<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C.  20549
                                   FORM 10-K

Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 1998

                        Commission file number 0-25422

                             PAB BANKSHARES, INC.
            (Exact name of registrant as specified in its charter)


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<S>                                                      <C>
             Georgia                                                                  58-1473302
-------------------------------------------------------                 -------------------------------------
(State or other jurisdiction of incorporation or                              (I.R.S. Employer ID Number)
 organization)

                            3102 North Oak Street Extension, Valdosta, Georgia 31602
----------------------------------------------------------------------------------------------------------------
                                    (Address of principal executive office)

                      Registrant's telephone number, including area code      912/241-2775
 
 
                                    Securities registered pursuant to Section 12(b) of the Act:


               No par value Common Stock                                The American Stock Exchange
-------------------------------------------------------  ---------------------------------------------------------
                  (Title of Class)                                 (Name of Exchange on which Registered)
                                   

                           Securities registered pursuant to Section 12(g) of the Act

                                                      None
                                      -----------------------------------                                          
                                                (Title of Class)
</TABLE>


Indicate by check mark whether 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 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. ___   
          
The aggregate market value of the voting stock held by non-affiliates of
Registrant at March 8, 1999 was $91,472,872 based on a recent trading price of
$16.00 per share.

The number of shares outstanding of Registrant's common stock at March 8, 1999
was 8,289,998 shares.

Documents Incorporated by Reference:  Portions of the Proxy Statement for the
1999 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of  Registrant's fiscal year-end are incorporated by
reference in Part III.
<PAGE>
 
                              PAB BANKSHARES, INC.
 
                               TABLE OF CONTENTS
                               -----------------

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                                                                   Page

                                     PART I

<S>             <C>                                                   <C>      
     ITEM 1.    DESCRIPTION OF BUSINESS.............................   1
     ITEM 2.    DESCRIPTION OF PROPERTY.............................  10
     ITEM 3.    LEGAL PROCEEDINGS...................................  11
     ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.  11
 
                                    PART II


     ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS...........................................  11

     ITEM 6.    SELECTED FINANCIAL DATA.............................  14

     ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS................  15

     ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                 MARKET RISK........................................  37

     ITEM 8.    FINANCIAL STATEMENTS................................  37

     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE................  37

                                    PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS.....................  37

     ITEM 11.  EXECUTIVE COMPENSATION...............................  37

     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT.........................................  37

     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......  38


                                    PART IV


     ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K.....................  38

               SIGNATURES...........................................  40

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                                     PART I
                                     ------
                                        
ITEM 1.  DESCRIPTION OF BUSINESS

Business Development

     The primary business of the Company, as a bank holding company, is to
manage the business and affairs of its four commercial bank subsidiaries, The
Park Avenue Bank in Valdosta, Georgia, Farmers & Merchants Bank in Adel,
Georgia, First Community Bank of Southwest Georgia in Bainbridge, Georgia, and
Eagle Bank and Trust in Statesboro, Georgia (the four banking subsidiaries are
sometimes individually and collectively referred to herein as the "Banks").
Unless otherwise indicated by the context, the term "Company" shall refer to PAB
Bankshares, Inc. and its subsidiaries.

     The Company was organized in 1982 to own 100% of the stock of The Park
Avenue Bank, a state-chartered commercial bank.  Effective December 31, 1982,
the Company became a bank holding company, registered with the Federal Reserve
Board and the Georgia Department of Banking and Finance.  In 1985, the Company
acquired 87% of the stock and control of Farmers & Merchants Bank, a state-
chartered commercial bank.  The Company subsequently increased its ownership to
99.9% of the stock of Farmers & Merchants Bank.  Effective January 1, 1995, the
Company acquired 100% of the stock of First Federal Savings Bank of Bainbridge
(the "Savings Bank"), a federal stock savings bank.  The Savings Bank was
converted to a commercial bank charter and the name changed to First Community
Bank of Southwest Georgia ("First Community") in 1997.  Effective June 19, 1998,
the Company acquired 100% of the stock of Investors Financial Corporation
("Investors") and its wholly-owned subsidiary, Bainbridge National Bank.
Bainbridge National Bank was merged into First Community Bank of Southwest
Georgia in August, 1998.  Effective December 10, 1998, the Company acquired 100%
of the stock of Eagle Bancorp, Inc, and its wholly-owned subsidiary, Eagle Bank
and Trust.

     The Company's offices are located in The Park Avenue Bank's main office at
3102 North Oak Street Extension, Valdosta, Georgia 31602, and its telephone
number is (912) 241-2775.

Business of Issuer

     The Company is authorized to engage in any activity permitted by law to a
corporation, subject to applicable federal and state regulatory restrictions on
the activities of bank holding companies.  The Company's holding company
structure provides it with greater flexibility than the respective Banks would
otherwise have to expand and diversify their business activities, through newly
formed subsidiaries, or through acquisitions.  Although the Company has no
present plans to engage in other business activities, management from time to
time studies the feasibility of establishing or acquiring subsidiaries to engage
in other business activities to the extent permitted by law.

The Park Avenue Bank
--------------------

     The Park Avenue Bank commenced operations in 1971 as a state-chartered
commercial bank; previously, The Park Avenue Bank was a regulated certificated
bank which commenced operations in 1967 and a private bank which was organized
in 1956.  The Park Avenue Bank is located in Valdosta, Lowndes County, Georgia,
its primary service area.  The Park Avenue Bank had approximately $217.7 million
in total assets, deposits of approximately $178.3 million and net worth of
approximately $16.6 million at December 31, 1998.  Customer deposits with The
Park Avenue Bank are insured to the maximum extent provided by law through the
Federal Deposit Insurance Corporation ("FDIC").

     The Valdosta Chamber of Commerce estimates the current population of
Valdosta to be approximately 40,000 and the population of Lowndes County to be
approximately 76,000.  Valdosta is the county seat of Lowndes County and is
approximately 18 miles north of the Georgia-Florida border.

                                       1
<PAGE>
 
Farmers & Merchants Bank

     Farmers & Merchants Bank commenced operations in 1947 as a state-chartered
commercial bank.  Customer deposits with the Farmers & Merchants Bank are
insured to the maximum extent provided by law through the FDIC.  The Farmers &
Merchants Bank is located in Adel, Cook County, Georgia, its primary service
area.

     Farmers & Merchants Bank had approximately $51.3 million in total assets,
deposits of approximately $42.6 million and net worth of approximately $4.9
million at December 31, 1998.

     The Cook County Chamber of Commerce estimates the current population of
Adel to be approximately 6,000 and the population of Cook County to be
approximately 13,000.  Adel is approximately 25 miles north of Valdosta,
Georgia.

First Community Bank of Southwest Georgia (formerly First Federal Savings Bank
of Bainbridge)

     First Community was chartered in 1934 as a federal mutual savings and loan
association.  In June 1990, First Community was converted from a federal mutual
savings and loan association to a federal stock savings bank through the sale
and issuance of common stock.  First Community was converted to a commercial
bank in 1997.  Bainbridge National Bank was merged with First Community on
August 31, 1998.  Customer savings accounts are insured to the maximum extent
provided by law through the FDIC.

     First Community had approximately $165.2 million in total assets, deposits
of approximately $131.3 million and net worth of approximately $16.9 million at
December 31, 1998.

     The Decatur County Chamber of Commerce estimates the current population of
Bainbridge to be approximately 14,000 and the population of Decatur County to be
approximately 28,000.  Bainbridge is approximately 90 miles west of Valdosta,
Georgia.

Eagle Bank and Trust

     Eagle Bank and Trust commenced operations in 1991 as a state-chartered
commercial bank.  Customer deposits with Eagle Bank and Trust are insured to the
maximum extent provided by law through the FDIC.  The Bank is located in
Statesboro, Bulloch County, Georgia, its primary service area.

     Eagle Bank and Trust had approximately $78.2 million in total assets,
deposits of approximately $65.5 million and net worth of approximately $7.2
million at December 31, 1998.

     The Bulloch County Chamber of Commerce estimates the current population of
Statesboro be approximately 32,000 and the population of Bulloch County to be
approximately 43,000.  Statesboro is approximately 155 miles northeast of
Valdosta, Georgia.

Banking Services and Operations

     Each Bank offers a full range commercial banking services to individuals,
professional and business customers in their respective primary service areas.
These services include personal and business checking accounts and savings and
other type certificates of deposit.  The Park Avenue Bank issues credit cards
and acts as a merchant depository for cardholder drafts under both VISA and
MasterCard. Eagle Bank and Trust provides credit cards in association with The
Bankers Bank and acts as a merchant depository for cardholder drafts under both
VISA and MasterCard.  The Banks offer night depository and bank-by-mail services
and sell bank drafts and travelers checks (issued by an independent entity).
The Banks do not presently offer trust and fiduciary services.

     The principal sources of income for the Banks are interest and fees
collected on loans and interest on investment securities.  The principal
expenses of the Banks are interest paid on savings deposits, interest paid on
other borrowings by the Banks, employee compensation, office expenses, and other
operating expenses.

                                       2
<PAGE>
 
Lending

     The Banks seek to attract deposits from the general public and use such
deposits, together with borrowings and other sources of funds, to originate and
purchase loans.  The Banks each offer a full range of short and medium
commercial, consumer and real estate loans.  Commercial lending activities are
directed principally toward businesses whose demand for funds falls within the
respective Bank's lending limits.  Consumer lending has been oriented primarily
to the needs of the respective Bank's customers for such purposes as home
remodeling, education and automobiles.  Real estate lending is oriented toward
construction loans and short-term commercial loans.  Each Bank also originates
fixed and variable-residential and other mortgage loans for its own account.
The lending policies and procedures of each Bank are established and
periodically reviewed by each Bank's Board of Directors.

     The Park Avenue Bank's loan portfolio totaled $150.6 million at 
December 31, 1998, which was comprised of approximately 52.81% commercial loans,
commercial real estate and agri-business loans, 17.14% consumer loans, 23.87%
residential real estate mortgage loans and 6.18% construction loans.  The Park
Avenue Bank's loan to deposit ratio at December 31, 1998 was approximately
84.45%.

     Farmers & Merchants Bank's loan portfolio totaled $35.8 million at December
31, 1998, which was comprised of approximately 53.52% commercial loans,
commercial real estate and agri-business loans, 13.53% consumer loans, 27.11%
residential real estate mortgage loans and 5.84% construction loans.  Farmers &
Merchants Bank's loan to deposit ratio at December 31, 1998 was approximately
83.86%.

     First Community's loan portfolio totaled $114.6 million at December 31,
1998, which was comprised of approximately 39.95% residential real estate
mortgage loans, 44.52% commercial loans, commercial real estate and agri-
business loans, 12.16% consumer loans and 3.37% construction loans.  First
Community's loan to deposit ratio at December 31, 1998 was approximately 87.33%.

     Eagle Bank and Trust's loan portfolio totaled $50.7 million at December 31,
1998, which was comprised of approximately 35.95% residential real estate
mortgage loans, 40.88% commercial loans, commercial real estate and agri-
business loans, 9.52% consumer loans and 13.65% construction loans.  Eagle Bank
and Trust's loan to deposit ratio at December 31, 1998 was approximately 77.41%.

Deposits

     Checking, savings, money market accounts, and other time deposits are the
principal sources of the Banks' funds for loans and investments.  Most of the
Banks' deposits are obtained from individuals and small businesses.  At December
31, 1998, The Park Avenue Bank had deposits of approximately $178.3 million,
Farmers & Merchants Bank had deposits of approximately $42.6 million, First
Community had deposits of approximately $131.3 million and Eagle Bank and Trust
had deposits of approximately $65.5 million.

     The Banks seek to attract new deposits by paying rates of interest on
certificates of deposit and money market accounts which are competitive in their
respective primary service areas.  The Banks generally do not pay brokers'
commissions in connection with the obtaining of deposits.

Asset and Liability Management

     The primary assets of each Bank consists of its loan portfolio and
investment account.  Consistent with the requirements of prudent banking
necessary to maintain liquidity, management seeks to match maturities and rates
of loans and the investment portfolio with those of deposits, although exact
matching generally is not possible.  Management seeks to invest the largest
portion of each Bank's assets in commercial and agri-business, consumer and
residential real estate loans.  Each Bank anticipates that loans will be limited
to approximately 75% to 85% of deposits, capital funds and other borrowings.
The Company anticipates that each Bank's investment account will consist
primarily of marketable securities of the United States government, federal
agencies and state and municipal governments, generally with varied maturities.

     The investment policy of each Bank provides for a portfolio divided among
issues purchased to meet one or more of the following objectives:  (i) to
complement strategies developed in assets/liquidity management, including

                                       3
<PAGE>
 
desired liquidity levels; (ii) to maximize after tax income from funds not
needed for day-to-day operations and loan demands; and (iii) to provide
collateral necessary for acceptance of public funds.  Management anticipates
that this policy will allow each Bank to deal with seasonal deposits
fluctuations and to provide for basic liquidity consistent with the Bank's loan
demand.  When possible, maturation will match anticipated liquidity demands.
Longer term securities may be selected for a combination of yield and exemption
from federal income taxation when appropriate.

     Deposit accounts are expected to represent the majority of the liabilities
of the Banks.  These will include transaction accounts, savings accounts, time
deposits and certificates of deposit.

     The Banks derive their income principally from interest charged on loans
and, to a lesser extent, from interest earned on investments, from fees received
in connection with the origination of loans and from other services. The Banks'
principal expenses are anticipated to be interest expense on deposits and
operating expenses.  The funds for such activities are provided principally by
operating revenues, deposit growth, purchase of federal funds from other banks,
repayment of outstanding loans and sale of loans and investment securities.

Supervision and Regulation

     General
     -------

     The following discussion summarizes material elements of the federal and
state regulatory framework applicable to commercial banks, savings banks
(sometimes referred to herein as "thrifts"), bank holding companies, and savings
bank holding companies.  Such discussion is qualified in its entirety by
reference to applicable federal and state statutes and regulations.
Furthermore, the statutes and regulations affecting the Company and the Banks
may change after the date of this Annual Report on Form 10-K, and any such
changes may have a material adverse effect on the Banks or the Company.

     Regulation of the Company
     -------------------------

     The Company is a bank holding company registered with the Federal Reserve
Board (the "Federal Reserve") and the Georgia Department of Banking and Finance
("Georgia Department") under the federal Bank Holding Company Act of 1956 ( the
"BHC Act") and the Georgia Bank Holding Company Act (the "Georgia BHC Act").  As
such, the Company is subject to the supervision, examination, and reporting
requirements of the BHC Act and the regulations of the Federal Reserve.

     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 the assets
of any bank; or (iii) it may merge or consolidate with any other bank holding
company.  Similar federal statutes require a savings and loan holding company to
obtain prior approval of the Office of Thrift Supervision before acquiring
direct or indirect ownership or control of a savings bank or savings
association.

     The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in 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 United States, or that in any other manner would be a 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 community 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 concerned and the convenience and needs of the community to
be served.  Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.

     The BHC Act, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company, and any other bank holding company located in
Georgia, may now acquire a bank located in any other

                                       4
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state, and any bank holding company located outside Georgia may lawfully acquire
a Georgia-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether.

     In response to the Interstate Banking Act, the Georgia Legislature adopted
the Georgia Interstate Banking Act, effective July 1, 1995.  The Georgia
Interstate Banking Act provides that (i) interstate acquisitions of institutions
located in Georgia will be permitted in states which also allow national
interstate acquisitions, and (ii) interstate acquisitions of institutions
located in Georgia will be permitted by institutions located in states which
allow national interstate acquisitions.

     Additionally, in February 1996, the Georgia Legislature adopted the
"Georgia Interstate Branching Act" which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all non-
Georgia banks and bank holding companies owning or acquiring banks in Georgia
the right to merge any lawfully-acquired bank into an interstate branch network.
Beginning July 1, 1998, the Georgia Interstate Branching Act also allows banks
to establish de novo branches throughout Georgia.

     The BHC Act generally prohibits 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.  In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be 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.

     Each of the Banks is a member of the FDIC, and as such, its deposits are
insured to the maximum extent provided by law.  Each of the Banks is also
subject to numerous state and federal statutes and regulations that affect its
business, activities and operations and each is supervised and examined by one
or more state or federal bank regulatory agencies.

     The Banks are subject to regulation, supervision and examination by the
FDIC and the Georgia Department.  The Federal Reserve and the Georgia Department
regularly examine the operations of the Banks and are given authority to approve
or disapprove mergers, consolidations, the establishment of branches, and
similar corporate actions.  The federal banking regulators and the Georgia
Department also have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of the law.

     Payment of Dividends
     --------------------

     The Company is a legal entity separate and distinct from its bank
subsidiaries.  The principal sources of revenues to the Company, including cash
flow to pay dividends to its shareholders, are dividends from the Banks.  There
are statutory and regulatory limitations on the payment of dividends by the
Banks, as well as by the Company to its shareholders.

     If, in the opinion of the federal banking regulator, 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 regulator
may require, after notice and hearing, that such institution cease and desist
from such practice.  The federal banking regulators have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be 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.  Moreover, the federal
banking regulators have issued policy statements that provide that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.  The 

                                       5
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payment of dividends by the Company and its banking subsidiaries may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.

     Capital Adequacy
     ----------------

     The Company and each of the Banks are required to comply with capital
adequacy standards established by the Federal Reserve in the case of the
Company, and the appropriate federal banking regulator in the case of its Bank
subsidiaries.  There are two basic measures of capital adequacy for bank holding
companies that have been promulgated by the Federal Reserve: (1) a risk-based
measure and (2) 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 profile 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 (the "Total Risk-Based Capital Ratio")
of total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%.  At least
half of Total Capital must be comprised of common stock, minority interests in
the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier I Capital").  The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier II Capital").  At December 31, 1998, the
Company's consolidated Total Risk-Based Capital Ratio and its Tier I Risk-Based
Capital Ratio (i.e., the ratio of Tier I Capital to risk-weighted assets) were
13.8% and 12.6% 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 I Capital to average assets, less goodwill
and certain other intangible assets, of 3% 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%, plus an additional cushion of 100 to 200 basis
points.  The Company's Leverage Ratio at December 31, 1998 was 9.6%.  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 I Capital Leverage Ratio" (deducting all
intangibles) and other indicia of capital strength in evaluating proposals for
expansion or new activities.

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

     Each of the Banks was in compliance with applicable minimum capital
requirements as of December 31, 1998.  The Company has not been advised by any
regulator of any specific minimum capital ratio requirement applicable to it or
any Bank.

     Failure to meet capital guidelines could subject a Bank 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.

     Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking institutions beyond their current levels.  In
this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA, proposed
an amendment to the risk-based capital standards that would calculate the change
in an institution's net economic value attributable to increases and decreases
in market interest rates and would require banks with excessive interest rate
risk exposure to hold additional amounts of capital against such exposures.

                                       6
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     Support of Subsidiary Institutions
     ----------------------------------

     Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support each of its banking
subsidiaries.  This support may be required at times when, absent such Federal
Reserve policy, the Company may not be inclined to provide it.  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 banks.  In the event of a bank holding company's bankruptcy, any commitment
by the 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.

     Under the Federal Deposit Insurance Act ("FDIC"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default."  "Default" is defined generally
as the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance.  The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution.  As a
result, any loss suffered by the FDIC in respect of any of these subsidiaries
would likely result in assertion of the cross-guarantee provisions, the
assessment of such estimated losses against the depository institution's banking
affiliates, and a potential loss of the investment in such other subsidiary
depository institution.

     Prompt Corrective Action
     ------------------------

     FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions.  Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and 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 which will depend upon
the capital category in which the institution is placed.  Generally, subject to
a narrow exception, FDICIA requires the banking regulator to appoint a receiver
or conservator for an institution that is critically undercapitalized.  The
federal banking regulators have specified by regulation the relevant capital
level for each category.

     Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) has a Total Risk-Based Capital Ratio of 10%
or greater, a Tier I Risk-Based Capital Ratio of 6% or greater, and a Leverage
Ratio of 5% or greater and (ii) is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
appropriate federal banking regulator is deemed to be well capitalized.  An
institution with a total Risk-Based Capital Ratio of 8% or greater, a Tier I
Risk-Based Capital Ratio of 4% or greater, and a Leverage Ratio of 4% or greater
is considered to be adequately capitalized.  A depository institution that has a
Total Risk-Based Capital Ratio of less than 8%, a Tier I Risk-Based Capital
Ratio of less than 4%, or a Leverage Ratio of less than 4% is considered to be
undercapitalized.  A depository institution that has a Total Risk-Based Capital
Ratio of less than 6%, a Tier I Risk-Based Capital Ratio of less than 3%, or a
Leverage Ratio of less than 3% is considered to be significantly
undercapitalized, and an institution that has a tangible equity capital to
assets ratio equal to or less than 2% is deemed to be critically
undercapitalized.  For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier I Capital for purposes of the
risk-based capital standards, plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets with certain exceptions.  A depository institution may be deemed to be in
a capitalized category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.

     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
regulator.  Under FDICIA, a bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan, subject to
certain limitations.  The obligation of a controlling holding company under
FDICIA to fund a capital restoration plan is limited to the lesser of 5% of an
undercapitalized subsidiary's assets or the amount 

                                       7
<PAGE>
 
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 in accordance with an accepted capital restoration plan
or with the approval of the FDIC. In addition, the appropriate federal banking
regulator is given authority with respect to any undercapitalized depository
institution to take any of the actions it is required to or may take with
respect to a significantly undercapitalized institution as described below if it
determines "that those actions are necessary to carry out the purpose" of
FDICIA.

     For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking regulator must require the institution to take one or more of
the following actions:  (i) sell enough shares, including voting shares, to
become adequately capitalized; (ii) merge with (or be sold to) another
institution (or holding company), but only if grounds exist for appointing a
conservator or receiver; (iii) restrict certain transactions with banking
affiliates as if the "sister bank" exception to the requirements of Section 23A
of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions
with bank or non-bank affiliates; (v) restrict interest rates that the
institution pays on deposits to "prevailing rates" in the institution's
"region;" (vi) restrict asset growth or reduce total assets; (vii) alter,
reduce, or terminate activities; (viii) hold a new election of directors; (ix)
dismiss any director or senior executive officer who held office for more than
180 days immediately before the institution became undercapitalized, provided
that in requiring dismissal of a director or senior officer, the regulator must
comply with certain procedural requirements, including the opportunity for an
appeal in which the director or officer will have the burden of proving his or
her value to the institution; (x) employ "qualified" senior executive officers;
(xi) cease accepting deposits from correspondent depository institutions; (xii)
divest certain nondepository affiliates which pose a danger to the institution;
or (xiii) be divested by a parent holding company.  In addition, without the
prior approval of the appropriate federal banking regulator, a significantly
undercapitalized institution may not pay any bonus to any senior executive
officer or increase the rate of compensation for such officer.

     At December 31, 1998, each Bank had the requisite capital levels to qualify
as "well capitalized."

FDIC Insurance Assessments

     Pursuant to FDICIA, the FDIC adopted a new 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 new
system, which went into effect on January 1, 1994, 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.  An institution is also assigned by the FDIC to one
of three supervisory subgroups within each capital group.  An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned.  Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied.  Assessment rates for members of both the Bank
Insurance Fund ("BIF") and the SAIF for the first half of 1995 ranged from 23
basis points (0.23% of deposits) for an institution in the highest category
(i.e., "well capitalized" and "healthy") to 31 basis points (0.31% of deposits)
for an institution in the lowest category (i.e., "undercapitalized" and
"substantial supervisory concern").  These rates were established for both funds
to achieve a designated ratio of reserves to insured deposits (i.e., 1.25%)
within a specified period of time.

     Once the designated ratio for the BIF was reached in May 1995, the FDIC was
authorized to reduce the minimum assessment rate below the 23 basis points and
to set future assessment rates at such levels that would maintain the fund's
reserve ratio at the designated level.  In August 1995, the FDIC adopted
regulations reducing the assessment rates for BIF-member banks.  Subsequently,
on November 14, 1995, the FDIC announced that, beginning in 1997, it would
further reduce the deposit insurance premiums for 92% of all BIF members that
are in the highest capital and supervisory categories to $2,000 per year,
regardless of deposit size.  At the same time, the FDIC elected to retain the
existing assessment rate range for SAIF members for the foreseeable future given
the undercapitalized nature of that insurance fund.  Thrift industry
representatives argued that this significant premium disparity resulted in
savings associations having to operate at a competitive disadvantage to their
BIF insured bank counterparts.

                                       8
<PAGE>
 
     On September 30, 1996, the President signed the Deposit Insurance Fund Act
of 1996 ("DIFA").  DIFA mandated that the FDIC impose a one-time special
assessment on the SAIF-assessable deposits of each insured depository
institution at a rate applicable to all such institutions that the FDIC
determined would cause the SAIF to achieve its designated reserve ratio of 1.25%
as of October 1, 1996.  The assessment was based on the amount of SAIF-insured
deposits owned by each institution as of March 31, 1995.  DIFA provides that the
FDIC may not set semi-annual assessments with respect to SAIF or BIF in excess
of the amount needed to maintain the 1.25% designated reserve ratio or, if the
reserve ratio is less than the designated reserve ratio, to increase the reserve
ratio to the designated reserve ratio.  On October 10, 1996, the FDIC adopted a
final rule governing the payment of the SAIF special assessment to recapitalize
the fund in the amount of 65.7 basis points for SAIF members.

