**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 June 30, 2004 - Commission File Number 1-11823


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









**PAB BANKSHARES, INC.**


(A Georgia Corporation)


IRS Employer Identification Number: 58-1473302





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


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








Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes [X] No [ ]





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


Yes [X] No [ ]





The number of shares outstanding of the registrants common stock at July 30, 2004 was 9,488,760 shares.













**TABLE OF CONTENTS**


PagePART I

FINANCIAL 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 Conditionand Results of Operations

12Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20Item 4.

Controls and Procedures

21PART II

OTHER INFORMATIONItem 1.

Legal Proceedings

NoneItem 2.

Changes in Securities and Use of Proceeds

22Item 3.

Defaults Upon Senior Securities

NoneItem 4.

Submissions of Matters to a Vote of Security Holders

22Item 5.

Other Information

NoneItem 6.

Exhibits and Reports on Form 8-K

23SIGNATURES



23  - 2 -


****


****PART I**. FINANCIAL INFORMATION**


**PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CONDITION****AS OF JUNE 30, 2004 AND DECEMBER 31, 2003**
**June 30,**
**December 31,****2004**
**2003****(Unaudited)****ASSETS**Cash and due from banks

$
20,789,330

$
22,920,218Interest-bearing deposits in other banks


1,569,291


505,409Federal funds sold


12,541,750


330,187Investment securities


108,576,156


126,825,013Loans


554,523,799


538,643,842Allowance for loan losses


(9,609,087
)

(10,139,114
)Net loans


544,914,712


528,504,728Premises and equipment, net


19,489,713


20,047,375Goodwill


5,984,604


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


10,566,108


10,422,078Foreclosed assets


4,298,433


4,577,824Other assets


10,506,434


10,623,956Total assets

$
739,236,531

$
730,741,392**LIABILITIES AND STOCKHOLDERS EQUITY**Deposits:Noninterest-bearing demand

$
96,554,164

$
94,882,871Interest-bearing demand and savings


218,673,577


202,753,493Time


250,385,508


259,280,172Total deposits


565,613,249


556,916,536Federal funds purchased and securities sold under agreements to repurchase


20,974,252


36,919,790Advances from the Federal Home Loan Bank of Atlanta


59,321,386


44,714,043Guaranteed preferred beneficial interests in debentures


10,310,000


10,000,000Other liabilities


5,282,895


6,128,857Total liabilities


661,501,782


654,679,226**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,9,496,360 and 9,484,660 shares issued and outstanding


1,217,065


1,217,065Additional paid-in capital


29,285,477


29,314,700Retained earnings


48,566,093


45,651,500Accumulated other comprehensive loss


(1,333,886
)

(121,099
)Total stockholders equity


77,734,749


76,062,166Total liabilities and stockholders equity

$
739,236,531

$
730,741,392See accompanying notes to consolidated financial statements.


- 3 -







****PAB** BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF INCOME****(Unaudited)****Three Months Ended**
**Six Months Ended****June 30,**
**June 30,****2004**
**2003**
**2004**
**2003****Interest income:**Interest and fees on loans

$
8,360,603

$
8,953,641

$
16,611,801

$
18,276,790Interest and dividends on investment securities:Taxable


1,075,233


997,672


2,316,148


1,950,342Nontaxable


84,147


88,245


171,530


172,414Other interest income


31,893


35,086


39,681


91,735Total interest income


9,551,876


10,074,644


19,139,160


20,491,281**Interest expense:**Interest on deposits


1,886,975


2,679,102


3,841,957


5,642,670Interest on Federal Home Loan Bank advances


279,054


397,199


529,211


841,819Interest on other borrowings


214,949


177,838


439,861


362,928Total interest expense


2,380,978


3,254,139


4,811,029


6,847,417Net interest income


7,170,898


6,820,505


14,328,131


13,643,864**Provision for loan losses**


-


-


-


-Net interest income after provision for loan losses


7,170,898


6,820,505


14,328,131


13,643,864**Other income:**Service charges on deposit accounts


1,094,276


1,287,588


2,160,171


2,534,039Other fee income


289,099


453,579


669,509


965,471Securities transactions, net


(1,020
)

