**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





**FORM
10-K**





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





For the
Fiscal Year Ended December 31, 2004





Commission
File Number 1-11823












**PAB
BANKSHARES, INC.**


(A
Georgia Corporation)


IRS
Employer Identification Number: 58-1473302





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


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





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





Title
      of each class
    
    Name
      of each exchange on which registered****
      **Common
      Stock, no par value**
    
    ****
      **American
      Stock Exchange**





SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]





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





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).


Yes [X]
No [_] The aggregate market value of voting common stock held by non-affiliates
on June 30, 2004 was approximately $87.3 million (based on shares held by
non-affiliates at $12.14 per share, the closing stock price on the American
Stock Exchange on June 30, 2004).





As of
February 28, 2005 (the latest practicable date), the registrant had 9,495,320
shares of common stock outstanding.





**DOCUMENTS
INCORPORATED BY REFERENCE**





Portions
of the registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders
to be held on May 24, 2005 are incorporated by reference in answer to Part III
of this Form 10-K.
















**TABLE
OF CONTENTS**
 **Item**
    
    **Page****PART
      I**Cautionary
      Notice Regarding Forward-Looking Statements
    31.
    BUSINESSGeneral
    3Supervision
      and Regulation
    72.
    PROPERTIES
    123.
    LEGAL
      PROCEEDINGS
    134.
    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
    13**PART
      II**5.
    MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERMATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES
    136.
    SELECTED
      FINANCIAL DATA
    147.
    MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND
      RESULTS OF OPERATIONSOverview
      of Key Financial, Strategic and Performance Factors
    15Statistical
      Disclosures
    18Liquidity
      and Capital Resources
    26Results
      of Operations
    287A.
    QUANTATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    328.
    FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATAQuarterly
      Financial Summary for 2004 and 2003
    34Management's
      Report On Internal Control Over Financial Reporting
    35Auditor's
      Attestation Report
    36Reports
      of Independent Public Accountants
    38Consolidated
      Balance Sheets at December 31, 2004 and 2003
    39Consolidated
      Statements of Income for the Three Years Ended December 31,
      2004
    40Consolidated
      Statements of Comprehensive Income for the Three Years EndedDecember
      31, 2004
    41Consolidated
      Statements of Stockholders' Equity for the Three Years EndedDecember
      31, 2004
    42Consolidated
      Statements of Cash Flows for the Three Years Ended December 31,
      2004
    43Notes
      to Consolidated Financial Statements
    459.
    CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND
      FINANCIAL DISCLOSURE
    689A.
    CONTROLS
      AND PROCEDURES
    689B.
    OTHER
      INFORMATION
    68**PART
      III**10.
    DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT
    6811.
    EXECUTIVE
      CONPENSATION
    6812.
    SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND
      RELATED STOCKHOLDER MATTERS
    6913.
    CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
    6914.
    PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
    69**PART
      IV**15.
    EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
    70**SIGNATURES**
    
    72


2





**PART
I**





**CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





Some of
the statements in this Report, including, without limitation, matters discussed
under the caption " *Management's
Discussion and Analysis of Financial Condition and Results of
Operation* ", as
well as oral statements made by PAB Bankshares, Inc. ("PAB", and also referred
to in this Report as either "the Company", "we", "us", or "our") or the
officers, directors, or employees of PAB may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"). Forward-looking statements include statements
about the competitiveness of the banking industry, potential regulatory
obligations, our entrance and expansion into higher growth markets, our other
business strategies and other statements that are not historical facts. When we
use words like "anticipate", "believe", "intend", "plan", "expect", "estimate",
"could", "should", "will", and similar expressions, you should consider them as
identifying forward-looking statements. These forward-looking statements involve
risks and uncertainties and are based on our beliefs and assumptions, and on the
information available to us at the time that these disclosures were prepared.
Factors that may cause actual results to differ materially from those expressed
or implied by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressures among depository and other
financial institutions may increase significantly; (2) changes in the interest
rate environment may reduce margins; (3) general economic conditions may be less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and/or a reduction in demand for credit; (4) legislative or
regulatory changes, including changes in accounting standards and compliance
requirements, may adversely affect the businesses in which we are engaged; (5)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than us; (6) adverse
changes may occur in the bond and equity markets; (7) war or terrorist
activities may cause further deterioration in the economy or cause instability
in credit markets; and (8) restrictions or conditions imposed by our regulators
on our operations may make it more difficult for us to achieve our goals. Many
of such factors are beyond our ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking statements. We
disclaim any obligation to update or revise any forward-looking statements
contained in this Report, whether as a result of new information, future events
or otherwise.





**ITEM
1. BUSINESS**





**General**





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





The
history of the Bank is a true American success story. In 1956, using his
personal savings of $3,000, Mr. James L. Dewar, Sr. and his wife, Dorothy,
opened a private bank in a small office on the corner of Park Avenue and North
Ashley Street in Valdosta. As a former teacher and school superintendent, Mr.
Dewar's bank initially catered to the financial needs of teachers and
educational administrators in the community. From these humble beginnings and
our Founder's pledge to provide exceptional customer service, grew the nearly
$900 million, publicly-traded, multi-state financial institution of
today.





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





3





*Markets
and Competition*


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





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





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





South
Georgia


The Bank
has a proud tradition of community banking in South Georgia spanning decades,
and we have developed a large market share in many of these communities. As
previously mentioned, we have been in Valdosta since 1956, but our roots run
deeper in some of the financial institutions we acquired in other South Georgia
communities. We have been in Adel (Cook County) since 1948, and we have been in
both Bainbridge (Decatur County) and Baxley (Appling County) since 1934. We are
also located in Statesboro (Bulloch County), Hazlehurst (Jeff Davis County), and
Cairo (Grady County). Collectively, we refer to all of these seven communities
as our "South Georgia" market in this Report. In 2001, we began consolidating
the separate charters of our banks into one charter, The Park Avenue Bank. The
charter consolidation was completed in April 2002, and all of our banking
offices now operate under the "PAB" logo. Overall, we have a 2.5% market
share 1 of the
total deposits in the state's southern tier 2 . Our
branch network in South Georgia has allowed us to deliver retail banking
services in these communities more effectively. Therefore, our focus in South
Georgia is on providing traditional community banking products and services to
consumers, businesses, and municipalities.





**Valdosta** and **Adel** are
located off Interstate 75 in the middle of South Georgia. Valdosta is the county
seat of Lowndes County and is 18 miles north of the Florida state line. The
Valdosta Metropolitan Statistical Area ("MSA") is comprised of Lowndes, Brooks,
Berrien, and Echols Counties. Adel is in Cook County and is 21 miles north of
Valdosta. We have 67 employees, five branches, and four ATM's serving our
customers in these communities. The Company's administrative and operational
facilities and 92 additional employees are also located in Valdosta. Prior to
its merger with the Bank in 2001, the Adel office operated under a separate bank
charter called Farmers and Merchants Bank. Moody Air Force Base, Valdosta State
University, and several transportation and distribution centers of regional and
national firms are major economic factors to the area. As with most of South
Georgia, the timber and farming industries and those agricultural-related
businesses are also vital to the local economy.





**Bainbridge** and **Cairo** are 82
and 58 miles, respectively, west of Valdosta along U.S. Highway 84 in the
southwest corner of the state in the heart of Georgia's "Plantation Trace", a
region dotted with historic antebellum-era plantations and farms. Also, both
communities are within 42 miles of the Tallahassee, Florida MSA. We have 35
employees, four branches, and five ATM's serving our customers in these
communities. Prior to their merger with the Bank in 2002, the Bainbridge offices
were part of the First Community Bank of Southwest Georgia charter, and the
Cairo office was called Bank of Grady County. First Community Bank of Southwest
Georgia was formed in 1998 from the merger of First Federal Savings Bank and
Bainbridge National Bank. The farming community and those agricultural-related
businesses are vital to the local economy.








1
    Based
      on the FDIC/OTS Summary of Deposits report as of June 30,
      2004.


2
    Regions
      9-12 as defined by the Georgia Department of Community Affairs and is
      comprised of 58 counties.





4





**Statesboro** , 161
miles northeast of Valdosta, sits at the intersection of U.S. Highway 80 and
U.S. Highway 301, off of Interstate 16, in Southeast Georgia. Statesboro is also
53 miles west of the Savannah MSA. We have 21 employees, two branches, and three
ATM's serving our customers in this community. Prior to its merger with the Bank
in 2002, the Statesboro offices had operated under the Eagle Bank and Trust
charter. Georgia Southern University is located in Statesboro. The timber
industry, the farming community, and those agricultural-related businesses are
also vital to the local economy.





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





North
Georgia


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





**McDonough** and **Stockbridge** are
located along Interstate 75 in Henry County. Henry County is the southern-most
county of the Atlanta MSA. McDonough is 30 miles south of Downtown Atlanta.
Henry County has consistently been ranked among the fastest growing counties in
the nation over the past several years. According to estimates provided by the
Atlanta Regional Commission, a planning agency for the Atlanta MSA, the
population in Henry County has grown nearly 31% from 2000 to 2004. We have been
actively involved in financing several residential and commercial construction
and development projects in Henry County since our McDonough office opened in
2000. The opening of our second location in Stockbridge in 2004 has allowed us
to also develop a more retail presence in the county.





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





**Athens** is 70
miles east of Downtown Atlanta. Athens is part of a consolidated city/county
government with Clarke County. The University of Georgia is located in Athens
and is the single largest economic factor in the Athens-Clarke County MSA. With
only a loan production office in the area, our focus has been on commercial
lending. We are currently evaluating the possibility of establishing a full
service branch in Athens as part of our expansion plans for North
Georgia.





** In
April 2005, we intend to open a loan production office near Vinings in **Cobb
County** ,
Georgia, on the northwest side of the Atlanta MSA. At December 31, 2004, we had
$11.1 million in loans outstanding that were originated by a lender that will
operate from this office. These loans are included in the Henry County totals in
this Report.





Florida


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





5





Our **Ocala** office
is near several retirement communities and has served primarily as a deposit
gathering facility for the Bank. Ocala is in Central Florida, 130 miles south of
Valdosta along Interstate 75. With over $3.5 billion in deposits 3 , Marion
County is the largest deposit market in which we have a branch office. Ocala is
known for its equestrian training facilities and retirement communities due to
its mild year-round climate.





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





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





**Market/**
    
    #
      of
    
    Total
    
    Total
    
    Market
    
    
    
    Population
    
    Employment
    
    UnemploymentCounty
    
    Offices
    
    Loans4
    
    Deposits4
    
    Share
      (%)5
    
    Population6
    
    Growth
      (%)7
    
    Growth
      (%)8
    
    Rate
      (%)9**South
      Georgia**Lowndes
    
    
    4
    
    $
    134,138
    
    $
    200,034
    
    
    15.3
    
    
    94,579
    
    
    2.7
    
    
    0.8
    
    
    2.7Cook
    
    
    1
    
    
    10,321
    
    
    35,497
    
    
    21.2
    
    
    15,951
    
    
    1.1
    
    
    0.6
    
    
    4.7Decatur
    
    
    3
    
    
    48,697
    
    
    96,644
    
    
    34.3
    
    
    28,212
    
    
    -0.1
    
    
    0.2
    
    
    5.7Grady
    
    
    1
    
    
    13,867
    
    
    11,231
    
    
    4.2
    
    
    24,185
    
    
    2.2
    
    
    0.2
    
    
    4.4Appling
    
    
    1
    
    
    29,950
    
    
    42,979
    
    
    20.8
    
    
    17,797
    
    
    2.2
    
    
    -0.1
    
    
    5.9Jeff
      Davis
    
    
    1
    
    
    8,453
    
    
    35,747
    
    
    22.4
    
    
    12,888
    
    
    1.6
    
    
    0.0
    
    
    8.8Bulloch
    
    
    2
    
    
    40,995
    
    
    57,514
    
    
    8.5
    
    
    58,360
    
    
    4.2
    
    
    0.6
    
    
    2.7$
    286,421
    
    $
    479,646**North
      Georgia**Henry
    
    
    2
    
    $
    186,628
    
    $
    28,311
    
    
    2.2
    
    
    150,003
    
    
    25.7
    
    
    0.9
    
    
    4.0Hall
    
    
    1
    
    
    75,773
    
    
    11,983
    
    
    0.2
    
    
    156,101
    
    
    12.1
    
    
    1.0
    
    
    2.9Clarke
    
    
    1
    
    
    16,826
    
    
    -
    
    
    -
    
    
    103,691
    
    
    2.2
    
    
    -0.7
    
    
    3.0$
    279,227
    
    $
    40,294**Florida**Marion
    
    
    1
    
    $
    14,751
    
    $
    79,503
    
    
    1.6
    
    
    280,288
    
    
    8.3
    
    
    3.0
    
    
    3.7St.
      Johns
    
    
    1
    
    
    39,564
    
    
    4,704
    
    
    -
    
    
    142,869
    
    
    16.0
    
    
    3.7
    
    
    3.2$
    54,315
    
    $
    84,207





*Employees*


On
January 31, 2005, we had a total of 266 full-time and 26 part-time employees. We
consider our relationship with our employees to be excellent. We offer a
competitive compensation and benefits package to our employees.





*Availability
of Information*


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


**_______________________________**


3
    Based
      on the FDIC/OTS Summary of Deposits report as of June 30,
      2004.


4
    Dollar
      amounts are presented in thousands as of December 31, 2004. Amounts
      exclude $26.2 million in loans and $53.4 million in deposits assigned to
      the "Treasury" that are not allocated to any particular market (i.e.
      participation loans, employee and director accounts, brokered deposits,
      official checks, etc.).


5
    Based
      on the FDIC/OTS Summary of Deposits report as of June 30,
      2004.


6
    Estimated
      July 1, 2003 population provided by the U.S. Census
  Bureau.


7
    Estimated
      percentage population change from April 1, 2000 to July 1, 2003 provided
      by the U.S. Census Bureau.


8
    Total
      employment growth (not seasonally adjusted) for the Fourth Quarter 2004
      Year-To-Date % change from the prior year's YTD data provided by the
      Bureau of Labor Statistics Household
Survey.


9
    Unemployment
      rate (not seasonally adjusted) for the Fourth Quarter 2004 provided by the
      Bureau of Labor Statistics.







6





**Supervision
and Regulation**





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





·
    How,
      when and where we may expand
geographically;


·
    Into
      what product or service market we may
enter;


·
    How
      we must manage our assets; and


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





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





*General*


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





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





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





*Acquisitions*


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





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





7





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





*Activities*


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





*Gramm-Leach-Bliley
Act*


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





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





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





*Payment
of Dividends*


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





8





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





As
previously mentioned, pursuant to a Resolution entered into with our federal and
state regulatory agencies on May 20, 2002, neither the Bank nor PAB could
declare a dividend without obtaining prior governmental approvals. While under
the Resolution, in March 2003, we requested and received approval from the
Federal Reserve for the payment of a First Quarter 2003 dividend in the amount
of $.03 per share to stockholders of record on March 31, 2003. Again, in May
2003, we requested and received approval from the Federal Reserve for the
payment of a Second Quarter 2003 dividend in the amount of $.03 per share to
stockholders of record on June 30, 2003. The Resolution was terminated by the
regulators on August 25, 2003, and the dividend restrictions were removed.
During 2004, PAB paid $.34 per share in aggregate dividends to its stockholders.
On December 31, 2004, the Bank was able to pay $10,319,000 in dividends to its
parent holding company, PAB, without further regulatory approval.





*Capital
Adequacy*


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





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





The
minimum guideline for the ratio of Total Capital to risk-weighted assets
(including certain off-balance-sheet items, such as standby letters of credit)
is 8.0%. Total Capital consists of Tier 1 Capital, which is comprised of common
stock, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries and non-cumulative perpetual preferred stock, less
goodwill and certain other intangible assets, and Tier 2 Capital, which consists
of subordinated debt, other preferred stock, and a limited amount of loan loss
reserves. At December 31, 2004, our consolidated Total Capital Ratio and our
Tier 1 Capital Ratio were 13.5% and 12.2%, respectively.





In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum ratio (the
"Leverage Ratio") of Tier 1 Capital to average assets, less goodwill and certain
other intangible assets, of 3.0% for bank holding companies that meet certain
specified criteria, including those having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3.0%, plus an additional cushion of 100 to 200 basis points. Our
Leverage Ratio at December 31, 2004 was 10.4%. The guidelines also provide that
bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a "tangible
Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other indicators
of capital strength in evaluating proposals for expansion or new
activities.





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





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





9





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





*Support
of Subsidiary Institutions*


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





*Prompt
Corrective Action*


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





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





At
December 31, 2004, the Bank had the requisite capital level to qualify as "well
capitalized" under the regulatory framework for prompt corrective
action.





*FDIC
Insurance Assessments*


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





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





10





*Safety
and Soundness Standards*


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





*Community
Reinvestment Act*


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





*Privacy*


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





*Monetary
Policy*


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





*USA
Patriot Act of 2001*


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





11





*Georgia
Fair Lending Act*


The
Georgia Fair Lending Act (the "GFLA") became initially effective on October 1,
2002 and establishes a number of prohibitions for loans that are "covered" by
the statute. Generally, a loan is "covered" by the GFLA if it has an annual
interest rate that exceeds the prime rate or comparable yield on treasury
securities by an amount specified by the statute or if its points and fees
exceed a specified percentage of the total loan amount. The GFLA has a broad
definition of points and fees. Any creditor who violates the GFLA may be liable
to the borrower for actual damages; statutory damages equal to two times the
interest paid under the loan; forfeiture of interest; punitive damages; costs;
and/or reasonable attorney's fees. For any violation for which statutory damages
may be awarded, the GFLA provides the borrower with a right of
rescission.





The GFLA
is a controversial law because of provisions such as those creating potential
liability for assignees and holders of "covered" loans. As a result, the GFLA
was amended, effective March 7, 2003, by the Georgia legislature in an effort to
address a number of those provisions. On July
31, 2003, the Office of the Comptroller of the Currency issued a Preemption
Determination and Order declaring most of the GFLA preempted by federal law and,
therefore, inapplicable to nationally chartered banks. The Georgia Department
issued a complying Declaratory Ruling on August 5, 2003. The order purported to
preempt all of the GFLA, and even though there may be several parts of the GFLA
that remain effective as to national banks, those non-preempted parts are likely
inapplicable or moot due to the articulated preemption of most other operative
parts of the GFLA. The preemption-parity provisions of the GFLA level the
playing field for state-chartered banks in that aspects of GFLA preempted by
federal law become inapplicable to state-chartered as well as
nationally-chartered banks.

*Check 21*


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





·
    allowing
      check truncation without making it mandatory;


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


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


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


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


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





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




**ITEM
2. PROPERTIES**





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





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




12


****
 **ITEM
3. LEGAL PROCEEDINGS**
 
 The
nature of the business of PAB and the Bank ordinarily results in a certain
amount of litigation. Accordingly, we are party to a limited number of lawsuits
incidental to our respective businesses. In our opinion, the ultimate
disposition of these matters will not have a material adverse impact on our
consolidated financial position or results of operations.
 
 **ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
matters were submitted to a vote of our stockholders during the fourth quarter
of 2004.


****


**PART
II**





**ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS**


**AND
ISSUER PURCHASES OF EQUITY SECURITIES**





Our
common stock has been listed for quotation on the American Stock Exchange
("AMEX") under the symbol "PAB" since July 9, 1996. On February 28, 2005, there
were 2,305 holders of record of our common stock.





