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 September 30, 2003  Commission File Number 1-11823


_____________




PAB BANKSHARES, INC.


(A Georgia Corporation)


IRS Employer Identification Number: 58-1473302





3250 North Valdosta Road, Valdosta, Georgia 31602


Telephone Number: (229) 241-2775








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 October 31, 2003 was 9,477,810 shares.






-1-


TABLE OF CONTENTS




PagePART IFINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)Statements of Condition
3Statements of Income
4Statements of Comprehensive Income
5Statements of Stockholders Equity
6Statements of Cash Flows
7Notes to Consolidated Financial Statements
9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
12Item 3. Quantitative and Qualitative Disclosures About Market Risk
22Item 4. Controls and Procedures
23PART IIOTHER INFORMATIONItem 1. Legal Proceedings
NoneItem 2. Changes in Securities and Use of Proceeds
NoneItem 3. Defaults Upon Senior Securities
NoneItem 4. Submissions of Matters to a Vote of Security Holders
NoneItem 5. Other Information
NoneItem 6. Exhibits and Reports on Form 8-K
24SIGNATURES
25




-2-





PART I.   FINANCIAL INFORMATION





PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONDITIONAS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002**September 30,**


December 31,2003


2002**(Unaudited)**ASSETSCash and due from banks

$
22,513,973

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


587,733


974,848Federal funds sold


78,505


30,784,000Investment securities


139,361,005


98,025,604Loans


531,551,168


555,238,242Allowance for loan losses


(10,425,900
)

(12,096,988
)Net loans


521,125,268


543,141,254Premises and equipment


21,208,632


22,555,234Goodwill and other intangible assets


5,984,604


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


10,304,872


9,950,135Foreclosed assets


3,918,191


1,284,487Other assets


10,632,578


10,011,854Total assets

$
735,715,361

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

$
93,621,857

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


202,563,259


213,981,795Time


267,227,215


305,081,383Total deposits


563,412,331


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


36,998,203


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


44,822,678


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


10,000,000


10,000,000Other liabilities


6,071,064


6,251,175Total liabilities


661,304,276


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


-


-Common stock, no par value, 98,500,000 shares authorized,9,452,584 and 9,430,413 shares issued


1,217,065


1,217,065Additional paid-in capital


28,995,232


28,785,476Retained earnings


44,428,662


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


(229,874
)

1,033,870Total stockholders equity


74,411,085


71,264,738Total liabilities and stockholders equity

$
735,715,361

$
747,911,298




See accompanying notes to consolidated financial statements.






-3-




PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Unaudited)Three Months Ended
Nine Months EndedSeptember 30,
September 30,2003


