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, 2003  Commission File Number 001-11823


_____________


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 o    No x





The number of shares outstanding of the registrants common stock at March 31, 2003 was 9,430,413 shares.







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TABLE OF CONTENTS





|                                                                         | Page
|------------------------------------------------------------------------ | ----
|                                                                         |     
|PART I        FINANCIAL INFORMATION                                      |     
|Item 1.     Consolidated Financial Statements (Unaudited)                |     
|Statements of Condition                                                  | 3   
|Statements of Income                                                     | 4   
|Statements of Comprehensive Income                                       | 5   
|Statements of Stockholders Equity                                       | 6   
|Statements of Cash Flows                                                 | 7   
|Notes to Consolidated Financial Statements                               | 9   
|Item 2.      Managements Discussion and Analysis of Financial Condition |     
|and Results of Operations                                                | 11  
|Item 3.      Qualitative and Quantitative Disclosures About Market Risk  | 18  
|Item 4.      Controls and Procedures                                     | 19  
|                                                                         |     
|PART IIOTHER INFORMATION                                                 |     
|Item 1.      Legal Proceedings                                           | None
|Item 2.      Changes in Securities and Use of Proceeds                   | None
|Item 3.      Defaults Upon Senior Securities                             | None
|Item 4.      Submissions of Matters to a Vote of Security Holders        | None
|Item 5.      Other Information                                           | None
|Item 6.      Exhibits and Reports on Form 8-K                            | 19  
|                                                                         |     
|SIGNATURES                                                               | 20  
|CERTIFICATIONS                                                           | 21  




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PART I. FINANCIAL INFORMATION





|PAB BANKSHARES, INC. AND SUBSIDIARIES                                               
|------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CONDITION                                                
|AS OF MARCH 31, 2003 AND DECEMBER 31, 2002                                          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|ASSETS                                                                              
|Cash and due from banks                                                             
|Interest-bearing deposits in other banks                                            
|Federal funds sold                                                                  
|Investment securities                                                               
|                                                                                    
|Loans                                                                               
|Allowance for loan losses                                                           
|                                                                                    
|Net loans                                                                           
|                                                                                    
|                                                                                    
|Premises and equipment                                                              
|Goodwill and other intangible assets                                                
|Cash value of bank-owned life insurance policies                                    
|Foreclosed assets                                                                   
|Other assets                                                                        
|                                                                                    
|                                                                                    
|Total assets                                                                        
|                                                                                    
|                                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                
|Deposits:                                                                           
|Noninterest-bearing demand                                                          
|Interest-bearing demand and savings                                                 
|Time                                                                                
|                                                                                    
|Total deposits                                                                      
|                                                                                    
|                                                                                    
|Federal funds purchased and securities sold under agreements to repurchase          
|Advances from the Federal Home Loan Bank of Atlanta                                 
|Guaranteed preferred beneficial interests in debentures (trust preferred securities)
|Other liabilities                                                                   
|                                                                                    
|Total liabilities                                                                   
|                                                                                    
|                                                                                    
|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,                           
|9,430,413 shares issued                                                             
|Additional paid-in capital                                                          
|Retained earnings                                                                   
|Accumulated other comprehensive income                                              
|                                                                                    
|Total stockholders equity                                                          
|                                                                                    
|                                                                                    
|Total liabilities and stockholders equity                                          
|                                                                                    
|                                                                                    
|See accompanying notes to consolidated financial statements.                        