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





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





Sales
      PriceCalendar
      Period
    
    High
    
    Low
    
    Dividends
    
    Earnings2003First
      Quarter
    
    $
    9.48
    
    $
    8.10
    
    $
    0.03
    
    $
    0.19Second
      Quarter
    
    
    13.95
    
    
    9.07
    
    
    0.03
    
    
    0.18Third
      Quarter
    
    
    13.81
    
    
    12.70
    
    
    0.05
    
    
    0.18Fourth
      Quarter
    
    
    15.75
    
    
    13.69
    
    
    0.07
    
    
    0.192004First
      Quarter
    
    $
    15.80
    
    $
    12.65
    
    $
    0.07
    
    $
    0.22Second
      Quarter
    
    
    14.15
    
    
    11.44
    
    
    0.07
    
    
    0.22Third
      Quarter
    
    
    13.00
    
    
    11.83
    
    
    0.10
    
    
    0.21Fourth
      Quarter
    
    
    13.75
    
    
    12.90
    
    
    0.10
    
    
    0.23





*Stock
Buyback Plan*


A summary
of our purchases of PAB common stock during the fourth quarter ended December
31, 2004 follows.





Total
      number
      of
      shares
      purchased
    
    Average
      price
      paid
      per
      share
    
    Number
      of shares
      purchased
      as part of
      publicly
      announced
      plans
      or programs
    
    Maximum
      number of
      shares
      that may yet be
      purchased
      under the
      plans
      or programs1October
    
    
    11,000
    
    $
    13.05
    
    
    11,000
    
    
    353,700November
    
    
    -
    
    
    -
    
    
    -
    
    
    -December
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
    
    
    11,000
    
    $
    13.05
    
    
    11,000
    
    
    353,700





1
    On
      May 25, 2004, the Board of Directors authorized the purchase of 400,000
      shares of the Company's common stock. The plan will expire May 25, 2005.





13





**ITEM
6. SELECTED FINANCIAL DATA**


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





(In
      thousands, except per share and other data)
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Summary
      of Operations:Interest
      income
    
    $
    40,597
    
    $
    40,040
    
    $
    48,079
    
    $
    62,715
    
    $
    57,526Interest
      expense
    
    
    10,624
    
    
    12,467
    
    
    19,989
    
    
    35,600
    
    
    28,674Net
      interest income
    
    
    29,973
    
    
    27,573
    
    
    28,090
    
    
    27,115
    
    
    28,852Provision
      for loan losses
    
    
    600
    
    
    -
    
    
    2,575
    
    
    12,220
    
    
    4,099Other
      income
    
    
    6,344
    
    
    8,616
    
    
    8,013
    
    
    11,923
    
    
    5,756Other
      expense
    
    
    23,055
    
    
    25,702
    
    
    24,368
    
    
    26,921
    
    
    21,874Income
      (loss) before income tax expense
    
    
    12,662
    
    
    10,487
    
    
    9,160
    
    
    (103
    )
    
    8,635Income
      tax expense (benefit)
    
    
    4,144
    
    
    3,361
    
    
    2,813
    
    
    (251
    )
    
    2,909Net
      income
    
    $
    8,518
    
    $
    7,126
    
    $
    6,347
    
    $
    148
    
    $
    5,726Net
      interest income on a taxable-equivalent basis
    
    $
    30,148
    
    $
    27,759
    
    $
    28,225
    
    $
    27,216
    
    $
    28,968Selected
      Average Balances:Total
      assets
    
    $
    765,016
    
    $
    736,367
    
    $
    779,958
    
    $
    847,100
    
    $
    694,674Earnings
      assets
    
    
    704,345
    
    
    676,372
    
    
    719,352
    
    
    780,120
    
    
    640,889Loans
    
    
    569,858
    
    
    537,223
    
    
    586,712
    
    
    616,156
    
    
    534,340Deposits
    
    
    575,767
    
    
    576,871
    
    
    641,448
    
    
    694,219
    
    
    548,276Stockholders'
      equity
    
    
    79,499
    
    
    75,906
    
    
    67,975
    
    
    72,268
    
    
    70,706Selected
      Year End Balances:Total
      assets
    
    $
    868,975
    
    $
    730,741
    
    $
    747,911
    
    $
    859,143
    
    $
    794,907Earnings
      assets
    
    
    808,886
    
    
    666,488
    
    
    683,456
    
    
    790,546
    
    
    722,490Loans
    
    
    646,149
    
    
    538,644
    
    
    555,238
    
    
    637,825
    
    
    580,737Allowance
      for loan losses
    
    
    9,066
    
    
    10,139
    
    
    12,097
    
    
    15,765
    
    
    8,185Deposits
    
    
    657,550
    
    
    556,917
    
    
    606,730
    
    
    720,398
    
    
    637,180Stockholders'
      equity
    
    
    81,000
    
    
    76,062
    
    
    71,265
    
    
    65,372
    
    
    70,780Common
      Share Data:Outstanding
      at year end
    
    
    9,495,320
    
    
    9,484,660
    
    
    9,430,413
    
    
    9,409,913
    
    
    9,501,947Weighted
      average outstanding
    
    
    9,499,709
    
    
    9,476,158
    
    
    9,426,761
    
    
    9,482,709
    
    
    9,528,387Diluted
      weighted average outstanding
    
    
    9,642,065
    
    
    9,686,617
    
    
    9,459,768
    
    
    9,550,080
    
    
    9,598,790Per
      Share Ratios:Net
      income - basic
    
    $
    0.89
    
    $
    0.75
    
    $
    0.67
    
    $
    0.02
    
    $
    0.60Net
      income - diluted
    
    
    0.88
    
    
    0.74
    
    
    0.67
    
    
    0.02
    
    
    0.60Dividends
      declared
    
    
    0.34
    
    
    0.18
    
    
    0.11
    
    
    0.44
    
    
    0.43Book
      value
    
    
    8.53
    
    
    8.02
    
    
    7.56
    
    
    6.95
    
    
    7.45Profitability
      Ratios:Return
      on average assets
    
    
    1.11
    %
    
    0.97
    %
    
    0.81
    %
    
    0.02
    %
    
    0.82
    %Return
      on average equity
    
    
    10.71
    %
    
    9.60
    %
    
    9.34
    %
    
    0.20
    %
    
    8.10
    %Net
      interest margin
    
    
    4.28
    %
    
    4.11
    %
    
    3.92
    %
    
    3.49
    %
    
    4.52
    %Efficiency
      ratio
    
    
    63.18
    %
    
    68.90
    %
    
    67.04
    %
    
    74.02
    %
    
    60.39
    %Liquidity
      Ratios:Total
      loans to total deposits
    
    
    98.27
    %
    
    96.72
    %
    
    91.51
    %
    
    88.54
    %
    
    91.14
    %Average
      loans to average earning assets
    
    
    80.91
    %
    
    80.03
    %
    
    81.56
    %
    
    78.98
    %
    
    83.37
    %Noninterest-bearing
      deposits to total deposits
    
    
    15.15
    %
    
    17.04
    %
    
    14.45
    %
    
    11.31
    %
    
    11.09
    %Capital
      Adequacy Ratios:Average
      equity to average assets
    
    
    10.39
    %
    
    10.08
    %
    
    8.72
    %
    
    8.53
    %
    
    10.18
    %Dividend
      payout ratio
    
    
    37.93
    %
    
    23.89
    %
    
    16.39
    %
    
    2855.42
    %
    
    72.08
    %Asset
      Quality Ratios:Net
      charge-offs to average loans
    
    
    0.29
    %
    
    0.36
    %
    
    1.06
    %
    
    0.75
    %
    
    0.26
    %Nonperforming
      loans to total loans
    
    
    0.54
    %
    
    1.53
    %
    
    2.09
    %
    
    1.91
    %
    
    1.27
    %Nonperforming
      assets to total assets
    
    
    0.40
    %
    
    1.75
    %
    
    1.72
    %
    
    1.57
    %
    
    0.99
    %Allowance
      for loan losses to total loans
    
    
    1.40
    %
    
    1.88
    %
    
    2.18
    %
    
    2.47
    %
    
    1.41
    %Allowance
      for loan losses to nonperforming loans
    
    
    261.04
    %
    
    123.41
    %
    
    104.33
    %
    
    129.44
    %
    
    111.03
    %








14





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





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





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








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





Our
operating subsidiary, The Park Avenue Bank, is an $868 million community bank
with 17 branches and two loan production offices in Georgia and Florida. We have
offices in both smaller, rural communities as well as larger, metropolitan
communities. We provide traditional banking products and services to both
commercial and individual customers in our markets. For additional information
on our markets, see the *"* *Markets
and Competition"* section
in Part I of this Report. As a bank, we operate in a highly regulated and
competitive environment. Our primary objective is to accept deposits and borrow
additional funds as needed at low costs and invest those funds in a safe and
sound manner in loans and investments at a higher yield in order to increase the
return on our stockholders' investment. Competition, regulation, credit risk,
and interest rate risk are the primary factors that we must manage in order to
be successful.





In terms
of profitability, our return on average assets ("ROA") and return on average
equity ("ROE") for 2004 was 1.11% and 10.71%, respectively. The table below
summarizes our net income, diluted earnings per share ("EPS"), ROA and ROE for
the past five years.





Year
    
    Net
      Income
    
    EPS
    
    ROA
    
    ROE(In
      Thousands)2000
    
    $
    5,726
    
    $
    0.60
    
    
    0.82
    %
    
    8.10
    %2001
    
    
    148
    
    
    0.02
    
    
    0.02
    %
    
    0.20
    %2002
    
    
    6,347
    
    
    0.67
    
    
    0.81
    %
    
    9.34
    %2003
    
    
    7,126
    
    
    0.74
    
    
    0.97
    %
    
    9.60
    %2004
    
    
    8,518
    
    
    0.88
    
    
    1.11
    %
    
    10.71
    %








2004 was
a benchmark year for the Company in terms of growth and profitability. For the
first time in five years, the Company posted a double-digit asset growth rate,
an ROA greater than 1.0%, and a double-digit ROE. Our plan is to continue to
deliver these results to our shareholders. We want to continue to expand our
presence in the higher growth markets in North Georgia and Florida, seek
opportunities to enter new growth markets, and recapture lost market share in
our South Georgia markets. A recap of what happened in 2001 and our subsequent
progression follows.





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





15





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





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





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





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





Quarter
      Ended
    
    Loans
    
    Deposits
    
    Net
      Interest Income*
    
    Net
      Interest Margin*(Dollars
      In Thousands)09/30/01
    
    $
    644,101
    
    $
    709,130
    
    $
    6,602
    
    
    3.36
    %12/31/01
    
    
    637,825
    
    
    720,398
    
    
    6,686
    
    
    3.32
    %03/31/02
    
    
    607,707
    
    
    672,337
    
    
    6,946
    
    
    3.67
    %06/30/02
    
    
    590,344
    
    
    628,927
    
    
    6,993
    
    
    3.89
    %09/30/02
    
    
    553,458
    
    
    615,415
    
    
    7,032
    
    
    3.98
    %12/31/02
    
    
    555,238
    
    
    606,730
    
    
    7,254
    
    
    4.18
    %03/31/03
    
    
    547,785
    
    
    587,719
    
    
    6,867
    
    
    4.15
    %06/30/03
    
    
    529,230
    
    
    573,230
    
    
    6,866
    
    
    4.13
    %09/30/03
    
    
    531,551
    
    
    563,412
    
    
    6,968
    
    
    4.02
    %12/31/03
    
    
    538,644
    
    
    556,917
    
    
    7,058
    
    
    4.14
    %03/31/04
    
    
    549,149
    
    
    556,853
    
    
    7,202
    
    
    4.34
    %06/30/04
    
    
    554,524
    
    
    565,613
    
    
    7,214
    
    
    4.28
    %09/30/04
    
    
    600,450
    
    
    575,775
    
    
    7,760
    
    
    4.35
    %12/31/04
    
    
    646,149
    
    
    657,550
    
    
    7,971
    
    
    4.15
    %*
      shown on a taxable-equivalent basis





In 2004,
our total loans increased $107.5 million, or 20.0%, on the strength of our North
Georgia market. The majority of our loan growth was in commercial real estate
lending, which is comprised of residential and commercial construction and
development loans as well as owner-occupied and income-producing commercial real
estate mortgages.





Our
construction and development loan portfolio increased $66.7 million, or 66.6%,
from $100.2 million at December 31, 2003 to $166.9 million at December 31, 2004.
As a percentage of total loans, this portfolio increased from 18.6% at the end
of 2003 to 25.8% at the end of 2004. The increase in this type of lending is
representative of the overall economic growth and development of our North
Georgia and Florida markets.





Our
commercial real estate mortgage portfolio increased $38.7 million, or 20.5%,
from $188.6 million at December 31, 2003 to $227.3 million at December 31, 2004.
As a percentage of total loans, this portfolio increased only fractionally from
35.0% at the end of 2003 to 35.2% at the end of 2004.





16





The
return of loan demand generated the need to grow deposits and employ other
funding sources. While we eased back into a more competitive mode on our deposit
pricing, we utilized third-party brokered deposits, FHLB advances, Fed Funds
purchased, and repurchase agreements to meet our interim funding needs. The
total increase in deposits for 2004 was $100.6 million, or 18.1%, and brokered
deposits accounted for $47.0 million of that increase. We also added $54.3
million in net additional advances with the FHLB in 2004.





Total
stockholders' equity increased $4.9 million, or 6.5%, during 2004. Equity was
increased primarily from the contribution of $8.5 million from 2004 earnings net
of $3.2 million in dividends paid. As a percentage of total assets, equity
represented 9.3% at end of 2004, compared to 10.4% at the beginning of 2004,
with the decrease resulting from an increase in assets during the year.





A
breakdown of loans and deposits as of December 31, 2004 and 2003 and the
percentage of net growth (or contraction) in 2004 for each market is provided in
the table below.





**Market/**
    
    #
      of
    
    Total
      Loans
    
    
    
    Total
      DepositsCounty
    
    Offices
    
    2004
    
    2003
    
    %
      Chg
    
    2004
    
    2003
    
    %
      Chg(Dollars
      in Thousands)**South
      Georgia**Lowndes
    
    
    4
    
    $
    134,138
    
    $
    117,462
    
    
    14.2
    
    $
    200,034
    
    $
    189,473
    
    
    5.6Cook
    
    
    1
    
    
    10,321
    
    
    11,934
    
    
    (13.5
    )
    
    35,497
    
    
    33,256
    
    
    6.7Decatur
    
    
    3
    
    
    48,697
    
    
    53,246
    
    
    (8.5
    )
    
    96,644
    
    
    100,190
    
    
    (3.5
    )Grady
    
    
    1
    
    
    13,867
    
    
    12,289
    
    
    12.8
    
    
    11,231
    
    
    10,610
    
    
    5.9Appling
    
    
    1
    
    
    29,950
    
    
    36,522
    
    
    (18.0
    )
    
    42,979
    
    
    42,614
    
    
    0.9Jeff
      Davis
    
    
    1
    
    
    8,453
    
    
    8,975
    
    
    (5.8
    )
    
    35,747
    
    
    33,644
    
    
    6.3Bulloch
    
    
    2
    
    
    40,995
    
    
    45,981
    
    
    (10.8
    )
    
    57,514
    
    
    58,709
    
    
    (2.0
    )$
    286,421
    
    $
    286,409
    
    
    0.0
    
    $
    479,646
    
    $
    468,496
    
    
    2.4**North
      Georgia**Henry
    
    
    2
    
    $
    186,628
    
    $
    118,140
    
    
    58.0
    
    $
    28,311
    
    $
    23,301
    
    
    21.5Hall
    
    
    1
    
    
    75,773
    
    
    54,824
    
    
    38.2
    
    
    11,983
    
    
    4,447
    
    
    169.5Clarke
    
    
    1
    
    
    16,826
    
    
    6,270
    
    
    168.4
    
    
    -
    
    
    -
    
    
    -$
    279,227
    
    $
    179,234
    
    
    55.8
    
    $
    40,294
    
    $
    27,748
    
    
    45.2**Florida**Marion
    
    
    1
    
    $
    14,751
    
    $
    24,670
    
    
    (40.2
    )
    $
    79,503
    
    $
    54,299
    
    
    46.4St.
      Johns
    
    
    1
    
    
    39,564
    
    
    17,319
    
    
    128.4
    
    
    4,704
    
    
    -
    
    
    -$
    54,315
    
    $
    41,989
    
    
    29.4
    
    $
    84,207
    
    $
    54,299
    
    
    55.1**Treasury**
    
    
    -
    
    $
    26,186
    
    $
    31,012
    
    
    (15.6
    )
    $
    53,403
    
    $
    6,374
    
    
    737.8Total
    
    
    
    
    $
    646,149
    
    $
    538,644
    
    
    20.0
    
    $
    657,550
    
    $
    556,917
    
    
    18.1





17





**STATISTICAL
DISCLOSURES**





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





During
2004, the Federal Reserve raised the federal funds rate five times, in 25 basis
point increments, from 1.00% to 2.25%, with the first increase in June. Being in
an asset-sensitive interest rate position on our balance sheet (our earning
assets reprice more frequently than our rate-sensitive liabilities), we expect
to benefit during a period of rising interest rates. However, if interest rates
continue to rise and we continue to grow our balance sheet, we expect the
incremental cost of those additional funds needed for such growth to be higher
than our current cost of funds, which would offset some of the expected benefit
in earnings. This occurred during the fourth quarter of 2004, as we increased
deposits to fund loan growth.





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





*Rate
/ Volume Analysis*


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





For
      the Years Ended December 31,
    
    2004
      vs. 2003
    
    2003
      vs. 2002Increase
    
    Changes
      Due To
    
    Increase
    
    Changes
      Due To(Decrease)
    
    Rate
    
    Volume
    
    (Decrease)
    
    Rate
    
    Volume(Dollars
      In Thousands)Increase
      (decrease) inincome
      from earning assets:Loans
    
    $
    79
    
    $
    (1,803
    )
    $
    1,882
    
    $
    (7,628
    )
    $
    (4,290
    )
    $
    (3,338
    )Taxable
      securities
    
    
    489
    
    
    432
    
    
    57
    
    
    (104
    )
    
    (1,172
    )
    
    1,068Nontaxable
      securities
    
    
    (32
    )
    
    (18
    )
    
    (14
    )
    
    148
    
    
    (28
    )
    
    176Other
      short-term investments
    
    
    10
    
    
    28
    
    
    (18
    )
    
    (404
    )
    
    (57
    )
    
    (347
    )Total
      interest income
    
    
    546
    
    
    (1,361
    )
    
    1,907
    
    
    (7,988
    )
    
    (5,547
    )
    
    (2,441
    )Increase
      (decrease) inexpense
      from interest-bearing liabilities:Demand
      deposits
    
    
    (204
    )
    
    (257
    )
    
    53
    
    
    (926
    )
    
    (915
    )
    
    (11
    )Savings
      deposits
    
    
    (47
    )
    
    (66
    )
    
    19
    
    
    (149
    )
    
    (162
    )
    
    13Time
      deposits
    
    
    (1,766
    )
    
    (1,293
    )
    
    (473
    )
    
    (5,791
    )
    
    (2,897
    )
    
    (2,894
    )FHLB
      advances
    
    
    64
    
    
    (678
    )
    
    742
    
    
    (543
    )
    
    (954
    )
    
    411Notes
      payable
    
    
    62
    
    
    46
    
    
    16
    
    
    (103
    )
    
    (103
    )
    
    -Other
      short-term borrowings
    
    
    48
    
    
    23
    
    
    25
    
    
    (10
    )
    
    (158
    )
    
    148Total
      interest expense
    
    
    (1,843
    )
    
    (2,225
    )
    
    382
    
    
    (7,522
    )
    
    (5,189
    )
    
    (2,333
    )Net
      interest income
    
    $
    2,389
    
    $
    864
    
    $
    1,525
    
    $
    (466
    )
    $
    (358
    )
    $
    (108
    )





18





*Average
Balances, Interest and Yields*


The
following table details the average balance of interest-earning assets and
interest-bearing liabilities, the amount of interest earned and paid, and the
average yields and rates realized for each of the last three years. Federally
tax-exempt income is presented on a taxable-equivalent basis assuming a 34%
Federal tax rate. Loan average balances include loans on nonaccrual
status.