     In addition, DIFA mandates the merger of the SAIF and BIF, effective
January 1, 1999, but only if no insured depository institution is a savings
association on that date.  The combined deposit insurance fund would be called
the "deposit insurance fund" or "DIF."

     Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding 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.

     Safety and Soundness Standards
     ------------------------------

     The FDIA, as amended by 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, effective
August 9, 1995, 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, 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
shareholders.  The federal banking agencies determined that stock valuation
standards were not appropriate.  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 accepted 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 association is
subject under the "prompt corrective action" provisions of FDICIA.  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 bank regulatory agencies also proposed guidelines for asset quality and
earnings standards.

Competition

     The Banks experience competition in attracting and retaining business and
personal checking and savings accounts and in making commercial, consumer and
real estate loans in their respective primary service area.  Direct competition
for such accounts comes from other commercial banks, savings institutions,
credit unions, brokerage firms and money market funds.  The primary factors in
competing for loans are interest rates, loan origination fees and the range of
lending services offered.  The competition for origination of loans normally
comes from other commercial banks, savings institutions, credit unions and
mortgage banking firms.  Such entities may have competitive advantages as a
result of greater resources and higher lending limits (by virtue of greater
capitalization) or being subject to different regulations.

     In order to compete with other financial institutions in their respective
primary service areas, each Bank relies principally upon personal contacts of
their officers and directors, and upon local advertising and promotional

                                       9
<PAGE>
 
activities, to attract potential customers with the personalized and wide range
of financial services offered by an independent, locally-owned and managed
financial institution.

Employees

     As of December 31, 1998, the Company employed 17 full-time employees and 8
part-time employees, The Park Avenue Bank employed 67 full-time employees and 14
part-time employees, Farmers & Merchants Bank employed 24 full-time employees
and 3 part-time employees, First Community employed 53 full-time employees and
13 part-time employees and Eagle Bank and Trust employed 33 full-time employees
and 5 part-time employees.  The Company and each Bank considers their respective
relationships with their employees to be good.

Cautionary Notice Regarding Forward-Looking Statements

  This Annual Report on Form 10-K contains forward-looking statements, including
statements regarding, among other items, (i) the Company's or one or more Bank's
plans, intentions or expectations, (ii) general competitive conditions, and
(iii) the Company's management information systems.  The words "expect,"
"anticipate," "intend," "plan," "believe," "estimate," and similar expressions
are intended to identify such forwardlooking statements; however, this Annual
Report also contains other forward looking statements in addition to historical
information.  This notice is intended to take advantage of the "safe harbor"
provided by the Private Securities Litigation Reform Act of 1995 with respect to
such forward-looking statements.  These forward-looking statements involve a
number of risks and uncertainties, accordingly, there can be no assurance that
such indicated results will be realized.  Among others, factors that could cause
actual results to differ materially are the following: development of trends in
the general economy; the highly competitive nature of the banking industry; the
dependence on key personnel who have been hired or retained by the Company;
changes in regulatory requirements which are applicable to the Company's
business; and the risk factors listed from time to time in the Company's
Commission reports, including but not limited to, its Annual Reports on Form 10-
K.  By making these forward-looking statements, the Company does not undertake
to update them in any manner except as may be required by the Company's
disclosure obligations in filings it makes with the Securities and Exchange
Commission under the Federal securities laws.

ITEM 2.  DESCRIPTION OF PROPERTY

     The Company's offices are located in The Park Avenue Bank's main office at
3102 North Oak Street Extension, Valdosta, Georgia 31602, and its telephone
number is (912) 241-2775.

     The Park Avenue Bank's business is conducted at the following locations:

     (1)  Main office - 3102 North Oak Street Extension, Valdosta, Georgia
          31602;

     (2)  Downtown branch - 124 West Hill Avenue, Valdosta, Georgia 31601;

     (3)  Francis Lake Shopping Center branch - Highway 376, Lake Park, Georgia
          31636; and

     (4) Baytree branch   1517 Baytree Road, Valdosta, Georgia 31602

     The Park Avenue Bank owns all of its office locations.

     Farmers & Merchants Bank's business is conducted at 301 West Fourth Street,
     Adel, Georgia 31620, which building it owns.

     First Community's business is conducted at the following locations:

     (1)  Main office  226 South Broad Street, Bainbridge, Georgia 31717;

     (2)  Cairo branch - 800 N. Broad Street, Cairo, Georgia 31728; and

                                      10
<PAGE>
 
     (3) Shotwell branch  400 E. Shotwell Street, Bainbridge, Georgia 31717

     First Community owns all of its office locations.

     Eagle Bank and Trust's business is conducted at the following locations:

     (1) Main office  335 South Main Street, Statesboro, Georgia 33458; and

     (2) Mall office -726 Northside Drive, Statesboro, Georgia  33458

     Eagle Bank and Trust owns all of its office locations.

ITEM 3.  LEGAL PROCEEDINGS

     Neither the Company nor any of the Banks is a party to any pending legal
proceedings, other than routine litigation incidental to each Bank's business,
which management believes would have a material effect upon the operations or
financial condition of the Company or the Banks.

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

     None.

                                    PART II
                                    -------



ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     As of December 31, 1998 there were approximately 2,500 shareholders of
record of the Company's common stock.  Prior to July 9, 1996 there was no
established trading market for the Company's common stock.  The Company's common
stock began trading on the American Stock Exchange on July 9, 1996 under the
symbol "PAB."  The following table shows the high and low prices for each
quarter of the 1997 and 1998 fiscal year:

<TABLE>
<CAPTION>
                                               Sales
                                             Prices Per
                                            Share of PAB
                                            Common Stock
                                           --------------
                                           High       Low 
                                           ----       ---
<S>                                       <C>       <C>
1997                                     
First Quarter                             $10.69    $ 9.44
Second Quarter                             11.00     10.13
Third Quarter                              11.38     10.50
Fourth Quarter                             12.06     10.56
                                         
1998                                     
First Quarter                              27.38     11.75
Second Quarter                             23.75     20.00
Third Quarter                              23.38     18.13
Fourth Quarter                             21.50     17.25
</TABLE>

     The Company has declared and paid cash dividends on the common stock since
1983 (its first full year of operations).  The Company paid cash dividends of
$.175 per share ($988,423 in the aggregate) in fiscal year 1997 and 

                                      11
<PAGE>
 
$.275 per share ($1,997,476 in the aggregate) in fiscal year 1998. Per share
amounts have been adjusted to reflect a two-for-one stock split in 1998.

     The primary source of funds available for the payment of cash dividends by
the Company is dividends from the Banks.  The ability of the Banks to pay
dividends are subject to the provisions of the Financial Institutions Code of
Georgia, the rules of the Georgia Department.

     If, in the opinion of the federal banking regulator, 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 regulator
may require, after notice and hearing, that such institution cease and desist
from such practice.  The federal banking regulators have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be unsafe and unsound banking practice.  Under the FDICIA, a
depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it already is undercapitalized.  Moreover, the
federal banking regulators have issued policy statements that provide that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings.  The payment of dividends by the Company and its
banking subsidiaries may also be affected or limited by other factors, such as
the requirement to maintain adequate capital above regulatory guidelines.

Recent Sales of Unregistered Securities

     Pursuant to the PAB Bankshares, Inc. 1994 Directors' Deferred Stock
Purchase Plan, directors of the Company and the Banks may elect to receive
Company common stock in lieu of cash compensation otherwise payable to the
directors for their service as members of the Board of Directors of the Company
and any Bank, or any committee thereof.  The table below sets forth the number
of shares of common stock the Company issued on January 15, 1998 in lieu of fees
payable in connection with meetings held in 1997.
<TABLE>
<CAPTION>
 
 
          Name                  Total Number of Shares of  Price per
                                      Common Stock           Share
                                -------------------------  ---------
<S>                             <C>                        <C>
 
     John Clark                            285              $21.375
     James L. Dewar, Jr.                   570               21.375
     F. Ferrell Scruggs, Sr.               519               21.375
     D. Ramsay Simmons, Jr.                318               21.375
     Joe P. Singletary, Jr.                594               21.375
     Charles O. Templeton                  102               21.375
     Kenneth Scruggs, Sr.                  112               21.375
     T. Lavelle Webb                       121               21.375
     David Brown                            98               21.375
     Joseph Durrenberger                   107               21.375
     Richard Nijem                         102               21.375
     W.F. Bozeman                           80               21.375
     Howard McClain                         25               21.375
     Larry Griner                           95               21.375
     Roger Watson                           95               21.375
     Fleming Williams                       91               21.375
     Raleigh Rollins                       252               21.375
     Oscar Jackson                         198               21.375
</TABLE>

                                      12
<PAGE>
 
     In addition, Robert McDaniel, a former loan officer of First Community,
purchased 250 shares of Company common stock upon the exercise of options
granted to him under the Company 1994 Employee Stock Option Plan.  Mr. McDaniel
purchased these shares on November 3, 1998, prior to terminating his employment
with First Community.

     All of the shares of common stock were acquired by the directors and Mr.
McDaniel described above for investment purposes and with no present intention
toward resale or distribution thereof.  The sales were made without public
solicitation, and the stock certificates bear restrictive legends.  No
underwriter was involved in the transactions, and no commissions were paid.  As
a result, each of the transactions was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.

                                      13
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

                            SELECTED FINANCIAL DATA

                 (Dollars in thousands, except per share data)
                 ---------------------------------------------
<TABLE>
<CAPTION>
Operating Results:
------------------           
                                                     YEARS ENDED DECEMBER 31,
                                         -------------------------------------------------
                                           1998       1997      1996      1995      1994
                                         ---------  --------  --------  --------  --------
<S>                                      <C>        <C>       <C>       <C>       <C>
Total revenues                           $ 45,320    40,374    36,442    32,810    22,844
                                         ========   =======   =======   =======   =======
Interest income                          $ 39,697    36,064    32,591    29,630    20,542
Interest expense                          (19,004)  (16,970)  (16,010)  (14,206)   (8,622)
                                         --------   -------   -------   -------   -------
Net interest income before
  provision for loan losses                20,693    19,094    16,581    15,424    11,920
Provision for loan losses                    (903)     (793)     (633)     (593)     (538)
Securities gains (losses)                      11       (13)      131       127       (63)
Other income                                5,612     4,323     3,721     3,053     2,365
Merger related expenses (before tax)         (620)     (119)      -0-       -0-       -0-
SAIF assessment                               -0-       -0-      (385)      -0-       -0-
Other expenses                            (14,795)  (13,327)  (12,145)  (11,622)   (9,298)
                                         --------   -------   -------   -------   -------
Income before taxes                         9,998     9,165     7,270     6,389     4,386
Income taxes                               (3,347)   (3,162)   (2,451)   (2,083)   (1,356)
                                         --------   -------   -------   -------   -------
Net income                               $  6,651     6,003     4,819     4,306     3,030
                                         ========   =======   =======   =======   =======
Basic earnings per share: (1)
  Net income                             $    .80       .73       .60       .53       .42
  Merger related expenses                     .05       .01       .00       .00       .00
  SAIF assessment                             .00       .00       .03       .00       .00
                                         --------   -------   -------   -------   -------
  Net income before merger expenses
    and SAIF assessment                  $    .85       .74       .63       .53       .42
                                         ========   =======   =======   =======   =======
Diluted earnings per share: (1)
  Net income                             $    .78       .72       .59       .53       .42
  Merger related expenses                     .05       .01       .00       .00       .00
  SAIF assessment                             .00       .00       .03       .00       .00
                                         --------   -------   -------   -------   -------
  Net income before merger expenses
    and SAIF assessment                  $    .83       .73       .62       .53       .42
                                         ========   =======   =======   =======   =======
Dividends per share (1)                  $   .275      .175      .135      .103      .088
                                         ========   =======   =======   =======   =======
 
<CAPTION>

Financial Condition:
--------------------                         
                                                           DECEMBER 31,
                                         ------------------------------------------------
                                             1998      1997      1996      1995      1994
                                         --------   -------   -------   -------   -------
<S>                                      <C>        <C>       <C>       <C>       <C>
Loans, net                               $347,305   317,269   282,493   246,789   188,283
Interest-bearing  deposits                  1,934     6,669     5,605     3,437     3,083
Investments                                95,209    83,439    89,499    93,401    59,341
Federal funds sold and securities
  purchased under agreements  to
  resell                                   15,630    15,848    16,984     9,817     4,371
Assets                                    513,743   471,901   433,549   393,543   290,233
Deposits                                  413,256   386,643   367,359   338,924   248,672
Federal funds purchased                     3,824       -0-       200       -0-       870
Advances from Federal Home
  Loan Bank                                39,058    31,812    17,645     8,941     5,629
Other long-term indebtedness                  -0-     2,184     3,384     5,157     4,730
Other borrowed funds                        2,339     1,005       170       -0-       -0-
Stockholders'  equity                      51,102    46,065    40,875    36,483    27,839
 
<CAPTION>

Asset Quality:
--------------
                                                           DECEMBER 31,
                                         ------------------------------------------------
                                            1998      1997      1996      1995      1994
                                         --------   -------   -------   -------   -------
<S>                                      <C>        <C>       <C>       <C>       <C>
Foreclosed real estate                   $    438       434       371       443        71
Non-accrual loans                           1,251       520       527       306       280
Loans 90 days or more past due and
  still accruing                              199       178       265       722        35
                                         --------   -------   -------   -------   -------
Total non-performing assets and loans
  90 days or more past due               $  1,888     1,132     1,163     1,471       386
                                         ========   =======   =======   =======   =======
</TABLE>

(1) Earnings per share have been adjusted to reflect a 2-for-1 stock split in
    1996 and 1998.
(2) All data for prior periods has been restated to reflect mergers accounted
    for as poolings of interests occurring in 1998.

                                      14
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     This analysis has been prepared to provide insight into the consolidated
financial condition of the Company and to address the factors which the Company
believes have affected the Company's results of operations.  Unless otherwise
noted, the financial and other information presented with respect to the Company
in this discussion and elsewhere in this annual report generally includes the
accounts of the Banks.  The Company's consolidated financial statements and
accompanying notes which follow are an integral part of this review and should
be read in conjunction with it.

Results of Operations
 
     The Company, including operations of the Banks, reported consolidated net
income of $6,651,050 ($.80 and $.78 basic and diluted earnings per share) for
the year ended December 31, 1998 compared to $6,002,894 ($.73 and $.72 basic and
diluted earnings per share) for the year ended December 31, 1997 and $4,818,603
($.60 and $.59 basic and diluted earnings per share) for the year ended December
31, 1996.   Net interest income after provision for loan losses was $19,790,078,
$18,300,673 and $15,948,806 for the three years ended December 31, 1998, 1997,
and 1996, respectively.  The provision for loan losses was $903,404, $792,900
and $632,842 for the three years ended December 31, 1998, 1997 and 1996,
respectively.  Non-interest income totalled $5,623,055, $4,310,047 and
$3,850,515 for the three years ended December 31, 1998, 1997 and 1996,
respectively and non-interest expenses totalled $15,414,632, $13,446,200 and
$12,530,008 for the three years ended December 31, 1998, 1997 and 1996,
respectively.

     During the year ended December 31, 1998 and 1997, the Company incurred
merger related expenses related to the merger of Investors and Eagle Bancorp,
Inc., both of which were accounted for by the pooling of interests method of
accounting.  Theses expenses aggregated approximately $620,000 for 1998 and
$119,000 for 1997.  Additionally, during the year ended December 31, 1996, First
Community (a thrift subsidiary now converted to a commercial bank subsidiary)
was assessed a charge of approximately $385,000 to recapitalize the thrift
industry insurance fund.  Excluding the effects of these expenses, including
related tax benefits, would have resulted in an increase in the Company's
earnings per share of $.05 for 1998, $.01 for 1997 and $.03 for 1996.  This
would have resulted in basic and diluted earnings per share of $.85 and $.83 for
1998, $.74 and $.73 for 1997 and $.63 and $.62 for 1996.

     The following table summarizes the results of operations of the Company for
the three years ended December 31, 1998.
<TABLE>
<CAPTION>
 
                                YEARS ENDED DECEMBER 31,
                              -----------------------------
                                 (Dollars in thousands)
                                1998       1997      1996
                              ---------  --------  --------
<S>                           <C>        <C>       <C>
Interest income               $ 39,697    36,064    32,591
Interest expense               (19,004)  (16,970)  (16,010)
                              --------   -------   -------
Net interest income             20,693    19,094    16,581
Provision for loan losses         (903)     (793)     (633)
Non-interest income              5,623     4,310     3,851
Special SAIF assessment            -0-       -0-      (385)
Other non-interest expense     (15,415)  (13,446)  (12,145)
                              --------   -------   -------
Income before taxes              9,998     9,165     7,269
Income taxes                    (3,347)   (3,162)   (2,450)
                              --------   -------   -------
 
Net income                    $  6,651     6,003     4,819
                              ========   =======   =======
</TABLE>

                                      15
<PAGE>
 
<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                               ---------------------------
                                                 1998      1997     1996
                                               --------  --------  -------
<S>                                            <C>       <C>       <C>
Return on assets (net income divided
 by average total assets)                         1.35%     1.33%    1.17%
 
Return on equity (net income divided
 by average equity)                              13.69%    13.81%   12.48%
 
Dividend payout ratio (dividends
 declared per share divided by diluted
 net income per share)                           35.26%    24.31%   22.88%
 
Equity to assets ratio at December 31
 (average equity divided by average
 total assets)                                    9.95%     9.76%    9.43%
 
Book value per share at December 31             $ 6.17    $ 5.57   $ 5.00
 
Net interest margin as percentage of
 average interest-earning assets                  4.64%     4.62%    4.39%
 
Efficiency ratio, excluding merger expenses
 and SAIF assessment                             55.54%    56.31%   58.78%
 
Non-performing assets and loans 90 days
 or more past due as percentage of
 total loans at December 31                        .54%      .35%     .41%
</TABLE>

Comparison of Years Ended December 31, 1998 and 1997

     Operations for the year ended December 31, 1998 resulted in net income of
approximately $6.7 million compared to a net income of approximately $6.0
million for the year ended December 31, 1997.

     Interest Income
     ---------------

     Total interest income increased approximately $3.6 million for 1998
compared to 1997.  This increase is attributed to the factors explained in the
following paragraphs.

     Interest earned on loans increased from approximately $30.0 million in 1997
to approximately $33.1 million in 1998, an increase of $3.1 million.  This
increase was the combined effect of an increase in the average loan portfolio
balance from approximately $314.7 million in 1997 to $328.1 million in 1998 and
an increase in the rate earned on the loan portfolio from 9.54% in 1997 to 10.1%
in 1998.

     Interest earned on taxable investment securities decreased from
approximately $5.1 million in 1997 to approximately $4.7 million in 1998, a
decrease of $447,000.  This decrease was the net effect of an increase in the
average taxable investment portfolio balance from approximately $80.8 million in
1997 to approximately $81.5 million in 1998 and a decrease in the rate earned on
the taxable investment portfolio from 6.31% in 1997 to 5.71% in 1998.

     Interest earned on nontaxable investment securities increased from
approximately $247,000 in 1997 to approximately $316,000 in 1998, an increase of
$69,000.  This increase was the net effect of an increase in the average non-
taxable investment portfolio balance from approximately $5.6 million in 1997 to
approximately $7.5 million in 1998 and a decrease in the rate earned on the non-
taxable investment portfolio from 4.41% in 1997 to 4.2% in 1998.

     Interest earned on interest-bearing deposits in banks decreased from
approximately $236,000 in 1997 to approximately $206,000 in 1998, a decrease of
$30,000.  This decrease was the combined effect of a decrease in the 

                                      16
<PAGE>
 
average interest-bearing deposits balance from $4.7 million in 1997 to $4.3
million in 1998 and a decrease in the rate earned on the interest-bearing
deposits from 5.0% in 1997 to 4.78% in 1998.

     Interest earned on federal funds sold increased from approximately $448,000
in 1997 to approximately $1.3 million in 1998, an increase of $934,000.  This
increase was the net effect of an increase in the average federal funds sold
balance from approximately $7.1 million in 1997 to approximately $24.3 million
in 1998 and a decrease in the rate earned on the federal funds sold from 6.32%
in 1997 to 5.69% in 1998.

       Interest Expense
       ----------------

     Total interest expense increased approximately $2.03 million in 1998
compared to 1997.  This increase is attributed to the factors explained in the
following paragraphs.

     The increase in total interest expense was the combined effect of an
increase in the average balance of interest-bearing deposits from approximately
$315.5 million in 1997 to approximately $331.3 million in 1998 and an increase
in the average rate paid on deposits from 4.85% in 1997 to 4.9% in 1998.  The
Company's interest expense on interest-bearing deposits increased $950,000 from
approximately $15.3 million for the year ended December 31, 1997 to
approximately $16.2 million for the year ended December 31, 1998.  The increase
in interest-bearing deposits came from the local communities served by the
Banks.

     All other interest expense consisting principally of interest on notes and
mortgages payable, increased from approximately $1.7 million for the year ended
December 31, 1997 to approximately $2.8 million for the year ended December 31,
1998, an increase of  $1.1 million.  This increase was the combined effect of an
increase in the average balance of Federal Home Loan Bank advances from
approximately $23.2 million in 1997 to approximately $35.4 million in 1998 and
an increase in the average rate from 5.79% in 1997 to 6.75% in 1998.  These
advances were to match fund mortgage loans made.  Additionally, the Company had
a note payable to a correspondent bank which had a balance of approximately $2.2
million at December 31, 1997, which was repaid prior to maturity during the year
ended December 31, 1998.  The interest rate was a variable interest rate (7.65%
at December 31, 1997).  The note provided for equal semi-annual installments in
the amount of $36,500 with a maturity date in 2005.  Interest on notes payable
decreased from approximately $240,000 for the year ended December 31, 1997 to
approximately $152,000 for the year ended December 31, 1998, a decrease of
$88,000.

     Interest of approximately $128,000 was paid on federal funds purchased
during the year ended December 31, 1998 and approximately $76,000 during the
year ended December 31, 1997, an increase of $52,000.  Federal funds purchased
outstanding totalled $3.8 million at December 31, 1998.  There were no balances
outstanding at December 31, 1997.

     Interest of approximately $28,000 was paid on other borrowed funds during
the year ended December 31, 1997 and approximately $98,000 during the year ended
December 31, 1998, an increase of $70,000.  This represented interest expense on
sweep agreements.  This increase was the combined effect of an increase in the
average balance of sweep agreements from approximately $500,000 for the year
ended December 31, 1997 to approximately $1.7 million for the year ended
December 31, 1998 and an increase in the average rate paid from 5.25% for the
year ended December 31, 1997 to 5.84% for the year ended December 31, 1998.

       Provision for Loan Losses
       -------------------------

     The provision for loan losses for the year ended December 31, 1998 as
compared to 1997 increased approximately $110,000.  The balance of the allowance
for loan losses was approximately $4.4 million at December 31, 1998 and
approximately $4.2 million at December 31, 1997.  Actual loan charge-offs net of
recoveries were approximately $720,000 for the year ended December 31, 1998 and
approximately $353,000 for the year ended December 31, 1997.  Non-accrual loans
were approximately $1.3 million at December 31, 1998 as compared to $520,000 at
December 31, 1997.  Loans 90 days or more past due and still accruing amounted
to approximately $199,000 at December 31, 1998 and $178,000 at December 31,
1997.  In determining an adequate level of loan loss reserves, such loans were
included in such consideration.  The amount of the provision for loan losses is
a result of the amount of loans charged-off, the amount of loans recovered and
management's conclusion concerning the level of the allowance for loan losses.
The level of the allowance for loan losses is based upon a number of factors
including the Banks' past loan loss 

                                      17
<PAGE>
 
experience, management's evaluation of the collectibility of loans, the general
state of the economy, specific impaired loans and other relevant factors.

     Non-Interest Income
     -------------------

     The following table presents the principal components of non-interest
income for the years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                     --------------------------
                                                         1998          1997
                                                     -------------  -----------
                                                       (Dollars in thousands)
<S>                                                  <C>            <C>
 
  Service charges on deposit accounts                   $3,013        2,797
  Insurance commissions                                    221          148
  Fees on mortgage loans originated for sale               725          244
  Late charges and other loan fees                         657          349
  Equity in earnings of unconsolidated subsidiary          368          256
  Securities gains (losses)                                 11          (13)
  Gain (loss) on sale of loans                               2           24
  Gain (loss) on sale of other real estate                  (5)           3
  Gain (loss) on sale of assets                            109           (2)
  Other income                                             522          504
                                                        ------        -----
    Total non-interest income                           $5,623        4,310
                                                        ======        =====
 
</TABLE>

     Non-interest income for the year ended December 31, 1998 as compared to
1997, increased approximately $1.3 million.  Service charges on deposit accounts
for the year ended December 31, 1998 as compared to 1997 increased approximately
$216,000.  This increase was related primarily to an increase in the number of
transactional accounts with NSF charges.  Fees on mortgage loans originated for
sale increased approximately $481,000 reflecting an increase in mortgage loan
originations.  Late charges and other miscellaneous loan fees increased
approximately $308,000 reflecting an increase in loan volume.  Equity in
earnings of unconsolidated subsidiary increased approximately $112,000.  This
represents the Company's 50% interest in the earnings of Empire Financial
Services, Inc. ("Empire"), an unconsolidated subsidiary which is 50% owned by
First Community.  All other income increased from approximately $664,000 for the
year ended December 31, 1997 to approximately $860,000 in 1998, an increase of
$196,000.