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|PAB BANKSHARES, INC. AND SUBSIDIARIES                       
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                           
|THREE MONTHS ENDED MARCH 31, 2003 AND 2002                  
|(Unaudited)                                                 
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income:                                            
|Interest and fees on loans                                  
|Interest and dividends on investment securities:            
|Taxable                                                     
|Nontaxable                                                  
|Other interest income                                       
|                                                            
|Total interest income                                       
|                                                            
|                                                            
|Interest expense:                                           
|Interest on deposits                                        
|Interest on Federal Home Loan Bank advances                 
|Interest on other borrowings                                
|Other interest expense                                      
|                                                            
|Total interest expense                                      
|                                                            
|                                                            
|Net interest income                                         
|                                                            
|Provision for loan losses                                   
|                                                            
|Net interest income after provision for loan losses         
|                                                            
|                                                            
|Other income:                                               
|Service charges on deposit accounts                         
|Other fee income                                            
|Securities transactions, net                                
|Other noninterest income                                    
|                                                            
|Total other income                                          
|                                                            
|                                                            
|Other expenses:                                             
|Salaries and employee benefits                              
|Occupancy expense of premises                               
|Furniture and equipment expense                             
|Other noninterest expense                                   
|                                                            
|Total other expenses                                        
|                                                            
|                                                            
|Income before income tax expense                            
|Income tax expense                                          
|                                                            
|                                                            
|Net income                                                  
|                                                            
|                                                            
|Earnings per common share:                                  
|Basic                                                       
|                                                            
|Diluted                                                     
|                                                            
|                                                            
|See accompanying notes to consolidated financial statements.




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|PAB BANKSHARES, INC. AND SUBSIDIARIES                       
|------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME             
|THREE MONTHS ENDED MARCH 31, 2003 AND 2002                  
|(Unaudited)                                                 
|                                                            
|                                                            
|                                                            
|                                                            
|Net income                                                  
|                                                            
|Other comprehensive income (loss):                          
|Unrealized holding losses arising during the period, net of 
|tax benefit of $142,560 and $213,128                        
|Reclassification adjustment for (gains) losses included in  
|net income, net of tax (benefit) of $85,196 and ($4,976)    
|                                                            
|                                                            
|                                                            
|                                                            
|Comprehensive income                                        
|                                                            
|                                                            
|See accompanying notes to consolidated financial statements.

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|PAB BANKSHARES, INC. AND SUBSIDIARIES                                 
|----------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                       
|THREE MONTHS ENDED MARCH 31, 2003 AND ONE YEAR ENDED DECEMBER 31, 2002
|(Unaudited)                                                           
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Balance, December 31, 2001                                            
|Net income                                                            
|Other comprehensive income                                            
|Cash dividends declared,                                              
|$0.11 per share                                                       
|Stock options exercised                                               
|                                                                      
|Balance, December 31, 2002                                            
|Net income                                                            
|Other comprehensive loss                                              
|Cash dividends declared,                                              
|$0.03 per share                                                       
|                                                                      
|Balance, March 31, 2003                                               
|                                                                      
|                                                                      
|See accompanying notes to consolidated financial statements.          




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|PAB BANKSHARES, INC. AND SUBSIDIARIES                                 
|----------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                 
|THREE MONTHS ENDED MARCH 31, 2003 AND 2002                            
|(Unaudited)                                                           
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|CASH FLOWS FROM OPERATING ACTIVITIES                                  
|Net income                                                            
|Adjustments to reconcile net income to net cash                       
|provided by operating activities:                                     
|Depreciation, amortization and accretion, net                         
|Provision for loan losses                                             
|Net realized (gain) loss on securities transactions                   
|Net gain (loss) on disposal of assets                                 
|Net gain on sale of branch office                                     
|Increase in cash value of bank-owned life insurance                   
|Increase (decrease) in deferred compensation accrual                  
|Decrease in retirement accruals                                       
|Decrease in taxes receivable                                          
|Decrease in interest receivable                                       
|Decrease in interest payable                                          
|Net increase in prepaid expenses and other assets                     
|Net increase (decrease) in accrued expenses and other liabilities     
|                                                                      
|Net cash provided by operating activities                             
|                                                                      
|                                                                      
|CASH FLOWS FROM INVESTING ACTIVITIES                                  
|Decrease in interest-bearing deposits in other banks                  
|Increase (decrease) in Federal funds sold                             
|Purchase of securities available for sale                             
|Proceeds from sales and calls of securities available for sale        
|Proceeds from maturities and paydowns of securities available for sale
|Purchase of restricted and other equity investments                   
|Redemption of restricted and other equity investments                 
|Net decrease in loans                                                 
|Net proceeds from sale of branch office                               
|Purchase of premises and equipment                                    
|Proceeds from disposal of assets                                      
|                                                                      
|Net cash provided by investing activities                             
|                                                                      
|                                                                      
|CASH FLOWS FROM FINANCING ACTIVITIES                                  
|Net decrease in deposits                                              
|Net increase (decrease) in Federal funds purchased and                
|securities sold under repurchase agreements                           
|Payments on Federal Home Loan Bank advances                           
|Dividends paid                                                        
|Proceeds from the exercise of stock options                           
|Repurchase of preferred stock in REIT subsidiaries                    
|                                                                      
|Net cash used in financing activities                                 
|                                                                      
|                                                                      