For
      the Years EndedDecember
      31,
    
    2004
    
    2003
    
    2002Interest
    
    Average
    
    
    
    Interest
    
    Average
    
    
    
    Interest
    
    AverageAverage
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(Dollars
      In Thousands)ASSETSInterest-earning
      assets:Loans
    
    $
    569,858
    
    $
    35,096
    
    
    6.16
    %
    $
    540,787
    
    $
    35,017
    
    
    6.48
    %
    $
    586,712
    
    $
    42,645
    
    
    7.27
    %Investment
      securities:Taxable
    
    
    115,781
    
    
    5,023
    
    
    4.34
    %
    
    114,343
    
    
    4,534
    
    
    3.96
    %
    
    92,942
    
    
    4,638
    
    
    4.99
    %Nontaxable
    
    
    8,645
    
    
    514
    
    
    5.95
    %
    
    8,875
    
    
    546
    
    
    6.15
    %
    
    6,157
    
    
    398
    
    
    6.46
    %Other
      short-terminvestments
    
    
    10,061
    
    
    139
    
    
    1.38
    %
    
    11,713
    
    
    129
    
    
    1.10
    %
    
    33,541
    
    
    533
    
    
    1.59
    %Total
      interest-earning
      assets
    
    
    704,345
    
    
    40,772
    
    
    5.79
    %
    
    675,718
    
    
    40,226
    
    
    5.95
    %
    
    719,352
    
    
    48,214
    
    
    6.70
    %Noninterest-earning
      assets:Cash
    
    
    20,258
    
    
    
    
    
    
    
    
    20,629
    
    
    
    
    
    
    
    
    22,541Allowance
      for loan losses
    
    
    (9,586
    )
    
    
    
    
    
    
    
    (11,146
    )
    
    
    
    
    
    
    
    (14,903
    )Unrealized
      gain (loss)on
      securitiesavailable
      for sale
    
    
    (352
    )
    
    
    
    
    
    
    
    675
    
    
    
    
    
    
    
    
    1,095Other
      assets
    
    
    50,351
    
    
    
    
    
    
    
    
    50,491
    
    
    
    
    
    
    
    
    51,873Total
      assets
    
    $
    765,016
    
    
    
    
    
    
    
    $
    736,367
    
    
    
    
    
    
    
    $
    779,958LIABILITIES
      ANDSTOCKHOLDERS'
      EQUITYInterest-bearing
      liabilities:Demand
      deposits
    
    $
    173,555
    
    $
    1,200
    
    
    0.69
    %
    $
    167,215
    
    $
    1,404
    
    
    0.84
    %
    $
    167,986
    
    $
    2,223
    
    
    1.39
    %Savings
      deposits
    
    
    42,137
    
    
    234
    
    
    0.56
    %
    
    39,445
    
    
    281
    
    
    0.71
    %
    
    38,289
    
    
    537
    
    
    1.12
    %Time
      deposits
    
    
    264,216
    
    
    6,752
    
    
    2.56
    %
    
    279,767
    
    
    8,518
    
    
    3.04
    %
    
    350,697
    
    
    14,309
    
    
    4.08
    %FHLB
      advances
    
    
    66,787
    
    
    1,535
    
    
    2.30
    %
    
    44,387
    
    
    1,471
    
    
    3.31
    %
    
    36,863
    
    
    2,014
    
    
    5.46
    %Notes
      payable
    
    
    10,310
    
    
    567
    
    
    5.50
    %
    
    10,000
    
    
    505
    
    
    5.05
    %
    
    10,000
    
    
    608
    
    
    6.08
    %Other
      short-termborrowings
    
    
    27,408
    
    
    336
    
    
    1.23
    %
    
    25,243
    
    
    288
    
    
    1.14
    %
    
    16,870
    
    
    298
    
    
    1.77
    %Total
      interest-bearing
      liabilities
    
    
    584,413
    
    
    10,624
    
    
    1.82
    %
    
    566,057
    
    
    12,467
    
    
    2.20
    %
    
    620,705
    
    
    19,989
    
    
    3.22
    %Noninterest-bearing
      liabilitiesand
      stockholders' equity:Demand
      deposits
    
    
    95,859
    
    
    
    
    
    
    
    
    90,444
    
    
    
    
    
    
    
    
    84,476Other
      liabilities
    
    
    5,245
    
    
    
    
    
    
    
    
    5,637
    
    
    
    
    
    
    
    
    6,802Stockholders'
      equity
    
    
    79,499
    
    
    
    
    
    
    
    
    74,229
    
    
    
    
    
    
    
    
    67,975Total
      liabilities andstockholders'
    
    $
    765,016
    
    
    
    
    
    
    
    $
    736,367
    
    
    
    
    
    
    
    $
    779,958equityInterest
      rate spread
    
    
    
    
    
    
    
    
    3.97
    %
    
    
    
    
    
    
    
    3.75
    %
    
    
    
    
    
    
    
    3.48
    %Net
      interest income
    
    
    
    
    $
    30,148
    
    
    
    
    
    
    
    $
    27,759
    
    
    
    
    
    
    
    $
    28,225Net
      interest margin
    
    
    
    
    
    
    
    
    4.28
    %
    
    
    
    
    
    
    
    4.11
    %
    
    
    
    
    
    
    
    3.92
    %


19





**Investment
Portfolio**





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





As
      of December 31,
    
    2004
    
    2003
    
    2002(Dollars
      in Thousands)U.
      S. Government agency securities
    
    $
    52,519
    
    $
    57,328
    
    $
    25,622State
      and municipal securities
    
    
    8,738
    
    
    9,400
    
    
    8,614Mortgage-backed
      securities
    
    
    54,997
    
    
    50,296
    
    
    32,066Corporate
      debt securities
    
    
    4,318
    
    
    4,354
    
    
    12,397Equity
      securities
    
    
    8,112
    
    
    5,447
    
    
    19,327$
    128,684
    
    $
    126,825
    
    $
    98,026





At
December 31, 2004, the estimated fair market value of our investment portfolio
was approximately $452,000, or 0.35%, below our amortized cost; however, market
values may fluctuate significantly as interest rates change.





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





The
following table shows the maturities of non-equity investment securities at
December 31, 2004 and the weighted-average yields (on a fully taxable basis
assuming a 34% tax rate) on such securities. The maturities presented for
mortgage-backed securities are based on the average lives of those bonds at the
then projected prepayment speeds. Actual maturities usually differ from
contractual maturities because certain security issuers have the right to call
or prepay obligations with or without call or prepayment penalties. Of the
investments in U.S. Government agency securities maturing after one year,
approximately $31.0 million, or 59%, are potentially callable at par value
within one year.





U.S.
      Government
    
    State
      and Municipal
    
    Mortgage-Backed
    
    Corporate
      DebtAgency
      Securities
    
    Securities
    
    Securities
    
    SecuritiesAs
      of December 31, 2004
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield(Dollars
      in Thousands)Due
      in one year or less
    
    $
    2,219
    
    
    4.40
    %
    $
    747
    
    
    5.70
    %
    $
    -
    
    
    -
    
    $
    -
    
    
    -Due
      after one year through five years
    
    
    9,061
    
    
    4.72
    %
    
    2,792
    
    
    5.25
    %
    
    48,155
    
    
    4.05
    %
    
    2,127
    
    
    3.96
    %Due
      after five years through ten years
    
    
    23,374
    
    
    4.47
    %
    
    2,182
    
    
    5.44
    %
    
    6,842
    
    
    4.71
    %
    
    2,191
    
    
    6.04
    %Due
      after ten years
    
    
    17,865
    
    
    5.57
    %
    
    3,017
    
    
    6.50
    %
    
    -
    
    
    -
    
    
    -
    
    
    -Total
    
    $
    52,519
    
    
    4.88
    %
    $
    8,738
    
    
    5.77
    %
    $
    54,997
    
    
    4.13
    %
    $
    4,318
    
    
    5.02
    %





20





**Loan
Portfolio**





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





*Types
of Loans*


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





As
      of December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Commercial
      and financial
    
    $
    59,703
    
    $
    53,849
    
    $
    62,653
    
    $
    80,493
    
    $
    72,942Agricultural
      (including loans secured by farmland)
    
    
    26,704
    
    
    24,071
    
    
    21,777
    
    
    26,428
    
    
    23,064Real
      estate - construction
    
    
    166,854
    
    
    100,150
    
    
    83,836
    
    
    63,486
    
    
    40,130Real
      estate - mortgage (commercial and residential)
    
    
    375,222
    
    
    332,004
    
    
    338,261
    
    
    402,988
    
    
    376,000Installment
      loans to individuals and other
    
    
    19,552
    
    
    29,366
    
    
    48,934
    
    
    64,806
    
    
    68,880648,035
    
    
    539,440
    
    
    555,461
    
    
    638,201
    
    
    581,016Deferred
      loan fees and unearned interest, net
    
    
    (1,886
    )
    
    (796
    )
    
    (223
    )
    
    (376
    )
    
    (279
    )646,149
    
    
    538,644
    
    
    555,238
    
    
    637,825
    
    
    580,737Allowance
      for loans losses
    
    
    (9,066
    )
    
    (10,139
    )
    
    (12,097
    )
    
    (15,765
    )
    
    (8,185
    )Loans,
      net
    
    $
    637,083
    
    $
    528,505
    
    $
    543,141
    
    $
    622,060
    
    $
    572,552








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





As
      of December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Commercial
      and financial
    
    
    9.24
    %
    
    10.00
    %
    
    11.28
    %
    
    12.62
    %
    
    12.56
    %Agricultural
      (including loans secured by farmland)
    
    
    4.13
    %
    
    4.47
    %
    
    3.92
    %
    
    4.15
    %
    
    3.97
    %Real
      estate - construction
    
    
    25.82
    %
    
    18.59
    %
    
    15.10
    %
    
    9.95
    %
    
    6.91
    %Real
      estate - mortgage (commercial and residential)
    
    
    58.07
    %
    
    61.64
    %
    
    60.93
    %
    
    63.18
    %
    
    64.75
    %Installment
      loans to individuals and other
    
    
    3.03
    %
    
    5.45
    %
    
    8.81
    %
    
    10.16
    %
    
    11.86
    %100.29
    %
    
    100.15
    %
    
    100.04
    %
    
    100.06
    %
    
    100.05
    %Deferred
      loan fees and unearned interest, net
    
    
    -0.29
    %
    
    -0.15
    %
    
    -0.04
    %
    
    -0.06
    %
    
    -0.05
    %100.00
    %
    
    100.00
    %
    
    100.00
    %
    
    100.00
    %
    
    100.00
    %Allowance
      for loans losses
    
    
    -1.40
    %
    
    -1.88
    %
    
    -2.18
    %
    
    -2.47
    %
    
    -1.41
    %Loans,
      net
    
    
    98.60
    %
    
    98.12
    %
    
    97.82
    %
    
    97.53
    %
    
    98.59
    %








In 2004,
the makeup of the loan portfolio continued to shift as loans secured by real
estate increased to represent 86.76% of the total portfolio at the end of 2004
from 82.99% at the end of 2003 and 78.46% at the end of 2002. Installment loans
to individuals and other loans decreased to 3.03% of the portfolio at the end of
2004 from 5.45% at the end of 2003 and 8.81% at the end of 2002. Overall, the
loan portfolio increased $107.5 million, or 20%, from $538.6 million at the
beginning of the year to $646.1 million at year end. The largest category of the
total portfolio, commercial and residential real estate mortgages, increased
$43.2 million in total, while the percentage of the total portfolio dropped
slightly at the end of 2004 to 58.07% from 61.64% at the end of 2003. The makeup
of this category has continued to shift from residential real estate loans, 39%
of the total, to a larger commercial real estate portfolio, 61% of the total.
Commercial real estate loans increased $38.7 million during 2004 while
residential real estate loans increased $4.5 million.





The
second largest category of the portfolio, real estate - construction,
represented 25.82% of the category at the end of 2004 compared to 18.59% at the
end of 2003. Our growth in residential construction lending in Henry County and
its surrounding counties was the primary reason for the $66.7 million increase
in real estate construction loans. Of the $166.9 million in construction loans
outstanding at the end of 2004, $107.7 million were originated from our Henry
County offices.





21





A summary
of loans from each market outstanding at December 31, 2004 is presented in the
following table.





South
      Georgia
    
    North
      Georgia
    
    FloridaMarket
    
    Market
    
    Market
    
    Treasury
    
    Total(Dollars
      in Thousands)Commercial
      and financial
    
    $
    41,375
    
    $
    16,508
    
    $
    1,523
    
    $
    297
    
    $
    59,703Agricultural
      (including loans secured by farmland)
    
    
    23,394
    
    
    2,897
    
    
    413
    
    
    -
    
    
    26,704Real
      estate - construction
    
    
    16,216
    
    
    119,832
    
    
    30,481
    
    
    325
    
    
    166,854Real
      estate - mortgage (commercial and residential)
    
    
    189,018
    
    
    139,311
    
    
    22,885
    
    
    24,008
    
    
    375,222Installment
      loans to individuals and others
    
    
    16,465
    
    
    1,260
    
    
    267
    
    
    1,560
    
    
    19,552286,468
    
    
    279,808
    
    
    55,569
    
    
    26,190
    
    
    648,035Deferred
      loan fees and unearned interest, net
    
    
    (47
    )
    
    (581
    )
    
    (1,254
    )
    
    (4
    )
    
    (1,886
    )286,421
    
    
    279,227
    
    
    54,315
    
    
    26,186
    
    
    646,149Allowance
      for loan losses
    
    
    (4,066
    )
    
    (3,780
    )
    
    (747
    )
    
    (473
    )
    
    (9,066
    )$
    282,355
    
    $
    275,447
    
    $
    53,568
    
    $
    25,713
    
    $
    637,083








In
addition to the geographic concentrations noted in the tables above, we had
approximately $35.8 million in loans secured by real estate in Florida to
customers of our South Georgia, North Georgia and Treasury offices.





In 2004,
loans in our North Georgia market increased 55.8% and loans in our Florida
market increased 29.4%. While these are relatively new markets for us and some
level of growth is expected, the growth that we have experienced from these
markets can be attributed to the addition of experienced lenders with contacts
in these markets, and strong local economic activity. Our ability to continue to
grow in these markets is dependent upon a continuation of these favorable
attributes.





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


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





Commercial
    
    
    
    Real
      Estate -
    
    Real
      Estate -
    
    All
      OtherAs
      of December 31, 2004
    
    &
      Financial
    
    Agricultural
    
    Construction
    
    Mortgage
    
    Loans
    
    Total(Dollars
      in Thousands)Due
      in one year or less
    
    $
    40,209
    
    $
    10,993
    
    $
    130,080
    
    $
    97,034
    
    $
    9,129
    
    $
    287,445Due
      after one year through five years
    
    
    18,699
    
    
    12,627
    
    
    35,958
    
    
    210,371
    
    
    8,739
    
    
    286,394Due
      after five years
    
    
    795
    
    
    3,084
    
    
    816
    
    
    67,817
    
    
    1,684
    
    
    74,196Total
    
    $
    59,703
    
    $
    26,704
    
    $
    166,854
    
    $
    375,222
    
    $
    19,552
    
    $
    648,035Of
      the above loans maturing after one year,those
      with predetermined fixed rates
    
    $
    3,753
    
    $
    2,657
    
    $
    159
    
    $
    93,744
    
    $
    8,330
    
    $
    108,643those
      with floating or adjustable rates
    
    
    15,741
    
    
    13,054
    
    
    36,615
    
    
    184,444
    
    
    2,093
    
    
    251,947Total
      maturing after one year
    
    $
    19,494
    
    $
    15,711
    
    $
    36,774
    
    $
    278,188
    
    $
    10,423
    
    $
    360,590








While we
do make some long-term, fixed rate commercial real estate loans, with interest
rates near forty year lows, we have a preference to offer loans to our
commercial customers on a floating rate basis usually tied to a prime interest
rate. This preference has contributed to our asset-sensitive interest rate risk
position. At December 31, 2004, approximately 83% of our loan portfolio will
either mature or reprice within the next twelve months.





22








*Nonaccrual,
Past Due and Restructured Loans*


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





As
      of December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Loans
      accounted for on a nonaccrual basis
    
    $
    1,417
    
    $
    7,048
    
    $
    10,378
    
    $
    10,581
    
    $
    2,430Accruing
      loans which are contractually past due90
      days or more as to principal or interest payments
    
    
    11
    
    
    -
    
    
    -
    
    
    1,598
    
    
    509Troubled
      debt restructurings not included above
    
    
    2,045
    
    
    1,168
    
    
    1,217
    
    
    -
    
    
    -Other
      impaired loans
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    4,433Total
      nonperforming loans
    
    $
    3,473
    
    $
    8,216
    
    $
    11,595
    
    $
    12,179
    
    $
    7,372Ratio
      of nonperforming loans to total loans (%)
    
    
    0.54
    
    
    1.53
    
    
    2.09
    
    
    1.91
    
    
    1.27Allowance
      for loan losses to nonperforming loans (%)
    
    
    261.04
    
    
    123.41
    
    
    104.33
    
    
    129.44
    
    
    111.03








We have
continued to improve our asset quality by working down our levels of
nonperforming loans and monitoring our portfolio for potential problem loans to
promptly resolve any material issues that might arise.





In
December 2004, we discovered that a $5.2 million commercial real estate loan
originated from our Hall County office was not as it was represented for
approval in October 2004. With the help of counsel, we have investigated the
situation to minimize our potential risk exposure, but we still have not reached
a final conclusion on this credit. We engaged another appraiser to provide
"As Is" values for the property to support our loans, and we are working with
the borrower, the contractors, and the tenants to ensure completion of the
project. We believe that we have sufficient reserves ($792,000) allocated to
these loans as of December 31, 2004. These loans were not considered impaired as
of year end, however, in February 2005, we placed this loan and a related
$517,000 loan on nonaccrual status as it became evident that the borrower would
be unable to perform under the terms of the notes. Obviously, these loans will
increase our level of nonperforming loans for the first quarter of
2005.





At
December 31, 2004, we had $4.10 million in total delinquent loans (loans past
due 30 days or more), or 0.63% of total loans. This is an improvement from 1.04%
one year ago and a recent high of 4.33% at March 31, 2002.





The
accrual of interest on loans is discontinued when, in our judgment, the borrower
may be unable to meet payments as they become due, unless the loan is well
secured. All interest accrued but not collected for loans that are placed on
nonaccrual status is reversed against interest income. Interest income on
nonaccrual loans is subsequently recognized only to the extent cash payments are
received until the loan is returned to accrual status. For the year ended
December 31, 2004, the gross interest income that would have been recorded if
our nonperforming loans had been current in accordance with their original terms
was approximately $357,000. The amount of interest income on the above
nonperforming loans that was included in net income for the year ended December
31, 2004 was approximately $315,000. The allowance for loan losses related to
our nonperforming loans amounted to approximately $510,000 and $2,351,000 at
December 31, 2004 and 2003, respectively, due to a decline in specific reserves
on loans individually evaluated for impairment.