2002


2003


2002Interest income:Interest and fees on loans

$
8,521,776

$
10,306,013

$
26,798,566

$
32,438,478Interest and dividends on investment securities:Taxable


1,247,202


1,065,323


3,197,544


3,720,168Nontaxable


93,317


78,180


265,731


180,980Other interest income


29,857


169,675


121,592


385,372Total interest income


9,892,152


11,619,191


30,383,433


36,724,998Interest expense:Interest on deposits


2,395,535


3,904,190


8,038,205


13,642,637Interest on Federal Home Loan Bank advances


373,072


501,455


1,214,891


1,513,682Interest on other borrowings


122,255


146,908


380,948


466,251Other interest expense


81,052


74,763


185,287


223,909Total interest expense


2,971,914


4,627,316


9,819,331


15,846,479Net interest income


6,920,238


6,991,875


20,564,102


20,878,519Provision for loan losses


-


512,583


-


1,487,417Net interest income after provision for loan losses


6,920,238


6,479,292


20,564,102


19,391,102Other income:Service charges on deposit accounts


1,223,377


1,346,718


3,757,416


3,986,168Other fee income


446,782


447,008


1,412,253


1,373,855Securities transactions, net


1,047,046


29,949


1,404,820


58,009Other noninterest income


147,926


187,944


338,678


752,973Total other income


2,865,131


2,011,619


6,913,167


6,171,005Other expenses:Salaries and employee benefits


3,473,576


3,510,429


11,284,981


10,266,039Occupancy expense of premises


452,580


443,925


1,330,486


1,262,187Furniture and equipment expense


595,558


597,416


1,797,473


1,781,443Loss on early retirement of debt


1,438,085


-


1,438,085


-Other noninterest expense


1,382,988


1,555,091


4,021,660


4,861,737Total other expenses


7,342,787


6,106,861


19,872,685


18,171,406Income before income tax expense and extraordinary item


2,442,582


2,384,050


7,604,584


7,390,701Income tax expense


760,156


733,561


2,365,663


2,302,167Net income

$
1,682,426

$
1,650,489

$
5,238,921

$
5,088,534Earnings per common share:Basic

$
0.19

$
0.18

$
0.56

$
0.54Diluted

$
0.18

$
0.18

$
0.55

$
0.54




See accompanying notes to consolidated financial statements.




-4-







PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)Three Months Ended
Nine Months EndedSeptember 30,
September 30,2003


2002


2003


2002Net income

$
1,682,426

$
1,650,489

$
5,238,921

$
5,088,534Other comprehensive income (loss):Unrealized holding gains (losses) arising during the period,net of tax (benefit) of ($300,586) and $142,054 for thequarter and ($173,381) and $275,853 for the year

(583,491
)

275,752


(336,563
)

535,624Reclassification adjustment for gains included in netincome, net of tax of $488,949 and $10,183 for thequarter and $477,639 and $19,723 for the year

(949,136
)

(19,766
)

(927,181
)

(38,286
)(1,532,627
)

255,986


(1,263,744
)

497,338Comprehensive income

$
149,799

$
1,906,475

$
3,975,177

$
5,585,872




See accompanying notes to consolidated financial statements.




-5-




PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYNINE MONTHS ENDED SEPTEMBER 30, 2003 AND YEAR ENDED DECEMBER 31, 2002(Unaudited)**Accumulated****Other**Common Stock
**Additional**

**Comprehensive****Paid-in**

**Retained**

**Income****Shares**

Par Value

Capital

Earnings

(Loss)
TotalBalance, December 31, 2001


9,409,913

$
1,217,065

$
28,657,351

$
34,917,898

$
579,569

$
65,371,883Net income


-


-


-


6,346,839


-


6,346,839Other comprehensive income


-


-


-


-


454,301


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


-


-


-


(1,036,410
)

-


(1,036,410
)Stock options exercised


20,500


-


128,125


-


-


128,125Balance, December 31, 2002


9,430,413


1,217,065


28,785,476


40,228,327


1,033,870


71,264,738Net income


-


-


-


5,238,921


-


5,238,921Other comprehensive income


-


-


-


-


(1,263,744
)

(1,263,744
)Cash dividends declared,$.11 per share


-


-


-


(1,038,586
)

-


(1,038,586
)Stock options exercised


22,171


-


209,756


-


-


209,756Balance, September 30, 2003


9,452,584

$
1,217,065

$
28,995,232

$
44,428,662

$
(229,874
)
$
74,411,085





See accompanying notes to consolidated financial statements.




-6-




PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002(Unaudited)2003


2002CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
5,238,921

$
5,088,534Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation, amortization and accretion, net


2,662,479


2,033,950Provision for loan losses


-


1,487,417Net realized gain on securities transactions


(1,404,820
)

(58,009
)Net loss (gain) on disposal of assets


231,725


(5,468
)Net gain on sale of branch office


-


(100,000
)Increase in cash value of bank-owned life insurance


(354,737
)

(350,732
)Decrease in deferred compensation accrual


(102,318
)

(63,412
)Decrease in retirement accruals


(273,414
)

(245,895
)Decrease in taxes receivable


118,333


1,530,144Increase in taxes payable


512,330


-Decrease in interest receivable


130,368


2,353,207Decrease in interest payable


(313,009
)

(1,668,149
)Net increase in prepaid expenses and other assets


(170,010
)

