****


**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**


_____________


****


**FORM
10-Q**





**Quarterly
Report Pursuant to Section 13 or 15(d) of the**


**Securities
Exchange Act of 1934**





For the
Quarterly Period Ended March 31, 2005 - 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**








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 o





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


Yes x No o





The
number of shares outstanding of the registrant’s common stock at April 29, 2005
was 9,525,428 shares.













**TABLE
OF CONTENTS**





PagePART
      IFINANCIAL
      INFORMATIONItem
      1.
    
    Consolidated
      Financial Statements (Unaudited)Statements
      of Condition
    1Statements
      of Income
    2Statements
      of Comprehensive Income
    3Statements
      of Stockholders’ Equity
    4Statements
      of Cash Flows
    5Notes
      to Consolidated Financial Statements
    7Item
      2.
    
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    10Item
      3.
    
    Quantitative
      and Qualitative Disclosures About Market Risk
    18Item
      4.
    
    Controls
      and Procedures
    19PART
      IIOTHER
      INFORMATIONItem
      1.
    
    Legal
      Proceedings
    19Item
      2.
    
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    19Item
      3.
    
    Defaults
      Upon Senior Securities
    20Item
      4.
    
    Submissions
      of Matters to a Vote of Security Holders
    20Item
      5.
    
    Other
      Information
    20Item
      6.
    
    Exhibits
    20SIGNATURES
    20




i




**PART
I. FINANCIAL INFORMATION**
 **PAB
BANKSHARES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CONDITION**
 **AS
OF MARCH 31, 2005 AND DECEMBER 31, 2004**
 **March
      31,**
    
    **December
      31,****2005**
    
    **2004****(Unaudited)****ASSETS**Cash
      and due from banks
    
    $
    17,199,641
    
    $
    22,976,924Interest-bearing
      deposits in other banks
    
    
    16,320,672
    
    
    984,737Federal
      funds sold
    
    
    31,711,854
    
    
    32,616,121Investment
      securities
    
    
    125,241,277
    
    
    128,683,829Loans
    
    
    679,608,193
    
    
    646,149,340Allowance
      for loan losses
    
    
    (9,867,192
    )
    
    (9,066,566
    )Net
      loans
    
    
    669,741,001
    
    
    637,082,774Premises
      and equipment, net
    
    
    18,500,005
    
    
    18,812,209Goodwill
    
    
    5,984,604
    
    
    5,984,604Cash
      value of bank-owned life insurance policies
    
    
    10,816,703
    
    
    10,737,204Foreclosed
      assets
    
    
    532
    
    
    30,216Other
      assets
    
    
    11,614,879
    
    
    11,066,368Total
      assets
    
    $
    907,131,168
    
    $
    868,974,986**LIABILITIES
      AND STOCKHOLDERS' EQUITY**Deposits:Noninterest-bearing
      demand
    
    $
    104,633,976
    
    $
    99,627,825Interest-bearing
      demand and savings
    
    
    246,973,177
    
    
    224,836,339Time
    
    
    349,434,144
    
    
    333,086,272Total
      deposits
    
    
    701,041,297
    
    
    657,550,436Federal
      funds purchased and securities sold under agreements to
      repurchase
    
    
    8,411,803
    
    
    14,168,098Advances
      from the Federal Home Loan Bank of Atlanta
    
    
    98,737,694
    
    
    99,001,125Guaranteed
      preferred beneficial interests in debentures (trust preferred
      securities)
    
    
    10,310,000
    
    
    10,310,000Other
      liabilities
    
    
    7,044,779
    
    
    6,945,443Total
      liabilities
    
    
    825,545,573
    
    
    787,975,102**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; 9,525,428 and 9,495,320
      shares issued and outstanding
    
    
    1,217,065
    
    
    1,217,065Additional
      paid-in capital
    
    
    29,213,206
    
    
    29,143,017Retained
      earnings
    
    
    52,369,282
    
    
    50,938,254Accumulated
      other comprehensive loss
    
    
    (1,213,958
    )
    
    (298,452
    )Total
      stockholders' equity
    
    
    81,585,595
    
    
    80,999,884Total
      liabilities and stockholders' equity
    
    $
    907,131,168
    
    $
    868,974,986
  See
accompanying notes to consolidated financial
statements.