     Non-Interest Expenses
     ---------------------

     The following table presents the principal components of non-interest
expenses for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
 
                                        YEARS ENDED DECEMBER 31,
                                        ------------------------
                                            1998         1997
                                        ------------  ----------
                                         (Dollars in thousands)
<S>                                     <C>           <C>
 
  Compensation                               $ 6,636       6,002
  Other personnel expenses                     1,588       1,294
  Occupancy expense of bank premises             746         729
  Furniture and equipment expense              1,302       1,246
  Federal deposit insurance                       90          80
  Postage and courier services                   339         359
  Supplies                                       497         494
  Amortization                                   357         357
  Other operating expenses                     3,860       2,885
                                             -------      ------
    Total non-interest expenses              $15,415      13,446
                                             =======      ======
</TABLE>

                                      18
<PAGE>
 
     Non-interest expenses for the year ended December 31, 1998 as compared to
1997, increased approximately $2.0 million or 14.6%.

     Compensation and other personnel expenses increased approximately $928,000
reflecting an increase in the number of employees, in wage levels and in the
cost of employee benefits.  Merger related expenses for the year ended December
31, 1998 as compared to 1997 increased approximately $501,000.  These expenses
were incurred by the Company and two subsidiaries in connection with the
acquisition by merger of two subsidiaries in 1998, which were accounted for as
poolings of interest.  All other expenses increased approximately $540,000 or
8.95%.  The increases were primarily attributed to a larger volume of business.

       Income Taxes
       ------------

     The effective tax rate for the year ended December 31, 1998 was 33.5%
compared to 34.5% for the year ended December 31, 1997.


Comparison of Years Ended December 31, 1997 and 1996

     Operations for the year ended December 31, 1997 resulted in a net income of
approximately $6.0 million compared to a net income of approximately $4.8
million  for the year ended December 31, 1996.

         Interest Income
         ---------------

     Total interest income increased approximately $3.5 million for 1997
compared to 1996.  This increase is attributed to the factors explained in the
following paragraphs.

     Interest earned on loans increased from approximately $26.3million in 1996
to approximately $30.0 million in 1997, an increase of $3.7 million.  This
increase was the net effect of an increase in the average loan portfolio balance
from approximately $274.4 million in 1996 to $314.7 million in 1997 and a
decrease in the rate earned on the loan portfolio from 9.6% in 1996 to 9.54% in
1997.

     Interest earned on taxable investment securities decreased from
approximately $5.5 million in 1996 to approximately $5.1 million in 1997, a
decrease of $432,000.  This decrease was the combined effect of a decrease in
the average taxable investment portfolio balance from approximately $86.8
million in 1996 to approximately $80.8 million in 1997 and a decrease in the
rate earned on the taxable investment portfolio from 6.38% in 1996 to 6.31% in
1997.

     Interest earned on nontaxable investment securities increased from
approximately $239,000 in 1996 to approximately $247,000 in 1997, an increase of
$8,000.  This increase was the net effect of an increase in the average non-
taxable investment portfolio balance from approximately $4.9 million in 1996 to
approximately $5.6 million in 1997 and a decrease in the rate earned on the non-
taxable investment portfolio from 4.9% in 1996 to 4.41% in 1997.

     Interest earned on interest-bearing deposits in banks increased from
approximately $91,000 in 1996 to approximately $236,000 in 1997, an increase of
$145,000.  This increase was the combined effect of an increase in the average
interest-bearing deposits balance from $2.4 million in 1996 to $4.7 million in
1997 and an increase in the rate earned on the interest-bearing deposits from
3.84% in 1996 to 5.0% in 1997.

     Interest earned on federal funds sold increased from approximately $394,000
in 1996 to approximately $448,000 in 1997, an increase of $54,000.  This
increase was the net effect of a decrease in the average federal funds sold
balance from approximately $9.5 million in 1996 to approximately $7.1 million in
1997 and an increase in the rate earned on the federal funds sold from 4.17% in
1996 to 6.32% in 1997.

     Interest Expense
     ----------------

     Total interest expense increased approximately $960,000 in 1997 compared to
1996.  This increase is attributed to the factors explained in the following
paragraphs.

                                       19
<PAGE>
 
     The increase in total interest expense was the net effect of an increase in
the average balance of interest-bearing deposits from approximately $295.1
million in 1996 to approximately $315.5 million in 1997 and a decrease in the
average rate paid on deposits from 4.99% in 1996 to 4.85% in 1997.  The effect
of these changes increased the interest expense on interest-bearing deposits
from approximately $14.7 million for the year ended December 31, 1996 to
approximately $15.3 million for the year ended December 31, 1997, an increase of
$569,000.  The increase in interest-bearing deposits came from the local
communities served by the Banks.

     All other interest expense consisting principally of interest on notes and
mortgages payable, increased from approximately $1.3 million for the year ended
December 31, 1996 to approximately $1.7 million for the year ended December 31,
1997, an increase of $392,000.  This increase was the combined effect of an
increase in the average balance of Federal Home Loan Bank advances from
approximately $16.3 million in 1996 to approximately $23.2 million in 1997 and
an increase in the average rate from 5.44% in 1996 to 5.79% in 1997.  These
advances were to match fund mortgage loans made.  Additionally, the Company had
notes payable to correspondent banks which had a balance of approximately $2.2
million at December 31, 1997.  The interest rate was variable (7.65% at December
31, 1997).  Semi-annual principal payments were scheduled through the maturity
date in 2005.  Interest on notes payable decreased from approximately $337,000
for the year ended December 31, 1996 to approximately $240,000 for the year
ended December 31, 1997, a decrease of $97,000.

     Interest of approximately $76,000 was paid on federal funds purchased
during the year ended December 31, 1997 and approximately $44,000 during the
year ended December 31, 1996, an increase of $32,000.  There was no federal
funds purchased outstanding at December 31, 1997.

     Interest of approximately $24,000 was paid on other borrowed funds during
the year ended December 31, 1996 and approximately $28,000 during the year ended
December 31, 1997, an increase of $4,000.  This represented interest expense on
sweep agreements.  This increase was the net effect of a decrease in the average
balance of sweep agreements from approximately $600,000 for the year ended
December 31, 1996 to approximately $500,000 for the year ended December 31, 1997
and an increase in the average rate paid from 4.17% for the year ended December
31, 1996 to 5.25% for the year ended December 31, 1997.

     Provision for Loan Losses
     -------------------------

     The provision for loan losses for the year ended December 31, 1997 as
compared to 1996 increased approximately $160,000.  The balance of the allowance
for loan losses was approximately $4.2 million at December 31, 1997 and
approximately $3.8 million at December 31, 1996.  Actual loan charge-offs net of
recoveries were approximately $353,000 for the year ended December 31, 1997 and
approximately $257,000 for the year ended December 31, 1996.  Non-accrual loans
were approximately $520,000 at December 31, 1997 as compared to $527,000 at
December 31, 1996.  Loans 90 days or more past due and still accruing amounted
to approximately $178,000 at December 31, 1997 and $265,000 at December 31,
1996.  In determining an adequate level of loan loss reserves, such loans were
included in such consideration.  The amount of the provision for loan losses is
a result of the amount of loans charged-off, the amount of loans recovered and
management's conclusion concerning the level of the allowance for loan losses.
The level of the allowance for loan losses is based upon a number of factors
including the Banks' past loan loss experience, management's evaluation of the
collectibility of loans, the general state of the economy, specific impaired
loans and other relevant factors.

                                       20
<PAGE>
 
     Non-Interest Income
     -------------------

     The following table presents the principal components of non-interest
income for the years ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                     -------------------------
                                                         1997          1996
                                                     -------------  ----------
                                                      (Dollars in thousands)
<S>                                                  <C>            <C>
  Service charges on deposit accounts                      $2,797        2,407
  Insurance commissions                                       148           84
  Fees on mortgage loans originated for sale                  244          254
  Late charges and other loan fees                            349          298
  Equity in earnings of unconsolidated subsidiary             256          216
  Securities gains (losses)                                   (13)         131
  Gain (loss) on sale of loans                                 24           11
  Gain (loss) on sale of other real estate                      3            1
  Gain (loss) on sale of assets                                (2)           3
  Other income                                                504          446
                                                           ------        -----
    Total non-interest income                              $4,310        3,851
                                                           ======        =====
</TABLE>

     Non-interest income for the year ended December 31, 1997 as compared to
1996, increased approximately $459,000.  Service charges on deposit accounts for
the year ended December 31, 1997 as compared to 1996 increased approximately
$390,000.  This increase was related primarily to an increase in the number of
transaction deposit accounts with NSF charges.  Late charges and other
miscellaneous loan fees increased approximately $51,000 reflecting an increase
in loan volume.  Securities gains for the year ended December 31, 1997 as
compared to 1996 decreased approximately $144,000.  Equity in earnings of
unconsolidated subsidiary increased approximately $40,000.  This represents the
Company's 50% interest in the earnings of Empire.  All other income increased
from approximately $799,000 for the year ended December 31, 1996 to
approximately $921,000 in 1997.

     Non-Interest Expenses
     ---------------------

     The following table presents the principal components of non-interest
expenses for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                        YEARS ENDED DECEMBER 31,
                                        ------------------------
                                            1997         1996
                                        ------------  ----------
                                         (Dollars in thousands)
<S>                                     <C>           <C>
 
  Compensation                               $ 6,002       5,430
  Other personnel expenses                     1,294       1,060
  Occupancy expense of bank premises             729         696
  Furniture and equipment expense              1,246       1,159
  Federal deposit insurance                       80         117
  Special SAIF assessment                        -0-         385
  Postage and courier services                   359         315
  Supplies                                       494         418
  Amortization                                   357         376
  Other operating expenses                     2,885       2,574
                                             -------      ------
 
    Total non-interest expenses              $13,446      12,530
                                             =======      ======
</TABLE>

     Non-interest expenses for the year ended December 31, 1997 as compared to
1996, increased approximately $916,000 or 7.3% ($1,301,000 or 10.7% excluding
special SAIF assessment in 1996).

     Compensation and other personnel expenses increased approximately $806,000
reflecting an increase in the number of employees, in wage levels and in the
cost of employee benefits.  During the quarter ended September 30, 

                                       21
<PAGE>
 
1996, the much publicized pending legislation which would result in a special
SAIF assessment to recapitalize the insurance fund was signed into law. This
assessment affected the Company's then thrift subsidiary, First Community, and
resulted in an assessment of $.657 per $100 of domestic deposits held as of
March 31, 1995. This assessment amounted to $385,000. Federal deposit insurance
decreased $37,000 for the year ended December 31, 1997 compared to 1996 as a
result of reductions in federal deposit insurance premium rates. All other
expenses increased approximately $532,000 or 9.6%. The increases were primarily
attributed to a larger volume of business.

     Income Taxes
     ------------

     The effective tax rate for the year ended December 31, 1997 was 34.5%
compared to 33.7% for the year ended December 31, 1996.


Asset/Liability Management and Market Risk (Quantitative and Qualitative
Disclosures About Market Risk)

     The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk.  The Company utilizes no derivative
instruments to mitigate its credit risk, relying instead on strict underwriting
standards, loan review, and an adequate loan loss reserve.

     Interest rate risk is the risk of loss in value due to changes in interest
rates.  This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives.   ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in Economic Value of Equity  ("EVE") and net interest income under
various interest rate scenarios.

     Market value has taken on greater interest as a measure of equity risk.  By
marking-to-market the components of the balance sheet, the Company can compute
the market value of equity.  Not unlike a bond analysis, interest rates are
changed at various increments and the new market value is calculated.   ALCO
attempts to manage the various components of the Company's balance sheet to
minimize the impact of sudden and sustained changes in interest rates on EVE and
net interest income.

     The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO.  Rate risk measurement
is undertaken to determine potential loss in the net interest margin ("NIM")
and, ultimately, in each Bank's capital ratio.  One of the most popular methods
used to estimate interest rate risk is the rate sensitivity gap.  The theory
states that interest rate risk is due to the volume differences, called GAP,
between repricable assets and liabilities over a specific period of time.  NIM
change can be quantified by assuming a rate change and applying it to this GAP.
If potential changes to EVE and NIM resulting from hypothetical interest rate
swings are not within limits acceptable by the Board of Directors, the Board of
Directors may direct management to adjust its asset and liability mix to bring
interest rate risk within acceptable limits.

     To ensure that the Company's EVE and NIM remain within acceptable limits
the following strategies have been developed.  First, greater emphasis has been
placed on adjustable rate loans, which generally reprice in one year or less.
Second, its investment activities are short- and medium-term securities.  Third,
attempt to maintain and increase regular savings and transaction deposit
accounts.  Fourth, utilize long-term borrowings to match long-term assets.

                                       22
<PAGE>
 
     The following table presents the Company's projected change in EVE and net
interest income for the various rate shock levels as of December 31, 1998.  EVE
and the impact on net interest income for the Company are regularly calculated
internally.

                      CHANGES IN ECONOMIC VALUE OF EQUITY
                      -----------------------------------

<TABLE>
<CAPTION>
 
                             MARKET
                            VALUE OF
        CHANGE IN           PORTFOLIO      ACTUAL     PERCENT
     INTEREST RATES          EQUITY        CHANGE      CHANGE
-------------------------  -----------  ------------  --------
<S>                        <C>          <C>           <C>
 
200 basis point rise       $14,115,000   -$6,814,000   -32.56%
Base rate scenario          20,929,000           -0-      .00%
200 basis point decline     28,790,000  $  7,861,000   +37.56%
</TABLE>

                         CHANGES IN NET INTEREST INCOME
                         ------------------------------

<TABLE>
<CAPTION>
 
                               NET
        CHANGE IN           INTEREST      ACTUAL    PERCENT
     INTEREST RATES          INCOME       CHANGE     CHANGE
-------------------------  -----------  ----------  --------
<S>                        <C>          <C>         <C>
 
200 basis point rise       $22,769,000  +$ 478,000    +2.14%
Base rate scenario          22,291,000         -0-      .00%
200 basis point decline     21,945,000  -$ 346,000    -1.55%
</TABLE>

     The preceding table indicates that at December 31, 1998, in the event of a
sudden and sustained increase in prevailing market interest rates, the Company's
EVE would be expected to decrease and in the event of a decrease in prevailing
market rates, the Company's net interest income would be expected to decrease.
At December 31, 1998, the Company's estimated changes in EVE were acceptable to
the Board of Directors.

     Rate risk analysis can be complex and risk can only be estimated.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual future results.  Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.

Interest Rate Sensitivity GAP Up to One Year

     As of December 31, 1998, excluding NOW and savings accounts, which the
Company does not consider to be rate sensitive, the Company has a positive
interest sensitivity GAP up to one year.  The following table presents the
interest-sensitivity GAP of the Company, the rate sensitive assets to rate
sensitive liabilities and comfort ranges as of December 31, 1998.

<TABLE>
<CAPTION>
                                               UP TO
                                             ONE YEAR
                                      -----------------------
                                      (Dollars in  thousands)
<S>                                   <C>
 
  Total rate sensitive assets                      $  210,932
  Total rate sensitive liabilities                    225,363
                                                   ----------
 
  Interest-sensitivity  GAP                         -$ 14,431
 
  GAP ratio                                               .94
                                                   ==========
 
  Comfort range                                      .80-1.20
                                                   ==========
 
</TABLE>

                                       23
<PAGE>
 
Financial Condition

     The Company, including the Banks, reported consolidated total assets of
approximately $513.7 million at December 31, 1998 and $471.9 million at December
31, 1997 representing an increase of approximately $41.8 million for the year
ended December 31, 1998.  Loan growth exceeded deposit growth as loans increased
approximately $30.2 million and deposits increased approximately $26.6 million.
Additionally, funds were provided by operations of $7.8 million, sale of stock
of $300,000, Federal Home Loan Bank advances of $7.2 million, decrease in
interest-bearing deposits of $4.7 million, increase in federal funds purchased
and other borrowings of $5.2 million and decrease in federal funds sold of
$200,000.  These funds were used to purchase additional bank premises and
equipment of $3.5 million, pay dividends of $2.1 million, increase investment
securities $11.5 million, increase cash by $2.5 million and decrease note
payable to a correspondent bank by $2.2 million.  The growth in loans and
deposits is attributable to several factors including  growth in the customer
base due to the business development efforts of the management team, the pricing
of loans and deposits and the favorable economic conditions experienced in the
markets served by the Banks.

     The changes in interest rates as previously discussed are reflective of
interest rates in general and market conditions including competition.  Changes
in short-term funds including cash and due from banks, federal funds sold,
interest-bearing deposits and investment securities are reflective of the
liquidity position of the Company.

     The Company's capital to assets ratio as of December 31, 1998 and 1997 was
9.95% and 9.76%, respectively.

     The Company and the Banks are subject to various regulatory capital
requirements administered by the state and 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 Company's and the Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices.  The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.

     Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of December 31, 1998 and 1997,
that the Company and the Banks meet all capital adequacy requirements to which
they are subject.

    As of December 31, 1998, the most recent notification from banking
regulators categorized the Company and the Banks as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized as
adequately capitalized, the Company and the Banks must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table.  There have been no conditions or events since that notification that
management believes have changed the institutions' category.

                                       24
<PAGE>
 
    The Company's consolidated actual capital amounts and ratios and the minimum
amounts and ratios under the capital adequacy and prompt corrective action
provisions are presented below:

<TABLE>
<CAPTION>
 
                                                      TO BE WELL
                                                   CAPITALIZED UNDER
                                                    FOR CAPITAL      PROMPT CORRECTIVE
                                    ACTUAL       ADEQUACY PURPOSES    ACTION PROVISION
                                ---------------  ------------------  ------------------
                                AMOUNT   RATIO    AMOUNT    RATIO     AMOUNT    RATIO
                                -------  ------  --------  --------  --------  --------
                                                (Dollars in thousands)
<S>                             <C>      <C>     <C>       <C>       <C>       <C>
As of December 31, 1998:
 Total Capital
   (to risk weighted assets)    $52,482   13.8%    30,424        8%    38,030      10%
 Tier I Capital
   (to risk weighted assets)     48,056   12.6%    15,256        4%    22,884       6%
 Tier I Capital
   (to average assets)           48,056    9.6%    20,023        4%    25,029       5%
 
As of December 31, 1997:
 Total Capital
   (to risk weighted assets)    $47,122   14.9%    25,300        8%    31,626      10%
 Tier I Capital
   (to risk weighted assets)     42,879   13.5%    12,705        4%    19,057       6%
 Tier I Capital
   (to average assets)           42,879    9.5%    18,054        4%    22,568       5%
 
</TABLE>

Liquidity and Capital Resources

     Liquidity management involves the matching of the cash flow requirements of
customers, for the withdrawal of funds or the funding of additional loans, and
the ability of the Banks to meet those requirements.  Management monitors and
maintains appropriate levels of assets and liabilities so that maturities of
assets are such that adequate funds are provided to meet estimated customer
withdrawals and loan requests.

     The Banks' liquidity position depends primarily upon the liquidity of its
assets relative to its need to respond to short-term demand for funds caused by
withdrawals from deposit accounts and loan funding commitments.  Primary sources
of liquidity are scheduled payments on its loans and interest on the Banks'
investments.  The Banks may also utilize their cash and due from banks, short-
term deposits with financial institutions, federal funds sold and investment
securities to meet liquidity requirements.  At December 31, 1998, the Banks'
cash and due from banks were approximately $24.5 million (after reduction for
their required reserves of $1.9 million), their short-term deposits with
financial institutions were $1.9 million, and their federal funds sold were
$15.6 million.  The effect of the required reserves is to reduce available
liquidity.  All of the above can be converted to cash on short notice.  The sale
of investments, which had a market value of approximately $95.2 million at
December 31, 1998, can also be used to meet liquidity requirements, to the
extent the investments are not pledged to secure public funds on deposit as
required by law.  Securities with a market value of $37.3 million were pledged
as of December 31, 1998.

     The Banks' funding needs are based primarily on the volume of lending.  The
primary funding source is from new deposits.  The Banks seek to attract new
deposits by paying rates of interest on deposit accounts which are competitive
in their respective primary service areas.  The Banks generally do not pay
brokers' commissions in connection with the obtaining of deposits or have
deposits outside the primary service area.  The Banks do not pay premiums to
attract deposits.  As of December 31, 1998, the average cost for deposit
liabilities was approximately 4.9%.  The Banks continue to expect that new
deposits will serve as its primary funding source.

     The Banks also have the ability, on a short-term basis, to borrow and
purchase federal funds from other financial institutions.  The Banks are members
of the Federal Home Loan Bank of Atlanta and as such have the ability to secure
advances therefrom, although the cost of such advances exceed lower cost
alternatives such as deposits from the local communities.  The Banks had
advances outstanding from the Federal Home Loan Bank of Atlanta of $39.1 million
at December 31, 1998 at an average rate of 6.03%.

     The average loan to deposit ratio for the Company at December 31, 1998 was
85.1%  compared to 83.2% at December 31, 1997.

                                       25
<PAGE>
 
<TABLE>
<CAPTION>
Average Balance Sheets
The following table presents average balance sheets for the three years ended December 31, 1998.
 
                                                                                    YEARS ENDED DECEMBER 31,
                                                                  -------------------------------------------------------------
ASSETS                                                                    1998                  1997                1996
                                                                  ---------------------  ------------------  ------------------
<S>                                                               <C>                    <C>                 <C>
                                                                                     (Dollars in thousands)
Cash and cash equivalents:
  Cash and due from banks                                                     $ 25,131              19,789              15,987
  Interest-bearing deposits in other banks                                       2,404               2,165                 869
                                                                              --------             -------             -------
Total cash and cash equivalents                                                 27,535              21,954              16,856
Time deposits                                                                    1,897               2,547               1,499
Federal funds sold and securities purchased under
  agreement to resell                                                           24,283               7,093               9,458
Investment securities                                                           89,324              86,469              91,750
Investment in unconsolidated subsidiary                                             51                  98                 133
Loans, net of allowance for loan losses and unearned
  interest                                                                     323,743             310,628             270,738
Bank premises and equipment                                                     12,725              11,445              10,990
Other REO                                                                          436                 402                 407
Land and building of former banking offices                                        319                 380                 285
Land and building held for lease                                                   295                 183                 367
Accrued interest receivable                                                      5,314               4,854               3,803
Goodwill                                                                         2,892               3,249               3,615
Cash value of life insurance                                                     2,836               2,371               1,749
Other assets                                                                     1,172               1,052               1,896
                                                                              --------             -------             -------
Total assets                                                                  $492,822             452,725             413,546
                                                                              ========             =======             =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
  Demand                                                                      $ 67,514              61,548              53,884
  NOW                                                                           87,575              77,821              77,108
  Savings                                                                       24,741              25,264              25,641
  Time                                                                         219,028             212,368             192,373
                                                                              --------             -------             -------
                                                                               398,858             377,001             349,006
Federal funds purchased                                                          1,912               1,200               1,057
Notes payable                                                                    2,184               3,271               4,271
Other borrowed funds                                                             1,672                 535                 584
Advances from Federal Home Loan Bank                                            35,435              23,194              16,323
Accrued interest                                                                 1,629               1,650               1,162
Other liabilities                                                                2,549               2,403               2,464
                                                                              --------             -------             -------
Total liabilities                                                              444,239             409,254             374,867
                                                                              --------             -------             -------
Stockholders' equity:
  Common stock                                                                   1,240               1,264               1,719
  Additional paid in capital                                                    26,057              26,104              25,015
  Retained earnings                                                             21,552              17,119              13,158
  Accumulated other comprehensive income                                           226                  13                  55
  Treasury stock                                                                  (492)             (1,029)             (1,268)
                                                                              --------             -------             -------
Total stockholders' equity                                                      48,583              43,471              38,679
                                                                              --------             -------             -------
Total liabilities and stockholders' equity                                    $492,822             452,725             413,546
                                                                              ========             =======             =======
</TABLE>

                                       26
<PAGE>
 
Average Yields Earned and Rates Paid

    The following tables presents the average balances, average yields and
interest earned on interest-earning assets and average rates and interest paid
on interest-bearing liabilities for the three years ended December 31, 1998.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                              --------------------------------------------------------------------------------
                                          1998                       1997                       1996
                                -------------------------  -------------------------  -------------------------
                                AVERAGE   INCOME/  YIELD   AVERAGE   INCOME/  YIELD   AVERAGE   INCOME/  YIELD
                                BALANCES  EXPENSE  RATES   BALANCES  EXPENSE  RATES   BALANCES  EXPENSE  RATES
                                --------  -------  ------  --------  -------  ------  --------  -------  ------
                                            (Dollars in thousands)
<S>                             <C>       <C>      <C>     <C>       <C>      <C>     <C>       <C>      <C>
Average yield on loans (1)(3)   $328,078   33,140  10.10%   314,651   30,031   9.54%   274,352   26,334   9.60%
Average yield on taxable
  investment securities           81,477    4,654   5.71%    80,836    5,101   6.31%    86,774    5,533   6.38%
Average yield on non-taxable
  investment securities (2)        7,505      316   4.20%     5,599      247   4.41%     4,872      239   4.90%
Average yield on interest-
  bearing deposits in banks        4,302      206   4.78%     4,711      236   5.00%     2,368       90   3.84%
Average yield on federal
  funds sold                      24,283    1,382   5.69%     7,093      448   6.32%     9,458      394   4.17%
                                --------   ------  -----    -------   ------   ----    -------   ------   ----
 
Average yield on all
  interest-earning assets       $445,645   39,698   8.91%   412,890   36,063   8.73%   377,824   32,590   8.63%
                                ========   ======  =====    =======   ======   ====    =======   ======   ====
 
Average rate paid on now
  account deposits              $ 87,575    2,691   3.07%    77,821    2,237   2.87%    77,108    2,327   3.02%
Average rate paid on savings
  deposits                        24,741      758   3.06%    25,264      799   3.16%    25,641      807   3.15%
Average rate paid on time        219,028   12,786   5.84%   212,368   12,248   5.77%   192,373   11,582   6.02%
 deposits
Average rate paid on federal
 funds
  purchased                        1,912      128   6.70%     1,200       76   6.32%     1,057       44   4.17%
Average rate paid on notes
  payable                          2,184      152   6.94%     3,271      240   7.33%     4,271      337   7.90%
Average rate paid on other
  borrowed funds                   1,672       98   5.84%       535       28   5.25%       584       24   4.17%
Federal Home Loan Bank            35,435    2,391   6.75%    23,194    1,342   5.79%    16,323      888   5.44%
 advances                       --------   ------  -----    -------   ------   ----    -------   ------   ----
 
Average rate paid on all
 interest-
  bearing liabilities           $372,547   19,004   5.10%   343,653   16,970   4.94%   317,357   16,009   5.04%
                                ========   ======  =====    =======   ======   ====    =======   ======   ====
 
Average net yield on interest-
  earning assets (net interest
  income as a percentage of
  average interest-earning                          4.64%                      4.62%                      4.39%
   assets)                                         =====                       ====                       ====
</TABLE>


(1) Non-accruing loans have been included in the "average amount outstanding"
    and average loans have not been reduced by the allowance for loan losses.
(2) Interest income on tax exempt securities has not been calculated on a tax
    equivalent basis.
(3) Loan fees included in interest income amounted to approximately $1,100,000
    in 1998, $1,137,000 in 1997, and $929,000 in 1996.