**Allowance
For Loan Losses**





At
December 31, 2004, the allowance as a percent of total loans was 1.40%, compared
to 1.88% at December 31, 2003. We consider the current level of the allowance
for loan losses adequate to absorb losses from loans in the portfolio. As an
integral part of our credit risk management process, we regularly review loans
in our portfolio for credit quality and documentation of collateral. The lenders
are primarily responsible for assigning a risk grade to each loan in their
portfolio. Their assessments are supplemented with independent reviews conducted
by our internal audit department and external loan review consultants. All loans
in excess of $150,000 that have been identified for potential credit weakness
are reviewed quarterly by a management committee to further enhance the process
for timely recognition of losses and for determining appropriate reserves.





23





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





The first
component of the allowance for loan loss methodology covers the measurement of
specific allowances for individual impaired loans as required by Financial
Accounting Standards Board ("FASB") Statement No. 114, *Accounting
by Creditors for Impairment of a Loan* . Each
loan relationship with amounts due in excess of $500,000 that has been
identified for potential credit weakness is evaluated for impairment. A loan is
impaired when, based on current information and events, it is probable that the
borrower will be unable to pay all amounts due according to the contractual
terms of the loan agreement. By definition, we consider all loans on nonaccrual
status and all loans whose terms have been modified in a troubled debt
restructuring as impaired. If impairment is determined, a specific valuation is
assessed on that loan based on realizable collateral values (if collateral
dependent), discounted cash flows, or observable market values. At December 31,
2004, we had $1.08 million in specific reserves on $7.46 million in individually
evaluated impaired and other significant potential problem loans. This is a
decrease from the $1.58 million in specific reserves on $4.75 million in
individually evaluated loans at December 31, 2003.





The
second component of the allowance for loan loss methodology addresses all loans
not individually evaluated for impairment but are either internally rated,
criticized by our banking examiners, or past due 30 day or more. The allowance
factors are based on industry standards and supported by our own historical loss
analysis. At December 31, 2004, we had $2.79 million in general reserves
allocated to $67.5 million rated and delinquent loans. This is a decrease from
the $4.03 million reserved on $73.3 million rated and delinquent loans at
December 31, 2003. The decrease is due to continued improvement in the more
severe rating categories over the past 12 months.





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





·
    levels
      of and trends in delinquencies and impaired
loans;


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


·
    trends
      in volume and terms of loans;


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


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


·
    national
      and local economic trends and conditions;


·
    industry
      conditions; and


·
    effects
      of changes in credit concentrations.





The
quantitative risk factors used in determining these general reserves require a
high degree of management judgment. At December 31, 2004, we had $5.19 million
in general reserves compared to $4.53 million one year ago. While we have seen
improving trends in may of the environmental factors, the general reserve
increased slightly over last year primarily due to additional caution taken into
consideration for our increased concentration in residential construction
lending and our entering into new markets.





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





24





*Allocation
of the Allowance for Loan Losses*


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





As
      of December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      ofLoans
      in
    
    
    
    Loans
      in
    
    
    
    Loans
      in
    
    
    
    Loans
      in
    
    
    
    Loans
      inCategory
    
    
    
    Category
    
    
    
    Category
    
    
    
    Category
    
    
    
    Categoryto
      Total
    
    
    
    to
      Total
    
    
    
    to
      Total
    
    
    
    to
      Total
    
    
    
    to
      TotalAmount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans(Dollars
      in Thousands)Commercial,
      financialand
      agricultural
    
    $
    1,657
    
    
    13.3
    %
    $
    2,312
    
    
    14.4
    %
    $
    2,422
    
    
    15.2
    %
    $
    2,823
    
    
    16.7
    %
    $
    1,203
    
    
    16.5
    %Real
      estate - construction
    
    
    2,211
    
    
    25.8
    %
    
    1,168
    
    
    18.6
    %
    
    1,293
    
    
    15.1
    %
    
    1,572
    
    
    9.9
    %
    
    973
    
    
    6.9
    %Real
      estate - mortgage
    
    
    4,851
    
    
    57.9
    %
    
    5,349
    
    
    61.6
    %
    
    7,660
    
    
    60.9
    %
    
    9,244
    
    
    63.2
    %
    
    4,779
    
    
    64.7
    %Consumer
      and other loans
    
    
    335
    
    
    3.0
    %
    
    549
    
    
    5.4
    %
    
    722
    
    
    8.8
    %
    
    2,126
    
    
    10.2
    %
    
    1,230
    
    
    11.9
    %Unallocated
    
    
    12
    
    
    
    
    
    761
    
    
    
    
    
    -
    
    
    
    
    
    -
    
    
    
    
    
    -Total
    
    $
    9,066
    
    
    100.0
    %
    $
    10,139
    
    
    100.0
    %
    $
    12,097
    
    
    100.0
    %
    $
    15,765
    
    
    100.0
    %
    $
    8,185
    
    
    100.0
    %








*Summary
of Loan Loss Experience*


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





For
      the Years Ended December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in Thousands)Balance
      at beginning of year
    
    $
    10,139
    
    $
    12,097
    
    $
    15,765
    
    $
    8,185
    
    $
    5,037Charge-offs:Commercial,
      financial and agricultural
    
    
    511
    
    
    365
    
    
    3,771
    
    
    1,619
    
    
    680Real
      estate - construction
    
    
    -
    
    
    9
    
    
    -
    
    
    2,001
    
    
    110Real
      estate - mortgage (commercial and residential)
    
    
    1,673
    
    
    1,167
    
    
    1,752
    
    
    538
    
    
    393Installment
      loans to individuals and other loans
    
    
    389
    
    
    1,578
    
    
    1,079
    
    
    675
    
    
    4012,573
    
    
    3,119
    
    
    6,602
    
    
    4,833
    
    
    1,584Recoveries:Commercial,
      financial and agricultural
    
    
    117
    
    
    673
    
    
    89
    
    
    55
    
    
    59Real
      estate - construction
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Real
      estate - mortgage (commercial and residential)
    
    
    330
    
    
    180
    
    
    119
    
    
    72
    
    
    72Installment
      loans to individuals and other loans
    
    
    453
    
    
    308
    
    
    151
    
    
    66
    
    
    51900
    
    
    1,161
    
    
    359
    
    
    193
    
    
    182Net
      charge-offs
    
    
    1,673
    
    
    1,958
    
    
    6,243
    
    
    4,640
    
    
    1,402Additions
      provided to the allowancecharged
      to operations
    
    
    600
    
    
    -
    
    
    2,575
    
    
    12,220
    
    
    4,099Allowance
      for loan losses of acquired bank
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    451Balance
      at end of year
    
    $
    9,066
    
    $
    10,139
    
    $
    12,097
    
    $
    15,765
    
    $
    8,185Average
      balance of loans outstanding
    
    $
    569,858
    
    $
    540,787
    
    $
    586,712
    
    $
    616,156
    
    $
    534,340Ratio
      of net charge-offs during the year to averageloans
      outstanding during the year (%)
    
    
    0.29
    
    
    0.36
    
    
    1.06
    
    
    0.75
    
    
    0.26





25





**Deposits**





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





2004
    
    2003
    
    2002For
      the Year Ended December 31,
    
    Average
      Balance
    
    Rate
    
    Average
      Balance
    
    Rate
    
    Average
      Balance
    
    Rate(Dollars
      in Thousands)Noninterest-bearing
      demand
    
    $
    95,859
    
    
    -
    
    $
    90,444
    
    
    -
    
    $
    84,476
    
    
    -Interest-bearing
      demand
    
    
    173,555
    
    
    0.69
    %
    
    167,215
    
    
    0.84
    %
    
    167,986
    
    
    1.39
    %Savings
    
    
    42,137
    
    
    0.56
    %
    
    39,445
    
    
    0.71
    %
    
    38,289
    
    
    1.12
    %Time
    
    
    264,216
    
    
    2.56
    %
    
    279,767
    
    
    3.04
    %
    
    350,697
    
    
    4.08
    %Total
    
    $
    575,767
    
    
    1.42
    %
    $
    576,871
    
    
    1.77
    %
    $
    641,448
    
    
    2.66
    %





Our total
deposit portfolio grew $100.6 million, or 18.1%, in 2004. Of this increase,
$47.0 million is from the purchase of brokered deposits. The average rate paid
on time deposits dropped 48 basis points from 3.04% in 2003 to 2.56% in 2004.
The decrease in rate on these deposits allowed us to improve our net interest
margin and keep our net interest income from falling to a less profitable level.
While we have historically enjoyed a relatively low cost of funds from our core
deposits, with the current rising rate environment and our plan to grow the
balance sheet, we do not expect to be able to sustain these low levels of
interest rates on deposits.





The
maturities of time deposits of $100,000 or more as of December 31, 2004 are
summarized below.





Amount
      (in
      thousands)Three
      months or less
    
    $
    23,818Over
      three through six months
    
    
    25,487Over
      six months through one year
    
    
    57,591Over
      one year
    
    
    38,982Total
    
    $
    145,878








**LIQUIDITY
AND CAPITAL RESOURCES**





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





At
December 31, 2004, our liquidity ratio was 20.42% and our net noncore funding
dependency ratio was 29.18%. Our liquidity and funding policy provides that we
should maintain a liquidity position of greater than or equal to 15% and a net
noncore funding dependency ratio of less than or equal to 25%. Due to our
reliance on brokered deposits and FHLB advances for funding during the fourth
quarter, we exceeded our policy limit in the net noncore funding dependency
ratio at year end. Since year end we are aware of no trends or events likely to
result in a material change in our ability to meet the borrowing needs and
deposit withdrawal requirements of our customers.





*Investment
Portfolio*


The
Bank's investment portfolio is another primary source of liquidity. Maturities
of securities provide a constant flow of funds that are available for cash
needs. Contractual investment securities that mature within one year totaled
$998,000 at December 31, 2004. However, mortgage-backed securities and
securities with call provisions create cash flows earlier than the contractual
maturities. Estimates of prepayments on mortgage-backed securities and call
provisions on Federal agency and state and municipals increase the forecasted
cash flows from the investment portfolio.





26




Our
liquidity from investments is somewhat limited since we pledge certain
investments to secure public deposits, certain borrowing arrangements, and for
other purposes. At December 31, 2004, approximately 82.4% of our $128.7 million
investment portfolio was pledged as collateral to others.





*Borrowings*


As with
most community banks, loan volume is the driver for the remainder of our balance
sheet. Since our loan volume has grown $107.5 million this past year, we have
become more aggressive in retaining time deposits. As a result, total time
deposits have increased $73.8 million, or 28.5%, since December 31, 2003.
Of this $73.8 million in time deposit growth, $47.0 million are in the form of
brokered deposits. To further fund this loan growth, we borrowed $54.7 million
in advances from the Federal Home Loan Bank of Atlanta (the "FHLB") during 2004.





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





On
November 28, 2001, PAB Bankshares Capital Trust I ("PAB Trust") issued $10
million of Floating Rate Capital Securities, also referred to as "trust
preferred securities". We formed PAB Trust, a statutory business trust created
under the laws of the State of Delaware, for the sole purpose of issuing the
trust preferred securities and investing the proceeds in Floating Rate Junior
Subordinated Debentures issued by us. The interest rates on both the trust
preferred securities and the debentures are reset semi-annually at LIBOR plus
3.75% (currently 6.44%) with a rate cap of 11.0% through December 8, 2006. We
entered into agreements which, taken collectively, fully, irrevocably and
unconditionally guarantee, on a subordinated basis, all of PAB Trust's
obligations under the trust preferred securities. PAB Trust's sole asset is the
debentures issued by us. The debentures will mature on December 8, 2031, but are
callable at par at our option in whole or in part anytime after December 8,
2006. The proceeds from the issuance of the trust preferred securities qualify
as Tier 1 Capital under the risk-based capital guidelines established by the
Federal Reserve.





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





At
December 31, 2004, we had $11.7 million in an available secured credit line with
the FHLB and an additional $40.0 million in unsecured Fed Funds lines of credit
available with correspondent banks.





*Contractual
Obligations*


Summarized
below are our contractual obligations as of December 31, 2004.





1
      year
    
    Over
      1
    
    Over
      3
    
    More
      thanContractual
      Obligations
    
    Total
    
    or
      less
    
    to
      3 years
    
    to
      5 years
    
    5
      years(Dollars
      in Thousands)FHLB
      Advances
    
    $
    99,001
    
    $
    11,181
    
    $
    21,216
    
    $
    15,202
    
    $
    51,402Operating
      Lease Obligations
    
    
    598
    
    
    166
    
    
    281
    
    
    151
    
    
    -Guaranteed
      Preferred Beneficial Interests in Debentures
    
    
    10,310
    
    
    -
    
    
    -
    
    
    -
    
    
    10,310$
    109,909
    
    $
    11,347
    
    $
    21,497
    
    $
    15,353
    
    $
    61,712





*Off-Balance-Sheet
Financing*


Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance-sheet
financial instruments include commitments to extend credit and standby letters
of credit. These financial instruments are included in the financial statements
when funds are distributed or the instruments become payable. We use the same credit policies in making commitments as we do for on-balance-sheet
instruments. Our
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit, standby letters of credit
and credit card commitments is represented by the contractual amount of those
instruments.  At
December 31, 2004, we had outstanding commitments to extend credit through open
lines of credit of approximately $118.2 million and outstanding standby letters
of credit of approximately $5.7 million.





27





*Commitments
of Capital*


At
December 31, 2004, we had accepted a bid to replace eight of our ATM's for
approximately $220,000 and to add two additional ATM's for a cost of
approximately $100,000. Although
we have no commitments, locations identified, or regulatory approval
applications in process, we have budgeted to add up to two branches during 2005.
In April 2005, we intend to open a loan production office in Cobb County. We
expect to enter into a lease agreement for the planned space and we have
budgeted up to $25,000 to furnish and equip the office to meet our
needs.





*Stockholders'
Equity*


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





The
following table summarizes our consolidated regulatory capital ratios at
December 31, 2004, 2003 and 2002.


MinimumRegulatory2004
    
    2003
    
    2002
    
    RequirementTotal
      Capital to Risk Weighted Assets
    
    
    13.5
    %
    
    15.1
    %
    
    14.0
    %
    
    8.0
    %Tier
      1 Capital to Risk Weighted Assets
    
    
    12.2
    %
    
    13.9
    %
    
    12.7
    %
    
    4.0
    %Tier
      1 Capital to Average Assets (Leverage Ratio)
    
    
    10.4
    %
    
    11.0
    %
    
    10.0
    %
    
    4.0
    %








**RESULTS
OF OPERATIONS**





**Net
Interest Income**





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





Net
interest income, on a tax equivalent basis, for 2003 decreased by $466,000, or
1.7%, over 2002. The $8.0 million decrease in interest income was primarily the
result of a 75 basis point drop in the average yield on earning assets during
the year from 2002 to 2003. The majority of the $7.5 million decrease in
interest expense was the result of a 102 basis point drop in the average yield
on interest-bearing liabilities during the year from 2002 to 2003.





The net
interest margin is net interest income expressed as a percentage of average
earning assets. Our net interest margin increased from 4.11% in 2003 to 4.28% in
2004, a 17 basis point improvement. Although our net interest margin improved
during 2004, our ability to continue to improve our net interest margin in 2005
will be a challenge considering the current flattening of the interest rate
curve and our rising incremental cost of funds.





**Provision
for Loan Losses**





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





For the
year ended December 31, 2004, we recorded $600,000 as a provision for loan
losses, compared to no provision recorded for the same period in 2003. The
increase is due to a growing loan portfolio, balanced by continued improvement
in the level of total nonperforming loans, and an improvement in several
environmental factors previously discussed.





28





**Noninterest
Income**





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





For
      the Year Ended December 31,
    
    2004
    
    
    
    2003
    
    
    
    2002Percent
    
    
    
    PercentChange
    
    
    
    ChangeAmount
    
    2004
      vs. 2003
    
    Amount
    
    2003
      vs. 2002
    
    Amount(Dollars
      In Thousands)Service
      charges on deposit accounts
    
    $
    4,417
    
    
    -10.3
    %
    $
    4,926
    
    
    -7.0
    %
    $
    5,295Mortgage
      origination fees
    
    
    522
    
    
    -27.0
    %
    
    715
    
    
    -14.7
    %
    
    838Brokerage
      commissions and fees
    
    
    121
    
    
    -74.2
    %
    
    469
    
    
    -3.3
    %
    
    485ATM
      / debit card fee income
    
    
    419
    
    
    17.4
    %
    
    357
    
    
    8.5
    %
    
    329Other
      commissions and fees
    
    
    225
    
    
    -11.1
    %
    
    253
    
    
    8.6
    %
    
    233Securities
      transactions, net *
    
    
    5
    
    
    -99.6
    %
    
    1,416
    
    
    442.5
    %
    
    261Earnings
      of bank-owned life insurance
    
    
    315
    
    
    -33.3
    %
    
    472
    
    
    -1.3
    %
    
    478Gain
      (loss) on disposal / write-down of assets *
    
    
    119
    
    
    -146.1
    %
    
    (258
    )
    
    -5.1
    %
    
    (272
    )Other
      noninterest income
    
    
    201
    
    
    -24.4
    %
    
    266
    
    
    -27.3
    %
    
    366Total
      Noninterest Income
    
    $
    6,344
    
    
    -26.4
    %
    $
    8,616
    
    
    7.5
    %
    $
    8,013





*
Non-recurring items for discussion purposes





Noninterest
income decreased 26.4% in 2004. As a percentage of average assets, noninterest
income, excluding securities transactions and other non-recurring gains and
losses, has been 0.81%, 1.01%, and 1.03% for each of the last three years
ended December 31, 2004, 2003 and 2002, respectively.





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





Mortgage
origination fees continued to decline in 2004 due to a decrease in the
refinancing activity during the year.





Brokerage
income declined due to the sale of that unit in February 2004. We will continue
to receive a small portion of the commissions earned on a select list of
accounts held by employees and directors of the Bank going forward. In addition
to the decline in commission revenue, we have had a greater decline in
brokerage-related expenses. Included in noninterest expense for the years ended
December 31, 2004, 2003, and 2002, were brokerage expenses totaling $96,799,
$430,136, and $640,954, respectively.





Fee
income from ATM and debit cards increased in 2004 as the volume of point-of-sale
transactions has continued to increase from previous years.





Gains on
securities transactions decreased $1.4 million in 2004. There was a
non-recurring $1.0 million gain on the sale of stock in Community Financial
Services, Inc. (a correspondent bank's holding company) recorded in
2003.





Earnings
on bank-owned life insurance was down in 2004. This is due to the lower earnings
credit on the policies resulting from the low interest rate
environment.





Included
in gain (loss) on disposal / write-down of assets for 2004 was a $200,000 gain
on the sale of our brokerage services unit in February. Also in January 2004, we
sold a former branch office in Ocala, Florida for $800,000, recording a gain of
$27,000. This branch was closed in November of 2003, with our main branch in
Ocala assuming the deposit and loan relationships at that time.