1





**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF INCOME**


**THREE
MONTHS ENDED MARCH 31, 2005 AND 2004**


**(Unaudited)****Three
      Months Ended March 31,****2005**
    
    **2004****Interest
      income:**Interest
      and fees on loans
    
    $
    10,836,772
    
    $
    8,251,198Interest
      and dividends on investment securities:Taxable
    
    
    1,296,825
    
    
    1,240,915Nontaxable
    
    
    81,899
    
    
    87,383Other
      interest income
    
    
    251,847
    
    
    7,788Total
      interest income
    
    
    12,467,343
    
    
    9,587,284**Interest
      expense:**Interest
      on deposits
    
    
    3,013,561
    
    
    1,954,982Interest
      on Federal Home Loan Bank advances
    
    
    682,882
    
    
    250,157Interest
      on other borrowings
    
    
    197,850
    
    
    224,912Total
      interest expense
    
    
    3,894,293
    
    
    2,430,051Net
      interest income
    
    
    8,573,050
    
    
    7,157,233**Provision
      for loan losses**
    
    
    460,200
    
    
    -Net
      interest income after provision for loan losses
    
    
    8,112,850
    
    
    7,157,233**Other
      income:**Service
      charges on deposit accounts
    
    
    922,055
    
    
    1,065,895Other
      fee income
    
    
    300,708
    
    
    380,410Securities
      transactions, net
    
    
    -
    
    
    1,596Other
      noninterest income
    
    
    124,618
    
    
    358,009Total
      other income
    
    
    1,347,381
    
    
    1,805,910**Other
      expenses:**Salaries
      and employee benefits
    
    
    3,490,325
    
    
    3,572,652Occupancy
      expense of premises
    
    
    469,207
    
    
    442,014Furniture
      and equipment expense
    
    
    503,152
    
    
    526,951Loss
      on early retirement of debt
    
    
    -
    
    
    -Other
      noninterest expense
    
    
    1,302,640
    
    
    1,183,912Total
      other expenses
    
    
    5,765,324
    
    
    5,725,529Income
      before income tax expense
    
    
    3,694,907
    
    
    3,237,614**Income
      tax expense**
    
    
    1,216,258
    
    
    1,111,333Net
      income
    
    $
    2,478,649
    
    $
    2,126,281**Earnings
      per common share:**Basic
    
    $
    0.26
    
    $
    0.22Diluted
    
    $
    0.26
    
    $
    0.22





See
accompanying notes to consolidated financial statements.




2




**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME**


**THREE
MONTHS ENDED MARCH 31, 2005 AND 2004**


**(Unaudited)****Three
      Months Ended March 31,****2005**
    
    **2004**Net
      income
    
    $
    2,478,649
    
    $
    2,126,281Other
      comprehensive income (loss):Unrealized
      holding gains (losses) arising during the period, net of tax (benefit) of
      ($471,625) and $463,916
    
    
    (915,506
    )
    
    900,542Reclassification
      adjustment for gains included in net income, net of tax of $0 and
      $543
    
    
    -
    
    
    (1,053
    )(915,506
    )
    
    899,489Comprehensive
      income
    
    $
    1,563,143
    
    $
    3,025,770





See
accompanying notes to consolidated financial statements.




3




**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY**


**THREE
MONTHS ENDED MARCH 31, 2005 (Unaudited) AND YEAR ENDED DECEMBER 31,
2004**


**Accumulated****Additional**
    
    
    
    **Other****Common
      Stock**
    
    **Paid-in**
    
    **Retained**
    
    **Comprehensive****Shares**
    
    **Par
      Value**
    
    **Capital**
    
    **Earnings**
    
    **Loss**
    
    **Total****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
    )
    
    80,999,884Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    2,478,649
    
    
    -
    
    
    2,478,649Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (915,506
    )
    
    (915,506
    )Cash
      dividends declared,$.11 per share
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,047,621
    )
    
    -
    
    
    (1,047,621
    )Stock
      acquired and cancelledunder stock repurchase
      plan
    
    
    (17,692
    )
    
    -
    
    
    (249,988
    )
    
    -
    
    
    -
    
    
    (249,988
    )Stock
      options exercised
    
    
    47,800
    
    
    -
    
    
    320,177
    
    
    -
    
    
    -
    
    
    320,177**Balance,
      March 31, 2005**
    
    
    9,525,428
    
    $
    1,217,065
    
    $
    29,213,206
    
    $
    52,369,282
    
    $
    (1,213,958
    )
    $
    81,585,595





See
accompanying notes to consolidated financial statements.




4




**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**THREE
MONTHS ENDED MARCH 31, 2005 AND 2004**


**(Unaudited)****Three
      Months Ended March 31,****2005**
    
    **2004****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      income
    
    $
    2,478,649
    
    $
    2,126,281Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      amortization and accretion, net
    
    
    545,317
    
    
    646,039Provision
      for loan losses
    
    
    460,200
    
    
    -Provision
      for deferred taxes
    
    
    -
    
    
    14,351Net
      realized gain on securities transactions
    
    
    -
    
    
    (1,596
    )(Gain)
      loss on disposal of assets
    
    
    2,518
    
    
    (10,075
    )Increase
      in cash value of bank-owned life insurance
    
    
    (79,499
    )
    
    (98,234
    )Decrease
      in deferred compensation accrual
    
    
    (3,682
    )
    
    (50,864
    )Decrease
      in retirement accruals
    
    
    (88,838
    )
    
    (98,271
    )Net
      change in taxes receivable and taxes payable
    
    
    1,216,258
    
    
    1,096,982(Increase)
      decrease in interest receivable
    
    
    (210,983
    )
    
    384,903Increase
      in interest payable
    
    
    419,818
    
    
    45,952Net
      increase in prepaid expenses and other assets
    
    
    (541,948
    )
    
    (514,585
    )Net
      decrease in accrued expenses and other liabilities
    
    
    (877,489
    )
    
    (836,685
    )Net
      cash provided by operating activities
    
    
    3,320,321
    
    
    2,704,198**CASH
      FLOWS FROM INVESTING ACTIVITIES**Increase
      in interest-bearing deposits in other banks
    
    
    (15,335,935
    )
    
    (249,658
    )(Increase)
      decrease in federal funds sold
    
    
    904,267
    
    
    (9,825,457
    )Purchase
      of debt securities
    
    
    (8,172,409
    )
    