(118,989
)Net decrease in accrued expenses and other liabilities


28,661


195,621Net cash provided by operating activities


6,304,509


10,078,219CASH FLOWS FROM INVESTING ACTIVITIESIncrease in interest-bearing deposits in other banks


387,115


15,535,307(Increase) decrease in Federal funds sold


30,705,495


(16,069,000
)Purchase of securities available for sale


(112,505,824
)

(52,708,281
)Proceeds from sales and calls of securities available for sale


40,783,374


46,490,803Proceeds from maturities and paydowns of securities available for sale


29,066,126


22,058,066Purchase of restricted and other equity investments


(1,444,700
)

(980,150
)Redemption of restricted and other equity investments


1,275,200


540,500Net decrease in loans


17,492,586


68,511,099Net proceeds from sale of branch office


-


7,748,200Purchase of premises and equipment


(793,544
)

(2,722,505
)Proceeds from disposal of assets


1,555,392


1,049,969Net cash provided by investing activities


6,521,220


89,454,008CASH FLOWS FROM FINANCING ACTIVITIESNet decrease in deposits


(43,317,902
)

(100,818,724
)Net increase in Federal funds purchased andsecurities sold under repurchase agreements


19,477,961


3,256,228Advances from Federal Home Loan Bank


36,000,000


-Payments on Federal Home Loan Bank advances


(27,322,232
)

(1,659,904
)Dividends paid


(567,617
)

(2,075,160
)Proceeds from the exercise of stock options


209,756


128,125Issuance of preferred stock in REIT subsidiaries


14,000


-Repurchase of preferred stock in REIT subsidiaries


(5,000
)

(19,000
)Net cash used in financing activities


(15,511,034
)

(101,188,435
)  -7-
  PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002(Unaudited)2003


2002Net decrease in cash and due from banks

$
(2,685,305
)
$
(1,656,208
)Cash and due from banks at beginning of period


25,199,278


28,188,779Cash and due from banks at end of period

$
22,513,973

$
26,532,571SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
10,132,340

$
17,514,628Taxes

$
1,735,000

$
3,832,311NONCASH INVESTING AND FINANCING TRANSACTIONSIncrease (decrease) in unrealized gains on securities available for sale

$
(1,914,761
)
$
753,323Transfer of premises and equipment to other assets

$
551,269

$
- 
 See accompanying notes to consolidated financial statements.





-8-





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
1St. Augustine, St. Johns County, Florida
1 (loan production office)Athens, Clarke 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 and nine months ended September 30, 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.








-9-





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:










Three Months Ended
Nine Months EndedSeptember 30,
September 30,2003


2002


2003


2002Basic earnings per share:Net income

$
1,682,426

$
1,650,489

$
5,238,921

$
5,088,534Weighted average common shares outstanding


9,445,852


9,430,413


9,436,026


9,425,530Earnings per common share

$
0.19

$
0.18

$
0.56

$
0.54Diluted earnings per share:Net income

$
1,682,426

$
1,650,489

$
5,238,921

$
5,088,534Weighted average common shares outstanding


9,445,852


9,430,413


9,436,026


9,425,530Effect of dilutive stock options


170,000


23,517


111,239


31,266Weighted average diluted commonshares outstanding


9,615,852


9,453,930


9,547,265


9,456,796Earnings per common share

$
0.18

$
0.18

$
0.55

$
0.54







-10-





PAB BANKSHARES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


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 and nine months ended September 30, 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.











Three Months Ended
Nine Months EndedSeptember 30,
September 30,2003


2002


2003


2002Net income, as reported

$
1,682,426

$
1,650,489

$
5,238,921

$
5,088,534Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(60,537
)

(60,577
)

(176,021
)

(167,400
)Pro forma net income

$
1,621,889

$
1,589,912

$
5,062,900

$
4,921,134Earnings per share:Basic  as reported

$
0.19

$
0.18

$
0.56

$
0.54Basic  pro forma

$
0.17

$
0.16

$
0.54

$
0.52Diluted  as reported

$
0.18

$
0.18

$
0.55

$
0.54Diluted  pro forma

$
0.16

$
0.16

$
0.53

$
0.52








NOTE 5. RELATED PARTY TRANSACTIONS





In the ordinary course of business, the Company has granted loans to certain related parties, including executive officers, directors and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Loans to related parties were $8,187,493 as of September 30, 2003 and $9,205,942 as of December 31, 2002.