29





**Noninterest
Expense**





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





For
      the Year Ended December 31,
    
    2004
    
    
    
    2003
    
    
    
    2002Percent
    
    
    
    PercentChange
    
    
    
    ChangeAmount
    
    2004
      vs. 2003
    
    Amount
    
    2003
      vs. 2002
    
    Amount(Dollars
      In Thousands)Salaries
      and wages
    
    $
    12,201
    
    
    0.5
    %
    $
    12,136
    
    
    0.3
    %
    $
    12,097Deferred
      loan cost
    
    
    (990
    )
    
    127.1
    %
    
    (436
    )
    
    -62.9
    %
    
    (1,176
    )Employee
      benefits
    
    
    2,862
    
    
    -10.5
    %
    
    3,196
    
    
    8.0
    %
    
    2,958Net
      occupancy expense of premises
    
    
    1,878
    
    
    4.4
    %
    
    1,799
    
    
    4.8
    %
    
    1,716Furniture
      and equipment expense
    
    
    2,091
    
    
    -11.2
    %
    
    2,355
    
    
    -1.7
    %
    
    2,396Advertising
      and business development
    
    
    496
    
    
    14.5
    %
    
    433
    
    
    -15.4
    %
    
    512Supplies
      and printing
    
    
    424
    
    
    -22.1
    %
    
    544
    
    
    -14.7
    %
    
    638Telephone
      and internet charges
    
    
    342
    
    
    -24.8
    %
    
    455
    
    
    -28.7
    %
    
    638Postage
      and courier
    
    
    546
    
    
    -3.0
    %
    
    563
    
    
    -12.6
    %
    
    644Legal
      and accounting fees
    
    
    304
    
    
    -42.4
    %
    
    528
    
    
    -40.2
    %
    
    883Service
      charges and fees
    
    
    433
    
    
    -10.5
    %
    
    484
    
    
    -19.7
    %
    
    603Loss
      on early retirement of debt
    
    
    -
    
    
    -
    
    
    1,438
    
    
    -
    
    
    -Other
      noninterest expense
    
    
    2,468
    
    
    11.8
    %
    
    2,207
    
    
    -10.2
    %
    
    2,459Total
      Noninterest Expense
    
    $
    23,055
    
    
    -10.3
    %
    $
    25,702
    
    
    5.5
    %
    $
    24,368





As a
percentage of average assets, noninterest expense was 3.01%, 3.49%, and
3.12% in 2004, 2003 and 2002, respectively. During 2003, we incurred a $1.44
million loss on the early retirement of debt with the FHLB, saving significant
interest expense over the next several years. Excluding this loss, noninterest
expense would have totaled $24.3 million, or 3.30% of average assets for
2003.





The 0.5%
increase in salaries and wages is the result of several factors. Included in
salaries and wages for 2004 was a nonrecurring $685,645 CEO severance contract
charge. The sale of our brokerage services unit in 2004 resulted in a decreased
in salary and wage expense of $77,834 for 2004 compared to $335,623 and $458,868
for 2003 and 2002 respectively. Also, as our mortgage origination income
declined, mortgage commissions paid decreased; $77,801, $135,156 and
$231,253 for 2004, 2003 and 2002 respectively.





Deferred
loan cost, a credit against salaries and wages, increased 127.1%, from 2003 and
resulted in a decrease in expense reported during 2004, compared to 2003. The
increase in the deferral of loan costs is due to the growth in loan volume.





Employee
benefits decreased due primarily to a 14.0% decrease in health insurance
premiums as we switched insurance plans, providers and administrators during the
year.





Occupancy
expense increased 4.4% in 2004 due to the addition of new facilities and the
typical increases in property taxes, insurance, and utilities. Furniture and
equipment expense decreased 11.2% in 2004 due primarily to a $209,000 decrease
in depreciation expense.





Legal and
accounting fees decreased by 42.4% in 2004. This decrease is due primarily to
the drop in legal expense associated with the collection and recovery of problem
loans.





The cost
of acquiring, maintaining, and repairing foreclosed other real estate owned and
other repossessed property included in other noninterest expense increased
$292,277, or 117%, to $543,828 in 2004, from $251,551 in 2003 and $181,372 in
2002, due to an increase in activity in 2003 and 2004.





All other
major expense categories have decreased due to efficiencies gained from the
charter consolidation process, the utilization of technology, and tighter
budgeting and cost control measures.





30





**Income
Taxes**





The
provision for income tax expense as a percentage of pre-tax income was 32.7%,
32.1%, and 30.7% for 2004, 2003 and 2002, respectively. The difference between
the effective rate and the statutory federal rate of 34% is due primarily to
income earned on our investments in and loans to tax-exempt municipalities and
earnings on the cash value of our bank-owned life insurance.





**Fourth
Quarter Results**





For the
fourth quarter of 2004, our net income was $2.2 million, or $0.23 per diluted
share, compared to net income of $1.9 million, or $0.19 per share, in the fourth
quarter of 2003. In the fourth quarter of 2004, we provided $600,000 to the
allowance for loan losses, compared to no provision in 2003. Our net interest
margin for the fourth quarter of 2004 was 4.15% compared to 4.14% in 2003. The
average yield on earning assets grew 13 basis points to 5.82% in the fourth
quarter of 2004 from 5.69% in 2003. Correspondingly, the average rate paid on
interest-bearing liabilities also increased, from 1.87% in 2003 to 1.99% in
2004, or 12 basis points.





**Impact
of Inflation**





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





**Critical
Accounting Policies**





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





*Allowance
for Loan Losses*


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





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





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





31





*Estimates
of Fair Value*


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





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





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





**Recent
Accounting Pronouncements**





In
management's opinion, there are no recent accounting pronouncements that have
had a material impact on PAB's earnings or financial position as of or for the
year ended December 31, 2004. For more detailed disclosure on recent accounting
developments, see Note 1 to the Consolidated Financial Statements included in
Item 8 of this Report.








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





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





Interest
rates play a major part in the net interest income of a financial institution.
The sensitivity to rate changes is known as "interest rate risk." The repricing
of interest earning assets and interest-bearing liabilities can influence the
changes in net interest income. As part of our asset/liability management
program, the timing of repriced assets and liabilities is referred to as gap
management. It is our policy to maintain a gap ratio in the one-year time
horizon between 0.80 and 1.20. However, with interest rates at historic lows and
the shape of the interest rate curve, the Company has exceeded policy limits by
adjusting the balance sheet to a more asset-sensitive position. At December 31,
2004, our one-year management-adjusted gap ratio of 1.57 was outside of our
policy guidelines due to our preference to offer floating rate loans over fixed
rate loans at this time. This exception to policy, while monitored closely, is
an acceptable risk that positions our financial condition to benefit from an
increase in interest rates.





32





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





Cumulative
      Repricing Gap Analysis3-Month
    
    6-Month
    
    1-Year(Dollars
      in Thousands)*Regulatory
      Defined*Rate
      Sensitive Assets (RSA)
    
    $
    489,459
    
    $
    509,328
    
    $
    561,826Rate
      Sensitive Liabilities (RSL)
    
    
    325,674
    
    
    382,000
    
    
    496,875RSA
      minus RSL (Gap)
    
    $
    163,785
    
    $
    127,328
    
    $
    64,951Gap
      Ratio (RSA/RSL)
    
    
    1.50
    
    
    1.33
    
    
    1.13*Management-Adjusted*Rate
      Sensitive Assets (RSA)
    
    $
    502,422
    
    $
    535,254
    
    $
    610,489Rate
      Sensitive Liabilities (RSL)
    
    
    149,847
    
    
    206,173
    
    
    389,841RSA
      minus RSL (Gap)
    
    $
    352,575
    
    $
    329,081
    
    $
    220,648Gap
      Ratio (RSA/RSL)
    
    
    3.35
    
    
    2.60
    
    
    1.57








We use
simulation analysis to monitor changes in net interest income due to changes in
market interest rates. The simulation of rising, declining, and flat interest
rate scenarios allows us to monitor and adjust interest rate sensitivity to
minimize the impact of market interest rate swings. The analysis of the impact
on net interest income over a twelve-month period is subjected to increases or
decreases in market rates on net interest income and is monitored on a quarterly
basis. As of year end, the simulation model projected net interest income would
increase 12.09% over the next year if market rates immediately rose by 200 basis
points. On the other hand, the model projected net interest income to decrease
18.55% over the next year if market rates immediately fell by 200 basis points.
The high volatility in our results is due primarily to our asset-sensitive
balance sheet mix and our behavioral assumptions for repricing and prepayment
speeds. Our policy states that net interest income cannot be reduced by more
than 10% using this analysis, and technically, we were outside of policy
guidelines at year end. However, this exception was mitigated because a further
200 basis point drop was not realistic given that the federal funds rate stood
at 2.25%. If market rates immediately fell by 100 basis points, a more plausible
but still unlikely scenario, our model projected net interest income to decrease
7.08% over the next year.





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





Market
    Effect
      on Net Interest IncomeRate
      Change
    Gradual
    Immediate+300
      bps
    13.72%
    18.25%+200
      bps
    11.31%
    12.09%+100
      bps
    6.17%
    6.01%-100
      bps
    -7.01%
    -7.08%





33





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





**Quarterly
Financial Summary for 2004 and 2003**


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





Quarterly
      Period EndingMarch
      31
    
    June
      30
    
    September
      30
    
    December
      31Year
      ended December 31, 2004:Interest
      income
    
    $
    9,587
    
    $
    9,552
    
    $
    10,328
    
    $
    11,129Interest expense
    
    
    2,430
    
    
    2,381
    
    
    2,611
    
    
    3,201Net interest income
    
    
    7,157
    
    
    7,171
    
    
    7,717
    
    
    7,928Provision
      for loan losses
    
    
    -
    
    
    -
    
    
    -
    
    
    600Net interest incomeafter provision forloan losses
    
    
    7,157
    
    
    7,171
    
    
    7,717
    
    
    7,328Other
      income
    
    
    1,806
    
    
    1,490
    
    
    1,614
    
    
    1,434Other expenses
    
    
    5,726
    
    
    5,613
    
    
    6,287
    
    
    5,429Income beforeincome taxes
    
    
    3,237
    
    
    3,048
    
    
    3,044
    
    
    3,333Income
      tax
    
    
    1,111
    
    
    928
    
    
    983
    
    
    1,122Net income
    
    $
    2,126
    
    $
    2,120
    
    $
    2,061
    
    $
    2,211Basic
      earnings per share
    
    $
    0.22
    
    $
    0.23
    
    $
    0.21
    
    $
    0.23Diluted
      earnings per share
    
    $
    0.22
    
    $
    0.22
    
    $
    0.21
    
    $
    0.23Year
      ended December 31, 2003:Interest income
    
    $
    10,416
    
    $
    10,075
    
    $
    9,892
    
    $
    9,657Interest
      expense
    
    
    3,593
    
    
    3,254
    
    
    2,972
    
    
    2,648Net interest income
    
    
    6,823
    
    
    6,821
    
    
    6,920
    
    
    7,009Provision for loan losses
    
    
    -
    
    
    -
    
    
    -
    
    
    -Net interest incomeafter
      provision forloan
      losses
    
    
    6,823
    
    
    6,821
    
    
    6,920
    
    
    7,009Other income
    
    
    2,161
    
    
    1,887
    
    
    2,865
    
    
    1,702Other
      expenses
    
    
    6,305
    
    
    6,225
    
    
    7,343
    
    
    5,829Income beforeincome
      taxes
    
    
    2,679
    
    
    2,483
    
    
    2,442
    
    
    2,882Income
      tax
    
    
    854
    
    
    751
    
    
    760
    
    
    995Net
      income
    
    $
    1,825
    
    $
    1,732
    
    $
    1,682
    
    $
    1,887Basic
      earnings per share
    
    $
    0.19
    
    $
    0.18
    
    $
    0.19
    
    $
    0.19Diluted
      earnings per share
    
    $
    0.19
    
    $
    0.18
    
    $
    0.18
    
    $
    0.19








34











**MANAGEMENT'S
REPORT ON**


**INTERNAL
CONTROL OVER FINANCIAL REPORTING**











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





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





The
management of the Company has assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. To make this
assessment, we used the criteria for effective internal control over financial
reporting described in *"Internal
Control - Integrated Framework"* , issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our assessment, we believe that, as of December 31, 2004, the Company's
internal control over financial reporting was effective.





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





PAB
      BANKSHARES, INC.*/s/
      M. Burke Welsh, Jr*
    
    */s/
      Donald J. Torbert, Jr.*M.
      Burke Welsh, Jr.
    
    Donald
      J. Torbert, Jr.President
      and
    
    Executive
      Vice President andChief
      Executive Officer
    
    Chief
      Financial OfficerFebruary
      22, 2005
    
    February
      22, 2005Date
    
    Date





35





CERTIFIED PUBLIC ACCOUNTANTS,
    LLC








**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








**To
the Board of Directors**


**PAB
Bankshares, Inc.**


**Valdosta,
Georgia**





We have
audited management's assessment, included in the accompanying management's
report on internal control over financial reporting, that PAB Bankshares, Inc.
and subsidiaries maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in *Internal
Control— Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
PAB Bankshares, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment, and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.





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





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





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








36





In our
opinion, management's assessment that PAB Bankshares, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in *Internal
Control—Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, PAB Bankshares, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in *Internal
Control—Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of PAB
Bankshares, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated, February 22, 2005,
expressed an unqualified opinion.











Albany,
Georgia


February
22, 2005





37








CERTIFIED PUBLIC ACCOUNTANTS,
    LLC









**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








**To
the Board of Directors**


**PAB
Bankshares, Inc.**


**Valdosta,
Georgia**








We have
audited the accompanying balance sheets of PAB Bankshares, Inc. and subsidiaries
as of December 31, 2004 and 2003, and the related statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2004. Our


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








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








In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PAB Bankshares, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.














Albany,
Georgia


February
22, 2005




38




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      BALANCE SHEETS****DECEMBER
      31, 2004 AND 2003****2004**
    
    **2003****ASSETS**Cash
      and due from banks
    
    $
    22,976,924
    
    $
    22,920,218Interest-bearing
      deposits in other banks
    
    
    984,737
    
    
    505,409Federal
      funds sold
    
    
    32,616,121
    
    
    330,187Investment
      securities
    
    
    128,683,829
    
    
    126,825,013Loans
    
    
    646,149,340
    
    
    538,643,842Allowance
      for loan losses
    
    
    (9,066,566
    )
    
    (10,139,114
    )Net
      loans
    
    
    637,082,774
    
    
    528,504,728Premises
      and equipment, net
    
    
    18,812,209
    
    
    20,047,375Goodwill
    
    
    5,984,604
    
    
    5,984,604Cash
      value of bank-owned life insurance policies
    
    
    10,737,204
    
    
    10,422,078Foreclosed
      assets
    
    
    30,216
    
    
    4,577,824Other
      assets
    
    
    11,066,368
    
    
    10,623,956Total
      assets
    
    $
    868,974,986
    
    $
    730,741,392**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
      demand
    
    $
    99,627,825
    
    $
    94,892,871Interest-bearing
      demand and savings
    
    
    224,836,339
    
    
    202,753,493Time
    
    
    333,086,272
    
    
    259,270,172Total
      deposits
    
    
    657,550,436
    
    
    556,916,536Federal
      funds purchased and securities sold under agreements to
      repurchase
    
    
    14,168,098
    
    
    36,919,790Advances
      from the Federal Home Loan Bank of Atlanta
    
    
    99,001,125
    
    
    44,714,043Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
    
    
    10,310,000
    
    
    10,000,000Other
      liabilities
    
    
    6,945,443
    
    
    6,128,857Total
      liabilities
    
    
    787,975,102
    
    
    654,679,226Commitments
      and contingencies (See Note 19)**Stockholders'
      equity:**Preferred
      stock, no par value; 1,500,000 shares authorized; no shares
      issued
    
    
    -
    
    
    -Common
      stock, no par value; 98,500,000 shares authorized;9,495,320
      and 9,484,660 shares issued and outstanding
    
    
    1,217,065
    
    
    1,217,065Additional
      paid-in capital
    
    
    29,143,017
    
    
    29,314,700Retained
      earnings
    
    
    50,938,254
    
    
    45,651,500Accumulated
      other comprehensive loss
    
    
    (298,452
    )
    
    (121,099
    )Total
      stockholders' equity
    
    
    80,999,884
    
    
    76,062,166Total
      liabilities and stockholders' equity
    
    $
    868,974,986
    
    $
    730,741,392See
      accompanying notes to consolidated financial statements.








39




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF INCOME****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002********2004**
    
    **2003**
    
    **2002****Interest
      income:**Interest
      and fees on loans
    
    $
    35,096,225
    
    $
    35,017,485
    
    $
    42,645,210Interest
      and dividends on investment securities:Taxable
    
    
    5,022,307
    
    
    4,533,603
    
    
    4,637,821Nontaxable
    
    
    339,398
    
    
    360,476
    
    
    262,446Other
      interest income
    
    
    139,180
    
    
    128,854
    
    
    533,048Total
      interest income
    
    
    40,597,110
    
    
    40,040,418
    
    
    48,078,525**Interest
      expense:**Interest
      on deposits
    
    
    8,185,878
    
    
    10,203,408
    
    
    17,068,902Interest
      on Federal Home Loan Bank advances
    
    
    1,534,732
    
    
    1,470,649
    
    
    2,013,671Interest
      on other borrowings
    
    
    903,467
    
    
    793,234
    
    
    906,088Total
      interest expense
    
    
    10,624,077
    
    
    12,467,291
    
    
    19,988,661Net
      interest income
    
    
    29,973,033
    
    
    27,573,127
    
    
    28,089,864**Provision
      for loan losses**
    
    
    600,000
    
    
    -
    
    
    2,575,000Net
      interest income after provision for loan losses
    
    
    29,373,033
    
    
    27,573,127
    
    
    25,514,864**Other
      income:**Service
      charges on deposit accounts
    
    
    4,417,464
    
    
    4,925,500
    
    
    5,294,753Other
      fee income
    
    
    1,286,544
    
    
    1,794,684
    
    
    1,884,885Securities
      transactions, net
    
    
    5,164
    
    
    1,415,603
    
    
    261,178Other
      noninterest income
    
    
    634,912
    
    
    479,750
    
    
    572,341Total
      other income
    
    
    6,344,084
    
    
    8,615,537
    
    
    8,013,157**Other
      expenses:**Salaries
      and employee benefits
    
    
    14,072,903
    
    
    14,895,502
    
    
    13,879,438Occupancy
      expense of premises
    
    
    1,878,234
    
    
    1,799,467
    
    
    1,716,338Furniture
      and equipment expense
    
    
    2,090,497
    
    
    2,355,038
    
    
    2,396,318Loss
      on early retirement of debt
    
    
    -
    
    
    1,438,085
    
    
    -Other
      noninterest expense
    
    
    5,013,119
    
    
    5,214,010
    
    
    6,376,134Total
      other expenses
    
    
    23,054,753
    
    
    25,702,102
    
    
    24,368,228Income
      before income tax expense
    
    
    12,662,364
    
    
    10,486,562
    
    
    9,159,793**Income
      tax expense**
    
    
    4,144,279
    
    
    3,361,044
    
    
    2,812,954Net
      income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839**Earnings
      per common share:**Basic
    
    $
    0.89
    
    $
    0.75
    
    $
    0.67Diluted
    
    $
    0.88
    
    $
    0.74
    
    $
    0.67See
      accompanying notes to consolidated financial statements.








40




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002********2004**
    
    **2003**
    
    **2002**Net
      income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Other
      comprehensive income (loss):Unrealized
      holding gains (losses) arising during the period,net
      of tax (benefit) of ($89,608); ($113,679); and $322,761
    
    
    (173,945
    )
    
    (220,671
    )
    
    626,678Reclassification
      adjustment for gains included in netincome,
      net of tax of $1,756; $481,305; and $88,801
    
    
    (3,408
    )
    
    (934,298
    )
    
    (172,377
    )(177,353
    )
    
    (1,154,969
    )
    
    454,301Comprehensive
      income
    
    $
    8,340,732
    
    $
    5,970,549
    
    $
    6,801,140See
      accompanying notes to consolidated financial statements.