    -Proceeds
      from sales and calls of debt securities
    
    
    6,800,000
    
    
    6,940,943Proceeds
      from maturities and paydowns of debt securities
    
    
    3,604,600
    
    
    4,997,794Purchase
      of equity investments
    
    
    (278,100
    )
    
    (324,700
    )Redemption
      of equity investments
    
    
    -
    
    
    600Net
      increase in loans
    
    
    (33,160,598
    )
    
    (11,286,498
    )Purchase
      of premises and equipment
    
    
    (117,944
    )
    
    (278,337
    )Proceeds
      from disposal of assets
    
    
    72,723
    
    
    1,397,552Net
      cash used in investing activities
    
    
    (45,683,396
    )
    
    (8,627,761
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES**Net
      increase (decrease) in deposits
    
    
    43,490,861
    
    
    (63,759
    )Net
      decrease in federal funds purchased and securities sold under repurchase
      agreements
    
    
    (5,756,295
    )
    
    (5,242,671
    )Advances
      from the Federal Home Loan Bank
    
    
    1,470,000
    
    
    6,848,400Payments
      on Federal Home Loan Bank advances
    
    
    (1,733,431
    )
    
    (136,062
    )Dividends
      paid
    
    
    (949,532
    )
    
    (661,418
    )Proceeds
      from the exercise of stock options
    
    
    320,177
    
    
    188,820Acquisition
      of stock under stock repurchase plans
    
    
    (249,988
    )
    
    -Repurchase
      of preferred stock in REIT subsidiaries
    
    
    (6,000
    )
    
    -Net
      cash provided by financing activities
    
    
    36,585,792
    
    
    933,310




5




**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**THREE
MONTHS ENDED MARCH 31, 2005 AND 2004 (Continued)**


**(Unaudited)****Three
      Months Ended March 31,****2005**
    
    **2004**Net
      decrease in cash and due from banks
    
    $
    (5,777,283
    )
    $
    (4,990,253
    )Cash
      and due from banks at beginning of period
    
    
    22,976,924
    
    
    22,920,218Cash
      and due from banks at end of period
    
    $
    17,199,641
    
    $
    17,929,965**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION**Cash
      paid during the period for:Interest
    
    $
    3,474,475
    
    $
    2,384,099Taxes
    
    $
    -
    
    $
    -**NONCASH
      INVESTING AND FINANCING TRANSACTIONS**Increase
      (decrease) in unrealized gains on securities available for
      sale
    
    $
    (1,387,131
    )
    $
    1,362,860




See
accompanying notes to consolidated financial statements.




6





**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**










**NOTE
1. 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)Atlanta,
      Cobb County, Georgia *
    
    1
      (loan production office)**Florida
      Market:**Ocala,
      Marion County, Florida
    
    1St.
      Augustine, St. Johns County, Florida
    
    1
      (loan production office)*
      opened April 1, 2005





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. 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
adoption of FASB Interpretation No. 46R 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 $109,000 and $115,000 as of March 31,
2005 and December 31, 2004, respectively.





7





**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**










**NOTE
2. BASIS OF PRESENTATION**





The
accompanying consolidated financial information of the Company is unaudited;
however, such information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and results of operations. The
results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the full year.
These statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2004.





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 conformity 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.








**NOTE
3. EARNINGS PER COMMON 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.





The
components used to calculate basic and diluted earnings per share for the three
months ended March 31, 2005 and 2004 follow.





**Three
      Months Ended March 31,****2005**
    
    **2004**Basic
      earnings per share:Net
      income
    
    $
    2,478,649
    
    $
    2,126,281Weighted
      average common shares outstanding
    
    
    9,498,988
    
    
    9,500,031Earnings
      per common share
    
    $
    0.26
    
    $
    0.22Diluted
      earnings per share:Net
      income
    
    $
    2,478,649
    
    $
    2,126,281Weighted
      average common shares outstanding
    
    
    9,498,988
    
    
    9,500,031Effect
      of dilutive stock options
    
    
    149,642
    
    
    189,549Weighted
      average diluted common shares outstanding
    
    
    9,648,630
    
    
    9,689,580Earnings
      per common share
    
    $
    0.26
    
    $
    0.22




8





**PAB
BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








**NOTE
4. STOCK-BASED EMPLOYEE COMPENSATION**





The
Company accounts for stock options under its stock option plans based on the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, *Accounting
for Stock Issued to Employees* , and
related Interpretations. The following table illustrates the effect on net
income and earnings per share for the three months ended March 31, 2005 and 2004
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.





**Three
      Months Ended March 31,****2005**
    
    **2004**Net
      income, as reported
    
    $
    2,478,649
    
    $
    2,126,281Deduct:Total
      stock-based employee compensation expense determined under fair value
      based method for all awards, net of related tax effects
    
    
    (42,964
    )
    
    (54,420
    )Pro
      forma net income
    
    $
    2,435,685
    
    $
    2,071,861Earnings
      per share:Basic
      - as reported
    
    $
    0.26
    
    $
    0.22Basic
      - pro forma
    
    $
    0.26
    
    $
    0.22Diluted
      - as reported
    
    $
    0.26
    
    $
    0.22Diluted
      - pro forma
    
    $
    0.25
    
    $
    0.21





9





**CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





Some of
the statements in this Report, including, without limitation, statements made
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. 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 or the volumes or values of loans made by The Park Avenue Bank; (3)
general economic conditions (both generally and in our markets) may be less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and/or a reduction in demand for credit; (4) legislative or
regulatory changes, including changes in accounting standards and compliance
requirements, may adversely affect the businesses in which we are engaged; (5)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than we can; (6) adverse
changes may occur in the bond and equity markets; (7) war or terrorist
activities may cause deterioration in the economy or cause instability in credit
markets; (8) restrictions or conditions imposed by our regulators on our
operations may make it more difficult for us to achieve our goals; and (9)
economic, governmental or other factors may prevent the projected population and
commercial growth in the countries and cities in which we operate.  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
2. 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 the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes included in this Report as
well as the Consolidated Financial Statements, related Notes, and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company’s 2004 Annual Report on Form 10-K, 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.