                                       27
<PAGE>
 
    The table below sets forth certain information regarding changes in interest
income and interest expense for the periods indicated.  For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rates (change in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the change
in volume).  The net change attributable to both volume and rate, which cannot
be segregated, has been allocated proportionately to change due to volume and
change due to rate.
<TABLE>
<CAPTION>
 
                                                   YEARS ENDED DECEMBER 31,
                                         -------------------------------------------------
                                               1997 VS. 1998             1996 VS. 1997
                                         -----------------------   -----------------------
                                          INCREASE (DECREASE)       INCREASE (DECREASE)
                                                DUE TO                    DUE TO
                                         ----------------------   ------------------------
                                         VOLUME    RATE    NET    VOLUME    RATE     NET
                                         ------  ------  ------   ------  ------   -------
<S>                                      <C>      <C>     <C>     <C>      <C>     <C>
                                                      (Dollars in thousands)
Interest income:
 Loans                                   $1,308  $1,799  $3,107   $3,862   $(164)  $3,698
 Taxable investment securities               41    (488)   (447)    (372)    (60)    (432)
 Non-taxable investment securities           80     (11)     69       24     (16)       8
 Interest-bearing deposits in banks         (20)    (10)    (30)     111      34      145
 Federal funds sold                         974     (40)    934      (51)    105       54
                                         ------  ------  ------   ------   -----   ------
  Total                                  $2,383  $1,250  $3,633   $3,574   $(101)  $3,473
                                         ------  ------  ------   ------   -----   ------
 
Interest expense:
 NOW account deposits                    $  293   $ 161  $  454   $   21   $(111)   $ (90)
 Savings deposits                           (16)    (25)    (41)     (10)      2       (8)
 Time deposits                              388     150     538    1,107    (442)     665
 Federal funds purchased                     47       5      52        7      25       32
 Advances from Federal Home Loan Bank       798     251   1,049      394      60      454
 Other borrowed funds                        66       4      70       (2)      6        4
 Other long-term debt                       (76)    (12)    (88)     (74)    (23)     (97)
                                         ------   -----  ------   ------   -----   ------
  Total                                  $1,500   $ 534  $2,034   $1,443    (483)  $  960
                                         ------   -----  ------   ------   -----   ------
Net interest income                      $  883   $ 716  $1,599   $2,131   $ 382   $2,513
                                         ======   =====  ======   ======   =====   ======
</TABLE>

                                       28
<PAGE>
 
Investment Portfolio

    The following table presents investments in obligations of (i) U.S. Treasury
and other U.S. government agencies and corporations, (ii) states of the U.S. and
political subdivisions and (iii) other securities as of December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                       -----------------------------------------------------------------------
                                               1998                     1997                   1996
                                       ----------------------  ----------------------  -----------------------
                                       SECURITIES  SECURITIES  SECURITIES  SECURITIES  SECURITIES   SECURITIES
                                       AVAILABLE    HELD TO    AVAILABLE    HELD TO     AVAILABLE    HELD TO
                                        FOR SALE    MATURITY    FOR SALE    MATURITY    FOR SALE     MATURITY
                                       ----------  ----------  ----------  ----------  -----------  ----------
                                                               ( Dollars in thousands)
<S>                                    <C>         <C>         <C>         <C>         <C>          <C>
 U.S. Treasury and other
   U.S. government agencies
   and corporations                       $80,813        $-0-     $67,683      $4,542     $64,686       $3,790
 States of the U.S. and
   political subdivisions                   9,097         -0-       5,914         -0-      17,015          -0-
 Other securities                           4,808         -0-       5,107         -0-       3,315          -0-
                                          -------        ----     -------      ------     -------       ------
   Total                                   94,718        $-0-     $78,704      $4,542     $85,016       $3,790
                                          
 
 Unrealized gains (losses)
   on available-for-sale-securities           491         -0-         193         -0-        (125)         -0-
                                          -------        ----     -------      ------     -------       ------
                                          $95,209        $-0-     $78,897      $4,542     $84,891       $3,790
                                          =======        ====     =======      ======     =======       ======
</TABLE>
(1) Securities available-for-sale  are carried at market value and securities
    held-to-maturity are carried at amortized cost.


    The following table presents the amortized cost (cost for equity securities)
of investments in obligations of (i) U.S. Treasury and other U.S. government
agencies and corporations, (ii) states of the U.S. and political subdivisions
and (iii) other securities as of December 31, 1998 that are due (a) in one year
or less, (b) after one year through five years, (c) after five years through ten
years and (d) after ten years.  In addition, the table provides the weighted
average yield for each range of maturities.
<TABLE>
<CAPTION>
 
                                                            AMOUNT AT DECEMBER 31, 1998 DUE IN
                                    -----------------------------------------------------------------------------------
                                                         AFTER ONE       AFTER FIVE
                                                        THROUGH FIVE    THROUGH TEN
                                    ONE YEAR OR LESS       YEARS           YEARS       AFTER TEN YEARS       TOTAL
                                    -----------------  --------------  --------------  ----------------  --------------
                                     AMOUNT    YIELD   AMOUNT  YIELD   AMOUNT  YIELD   AMOUNT    YIELD   AMOUNT  YIELD
                                    --------  -------  ------  ------  ------  ------  -------  -------  ------  ------
                                                                  (Dollars in thousands)
<S>                                 <C>       <C>      <C>     <C>     <C>     <C>     <C>      <C>      <C>     <C>
U. S. Treasury and other U. S.
government agencies and
corporations                         $10,670    6.10% $44,932   5.71%  $6,699   6.70%  $18,224    6.22% $80,525   5.96%
States of the U.S. and political
subdivisions (1)(2)                    1,157    6.48    3,545   7.17      316   6.90     4,078    5.13    9,096   6.16
Other securities (2)(3)                  -0-     .00      -0-    .00      -0-    .00     5,097    6.89    5,097   6.89
                                     -------    ----  -------   ----   ------   ----   -------   -----  -------   ----
Total                                $11,827    6.14% $48,477   5.81%  $7,015   6.71%  $27,399    6.18% $94,718   6.03%
                                     =======    ====  =======   ====   ======   ====   =======   =====  =======   ====
-----------------------------
</TABLE>
(1) Yields on tax exempt obligations have been computed on a tax equivalent
    basis.

(2) As of December 31, 1998, there was no aggregate book values of any issuer
    which exceeded 10% of the Company's stockholders' equity.

(3) Consists of domestic corporate notes, stocks and mutual funds which are
    comprised of Federal Home Loan Bank of Atlanta and Community Financial
    Services, Inc. stock and mutual funds consisting predominately of U.S.
    government  securities.  Yield represents yield earned for 1998.

                                       29
<PAGE>
 
Loan Portfolio

    Before reduction for the allowance for loan losses, the loan portfolio
totaled approximately $351.7 million at December 31, 1998 which was an increase
of approximately $30.2 million from December 31, 1997 or 9.39%.  During the year
ended December 31, 1998, average net loans were approximately $323.7 million
compared to $310.6 million in 1997, an increase of approximately $13.1 million.
During the year ended December 31, 1996, average net loans were approximately
$270.7 million.  These average loan levels reflected a slower rate of growth
from 1997 to 1998 of $13.1 million compared to the rate of growth from 1996 to
1997 of $39.9 million.

    The following table sets forth information summarizing the composition of
the loan portfolio at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                                    YEARS ENDED DECEMBER 31,
                                                  -----------------------------
                                                    1998       1997      1996
                                                  ---------  --------  --------
                                                    (Dollars in  thousands)
<S>                                               <C>        <C>       <C>  
 Commercial and financial                         $ 55,885  $ 70,912  $ 45,947
 Agricultural                                        6,759     7,340     2,517  
 Real estate - construction                         22,196    19,519    14,589
 Real estate - mortgage                            215,006   178,709   179,620
 Installment loans to individuals and other         51,752    45,067    43,623
 Overdrafts                                            346       302       303
                                                  --------  --------  --------
                                                   351,944   321,849   286,599
 Deferred loan fees and unearned interest, net        (213)     (337)     (302)
                                                  --------  --------  --------
                                                   351,731   321,512   286,297
 Allowance for loan losses                          (4,426)   (4,243)   (3,804)
                                                  --------  --------  --------
   Loans, net                                     $347,305   317,269   282,493
                                                  ========  ========  ========
</TABLE>

  The following table sets forth certain information at December 31, 1998
regarding the dollar amount of all loans based on their contractual terms to
maturity for fixed rate loans and repricing frequency for adjustable rate loans.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported for one year or less.
<TABLE>
<CAPTION>
 
                           TOTAL LOANS AT DECEMBER 31, 1998 DUE FOR REPRICING IN
                           -----------------------------------------------------
                                         AFTER ONE                      
                                            YEAR                        
                           ONE YEAR       THROUGH        DUE AFTER      
                           OR LESS       FIVE YEARS      FIVE YEARS       TOTAL
                           --------      ----------      ----------     --------
                                        (Dollars in  thousands)                                              
<S>                        <C>           <C>             <C>             <C> 
Total  Loans               $166,768         147,706          37,470      351,944
                           ========      ==========      ==========     ========


    The following table sets forth certain information at December 31, 1998
regarding the dollar amount of all loans based on their contractual terms to
maturity.  Demand loans, loans having no stated schedule of repayments and no
stated maturity and overdrafts are reported as due in one year or less.

                                TOTAL  LOANS AT DECEMBER 31, 1998 DUE IN
                                ----------------------------------------
                                ONE YEAR        AFTER ONE   
                                 OR LESS         YEAR             TOTAL
                                --------        -------         --------
                                        (Dollars in thousands)       
                                                           
Total Loans                      140,348         211,596         351,944
                                ========        ========        ========
</TABLE> 

                                       30
<PAGE>
 
    The following table presents information concerning outstanding balances of
nonperforming loans at December 31, 1998, 1997 and 1996.  Nonperforming loans
consists of loans which have been placed on nonaccrual status or are past due
more than 90 days with respect to principal or interest.
<TABLE>
<CAPTION>
 
                                                                             YEARS ENDED DECEMBER 31,
                                                                        ----------------------------------------
                                                                            1998          1997          1996
                                                                        -------------   -----------   ----------
                                                                                   (Dollars in thousands)
<S>                                                                   <C>              <C>           <C>
Loans accounted for on a nonaccrual basis (1)                               $1,251           520            527
Accruing loans which are contractually past
  due 90 days or more as to principal or
  interest payments (1)                                                        199           178            265
Other loans which are "troubled debt
  restructurings" (1)                                                          -0-           -0-            -0-
</TABLE>

    For the year ended December 31, 1998 for loans accounted for on a nonaccrual
basis and other loans which are "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15, the gross interest income
that would have been reported if the loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, if held for part of the period, was approximately $52,700 and the
amount of interest income on those loans that was included in net income for the
period was approximately $19,000.

    A loan is placed on non-accrual status when the loan has been delinquent for
90 days except where an analysis of related collateral values reflects
sufficient collateral to secure principal and accrued interest.  When accrual of
interest is discontinued, all unpaid accrued interest is reversed.

    As of December 31, 1998, in the opinion of management, there are no
additional problem loans of significance which are not now disclosed under
information concerning nonaccrual, past due and restructured loans.

    As of December 31, 1998, there are no loan concentrations exceeding 10% of
total loans which are not otherwise disclosed previously as a category of loans.

    As of December 31, 1998, there are no other interest-bearing assets that
would be required to be disclosed as nonaccrual, past due or restructured loans
if such assets were loans.

--------------------------
(1)  There are no foreign loans.


Reserve For Possible Loan Losses

    An allowance for loan losses is established through a provision for loan
losses charged to expenses.  Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely.  The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible based
on evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, specific impaired loans and current economic conditions that may
affect the borrowers' ability to pay.

    The reserve for possible loan losses was approximately 1.26% of outstanding
loans at December 31, 1998 and 1.32% at December 31, 1997.  The reserve was
increased to approximately $4.4 million at December 31, 1998 from approximately
$4.2 million at December 31, 1997.  Nonperforming loans increased from
approximately $520,000 at December 31, 1997 to approximately $1.3 million at
December 31, 1998, representing .36% of total loans.  Management believes that
the reserve for loan losses of approximately $4.4 million at December 31, 1998
is adequate due to the $808,000 of charge-offs in the year ended December 31,
1998 and the fact that approximately $237.2 million or 67.4% of the Banks' loan
portfolio consisted of loans secured by real estate.

                                       31
<PAGE>
 
    The following table sets forth an analysis of loss experience for the
periods indicated:
<TABLE>
<CAPTION>
 
                                                  YEARS ENDED DECEMBER 31,
                                                 ---------------------------
                                                   1998      1997     1996
                                                 ---------  -------  -------
                                                   (Dollars in thousands)
<S>                                              <C>        <C>      <C>
Balance at beginning of period                     $4,243   $3,804   $3,427
                                                   ------   ------   ------
Charge-offs:
 Domestic:
   Commercial, financial and agricultural             207       97       56
   Real estate construction                           -0-      -0-      -0-
   Real estate mortgage                                45       36       89
   Installment loans to individuals                   556      294      155
   Overdrafts                                         -0-      -0-      -0-
                                                   ------   ------   ------
                                                      808      427      300
                                                   ------   ------   ------
Recoveries:
 Domestic:
   Commercial, financial and agricultural              16       14        2
   Real estate - construction                         -0-      -0-      -0-
   Real estate - mortgage                              22       16      -0-
   Installment loans to individuals                    50       43       42
   Overdrafts                                         -0-      -0-      -0-
                                                   ------   ------   ------
                                                       88       73       44
                                                   ------   ------   ------
Net charge-offs                                       720      354      256
                                                   ------   ------   ------
Additions charged to operations                       903      793      633
                                                   ------   ------   ------
Balance at end of period                           $4,426   $4,243   $3,804
                                                   ======   ======   ======
Ratio of net charge-offs during the period to
 average loans outstanding during the period          .22%     .11%     .09%
                                                   ======    =====    =====
</TABLE>

    The Banks have allocated the reserve for possible loan losses according to
the amounts 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 based on management's evaluation of the loan portfolio.
The amounts and percentages of such components of the reserve for possible loan
losses at December 31, 1998, 1997 and 1996 and the percent of loans in each
category to total loans are presented below.
<TABLE>
<CAPTION>
 
                                                                 YEARS ENDED  DECEMBER 31,
                                             -----------------------------------------------------------------
                                                    1998                    1997                   1996
                                             --------------------  ---------------------  --------------------
                                                       PERCENT                PERCENT               PERCENT
                                                       OF LOANS              TO LOANS               TO LOANS
                                                       IN EACH                IN EACH               IN EACH
                                                     CATEGORY TO            CATEGORY TO           CATEGORY TO
                                             AMOUNT  TOTAL LOANS   AMOUNT  TOTAL  LOANS   AMOUNT  TOTAL LOANS
                                             ------  ------------  ------  -------------  ------  ------------
                                                                  (Dollars in thousands)
<S>                                          <C>       <C>        <C>          <C>       <C>       <C>
 
 Domestic:
   Commercial, financial and agricultural    $  788        17.80%  $1,031         24.31%  $  643        16.91%
   Real estate  construction                    279         6.31      257          6.06      194         5.09
   Real estate  mortgage                      2,704        61.09    2,357         55.53    2,384        62.67
   Installment loans to individuals             651        14.70      594         14.00      579        15.22
   Overdrafts                                     4          .10        4           .10        4          .11
 Foreign                                        -0-          .00      -0-           .00      -0-          .00
 Unallocated                                    -0-          .00      -0-           .00      -0-          .00
                                             ------       ------   ------        ------   ------       ------
                                             $4,426       100.00%  $4,243        100.00%  $3,804       100.00%
                                             ======       ======   ======        ======   ======       ======
</TABLE>

                                       32
<PAGE>
 
     The following table sets forth an analysis of the average amount
outstanding and the average rate paid for all deposits for the categories and
periods indicated.
<TABLE>
<CAPTION>
 
                                                              YEARS ENDED DECEMBER 31,
                                           --------------------------------------------------------------
                                                   1998                  1997                1996
                                           --------------------  -------------------  -------------------
                                                      AVERAGE              AVERAGE              AVERAGE
                                            AMOUNT   RATE PAID   AMOUNT   RATE PAID   AMOUNT   RATE PAID
                                           --------  ----------  -------  ----------  -------  ----------
                                                               (Dollars in thousands)
<S>                                        <C>       <C>         <C>      <C>         <C>      <C>
 
 Deposits in domestic bank offices:
   Non-interest-bearing demand deposits    $ 67,514        .00% $ 61,548        .00% $ 53,884        .00%
   Interest-bearing demand deposits          87,575       3.07    77,821       2.87    77,108       3.02
   Savings deposits                          24,741       3.06    25,264       3.16    25,641       3.15
   Time deposits                            219,028       5.84   212,368       5.77   192,373       6.02
 Deposits in banking offices                    -0-        .00       -0-        .00       -0-        .00
                                           --------             --------             --------
     Total                                 $398,858              377,001              349,006
                                           ========             ========             ========
 
</TABLE>
Deposit Maturities

    The principal sources of funds for the Banks' loans and investments are
demand, time, savings and other deposits and borrowings.  The Banks offer a
variety of deposit accounts including checking and NOW accounts, savings and
time accounts, certificates of deposit and money market accounts.  As of
December 31, 1998, total deposits were approximately $413.3 million compared to
approximately $386.6 million at December 31, 1997 and compared to approximately
$367.4 million at December 31, 1996.  Although, in some instances, time deposits
greater than $100,000 may be more sensitive to changes in interest rates,
substantially all the Banks' deposits are derived from within their primary
service areas which management believes are not as interest rate sensitive as
are more urban service areas.  The Banks do not have any brokered deposits.

    The following table summarizes maturity information for time deposits
greater than $100,000 at December 31, 1998.
<TABLE>
<CAPTION>
 
                                      (Dollars in thousands)
                                     ----------------------
<S>                                 <C>
 
 Three months or less                            $16,309
 Over three through six months                    15,263
 Over six through 12 months                       24,036
 Over 12 months                                    5,170
                                                 -------
   Total                                         $60,778
                                                 =======
</TABLE>

                                       33
<PAGE>
 
Advances From Federal Home Loan Bank

   The following table shows the Company's borrowings from the Federal Home Loan
Bank and the weighted average interest rates thereon at the end of the last
three years.  Also provided are the maximum amount of borrowings and the average
amounts outstanding as well as weighted average interest rates for the three
years.
 
                                         FEDERAL HOME
                                           LOAN BANK
                                            ADVANCES
                                   -----------------------
                                   (Dollars in thousands)
Balance at December 31:
     1998                                    $39,058
     1997                                     31,812
     1996                                     17,645
Weighted average interest
 rate at year end:
     1998                                       6.03%
     1997                                       6.25%
     1996                                       6.42%
Maximum amount outstanding
   at any month's end:
     1998                                    $39,440
     1997                                     31,812
     1996                                     22,650
Average amount outstanding
   during the year:
     1998                                    $35,435
     1997                                     23,194
     1996                                     16,323
Weighted average interest
 rate during the year:
     1998                                       6.75%
     1997                                       5.79%
     1996                                       5.44%

Interest Rate Sensitivity

    The relative interest rate sensitivity of the Banks' assets and liabilities
indicates the extent to which the Banks' net interest income may be affected by
interest rate movements.  The Banks' ability to reprice assets and liabilities
in the same dollar amounts and at the same time minimizes interest rate risks.
One method of measuring the impact of interest rate changes on net interest
income is to measure, in a number of time frames, the interest-sensitivity gap,
by subtracting interest-sensitive liabilities from interest-sensitive  assets,
as reflected in the following table.  Such interest-sensitivity gap represents
the risk, or opportunity, in repricing.  If more assets than liabilities are
repriced at a given time in a rising rate environment, net interest income
improves; in a declining rate environment, net interest income deteriorates.
Conversely, if more liabilities than assets are repriced while interest rates
are rising, net interest income deteriorates; if interest rates are falling, net
interest income improves.

                                       34
<PAGE>
 
    The following table presents the interest-sensitivity gap of the Banks as of
December 31, 1998.
<TABLE>
<CAPTION>
 
                                                          OVER        OVER
                                              THREE   THREE MONTHS  ONE YEAR
                                              MONTHS    THROUGH     THROUGH       OVER
                                             OR LESS   12 MONTHS   FIVE YEARS  FIVE YEARS   TOTAL
                                             --------  ----------  ----------  ----------  -------
                                                            (Dollars in thousands)
<S>                                          <C>       <C>         <C>         <C>         <C>
Interest-earning assets:
 Short-term deposits and interest-bearing
   cash                                      $  1,637    $   198     $     99    $   -0-  $  1,934
 Loans                                        125,398     41,370      147,706     37,470   351,944
 Investment securities                         14,294     12,405       37,477     30,542    94,718
 Federal funds sold                            15,630        -0-          -0-        -0-    15,630
                                             --------    -------     --------    -------  --------
   Total interest-earning assets              156,959     53,973      185,282     68,012   464,226
                                             --------    -------     --------    -------  --------
 
Interest-bearing liabilities:
 NOW and savings (1)                              -0-        -0-          -0-        -0-       -0-
 Super NOW and money market                    43,122        -0-          -0-        -0-    43,122
 Time deposits                                 49,769    117,902       53,099        -0-   220,770
 Federal funds purchased                        3,824        -0-          -0-        -0-     3,824
 Other borrowed funds                           2,339        -0-          -0-        -0-     2,339
 Advances from Federal Home                                                             
  Loan Bank                                     3,374      5,033       17,203     13,448    39,058
                                             --------   --------     --------   --------  --------
   Total interest-bearing liabilities         102,428    122,935       70,302     13,448   309,113
                                             --------   --------     --------   --------  --------
                                                                                        
Interest-sensitivity  GAP                    $ 54,531   $(68,962)    $114,980   $ 54,564  $155,113
                                             ========   ========     ========   ========  ========
                                                                                        
Cumulative interest sensitivity  GAP         $ 54,531   $(14,431)    $100,549   $155,113 
                                             ========   ========     ========   ======== 
                                                                                        
Interest-sensitivity  GAP ratio                  1.53        .44         2.64       5.06 
                                             ========    =======      =======    ======= 
                                                                                        
Cumulative interest-                                                                    
 sensitivity  GAP ratio                          1.53        .94         1.34       1.50 
                                             ========    =======      =======    ======= 
</TABLE>
Comfort range .80 - 1.20

-------------------------

(1)   Not considered rate sensitive.