41




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002********Accumulated****Additional**
    
    
    
    **Other****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Comprehensive****Shares**
    
    **Par
      Value**
    
    **Capital**
    
    **Earnings**
    
    **Income
      (Loss)**
    
    **Total****Balance,
      December 31, 2001**
    
    
    9,409,913
    
    $
    1,217,065
    
    $
    28,657,351
    
    $
    34,917,898
    
    $
    579,569
    
    $
    65,371,883Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    6,346,839
    
    
    -
    
    
    6,346,839Other
      comprehensive income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    454,301
    
    
    454,301Cash
      dividends declared,$.11
      per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,036,410
    )
    
    -
    
    
    (1,036,410
    )Stock
      options exercised
    
    
    20,500
    
    
    -
    
    
    128,125
    
    
    -
    
    
    -
    
    
    128,125**Balance,
      December 31, 2002**
    
    
    9,430,413
    
    
    1,217,065
    
    
    28,785,476
    
    
    40,228,327
    
    
    1,033,870
    
    
    71,264,738Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    7,125,518
    
    
    -
    
    
    7,125,518Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,154,969
    )
    
    (1,154,969
    )Cash
      dividends declared,$.18
      per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,702,345
    )
    
    -
    
    
    (1,702,345
    )Stock
      options exercised
    
    
    54,247
    
    
    -
    
    
    529,224
    
    
    -
    
    
    -
    
    
    529,224**Balance,
      December 31, 2003**
    
    
    9,484,660
    
    
    1,217,065
    
    
    29,314,700
    
    
    45,651,500
    
    
    (121,099
    )
    
    76,062,166Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    8,518,085
    
    
    -
    
    
    8,518,085Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (177,353
    )
    
    (177,353
    )Cash
      dividends declared,$.34
      per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,231,331
    )
    
    -
    
    
    (3,231,331
    )Stock
      acquired and cancelledunder
      stock repurchase plan
    
    
    (46,300
    )
    
    -
    
    
    (576,198
    )
    
    -
    
    
    -
    
    
    (576,198
    )Stock
      options exercised
    
    
    56,960
    
    
    -
    
    
    404,515
    
    
    -
    
    
    -
    
    
    404,515**Balance,
      December 31, 2004**
    
    
    9,495,320
    
    $
    1,217,065
    
    $
    29,143,017
    
    $
    50,938,254
    
    $
    (298,452
    )
    $
    80,999,884See
      accompanying notes to consolidated financial statements.







42




**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002********2004**
    
    **2003**
    
    **2002****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation,
      amortization and accretion, net
    
    
    2,558,296
    
    
    3,574,422
    
    
    3,112,790Provision
      for loan losses
    
    
    600,000
    
    
    -
    
    
    2,575,000Provision
      for deferred taxes
    
    
    (17,353
    )
    
    879,072
    
    
    1,180,948Net
      realized gain on securities transactions
    
    
    (5,164
    )
    
    (1,415,603
    )
    
    (261,178
    )Net
      loss on disposal or write down of assets
    
    
    81,314
    
    
    257,770
    
    
    271,909Increase
      in cash value of bank-owned life insurance
    
    
    (315,126
    )
    
    (471,943
    )
    
    (478,199
    )Increase
      (decrease) in deferred compensation accrual
    
    
    (3,157
    )
    
    138,055
    
    
    88,063Increase
      (decrease) in retirement and severance accruals
    
    
    225,274
    
    
    (364,552
    )
    
    (402,362
    )(Increase)
      decrease in interest receivable
    
    
    (294,422
    )
    
    373,253
    
    
    2,870,401Increase
      (decrease) in interest payable
    
    
    265,438
    
    
    (475,207
    )
    
    (1,981,829
    )(Increase)
      decrease in taxes receivable
    
    
    (374,462
    )
    
    (151,677
    )
    
    628,882Net
      change in other assets and other liabilities
    
    
    (151,006
    )
    
    (32,160
    )
    
    512,462Net
      cash provided by operating activities
    
    
    11,087,717
    
    
    9,436,948
    
    
    14,463,726**CASH
      FLOWS FROM INVESTING ACTIVITIES**(Increase)
      decrease in interest-bearing deposits in other banks
    
    
    (479,328
    )
    
    469,439
    
    
    14,965,267(Increase)
      decrease in federal funds sold
    
    
    (32,285,934
    )
    
    30,453,813
    
    
    (6,579,000
    )Purchase
      of debt securities
    
    
    (34,315,807
    )
    
    (112,848,419
    )
    
    (76,717,640
    )Proceeds
      from sales and calls of debt securities
    
    
    17,638,840
    
    
    46,721,110
    
    
    64,734,595Proceeds
      from maturities and paydowns of debt securities
    
    
    17,569,214
    
    
    34,350,382
    
    
    27,114,382Purchase
      of equity securities
    
    
    (3,666,200
    )
    
    (1,444,700
    )
    
    (980,150
    )Redemption
      of equity securities
    
    
    600
    
    
    2,873,251
    
    
    1,688,500Net
      (increase) decrease in loans
    
    
    (109,835,353
    )
    
    8,879,190
    
    
    63,295,276Purchase
      of premises and equipment
    
    
    (754,628
    )
    
    (903,987
    )
    
    (3,203,850
    )Proceeds
      from disposal of assets
    
    
    6,047,535
    
    
    2,078,292
    
    
    2,218,559Net
      proceeds from sale of branch office
    
    
    -
    
    
    -
    
    
    7,748,200Net
      cash provided by (used in) investing activities
    
    
    (140,081,061
    )
    
    10,628,371
    
    
    94,284,139**CASH
      FLOWS FROM FINANCING ACTIVITIES**Net
      increase (decrease) in deposits
    
    
    100,633,900
    
    
    (49,813,697
    )
    
    (109,503,044
    )Net
      increase (decrease) in federal funds purchased and
    securitiessold
      under repurchase agreements
    
    
    (22,751,692
    )
    
    19,399,548
    
    
    1,811,621Advances
      from Federal Home Loan Bank
    
    
    54,688,400
    
    
    36,269,500
    
    
    331,000Payments
      on Federal Home Loan Bank advances
    
    
    (401,318
    )
    
    (27,700,367
    )
    
    (2,414,568
    )Dividends
      paid
    
    
    (2,945,557
    )
    
    (1,038,587
    )
    
    (2,071,500
    )Proceeds
      from the exercise of stock options
    
    
    404,515
    
    
    529,224
    
    
    128,125Issuance
      of preferred stock in REIT subsidiaries
    
    
    -
    
    
    15,000
    
    
    -Repurchase
      of preferred stock in REIT subsidiaries
    
    
    (2,000
    )
    
    (5,000
    )
    
    (19,000
    )Acquisition
      of stock under stock repurchase plans
    
    
    (576,198
    )
    
    -
    
    
    -Net
      cash provided by (used in) financing activities
    
    
    129,050,050
    
    
    (22,344,379
    )
    
    (111,737,366
    )





43


**PAB
      BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED
      STATEMENTS OF CASH FLOWS****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002********2004**
    
    **2003**
    
    **2002**Net
      increase (decrease) in cash and due from banks
    
    $
    56,706
    
    $
    (2,279,060
    )
    $
    (2,989,501
    )Cash
      and due from banks at beginning of period
    
    
    22,920,218
    
    
    25,199,278
    
    
    28,188,779Cash
      and due from banks at end of period
    
    $
    22,976,924
    
    $
    22,920,218
    
    $
    25,199,278**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION**Cash
      paid during the period for:Interest
    
    $
    10,358,639
    
    $
    12,942,498
    
    $
    21,970,490Taxes
    
    $
    4,536,091
    
    $
    2,633,649
    
    $
    1,003,124**NONCASH
      INVESTING AND FINANCING TRANSACTIONS**Increase
      (decrease) in unrealized gains on securities available for
      sale
    
    $
    (268,717
    )
    $
    (1,749,951
    )
    $
    688,114Transfer of premises and equipment to other assets
    
    $
    -
    
    $
    1,323,821
    
    $
    -Transfer
      of loans to foreclosed assets
    
    $
    657,307
    
    $
    5,514,057
    
    $
    2,280,526See
      accompanying notes to consolidated financial statements.




44





**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**




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





**Nature
of Business**





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





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





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





In 1998,
the Company formed two real estate investment trusts (each a "REIT") and two
intermediate REIT holding companies as subsidiaries of the Bank. The REITs were
established to realize state income tax benefits and to provide the Bank with
ready access to capital markets if additional capital were needed. The REIT
holding companies were established to provide assistance in managing the
Company's investment in the REITs. To comply with federal tax law, a minority
interest in the non-voting, cumulative preferred stock of the REITs was issued
to certain directors, officers and employees of the Company. The $500 par value
preferred stock pays an 8% annual dividend. The total minority interest of the
REITs included in other liabilities was $115,000 and $117,000 as of December 31,
2004 and December 31, 2003, respectively.




45





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





**Basis
Of Presentation and Accounting Estimates**





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





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





**Cash,
Due from Banks and Cash Flows**





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





**Interest
Bearing Deposits in Other Banks**





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





**Investment
Securities**





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





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





**Loans**





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





46





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





**Loans,
continued**





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





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





**Allowance
for Loan Losses**





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





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





**Premises
and Equipment**





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





**Goodwill**





Goodwill
represents the excess of cost over the fair value of the net assets purchased in
a business combination. Goodwill is required to be tested annually for
impairment, or whenever events occur that may indicate that the recoverability
of the carrying amount is not probable. In the event of an impairment the amount
by which the carrying amount exceeds the fair value would be charged to
earnings. The Company performed its annual test of impairment in the fourth
quarter and determined that there was no impairment of the carrying value as of
November 30, 2004.





There
were no changes in the carrying amount of goodwill during the year ended
December 31, 2004.




47





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





**Foreclosed
Assets**





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





**Income
Taxes**





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





**Stock
Based Compensation Plans**





At
December 31, 2004, the Company had options outstanding under two stock-based
employee compensation plans, which are described in more detail in Note 17. The
Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board "APB" Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
equal to the market value of the underlying stock on the date of
grant .





The
following table illustrates the effect on net income and earnings per share for
the years ended December 31, 2004, 2003 and 2002 if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, *Accounting
for Stock-Based Compensation* , to
stock-based employee compensation.





**2004**
    
    **2003**
    
    **2002**Net
      income, as reported
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Deduct:Total
      stock-based employee compensation expensedetermined
      under fair value based method for allawards,
      net of related tax effects
    
    
    (216,551
    )
    
    (230,257
    )
    
    (229,407
    )Pro
      forma net income
    
    $
    8,301,534
    
    $
    6,895,261
    
    $
    6,117,432Earnings
      per share:Basic
      - as reported
    
    $
    0.89
    
    $
    0.75
    
    $
    0.67Basic
      - pro forma
    
    $
    0.87
    
    $
    0.73
    
    $
    0.65Diluted
      - as reported
    
    $
    0.88
    
    $
    0.74
    
    $
    0.67Diluted
      - pro forma
    
    $
    0.86
    
    $
    0.72
    
    $
    0.65





**Earnings
Per Share**





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





48





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





**Comprehensive
Income (Loss)**





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





**Recent
Accounting Standards**





In
January 2003, the FASB issued Interpretation No. 46, *Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51* and, on
December 24, 2003, the FASB issued Interpretation No. 46R (Revised December
2003), *Consolidation
of Variable Interest Entities* . The
interpretation addresses consolidation by business enterprises of variable
interest entities. A variable interest entity is defined as an entity subject to
consolidation according to the provisions of the interpretation.  The
Company has determined that the provisions of the interpretation require
deconsolidation of the subsidiary trust which issued subordinated debentures
(see Note 9). The Company has adopted the provisions under the interpretation as
of January 1, 2004.





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





49





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





The Bank
is required to maintain reserve balances in cash or on deposit with
correspondent banks and the Federal Reserve Bank of Atlanta, based on a
percentage of deposits. The total of those reserve balances was approximately
$6,360,000 and $6,374,000 at December 31, 2004 and 2003,
respectively.








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





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





**Amortized**
      **Cost**
    
    **Gross**
      **Unrealized**
      **Gains**
    
    **Gross**
      **Unrealized**
      **Losses**
    
    **Fair**
      **Value****December
      31, 2004**U.S.
      Government agencies
    
    $
    53,025,477
    
    $
    140,010
    
    $
    (646,483
    )
    $
    52,519,004State
      and municipal securities
    
    
    8,564,881
    
    
    194,822
    
    
    (22,039
    )
    
    8,737,664Mortgage-backed
      securities
    
    
    55,134,557
    
    
    253,969
    
    
    (391,434
    )
    
    54,997,092Corporate
      debt securities
    
    
    4,298,816
    
    
    18,955
    
    
    -
    
    
    4,317,771Equity
      securities
    
    
    8,112,298
    
    
    -
    
    
    -
    
    
    8,112,298$
    129,136,029
    
    $
    607,756
    
    $
    (1,059,956
    )
    $
    128,683,829**December
      31, 2003**U.S.
      Government agencies
    
    $
    57,811,675
    
    $
    166,085
    
    $
    (649,092
    )
    $
    57,328,668State
      and municipal securities
    
    
    9,144,801
    
    
    274,842
    
    
    (19,855
    )
    
    9,399,788Mortgage-backed
      securities
    
    
    50,240,697
    
    
    354,708
    
    
    (299,442
    )
    
    50,295,963Corporate
      debt securities
    
    
    4,364,624
    
    
    29,012
    
    
    (39,741
    )
    
    4,353,895Equity
      securities
    
    
    5,446,699
    
    
    -
    
    
    -
    
    
    5,446,699$
    127,008,496
    
    $
    824,647
    
    $
    (1,008,130
    )
    $
    126,825,013





The
amortized cost and fair value of investment securities as of December 31, 2004
by contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties. Equity securities have
a perpetual life and no stated maturity, therefore these securities and the
mortgage-backed securities are shown separately from the other debt securities
in the following maturity summary.





**Amortized**
      **Cost**
    
    **Fair**
      **Value**Due
      in one year or less
    
    $
    993,191
    
    $
    997,918Due
      from one year to five years
    
    
    8,132,899
    
    
    8,227,603Due
      from five to ten years
    
    
    28,307,482
    
    
    28,099,805Due
      after ten years
    
    
    28,455,602
    
    
    28,249,113Mortgage-backed
      securities
    
    
    55,134,557
    
    
    54,997,092Equity
      securities
    
    
    8,112,298
    
    
    8,112,298$
    129,136,029
    
    $
    128,683,829





Securities
with a carrying value of $106,015,145 and $71,249,064 at December 31, 2004 and
2003, respectively, were pledged to secure public deposits, certain borrowing
arrangements, and for other purposes.





50





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**











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





Gains and
losses on sales and calls of investment securities for the years ended December
31, 2004, 2003 and 2002 consist of the following:





**2004**
    
    **2003**
    
    **2002**Gross
      gains on securities transactions
    
    $
    7,132
    
    $
    1,429,011
    
    $
    533,742Gross
      losses on securities transactions
    
    
    (1,968
    )
    
    (13,408
    )
    
    (272,564
    )Net
      realized gain on securities
      transactions
    
    $
    5,164
    
    $
    1,415,603
    
    $
    261,178








The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category, at December 31, 2004 and 2003. At
December 31, 2004 there are two U.S. Government agency debt issues and six
mortgage-backed securities issued by U.S. Government agencies in the investment
portfolio that have been in a continuous unrealized loss position for twelve
months or longer. These unrealized losses are due to fluctuations in interest
rates and are considered temporary because of acceptable investment grades on
each security.





**Less
      than Twelve Months**
    
    **Twelve
      Months or Longer****December
      31, 2004**
    
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**
    
    **Fair**
      **Value**
    
    **Unrealized**
      **Losses**U.S.
      Government agencies
    
    $
    13,498,803
    
    $
    246,262
    
    $
    13,087,800
    
    $
    400,221State
      and municipal securities
    
    
    3,022,852
    
    
    22,039
    
    
    -
    
    
    -Mortgage-backed
      securities
    
    
    33,232,400
    
    
    258,458
    
    
    9,509,301
    
    
    132,976Corporate
      debt securities
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      temporarily impaired securities
    
    $
    49,754,055
    
    $
    526,759
    
    $
    22,597,101
    
    $
    533,197**December
      31, 2003**U.S.
      Government agencies
    
    $
    27,990,205
    
    $
    649,092
    
    $
    -
    
    $
    -State
      and municipal securities
    
    
    1,742,080
    
    
    19,855
    
    
    -
    
    
    -Mortgage-backed
      securities
    
    
    38,404,930
    
    
    299,442
    
    
    -
    
    
    -Corporate
      debt securities
    
    
    2,169,495
    
    
    39,741
    
    
    -
    
    
    -Total
      temporarily impaired securities
    
    $
    70,306,710
    
    $
    1,008,130
    
    $
    -
    
    $
    -





51





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








****


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


The
composition of the loan portfolio as of December 31, 2004 and 2003
follows.





**2004**
    
    **2003**Commercial
      and financial
    
    $
    59,703,499
    
    $
    53,849,024Agricultural
    
    
    26,704,376
    
    
    24,071,141Real
      estate - Construction
    
    
    166,853,760
    
    
    100,150,095Real
      estate - Mortgage (commercial and residential)
    
    
    375,221,553
    
    
    332,003,534Installment
      loans to individuals and others
    
    
    19,381,324
    
    
    29,189,686Overdrafts
    
    
    170,806
    
    
    176,240648,035,318
    
    
    539,439,720Deferred
      loan fees and unearned interest, net
    
    
    (1,885,978
    )
    
    (795,878
    )646,149,340
    
    
    538,643,842Allowance
      for loan losses
    
    
    (9,066,566
    )
    
    (10,139,114
    )$
    637,082,774
    
    $
    528,504,728





Changes
in the allowance for loan losses for the years ended December 31, 2004, 2003 and
2002 follows.


**2004**
    
    **2003**
    
    **2002**Balance,
      beginning of year
    
    $
    10,139,114
    
    $
    12,096,988
    
    $
    15,765,373Provision
      charged to operations
    
    
    600,000
    
    
    -
    
    
    2,575,000Loans
      charged-off
    
    
    (2,572,845
    )
    
    (3,118,821
    )
    
    (6,602,334
    )Recoveries
    
    
    900,297
    
    
    1,160,947
    
    
    358,949Balance,
      end of year
    
    $
    9,066,566
    
    $
    10,139,114
    
    $
    12,096,988








A
summary of information pertaining to impaired loans as of December 31, 2004 and
2003 follows.





**2004**
    
    **2003**Loans
      accounted for on a nonaccrual basis
    
    $
    1,417,259
    
    $
    7,047,676Troubled
      debt restructurings not included above
    
    
    2,045,358
    
    
    1,167,933Loans
      past due 90 days or more and still accruing
    
    
    10,637
    
    
    -Total
      nonperforming loans
    
    $
    3,473,254
    
    $
    8,215,609Valuation
      allowance related to impaired loans
    
    $
    509,505
    
    $
    2,350,655





Additional
information on impaired loans for the years ended December 31, 2004, 2003 and
2002 follows.





**2004**
    
    **2003**
    
    **2002**Average
      recorded investment in impaired loans
    
    $
    6,505,508
    
    $
    9,894,628
    
    $
    13,206,730Approximate
      amount of interest income that would have been recorded if the impaired
      loans had remained current and on accrual status
    
    $
    357,385
    
    $
    767,711
    
    $
    1,135,894Interest
      income recognized on a cash basis on impaired loans
    
    $
    314,585
    
    $
    143,360
    
    $
    198,915





52





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








****


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


In the
ordinary course of business, the Company has granted loans to certain related
parties, including executive officers, directors and their affiliates. The
interest rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the type of
loan. Changes in related party loans for the year ended December 31, 2004
follows.