107,199


576


357,774Other noninterest income


107,766


38,311


465,775


190,753Total other income


1,490,121


1,886,677


3,296,031


4,048,037**Other expenses:**Salaries and employee benefits


3,341,315


3,817,765


6,913,967


7,811,405Occupancy expense of premises


459,525


442,816


901,539


877,906Furniture and equipment expense


522,958


615,315


1,049,909


1,201,915Other noninterest expense


1,289,372


1,348,663


2,473,284


2,638,672Total other expenses


5,613,170


6,224,559


11,338,699


12,529,898Income before income tax expense


3,047,849


2,482,623


6,285,463


5,162,003**Income tax expense**


928,060


750,972


2,039,393


1,605,507Net income

$
2,119,789

$
1,731,651

$
4,246,070

$
3,556,496**Earnings per common share:**Basic

$
0.23

$
0.19

$
0.45

$
0.38Diluted

$
0.22

$
0.18

$
0.44

$
0.37







See accompanying notes to consolidated financial statements.





- 4 -








****PAB** BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME****(Unaudited)**




**Three Months Ended**
**Six Months Ended****June 30,**
**June 30,****2004**
**2003**
**2004**
**2003**Net income

$
2,119,789

$
1,731,651

$
4,246,070

$
3,556,496Other comprehensive income (loss):Unrealized holding gains (losses) arising during theperiod, net of tax (benefit) of ($1,088,490) and $402,719for the quarter and ($624,966) and $260,158for the year to date


(2,112,949
)

781,749


(1,212,407
)

505,014Reclassification adjustment for (gains) lossesincluded in net income, net of tax (benefit) of ($347)and $36,448 for the quarter and $196 and $121,643for the year to date


673


(70,751
)

(380
)

(236,131
)(2,112,276
)

710,998


(1,212,787
)

268,883Comprehensive income

$
7,513

$
2,442,649

$
3,033,283

$
3,825,379





See accompanying notes to consolidated financial statements.









- 5 -





****PAB** BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY****SIX MONTHS ENDED JUNE 30, 2004 AND YEAR ENDED DECEMBER 31, 2003** 
 **Accumulated****Additional**

**Other****Common Stock**
**Paid-in**
**Retained**
**Comprehensive****Shares**
**Par Value**
**Capital**
**Earnings**
**Income (Loss)**
**Total****Balance, December 31, 2002**


9,430,413

$
1,217,065

$
28,785,476

$
40,228,327

$
1,033,870

$
71,264,738Net income


-


-


-


7,125,518


-


7,125,518Other comprehensive loss


-


-


-


-


(1,154,969
)

(1,154,969
)Cash dividends declared,$.18 per share


-


-


-


(1,702,345
)

-


(1,702,345
)Stock options exercised


54,247


-


529,224


-


-


529,224**Balance, December 31, 2003**


9,484,660


1,217,065


29,314,700


45,651,500


(121,099
)

76,062,166Net income


-


-


-


4,246,070


-


4,246,070Other comprehensive loss


-


-


-


-


(1,212,787
)

(1,212,787
)Cash dividends declared,$.14 per share


-


-


-


(1,331,477
)

-


(1,331,477
)Stock acquired and cancelledunder stock repurchase plan


(20,000
)

-


(241,288
)

-


-


(241,288
)Stock options exercised


31,700


-


212,065


-


-


212,065**Balance, June 30, 2004**


9,496,360

$
1,217,065

$
29,285,477

$
48,566,093

$
(1,333,886
)
$
77,734,749 See accompanying notes to consolidated financial statements.


- 6 -







****PAB** BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****SIX MONTHS ENDED JUNE 30, 2004 AND 2003****(Unaudited)**
**2004**


**2003****CASH FLOWS FROM OPERATING ACTIVITIES**Net income

$
4,246,070

$
3,556,496Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation, amortization and accretion, net


1,329,073


1,731,596Provision for loan losses


-


-Net realized gain on securities transactions


(576
)

(357,774
)Net gain (loss) on disposal of assets


(27,169
)

123,567Increase in cash value of bank-owned life insurance


(144,030
)

(237,638
)Increase (decrease) in deferred compensation accrual


(13,486
)

69,027Decrease in retirement accruals


(196,541
)

(182,376
)Decrease in taxes receivable


258,299


10,507Decrease in interest receivable


316,945


521,910Decrease in interest payable


(111,053
)

(223,852
)Net increase in prepaid expenses and other assets


(329,955
)

(107,205
)Net decrease in accrued expenses and other liabilities


(526,604
)