-11-








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", 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 allowance for loan losses, our commitments to extend credit, our net interest margin, our asset quality, the impact of our repayment of long-term FHLB advances on interest expense, 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, although some of these statements may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduction in demand for credit; (4) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which we are engaged; (5) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than us; (6) adverse changes may occur in the bond and equity markets; (7) opportunities to expand our presence in growth markets may be unavailable on terms suitable to management; and (8) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals. Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements contained in this 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, restricted us from redeeming our capital stock, paying dividends, modifying existing debt agreements, or incurring additional debt without the prior approval of our banking regulators. The Resolution was the result of an examination that found the Bank to be in less than satisfactory condition due primarily to serious weaknesses identified in the asset quality of the Banks loan portfolio. On August 25, 2003, the Federal Reserve terminated this Resolution with the Company.





FINANCIAL CONDITION





Total loans have decreased $23.7 million, or 4.3%, since December 31, 2002, however, loans are up $2.3 million since June 30, 2003. We would like to see this continue and we believe that our strategy to move into higher-growth markets will help us achieve our growth and profitability goals. Over the past twelve months, loans in our Henry and Hall County offices have grown $66.7 million, or 70%, from $95.4 million at September 30, 2002 to $162.2 million at September 30, 2003. As a percentage of total loans, the loans in these two offices have increased from 17.2% twelve months ago to 30.5% at quarter end.




-12-





The following table highlights the changes in the composition of the loan portfolio over the past nine months.





As of Quarter End


Sep-03


% of Total


Dec-02


% of Total(Dollars in Thousands)Commercial and financial

$
54,051


10.17
%

$
55,840


10.06
%Agricultural


26,392


4.97
%


22,178


3.99
%Real estate  construction


82,196


15.46
%


75,076


13.52
%Real estate - mortgage (commercial and residential)

335,030


63.03
%


354,628


63.87
%Installment loans to individuals and other loans

34,175


6.43
%


47,740


8.60
%531,844


100.06
%


555,461


100.04
%Unearned income, net


(293
)

-0.06
%


(223
)

-0.04
%531,551


100.00
%


555,238


100.00
%Allowance for loan losses


(10,426
)

-1.96
%


(12,097
)

-2.18
%$
521,125


98.04
%

$
543,141


97.82
%






We have recently opened two new loan production offices this year. In September, we opened an office in St. Augustine, Florida, where we will focus on the South Jacksonville, St. Augustine, Palm Coast and Daytona markets. In October, we opened an office in Athens, Georgia where we will focus on the Athens and Winder markets.





During the third quarter of 2003, we made the decision to close one of our two Ocala, Florida branches. We have a contract signed on the sale of the property, and no material gains or losses are anticipated associated with the sale of this property. The $4.4 million in loans and $7.4 million in deposits in this branch will continue to be serviced from our other Ocala office.





As with most community banks, loan volume is the driver for the remainder of the banks balance sheet. Since our loan volume has been down, we have not been aggressive in retaining time deposits. As a result, time deposits in total have decreased $37.9 million, or 12.4%, since year-end and we have repaid $12.7 million in advances from the Federal Home Loan Bank of Atlanta (the "FHLB") as they matured. In addition, we repaid $14.5 million in FHLB advances in the third quarter of 2003 that had a remaining average life to maturity of over five years and incurred a $1.44 million prepayment penalty. The average rate on these advances was 434 basis points higher than the current federal funds rate that we purchased to retire the advances. Our calculations indicate that we should achieve a significant savings in interest expense over the next five years due to paying off these advances.