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|PAB BANKSHARES, INC. AND SUBSIDIARIES                        
|-------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                        
|THREE MONTHS ENDED MARCH 31, 2003 AND 2002                   
|(Unaudited)                                                  
|                                                             
|                                                             
|                                                             
|                                                             
|Net increase (decrease) in cash and due from banks           
|                                                             
|Cash and due from banks at beginning of period               
|                                                             
|Cash and due from banks at end of period                     
|                                                             
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION            
|Cash paid during the period for:                             
|Interest                                                     
|                                                             
|Taxes                                                        
|                                                             
|NONCASH INVESTING AND FINANCING TRANSACTIONS                 
|Decrease in unrealized gains on securities available for sale
|                                                             
|See accompanying notes to consolidated financial statements. 







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





Banking Location
# of OfficesValdosta, 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
1McDonough, Henry County, Georgia
1Ocala, Marion County, Florida
2Oakwood, Hall County, Georgia
1Duluth, Gwinnett County, Georgia
1 (loan production office)





In addition to the banking products and services, the Bank offers brokerage, insurance, annuity, and investment planning services to its customers from its main office in Valdosta, Georgia.





The Company also owns PAB Bankshares Capital Trust I, a Delaware statutory business trust. This non-operating subsidiary was created in 2001 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company.





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, 2003 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 notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.





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





In preparing 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 in the near term relate to the determination of the allowance for loan losses, the valuation of goodwill, the valuation of foreclosed assets, and deferred taxes.


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PAB BANKSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)











NOTE 3. EARNINGS PER SHARE





The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2003 and 2002:





2003
2002Basic earnings per share:Net income

$
1,824,845

$
1,737,679Weighted average common shares outstanding


9,430,413


9,415,602Earnings per common share

$
0.19

$
0.18Diluted earnings per share:Net income

$
1,824,845

$
1,737,679Weighted average common shares outstanding


9,430,413


9,415,602Effect of dilutive stock options


46,232


50,506Weighted average diluted common shares outstanding


9,476,645


9,466,108Earnings per common share

$
0.19

$
0.18





NOTE 4. STOCK-BASED EMPLOYEE COMPENSATION





The Company accounts for grants of 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, 2003 and 2002 if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation , to stock-based employee compensation.





2003
2002Net income, as reported

$
1,824,845

$
1,737,679Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(57,476
)

(58,450
)Pro forma net income

$
1,767,369

$
1,679,229Earnings per share:Basic  as reported

$
0.19

$
0.18Basic  pro forma

$
0.19

$
0.18Diluted  as reported

$
0.19

$
0.18Diluted  pro forma

$
0.19

$
0.18


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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS





Some of the statements in this Quarterly Report on Form 10-Q, 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 under the federal securities laws. Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our charter consolidation plan, our entrance and expansion into higher growth markets, our other business strategies and other statements that are not historical facts. When we use words like anticipate, believe, intend, plan, expect, estimate, could, should, will, and similar expressions, you should consider them as identifying forward-looking statements. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduction in demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged; (5) costs or difficulties related to the integration of our businesses, including our charter consolidations, may be greater than expected; (6) expected cost savings associated with our charter consolidations may not be fully realized or realized within the expected time frame; (7) deposit attrition, customer loss or revenue loss following our charter consolidations may be greater than expected; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than us; (9) adverse changes may occur in the bond and equity markets; (10) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and (11) 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 Quarterly 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 Annual Consolidated Financial Statements and related Notes included in the Companys 2002 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.





On May 20, 2002, the Board of Directors adopted a Resolution requested by our primary federal regulator, the Federal Reserve Bank of Atlanta, which, among other things, restricts 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 is 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. This Resolution will remain in effect until removed by the regulators.