Our
operating subsidiary, The Park Avenue Bank, is a $905 million community bank
with 17 branches and three loan production offices in Georgia and Florida. We
have offices in both smaller, rural communities as well as larger, metropolitan
areas. We provide traditional banking products and services to commercial and
individual customers in our markets. Competition, regulation, credit risk, and
interest rate risk are the primary factors that we must manage in order to be
successful.





We
generally group our offices into three geographic regions for discussion
purposes due to the varying demographics of each market. Our offices in Lowndes,
Cook, Decatur, Grady, Bulloch, Appling and Jeff Davis counties are collectively
referred to as our “South Georgia” market. Our offices in Henry, Hall, Clarke
and Cobb counties are referred to collectively as our “North Georgia” market.
Our offices in Marion and St. Johns counties are collectively referred to as our
“Florida” market. In addition, our corporate assets, correspondent bank account
balances, investment portfolio, out-of-market participation loans, insider loans
and insider deposits, borrowings, etc. are reported at the corporate level, in
what we refer to as the “Treasury”.





10





**FINANCIAL
CONDITION**





The
Company’s total assets increased $38.2 million, or 4.4%, during the three months
ended March 31, 2005 to $907.1 million. This growth was fueled by a $43.5
million, or 6.6%, increase in deposits. We had a $27.2 million, or 8.4%,
increase in demand and savings deposit accounts during the quarter due to $5.1
million in additional municipal deposits and also an expanded effort that began
early in the fourth quarter of 2004 to increase market share in our communities.
In addition, we had a $16.3 million, or 4.9%, increase in time deposits during
the quarter. The increase in time deposits is net of a $2.2 million decrease in
brokered deposits. The additional deposits were used to fund $33.5 million, or
5.2%, in net new loan growth during the quarter. The loan growth came primarily
from recording $32.0 million, or 19.2%, in additional construction and
development loans during the quarter on strong demand in several of our markets.
Total loans have increased $131.4 million, or 23.9%, since March 31,
2004.





The table
below summarizes our loan portfolio by loan type as of the end of each of the
last five quarters.





As
      of Quarter End
    
    Mar-05
    
    Dec-04
    
    Sep-04
    
    Jun-04
    
    Mar-04(Dollars
      In Thousands)Commercial
      and financial
    
    $
    54,512
    
    $
    59,703
    
    $
    54,472
    
    $
    50,151
    
    $
    51,250Agricultural
      (including loans secured by farmland)
    
    
    27,237
    
    
    26,704
    
    
    30,076
    
    
    27,005
    
    
    24,091Real
      estate - construction
    
    
    198,815
    
    
    166,854
    
    
    142,744
    
    
    114,794
    
    
    114,907Real
      estate - mortgage (commercial and residential)
    
    
    380,180
    
    
    375,222
    
    
    351,547
    
    
    340,081
    
    
    334,879Installment
      loans to individuals and other loans
    
    
    20,585
    
    
    19,552
    
    
    22,366
    
    
    23,193
    
    
    24,845681,329
    
    
    648,035
    
    
    601,205
    
    
    555,224
    
    
    549,972Deferred
      loan fees and unearnedinterest, net
    
    
    (1,721
    )
    
    (1,886
    )
    
    (755
    )
    
    (700
    )
    
    (823
    )679,608
    
    
    646,149
    
    
    600,450
    
    
    554,524
    
    
    549,149Allowance
      for loan losses
    
    
    (9,867
    )
    
    (9,066
    )
    
    (9,562
    )
    
    (9,609
    )
    
    (9,730
    )$
    669,741
    
    $
    637,083
    
    $
    590,888
    
    $
    544,915
    
    $
    539,419





Stockholders’
equity was 9.0% of total assets at quarter end. Total equity increased $0.6
million, or 0.7%, since December 31, 2004. The $2.5 million in earnings was
offset by $1.0 million in dividends and a $0.9 million decrease in the market
value of our securities portfolio, net of tax, during the quarter. We declared
an $0.11 per common share dividend for the first quarter 2005, a 10% increase
over the $0.10 per common share dividend paid for the fourth quarter of
2004.





**RESULTS
OF OPERATIONS**





Net
income for the three months ended March 31, 2005 was $2.48 million, or $0.26 per
diluted share, as compared to $2.13 million, or $0.22 per diluted share, during
the same period in 2004. The $352,000, or 16.6%, increase in net income is the
net result of a $1,416,000 increase in net interest income (or $1,413,000 on a
taxable-equivalent basis) offset by a $460,000 increase in the provision for
loan losses, a $459,000 decrease in other income, a $40,000 increase in other
expenses, and a $105,000 increase in income tax expense.