During the second quarter of 2003, we executed two leverage strategies totaling $45 million to take advantage of low short-term interest rates and provide attractive margins even as we expect to move into a tightening cycle later in 2004. The first $35 million was used in an amortizing leverage strategy where we acquired mortgage-backed securities with $35 million in advances from the FHLB. The remaining $10 million was used in a liability-sensitive leverage strategy where we purchased a callable agency bond with a $10 million repurchase agreement.








RESULTS OF OPERATIONS





Net income for the quarter ended September 30, 2003 was $1.68 million, or $0.18 per diluted share, a slight increase compared to $1.65 million, or $0.18 per diluted share, during the same period in 2002.





Net income for the nine months ending September 30, 2003 was $5.24 million, or $0.55 per diluted share, as compared to $5.09 million, or $0.54 per diluted share, during the same period in 2002.





The major components of income and expense for each period presented are discussed in greater detail below.





-13-





Net Interest Income


The primary component of a financial institutions profitability is its 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 September 30, 2003, net interest income on a taxable-equivalent basis was $6.97 million, compared to $7.03 million earned during the same period in 2002. Interest income decreased $1.73 million, while interest expense decreased $1.66 million. The decrease in interest income was due to the combined effect of a $13.3 million decrease in average earning assets outstanding during the period and an 87 basis point decrease in the average yield earned on those earning assets during the period. In addition to the decrease in earning assets, there has also been a shift in the mix of earning assets. Loans represented 81.3% of earning assets during the third quarter of 2002 compared to only 77.1% this year. The decrease in interest expense was due to the combined effect of a $28.7 million decrease in interest-bearing liabilities outstanding during the period and a 99 basis point decrease in the average rate paid on those interest-bearing liabilities during the period. The decline in rates is reflective of the continued decline in overall market rates that began back in the first quarter of 2001. The $59.0 million decline in average time deposits outstanding represented $567,000 of the overall decrease in interest expense for the quarter, while the change in rate on time deposits represented another $603,000 of the decrease in interest expense.





The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin for the third quarter of 2003 was 4.02%, 4 basis points higher than our net interest margin of 3.98% during the same period in 2002. However, the margin for the third quarter of 2003 was lower than the 4.13% margin earned during the second quarter of 2003. 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 and nine months ended September 30, 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.