FINANCIAL CONDITION





During the three months ended March 31, 2003, total assets declined $31.1 million, or 4.2%, from $747.9 million at year end to $716.8 million at the end of the first quarter. Total loans decreased $7.5 million, or 1.3%, and total deposits decreased $19.0 million, or 3.1%, during the quarter. We also paid off $10.5 million in advances from the Federal Home Loan Bank of Atlanta (the FHLB).


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Overall, our loan volume for the quarter was steady but slower than anticipated. The $7.5 million decline reflected in the loan portfolio occurred during the last few weeks of the quarter as several large credits paid off. The decline in deposits is primarily the result of a $16.0 million decrease in time deposits during the quarter and the expected withdrawal of tax receipts deposited by local municipal authorities in December 2002.





Stockholders equity is 10.1% of total assets at quarter end. With the prior approval of our regulators, we declared a first quarter 2003 dividend of $0.03 per common share payable to stockholders of record on March 31, 2003.





RESULTS OF OPERATIONS





Net income for the three months ended March 31, 2003 was $1.83 million, or $0.19 per diluted share, as compared to $1.74 million, or $0.18 per diluted share, during the same period in 2002. The marginal $87,000 increase in net income is the net result of a $97,000 decrease in net interest income (or $79,000 on a taxable-equivalent basis), a $456,000 decrease in the provision for loan losses, a $25,000 decrease in other income, a $192,000 increase in other expenses, and a $55,000 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, 2003, net interest income on a taxable-equivalent basis was $6.87 million, or $79,000 less than our net interest income for the first quarter of 2002. Interest income decreased $2.56 million, while interest expense decreased $2.48 million.





Total interest income on a taxable-equivalent basis was $10.46 million, a 19.6% decrease compared to $13.02 million earned during the same period in 2002. The decrease in interest income was due to the combined effect of a $96.4 million decrease in average earning assets outstanding during the period and a 56 basis point decrease in the average yield earned on those earning assets during the period. The $69.3 million decline in average loans outstanding represented $1.27 million of the overall decrease in interest income for the quarter.





Total interest expense was $3.59 million, a 40.8% decrease compared to $6.07 million paid during the same period in 2002. The decrease in interest expense was due to the combined effect of a $106.1 million decrease in interest-bearing liabilities outstanding during the period and a 109 basis point decrease in the average rate paid on those interest-bearing liabilities during the period. The decline in rates is reflective of the decline in overall market rates since the first quarter of 2002. The $106.1 million decline in average time deposits outstanding represented $1.23 million of the overall decrease in interest expense for the quarter.





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 2003 was 4.15%, 48 basis points higher than our net interest margin of 3.67% during the same period in 2002. However, the margin for the first quarter of 2003 was slightly lower than the 4.18% margin earned during the fourth quarter of 2002. Our ability to maintain our net interest margin going forward will be a challenge as long as interest rates remain constant or slide even lower than the already historically low levels.





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 for the three months ended March 31, 2003 and 2002. 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.


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|For the Three Months Ended March 31, |  |                        | 2003    |  |   | 2002     | 
|------------------------------------ |  | ---------------------- | ------- |  | - | -------- | 
|                                     | 
|                                     |  |                        |         |  |   | Interest | 
|                                     |  |                        | Average |  |   | Income/  | 
|                                     |  |                        | Balance |  |   | Expense  | 
|                                     | 
|                                     |  | (Dollars In Thousands)
|Interest-earning assets:             |  |                        |         |  |   |          | 
|Loans                                |  | $                      | 554,638 |  | $ | 9,323    | 
|Investment securities:               |  |                        |         |  |   |          | 
|Taxable                              |  |                        | 89,785  |  |   | 953      | 
|Nontaxable                           |  |                        | 8,034   |  |   | 127      | 
|Other short-term investments         |  |                        | 19,070  |  |   | 57       | 
|                                     |  |                        |         |  |   |          | 
|Total interest-earning assets        |  | $                      | 671,527 |  | $ | 10,460   | 
|                                     |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 
|Interest-bearing liabilities:        |  |                        |         |  |   |          | 
|Demand deposits                      |  | $                      | 171,381 |  | $ | 449      | 
|Savings deposits                     |  |                        | 38,383  |  |   | 81       | 
|Time deposits                        |  |                        | 295,817 |  |   | 2,433    | 
|FHLB advances                        |  |                        | 34,324  |  |   | 445      | 
|Notes payable                        |  |                        | 10,000  |  |   | 131      | 
|Other short-term borrowings          |  |                        | 16,799  |  |   | 54       | 
|                                     |  |                        |         |  |   |          | 
|Total interest-bearing liabilities   |  | $                      | 566,704 |  | $ | 3,593    | 
|                                     |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 
|Interest rate spread                 |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 
|Net interest income                  |  |                        |         |  | $ | 6,867    | 
|                                     |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 
|Net interest margin                  |  |                        |         |  |   |          | 
|                                     |  |                        |         |  |   |          | 