Impact of Inflation and Changing Prices

    The majority of assets and liabilities of a financial institution are
monetary in nature and therefore differ greatly from most commercial and
industrial companies that have significant investments in fixed assets, such as
property, plant and equipment, and inventories and therefore are primarily
impacted by interest rates rather than changing prices.  While the general level
of inflation underlies most interest rates, interest rates react more to change
in the expected rate of inflation and to changes in monetary and fiscal policy.
Net interest income and the interest rate spread are good measures of the
company's ability to react to changing interest rates.  This information is
presented in further detail in the section entitled "Average Yields Earned and
Rates Paid."

                                       35
<PAGE>
 
YEAR 2000
---------

     The Year 2000 issue refers generally to the data structure and processing
problem that may prevent systems from properly processing data-sensitive
information when the year changes to 2000.  The Year 2000 issue affects IT
systems, such as computer programs and various types of electronic equipment
that process data information by using only two digits rather than four digits
to define the applicable year, and thus may recognize a date using "00" as the
year 1900 rather than the year 2000.  The issue also affects some non-IT
systems, such as devices which rely on a microcontroller to process date
information.  The Year 2000 issue could disrupt a company's operations by
generating erroneous data or causing system failures or miscalculations.

     The Company's State of Readiness
     --------------------------------

     The Company has implemented a Year 2000 readiness program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999.  This program is also designed to assess the readiness of
other entities with which the Company and its affiliates do business.  This
program has been divided into five phases:  Awareness; Assessment; Renovation;
Validation; and Implementation.  The major areas of focus include hardware,
software, embedded chips, third party vendors as well as third party data
centers.

     Management's target date for completion of all phases for its mission
critical applications is June 30, 1999. Mission critical applications include
those that (i) directly affect delivery of primary services to the Banks'
customers; (ii) directly affect revenue recognition and collection; (iii) would
create noncompliance with any statutes or laws; and (iv) would require
significant costs to address in the event of noncompliance.

     The principal critical area consists of software and hardware that comprise
the core of the Banks' customer servicing systems. Testing of these components
has been ongoing since the third quarter of 1998 and will continue until Year
2000 compliance has been achieved.  As of December 30, 1998, the Awareness,
Assessment, Renovation and Validation phases for mission critical applications
were each approximately 85% to 100% complete.  The Implementation phase is
approximately 80% complete.

     Costs to Address the Company's Year 2000 Issues
     -----------------------------------------------

     Expenses associated with the Company's Year 2000 compliance effort for
fiscal year 1998 were between $100,000 and $150,000.  Expenses  projected for
fiscal year 1999 are between $110,000 and $180,000.  Additionally, capital
investment estimates are between $350,000 and $500,000 over the life of the
project.

     Contingency Plans
     -----------------

     The Company has developed a contingency plan in connection with its Year
2000 readiness program, including a back-up site as well as back-up procedures
with Southern Financial Systems, located in Macon, Georgia, for its in-house
data processing system.  However, the Company realizes that any reasonable
contingency plan cannot accurately account for all possible scenarios which may
arise as a result of Year 2000 related computation problems.  Eagle Bank and
Trust utilizes a third party service bureau, M&I Data Services, located in Brown
Deer, Wisconsin, which has substantially completed all five phases of its Year
2000 readiness program.

     Risks of the Company's Year 2000 Issues
     ---------------------------------------

     The Company anticipates that its mission critical applications will be Year
2000 compliant by June 30, 1999. However, no assurance can be given that
unforeseen circumstances will not arise during the performance of the testing
and implementation phases.  Furthermore, the Year 2000 compliance status of
third party suppliers and networks, which could adversely impact the Company's
applications, cannot be fully known.  The Company is unable to determine the
impact that any system interruption would have on its results of operations,
financial position and cash flows.  However, such impact could be material.

                                       36
<PAGE>
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

          See "Item 7.  Management's Discussion and Analysis of Financial
          Condition and Results of Operations  Asset/Liability Management and
          Market Risk."

ITEM 8.   FINANCIAL STATEMENTS  .

     The Company's consolidated financial statements, notes thereto and
auditor's report thereon are set forth beginning on page F-1 of this report and
are incorporated herein by reference.


                  Index to Consolidated Financial Statements
                  ------------------------------------------


Financial Statements                                            Page
--------------------                                            ----

Independent Auditor's Report...................................  F-2
Consolidated Balance Sheets....................................  F-3
Consolidated Statements of Income..............................  F-4
Consolidated Statements of Comprehensive Income................  F-5
Consolidated Statements of Stockholders' Equity................  F-6
Consolidated Statements of Cash Flows..........................  F-8
Notes to Financial Statements..................................  F-9


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

         None.


                                 PART III
                                 --------
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS.

     The information set forth under the headings "Proposal One  Election of
Directors" and "Executive Officers" in the Company's Proxy Statement for the
1999 Annual Meeting of Shareholders is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION.

     The information set forth under the heading "Executive Compensation" in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information set forth under the heading "Principal Shareholders" in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders is
incorporated herein by reference.

                                       37
<PAGE>
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information set forth under the headings "Certain Transactions" and
"Executive Compensation  Compensation Committee Interlocks and Insider
Participation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated herein by reference.

                                    PART IV
                                    -------

ITEM 14.  EXHIBITS 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 have been omitted as the required information is not
applicable.

     3.   Exhibits.

Exhibit No.    Description
-----------    -----------

        2.1    Agreement and Plan of Merger, dated as of December 31, 1997 and
               amended on April 27, 1998, by and among Investors Financial
               Corporation, Bainbridge National Bank and the Registrant
               (previously filed as Exhibit 2(a) to the Registrant's
               Registration Statement No. 333-47513 on Form S-4 and incorporated
               herein by this reference).

        2.2    Agreement and Plan of Merger, dated as of June 30, 1998 and
               amended on September 29, 1998, by and between Eagle Bancorp, Inc.
               and the Registrant (previously filed as Exhibit 2(a) to the
               Registrant's Registration Statement No. 333-64945).

        3.1    Amended and Restated Articles of Incorporation (previously filed
               as Exhibit 3.1 to the Registrant's Registration Statement No.
               333-74819 on Form S-8 and incorporated herein by this reference).

        3.2    Amended and Restated Bylaws (previously filed as Exhibit 3.1 to
               the Registrant's Registration Statement No. 333-74819 on Form S-8
               and incorporated herein by this reference).

       10.1    Employment Agreement dated December 31, 1997 between First
               Community Bank of Southwest Georgia and Tracy A. Dixon.

       10.2.1  PAB Bankshares, Inc. First Amendment to First Restated and
               Amended Dividend Reinvestment and Common Stock Purchase Plan
               (previously filed as Exhibit 28.2 to the Registrant's
               Registration Statement No. 33-74080 on Form S-3 and incorporated
               herein by this reference).

       10.2.2  PAB Bankshares, Inc. Third Amended and Restated Dividend
               Reinvestment and Common Stock Purchase Plan (previously filed as
               Exhibit 28.1 to the Registrant's Registration Statement No. 33-
               74080 on Form S-3 on September 1, 1998, and incorporated herein
               by this reference).

       10.3    PAB Bankshares, Inc. 1994 Employee Stock Option Plan, as amended.

                                       38
<PAGE>
 
       10.4    PAB Bankshares, Inc. 1994 Directors Deferred Stock Purchase Plan.

       10.5    Form of Executive Salary Continuation Agreement, with attached
               Schedule of Terms.

       11.1    Statement Re Computation of Per Share Earnings.

       21.1    Subsidiaries of the Registrant.

       23.1    Accountants Consent.

       27.1    Financial Data Schedule  1998.

       27.2    Financial Data Schedule  1997.

       27.3    Financial Data Schedule  1996.


(b)  Reports on Form 8-K.

     None.

                                       39
<PAGE>
 
                                   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.



<TABLE>
<S>                                                       <C>       
Date:  March 31, 1999                                       PAB BANKSHARES, INC.
 
                                                            By:/s/ R. Bradford Burnette
                                                            ---------------------------------------------------
                                                            R. Bradford Burnette, President and Chief Executive
                                                            Officer
 
                                                            By:/s/ C. Larry Wilkinson
                                                            ---------------------------------------------------
                                                            C. Larry Wilkinson, Executive Vice President and
                                                            Chief Financial Officer
 
</TABLE>



     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 31, 1999.

<TABLE>                                                           
<CAPTION>                                                         
Signature                                                Title    
<S>                                                      <C>      
/s/ James L. Dewar, Sr.                                  
-------------------------------------------------------  Chairman of the Board and Director
James L. Dewar, Sr. 

/s/ R. Bradford Burnette                                 President/Chief Executive Officer and Director (Principal
-------------------------------------------------------  Executive Officer)
R. Bradford Burnette
 
/s/ Walter W. Carroll, II                                
-------------------------------------------------------  Director
Walter W. Carroll, II
 
/s/ William S. Cowart                                    
-------------------------------------------------------  Director
William S. Cowart
 
/s/ James L. Dewar, Jr.                                  
-------------------------------------------------------  Director
James L. Dewar, Jr.
                                                         
/s/ Thompson Kurrie, Jr.                                            
-------------------------------------------------------  Director  
Thompson Kurrie, Jr.

/s/ F. Ferrell Scruggs                                   
-------------------------------------------------------  Director
F. Ferrell Scruggs, Sr.
 
-------------------------------------------------------  Director
D. Ramsay Simmons, Jr.                                                          
 
/s/ Joe P. Singletary                                    
-------------------------------------------------------  Director
Joe P. Singletary, Jr.
 
-------------------------------------------------------  Director
William J. Jones                                          
</TABLE> 

                                       40
<PAGE>
 
<TABLE>     
<CAPTION>                                                        
Signature                                                Title   
<S>                                                      <C>     

-------------------------------------------------------
John M. Simmons                                          Director 

-------------------------------------------------------
Tracy A. Dixon                                           Director 

-------------------------------------------------------
Paul E. Parker                                           Director 

-------------------------------------------------------
James B. Lanier, Jr.                                     Director 
 
/s/ C. Larry Wilkinson                                   Executive Vice President and Director (Chief Financial Officer)
-------------------------------------------------------
C. Larry Wilkinson

</TABLE> 

                                       41
<PAGE>
 
                         Index to Financial Statements

<TABLE>
<CAPTION>
 
                                                                                                    Page
                                                                                                    ----
<S>                                                                                                 <C>
PAB Bankshares, Inc. and Subsidiaries
  Independent Auditors' Report                                                                      F-2
  Consolidated Balance Sheets - December 31, 1998 and 1997                                          F-3
  Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996                  F-4
  Consolidated Statements of Comprehensive Income  Years Ended December 31, 1998, 1997 and
     1996                                                                                           F-5
  Consolidated Statements of Stockholders' Equity - Years ended December 31, 1998, 1997 and 1996    F-6
  Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996              F-8
  Notes to Consolidated Financial Statements  Years Ended December 31, 1998, 1997 and 1996          F-9
 
</TABLE>

                                      F-1
<PAGE>
 
                                  INDEPENDENT AUDITOR'S REPORT
                                  ----------------------------



Board of Directors and Stockholders
PAB Bankshares, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of PAB Bankshares,
Inc. and its Subsidiaries as of December 31, 1998 and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PAB
Bankshares, Inc. and its Subsidiaries as of December 31, 1998, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.

We previously audited and reported on the consolidated balance sheet of PAB
Bankshares, Inc. and its Subsidiaries as of December 31, 1997 and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the two years ended December 31, 1997, prior to their
restatement for the 1998 pooling of interests.  The contribution of PAB
Bankshares, Inc. and Subsidiaries to total assets as of December 31, 1997 and
revenues and net income for the year ended December 31, 1997 represented 70%,
69% and 69% of the respective restated totals.  The contribution of PAB
Bankshares, Inc. and Subsidiaries to revenues and net income for the year ended
December 31, 1996 represented 68% and 69% of the respective restated totals.
Separate financial statements of the other companies included in the 1997
restated consolidated balance sheet and consolidated  statements of income,
comprehensive income, stockholders' equity and cash flows were audited and
reported on separately by other auditors.  We also audited the combination of
the accompanying consolidated balance sheet as of December 31, 1997 and
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for the two years ended December 31, 1997, after restatement for
the 1998 pooling of interests; in our opinion, such consolidated statements have
been properly combined on the basis described in Note 1 of the notes to
consolidated financial statements.



Stewart, Fowler & Stalvey, P.C.
-------------------------------


Valdosta, Georgia
January 13, 1999

                                      F-2
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                    ASSETS
                                   ---------

<TABLE>
<CAPTION>
 
                                                                                                  DECEMBER 31,
                                                                                             ------------------------
                                                                                                1998         1997
                                                                                             ----------   -----------
<S>                                                                                        <C>           <C>            
Cash and Cash Equivalents:                                                              
 Cash and due from banks                                                                     26,369,236    23,893,540
 Interest-bearing deposits in other banks                                                     1,538,435     3,271,018
 Federal funds sold and                                                                 
  securities purchased                                                                  
  under agreement to resell                                                                  15,630,000    15,848,204
                                                                                             ----------   -----------
        Total Cash and Cash Equivalents                                                      43,537,671    43,012,762
                                                                                        
Time Deposits                                                                                   396,000     3,398,000
Investment Securities, Notes 1 and2                                                          95,209,328    83,438,835
Investment in Unconsolidated Subsidiary, Notes 1 and 19                                          34,814        66,749
Loans, Net of Allowance for Loan Losses                                                                        
 ($4,426,217 - 1998; $4,243,043  1997)                                                                      
 and Unearned Interest, Notes 1, 5, 8 and 16                                                347,305,116   317,269,090
Bank Premises and Equipment, Notes 1 and 3                                                   13,620,861    11,829,631
Property Acquired in Settlement of Loans and                                                                
 Other Real Estate Owned:                                                               
 Land and building of former banking offices, Notes 1 and 4                                     322,920       315,277
 Land and building held for lease, Notes 1 and 4                                                590,486           -0-
 Property acquired in settlement of loans, Note 1                                               438,474       433,791
Accrued Interest Receivable                                                                   5,491,847     5,135,735
Cash Value of Life Insurance, Note 10                                                         2,888,472     2,783,838
Goodwill and other intangible assets, Note 1                                                  2,713,762     3,070,426
Other Assets, Note 1                                                                          1,192,259     1,147,078
                                                                                          -------------   -----------
                                                                                        
 Total Assets                                                                               513,742,010   471,901,212
                                                                                          =============   ===========
 
                                    LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
 Demand                                                                                    $ 68,633,159    66,394,196
 NOW                                                                                         99,335,495    77,999,133
 Savings                                                                                     24,517,302    24,964,224
 Time, $100,000 and over, Note 6                                                             60,778,164    63,984,294
 Other time, Note 6                                                                         159,991,854   153,301,771
                                                                                         --------------   -----------
                                                                                            413,255,974   386,643,618
 
Federal funds purchased
 and securities sold under
 agreement
 to repurchase                                                                                3,824,095           -0-
Notes Payable, Note 7                                                                               -0-     2,184,000
Other borrowed funds                                                                          2,339,170     1,004,854
Advances from Federal Home Loan Bank, Note 8                                                 39,057,723    31,811,673
Accrued Interest Payable                                                                      1,601,491     1,656,497
Advance Payments by Borrowers for Taxes and Insurance                                            52,672       180,322
Dividends Payable                                                                               662,440       548,106
Income taxes payable - current                                                                      -0-        71,693
Other Liabilities, Note 10                                                                    1,846,088     1,735,490
                                                                                         --------------   -----------
 
   Total Liabilities                                                                        462,639,653   425,836,253
                                                                                         --------------   -----------
 
Stockholders' Equity:
 Common stock, no par value, 15,000,000 shares authorized,
   8,280,495 shares (1997 - 8,435,099) issued and
   8,280,495 shares (1997 - 8,270,787) outstanding                                            1,217,065     1,263,745
                                                            
 Preferred stock, no par value, 1,500,000 shares
  authorized, no shares issued or outstanding                                                       -0-           -0-
 Additional paid in capital                                                                  25,809,693    26,304,565
 Retained earnings                                                                           23,739,623    19,364,279
 Accumulated other comprehensive income                                                         335,976       115,559
                                                                                         --------------   -----------
                                                                                             51,102,357    47,048,148
 Treasury stock, at cost (1997 - 164,312 shares)                                                    -0-      (983,189)
                                                                                         --------------   -----------
                                                                                             51,102,357    46,064,959
                                                                                         --------------   -----------
      Total Liabilities and Stockholders' Equity                                           $513,742,010   471,901,212
                                                                                         ==============   ===========

</TABLE> 

Note: The accompanying notes to consolidated financial statements are an 
integral part of this statement.

                                      F-3
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------
 
<TABLE> 
<CAPTION> 
                                                                                     YEAR ENDED DECEMBER 31,
                                                                          ---------------------------------------------
                                                                              1998            1997             1996
                                                                          ------------   --------------   -------------
<S>                                                                       <C>             <C>              <C>      
Interest Income:                                                          
Interest and fees on loans, Note 1                                        $ 33,139,539       30,031,418      26,333,790
Interest on investment securities:                                                              
 Taxable                                                                     4,654,243        5,101,374       5,533,168
 Tax exempt                                                                    315,524          247,061         238,874
Interest on federal funds sold                                               1,382,022          448,247         394,411
Interest on deposits in banks                                                  205,793          235,722          90,932
                                                                          ------------   --------------   -------------
                                                                          
 Total                                                                      39,697,121       36,063,822      32,591,175
                                                                          ------------   --------------   -------------
                                                                          
Interest Expense:                                                         
Interest on deposits                                                        16,234,940       15,284,549      14,715,770
Interest on federal funds purchased                                            128,131           75,815          44,057
Interest on notes and mortgages, Note 7                                        151,582          239,779         337,393
Interest on other borrowed funds                                                97,709           28,062          24,357
Interest on advances from Federal Home Loan Bank, Note 8                     2,391,277        1,342,044         887,950
                                                                          ------------   --------------   -------------
                                                                          
 Total                                                                      19,003,639       16,970,249      16,009,527
                                                                          ------------   --------------   -------------
                                                                          
Net Interest Income                                                         20,693,482       19,093,573      16,581,648
                                                                          
Provision for Loan Losses, Notes 1 and 5                                       903,404          792,900         632,842
                                                                          ------------   --------------   -------------
                                                                          
Net Interest Income After Provision for Loan Losses                         19,790,078       18,300,673      15,948,806
                                                                          ------------   --------------   -------------
                                                                          
Other Income:                                                             
Service charges on deposit accounts                                          3,012,558        2,797,077       2,406,437
Insurance commissions                                                          220,668          148,250          84,051
Fees on mortgage loans originated for sale                                     725,439          243,904         254,085
Late charges and other loan fees                                               656,588          349,258         298,212
Equity in earnings of unconsolidated subsidiary, Note 19                       368,064          255,877         215,692
Gain (Loss) on sale of loans                                                     1,989           23,955          11,412
Gain (Loss) on sale of other real estate                                        (5,025)           2,154           1,328
Gain (Loss) on sale of assets                                                  109,063           (1,854)          2,951
Securities gains (losses), Note 1                                               11,313          (12,532)        130,924
Other income                                                                   522,398          503,958         445,423
                                                                          ------------   --------------   -------------
                                                                          
 Total                                                                       5,623,055        4,310,047       3,850,515
                                                                          ------------   --------------   -------------
                                                                          
Other Expenses:                                                           
Compensation                                                                 6,636,426        6,001,823       5,430,070
Other personnel expenses, Notes 9 and 10                                     1,587,496        1,294,287       1,060,620
Occupancy expense of bank premises                                             745,799          728,986         696,605
Furniture and equipment expense                                              1,302,480        1,246,665       1,159,493
Federal deposit insurance                                                       90,408           80,510         116,521
Special SAIF assessment                                                            -0-              -0-         384,882
Postage and courier services                                                   338,621          358,593         314,550
Supplies                                                                       497,177          493,840         417,622
Amortization, Note 1                                                           356,664          356,664         375,912
Other operating expenses                                                     3,859,561        2,884,832       2,573,733
                                                                          ------------   --------------   -------------
                                                                          
 Total                                                                      15,414,632       13,446,200      12,530,008
                                                                          ------------   --------------   -------------
                                                                          
Income Before Income Taxes                                                   9,998,501        9,164,520       7,269,313
                                                                          
Income Taxes, Notes 1 and 13                                                 3,347,451        3,161,626       2,450,710
                                                                          ------------   --------------   -------------
                                                                          
Net Income                                                                $  6,651,050        6,002,894       4,818,603
                                                                          ============   ==============   =============
                                                                          
Earnings Per Share, Note 1:                                               
 Basic                                                                            $.80              .73             .60
                                                                          ============   ==============   =============
 Diluted                                                                          $.78              .72             .59
                                                                          ============   ==============   =============
</TABLE> 
Note: The accompanying notes to consolidated financial statements are an 
integral part of this statement.

                                      F-4
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                -----------------------------------------------
 
<TABLE> 
<CAPTION>  
                                                                                  YEAR ENDED DECEMBER 31,
                                                                     --------------------------------------------------
                                                                            1998              1997            1996
                                                                     -----------------   --------------   -------------
<S>                                                                  <C>                 <C>              <C>         
Net income                                                                $  6,651,050        6,002,894       4,818,603
                                                                     -----------------   --------------   -------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
 Unrealized holding gains (losses) arising during period                       227,460          198,757        (210,128)
 Less:  reclassification adjustment for
  (gains) losses included in net income                                         (7,043)           7,802         (81,513)
                                                                     -----------------   --------------   -------------
 Other comprehensive income                                                    220,417          206,559        (291,641)
                                                                     -----------------   --------------   -------------
 
Comprehensive Income                                                      $  6,871,467        6,209,453       4,526,962
                                                                     =================   ==============   =============

</TABLE> 
Note: The accompanying notes to consolidated financial statements are an
integral part of this statement.

                                      F-5
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                -----------------------------------------------              

<TABLE> 
<CAPTION> 
                                                                                            ACCUMULATED              
                                                                                              OTHER                 
                                 COMMON STOCK                      ADDITIONAL              COMPREHENSIVE             
                             ----------------------   PREFERRED    PAID IN       RETAINED     INCOME       TREASURY 
                             SHARES       AMOUNT        STOCK      CAPITAL       EARNINGS     (LOSS)         STOCK        TOTAL
                             ---------   ----------   ---------  ----------   ----------   -------------   ----------   ----------
<S>                          <C>         <C>            <C>        <C>          <C>          <C>             <C>          <C> 
Balances, December 31,                                                                                     
 1995,                                                                                                     
as previously reported       5,423,776   $1,263,745         -0-  14,744,823    8,646,737         184,469    1,461,043   23,378,731
Adjustment for pooling of                                                                                  
interests:                                                                                                 
 Issuance of shares to                                                                                     
  shareholders of Investors                                                                                
  Financial Corp.            1,711,249          -0-         -0-   4,608,542    2,279,663          16,638          -0-    6,904,843
 Issuance of shares to                                                                                     
  shareholders of Eagle                                                                                    
  Bancorp, Inc.                907,610          -0-         -0-   5,683,247      516,150            (466)         -0-    6,198,931
                             ---------   ----------         ---  ----------   ----------   -------------   ----------   ----------
                                                                                                           
Balances, December 31,                                                                                     
 1995,                                                                                                     
as restated                  8,042,635    1,263,745         -0-  25,036,612   11,442,550         200,641    1,461,043   36,482,505
                                                                                                           
Issuance of shares to                                                                                      
 directors                                                                                                 
in lieu of fees                 13,384          -0-         -0-      70,265          -0-             -0-          -0-       70,265
                                                                                                           
Issuance of shares through                                                                                 
dividend reinvestment plan      67,650          -0-         -0-     475,415          -0-             -0-          -0-      475,415
                                                                                                           
Issuance of shares through                                                                                 
common stock purchase plan      36,078          -0-         -0-     251,062          -0-             -0-          -0-      251,062
                                                                                                           
Stock issued by pooled                                                                                     
companies                          -0-          -0-         -0-       1,125          -0-             -0-          -0-        1,125
                                                                                                           
Net Income                         -0-          -0-         -0-         -0-    4,818,603             -0-          -0-    4,818,603
                                                                                                           
Dividends                          -0-          -0-         -0-         -0-     (749,082)            -0-          -0-     (749,082)
                                                                                                           
Dividends - pooled                                                                                         
 companies                         -0-          -0-         -0-         -0-     (638,223)            -0-          -0-     (638,223)
                                                                                                           
Acquisition of shares                                                                                      
of treasury stock               (4,948)         -0-         -0-         -0-          -0-             -0-       30,925      (30,925)
                                                                                                           
Sale of shares of                                                                                          
treasury stock                  69,760          -0-         -0-      68,153          -0-             -0-     (417,421)     485,574
                                                                                                           
Other comprehensive                                                                                        
income (loss)                      -0-          -0-         -0-         -0-          -0-        (291,641)         -0-     (291,641)
                             ---------   ----------         ---  ----------   ----------   -------------   ----------   ----------
                                                                                                           
Balances, December 31, 1996                                                                                
as restated                  8,224,559    1,263,745         -0-  25,902,632   14,873,848         (91,000)   1,074,547   40,874,678
                                                                                                           
Issuance of shares to                                                                                      
 directors                                                                                                 
in lieu of fees                 15,268          -0-         -0-       4,069          -0-             -0-      (91,358)      95,427
                                                                                                           
Issuance of shares                                                                                         
through dividend                                                                                           
reinvestment plan               26,150          -0-         -0-     270,062          -0-             -0-          -0-      270,062
                                                                                                           
Issuance of shares                                                                                         
through common stock                                                                                       
purchase plan                    4,810          -0-         -0-      50,732          -0-             -0-          -0-       50,732

</TABLE> 
Note: The accompanying notes to consolidated financial statements are an 
integral part of this statement.