Balance,
      beginning of year
    
    $
    7,758,735Advances
    
    
    18,323,785Repayments
    
    
    (13,706,511
    )Transactions
      due to changes in related parties
    
    
    (962,283
    )Balance,
      end of year
    
    $
    11,413,726








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





Premises
and equipment as of December 31, 2004 and 2003 follows.





**2004**
    
    **2003**Land
    
    $
    4,597,398
    
    $
    4,229,408Buildings
      and improvements
    
    
    16,507,046
    
    
    16,752,623Furniture,
      fixtures and equipment
    
    
    10,025,797
    
    
    10,775,647Construction
      in progress
    
    
    -
    
    
    33,45431,130,241
    
    
    31,791,132Less
      accumulated depreciation
    
    
    (12,318,032
    )
    
    (11,743,757
    )$
    18,812,209
    
    $
    20,047,375





Depreciation
expense amounted to $1,838,412, $2,047,623, and $2,110,353, for the years ended
December 31, 2004, 2003 and 2002, respectively.





The
Company leases office space at five locations. One location is leased on a
month-to-month basis. The other locations are under agreements with minimum
contractual obligations as of December 31, 2004 as follows:





**Year**
    
    **Amount**2005
    
    
    166,3932006
    
    
    139,8662007
    
    
    141,2302008
    
    
    134,7612009
    
    
    16,208Later
    
    
    -$
    598,458





The
Company also has commitments on various short-term operating leases for
equipment. Total lease expense amounted to $284,326, $246,360, and $203,984 for
the years ended December 31, 2004, 2003 and 2002 respectively.





53





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





A summary
of interest-bearing deposits as of December 31, 2004 and 2003
follows.





**2004**
    
    **2003**Interest-bearing
      demand
    
    $
    183,608,828
    
    $
    162,844,995Savings
    
    
    41,227,511
    
    
    39,908,498Time,
      $100,000 and over
    
    
    145,878,073
    
    
    82,831,847Other
      time
    
    
    187,208,199
    
    
    176,438,325$
    557,922,611
    
    $
    462,023,665





The
Company had $47,003,000 in brokered time deposits as of December 31,
2004.





Interest
expense on deposits for the years ended December 31, 2004, 2003 and 2002
follows.





**2004**
    
    **2003**
    
    **2002**Interest-bearing
      demand
    
    $
    1,199,639
    
    $
    1,404,086
    
    $
    2,330,026Savings
    
    
    234,512
    
    
    281,552
    
    
    430,179Time,
      $100,000 and over
    
    
    2,373,902
    
    
    2,673,927
    
    
    4,730,549Other
      time
    
    
    4,377,825
    
    
    5,843,843
    
    
    9,578,148$
    8,185,878
    
    $
    10,203,408
    
    $
    17,068,902





The
scheduled maturities of time deposits at December 31, 2004 follow.





**Year**
    
    **Amount**2005
    
    $
    227,884,1952006
    
    
    59,983,0132007
    
    
    21,524,8252008
    
    
    13,319,8732009
    
    
    9,554,720Later
    
    
    819,646$
    333,086,272








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





Securities
sold under repurchase agreements, which are secured borrowings, generally mature
within one day to 90 days from the transaction date. Securities sold under
repurchase agreements are reflected at the amount of cash received in connection
with the transactions. The Company may be required to provide additional
collateral based on the fair value of the underlying securities. The Company
monitors the fair value of the underlying securities on a weekly basis.
Securities sold under repurchase agreements at December 31, 2004 and 2003 were
$14,168,098 and $35,136,790, respectively.





54





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





Listed
below is a summary of the advances from the Federal Home Loan Bank of Atlanta
(the "FHLB") as of December 31, 2004 and 2003.





**2004**
    
    **2003**Adjustable
      rate advances due at various dates through September 30, 2009 with a
      weighted-average rate of 2.34% at December 31, 2004
    
    $
    15,441,580
    
    $
    3,941,580Fixed
      rate advances due at various dates through February 26, 2024 with a
      weighted-average rate of 3.90% at December 31, 2004
    
    
    22,959,545
    
    
    3,172,463Convertible
      advances due at various dates through July 15, 2014 with a
      weighted-average rate of 2.47% at December 31, 2004
    
    
    60,600,000
    
    
    37,600,000$
    99,001,125
    
    $
    44,714,043








The Bank
has pledged $95,880,257 in qualifying residential and commercial real estate
mortgage loans, $43,962,469 in investment securities and $5,912,900 in FHLB
stock as collateral on the advances from the FHLB.





Contractual
maturities of the advances from the FHLB at December 31, 2004
follow.





**Year**
    
    **Amount**2005
    
    
    11,181,2002006
    
    
    12,733,8082007
    
    
    8,482,4342008
    
    
    10,486,7302009
    
    
    4,715,148Later
    
    
    51,401,805$
    99,001,125








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





On
November 28, 2001, PAB Bankshares Capital Trust I ("PAB Trust") issued $10
million of Floating Rate Capital Securities "trust preferred securities". The
Company formed PAB Trust, a statutory business trust created under the laws of
the State of Delaware, for the sole purpose of issuing the trust preferred
securities and investing the proceeds in Floating Rate Junior Subordinated
Debentures (the "Debentures") issued by the Company. The interest rates on both
the trust preferred securities and the Debentures are reset semi-annually at
LIBOR plus 3.75% (currently 6.44%) with a rate cap of 11.0% through December 8,
2006. The Company entered into agreements which, taken collectively, fully,
irrevocably and unconditionally guarantee, on a subordinated basis, all of PAB
Trust's obligations under the trust preferred securities. PAB Trust's sole asset
is the Debentures issued by the Company. The Debentures will mature on December
8, 2031, but are callable at par by the Company in whole or in part anytime
after December 8, 2006. The proceeds from the issuance of these trust preferred
securities qualify as Tier 1 capital under the risk-based capital guidelines
established by the Federal Reserve.





As
discussed in Note 1, the Company adopted FASB Interpretation No. 46R (Revised
December 2003), *Consolidation
of Variable Interest Entities,* during
the first quarter of 2004. This interpretation addresses consolidation by
business entities of variable interest entities and when such entities are
subject to consolidation under the provisions of this interpretation. The
Company has determined that the revised provisions required deconsolidation of
PAB Trust. The adoption of this interpretation did not have a material effect on
the Company's financial statements. Prior years' consolidated financial
statements have not been restated.





55





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





The
components of income tax expense for the years ended December 31, 2004, 2003 and
2002 follow.





**2004**
    
    **2003**
    
    **2002**Current
    
    $
    4,161,632
    
    $
    2,481,972
    
    $
    1,632,006Deferred
    
    
    (17,353
    )
    
    879,072
    
    
    1,180,948$
    4,144,279
    
    $
    3,361,044
    
    $
    2,812,954





The
Company's income tax expense differs from the amounts computed by applying the
Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences for the years ended December 31, 2004, 2003
and 2002 follows.





**2004**
    
    **2003**
    
    **2002**Tax
      at statutory rate
    
    $
    4,326,730
    
    $
    3,565,431
    
    $
    3,114,330Increase
      (decrease) resulting from:State
      income tax, net of
      Federal
      tax benefit
    
    
    30,471
    
    
    16,172
    
    
    37,894Tax
      exempt interest and
      dividend
      exclusion
    
    
    (152,661
    )
    
    (181,127
    )
    
    (163,775
    )Increase
      in cash value of bank-
      owned
      life insurance policies
    
    
    (107,679
    )
    
    (160,542
    )
    
    (162,053
    )Deferred
      tax adjustment
    
    
    111
    
    
    116,257
    
    
    (20,897
    )Other
      items, net
    
    
    47,307
    
    
    4,853
    
    
    7,455Income
      tax expense
    
    $
    4,144,279
    
    $
    3,361,044
    
    $
    2,812,954








The
components of deferred income taxes at December 31, 2004 and 2003
follow.





**2004**
    
    **2003**Deferred
      tax assets and (liabilities):Accrued
      severance payable
    
    $
    254,914
    
    $
    178,321Allowance
      for loan losses
    
    
    3,082,632
    
    
    3,447,299Deferred
      compensation
    
    
    696,245
    
    
    697,320Deferred
      loan origination cost
    
    
    (322,622
    )
    
    (245,402
    )Deferred
      loan origination fees
    
    
    906,751
    
    
    462,745Other
      assets
    
    
    195,635
    
    
    362,637Premises
      and equipment
    
    
    (918,691
    )
    
    (1,025,409
    )Unrealized
      loss on securities
      available
      for sale
    
    
    153,748
    
    
    62,384Net
      deferred tax assets
    
    $
    4,048,612
    
    $
    3,939,895




56





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





The
Company provides an employee 401(k) plan for qualified employees. The 401(k)
plan allows participants to defer a portion of their compensation and provides
that the Company may match a portion of the participants' deferred compensation.
The plan also provides for non-elective and discretionary profit sharing
contributions to be made by the Company at the sole discretion of the Board of
Directors. Approximately 3.5% of the participants' eligible compensation was
accrued as the discretionary profit sharing contributions for 2004, 2003 and
2002. The employer contributions are on a five-year vesting schedule. All
full-time and part-time employees are eligible to participate in the plan
provided they have met the eligibility requirements. Generally, a participant
must have completed one month employment to become eligible, with employer
contributions beginning after six months of employment. Aggregate expense under
the plan charged to operations during 2004, 2003 and 2002 amounted to $705,747,
$711,102, and $675,614, respectively.








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





In years
past, the Company entered into separate deferred compensation arrangements with
certain officers. The agreements called for the deferred compensation to be
payable over a fifteen-year period beginning at the earlier of age 65, death, or
disability of each officer. Annual accruals were made based on actuarial
assumptions for the present value of the future obligations. In 2001, the Board
of Directors elected to terminate these plans. At that time, the Company
incurred an expense of approximately $898,000 for the accrual for the net
present value of the liability covering two executive officers that were
retiring at the end of 2001. The total accrued liability for these deferred
compensation plans was $2,047,781 and $2,050,938 at December 31, 2004 and 2003,
respectively. Aggregate expense under the deferred compensation plans charged to
salaries and employee benefits expense were $85,085, $138,055, and $165,009
during 2004, 2003 and 2002, respectively.





In 2001,
the Company entered into separate severance agreements with two retiring
executive officers that effectively terminated their then existing employment
agreements and committed to pay each officer a three-year severance package
beginning in January 2002. The Company accrued $1,291,388 representing the net
present value of the severance payments with the expense included in salaries
and employee benefits for the year ended December 31, 2001. The remaining
liability in the severance plans payable as of December 31, 2004 was $135,891.
In 2003, the severance agreement for one of the retired executives was amended
to spread the remaining payments due from the Company over an extended period to
December 31, 2005.





In August
2004, the Company entered into a severance agreement with a retiring executive
officer that effectively terminated his then existing employment agreement and
committed to pay a three-year severance package beginning in September 2004. The
Company accrued $685,645 representing the net present value of the severance
payments with the expense included in salaries and employee benefits for the
year ended December 31, 2004. The remaining liability in the severance plan
payable as of December 31, 2004 was $613,857.




57





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





Other fee
income for the years ended December 31, 2004, 2003 and 2002
follows.





**2004**
    
    **2003**
    
    **2002**Mortgage
      origination fees
    
    $
    521,511
    
    $
    715,358
    
    $
    838,044Brokerage
      commissions and fees
    
    
    121,017
    
    
    469,373
    
    
    485,401ATM
      and debit card fee income
    
    
    419,082
    
    
    357,235
    
    
    329,100Insurance
      premiums
    
    
    25,458
    
    
    773
    
    
    5,822Other
      fee income
    
    
    199,476
    
    
    251,945
    
    
    226,518Total
      other fee income
    
    $
    1,286,544
    
    $
    1,794,684
    
    $
    1,884,885





Other
noninterest income for the years ended December 31, 2004, 2003 and 2002
follows.





**2004**
    
    **2003**
    
    **2002**Earnings
      on bank-owned life insurance
    
    $
    315,126
    
    $
    472,183
    
    $
    478,199Gain
      (loss) on disposal / write-down of assets
    
    
    118,686
    
    
    (257,770
    )
    
    (271,909
    )Other
      noninterest income
    
    
    201,100
    
    
    265,337
    
    
    366,051Total
      other noninterest income
    
    $
    634,912
    
    $
    479,750
    
    $
    572,341





Other
noninterest expense for the years ended December 31, 2004, 2003 and 2002
follows.





**2004**
    
    **2003**
    
    **2002**Advertising
      and business development
    
    $
    495,954
    
    $
    433,079
    
    $
    511,902Supplies
      and printing
    
    
    423,724
    
    
    543,738
    
    
    638,240Telephone
      and internet charges
    
    
    342,084
    
    
    454,670
    
    
    638,209Postage
      and courier
    
    
    546,286
    
    
    563,156
    
    
    644,332Legal
      and accounting fees
    
    
    303,506
    
    
    528,493
    
    
    882,765Service
      charges and fees
    
    
    433,471
    
    
    483,769
    
    
    603,011Other
      noninterest expenses
    
    
    2,468,094
    
    
    2,207,105
    
    
    2,457,675Total
      other noninterest expense
    
    $
    5,013,119
    
    $
    5,214,010
    
    $
    6,376,134





58





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





The
components used to calculate basic and diluted earnings per share for the years
ended December 31, 2004, 2003 and 2002 follows.





**2004**
    
    **2003**
    
    **2002**Basic
      earnings per share:Net
      income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Weighted
      average common shares outstanding
    
    
    9,499,709
    
    
    9,446,142
    
    
    9,426,761Earnings
      per common share
    
    $
    0.89
    
    $
    0.75
    
    $
    0.67Diluted
      earnings per share:Net
      income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Weighted
      average common shares outstanding
    
    
    9,499,709
    
    
    9,446,142
    
    
    9,426,761Effect
      of dilutive stock options
    
    
    142,356
    
    
    141,045
    
    
    33,007Weighted
      average diluted commonshares
      outstanding
    
    
    9,642,065
    
    
    9,587,187
    
    
    9,459,768Earnings
      per common share
    
    $
    0.88
    
    $
    0.74
    
    $
    0.67








For the
years ended December 31, 2004, 2003 and 2002, options to purchase 175,639,
171,368, and 592,001, respectively, were outstanding but not included in the
computation of earnings per share because they were anti-dilutive.








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








On July
1, 2002, the Board of Directors established an Employee and Director Stock
Purchase Program to enable the Company and its participating subsidiaries to
provide to their respective employees and directors a convenient means of
purchasing for long term investment, and not for short term speculative gain,
common stock of the Company and thereby promote interest in the Company's
continuing success, growth and development. The program allows for an employee
or director to purchase up to a maximum of $2,000 a year of the Company's stock
with the Company matching 50% of the participants purchase. In order to be
eligible, an employee must be full-time and have worked a full month. During the
years ended December 31, 2004, 2003 and 2002, the Company recorded $105,077,
$89,256 and $51,590, respectively, of expense associated with this
program.








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





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




59





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





The
Company has two fixed stock option plans under which it has granted options to
its employees and directors to purchase common stock at the fair market price on
the date of grant. Both plans provide for "incentive stock options" and
"non-qualified stock options". The incentive stock options are intended to
qualify under Section 422 of the Internal Revenue Code for favorable tax
treatment. Under the 1994 Employee Stock Option Plan, the Board of Directors can
grant up to 400,000 stock options to employees of the Company as part of an
incentive plan to attract and retain key personnel in the Company. The 1994
Employee Stock Option Plan expired in 2004. Under the 1999 Stock Option Plan,
the Board of Directors can grant up to 600,000 stock options to directors,
employees, consultants and advisors of the Company. On December 31, 2004, there
were 154,616 stock options available for grant under the 1999 Stock Option
Plan.





A summary
of the status of the two fixed plans at December 31, 2004, 2003 and 2002 and
changes during the years ended on those dates follows.





**2004**
    
    **2003**
    
    **2002****Number**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    **Number**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    **Number**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**Under
      option, beginning
      of
      year
    
    
    695,367
    
    $
    10.60
    
    
    756,406
    
    $
    10.63
    
    
    731,635
    
    $
    11.22Granted
    
    
    23,000
    
    
    14.94
    
    
    28,500
    
    
    9.56
    
    
    168,700
    
    
    8.08Exercised
    
    
    (56,960
    )
    
    7.10
    
    
    (54,247
    )
    
    9.76
    
    
    (20,500
    )
    
    6.25Forfeited
    
    
    (9,630
    )
    
    13.01
    
    
    (35,292
    )
    
    11.59
    
    
    (123,429
    )
    
    11.41Under
      option, end of year
    
    
    651,777
    
    $
    11.03
    
    
    695,367
    
    $
    10.60
    
    
    756,406
    
    $
    10.63Exercisable
      at end of year
    
    
    461,013
    
    $
    11.45
    
    
    405,987
    
    $
    11.34
    
    
    366,546
    
    $
    11.41Weighted-average
      fair value
      per
      option of options
      granted
      during year
    
    
    
    
    $
    5.41
    
    
    
    
    $
    3.31
    
    
    
    
    $
    3.84








A further
summary of the options outstanding at December 31, 2004 follows.





**Options
      Outstanding**
    
    **Options
      Exercisable****Range
      of**
      **Exercise**
      **Prices**
    
    **Number**
    
    **Weighted-
      Average Contractual Life in Years**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**
    
    **Number**
    
    **Weighted-**
      **Average**
      **Exercise**
      **Price**$
      6.25 - 8.10
    
    
    150,000
    
    
    5.65
    
    $
    7.31
    
    
    77,000
    
    $
    6.858.19
      - 10.06
    
    
    161,090
    
    
    4.35
    
    
    9.73
    
    
    123,630
    
    
    9.8010.20
      - 10.94
    
    
    130,737
    
    
    6.46
    
    
    10.62
    
    
    85,993
    
    
    10.6211.15
      - 13.94
    
    
    93,000
    
    
    4.79
    
    
    12.91
    
    
    75,440
    
    
    12.9013.94
      - 21.63
    
    
    116,950
    
    
    5.23
    
    
    16.53
    
    
    98,950
    
    
    16.71651,777
    
    
    5.29
    
    
    11.03
    
    
    461,013
    
    
    11.45





60





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





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





**2004**
    
    **2003**
    
    **2002**Risk-free
      interest rate
    
    
    3.67%
      - 4.25
    %
    
    4.25
    %
    
    3.81
    %Expected
      life of the options
    
    
    7 -
      10 years
    
    
    10
      years
    
    
    10
      yearsExpected
      dividends (as a percent
      of
      the fair value of the stock)
    
    
    2.18%
      - 3.08
    %
    
    1.80
    %
    
    -Expected
      volatility
    
    
    33.98%
      - 35.23
    %
    
    27.22
    %
    
    28.79
    %








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





In May
2004, the Board of Directors approved a plan to purchase and cancel up to
400,000 shares of the Company's common stock. During 2004, the Company acquired
and canceled 46,300 shares of common stock for a total cost of $576,198. A
balance of 353,700 remained available from the plan for repurchase at December
31, 2004. The plan will expire in May 2005.








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





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





The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments as it does for
on-balance-sheet instruments. A
summary of the Bank's commitments as of December 31, 2004 and 2003
follows.