The
reasons for these changes are discussed in more detail below.





*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. For the three months ended March 31, 2005,
our net interest income on a taxable-equivalent basis was $8.62 million, a 19.6%
increase over the $7.20 million in net interest income for the first quarter of
2004. The increase in net interest income is due to an increase in volume and an
increase in interest rates. During the first quarter of 2005, our average
earning assets were 22.4% higher compared to the same period in 2004. The
average balances of our interest-bearing liabilities increased by 26.4% to fund
the asset growth. As short-term interest rates rose during the second half of
2004 and into the first quarter of 2005, the average yield on our earning assets
increased 29 basis points from 5.80% during the first quarter of 2004, to 6.09%
for the first quarter of 2005. However, the average rates paid for our funds
increased 49 basis points from 1.77% during the first quarter of 2004, to 2.26%
for the first quarter of 2005, and as a result, our net interest spread
tightened by 20 basis points from 4.03% during the first quarter of 2004, to
3.83% for the same period in 2005.





11





The net
interest margin is net interest income expressed as a percentage of average
earning assets. Our net interest margin for the first quarter of 2005 was 4.19%,
4 basis points higher than our net interest margin of 4.15% for the fourth
quarter of 2004, but 15 basis points lower than the 4.34% recorded for the first
quarter of 2004 due to the tighter net interest spread mentioned above. As we
grow the balance sheet, we expect to continue to have tighter net interest
spreads. A flat interest rate curve and incrementally higher cost of funds
needed for such growth will also have an impact on our
profitability.





The
following tables detail the average balances of interest-earning assets and
interest-bearing liabilities, the amount of interest earned and paid, and the
average yields and rates for the three months ended March 31, 2005 and 2004.
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 Three Months Ended March 31,
    
    2005
    
    
    
    
    
    2004Interest
    
    Average
    
    
    
    Interest
    
    AverageAverage
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(Dollars
      In Thousands)Interest-earning
      assets:Loans
    
    $
    665,750
    
    $
    10,836
    
    
    6.60
    %
    $
    541,549
    
    $
    8,251
    
    
    6.13
    %Investment
      securities:Taxable
    
    
    117,117
    
    
    1,297
    
    
    4.49
    %
    
    113,459
    
    
    1,241
    
    
    4.40
    %Nontaxable
    
    
    8,395
    
    
    124
    
    
    6.00
    %
    
    8,802
    
    
    132
    
    
    6.05
    %Other
      short-term investments
    
    
    42,189
    
    
    252
    
    
    2.42
    %
    
    3,707
    
    
    8
    
    
    0.85
    %Total
      interest-earning assets
    
    $
    833,451
    
    $
    12,509
    
    
    6.09
    %
    $
    667,517
    
    $
    9,632
    
    
    5.80
    %Interest-bearing
      liabilities:Demand
      deposits
    
    $
    193,108
    
    $
    496
    
    
    1.04
    %
    $
    165,252
    
    $
    255
    
    
    0.62
    %Savings
      deposits
    
    
    42,453
    
    
    63
    
    
    0.60
    %
    
    40,675
    
    
    56
    
    
    0.55
    %Time
      deposits
    
    
    343,035
    
    
    2,454
    
    
    2.90
    %
    
    255,192
    
    
    1,645
    
    
    2.59
    %FHLB
      advances
    
    
    98,694
    
    
    683
    
    
    2.81
    %
    
    45,873
    
    
    250
    
    
    2.19
    %Notes
      payable
    
    
    10,310
    
    
    168
    
    
    6.60
    %
    
    10,000
    
    
    126
    
    
    5.09
    %Other
      short-term borrowings
    
    
    9,711
    
    
    30
    
    
    1.25
    %
    
    34,549
    
    
    98
    
    
    1.14
    %Total
      interest-bearing liabilities
    
    $
    697,311
    
    $
    3,894
    
    
    2.26
    %
    $
    551,541
    
    $
    2,430
    
    
    1.77
    %Interest
      rate spread
    
    
    
    
    
    
    
    
    3.83
    %
    
    
    
    
    
    
    
    4.03
    %Net
      interest income
    
    
    
    
    $
    8,615
    
    
    
    
    
    
    
    $
    7,202Net
      interest margin
    
    
    
    
    
    
    
    
    4.19
    %
    
    
    
    
    
    
    
    4.34
    %





*Provision
for Loan Losses*


At March
31, 2005, the allowance for loan losses as a percent of total loans was 1.45%,
compared to 1.40% at December 31, 2004. The increase is due to the addition of
$460,000 in provision expense and $340,000 in net recoveries of previous bad
debts during the quarter. Our nonperforming assets increased $3.06 million, or
88%, during the quarter from $3.47 million at year end to $6.53 million as of
March 31, 2005. The increase is due to the placing of a $5.7 million line on
nonaccrual status during the quarter. We upgraded nearly $2 million in loans
previously reported as troubled debt restructurings during the quarter due to
their satisfactory performance over the past two years.





12





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. We have a comprehensive methodology for
determining the adequacy of our allowance for loan losses. This methodology
includes an assessment for specific valuations on larger loan lines and
nonperforming loans, and an assessment based on environmental factors applied to
other homogenous groups of otherwise performing loans.





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.





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.





The table
below summarizes our levels of nonperforming loans over the past five
quarters.