Provision for Loan Losses


For the three months ended March 31, 2003, there was no provision for loan losses recorded, compared to $456,000 recorded in the same period in 2002. Based on our monthly assessments of the allowance for loan losses during the quarter, no provision was needed. No net new loan growth and no material change in the level of nonperforming loans or delinquent loans during the quarter were contributing factors in our assessments.





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




|As of Quarter End                                    |  | Mar-03                 | Dec-02 | Sep-02 | Jun-02 | Mar-02
|---------------------------------------------------- |  | ---------------------- | ------ | ------ | ------ | ------
|                                                     | 
|                                                     |  | (Dollars in Thousands)
|Loans accounted for on a nonaccrual basis            |  | $                      | 10,301 |        | $      | 10,378
|Accruing loans which are contractually past due      |  |                        |        |        |        |       
|90 days or more as to principal or interest payments |  |                        | -      |        |        | -     
|                                                     | 
|Total nonperforming loans                            |  | $                      | 10,301 |        | $      | 10,378
|                                                     | 
|Total nonperforming loans as a percentage of         |  |                        |        |        |        |       
|total loans                                          |  |                        | 1.88   | %      |        | 1.87  
|                                                     | 




Net charge-offs of $345,000 during the first quarter was a 30.7% decrease compared to $498,000 during the same period in 2002. When annualized, this level of charge-offs equates to 0.25% of average loans, compared to 1.06% for the 2002 fiscal year.


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At March 31, 2003, the allowance as a percent of total loans was 2.15%, compared to 2.18% at December 31, 2002. We consider the current level of the allowance for loan losses adequate to absorb losses from loans in the portfolio. 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.





Other Income


A summary of other noninterest income for the three months ended March 31, 2003 and 2002 follows:





For the Three Months Ended March 31,

2003
2002PercentAmount
Amount
Change(Dollars In Thousands)Noninterest income:Service charges on deposit accounts

$
1,246

$
1,293


-3.6
%Other fee income


512


459


11.5
%Securities transactions, net


251


(15
)

1773.3
%Other noninterest income


152


449


-66.1
%Total noninterest income

$
2,161

$
2,186


-1.1
%Noninterest income as a percentageof average assets


0.30
%

0.26
%





During the three months ended March 31, 2003, total other income was $2.16 million, a 1.1% decrease compared to the same period in 2002. Other fee income increased due primarily to fees earned from mortgage operations. Mortgage origination fees increased $33,000, or 16.6%, due to a continued increase in volume of mortgage originations and refinancings this quarter compared to the first quarter of 2002. Gains on the sale of securities during the quarter were taken based on market opportunities. The $297,000 decrease in other noninterest income is the result of a $34,000 decrease in earnings on bank-owned life insurance due to a lower return on those investments this quarter compared to 2002, a gain of $100,000 was recorded on the sale of a branch office in 2002, a net gain of $67,000 was recorded on the sale of other real estate owned during 2002 compared to a net loss of $5,000 in 2003, and an $88,000 refund was received from a vendor due to past billing discrepancies in 2002.