For the Quarter Ended September 30,
2003


2002Interest


Average





Interest


AverageAverage


Income/


Yield/


Average


Income/


Yield/Balance


Expense


Rate


Balance


Expense


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

$
529,761

$
8,522


6.38
%
$
569,703

$
10,306


7.18
%Investment securities:Taxable


135,096


1,247


3.66
%

84,181


1,065


5.02
%Nontaxable


9,341


141


6.01
%

7,455


118


6.30
%Other short-term investments


13,131


30


0.90
%

39,247


170


1.72
%Total interest-earning assets
$
687,329

$
9,940


5.74
%
$
700,586

$
11,659


6.60
%Interest-bearing liabilities:Demand deposits

$
163,995

$
289


0.70
%
$
165,943

$
578


1.38
%Savings deposits


39,760


63


0.63
%

38,197


112


1.16
%Time deposits


275,564


2,044


2.94
%

334,543


3,214


3.81
%FHLB advances


53,126


373


2.79
%

36,672


501


5.43
%Notes payable


10,000


122


4.85
%

10,000


147


5.83
%Other short-term borrowings


30,865


81


1.04
%

16,648


75


1.78
%Total interest-bearing liabilities
$
573,310

$
2,972


2.06
%
$
602,003

$
4,627


3.05
%Interest rate spread








3.68
%







3.55
%Net interest income




$
6,968







$
7,032Net interest margin








4.02
%







3.98
%
  -14-
  For the Nine Months Ended September 30,
2003


2002Interest


Average





Interest


AverageAverage


Income/


Yield/


Average


Income/


Yield/Balance


Expense


Rate


Balance


Expense


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

$
541,987

$
26,799


6.61
%
$
597,509

$
32,438


7.26
%Investment securities:Taxable


110,178


3,197


3.88
%

95,520


3,720


5.21
%Nontaxable


8,656


403


6.22
%

5,681


275


6.45
%Other short-term investments


14,676


121


1.11
%

31,288


385


1.65
%Total interest-earning assets
$
675,497

$
30,520


6.04
%
$
729,998

$
36,818


6.74
%Interest-bearing liabilities:Demand deposits

$
167,033

$
1,116


0.89
%
$
167,097

$
1,807


1.45
%Savings deposits


39,199


220


0.75
%

38,383


330


1.15
%Time deposits


285,509


6,702


3.14
%

363,707


11,506


4.23
%FHLB advances


44,252


1,215


3.67
%

37,021


1,514


5.47
%Notes payable


10,000


381


5.09
%

10,000


466


6.23
%Other short-term borrowings


21,276


185


1.16
%

16,289


223


1.84
%Total interest-bearing liabilities
$
567,269

$
9,819


2.31
%
$
632,497

$
15,846


3.35
%Interest rate spread








3.73
%







3.39
%Net interest income




$
20,701







$
20,972Net interest margin








4.10
%







3.84
%





Provision for Loan Losses


For the nine months ended September 30, 2003, there was no provision for loan losses recorded, compared to $1.49 million for the same period in 2002. Based on our monthly assessments of the allowance for loan losses during the quarter, no provision was needed.





At September 30, 2003, the allowance as a percent of total loans was 1.96%, compared to 2.25% 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.





-15-





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. Total nonperforming loans decreased by $2.61 million during the third quarter of 2003 due primarily to the foreclosure and transfer of $2.69 million of loans to other real estate.








As of Quarter End


Sep-03


Jun-03


Mar-03


Dec-02


Sep-02(Dollars in Thousands)Loans accounted for on a nonaccrual basis

$
7,230

$
9,842

$
10,301

$
10,378

$
12,100Accruing loans which are contractually past due90 days or more as to principal or interest payments


-


-


-


-


52Total nonperforming loans

$
7,230

$
9,842

$
10,301

$
10,378

$
12,152Total nonperforming loans as a percentage oftotal loans


1.36
%

1.86
%

1.88
%

1.87
%

2.20
%








For the nine months ending September 30, 2003, net charge-offs of $1.67 million was a 65.38% decrease compared to $4.83 million during the same period in 2002. On an annualized basis, our net charge-offs for 2003 equates to 0.41% of average loans, compared to 1.06% for the 2002 fiscal year.





-16-





Other Income


A summary of noninterest income follows:





For the Quarter Ended September 30,

2003
2002PercentAmount


Amount


Change(Dollars in Thousands)Noninterest income:Service charges on deposit account

$
1,223

$
1,347


-9.2
%Mortgage origination fees


185


225


-18.0
%Brokerage commissions and fees


103


111


-7.9
%Securities transactions, net


1,047


30


3396.1
%Earnings on bank-owned life insurance


117


117


0.5
%Gain (loss) on disposal of assets


(35
)

10


-457.1
%Other noninterest income


225


172


30.8
%Total noninterest income

$
2,865

$
2,012


42.4
%For the Nine Months Ended September 30,


2003


2002PercentAmount


Amount


Change(Dollars in Thousands)Noninterest income:Service charges on deposit account

$
3,757

$
3,986


-5.7
%Mortgage origination fees


616


580


6.2
%Brokerage commissions and fees


306


400


-23.6
%Securities transactions, net


1,405


58


2321.7
%Earnings on bank-owned life insurance


355


351


1.1
%Gain (loss) on disposal of assets


(229
)

6


-4291.4
%Other noninterest income


703


790


-11.0
%Total noninterest income

$
6,913

$
6,171


12.0
%








The decrease in service charges and fees on deposit accounts is due primarily to lower transaction volume. The decrease in mortgage fees for the quarter is due to a decrease in demand for mortgage originations and refinancing and the loss of a mortgage originator who had accounted for 47% of all of our mortgage fee income for the third quarter of 2002. However, for the nine months we are still up 6.2% over last year to date. Brokerage commissions and fees are down $94,000 year to date because of lower transaction volume. Gains on the sale of securities during the quarter and year were taken based on market opportunities. During 2003, in conjunction with our focus on collection and recovery of problem loans, we have been able to dispose of a great deal of other real estate and repossessed automobiles. Related to this effort, we realized losses of $35,000 during the quarter and $229,000 for the year. Other noninterest income decreased in 2003 resulting from a gain of $100,000 recorded on the sale of a branch office in 2002, and an $88,000 refund received in 2002 from a vendor due to past billing discrepancies.