As
      of Quarter End
    
    Mar-05
    
    Dec-04
    
    Sep-04
    
    Jun-04
    
    Mar-04(Dollars
      In Thousands)Loans
      accounted for on a nonaccrual basis
    
    $
    6,531
    
    $
    1,417
    
    $
    3,857
    
    $
    4,484
    
    $
    4,868Accruing
      loans which are contractually past due 90 days or more as to principal or
      interest payments
    
    
    6
    
    
    11
    
    
    10
    
    
    9
    
    
    -Troubled
      debt restructurings not included above
    
    
    -
    
    
    2,045
    
    
    2,170
    
    
    2,179
    
    
    2,188Other
      impaired loans
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      nonperforming loans
    
    $
    6,537
    
    $
    3,473
    
    $
    6,037
    
    $
    6,672
    
    $
    7,056Total
      nonperforming loans as a percentage of total loans
    
    
    0.96
    %
    
    0.54
    %
    
    1.00
    %
    
    1.20
    %
    
    1.28
    %





13





*Other
Income*


A summary
of noninterest income follows:





For
      the Three Months Ended March 31,
    
    2005
    
    2004PercentAmount
    
    Amount
    
    Change(Dollars
      In Thousands)Noninterest
      income:Service
      charges on deposit accounts
    
    $
    922
    
    $
    1,066
    
    
    -13.5
    %Mortgage
      origination fees
    
    
    105
    
    
    103
    
    
    1.9
    %Securities
      transactions, net
    
    
    -
    
    
    2
    
    
    -100.0
    %Gain
      on sale of financial services operation
    
    
    -
    
    
    200
    
    
    -100.0
    %Earnings
      on bank-owned life insurance
    
    
    79
    
    
    98
    
    
    -19.4
    %Gain
      (loss) on disposal of assets
    
    
    (3
    )
    
    10
    
    
    -130.0
    %Other
      noninterest income
    
    
    244
    
    
    327
    
    
    -25.4
    %Total
      noninterest income
    
    $
    1,347
    
    $
    1,806
    
    
    -25.4
    %Noninterest
      income (annualized) as a percentage of average assets
    
    
    0.60
    %
    
    0.99
    %





Service
charges on deposit accounts decreased due to a continued decline in the volume
of overdraft and non-sufficient funds charges. Earnings on bank-owned life
insurance decreased primarily as a result of a lower rate of return on these
policies compared to 2004. In February of 2004 we recorded a one-time gain of
$200,000 on the sale of our financial services operation. We will, however,
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. Other
noninterest income decreased $83,000, due largely to the absence of income from
our financial services operation, we recorded $116,000 in brokerage fees for the
first quarter of 2004 and compared to $3,000 in the first quarter of 2005.
Excluding the brokerage fees, other noninterest income increased $30,000 for the
first quarter of 2005 compared to 2004.





*Other
Expenses*


A summary
of noninterest expense follows:





For
      the Three Months Ended March 31,
    
    2005
    
    2004PercentAmount
    
    Amount
    
    Change(Dollars
      In Thousands)Noninterest
      expenses:Salaries
      and wages
    
    $
    3,125
    
    $
    2,886
    
    
    8.3
    %Deferred
      loan costs
    
    
    (391
    )
    
    (169
    )
    
    131.4
    %Employee
      benefits
    
    
    756
    
    
    856
    
    
    -11.7
    %Net
      occupancy expense of premises
    
    
    469
    
    
    442
    
    
    6.1
    %Furniture
      and equipment expense
    
    
    503
    
    
    527
    
    
    -4.6
    %Advertising
      and business development
    
    
    127
    
    
    107
    
    
    18.7
    %Supplies
      and printing
    
    
    115
    
    
    121
    
    
    -5.0
    %Telephone
      and internet charges
    
    
    85
    
    
    78
    
    
    9.0
    %Postage
      and courier
    
    
    175
    
    
    142
    
    
    23.2
    %Legal
      and accounting fees
    
    
    107
    
    
    60
    
    
    78.3
    %Service
      charges and fees
    
    
    127
    
    
    118
    
    
    7.6
    %Other
      noninterest expense
    
    
    567
    
    
    558
    
    
    1.6
    %Total
      noninterest expense
    
    $
    5,765
    
    $
    5,726
    
    
    0.7
    %Noninterest
      expense (annualized) as a percentage of average assets
    
    
    2.58
    %
    
    3.14
    %




14




Salaries
and wages expense and employee benefits were up for the quarter due primarily to
the increase in the number of full-time equivalents from 275 in March of 2004 to
287 in March of 2005. We have hired several experienced lenders in our
high-growth markets as we continue our growth in these areas. Deferred loan
cost, a credit against salaries and wages, increased and resulted in a decrease
in expense reported during the period. The increase in the deferral of direct
loan costs is due to an increase in loan volume experienced during 2005 compared
to the same period in 2004.





Furniture
and equipment expense decreased primarily due to a $42,000 decrease in
depreciation expense from March 31, 2004 to March 31, 2005. Occupancy costs as
of March 31, 2005 increased from March 31, 2004 because of the combination of
opening a branch office in Stockbridge Georgia during the second half of 2004
and annual inflationary-type increases in insurance, maintenance costs, and
property taxes.