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Other Expenses


A summary of other noninterest expense for the three months ended March 31, 2003, and 2002 follows:





For the Three Months Ended March 31,

2003
2002PercentAmount
Amount
Change(Dollars In Thousands)Noninterest expenses:Salaries and wages

$
3,094

$
2,627


17.8
%Employee benefits


899


785


14.5
%Net occupancy expense of premises


435


405


7.4
%Furniture and equipment expense


587


605


-3.0
%Advertising and business development


99


113


-12.4
%Supplies and printing


152


185


-17.8
%Telephone and internet charges


142


146


-2.7
%Postage and courier


140


155


-9.7
%Legal and accounting fees


110


304


-63.8
%Other noninterest expense


647


788


-17.9
%Total noninterest expense

$
6,305

$
6,113


3.1
%Noninterest expense as a percentageof average assets


0.86
%

0.74
%





During the three months ended March 31, 2003, total other expense was $6.31 million, a 3.1% increase compared to the same period in 2002. The majority of the increase from 2002 is due to the 17.8% increase in salaries and wages and the corresponding 14.5% increase in employee benefits. Salary and wage expense increased $467,000 from the same period in 2002. Actual salaries and wages increased $241,000, or 9.5%, from the first quarter of 2002 due to annual raises and new hires. Deferred loan cost, a credit against salaries and wages, decreased $261,000, or 68.7%, from 2002 and resulted in an increase in expense reported during the period. The decline in the deferral of direct loan costs is due to a decline in loan volume experienced in the first quarter of 2003 compared to the first quarter of 2002.





Employee benefits increased $114,000 compared to the same period in 2002. Payroll taxes were up 25% due to the increase in salaries and wages. The 401k match and profit share expense increased 12.3% or $24,000, due to a change made during 2002 to the 401k plan on the entrance date for new employees. Health insurance increased 11.6% from the first quarter 2002 to the same quarter in 2003 due to an 11% increase in premiums from our health care provider. An additional expense for 2003 not incurred during the first quarter of 2002 was the Employee Stock Purchase Program (ESPP) match expense. The Company started the ESPP on July 1, 2002. 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 purchase. The ESPP match expense amounted to $23,000 for the first quarter of 2003.





Net occupancy expense increased 7.4% from the first quarter in 2002 to the same quarter in 2003. The majority of the increase is due to an additional $14,000 expense in utilities cost due in part to a new operations facility that opened in the second quarter of 2002. Legal and accounting fees were down 63.8% due to the expenses incurred in the first quarter of 2002 on the collection and recovery of problem loans and regulatory matters. The remaining expenses decreased due primarily to efficiencies gained from our charter consolidations and the centralization of back office operations and tighter cost controls.





Income Tax Expense


During the three months ended March 31, 2003, income tax expense was $854,000, a 6.8% increase compared to the same period in 2002. As a percentage of net income before taxes, income tax expense was 31.9% and 31.5% for the first quarters of 2003 and 2002, respectively.








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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.





The $19.0 million decline in deposits and the pay-off of $10.5 million in FHLB advances during the quarter reduced our overall level of liquidity, however our liquidity position is still sufficient to fund assets when needed and meet liability obligations when they come due. At March 31, 2003, our ratio of liquid assets (defined as the sum of cash and due from bank balances, interest-bearing deposits in other banks, Fed Funds sold, and investment securities) to total assets was 18.3%, compared to 20.7%, at December 31, 2002. It is our policy to maintain a ratio of liquid assets to total assets of at least 15%.





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 the instruments become payable. 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. 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, 2003 and December 31, 2002 are as follows:





Mar-03
Dec-02(Dollars In Thousands)Commitments to extend credit

$
52,604

$
70,351Standby letters of credit

$
1,368

$
1,445





At March 31, 2003, we had a total of $932,000 in construction in progress for a new branch building in Oakwood, Georgia. We opened the branch building on April 21, 2003 for a total cost of $1.4 million, including approximately $475,000 in land acquired during the first quarter of 2002. Management funded the balance of these expenditures with cash provided from operations in 2002 and 2003. There are no binding commitments for material cash expenditures outstanding.





Stockholders Equity


The Company maintains a ratio of stockholders equity to total assets that is considered adequate according to industry standards. The Company and the Bank are required to comply with capital adequacy standards established by banking regulators. At March 31, 2003, the Company and the Bank were in compliance with those standards. There are no conditions or events since quarter end that we believe have changed our capital ratings.