**2004**
    
    **2003**Commitments
      to extend credit
    
    $
    118,155,000
    
    $
    84,533,000Standby
      letters of credit
    
    $
    5,735,000
    
    $
    2,755,000





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





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





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





61





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





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





As of
December 31, 2004, approximately 87% of the Bank's loan portfolio is
concentrated in loans secured by real estate. A substantial portion of these
loans are in the Bank's primary market areas. In addition, a substantial portion
of the other real estate owned is located in those same markets. Accordingly,
the ultimate collectibility of the Bank's loan portfolio and the recovery of the
carrying amount of other real estate owned are susceptible to changes in market
conditions in the Bank's market areas. The other significant concentrations of
credit by type of loan are set forth in Note 4.








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





On May
20, 2002, the Company's Board of Directors adopted a Resolution requested by the
Federal Reserve Bank of Atlanta, which, among other things, restricted the
Company from redeeming its capital stock, paying dividends, modifying existing
debt agreements, or incurring additional debt without the prior approval of its
banking regulators. The Resolution was the result of an examination that found
the Bank to be in less than satisfactory condition due primarily to serious
weaknesses identified in the asset quality of the Bank's loan portfolio. On
August 25, 2003, the Federal Reserve terminated this Resolution with the
Company.





The Bank
is subject to certain restrictions on the amount of dividends that may be
declared without prior regulatory approval. At December 31, 2004, approximately
$10,319,000 of the Bank's retained earnings were available for dividend
declaration without regulatory approval.





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





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, as defined, and of Tier I capital to average
assets, as defined. Management believes, as of December 31, 2004 and 2003, the
Company and the Bank met all capital adequacy requirements to which they are
subject.





As of
December 31, 2004, the most recent notification from the regulatory authorities
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the Bank's
category.





62





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**










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





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





**Actual**
    
    **For
      Capital Adequacy Purposes**
    
    **To
      Be Well Capitalized Under Prompt Corrective Action
      Provisions**As
      of December 31, 2004:Total
      Capital to Risk
      Weighted
      Assets:Consolidated
    
    $
    94,223,000
    
    
    13.5
    %
    $
    56,025,000
    
    
    8.0
    %
    
    -
      N/A -Bank
    
    $
    92,156,000
    
    
    13.2
    %
    $
    55,918,000
    
    
    8.0
    %
    $
    69,898,000
    
    
    10.0
    %Tier
      1 Capital to Risk
      Weighted
      Assets:Consolidated
    
    $
    85,465,000
    
    
    12.2
    %
    $
    28,012,000
    
    
    4.0
    %
    
    -
      N/A -Bank
    
    $
    83,415,000
    
    
    11.9
    %
    $
    27,959,000
    
    
    4.0
    %
    $
    41,939,000
    
    
    6.0
    %Tier
      1 Capital to
      Average
      Assets:Consolidated
    
    $
    85,465,000
    
    
    10.4
    %
    $
    32,787,000
    
    
    4.0
    %
    
    -
      N/A -Bank
    
    $
    83,415,000
    
    
    10.2
    %
    $
    32,736,000
    
    
    4.0
    %
    $
    40,920,000
    
    
    5.0
    %As
      of December 31, 2003:Total
      Capital to Risk
      Weighted
      Assets:Consolidated
    
    $
    87,624,000
    
    
    15.1
    %
    $
    46,311,000
    
    
    8.0
    %
    
    -
      N/A -Bank
    
    $
    84,477,000
    
    
    14.7
    %
    $
    46,138,000
    
    
    8.0
    %
    $
    57,672,000
    
    
    10.0
    %Tier
      1 Capital to Risk
      Weighted
      Assets:Consolidated
    
    $
    80,352,000
    
    
    13.9
    %
    $
    23,155,000
    
    
    4.0
    %
    
    -
      N/A -Bank
    
    $
    77,232,000
    
    
    13.4
    %
    $
    23,069,000
    
    
    4.0
    %
    $
    34,603,000
    
    
    6.0
    %Tier
      1 Capital to
      Average
      Assets:Consolidated
    
    $
    80,352,000
    
    
    11.0
    %
    $
    29,258,000
    
    
    4.0
    %
    
    -
      N/A -Bank
    
    $
    77,232,000
    
    
    10.6
    %
    $
    29,200,000
    
    
    4.0
    %
    $
    36,501,000
    
    
    5.0
    %








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





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








63





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








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





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





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





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





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





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





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





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





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





The
carrying amounts and estimated fair value of the Company's financial instruments
as of December 31, 2004 and 2003 are summarized below. All dollar amounts have
been rounded to the nearest thousand.





**2004**
    
    **2003****Carrying**
      **Amount**
    
    **Fair**
      **Value**
    
    **Carrying**
      **Amount**
    
    **Fair**
      **Value**Cash
      and due from banks, interest-
      bearing
      deposits with other banks,
      and
      federal funds sold
    
    $
    56,578,000
    
    $
    56,578,000
    
    $
    23,756,000
    
    $
    23,756,000Investment
      securities
    
    
    128,684,000
    
    
    128,684,000
    
    
    126,825,000
    
    
    126,825,000Loans,
      net
    
    
    637,083,000
    
    
    638,327,000
    
    
    528,505,000
    
    
    530,863,000Deposits
    
    
    657,550,000
    
    
    657,916,000
    
    
    556,917,000
    
    
    559,601,000Federal
      funds purchased and
      securities
      sold under agreements
      to
      repurchase
    
    
    14,168,000
    
    
    14,168,000
    
    
    36,920,000
    
    
    36,920,000Advances
      from the FHLB
    
    
    99,001,000
    
    
    99,776,000
    
    
    44,714,000
    
    
    39,864,000Beneficial
      interest in debentures
    
    
    10,310,000
    
    
    10,310,000
    
    
    10,000,000
    
    
    10,000,000





64





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
23.  CONDENSED FINANCIAL INFORMATION OF PAB BANKSHARES,
INC.**


**(PARENT
COMPANY ONLY)**





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





**PAB
      BANKSHARES, INC.****CONDENSED
      STATEMENTS OF CONDITION****DECEMBER
      31, 2004 AND 2003****2004**
    
    **2003****ASSETS**Cash
      on deposit with subsidiary bank
    
    $
    4,207,561
    
    $
    4,209,082Investment
      securities
    
    
    349,945
    
    
    1,349,945Investment
      in subsidiary
    
    
    89,259,106
    
    
    82,941,976Other
      assets
    
    
    976,817
    
    
    1,169,493Total
      assets
    
    $
    94,793,429
    
    $
    89,670,496**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Guaranteed
      preferred beneficial interests
      in
      debentures (trust preferred securities)
    
    $
    10,310,000
    
    $
    10,000,000Dividends
      payable
    
    
    949,532
    
    
    663,758Other
      liabilities
    
    
    2,534,013
    
    
    2,944,572Total
      liabilities
    
    
    13,793,545
    
    
    13,608,330**Stockholders'
      equity**
    
    
    80,999,884
    
    
    76,062,166Total
      liabilities and stockholders' equity
    
    $
    94,793,429
    
    $
    89,670,496





65





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
      23.**
    **CONDENSED
      FINANCIAL INFORMATION OF PAB BANKSHARES,
INC.**


**(PARENT
COMPANY ONLY) (Continued)**





**PAB
      BANKSHARES, INC.****CONDENSED
      STATEMENTS OF INCOME****DECEMBER
      31, 2004, 2003 AND 2002****2004**
    
    **2003**
    
    **2002****Income**Dividends
      from subsidiaries
    
    $
    3,000,000
    
    $
    -
    
    $
    1,677,950Interest
      income
    
    
    54,813
    
    
    90,000
    
    
    90,000Management
      and service fees
    
    
    -
    
    
    -
    
    
    1,171,316Other
      income
    
    
    120
    
    
    4,541
    
    
    122Total
      income
    
    
    3,054,933
    
    
    94,541
    
    
    2,939,388**Expenses**
    
    
    1,047,898
    
    
    1,097,335
    
    
    2,988,293Income
      (loss) before income tax benefitand
      equity in undistributed earningsof
      subsidiaries
    
    
    2,007,035
    
    
    (1,002,794
    )
    
    (48,905
    )**Income
      tax benefit**
    
    
    326,567
    
    
    362,370
    
    
    745,316Income
      (loss) before equity inundistributed
      earnings of subsidiaries
    
    
    2,333,602
    
    
    (640,424
    )
    
    696,411Equity
      in undistributed earnings of
      subsidiaries
    
    
    6,184,483
    
    
    7,765,942
    
    
    5,650,428**Net
      income**
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839





66





**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**








**NOTE
      23.**
    **CONDENSED
      FINANCIAL INFORMATION OF PAB BANKSHARES, INC.**


**(PARENT
COMPANY ONLY) (Continued)**





**PAB
      BANKSHARES, INC.****CONDENSED
      STATEMENTS OF CASH FLOW****YEARS
      ENDED DECEMBER 31, 2004, 2003 AND 2002****2004**
    
    **2003**
    
    **2002****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      Income
    
    $
    8,518,085
    
    $
    7,125,518
    
    $
    6,346,839Adjustments
      to reconcile net income to
      net
      cash provided by operating activities:Depreciation
      and amortization
    
    
    68,899
    
    
    68,901
    
    
    376,322Deferred
      tax provision
    
    
    83,668
    
    
    57,487
    
    
    (242,454
    )Undistributed
      earnings of subsidiaries
    
    
    (6,184,483
    )
    
    (7,765,942
    )
    
    (5,650,428
    )Increase
      in deferred compensation accrual
    
    
    85,085
    
    
    138,055
    
    
    141,009Decrease
      in retirement accrual
    
    
    (388,583
    )
    
    (364,552
    )
    
    (402,362
    )Net
      change in other assets and liabilities
    
    
    (66,952
    )
    
    (62,763
    )
    
    162,271Net
      cash provided by (used in) operating activities
    
    
    2,115,719
    
    
    (803,296
    )
    
    731,197**CASH
      FLOWS FROM INVESTING ACTIVITIES**Proceeds
      from call of equity securities
    
    
    1,000,000
    
    
    -
    
    
    -Purchase
      of premises and equipment
    
    
    -
    
    
    -
    
    
    (118,106
    )Proceeds
      from disposal of assets
    
    
    -
    
    
    -
    
    
    4,025,426Net
      cash provided by investing activities
    
    
    1,000,000
    
    
    -
    
    
    3,907,320**CASH
      FLOWS USED IN FINANCING ACTIVITIES**Dividends
      paid
    
    
    (2,945,557
    )
    
    (1,038,587
    )
    
    (2,071,500
    )Proceeds
      from the exercise of stock options
    
    
    404,515
    
    
    529,224
    
    
    128,125Acquisition
      of stock under stock repurchase plans
    
    
    (576,198
    )
    
    -
    
    
    -Net
      cash used in financing activities
    
    
    (3,117,240
    )
    
    (509,363
    )
    
    (1,943,375
    )Net
      increase (decrease) in cash
    
    
    (1,521
    )
    
    (1,312,659
    )
    
    2,695,142Cash
      at beginning of period
    
    
    4,209,082
    
    
    5,521,741
    
    
    2,826,599Cash
      at end of period
    
    $
    4,207,561
    
    $
    4,209,082
    
    $
    5,521,741




67





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


**AND
FINANCIAL DISCLOSURES**





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








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





**Evaluation
of Disclosure Controls and Procedures**





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





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





Management's
Report on Internal Control Over Financial Reporting appears on page 35. The
Report of Independent Registered Accounting Firm appears on page 36. These
reports are incorporated by reference herein.





**Changes
in Internal Control over Financial Reporting**





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








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





There was
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of 2004 that has not been reported.








**PART
III**








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





Information
regarding our directors and executive officers, board committees, codes of
ethics, and compliance with Section 16 of the Exchange Act will be included in
our definitive Proxy Statement (the "2005 Proxy Statement") relating to the
annual meeting of shareholders of PAB and is incorporated herein by
reference.








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





Information
regarding executive compensation will be included in the 2005 Proxy Statement
and is incorporated herein by reference.





68





**ITEM
      12.**
    **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS**


**AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





Information
regarding beneficial ownership of our common stock will be included in the 2005
Proxy Statement and is incorporated herein by reference.





*Equity
Compensation Plan Information*


The
following table summarizes the Company's equity compensation plans as of
December 31, 2004.





Plan
      Category
    
    Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
    
    Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
    
    Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans*Equity
      Compensation PlansApproved
      by Security Holders
    
    
    461,013
    
    $
    11.45
    
    
    345,380Equity
      Compensation Plans NotApproved
      by Security Holders
    
    
    n/a
    
    
    n/a
    
    
    n/a*excluding
      securities reflected in the first column





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








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





Information
regarding certain relationships and related transactions will be included in the
2005 Proxy Statement and is incorporated herein by reference.








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





Information
regarding principal accountant fees and services will be included in the 2005
Proxy Statement and is incorporated herein by reference.




69





**PART
IV**





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





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




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


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


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


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




Exhibit
      No.
    Description3.1
    Amended
      and Restated Articles of Incorporation (incorporated by reference to
      Exhibit 3(a) to the Registrant's Registration Statement on Form S-4 (No.
      333-83907) filed with the Commission on October 14,
  1999).3.2
    Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
      Registrant's Current Report on Form 8-K dated February 22,
      2005).4.1
    Indenture
      Agreement, dated November 28, 2001, by and between the Registrant and
      Wilmington Trust Company for the issuance of Floating Rate Junior
      Subordinated Debt Securities due 2031 (incorporated by reference to
      Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal
      year ended December 31, 2001).10.1.1
    PAB
      Bankshares, Inc. First Amendment to First Restated and Amended Dividend
      Reinvestment and Common Stock Purchase Plan (incorporated by reference to
      Exhibit 28.2 to the Registrant's Registration Statement on Form S-3 (No.
      33-74080) filed with the Commission on April 8, 1997).10.1.2
    PAB
      Bankshares, Inc. Third Amended and Restated Dividend Reinvestment and
      Common Stock Purchase Plan (incorporated by reference to Exhibit 28.1 to
      the Registrant's Registration Statement on Form S-3 (No. 33-74080) filed
      with the Commission on September 1, 1998).10.2
    PAB
      Bankshares, Inc. 1994 Employee Stock Option Plan, as amended (incorporated
      by reference to Exhibit 10.3 to the Registrant's Annual Report on Form
      10-K for the fiscal year ended December 31, 1998).10.3
    Form
      of Executive Salary Continuation Agreement, with attached Schedule of
      Terms (incorporated by reference to Exhibit 10.5 to the Registrant's
      Annual Report on Form 10-K for the fiscal year ended December 31, 1998).10.4
    PAB
      Bankshares, Inc. 1999 Stock Option Plan (incorporated by reference to
      Exhibit 99 to the Registrant's Registration Statement on Form S-8 (No.
      333-89527) filed with the Commission on March 22,
1999).10.5
    Employee
      Contract Termination Agreement, dated September 1, 2001, by and between C.
      Larry Wilkinson and the Registrant (incorporated by reference to Exhibit
      10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year
      ended December 31, 2001).10.6
    Rescission
      Agreement, dated December 31, 2001, by and between R. Bradford Burnette
      and the Registrant (incorporated by reference to Exhibit 10.10 to the
      Registrant's Annual Report on Form 10-K for the fiscal year ended December
      31, 2001).
  70
 10.7
    PAB
      Bankshares, Inc. Employee and Director Stock Purchase Program, dated July
      1, 2002 and amended March 25, 2003 (incorporated by reference to Exhibit
      10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year
      ended December 31, 2002).10.8
    Employment
      Agreement, dated January 1, 2003, by and between Michael E. Ricketson, the
      Registrant, and the Bank (incorporated by reference to Exhibit 10.10 to
      the Registrant's Annual Report on Form 10-K for the fiscal year ended
      December 31, 2002).10.8.1
    First
      Amendment to Employment Agreement, dated August 25, 2003, by and between
      Michael E. Ricketson, the Registrant, and the Bank (incorporated by
      reference to Exhibit 10.14 to the Registrant's Quarterly Report on Form
      10-Q for the fiscal quarter ended September 30, 2003).10.9
    Employment
      Agreement, dated January 1, 2003, by and between Milton Burke Welsh and
      the Bank (incorporated by reference to Exhibit 10.11 to the Registrant's
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2002).10.10
    Employment
      Agreement, dated January 1, 2003, by and between R. Wesley Fuller and the
      Bank (incorporated by reference to Exhibit 10.12 to the Registrant's
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2002).10.11
    Employment
      Agreement, dated January 1, 2003, by and between Donald J. Torbert, Jr.
      and the Bank (incorporated by reference to Exhibit 10.13 to the
      Registrant's Annual Report on Form 10-K for the fiscal year ended December
      31, 2002).10.11.1
    First
      Amendment to Employment Agreement, dated August 26, 2003, by and between
      Donald J. Torbert, Jr. and the Bank (incorporated by reference to Exhibit
      10.15 to the Registrant's Quarterly Report on Form 10-Q for the fiscal
      quarter ended September 30, 2003).10.12
    Employment
      Contract Termination Agreement, dated August 9, 2004, by and between
      Michael E. Ricketson, the Registrant, and the Bank (incorporated by
      reference to Exhibit 10.12 to the Registrant's Quarterly Report on Form
      10-Q for the fiscal quarter ended September 30, 2004).21.1
    Subsidiaries
      of the Registrant.23.1
    Consent
      of Mauldin & Jenkins, LLC.31.1
    Rule
      13a-14(a) Certification of Chief Executive Officer31.2
    Rule
      13a-14(a) Certification of Chief Financial Officer32.1
    Section
      1350 Certification of Chief Executive Officer32.2
    Section
      1350 Certification of Chief Financial
Officer


71





**SIGNATURES**





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





**PAB
      BANKSHARES, INC.**Date:*March
      16, 2005*By:*/s/
      M. Burke Welsh, Jr*M.
      Burke Welsh, Jr.President
      and Chief Executive Officer








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





Signature
    
    Title
    
    Date*/s/
      R. Bradford Burnette*
    
    Director
    
    *March
      16, 2005*R.
      Bradford Burnette*/s/
      Walter W. Carroll II*
    
    Director
    
    *March
      16, 2005*Walter
      W. Carroll II*/s/
      James L. Dewar, Jr.*
    
    Director,
      Chairman
    
    *March
      16, 2005*James
      L. Dewar, Jr.*/s/
      Michael H. Godwin*
    
    Director
    
    *March
      16, 2005*Michael
      H. Godwin*/s/
      Bill J. Jones*
    
    Director
    
    *March
      16, 2005*Bill
      J. Jones*/s/
      James B. Lanier, Jr.*
    
    Director
    
    *March
      16, 2005*James
      B. Lanier, Jr.*/s/
      John E. Mansfield, Jr.*
    
    Director
    
    *March
      16, 2005*John
      E. Mansfield, Jr.*/s/
      Kennith D. McLeod*
    
    Director
    
    *March
      16, 2005*Kennith
      D. McLeod, CPA*/s/
      Paul E. Parker*
    
    Director
    
    *March
      16, 2005*Paul
      E. Parker*/s/
      F. Ferrell Scruggs, Sr.*
    
    Director
    
    *March
      16, 2005*F.
      Ferrell Scruggs, Sr.*/s/
      John M. Simmons*
    
    Director
    
    *March
      16, 2005*John
      M. Simmons*/s/
      Joe P. Singletary, Jr.*
    
    Director
    
    *March
      16, 2005*Joe
      P. Singletary, Jr.*/s/
      Donald J. Torbert, Jr.*
    
    Executive
      Vice President
    
    *March
      16, 2005*Donald
      J. Torbert, Jr., CPA
    
    and
      Chief Financial Officer(Principal
      Accounting Officer)*/s/
      M. Burke Welsh, Jr.*
    
    Director,
      President and
    
    *March
      16, 2005*M.
      Burke Welsh, Jr.
    
    Chief
      Executive Officer





72