(481,082
)Net cash provided by operating activities


4,800,973


4,423,176**CASH FLOWS FROM INVESTING ACTIVITIES**(Increase) decrease in interest-bearing deposits in other banks


(1,063,882
)

64,022(Increase) decrease in Federal funds sold


(12,211,563
)

21,923,000Purchase of securities available for sale


(6,255,684
)

(92,706,407
)Proceeds from sales and calls of securities available for sale


12,362,355


36,659,399Proceeds from maturities and paydowns of securities available for sale


10,660,983


14,800,721Purchase of restricted and other equity investments


(723,400
)

(1,444,700
)Redemption of restricted and other equity investments


600


543,800Net (increase) decrease in loans


(16,891,104
)

23,076,594Purchase of premises and equipment


(405,605
)

(665,149
)Proceeds from disposal of assets


1,595,899


740,135Net cash provided by (used in) investing activities


(12,931,401
)

2,991,415**CASH FLOWS FROM FINANCING ACTIVITIES**Net increase (decrease) in deposits


8,696,713


(33,500,171
)Net increase (decrease) in Federal funds purchased andsecurities sold under repurchase agreements


(15,945,538
)

7,500,848Advances from Federal Home Loan Bank


14,848,400


36,000,000Payments on Federal Home Loan Bank advances


(241,057
)

(12,653,221
)Dividends paid


(1,329,755
)

(287,313
)Proceeds from the exercise of stock options


212,065


41,935Acquisition of stock under stock repurchase plan


(241,288
)

-Repurchase of preferred stock in REIT subsidiaries


-


(3,000
)Net cash provided by (used in) financing activities


5,999,540


(2,900,922
)  - 7 -


**PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****SIX MONTHS ENDED JUNE 30, 2004 AND 2003****(Unaudited)**


**2004**
**2003**Net increase (decrease) in cash and due from banks

$
(2,130,888
)
$
4,513,669Cash and due from banks at beginning of period


22,920,218


25,199,278Cash and due from banks at end of period

$
20,789,330

$
29,712,947**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**Cash paid during the period for:Interest

$
4,922,082

$
7,071,269Taxes

$
1,781,094

$
1,595,000**NONCASH INVESTING AND FINANCING TRANSACTIONS**Increase (decrease) in unrealized gains on securities available for sale

$
(1,837,556
)
$
407,399Transfer 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 primarily in the local market areas listed below. The Company and the Bank are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.





**Banking Locations**

**Number of Offices****South Georgia Market:**Valdosta, Lowndes County, Georgia

3 (including the main office)Lake Park, Lowndes County, Georgia

1Adel, Cook County, Georgia

1Bainbridge, Decatur County, Georgia

3Cairo, Grady County, Georgia

1Statesboro, Bulloch County, Georgia

2Baxley, Appling County, Georgia

1Hazlehurst, Jeff Davis County, Georgia

1**North Georgia Market:**McDonough, Henry County, Georgia

1Stockbridge, Henry County, Georgia

1 (opened July 1, 2004)Oakwood, Hall County, Georgia

1Athens, Clarke County, Georgia

1 (loan production office)**Florida Market:**Ocala, Marion County, Florida

1St. Augustine, St. Johns County, Florida

1 (loan production office)


The Company also owns PAB Bankshares Capital Trust I, a Delaware statutory business trust. This non-operating subsidiary was created in 2001 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company. During the first quarter of 2004, the Company adopted FASB Interpretation No. 46R (Revised December 2003), "Consolidation of Variable Interest Entities". This interpretation addresses consolidation by business entities of variable interest entities and when such entities are subject to consolidation under the provisions of this Interpretation. The Company has determined that the revised provisions required deconsolidation of the subsidiary trust which issued the trust preferred securities. The Interpretation did not have a material effect on the Companys financial condition or results of operations.
 
 The Company has two real estate investment trusts (REITs) and two intermediate REIT holding companies as subsidiaries of the Bank. The REITs were established to realize state income tax benefits and to provide the Bank with ready access to capital markets if additional capital were needed. The REIT holding companies were established to provide assistance in managing the Companys investment in the REITs. To comply with Federal tax law, a minority interest in the non-voting, cumulative preferred stock of the REITs was issued to certain directors, officers and employees of the Company. The $500 par value preferred stock pays an 8% annual dividend. The total minority interest of the REITs included in other liabilities was $117,000 as of June 30, 2004 and December 31, 2003.