Advertising
and business development expense increased due to our focus on marketing and
growing our franchise. Legal and accounting fees increased due to expenses
associated with higher audit fees and Sarbanes-Oxley legislation.





Other
noninterest expense increased 1.6% from the first quarter of 2004 to the first
quarter of 2005. However, various expenses that comprise this line item changed
more significantly. The cost of acquiring, maintaining and repairing foreclosed
other real estate owned and other repossessed property included in other
noninterest expense decreased $106,000, or 93.8%. This decline is due to the
slow down in the number of repossessions and foreclosures on real estate during
the period. Directors’ fees and expenses increased $21,000, or 27.6%, due to a
new quarterly director compensation plan started in 2005. Outside consulting
fees increased $44,000, or 169.2%, due primarily to pre-employment recruiting
fees of $48,000 spent in the first quarter of 2005 to hire the new employees
mentioned above, compared to $6,000 spent in the first quarter of
2004.





*Income
Tax Expense*


As a
percentage of net income before taxes, income tax expense was 32.9% and 34.3%
for the three-month periods ended March 31, 2005 and 2004, respectively.








**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 March
31, 2005, our ratio of liquid assets (defined as the sum of cash and due from
bank balances, interest-bearing deposits in other banks, federal funds sold, and
investment securities) to total assets was 20.11%, compared to 18.71% at
December 31, 2004. It is our policy to maintain a ratio of liquid assets to
total assets of at least 15%.





We funded
the $33.5 million growth in loans and a $5.8 million decrease in repurchase
agreements during the first quarter of 2005 by utilizing $43.5 million in
deposit growth, and a $3.4 million decrease in investments, thus increasing our
cash, interest bearing deposits and federal funds by $8.7 million. We will
continue our strategy of being more aggressive with our in-market deposit
campaigns in an effort to reduce our dependency on non-core
funding.





During
the fourth quarter of 2004, the Bank entered into a new borrowing agreement with
the FHLB. This new agreement has allowed the Bank to pledge qualifying
commercial real estate loans, home equity loans, and multi-family residential
mortgages as collateral on its advances in addition to the FHLB’s current liens
on our one-to-four family mortgages and our investment securities held in
safekeeping by the FHLB. The pledge of additional collateral has given the Bank
the ability to continue to use FHLB advances for future liquidity
needs.





There are
no binding commitments for material cash expenditures outstanding at this
time.




15





*Contractual
Obligations*


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


Less
      than
    
    1
      to 3
    
    3
      to 5
    
    More
      thanContractual
      Obligations
    
    Total
    
    1
      year
    
    years
    
    years
    
    5
      years(Dollars
      In Thousands)Federal
      Home Loan Bank of Atlanta Advances
    
    $
    98,738
    
    $
    16,885
    
    $
    14,208
    
    $
    15,408
    
    $
    52,237Operating
      Lease Obligations
    
    
    606
    
    
    141
    
    
    314
    
    
    151
    
    
    -Guaranteed
      Preferred Beneficial Interests in Debentures
    
    
    10,310
    
    
    -
    
    
    -
    
    
    -
    
    
    10,310$
    109,654
    
    $
    17,026
    
    $
    14,522
    
    $
    15,559
    
    $
    62,547





*Off
Balance Sheet Arrangements*


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. Such financial instruments are included in the financial statements
when funds are distributed or when the instruments become payable. Our exposure
to credit loss in the event of nonperformance by the other party to a financial
instrument for commitments to extend credit, standby letters of credit and
credit card commitments is represented by the contractual amount of those
instruments. We use the same credit policies in making commitments as we do for
on-balance sheet instruments. Although these amounts do not necessarily
represent future cash requirements, a summary of our commitments as of March 31,
2005 and December 31, 2004 are as follows:





Mar-05
    
    Dec-04Commitments
      to extend credit
    
    $
    144,871,000
    
    $
    118,155,000Standby
      letters of credit
    
    $
    5,595,000
    
    $
    5,735,000





*Stockholders’
Equity*


The
Company maintains a ratio of stockholders’ equity to total assets that is
considered adequate according to regulatory standards. The Company and the Bank
are required to comply with capital adequacy standards established by our
regulators. At March 31, 2005, the Company and the Bank were in compliance with
those standards. There are no conditions or events since quarter end that we
believe have materially changed our regulatory capital ratios.





The
following table summarizes the regulatory capital ratios of the Company and the
Bank at March 31, 2005.





MinimumCompany
    
    
    
    RegulatoryConsolidated
    
    Bank
    
    RequirementTotal
      Capital to Risk Weighted Assets
    
    
    13.1
    %
    
    12.8
    %
    
    8.0
    %Tier
      1 Capital to Risk Weighted Assets
    
    
    11.8
    %
    
    11.6
    %
    
    4.0
    %Tier
      1 Capital to Average Assets (Leverage Ratio)
    
    
    9.8
    %
    
    9.6
    %
    
    4.0
    %





On May
25, 2004, the Company announced a plan to repurchase up to 400,000 shares of the
Company’s common stock over the next twelve-month period. The Company plans to
use cash on hand to repurchase its shares on the open market. At March 31, 2005,
the Company had $4.15 million in cash on hand. During the first quarter of 2005,
17,692 shares had been repurchased at an average price of $14.13. The expiration
date for this plan is May 25, 2005.





