$
23,756,000

$
23,756,000

$
56,958,000

$
56,958,000Investment securities


126,825,000


126,825,000


98,026,000


98,026,000Loans, net


528,505,000


530,863,000


543,141,000


549,290,000Deposits


556,917,000


559,601,000


606,730,000


609,484,000Federal funds purchased and securities sold under agreements to repurchase


36,920,000


36,920,000


17,520,000


17,520,000Advances from the FHLB


44,714,000


39,864,000


36,145,000


38,780,000Beneficial interest in debentures


10,000,000


10,000,000


10,000,000


10,000,000
    
 NOTE 24.   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 STATEMENTS OF CONDITIONDECEMBER 31, 2003 AND 20022003


2002Assets:Cash on deposit with subsidiary bank

$
4,209,082

$
5,521,741Investment securities


1,349,945


1,349,945Investment in subsidiary


82,941,976


76,331,003Other assets


1,169,493


1,271,218Total assets

$
89,670,496

$
84,473,907Liabilities and stockholders' equity:Guaranteed preferred beneficial interests in debentures (trust preferred securities)

$
10,000,000

$
10,000,000Dividends payable


663,758


-Other liabilities


2,944,572


3,209,169Total liabilities


13,608,330


13,209,169Stockholders' equity


76,062,166


71,264,738Total liabilities and stockholders' equity

$
89,670,496

$
84,473,907
     63
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 24. CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.
 (PARENT COMPANY ONLY) (Continued)
  PAB BANKSHARES, INC.CONDENSED STATEMENTS OF INCOMEDECEMBER 31, 2003, 2002 AND 20012003


2002


2001Income:Dividends from subsidiaries

$
-

$
1,677,950

$
3,914,630Interest income


90,000


90,000


60,747Management and service fees


-


1,171,316


1,866,933Other income


4,541


122


179,389Total income


94,541


2,939,388


6,021,699Expenses


1,097,335


2,988,293


8,591,404Loss before income tax benefit and in undistributed earnings of subsidiaries


(1,002,794
)

(48,905
)

(2,569,705
)Income tax benefit


362,370


745,316


2,196,385Income (loss) before equity in undistributed earnings of subsidiaries


(640,424
)

696,411


(373,320
)Equity in undistributed earnings of subsidiaries


7,765,942


5,650,428


520,480Net income

$
7,125,518

$
6,346,839

$
147,160
          64
  
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
   NOTE 24.   CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES, INC.
 (PARENT COMPANY ONLY) (Continued)
   PAB BANKSHARES, INC.CONDENSED STATEMENTS OF CASH FLOWDECEMBER 31, 2003, 2002 AND 20012003


2002


2001Cash Flows from Operating activities:Net Income

$
7,125,518

$
6,346,839

$
147,160Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


68,901


376,322


874,739Deferred tax provision


57,487


(242,454
)

788,607Gain on disposal of assets


-


-


(10,590
)Undistributed earnings of subsidiaries


(7,765,942
)

(5,650,428
)

(520,480
)Increase in cash value of life insurance


-


-


(6,859
)Increase in deferred compensation accrual


138,055


141,009


1,113,578Increase (decrease) in retirement accrual


(364,552
)

(402,362
)

1,291,388Net change in other assets and liabilities


(62,763
)

162,271


748,918Net cash provided by (used in) operating activities


(803,296
)

731,197


4,426,461Cash flows from investing activities:Purchase of securities available for sale


-


-


(1,000,000
)Purchase of premises and equipment


-


(118,106
)

(969,592
)Proceeds from disposal of assets


-


4,025,426


609,467Redemption of life insurance policies


-


-


60,998Investment in subsidiary


-


-


(3,516,874
)Net cash provided by (used in) investing activities


-


3,907,320


(4,816,001
)Cash flows from financing activities:Cash paid to former stockholders on acquisition


-


-


(7,667,280
)Proceeds on issuance of guaranteed preferred beneficial interests in debentures


-


-


10,000,000Dividends paid


(1,038,587
)

(2,071,500
)

(4,179,108
)Proceeds from the exercise of stock options


529,224


128,125


196,875Acquisition of stock under the stock repurchase plans


-


-


(1,293,808
)Costs capitalized on issuance of guaranteed preferred beneficial interests in debentures


-


-


(344,500
)Net cash used in financing activities


(509,363
)

(1,943,375
)

(3,287,821
)Net increase (decrease) in cash


(1,312,659
)

2,695,142


(3,677,361
)Cash at beginning of year


5,521,741


2,826,599


6,503,960Cash at end of year

$
4,209,082

$
5,521,741

$
2,826,599
  
 65
 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
   A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that review and evaluation, the CEO and CFO have concluded that the Company's current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.
   
 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 2004 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 2004 Proxy Statement and is incorporated herein by reference.
    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 2004 Proxy Statement and is incorporated herein by reference. Also see Equity Compensation Plan Information in Part II, Item 5 of this Report.
    ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   Information regarding certain relationships and related transactions will be included in the 2004 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 2004 Proxy Statement and is incorporated herein by reference.
   66
 
 PART IV
   ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 (a) 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.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).  67
  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).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
   
 (b) Reports on Form 8-K.
  1. Press Release dated November 3, 2003 Announcing Third Quarter 2003 Earnings.
  68 
 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 10, 2004*
By:
*/s/ Michael E. Ricketson*Michael E. Ricketson,President and Chief Executive Officer    Signature

Title

Date/s/ R. Bradford Burnette

Director

March 10, 2004R. Bradford Burnette/s/ Walter W. Carroll II

Director

March 10, 2004Walter W. Carroll II/s/ James L. Dewar, Jr.

Director, Chairman

March 10, 2004James L. Dewar, Jr./s/ Michael H. Godwin

Director

March 10, 2004Michael H. Godwin/s/ Bill J. Jones

Director

March 10, 2004Bill J. Jones/s/ James B. Lanier, Jr.

Director

March 10, 2004James B. Lanier, Jr./s/ Kennith D. McLeod

Director

March 10, 2004Kennith D. McLeod, CPA/s/ Paul E. Parker

Director

March 10, 2004Paul E. Parker/s/ Michael E. Ricketson

Director, President and Chief Executive Officer

March 10, 2004Michael E. Ricketson/s/ F. Ferrell Scruggs, Sr.

Director

March 10, 2004F. Ferrell Scruggs, Sr./s/ John M. Simmons

Director

March 10, 2004John M. Simmons/s/ Joe P. Singletary, Jr.

Director

March 10, 2004Joe P. Singletary, Jr./s/ Donald J. Torbert, Jr.

Executive Vice President and Chief Financial Officer (Principal Accounting Officer)

March 10, 2004Donald J. Torbert, Jr., CPA
  69