- 9 -








**PAB BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








****


**NOTE 2.  BASIS OF PRESENTATION**





The accompanying consolidated financial information of the Company is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.





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.





**NOTE 3.  EARNINGS PER SHARE**





The following table sets forth the computation of basic and diluted earnings per share:


**Three Months Ended**
**Six Months Ended****June 30,**
**June 30,****2004**
**2003**
**2004**
**2003**Basic earnings per share:Net income

$
2,119,789

$
1,731,651

$
4,246,070

$
3,556,496Weighted average common shares outstanding


9,515,438


9,431,644


9,507,735


9,431,032Earnings per common share

$
0.23

$
0.19

$
0.45

$
0.38Diluted earnings per share:Net income

$
2,119,789

$
1,731,651

$
4,246,070

$
3,556,496Weighted average common shares outstanding


9,515,438


9,431,644


9,507,735


9,431,032Effect of dilutive stock options


125,399


122,701


158,022


76,516Weighted average diluted commonshares outstanding


9,640,837


9,554,345


9,665,757


9,507,548Earnings per common share

$
0.22

$
0.18

$
0.44

$
0.37  - 10 -




**PAB BANKSHARES, INC. AND SUBSIDIARIES**


**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








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





The Company accounts for stock options under its stock option plans based on the recognition and measurement principles of Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and related Interpretations. The following table illustrates the effect on net income and earnings per share for the three months and six months ended June 30, 2004 and 2003 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**
**Six Months Ended****June 30,**
**June 30,****2004**
**2003**
**2004**
**2003**Net income, as reported

$
2,119,789

$
1,731,651

$
4,246,070

$
3,556,496Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(54,269
)

(59,047
)

(108,689
)

(115,484
)Pro forma net income

$
2,065,520

$
1,672,604

$
4,137,381

$
3,441,012Earnings per share:Basic - as reported

$
0.23

$
0.19

$
0.45

$
0.38Basic - pro forma

$
0.22

$
0.18

$
0.44

$
0.36Diluted - as reported

$
0.22

$
0.18

$
0.44

$
0.37Diluted - pro forma

$
0.21

$
0.18

$
0.43

$
0.36


- 11 -








**CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





Some of the statements in this Report, including, without limitation, matters discussed under the caption "*Management's Discussion and Analysis of Financial Condition and Results of Operation*", as well as oral statements made by PAB Bankshares, Inc. ("PAB", and also referred to in this Report as either "the Company", "we", "us", or "our") or the officers, directors, or employees of PAB may constitute "forward-looking statements" under federal securities laws. Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, potential share repurchases, 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) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than us; (6) adverse changes may occur in the bond and equity markets; (7) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and (8) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals. Many of such factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. We disclaim any obligation to update or revise any forward-looking statements contained in this Report, whether as a result of new information, future events or otherwise.





****ITEM 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 2003 Annual Report on Form 10-K, and Managements Discussion and Analysis of Financial Condition and Results of Operations included in the Companys 2003 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.





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





**FINANCIAL CONDITION**





During the six months ended June 30, 2004, total assets grew $8.5 million, or 1.2%, from $730.7 million as of the end of 2003 to $739.2 million at the end of the second quarter. Total loans increased $15.9 million, or 3.0%, and total deposits increased $8.7 million, or 1.6%, during the same period. Of the $8.7 million in net deposit growth for the year, $8.0 million was deposited into the Bank during the quarter by a local public funds account. We used $14.8 million in new advances from the Federal Home Loan Bank of Atlanta (the "FHLB"), cash flows from our investment portfolio, and the deposit growth to fund the increase in loans during the six months ended June 30, 2004. The balance of the investment cash flows and deposit growth has been temporarily invested in Fed Funds and will be used to meet liquidity needs, pay off debt, or reinvested in loans or securities.





- 12 -








Our loan portfolio continues to grow at a modest pace. Loans in North Georgia have increased $18.5 million (10.3%) since year end with the majority of the growth being construction and development loans. Loans in South Georgia have decreased $4.4 million (1.5%) since year end, and loans in Florida have increased $5.4 million (12.9%) since year end. Broken down by market, the loan portfolio consists of $198.3 million (35.8%) in North Georgia, $282.0 million (50.9%) in South Georgia, $47.4 million (8.5%) in Florida, and $26.8 million (4.8%) in the Treasury.