16





**CRITICAL
ACCOUNTING ESTIMATES**





The
preparation of financial statements and the related disclosures in conformity
with accounting principles generally accepted in the United States requires that
management make estimates and assumptions which affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. We believe that our determination of the allowance for loan losses
and the fair value of assets, including the impairment of goodwill, affect our
most significant judgments and estimates used in the preparation of our
consolidated financial statements. The
Company’s accounting policies are described in detail in Note 1 of our
Consolidated Financial Statements provided in Item 8 of our 2004 Annual Report
on Form 10-K. The following is a brief description of the Company’s critical
accounting estimates 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.





*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 or will have had a material impact on our earnings or financial position as
of or for the quarter ended March 31, 2005.





17





**ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK**





We are
subject to exposure to 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 the current environment of rising
interest rates, the Company has exceeded policy limits by adjusting the balance
sheet to a more asset-sensitive position. At March 31, 2005, our one-year
management-adjusted gap ratio of 1.65 was outside of our policy guidelines,
however, this exception to policy was part of our strategy to position our
balance sheet to benefit from the increase in interest rates.





The table
below has two gap ratio measurements, regulatory and management-adjusted. The
regulatory gap ratio considers only contractual maturities or repricings. The
management-adjusted gap ratio 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. We believe the
management-adjusted gap ratio is a more accurate reflection of the interest rate
risk in our balance sheet. The management-adjusted gap ratio 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.





3-Month
    
    6-Month
    
    1-Year(Dollars
      In Thousands)*Regulatory
      Defined*Rate
      Sensitive Assets (RSA)
    
    $
    617,123
    
    $
    625,629
    
    $
    637,735Rate
      Sensitive Liabilities (RSL)
    
    
    543,869
    
    
    563,389
    
    
    588,258RSA
      minus RSL (Gap)
    
    $
    73,254
    
    $
    62,240
    
    $
    49,477Gap
      Ratio (RSA/RSL)
    
    
    1.13
    
    
    1.11
    
    
    1.08*Management-Adjusted*Rate
      Sensitive Assets (RSA)
    
    $
    548,248
    
    $
    593,731
    
    $
    655,503Rate
      Sensitive Liabilities (RSL)
    
    
    160,140
    
    
    218,071
    
    
    396,630RSA
      minus RSL (Gap)
    
    $
    388,108
    
    $
    375,660
    
    $
    258,873Gap
      Ratio (RSA/RSL)
    
    
    3.42
    
    
    2.72
    
    
    1.65





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 quarter end, the simulation model projected net interest income
would increase 14.56% 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 19.88% 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 quarter end. If market rates immediately fell by 100
basis points, a more possible but still unlikely scenario, our model projected
net interest income to decrease 7.76% over the next year. During the first
quarter of 2005, the federal funds rate was increased twice by 25 basis points,
from 2.25% to 2.75%. As our interest sensitivity analysis shows, we expect the
rise in rates will help to increase our net interest income in future
periods.





18





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
      Rate
      Change
    Effect
      on Net Interest IncomeGradual
    Immediate+300
      bps
    14.34%
    20.41%+200
      bps
    12.05%
    14.56%+100
      bps
    6.87%
    7.39%-100
      bps
    -7.13%
    -7.76%


****


**ITEM
4. CONTROLS AND PROCEDURES**





A review
and evaluation was performed by the Company’s management, including the
Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report. Based on that review and evaluation, the CEO and CFO have
concluded that the Company’s current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company’s internal controls over financial reporting or in other factors
that could significantly affect the Company’s internal controls subsequent to
the date of their evaluation. There were no material weaknesses identified in
the course of such review and evaluation and, therefore, no corrective measures
were taken by the Company.







**PART
II. OTHER INFORMATION**




**ITEM
1. LEGAL PROCEEDINGS**





None








**ITEM
2. UNREGISTERED SALE OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES**





Total
      numberof
      sharespurchased
    
    Averageprice
      paidper
      share
    
    Number
      of sharespurchased
      as part ofpublicly
      announcedplans
      or programs
    
    Maximum
      number ofshares
      that may yet bepurchased
      under theplans
      or programs1January
    
    
    -
    
    $
    -
    
    
    -
    
    
    -February
    
    
    -
    
    
    -
    
    
    -
    
    
    -March
    
    
    17,692
    
    
    14.13
    
    
    17,692
    
    
    336,008Total
    
    
    17,692
    
    $
    14.13
    
    
    17,692
    
    
    336,008





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.





19





**ITEM
3. DEFAULTS UPON SENIOR SECURITIES**





None








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





None








**ITEM
5. OTHER INFORMATION**





None








**ITEM
6. EXHIBITS**





31.1
    
    Rule
      13a-14(a) Certification of CEO31.2
    
    Rule
      13a-14(a) Certification of CFO32.1
    
    Section
      1350 Certification of CEO32.2
    
    Section
      1350 Certification of CFO










**SIGNATURES**





Pursuant
to the requirements 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.**RegistrantDate:
    ***May
      10, 2005***
    
    By:
    ***/s/
      M. Burke Welsh, Jr.***M.
      Burke Welsh, Jr.President
      and Chief Executive Officer(principal
      executive officer of the registrant)Date:
    ***May
      10, 2005***
    
    By:
    ***/s/
      Donald J. Torbert, Jr.***Donald
      J. Torbert, Jr.Executive
      Vice President and Chief Financial Officer(principal
      financial officer of the registrant)




20