The following table summarizes the regulatory capital ratios of the Company and the Bank at March 31, 2003.





MinimumCompany

RegulatoryConsolidated
Bank
RequirementTotal Capital to Risk Weighted Assets


14.8
%

14.0
%

8.0
%Tier 1 Capital to Risk Weighted Assets


13.5
%

12.8
%

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


10.4
%

9.9
%

7.5
%*





* Under the provisions of our May 20, 2002 Resolution with the Federal Reserve Bank of Atlanta, the Bank is required to maintain a minimum Tier 1 Leverage Ratio of at least 7.5%.





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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 our 2002 Annual Report on Form 10-K. 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 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 cash flow assumptions or market conditions 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, 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 our earnings or financial position as of or for the quarter ended March 31, 2003.





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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 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 March 31, 2003, our one-year management-adjusted gap ratio of 1.56 was outside of our policy guidelines, however, this exception to policy was mitigated by our strategy to position our balance sheet to benefit from an increase in interest rates.





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. We believe the management-adjusted gap is a more accurate reflection of the interest rate risk in our balance sheet. The management-adjusted gap indicates we are highly asset sensitive in relation to changes in market interest rates in the short-term. Being asset sensitive would result in net interest income increasing in a rising rate environment and decreasing in a declining rate environment.





Cumulative Repricing Gap Analysis3-Month
6-Month
1-Year(Dollars in thousands)Regulatory DefinedRate Sensitive Assets (RSA)

$
327,477

$
358,849

$
429,889Rate Sensitive Liabilities (RSL)


313,090


369,296


459,210RSA minus RSL (Gap)

$
14,387

$
(10,447
)
$
(29,321
)Gap Ratio (RSA/RSL)


1.05


0.97


0.94Management-AdjustedRate Sensitive Assets (RSA)

$
360,416

$
419,852

$
525,657Rate Sensitive Liabilities (RSL)


122,979


179,186


337,610RSA minus RSL (Gap)

$
237,437

$
240,666

$
188,047Gap Ratio (RSA/RSL)


2.93


2.34


1.56





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 7.1% 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 21.9% 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. However, this exception was mitigated because a further 200 basis point drop was not realistic given that the federal funds rate stood at 1.25%. If market rates immediately fell by 100 basis points, a more plausible, however still unlikely scenario in our opinion, our model projected net interest income to decrease 9.9% 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


5.5
%

10.0
%+200 bps


4.7
%

7.1
%+100 bps


3.1
%

4.2
%-100 bps


-7.8
%

-9.9
%





ITEM 4. CONTROLS AND PROCEDURES





Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures. Based on that evaluation, the CEO and the CFO have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to this evaluation, there were no significant changes in the Companys internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses.











PART II. OTHER INFORMATION





ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K





(a)  Exhibits.





99.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act





99.2  Certification pursuant to Section 906 of the Sarbanes-Oxley Act





(b)  Reports on Form 8-K.





None.








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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 15, 2003
By:
*/s/ Michael E. Ricketson*Michael E. Ricketson,President and Chief Executive Officer Date: May 15, 2003
By:
*/s/ Donald J. Torbert, Jr.*Donald J. Torbert, Jr.Senior Vice President and Chief Financial Officer







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CERTIFICATION


I, Michael E. Ricketson, certify that:


1. I have reviewed this quarterly report on Form 10-Q of PAB Bankshares, Inc.;


2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;


3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash  flows of the registrant as of, and for, the periods presented in this quarterly report;


4.  The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;




b)  evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report; and




c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation;


5.  The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:




a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and


b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and


6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 15, 2003
By:
*/s/ Michael E. Ricketson*Michael E. Ricketson,President and Chief Executive Officer


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CERTIFICATION    I, Donald J. Torbert, Jr., certify that:   1.I have reviewed this quarterly report on Form 10-Q of PAB Bankshares, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report; and

c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 Date: May 15, 2003
By:
*/s/ Donald J. Torbert, Jr.*Donald J. Torbert, Jr.Senior Vice President and Chief Financial Officer


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