                                      F-6
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
          -----------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                                                         
                                                                                               ACCUMULATED             
                                                                                                  OTHER                
                               COMMON STOCK                      ADDITIONAL                   COMPREHENSIVE            
                           ------------------------   PREFERRED    PAID IN      RETAINED         INCOME      TREASURY 
                           SHARES         AMOUNT        STOCK      CAPITAL      EARNINGS         (LOSS)        STOCK        TOTAL
                           ---------   ------------   ---------   ----------    ----------   -------------   ---------   ----------
<S>                        <C>         <C>            <C>         <C>           <C>           <C>            <C>         <C> 
Stock issued by pooled                                                                                       
companies                        -0-            -0-         -0-       77,070           -0-             -0-         -0-       77,070
                                                                                                             
Net Income                       -0-            -0-         -0-          -0-     6,002,894             -0-         -0-    6,002,894
                                                                                                             
Dividends                        -0-            -0-         -0-          -0-      (988,423)            -0-         -0-     (988,423)
                                                                                                             
Dividends - pooled                                                                                           
 companies                       -0-            -0-         -0-          -0-      (524,040)            -0-         -0-     (524,040)
                                                                                                             
Other comprehensive income                                                                                   
(loss)                           -0-            -0-         -0-          -0-           -0-         206,559         -0-      206,559
                           ---------     ----------         ---   ----------    ----------   -------------   ---------   ----------
                                                                                                             
Balances, December 31,                                                                                       
 1997,                                                                                                       
as restated                8,270,787      1,263,745         -0-   26,304,565    19,364,279         115,559     983,189   46,064,959
                                                                                                             
Issuance of shares to                                                                                        
directors in lieu of fees      7,808            -0-         -0-       81,240           -0-             -0-         -0-       81,240
                                                                                                             
Issuance of shares                                                                                           
through dividend                                                                                             
reinvestment plan              1,650            -0-         -0-       19,685           -0-             -0-         -0-       19,685
                                                                                                             
Issuance of stock upon                                                                                       
exercise of employee                                                                                         
stock options                    250            -0-         -0-        2,515           -0-             -0-         -0-        2,515
                                                                                                             
Net Income                       -0-            -0-         -0-          -0-     6,651,050             -0-         -0-    6,651,050
                                                                                                             
Dividends                        -0-            -0-         -0-          -0-    (1,997,476)            -0-         -0-   (1,997,476)
                                                                                                             
Dividends - pooled                                                                                           
 companies                       -0-            -0-         -0-          -0-      (278,230)            -0-         -0-     (278,230)
                                                                                                             
Stock issued by pooled                                                                                       
 companies                       -0-            -0-         -0-      338,197           -0-             -0-         -0-      338,197
                                                                                                             
Cancellation of treasury                                                                                     
stock                            -0-        (46,680)        -0-     (936,509)          -0-             -0-    (983,189)         -0-
                                                                                                             
Other comprehensive income                                                                                   
(loss)                           -0-            -0-         -0-          -0-           -0-         220,417         -0-      220,417
                           ---------     ----------         ---   ----------    ----------   -------------   ---------   ----------
                                                                                                             
Balances, December 31,                                                                                       
1998                       8,280,495     $1,217,065         -0-   25,809,693    23,739,623         335,976         -0-   51,102,357
                           =========     ==========         ===   ==========    ==========   =============   =========   ==========
</TABLE> 

Note: The accompanying notes to consolidated financial statements are an
integral part of this statement.

                                      F-7
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------
 
<TABLE> 
<CAPTION> 
                                                                             YEARS ENDED DECEMBER 31,
                                                                     ---------------------------------------------
                                                                         1998            1997            1996
                                                                     ------------   --------------   -------------
<S>                                                                  <C>            <C>              <C> 
Cash Flows From Operating Activities:                                                         
Net income                                                           $  6,651,050        6,002,894       4,818,603
Adjustments to reconcile net income to net cash                                              
 provided by operating activities:                                                         
 Depreciation                                                           1,052,882        1,022,350         881,134
 Deferred income taxes                                                   (144,047)        (193,112)          3,840
 Provision for loan losses                                                903,404          792,900         632,842
 Amortization                                                             356,664          356,664         375,912
 Amortization (accretion) of securities                                   (92,283)         (45,989)       (178,209)
 (Gain) loss on sale of assets                                           (109,063)           1,854          (2,951)
 (Gain) loss on sale of loans                                              (1,989)         (23,955)        (11,412)
 (Gain) loss on sale of other real estate owned                             5,025           (2,154)         (1,328)
 Securities (gains) losses                                                (11,313)          12,532        (130,924)
 Minority interests                                                           741              595             495
 Equity in earnings of unconsolidated subsidiary                         (368,064)        (255,877)       (215,692)
 Dividend received from unconsolidated subsidiary                         400,000          320,000         220,000
 Increase in cash value of life insurance                                (104,634)             -0-             -0-
Change in assets and liabilities:                                                        
 (Increase) decrease in accrued interest receivable                      (356,112)        (422,541)       (261,233)
 Increase (decrease) in accrued interest payable                          (55,006)         (47,527)         66,544
 (Increase) decrease in other assets                                      (94,057)        (328,448)        (96,114)
 Increase (decrease) in income taxes payable                              (71,693)          11,986        (143,334)
 Increase (decrease) in other liabilities                                 241,217          531,581         459,648
                                                                     ------------   --------------   -------------
Net cash provided (used) by operating activities                        8,202,722        7,733,753       6,417,821
                                                                     ------------   --------------   -------------
Cash Flows From Investing Activities:                                                         
Capital expenditures                                                   (3,452,909)      (1,294,055)     (1,412,571)
Proceeds from sale of assets                                              185,014              -0-          72,810
(Increase) decrease in time deposits                                    3,002,000       (1,703,000)       (391,600)
(Increase) decrease in loans                                          (30,947,149)     (35,604,480)    (36,198,394)
Purchase of life insurance policies                                           -0-         (826,540)       (415,844)
Principal payments on mortgage-backed securities                        9,739,611          943,011       1,132,434
Purchase of available-for-sale securities                             (54,860,855)     (22,512,808)    (28,141,775)
Proceeds from sales and calls of available-for-sale                  
 securities                                                            20,576,316       14,273,949      12,362,247
Purchase of held-to-maturity securities                                       -0-       (1,245,625)       (748,359)
Proceeds from maturities of available-for-sale                       
 securities                                                            12,125,967       14,470,508      19,553,865
Proceeds from maturities of held-to-maturity securities                 1,050,000          500,000       1,050,000
                                                                     ------------   --------------   -------------
Net cash provided (used) by investing activities                      (42,582,005)     (32,999,040)    (33,137,187)
                                                                     ------------   --------------   -------------
Cash Flows From Financing Activities:                                                         
Increase (Decrease) in federal funds purchased                          3,824,095              -0-             -0-
Proceeds of additional stock issued                                       340,712          127,802         252,187
Increase (decrease) in time deposits                                    3,483,953        6,106,530      17,431,675
Increase (decrease) in other deposits                                  23,128,403       14,013,031      11,173,141
Advances from Federal Home Loan Bank                                   19,136,000       25,030,000      80,097,000
Payments on long-term indebtedness                                    (14,073,950)     (12,063,076)    (73,166,324)
Increase (Decrease) other borrowings                                    1,334,316         (200,000)       (500,000)
Dividends paid                                                         (2,141,687)      (1,335,932)       (635,091)
Acquisition of treasury stock                                                 -0-              -0-         (30,925)
Proceeds from sale of treasury stock                                          -0-              -0-         485,574
Decrease in advance payments by borrowers for taxes                  
 and insurance                                                           (127,650)          20,817         (48,260)
                                                                     ------------   --------------   -------------
Net cash provided (used) by financing activities                       34,904,192       31,699,172      35,058,977
                                                                     ------------   --------------   -------------
Net Increase (Decrease) in Cash and Cash Equivalents                      524,909        6,433,885       8,339,611
Cash and Cash Equivalents at Beginning of Period                       43,012,762       36,578,877      28,239,266
                                                                     ------------   --------------   -------------
Cash and Cash Equivalents at End of Period                           $ 43,537,671       43,012,762      36,578,877
                                                                     ============   ==============   =============
Supplemental Disclosures of Cash Flow Information                                            
-------------------------------------------------                                          
Cash Paid During The Period For:                                                         
Interest                                                             $ 19,058,645       16,975,242      15,881,975
                                                                     ============   ==============   =============
Income taxes                                                         $  3,716,269        3,301,649       2,585,355
                                                                     ============   ==============   =============
Schedule of Non-Cash Investing and Financing Activities                                                          
-------------------------------------------------------                                          
Total increase (decrease) in unrealized losses on securities         
 available-for-sale                                                  $   (297,936)         (39,748)        110,061
                                                                     ============   ==============   =============
Stock issued to directors in payment of fees and                                              
 stock issued through dividend reinvestment plan                     $    100,925          365,489         545,680
                                                                     ============   ==============   =============
</TABLE>

Note: The accompanying notes to consolidated financial statements are an 
integral part of this statement.

                                      F-8
<PAGE>
 
                     PAB BANKSHARES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

Note 1 - Summary of Significant Accounting Policies
---------------------------------------------------

Nature of operations:  PAB Bankshares, Inc. is engaged in the activity of
providing traditional banking services through its banking subsidiaries
consisting of Park Avenue Bank (Valdosta, Georgia), Farmers and Merchants Bank
(Adel, Georgia), First Community Bank of Southwest Georgia (Bainbridge, Georgia)
and Eagle Bank and Trust (Statesboro, Georgia).  All are state chartered banks.
The Banks primarily grant agribusiness, commercial, consumer and real estate
loans with a market area that includes predominately Lowndes County, Cook
County, Decatur County, Grady County and Bulloch County and the immediate
outlying areas.  The composition of the Banks' loan portfolio is detailed in
Note 5 of these financial statements.  The Banks limit investment securities to
U.S. Treasury obligations, obligations of other U.S. Government agencies and
corporations, obligations of state and political subdivisions and selected
mutual funds.  The Banks also purchase time deposits with other banks in
denominations generally not exceeding $100,000 per bank and sells federal funds
to major correspondent banks.  Through First Community Bank of Southwest
Georgia, PAB Bankshares, Inc. also owns one-half of the issued and outstanding
stock of an unconsolidated service corporation subsidiary, Empire Financial
Services, Inc., which is primarily engaged in the origination and servicing of
commercial real estate loans.

Consolidated financial statements:  The accompanying consolidated financial
statements include the accounts of PAB Bankshares, Inc. and its subsidiaries
consisting of Park Avenue Bank (100% owned), Farmers & Merchants Bank (99.9%
owned), First Community Bank of Southwest Georgia (100% owned) and Eagle Bank
and Trust (100% owned).  Intercompany transactions and balances have been
eliminated in consolidation.

Investment securities:  Effective January 1, 1994, debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost adjusted for amortization of premiums and
accretion of discounts using methods approximating the interest method.  Other
securities are classified as available-for-sale and are carried at fair value.
Unrealized gains and losses on securities available-for-sale are recognized as
direct increases or decreases in stockholders' equity.  Cost of securities sold
is determined using the specific identification method.

Bank premises and equipment and related depreciation:  Assets are stated at
cost, less depreciation.  Depreciation of bank premises and equipment, including
a building of a former banking office and a building acquired for lease, is
computed using the straight-line method over the estimated useful lives of the
assets.  Expenditures for maintenance, repairs, removals and betterments which
do not materially prolong the useful lives of the assets are charged to income
as incurred.  The cost of property retired or sold, and the related accumulated
depreciation, is removed from the accounts, and any gain or loss, after taking
into consideration proceeds from sale, is transferred to income.

Loans and allowance for losses on loans:  Loans are stated at the amount of
unpaid principal, reduced by unearned interest and an allowance for loan losses.
Unearned interest on installment loans is recognized as income over the terms of
the loans by the interest method.  Interest on other loans is calculated by
using the simple interest method on daily balances of the principal amount
outstanding.  The Banks provide for possible loan losses in amounts based upon
management's evaluation of the collectibility of loans and other relevant
factors including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows.  The allowance is increased
by a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.  Accrual of interest is discontinued when
management believes that the borrowers' financial condition is such that
collection of interest is doubtful.

Loan fees:  For longer term loans secured by real estate that are originated and
retained in the Banks' loan portfolios, loan origination fees and certain direct
loan origination costs are deferred and amortized to interest income over the
contractual life of the loan using the interest method.  For other loans, fees
are included in income as charged to the customer and the

                                      F-9
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

direct costs of origination are expensed as incurred.  Such method of accounting
for loan fees is in conformity with generally accepted accounting principles in
all material respects.

Other real estate owned:  Real estate acquired in settlement of loans is
initially recorded at market value at acquisition less estimated costs to sell
and subsequently carried at the lower of cost or market value less estimated
costs to sell.  Costs related to holding and maintaining real estate are charged
to operations and costs relating to improvement of the real estate are
capitalized.  Land acquired and held for future development is carried at cost.

Amortization:  Goodwill is being amortized over periods ranging from fifteen to
twenty-five years by the straight-line method.  Core deposit intangibles are
being amortized over a period of ten years.  The Company continually reviews
goodwill and other intangible assets on an objective and subjective basis for
any impairment which might effect the carrying value or remaining life of the
intangible asset.  Subjective factors considered include the legal and
regulatory environment, demand, competition and other economic factors.  On an
objective basis, the Company computes the discounted present value of projected
subsidiary net income and compares the result with the carrying value of
intangible assets.  If the carrying value exceeds the discounted present value
of projected net income, the Company records a write-down or reduces the
remaining period of amortization.  To date, the Company has not had to make any
such adjustments.

Earnings per share:  Earnings per share are computed on the weighted average
number of shares and common equivalent shares outstanding.  Weighted average
shares used in the computation of earnings per share were as follows:

<TABLE>
<CAPTION>
 
                                  YEAR ENDED DECEMBER 31, 1998   YEAR ENDED DECEMBER 31, 1997   YEAR ENDED DECEMBER 31, 1996
                                  -----------------------------  -----------------------------  ----------------------------
                                              WEIGHTED    PER-               WEIGHTED    PER-              WEIGHTED    PER-
                                               AVERAGE   SHARE                AVERAGE   SHARE               AVERAGE   SHARE
                                    INCOME     SHARES    AMOUNT    INCOME     SHARES    AMOUNT   INCOME     SHARES    AMOUNT
                                  ----------  ---------  ------  ----------  ---------  ------  ---------  ---------  ------
<S>                               <C>         <C>        <C>     <C>         <C>        <C>     <C>        <C>        <C>
Basic Earnings Per Share:
 Net Income                       $6,651,050  8,279,413    $.80   6,002,894  8,221,426    $.73  4,818,603  8,097,836    $.60
                                                           ====                           ====                        ======
 
Effect of Dilutive Securities:
 Stock Options                           -0-    210,879                 -0-     82,710                -0-     56,371
                                  ----------  ---------          ----------  ---------          ---------  ---------
 
Diluted Earning Per Share:
 Net Income                       $6,651,050  8,490,292    $.78  $6,002,894  8,304,136    $.72  4,818,603  8,154,207    $.59
                                  ==========  =========    ====  ==========  =========    ====  =========  =========  ======
</TABLE>

The weighted average shares used in calculating earnings per share information
has been adjusted to reflect a two-for-one stock split in 1998 and 1996.  No
transactions occurred after December 31, 1998 and before issuance of the
financial statements that would have changed materially the number of common
shares or potential common shares outstanding at December 31, 1998 if the
transaction had occurred before the end of the period.

Income taxes:  Deferred income taxes are reported for temporary differences
between items of income or expense reported in the financial statements and
those reported for income tax purposes.  At December 31, 1998 and 1997, other
assets included a deferred income tax charge of $742,116 and $725,709,
respectively.

Cash and cash equivalents:  For purposes of the statements of cash flows, cash
and cash equivalents include cash on hand, amounts due from banks and Federal
Funds sold.

Investment in unconsolidated subsidiary:  Investment in unconsolidated
subsidiary is accounted for under the equity method.

                                      F-10
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

Off balance sheet financial instruments:  In the ordinary course of business,
the Banks have entered into off balance sheet financial instruments consisting
of commitments to extend credit and standby letters of credit.  Such financial
instruments are recorded in the financial statements when they become payable.

Use of estimates:  The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that 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.

Certain significant estimates:  Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for losses on loans and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans.  In connection with the determination
of allowances for losses on loans and the valuation of foreclosed real estate,
management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions.  In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Banks' allowances for losses on loans and foreclosed real estate.  Such
agencies may require the Banks to recognize additions to the allowances based on
their judgements about information available to them at the time of their
examination.  It is at least reasonably possible that the allowances for losses
on loans and foreclosed real estate may change in the near term.

Stock-based compensation:  In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.  The Company has elected to disclose
the proforma effect on net income as if the fair value based method of
accounting for stock options had been used.

Fair values of financial instruments:  Statement of Financial Accounting
Standards No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition.  In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques.  Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows.  In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets, and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements.  Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

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

 Cash and cash equivalents:  The carrying amounts reported in the balance sheet
 for cash and cash equivalents approximate those assets' fair values.

 Time deposits:  Fair values for time deposits are estimated using a discounted
 cash flow analysis that applies interest rates currently being offered on
 certificates to a schedule of aggregated contractual maturities on such time
 deposits.

 Investment securities:  Fair values for investment securities are based on
 quoted market prices, where available.  If quoted market prices are not
 available, fair values are based on quoted market prices of comparable
 instruments.

                                      F-11
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

 Loans:  For variable-rate loans that reprice frequently and with no significant
 change in credit risk, fair values are based on carrying amounts.  The fair
 values for other loans (for example, fixed rate commercial real estate and
 rental property mortgage loans and commercial and industrial loans) are
 estimated using discounted cash flow analysis, based on interest rates
 currently being offered for loans with similar terms to borrowers of similar
 credit quality.  Loan fair value estimates include judgements regarding future
 expected loss experience and risk characteristics.  The carrying amount of
 accrued interest receivable approximates its fair value.

 Deposits:  The fair values disclosed for demand deposits (for example, checking
 accounts, interest-bearing checking accounts and savings accounts) are, by
 definition, equal to the amount payable on demand at the reporting date (that
 is, their carrying amounts).  The fair values for certificates of deposit are
 estimated using a discounted cash flow calculation that applies interest rates
 currently being offered on certificates to a schedule of aggregated contractual
 maturities on such time deposits.  The carrying amount of accrued interest
 payable approximates fair value.

 Short-term borrowings, notes payable and advances from Federal Home Loan Bank:
 The fair value of short-term borrowings, notes payable and advances from
 Federal Home Loan Bank are estimated using rates currently available for debt
 with similar terms and remaining maturities.

 Other liabilities:  Commitments to extend credit were evaluated and fair value
 was estimated using the terms for similar agreements, taking into account the
 remaining terms of the agreements and the present creditworthiness of the
 counterparties.  For fixed-rate loan commitments, fair value also considers the
 difference between current levels of interest rates and the committed rates.

Advertising:  The Company expenses advertising costs as they are incurred.
Advertising costs charged to expense were $257,849, $236,203 and $240,649 for
the years ended December 31, 1998, 1997 and 1996, respectively.

Capital structure:  During 1996 and 1998, the Company had a two-for-one stock
split.  The effect of the stock split was applied retroactively to previous
years.  During 1997, the number of shares of common stock was increased from
4,000,000 to 15,000,000 shares.  Also, during 1997, the Articles of
Incorporation were restated to authorize the issuance of 1,500,000 shares of
preferred stock.  As of December 31, 1998, no shares of preferred stock had been
issued.

Segment reporting:  The Company is engaged in the activity of providing
traditional banking services through its commercial banking subsidiaries
previously discussed under "nature of operations."  The Company does not have
reportable segments, foreign operations, assets located in foreign countries or
major customers, as defined in Statement of Financial Accounting Standards No.
131 (Disclosures About Segments of an Enterprise and Related Information).

Reclassifications:  Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the presentation adopted in
1998.

New accounting standards:  In March 1995, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 121 (SFAS)
(Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets To
Be Disposed Of).  This statement established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of.  This statement requires
that long-lived assets and other identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.  In
performing the review for recoverability, the entity should estimate the future
cash flows expected to result from the use of the asset and its eventual
disposition.  If the sum of the expected future cash flows is less than the
carrying amount of the asset, an impairment loss is recognized.  Otherwise, an
impairment loss is not recognized.  Measurement of an impairment loss for long-
lived assets and identifiable intangibles that an entity

                                      F-12
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

expects to hold and use should be based on the fair value of the asset.  The
statement requires that long-lived assets and certain identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell, except for assets that are covered by APB Opinion No. 30
(Reporting The Results Of Operations - Reporting The Effects Of Disposal Of A
Segment Of A Business And Extraordinary, Unusual And Infrequently Occurring
Events And Transactions). Assets that are covered by Opinion 30 will continue to
be reported at the lower of carrying amount or net realizable value.  This
statement was effective for fiscal years beginning after December 15, 1995.  The
adoption of this statement did not have a material impact on the Company's
financial statements.

In October 1995, the FASB issued SFAS No. 123 (Accounting For Stock-Based
Compensation).  This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans.  Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock.  Examples are stock purchase
plans, stock options, restricted stock and stock appreciation rights.  The
statement also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees.  Those transactions
must be accounted for based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measurable.  The statement defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans.  However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25 (Accounting For Stock Issued To
Employees).  Entities electing to remain with the accounting in Opinion 25, must
make proforma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting defined in this statement had
been applied.  The Company elected to continue to apply Opinion 25 and thus
provide proforma disclosures of net income and earnings per share.  This
statement is effective for fiscal years beginning after December 15, 1995.  The
adoption of this statement did not have a material impact on the Company's
financial statements.

In June 1996, the FASB issued SFAS No. 125 (Accounting For Transfers And
Servicing Of Financial Assets And Extinguishments Of Liabilities).  This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.  Those
standards are based on consistent application of a financial-components approach
that focuses on control.  Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered and derecognizes liabilities when extinguished.  This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.  The statement
applies to transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.  However, as a result of an
amendment to SFAS No. 125 by the FASB in December 1996, certain provisions of
SFAS No. 125 are deferred for an additional year.  Adoption of the new
accounting standard did not have a material impact on the Company's financial
statements.

In February 1997, the FASB issued SFAS No. 128 (Earnings Per Share).  This
statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock.  This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15 (Earnings Per Share) and makes them
comparable to international earnings per share standards.  It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share.  It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation.  Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared

                                      F-13
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

in the earnings of the entity.  Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Opinion 15.  This statement is
effective for financial statements issued for periods ending after December 15,
1997.  The adoption of this statement did not have a material impact on the
company's financial statements.

In February 1997, the FASB issued SFAS No. 129 (Disclosure Of Information About
Capital Structure).  This statement establishes standards for disclosing
information about an entity's capital structure.  It applies to all entities.
This statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10
(Omnibus Opinion - 1996), No. 15 (Earnings Per Share) and FASB No. 47
(Disclosure Of Long-Term Obligations), for entities that were subject to the
requirements of those standards.  This statement is effective for financial
statements issued for periods ending after December 15, 1997.  The adoption of
this statement did not have a material impact on the Company's financial
statements

In June 1997, the FASB issued SFAS No. 130 (Reporting Comprehensive Income).
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements.  This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.  This statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.  This statement requires that an enterprise
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position.  This statement is effective for
fiscal years beginning after December 15, 1997.  The adoption of this statement
did not have a material impact on the Company's financial statements.