-17-





Other Expenses





A summary of noninterest expense follows:





For the Quarter Ended September 30,

2003
2002PercentAmount


Amount


Change(Dollars in Thousands)Noninterest expenses:Salaries and wages

$
2,883

$
3,104


-7.1
%FAS 91 deferred loan cost


(111
)

(311
)

-64.2
%Employee benefits


702


717


-2.2
%Net occupancy expense of premises


453


444


1.9
%Furniture and equipment expense


596


598


-0.3
%Advertising and business development


115


123


-6.0
%Supplies and printing


135


180


-25.1
%Telephone and internet charges


108


170


-36.2
%Postage and courier


138


171


-19.2
%Legal and accounting fees


124


166


-25.4
%Loss on extinguishment of debt


1,438


-


-Other noninterest expense


762


745


2.3
%Total noninterest expense

$
7,343

$
6,107


20.2
%For the Nine Months Ended September 30,


2003


2002PercentAmount


Amount


Change(Dollars in Thousands)Noninterest expenses:Salaries and wages

$
9,222

$
9,114


1.2
%FAS 91 deferred loan cost


(329
)

(1,011
)

-67.5
%Employee benefits


2,392


2,163


10.6
%Net occupancy expense of premises


1,330


1,262


5.4
%Furniture and equipment expense


1,798


1,781


0.9
%Advertising and business development


317


360


-11.9
%Supplies and printing


435


525


-17.2
%Telephone and internet charges


365


486


-24.8
%Postage and courier


419


493


-14.9
%Legal and accounting fees


401


672


-40.4
%Loss on extinguishment of debt


1,438


-


-Other noninterest expense


2,085


2,326


-10.4
%Total noninterest expense

$
19,873

$
18,171


9.4
%





FAS 91 deferred loan cost, a credit against salaries and wages, decreased 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 during 2003 compared to the same period in 2002. The decrease in salaries and wages is due in part to an adjustment made to the accrual for incentives during the third quarter. Likewise, employee benefits decreased for the quarter due to an adjustment made to the profit sharing accrual.





-18-





Some of the year to date increase in employee benefits was due to higher premiums from our health care provider of 11% from 2002. An additional employee benefit expense for 2003, which was not incurred during the first half of 2002, was the Employee Stock Purchase Program (ESPP). The Company started the ESPP on July 1, 2002. The program allows for an employee or director to purchase up to $2,000 a year of the Companys stock with the Company matching 50% of the purchase. The ESPP match expense amounted to $72,000 and $29,000 for the nine months ending September 30, 2003 and 2002, respectively.





Legal and accounting fees were down due to the expenses incurred in the first half of 2002 on the collection and recovery of problem loans and regulatory matters. The $1.44 million loss on extinguishment of debt was incurred in order to pay off higher rate FHLB borrowings, saving significant interest expense in the future. The remaining expenses decreased due primarily to efficiencies gained from our charter consolidations, the centralization of back office operations and tighter cost controls.





Income Tax Expense


During the second quarter of 2003, income tax expense was $760,000, a 3.63% increase in comparison to the same period in 2002. Year to date for 2003, income tax expense was $2,366,000, a 2.76% increase compared to the same period in 2002. As a percentage of net income before taxes, income tax expense was 31.1% and 31.1% for the nine months ending September 30, 2003 and September 30, 2002, 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 .





The $9.8 million decrease in deposits and $2.3 million increase in loans was funded by $6.5 million liquidation of investments, $8.8 million decrease in Federal Funds Sold and a $6.3 million increase in Federal Funds Purchased during the quarter. Our loan portfolio increased $2.3 million during the third quarter of 2003. We believe that our liquidity position is sufficient to fund assets when needed and meet liability obligations when they come due. At September 30, 2003, 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 21.4%, 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%.





Stockholders Equity


The Company and the Bank are required to comply with capital adequacy standards established by banking regulators. At September 30, 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 September 30, 2003.





Park


MinimumCompany


Avenue


RegulatoryConsolidated


Bank


RequirementTotal Capital to Risk Weighted Assets


15.2
%

14.6
%

8.0
%Tier 1 Capital to Risk Weighted Assets


13.9
%

13.3
%

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


10.6
%

10.2
%

4.0
%








-19-





OFF BALANCE SHEET ARRANGEMENTS





Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. We are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. 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 and standby letters of credit 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 September 30, 2003 and December 31, 2002 are as follows:








Sep-03


Dec-02(Dollars in Thousands)Commitments to extend credit

$
58,487

$
70,351Standby letters of credit

$
1,833

$
1,445





Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.





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





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.





-20-





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, 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 Standards





In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN 45"), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 . FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosures required by FIN 45 improve the transparency of the financial statement information about the guarantors obligations and liquidity risks related to guarantees issued. This interpretation also incorporates, without change, the guidance in Financial Accounting Standards Board Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others , which is being superceded. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Companys consolidated financial statements.








In May 2003, the Financial Accounting Standards Board issued Statement No. 150 ("Statement 150"), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity . Statement 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the balance sheet. Prior to the issuance of Statement 150, the Company classified trust preferred securities as a liability on the consolidated balance sheet and its related interest cost as interest expense on the consolidated statement of income, which is consistent with the requirements of Statement 150. Statement 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Statement 150 will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The adoption of Statement 150 did not have an impact on the Companys consolidated financial statements.








-21-





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 September 30, 2003, our one-year management-adjusted gap ratio of 1.34 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)

$
343,531

$
376,404

$
426,059Rate Sensitive Liabilities (RSL)


328,262


387,021


463,016RSA minus RSL (Gap)

$
15,269

$
(10,617
)
$
(36,957
)Gap Ratio (RSA/RSL)


1.05


0.97


0.92Management-AdjustedRate Sensitive Assets (RSA)

$
356,268

$
401,878

$
476,343Rate Sensitive Liabilities (RSL)


148,440


207,199


354,638RSA minus RSL (Gap)

$
207,828

$
194,679

$
121,705Gap Ratio (RSA/RSL)


2.40


1.94


1.34








-22-





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 4.91% 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 21.58% 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 1.00%. 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 9.23% 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


6.12
%

5.38
%+200 bps


5.49
%

4.91
%+100 bps


3.79
%

3.49
%-100 bps


-8.45
%

-9.23
%














ITEM 4. CONTROLS AND PROCEDURES





As of the end of the period covered by 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. There were no changes in the Companys internal control over financial reporting identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





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PART II. OTHER INFORMATION








ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K





(a)   Exhibits.





10.14             First Amendment to Employment Agreement, dated August 25, 2003, by and between Michael. E. Ricketson, the Registrant, and the Bank.

10.15             First Amendment to Employment Agreement, dated August 26, 2003, by and between Donald J. Torbert, Jr. and the Bank.





31.1  Rule 13a-14(a) Certification of Chief Executive Officer





31.2  Rule 13a-14(a) Certification of Chief Financial Officer





32.1 Section 1350 Certification of Chief Executive Officer





32.2  Section 1350 Certification of Chief Financial Officer











(b)  Reports on Form 8-K.





1.  Press Release dated August 29, 2003 Announcing Termination of Board Resolution with Regulators and Third Quarter 2003 Dividend








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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.


Registrant




****Date:  November 14, 2003
By:
/s/  Michael E. RicketsonMichael E. RicketsonPresident and Chief Executive Officer




****Date:  November 14, 2003
By:
/s/  Donald J. Torbert, Jr.Donald J. Torbert, Jr.,Executive Vice President, Chief Financial Officer







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