In June 1997, the FASB issued SFAS No. 131 (Disclosures About Segments Of An
Enterprise And Related Information).  This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders.  It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments.  Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.  Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.  The statement requires that a public
business enterprise report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets.  It requires reconciliations of
total segment revenues, total segment profit or loss, total segment assets and
other amounts disclosed for segments to corresponding amounts in the
enterprise's general-purpose financial statements.  It requires that all public
business enterprises report information about the revenues derived from the
enterprise's products or services (or groups of similar products and services),
about the  Countries in which the enterprise earns revenues and holds assets and
about major customers regardless of whether that information is used in making
operating decisions.  The statement also requires that a public business
enterprise report descriptive information about the way that the operating
segments were determined, the products and services provided by the operating
segments, differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements and changes in the measurement of segment amounts from period to
period.  This statement is effective for financial statements for periods
beginning after December 15, 1997.  The adoption of this statement did not have
a material impact on the Company's financial statements.

                                      F-14
<PAGE>
 
Note 1 - Summary of Significant Accounting Policies (Continued)
--------------------------------------------------------------

In February 1998, the FASB issued SFAS No. 132 (Employers' Disclosures About
Pensions and Other Postretirement Benefits).  This statement revises employers'
disclosures about pension and other postretirement benefit plans.  It does not
change the measurement or recognition of those plans.  It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practical, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminate certain disclosures previously required by FASB
Statements No. 87, 88 and 106.  The statement suggests combined formats for
presentation of pension and other postretirement benefit disclosures.  This
statement is effective for fiscal years beginning after December 15, 1997.  The
adoption of this statement did not have a material impact on the Company's
financial statements.

In June 1998, the FASB issued SFAS No. 133 (Accounting for Derivative
Instruments and Hedging Activities).  This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities.  It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.  If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction.  Under this statement, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge.  Those
methods must be consistent with the entity's approach to managing risk.  This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.  Initial application of this statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
statement.  The adoption of this statement is not expected to have a material
impact on the Company's financial statements.

In October 1998, the FASB issued SFAS No. 134 (Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held For Sale by
a Mortgage Banking Enterprise).  This statement amends Statement No. 65
(Accounting for Certain Mortgage Banking Activities) to require that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sale or hold those
investments.  This statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This statement shall be effective for the first fiscal quarter beginning after
December 15, 1998.  The adoption of this statement is not expected to have a
material impact on the Company's financial statements.


Note 2 - Investment Securities
------------------------------

Investment securities are carried in the accompanying balance sheets as follows:

<TABLE>
<CAPTION>
 
                           DECEMBER 31,
                      -----------------------
                         1998         1997
                      -----------  ----------
<S>                   <C>          <C>
Available-for-sale    $95,209,328  78,897,138
Held-to-maturity              -0-   4,541,697
                      -----------  ----------
                      $95,209,328  83,438,835
                      ===========  ==========
</TABLE>

                                      F-15
<PAGE>
 
Note 2 - Investment Securities (Continued)
-----------------------------------------

Securities available-for-sale consist of the following:
-------------------------------------------------------

<TABLE>
<CAPTION>
 
As of December 31, 1998:
<S>                              <C>          <C>         <C>         <C>
                                                GROSS       GROSS
                                  AMORTIZED   UNREALIZED  UNREALIZED    MARKET
                                    COST        GAINS       LOSSES      VALUE
                                 -----------  ----------  ----------  ----------
U.S. Treasury Obligations        $ 8,902,483     186,439         -0-   9,088,922
Obligations of other U.S.
 Government agencies and
 corporations                     43,431,034     346,472      11,097  43,766,409
Obligations of state and
 political subdivisions            9,096,559     119,448       2,676   9,213,331
Mortgage backed securities        28,479,376     150,848     136,820  28,493,404
Federal Home Loan Bank
 stock                             2,722,800         -0-         -0-   2,722,800
Mutual Funds                       1,025,000         -0-     146,572     878,428
Federal Reserve Bank                 225,000         -0-         -0-     225,000
Community Financial Services,
 Inc. stock                          696,794         -0-         -0-     696,794
Other stock                          139,240         -0-      15,000     124,240
                                 -----------     -------     -------  ----------
                                 $94,718,286     803,207     312,165  95,209,328
                                 ===========     =======     =======  ==========
 
As of December 31, 1997:
 
                                                GROSS       GROSS
                                  AMORTIZED   UNREALIZED  UNREALIZED    MARKET
                                    COST        GAINS       LOSSES      VALUE
                                 -----------  ----------  ----------  ----------
U.S. Treasury Obligations        $13,946,055     104,613         -0-  14,050,668
Obligations of other U.S.
 Government agencies and
 corporations                     35,810,960     157,834      66,200  35,902,594
Obligations of state and
 political subdivisions            5,914,321      66,364       7,877   5,972,808
Mortgage backed securities        17,925,902     190,870      91,103  18,025,669
Federal Home Loan Bank
 Stock                             3,358,300         -0-         -0-   3,358,300
Mutual Funds                       1,000,000         -0-     146,395     853,605
Community Financial Services,
 Inc. stock                          473,494         -0-         -0-     473,494
Federal reserve stock                225,000         -0-         -0-     225,000
Other stock                           50,000         -0-      15,000      35,000
                                 -----------     -------     -------  ----------
                                 $78,704,032     519,681     326,575  78,897,138
                                 ===========     =======     =======  ==========
</TABLE>

                                      F-16
<PAGE>
 
Note 2 - Investment Securities (Continued)
-----------------------------------------

Securities held-to-maturity consist of the following:
-----------------------------------------------------
<TABLE>
<CAPTION>
 
As of December 31, 1997:
<S>                         <C>          <C>         <C>         <C>
                                           GROSS       GROSS
                             AMORTIZED   UNREALIZED  UNREALIZED   MARKET
                               COST        GAINS       LOSSES      VALUE
                            -----------  ----------  ----------  ---------
U.S. Treasuries and U.S.
 Government Agencies         $4,541,697      33,795       6,931  4,568,561
                            ===========  ==========  ==========  =========
</TABLE>

The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below.  Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call of prepayment penalties.

<TABLE>
<CAPTION>
                                      SECURITIES
                                  AVAILABLE-FOR-SALE
                                -----------------------
                                               MARKET
                                   COST        VALUE
                                -----------  ----------
<S>                             <C>          <C>
Due in one year or less         $11,827,338  11,897,557
Due after one year through
 five years                      48,476,626  49,021,932
Due after five years through
 ten years                        7,015,227   7,088,551
Due after ten years              22,590,261  22,554,026
                                -----------  ----------
                                $89,909,452  90,562,066
                                ===========  ==========
</TABLE>

Proceeds from sales and calls of available-for-sale securities during 1998 were
$20,576,316 with gross gains of $42,524 and gross losses of $31,211 being
recognized.

Proceeds from sales and calls of available-for-sale securities during 1997 were
$14,273,949 with gross gains of $11,484 and gross losses of $24,016 being
recognized.

Proceeds from sales and calls of available-for-sale securities during 1996 were
$12,362,247 with gross gains of $207,824 and gross losses of $76,900 being
recognized.

During 1998, debt securities with an amortized cost of $3,495,036 were
transferred from held-to-maturity to available-for-sale.  The securities had an
unrealized gain of $34,964.

Effective January 1, 1996, debt securities with an amortized cost of $1,609,517
were transferred from held-to-maturity to available-for-sale.  The securities
had an unrealized gain of $61,650.  Management made the transfer in response to
its decision to eliminate the held-to-maturity classification.

Securities with a carrying value of approximately $37,320,766 and $40,470,395 at
December 31, 1998 and 1997, respectively, were pledged to secure public monies
as required by law.

                                      F-17
<PAGE>
 
Note 3 - Bank Premises and Equipment
------------------------------------

Bank premises and equipment are stated at cost less accumulated depreciation,
and include the following:
<TABLE>
<CAPTION>
 
                                              DECEMBER 31,                 
                                      --------------------------   ESTIMATED
                                          1998          1997      USEFUL LIVES
                                      -------------  -----------  ------------
<S>                                   <C>            <C>          <C>
 Land                                  $ 3,464,950    2,979,978
 Bank premises and improvements          8,975,919    7,742,785   5-40 years
 Furniture, fixtures and equipment       6,547,172    5,588,446   5-15 years
 Automobiles                               201,951      225,906   3- 5 years
 Deposit on equipment                       41,988          -0-
                                       -----------   ----------
                                        19,231,980   16,537,115
 Less accumulated depreciation          (5,611,119)  (4,707,484)
                                       -----------   ----------
 
                                       $13,620,861   11,829,631
                                       ===========   ==========
</TABLE>
Depreciation expense amounted to $1,052,882, $1,022,350 and $881,134 for the
years ended December 31, 1998, 1997 and 1996, respectively.


Note 4 - Land and Building of Former Banking Office and Land and Building Held
------------------------------------------------------------------------------
For Lease
---------

Land and building of former banking office is stated at cost less accumulated
depreciation and include the following:
<TABLE>
<CAPTION>
 
                                                DECEMBER 31,               
                                          ----------------------  ESTIMATED
                                            1998         1997     USEFUL LIFE
                                          -----------  ---------  -----------
<S>                                     <C>            <C>        <C>
 Land                                      $  41,000     41,000
 Building                                    489,760    462,719     30 years
                                           ---------   --------
                                             530,760    503,719
 Less accumulated depreciation              (207,840)  (188,442)
                                           ---------   --------
                                           $ 322,920    315,277
                                           =========   ========
</TABLE> 
 
The building is currently being leased. Fair value of these assets exceeds book
 value.
 
Land and building acquired for lease is stated at cost less accumulated
 deprecation and include the following:

<TABLE> 
<CAPTION> 
 
 
                                               DECEMBER 31,       
                                           --------------------   ESTIMATED
                                             1998       1997      USEFUL LIFE
                                           ---------   --------   -----------
<S>                                       <C>         <C>        <C>         
 Land                                      $ 354,589        -0-
 Building                                    240,000        -0-    39 years
                                           ---------   --------
                                             594,589        -0-
 Less accumulated depreciation                (4,103)       -0-
                                           ---------   --------
                                         $   590,486        -0-
                                         ===========  =========

</TABLE> 

The property is held for lease.  Fair value of these assets exceeds book value.

                                      F-18
<PAGE>
 
<TABLE>
<CAPTION>
Note 5 - Loans
--------------
Major classifications of loans are as follows:
                                                   YEARS ENDED DECEMBER 31,
                                                  --------------------------
                                                      1998           1997
                                                  ------------   -----------
<S>                                               <C>            <C>
 Commercial and financial                         $ 55,885,120    70,911,845
 Agricultural                                        6,759,273     7,340,214
 Real estate - construction                         22,196,188    19,519,253
 Real estate - mortgage                            215,005,777   178,708,685
 Installment loans to individuals and other         51,751,606    45,066,948
 Overdrafts                                            346,766       301,755
                                                  ------------   -----------
                                                   351,944,730   321,848,700
 Deferred loan fees and unearned interest, net        (213,397)     (336,567)
                                                  ------------   -----------
                                                   351,731,333   321,512,133
 Allowance for loan losses                          (4,426,217)   (4,243,043)
                                                  ------------   -----------
  Loans, Net                                      $347,305,116   317,269,090
                                                  ============   ===========
</TABLE>

At December 31, 1998 and 1997, the total recorded investment in impaired loans,
all of which had allowances determined in accordance with SFAS No. 114 and No.
118, amounted to approximately $1,251,274 and $519,418, respectively.  The
average recorded investment in impaired loans amounted to approximately $83,921,
$268,243 and $84,803 for the years ended December 31, 1998, 1997 and 1996,
respectively.  The allowance for loan losses related to impaired loans amounted
to approximately $199,752 and $53,595 at December 31, 1998 and 1997,
respectively.  Interest income on impaired loans of $19,126, $19,528 and $2,116
was recognized for cash payments received in 1998, 1997 and 1996, respectively.
The Banks have no commitments to loan additional funds to borrowers whose loans
are classified as impaired.

First mortgage loans on residential (one-to-four units) real estate are pledged
to secure advances from the Federal Home Loan Bank (See Note 8).  The advances
must be fully secured after discounting the qualifying loans at 75% of the
principal balances outstanding.

At December 31, 1997, the Company was servicing mortgage loans for the benefit
of others totalling approximately $21,346,000.  While such loans were originated
by the Company, the entire cost of originating the loans has been allocated to
the loans with no cost being allocated to the mortgage servicing rights, since
management believes the amount to be immaterial.  During 1998, the Company
suspended its mortgage servicing activities and sold its mortgage servicing
rights, realizing a gain of $102,131.  Revenue from mortgage servicing
activities amounted to $42,592 and $59,171 for the years ended December 31, 1997
and 1996, respectively.

Transactions in the allowance for losses on loans were as follows:

<TABLE>
<CAPTION>
                                         YEARS ENDED DECEMBER 31,
                                    -----------------------------------
                                       1998         1997        1996
                                    -----------  ----------  ----------
<S>                                 <C>          <C>         <C>
 Balance, January 1                 $4,243,043   3,803,606   3,427,433
 Provision for losses charged to
   operating expenses                  903,404     792,900     632,842
 Recoveries                             87,843      73,787      44,281
                                    ----------   ---------   ---------
     Total                           5,234,290   4,670,293   4,104,556
 Less loans charged off               (808,073)   (427,250)   (300,950)
                                    ----------   ---------   ---------
 Balance, December 31               $4,426,217   4,243,043   3,803,606
                                    ==========   =========   =========
</TABLE>

                                      F-19
<PAGE>
 
Note 6 - Deposits
-----------------

At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
 
<S>               <C>
      1999        $169,058,197
      2000          32,416,029
      2001           7,178,189
      2002           4,601,810
      2003           7,515,793
                  ------------
                  $220,770,018
                  ============
</TABLE>


Note 7 - Notes Payable
----------------------

Notes payable consists of the following:
 

<TABLE> 
<CAPTION> 
                                                            DECEMBER 31,
                                                       -------------------- 
                                                        1997          1998
                                                       ------        ------ 
<S>                                                    <C>         <C> 
Note payable to correspondent bank,
 interest payable quarterly,
 variable interest rate (7.65% at
 December 31, 1997), equal semi-
 annual installments in the amount
 of $136,500, maturity date in
 2005, repaid during 1998 without
 prepayment penalty.  The note
 was secured by all of the issued
 and outstanding stock of Bainbridge
 National Bank prior to the merger
 with the Company.                                     $    -0-   2,184,000
                                                       ========  ==========

</TABLE> 


Note 8 - Advances From Federal Home Loan Bank
---------------------------------------------

Advances from the Federal Home Loan Bank consists of the following:

 
                                                            DECEMBER 31,
                                                      -------------------------
                                                        1998              1997
                                                      -------            ------

Advances payable, interest payable
 monthly or quarterly, combination of
 fixed and variable interest rates which
 averaged 6.03% and 6.25% at December 31, 1998,
 and 1997, respectively, various
 repayment options, maturities
 through August 2, 2010.                              $39,057,723    31,811,673
                                                      ===========    ==========

                                      F-20
<PAGE>
 
Note 8  Advances From Federal Home Loan Bank (Continued)
--------------------------------------------------------

Maturities of the advances for the succeeding five years are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING
                  DECEMBER 31,
                  ------------
<S>               <C>
      1999          $8,530,666
      2000           7,764,201
      2001           2,134,408
      2002           1,924,620
      2003           5,256,503
</TABLE>

The advances are collateralized as provided in Note 5.


Note 9 - Profit Sharing Plan and 401(k) Plan
--------------------------------------------

An employee profit sharing plan and 401(k) plan is provided for qualified
employees.  The plans are qualified under the Internal Revenue Code.  The Board
of Directors makes an annual determination of the contribution to the profit
sharing plan.  By law and pursuant to the terms and provisions of the employee
profit sharing plan, a contribution up to a maximum of 15% of the total
qualified employee compensation may be made.  Under the 401(k) plan, employees
may make salary deferral contributions of 10% to 15% of qualified employee
compensation.  The Company will make matching contributions at a level
determined by the Board of Directors.  Amounts contributed to the plans for the
years ended December 31, 1998, 1997 and 1996 totaled $328,073, $277,626 and
$243,569, respectively.


Note 10 - Deferred Compensation Plan
------------------------------------

Effective January 1, 1994, the Company adopted a deferred compensation plan for
the benefit of key employees.  While the plan is to be funded from the general
assets of the Company, life insurance policies were acquired for the purpose of
serving as the primary funding source.  As of December 31, 1998 and 1997, the
cash values of these policies were $2,849,483 and $2,747,030, respectively, and
the liability accrued for benefits payable under the plan was $403,749 and
$275,596, respectively.


Note 11 - Employee Stock Option Plan
------------------------------------

The Company's Stock Option Plan authorizes the granting of stock options to its
full-time employees for up to 400,000 shares of common stock.  Under the plan,
the exercise price of each option equals the market price of the Company's stock
on the grant date, and an option's maximum term is ten years.  Options are
granted as administered by the Board of Directors and, with limited exceptions,
vest on a straight-line basis over a five year period beginning February 26,
1997.

The fair value of each option grant is estimated on the grant date using an
option-pricing model with the following weighted-average assumptions used for
grants in 1998: dividend yield of 1.37%, risk free interest rate of 5.0%,
expected lives of 5 years for the options and a volatility rate of 30.00%.

Weighted-average assumptions used for grants in 1997 are as follows:  dividend
yield of 1.65%, risk-free interest rate of 5.57%, expected lives of five years
for the options and a volatility rate of 14.2%.

Weighted-average assumptions used for grants in 1996 are as follows:  dividend
yield of 1.65%, risk-free interest rate of 7.50%, expected lives of five years
for the options and a volatility rate of 23.0%.

                                      F-21
<PAGE>
 
Note 11 - Employee Stock Option Plan (Continued)
------------------------------------------------

A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996, and the changes during the years then ended is presented
below:

<TABLE>
<CAPTION>
 
                                          YEAR ENDED DECEMBER 31, 1998   YEAR ENDED DECEMBER 31, 1997   YEAR ENDED DECEMBER 31, 1996
                                         ------------------------------  -----------------------------  ----------------------------
                                                            WEIGHTED-                     WEIGHTED-                      WEIGHTED-
                                                             AVERAGE                       AVERAGE                        AVERAGE
FIXED                                                       EXERCISE                       EXERCISE                       EXERCISE
OPTIONS                                      SHARES           PRICE         SHARES          PRICE           SHARES         PRICE
---------------------------------------  ---------------  -------------  -------------  --------------  --------------  ------------
<S>                                      <C>              <C>            <C>            <C>             <C>             <C>
Outstanding at
  beginning of
  year                                          328,588        $  8.59        188,118           $ 6.35          44,118        $ 6.67
Granted                                          54,500          12.06        152,000            10.58         144,000          6.25
Exercised                                       (33,985)        (10.03)       (11,030)           14.00             -0-           .00
Forfeited                                        (2,000)          8.59           (500)           10.06             -0-           .00
                                               --------                      --------                          -------
Outstanding at
  end of year                                   347,103           8.76        328,588             8.04         188,118          6.35
                                               ========                      ========                          =======
 
Exercisable at
  December 31                                   162,603           8.09        162,388             8.59          84,118          6.47
Weighted-average
  fair value of
  options granted
  during the year                                 $3.71                          2.91                             1.92
                                               ========                      ========                          =======
</TABLE> 

 
The following table summarizes
 information about fixed stock options
 outstanding at December 31, 1998:
 
<TABLE> 
<CAPTION> 

                                                      OUTSTANDING OPTIONS                       EXERCISABLE OPTIONS
                                         --------------------------------------------        ---------------------------------
                                                             WEIGHTED-                  
                                                              AVERAGE       WEIGHTED                              WEIGHTED-
                                               NUMBER        REMAINING      AVERAGE              NUMBER            AVERAGE
RANGE OF OR ACTUAL                         OUTSTANDING      CONTRACTUAL     EXERCISE           EXERCISABLE        EXERCISE
EXERCISE PRICES                            AT 12/31/98         LIFE          PRICE             AT 12/31/98         PRICE
---------------------------------------  --------------   ------------   ------------        --------------    ------------
<S>                                        <C>              <C>          <C>                   <C>              <C>  
 $ 6.25                                         144,000        7 Years    $   6.25               81,600          $ 6.25
 9.43                                            17,353        2 Years        9.43               17,353            9.43
 10.06                                          131,250        8 Years       10.06               61,650           10.06
 12.06                                           54,500        9 Years       12.06                2,000           12.06
                                               --------                                         -------     
 $ 6.25 to                                                                                                  
 $12.06                                         347,103                                         162,603     
                                               ========                                         =======     
</TABLE>         

If the Company had used the fair value based method of accounting for its
employee stock option plan, as prescribed by Statement of Financial Accounting
Standards No. 123, compensation cost in net income for the year ended December
31, 1998 would have increased by $136,754, resulting in net income of
$6,514,296, net of tax. Basic earnings per share would have declined from $.80
to $.79 and diluted earnings per share would have declined from $.78 to $.77.

If the Company had used the fair value based method of accounting for its
employee stock option plan for the year ended December 31, 1997, compensation
cost in net income would have increased by $170,487, resulting in net income of
$5,889,675, net of tax.  Basic earnings per share would have declined from $.73
to $.72 and diluted earnings per share would have declined from $.72 to $.71.

                                      F-22
<PAGE>
 
Note 11 - Employee Stock Option Plan (Continued)
------------------------------------------------

If the Company had used the fair value based method of accounting for its
employee stock option plan for the year ended December 31, 1996, compensation
cost and net income would not have changed.


Note 12 - Directors Deferred Stock Purchase Plan
------------------------------------------------

On April 18, 1994, the Company's shareholders approved the Directors Deferred
Stock Purchase Plan (the "Director Plan"), which provides that a director of the
Company or any subsidiary may elect to receive shares of common stock of the
Company in lieu of the cash compensation otherwise payable as director's fees
for services as a member of the Board of Directors or any committee thereof. The
shares of common stock issuable to an electing director shall be issued on
January 15 following each fiscal year in a whole number (rounded down) resulting
from the amount of such director's fees (or a portion thereof as determined by
such director) for such previous fiscal year divided by 100% of the fair market
value of the common stock as of January 1 of such previous fiscal year. The
Director Plan covers 100,000 shares of common stock, which may be authorized for
issuance and delivery thereunder. The Director Plan shall remain in effect for
five years (through January 15, 1999) or until termination by the Board,
whichever occurs first. The Director Plan is administered by the Board of
Directors of the Company. The Company has issued 7,808, 15,268 and 13,384 shares
of common stock under the Director Plan for the years ended December 31, 1998,
1997 and 1996, respectively.

Note 13 - Income Taxes
----------------------

Income tax expense is comprised of federal and state income taxes as follows:
<TABLE>
<CAPTION>
                                    YEARS ENDED DECEMBER 31,
                               -----------------------------------
                                  1998         1997        1996
                               -----------  ----------  ----------
<S>                            <C>          <C>         <C>
 Current expense               $3,491,498   3,354,738   2,446,870
 Deferred (credit)               (144,047)   (193,112)      3,840
                               ----------   ---------   ---------
                               $3,347,451   3,161,626   2,450,710
                               ==========   =========   =========
</TABLE> 
 
Income tax at the statutory rate of 34% is reconciled to the Company's actual
 provision as follows:

<TABLE> 
<CAPTION> 
 

                                                                    YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                 1998        1997        1996
                                                              ----------   ---------   ---------
<S>                                                          <C>          <C> 
 Tax at statutory rate                                        $3,399,490   3,115,937   2,471,566
 State income taxes                                              263,250     269,620     146,532
 Tax exempt interest and dividend                        
  exclusion                                                     (358,249)   (217,387)   (203,021)
 Amortization of goodwill                                         43,746      43,746      43,746
 Increase in cash value of life                          
  insurance policies                                             (46,088)    (27,038)    (20,914)
 Other                                                            45,302     (23,252)     12,801
                                                              ----------   ---------   ---------
 Actual income tax expense                                    $3,347,451   3,161,626   2,450,710
                                                              ==========   =========   =========
</TABLE>

                                      F-23
<PAGE>
 
Note 13 - Income Taxes (Continued)
----------------------------------

Deferred tax liabilities have been provided for taxable temporary differences
related to accumulated depreciation, stock dividends and unrealized gains on
available-for-sale securities.  Deferred tax assets have been provided for
deductible temporary differences related to unrealized losses on available-for-
sale securities, the allowance for loan losses, deferred compensation and
purchase accounting adjustments.  The net deferred tax assets in the
accompanying balance sheets include the following components:
<TABLE>
<CAPTION>
 
                                          DECEMBER 31,
                                      ---------------------
                                         1998       1997
                                      ----------  ---------
<S>                                   <C>         <C>
 Deferred tax assets:
   Allowance for loan losses          $1,466,014  1,404,426
   Purchase accounting adjustments        18,984     14,880
   Deferred compensation plan            152,359    103,999
   Other                                  56,275     26,828
                                      ----------  ---------
                                       1,693,632  1,550,133
                                      ----------  ---------
 Deferred tax liabilities:
   Bank premises and equipment and
     depreciation                        595,062    544,607
   Stock dividends                        77,057     77,057
   Unrealized gains on available-
     for-sale securities                 205,202     77,562
   Amortization of core deposits          65,138     94,748
   Other                                   9,057     30,450
                                      ----------  ---------
                                         951,516    824,424
                                      ----------  ---------
Net deferred tax assets               $  742,116    725,709
                                      ==========  =========
</TABLE>

No valuation allowance was established in view of the Company's tax strategies
coupled with anticipated future taxable income as evidenced by the Company's
earnings potential.

Through 1995, thrift institutions were allowed, for tax purposes, a special
deduction for bad debts based on a percentage of taxable income before such
deduction, subject to various limitations provided by the Internal Revenue Code.
One of the Company's subsidiaries (converted from a thrift subsidiary) had an
allowable percentage of 8%.  Effective January 1, 1996, only the experience
method is allowable for computing the provision for bad debts for tax purposes.
Additionally, any excess bad debt deductions taken after December 31, 1987, must
be recaptured over a six year period.  The effect of changing the method of
computing bad debts had no effect upon the income tax provision of the Company's
subsidiary inasmuch as the excess deductions had been subjected to the deferred
income tax provision.

For tax purposes, included in retained earnings of the Company's subsidiary (now
converted from a thrift subsidiary) at December 31, 1998, is approximately
$2,033,000 of accumulated bad debt deductions for which no deferred income tax
liability has been recorded.  This amount represents an allocation of income to
bad debt deductions for tax purposes only.  Reduction of amounts so allocated
for purposes other than tax bad debt losses or adjustments arising from carry-
back of net operating losses would give rise to income for tax purposes only,
which would be subject to income taxes at the then prevailing corporate rate.

                                      F-24
<PAGE>
 
Note 14 - Dividend Reinvestment and Common Stock Purchase Plan
--------------------------------------------------------------

On December 20, 1993, the Company's Board of Directors approved a dividend
reinvestment and common stock purchase plan.  The purpose of the plan is to
provide shareholders of record of the Company's common stock, who elect to
participate in the plan, with a simple and convenient means to reinvest
automatically cash dividends and make additional voluntary cash purchases of
shares of common stock without the expense of brokerage commissions or other
fees.  Eligible participants may purchase common stock through automatic
reinvestment of common stock dividends on all of their shares or not less than
50% of their shares and make additional voluntary cash payments of not less than
$50 nor more than $1,000, in the aggregate, for each calendar year.  The price
of common stock purchased with dividends will be 100% of the fair market value
of the stock.  The price of common stock purchased with voluntary cash payments
will be 100% of the fair market value of the stock.  Among amendments to the
plan effective January 1, 1998, is the elimination of the 50% minimum
participation level for dividend reinvestment.  During the years ended December
31, 1998, 1997 and 1996, the plan resulted in the incremental issuance of 1,650,
30,960 and 103,728 shares, respectively.  The decline in the incremental shares
issued is due to the current policy of acquiring shares in the market place to
fill orders for dividend reinvestment and stock purchases rather than issuing
additional shares.


Note 15 - Commitments, Contingencies and Financial Instruments With Off-Balance-
--------------------------------------------------------------------------------
    Sheet Risk
    ----------

The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk.  These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit.  A summary of the Banks' commitments and contingent
liabilities is as follows:
<TABLE>
<CAPTION>
 
                                      NOTIONAL AMOUNT
                                  -----------------------
                                       DECEMBER 31,
                                  -----------------------
                                     1998         1997
                                  -----------  ----------
<S>                               <C>          <C>
 
  Commitments to extend credit    $47,369,264  42,651,000
  Standby letters of credit         1,768,132   2,783,400
</TABLE>

Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance by the customer.  The Banks'
credit policies and procedures for credit commitments are the same as those for
extensions of credit that are reported in the financial statements.  Because
these instruments have fixed maturity dates and because many of them expire
without being drawn upon, they do not generally present any significant
liquidity risk to the Banks.  The Banks' have not incurred any losses on their
commitments in either 1998 or 1997.

The nature of the business of the Company and the Banks is such that they are
ordinarily subjected to a certain amount of litigation.  In the opinion of
management and counsel, there is no litigation in which the outcome will have a
material effect on the financial statements.

                                      F-25
<PAGE>
 
Note 16 - Related Party Transactions
------------------------------------

At December 31, 1998 and 1997, loans to all officers, directors and employees
and their associates aggregated approximately $10,965,398 and $15,168,730,
respectively.

The following is a summary of the activity in loans to executive officers,
directors and principal shareholders where the aggregate to any one exceeded
$60,000 during the year ended December 31, 1998:
<TABLE>
<CAPTION>
 
<S>                                <C>
     Balance, beginning of year    $ 10,748,447
     Amounts advanced                11,118,016
     Repayments                     (11,004,349)
                                   ------------
     Balance, end of year          $ 10,862,114
                                   ============
</TABLE>

Employees, officers, directors and principal shareholders maintained customary
deposit relationship with the Banks.  The aggregate of such deposits was
approximately $13,500,000 at December 31, 1998.

Management believes that all of the above transactions were entered into in the
normal course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers and did not involve more than
normal credit risk or present other unfavorable features.


Note 17 - Regulatory Matters
----------------------------

The primary source of funds available for the payment of cash dividends are
dividends received  by PAB Bankshares, Inc. from subsidiary Banks.  The Banks
are limited by banking regulations as to the amount of dividends that may be
paid without prior approval of the Banks' regulatory agency.  Retained earnings
of the Banks against which dividends may be charged is approximately $11,789,000
at December 31, 1998 and the amount of dividends which may be paid within one
year is approximately $3,922,000.

The Banks are required to maintain average balances with the Federal Reserve
Bank.  The average amount of those reserve balances for the year ended December
31, 1998 was approximately $1,866,000.

The Company and the Banks are subject to various regulatory capital requirements
administered by the state and 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 Company's and the Banks' financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices.  The capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined).  Management believes, as of December 31, 1998 and 1997,
that the Company and the Banks meet all capital adequacy requirements to which
they are subject.

The most recent notification from Banking regulators categorized the Company and
the Banks as well capitalized under the regulatory framework for prompt
corrective action.  To be categorized as well capitalized, the Company and the
Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table.  There have been no conditions or
events since that notification that management believes have changed the
institution's category.

                                      F-26
<PAGE>
 
Note 17--Regulatory Matters (Continued)
---------------------------------------

The Company's consolidated actual capital amounts and ratios and the minimum
amounts and ratios under the capital adequacy and prompt corrective action
provisions are presented below:
<TABLE>
<CAPTION>
                                                                           
                                                  CAPITALIZED UNDER       TO BE WELL
                                                     FOR CAPITAL       PROMPT CORRECTIVE
                                    ACTUAL       ADEQUACY PURPOSES:   ACTION PROVISIONS:
                                ---------------  -------------------  -------------------
                                AMOUNT   RATIO    AMOUNT     RATIO     AMOUNT     RATIO
                                -------  ------  ---------  --------  ---------  --------
                                                 (Amounts in thousands)
<S>                             <C>      <C>     <C>        <C>       <C>        <C>
As of December 31, 1998:
 Total Capital
   (to Risk Weighted Assets)    $52,482   13.8%     30,424      8.0%     38,030  less than 10.0%
 Tier I Capital
   (to Risk Weighted Assets)     48,056   12.6%     15,256      4.0%     22,884  less than  6.0%
 Tier I Capital
   (to Average Assets)           48,056    9.6%     20,023      4.0%     25,029  less than  5.0%
 
As of December 31, 1997:
 Total Capital
   (to Risk Weighted Assets)    $47,122   14.9%     25,300      8.0%     31,626  less than 10.0%
 Tier I Capital
   (to Risk Weighted Assets)     42,879   13.5%     12,705      4.0%     19,057  less than  6.0%
 Tier I Capital
   (to Average Assets)           42,879    9.5%     18,054      4.0%     22,568  less than  5.0%
 
</TABLE>

Note 18 - Concentrations of Credit Risk
---------------------------------------

In addition to the concentrations of credit risk disclosures in notes one and
five, the Company and its subsidiaries maintains its cash in bank deposit
accounts which usually exceed federally insured limits and sells federal funds
to correspondent banks on an unsecured basis.  The Company and its subsidiaries
has not experienced any losses in such accounts.  Management believes the
Company and its subsidiaries is not exposed to any significant credit risk on
cash and cash equivalents and federal funds sold.

Note 19 - Investment in Unconsolidated Subsidiary
-------------------------------------------------

On August 14, 1985, the Board of Directors of the Company's subsidiary (First
Community Bank of Southwest Georgia) approved participation in the formation of
a new service corporation, Empire Financial Services, Inc. ("Empire") with its
home office located in Milledgeville, Georgia.  The primary purpose of the
service corporation is the origination and servicing of commercial real estate
loans.  Since the formation of the service corporation, First Community has
participated in loans originated by Empire when deemed appropriate by
management.

First Community owns 50% of the outstanding stock of Empire.  First Community
accounts for its investment in Empire under the equity method.  The investment
in Empire exceeded First Community's share of the underlying net assets by
$48,588 at December 31, 1998, and is being amortized on the straight-line method
over twenty-five years.

                                      F-27
<PAGE>
 
Following is a summary of the unaudited financial position at December 31, 1998
and 1997 and unaudited results of operations of Empire for the three years ended
December 31, 1998:

<TABLE>
<CAPTION>
 
                                                               DECEMBER 31,
                                                           ---------------------
                                                              1998       1997
                                                           ----------  ---------
                                        ASSETS
                                      ----------
<S>                                                        <C>         <C>
 
Current assets                                             $1,516,951    438,363
Premises and equipment                                        584,181    427,981
                                                           ----------  ---------
 
 Total Assets                                              $2,101,132    866,344
                                                           ==========  =========
 
  LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------
 
Current liabilities                                        $1,325,531    460,334
Long-term liabilities                                         441,302    311,046
                                                           ----------  ---------
 Total Liabilities                                          1,766,833    771,380
Stockholders' equity                                          334,299     94,964
                                                           ----------  ---------
 
 Total Liabilities and Stockholders' Equity                $2,101,132    866,344
                                                           ==========  =========
 <CAPTION> 
                                                    YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                                  1998        1997       1996
                                               ----------  ----------  ---------
<S>                                            <C>         <C>         <C>
Total revenue                                  $2,999,317   1,724,445  1,811,282
                                               ==========  ==========  =========
 
Net income                                     $1,039,334     503,236    498,328
                                               ==========  ==========  =========
 
First Community Bank of Southwest Georgia's
 proportionate share of net income             $  519,667     251,618    249,164
                                               ==========  ==========  =========
</TABLE>

To facilitate the timely closing of its books and preparation of monthly
financial statements, the Company's subsidiary (First Community Bank of
Southwest Georgia) follows a consistent practice of accruing its share of Empire
earnings one month in arrears.  As of December 31, 1998, an additional amount of
earnings of approximately $150,000 was recorded in January 1999.  There was no
significant earnings recorded in arrears at December 31, 1997 or 1996.

                                      F-28
<PAGE>
 
Note 20 - Financial Information of PAB Bankshares, Inc. (Parent Only)
---------------------------------------------------------------------

Condensed balance sheets of PAB Bankshares, Inc. as of December 31, 1998 and
1997 and related statements of income and cash flows for the three years ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
                  BALANCE SHEETS
                  --------------                     
                                                          DECEMBER 31,
                                                     -----------------------
                       ASSETS                            1998        1997
                       ------                        -----------  ----------
<S>                                                  <C>          <C> 
Cash on deposit with subsidiary banks                $ 4,296,858   2,460,360
Investment in:
 Park Avenue Bank                                     16,628,190  14,626,656
 Farmers & Merchants Bank                              4,881,654   4,348,746
 First Community Bank of Southwest Georgia            16,888,997  19,736,728
 Eagle Bank and Trust                                  7,244,621   6,749,255
Property, Plant and Equipment, net of accumulated
 depreciation                                            561,599     673,885
Land and building held for lease                         594,589         -0-
Income taxes receivable                                  737,965     361,659
Other assets                                             279,498     315,812
                                                     -----------  ----------
   Total Assets                                      $52,113,971  49,273,101
                                                     ===========  ==========
 
            LIABILITIES AND STOCKHOLDERS' EQUITY
            ------------------------------------
 
Liabilities:
 Dividends payable                                   $   662,440     548,106
 Notes payable                                               -0-   2,184,000
 Other liabilities                                       349,174     476,036
                                                     -----------  ----------
                                                       1,011,614   3,208,142
                                                     -----------  ----------
Stockholders' Equity:
 Common stock                                          1,217,065   1,263,745
 Additional paid in capital                           25,809,693  26,304,565
 Retained earnings                                    23,739,623  19,364,279
 Other comprehensive income                              335,976     115,559
                                                     -----------  ----------
                                                      51,102,357  47,048,148
Less:  Treasury Stock, at cost                               -0-    (983,189)
                                                     -----------  ----------
                                                      51,102,357  46,064,959
                                                     -----------  ----------
   Total Liabilities and Stockholders' Equity        $52,113,971  49,273,101
                                                     ===========  ==========
</TABLE>

                                      F-29
<PAGE>
 
Note 20 - Financial Information of PAB Bankshares, Inc. (Parent Only)
---------------------------------------------------------------------
(Continued)
-----------
<TABLE>
<CAPTION>
                               STATEMENTS OF INCOME
                               --------------------                                
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                      ----------------------------------
                                                                                         1998        1997        1996
                                                                                      ----------   ---------   ---------
<S>                                                                                  <C>           <C>         <C> 
Income:
 Equity in earnings of subsidiary banks:
  Park Avenue Bank                                                                    $3,273,601   2,791,419   2,476,434
  Farmers & Merchants Bank                                                               822,972     654,480     549,467
  First Community Bank of Southwest
   Georgia                                                                             2,930,637   2,533,316   1,937,760
  Eagle Bank and Trust                                                                   817,794     749,145     615,634
 Interest Income:
  Subsidiary banks                                                                        10,224      15,246      15,957
 Computer service income, management
  and other fees from subsidiary banks                                                   976,459   1,084,887     504,109
 Other income                                                                             11,183       3,831      49,601
                                                                                      ----------   ---------   ---------
                                                                                       8,842,870   7,832,324   6,148,962
Expenses                                                                               2,925,795   2,243,765   1,699,736
                                                                                      ----------   ---------   ---------
Income before taxes                                                                    5,917,075   5,588,559   4,449,226
Income taxes (benefit)                                                                  (733,975)   (414,335)   (369,377)
                                                                                      ----------   ---------   ---------
 Net Income                                                                           $6,651,050   6,002,894   4,818,603
                                                                                      ==========   =========   =========
</TABLE> 

                                      F-30
<PAGE>
 
Note 20 - Financial Information of PAB Bankshares, Inc. (Parent Only) 
--------------------------------------------------------------------- 
(Continued)
-----------

<TABLE> 
<CAPTION> 
                    STATEMENTS OF CASH FLOWS
                    ------------------------
                                                                                YEARS ENDED DECEMBER 31,
                                                          -----------------------------------------------------------------
                                                                 1998                   1997                   1996
                                                          -------------------   -------------------   ---------------------
Cash Flows From Operating Activities:
<S>                                                       <C>                   <C>                   <C>
  Net income                                                      $ 6,651,050             6,002,894             4,818,603
  Adjustments to reconcile net income
  to net cash provided by operating
    activities:
    Depreciation and amortization                                     245,021               203,094               131,879
    Equity in earnings of subsidiary
      banks                                                        (7,845,004)           (6,728,360)           (5,579,295)
    (Gains) Loss on sale of assets                                     (6,932)                  -0-                (1,795)
    Dividends received from subsidiaries:
      Park Avenue Bank                                              1,395,708             2,170,812               850,000
      Farmers & Merchants Banks                                       327,245               370,167               179,838
      First Community Bank of Southwest
        Georgia                                                     5,778,050             1,691,123             1,079,586
     Eagle Bank and Trust                                             382,339                   -0-                   -0-
    Deferred income taxes                                               6,539                18,772                 8,001
    Change in assets and liabilities                                 (394,048)              204,849               (79,261)
                                                                  -----------            ----------            ----------
Net cash provided (used) by operating activities                    6,539,968             3,933,351             1,407,556
                                                                  -----------            ----------            ----------
 
Cash Flows From Investing Activities:
  Proceeds from sale of assets                                         17,600                   -0-                68,901
  Capital expenditures                                               (733,914)             (405,678)             (259,694)
  (Increase) Decrease in cash value of
    life insurance                                                     (2,181)               (6,938)               (1,573)
                                                                  -----------            ----------            ----------
Net cash provided (used) by investing activities                     (718,495)             (412,616)             (192,366)
                                                                  -----------            ----------            ----------
 
Cash Flows From Financing Activities:
  Dividends paid                                                   (2,141,687)           (1,335,932)             (635,091)
  Repayment of notes payable                                       (2,184,000)           (1,200,000)           (1,773,000)
  Proceeds from issuance of stock                                     340,712               124,302               734,021
  Acquisition of treasury stock                                           -0-                   -0-               (30,925)
                                                                  -----------            ----------            ----------
Net cash provided (used) by financing activities                   (3,984,975)           (2,411,630)           (1,704,995)
                                                                  -----------            ----------            ----------
 
Net Increase (Decrease) in Cash                                     1,836,498             1,109,105              (489,805)
 
Cash and Cash Equivalents at Beginning of Period                    2,460,360             1,351,255             1,841,060
                                                                  -----------            ----------            ----------
 
Cash and Cash Equivalents at End of Period                        $ 4,296,858             2,460,360             1,351,255
                                                                  ===========            ==========            ==========
 
Supplemental Disclosures of Cash Flow Information
--------------------------------------------------------
Cash paid during the period for:
  Interest                                                        $   151,582               240,184               388,197
                                                                  ===========            ==========            ==========
  Income taxes (received)                                         $  (364,208)             (467,814)             (308,128)
                                                                  ===========            ==========            ==========
</TABLE>

                                      F-31
<PAGE>
 
Note 21 - Fair Values of Financial Instruments
----------------------------------------------
 
The estimated fair values of the Company's financial instruments are as follows:

 
<TABLE> 
<CAPTION> 
                                                      DECEMBER 31, 1998                    DECEMBER 31, 1997
                                            ------------------------------------  --------------------------------------
                                               CARRYING             FAIR              CARRYING              FAIR
                                                AMOUNT              VALUE               VALUE               VALUE
                                           ----------------  -------------------  -----------------  -------------------
<S>                                        <C>               <C>                  <C>                <C>
Financial assets:
Cash and cash equivalents                      $ 43,537,671           43,537,671         43,012,762           43,012,762
Time deposits                                       396,000              396,000          3,398,000            3,398,000
Investment securities                            95,209,328           95,209,328         83,438,835           83,465,699
Loans, net of allowance for
loan losses                                     347,305,116          337,361,000        317,269,090          317,496,565
Accrued interest receivable                       5,491,847            5,491,847          5,135,735            5,135,735
 
Financial liabilities:
Deposits                                        413,255,974          422,841,000        386,643,618          390,871,566
Notes payable                                           -0-                  -0-          2,184,000            2,184,000
Advances from Federal Home
Loan Bank                                        39,057,723           35,390,000         31,811,673           31,853,779
Accrued interest payable                          1,601,491            1,601,491          1,656,497            1,656,497
Other borrowed funds                              2,339,170            2,339,170          1,004,854            1,004,854
Federal funds purchased                           3,824,095            3,824,095                -0-                  -0-
</TABLE>


The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.

<TABLE>
<CAPTION>
                                NOTIONAL       FAIR      NOTIONAL      FAIR
                                 AMOUNT       VALUE       AMOUNT      VALUE
                              ------------  ----------  ----------  ----------
<S>                           <C>           <C>         <C>         <C>
Other:
 Commitments to extend
   credit                      $47,369,264  47,369,264  42,651,000  42,651,000
 Standby letters of credit       1,768,132   1,768,132   2,783,400   2,783,400
</TABLE>

                                      F-32
<PAGE>
 
Note 22 - Mergers and Acquisitions
----------------------------------

On June 19, 1998, the Company acquired all of the outstanding common stock of
Investors Financial Corp. (Investors) in exchange for 1,711,249 shares of the
Company's common stock and a nominal amount of cash in lieu of fractional
shares.  Immediately following the merger, Investors was liquidated and its
wholly-owned subsidiary, Bainbridge National Bank, became a wholly-owned
subsidiary of the Company.  Bainbridge National Bank was a commercial banking
entity operating in Bainbridge, Georgia and surrounding areas.  Effective August
31, 1998, Bainbridge National Bank was merged with First Community Bank of
Southwest Georgia.  On December 9, 1998, the Company acquired all of the
outstanding common stock of Eagle Bank Corp., Inc. (Eagle) in exchange for
907,610 shares of the Company's common stock.  Immediately following the merger,
Eagle was liquidated and its wholly-owned subsidiary, Eagle Bank and Trust,
became a wholly-owned subsidiary of the Company.  Eagle Bank and Trust is a
state chartered commercial bank operating in Statesboro, Georgia and surrounding
areas.

The mergers of Investors and Eagle have been accounted for as poolings of
interests and, accordingly, all prior financial statements have been restated to
include the accounts and operations of the pooled companies.  The following
table presents a reconciliation of net interest income and net income, as
previously reported by the Company, to those presented in the accompanying
consolidated financial statements and reflects the net interest income and net
income of the previously separate companies for the periods before the mergers.

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                          ---------------------------------------------------------
                                                               1998                1997                 1996
                                                          ---------------  --------------------  ------------------
<S>                                                       <C>              <C>                   <C>
Net Interest Income:
  PAB Bankshares, Inc.                                        $16,080,518            13,083,267          11,148,043
  Investors Financial Corp./Bainbridge
    National Bank                                               1,705,081             3,300,480           3,061,889
  Eagle Bancorp, Inc./Eagle Bank
    and Trust                                                   2,907,883             2,709,826           2,371,716
                                                              -----------            ----------          ----------
Combined                                                      $20,693,482            19,093,573          16,581,648
                                                              ===========            ==========          ==========
 
Net Income:
  PAB Bankshares, Inc.                                        $ 5,226,774             4,144,133           3,348,554
  Investors Financial Corp./Bainbridge
    National Bank                                                 606,481             1,184,820             968,193
  Eagle Bancorp, Inc./Eagle Bank
    and Trust                                                     817,795               673,941             501,856
                                                              -----------            ----------          ----------
Combined                                                      $ 6,651,050             6,002,894           4,818,603
                                                              ===========            ==========          ==========
</TABLE>
                                                                                

                                      F-33
<PAGE>
 
Note 23 - Quarterly Results of Operations (Unaudited)
-----------------------------------------------------

The following is a summary of the quarterly results of operations for the two
years ended December 31, 1998:

<TABLE>
<CAPTION>
 
                                                    QUARTERLY PERIOD ENDED
                                        -------------------------------------------------
                                         MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                                        ---------- --------- -------------- ------------- 
                                              (In Thousands, Except Per share Data)
Year Ended December 31, 1998:
<S>                                       <C>       <C>          <C>            <C>
  Interest income                         $ 9,600    9,912       10,090         10,094
  Interest expense                         (4,580)  (4,823)      (4,816)        (4,784)
                                          -------   ------       ------         ------
  Net interest income                       5,020    5,089        5,274          5,310
  Provision for loan losses                  (292)    (174)        (166)          (271)
                                          -------   ------       ------         ------
  Net interest income                                                        
    after provision for                                                      
    loan losses                             4,728    4,915        5,108          5,039
  Other income                              1,463    1,364        1,427          1,368
  Other expenses                           (3,507)  (3,828)      (3,988)        (4,091)
                                          -------   ------       ------         ------
  Income before income taxes                2,684    2,451        2,547          2,316
  Income taxes                               (874)    (855)        (872)          (746)
                                          -------   ------       ------         ------
  Net income                              $ 1,810    1,596        1,675          1,570
                                          =======   ======       ======         ======
                                                                             
  Basic earnings per share                $  0.22     0.19         0.20           0.19
                                          =======   ======       ======         ======
  Diluted earnings per share              $  0.22     0.19         0.19           0.18
                                          =======   ======       ======         ======
                                                                             
Year Ended December 31, 1997:                                                
  Interest income                         $ 8,512    8,828        9,233          9,491
  Interest expense                         (4,022)  (4,119)      (4,322)        (4,506)
                                          -------   ------       ------         ------
  Net interest income                       4,490    4,709        4,911          4,985
  Provision for loan losses                  (139)    (168)        (269)          (217)
                                          -------   ------       ------         ------
  Net interest income                                                        
    after provision for                                                      
    Loan losses                             4,351    4,541        4,642          4,768
  Other income                                971    1,105        1,058          1,176
  Other expenses                           (3,163)  (3,272)      (3,404)        (3,607)
                                          -------   ------       ------         ------
  Income before income taxes                2,159    2,374        2,296          2,337
  Income taxes                               (735)    (810)        (842)          (776)
                                          -------   ------       ------         ------
  Net income                              $ 1,424    1,564        1,454          1,561
                                          =======   ======       ======         ======
                                                                             
  Basic earnings per share                $  0.17     0.19         0.18           0.19
                                          =======   ======       ======         ======
  Diluted earnings per share              $  0.17     0.19         0.17           0.19
                                          =======   ======       ======         ======
</TABLE>