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


As of Quarter End

Jun-04
% of Total
Dec-03
% of Total(Dollars In Thousands)Commercial and financial

$
50,151


9.0
%
$
53,849


10.0
%Agricultural (including loans secured by farmland)


27,005


4.9
%

24,071


4.5
%Real estate - construction


114,794


20.7
%

100,150


18.6
%Real estate - mortgage (commercial and residential)


340,081


61.3
%

332,004


61.6
%Installment loans to individuals and other loans


23,193


4.2
%

29,366


5.5
%555,224


100.1
%

539,440


100.1
%Unearned income, net


(700
)

-0.1
%

(796
)

-0.1
%554,524


100.0
%

538,644


100.0
%Allowance for loan losses


(9,609
)

-1.7
%

(10,139
)

-1.9
%$
544,915


98.3
%
$
528,505


98.1
%







Stockholders equity was 10.5% of total assets at quarter end. Total equity has increased $1.7 million, or 2.2%, since year end. This increase is primarily the net result of $4.2 million in earnings, less $1.3 million in dividends and a $1.2 million decrease in the market value of our securities portfolio. We declared a second quarter 2004 dividend of $0.07 per common share payable to stockholders of record on June 30, 2004. We announced a 400,000 share stock buyback plan during the second quarter of 2004, and we repurchased and cancelled 20,000 shares of our common stock under the plan during the quarter.





**RESULTS OF OPERATIONS**





Net income for the three months ended June 30, 2004 was $2.1 million, or $0.22 per diluted share, as compared to $1.7 million, or $0.18 per diluted share, during the same period in 2003. The $388,000 increase in net income is the net result of a $350,000 increase in net interest income (or $348,000 on a taxable-equivalent basis), a $397,000 decrease in other income, a $612,000 decrease in other expenses, and a $177,000 increase in income tax expense.





Net income for the six months ended June 30, 2004 was $4.2 million, or $0.44 per diluted share, as compared to $3.6 million, or $0.37 per diluted share, during the same period in 2003. The $690,000 increase in net income is the net result of a $684,000 increase in net interest income (or $683,000 on a taxable-equivalent basis), a $752,000 decrease in other income, a $1,191,000 decrease in other expenses, and a $433,000 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 June 30, 2004, our net interest income on a taxable-equivalent basis was $7.2 million, a 5.1% increase over the $6.9 million in net interest income for the second quarter of 2003. For the six months ended June 30, 2004, net interest income on a taxable-equivalent basis was $14.4 million, a 5.0% increase over the $13.7 million in net interest income for the same period in 2003. The improvement in net interest income for the quarter and year to date is primarily the result of our aggressive management of our interest expense. With the majority of our earning assets repricing downward, we had to lower our deposit rates and refinance our other borrowings at lower rates to offset the decrease in interest income.


- 13 -





For the second quarter of 2004, total interest income on a taxable-equivalent basis was $9.6 million, a 5.2% decrease compared to $10.1 million earned during the same period in 2003. The decrease in interest income was due primarily to a 38 basis point decrease in the average yield earned on those earning assets between the periods. Total interest expense was $2.4 million, a 26.8% decrease compared to $3.3 million paid during the same period in 2003. The decrease in interest expense was due primarily to a 60 basis point decrease in the average rate paid on those interest-bearing liabilities between the periods.





For the first half of 2004, total interest income on a taxable-equivalent basis was $19.2 million, a 6.2% decrease compared to $20.5 million earned during the same period in 2003. The decrease in interest income was due primarily to a 45 basis point decrease in the average yield earned on those earning assets between the periods. Total interest expense was $4.8 million, a 29.7% decrease compared to $6.8 million paid during the same period in 2003. The decrease in interest expense was due primarily to a 71 basis point decrease in the average rate paid on those interest-bearing liabilities between the periods.





The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin for the second quarter of 2004 was 4.28%, 15 basis points higher than our net interest margin of 4.13% during the same period in 2003. For the six months ended June 30, 2004, our net interest margin was 4.31%, 17 basis points higher than our net interest margin of 4.14% for the same period in 2003. Both of these improved margins are primarily the result of a lower cost of funds compared to the three and six months periods ending June 30, 2003.





The following tables detail the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned and paid, and the average yields and rates for the three months and six months ended June 30, 2004 and 2003. 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 June 30,



2004





2003Interest

Average



Interest

AverageAverage

Income/

Yield/

Average

Income/

Yield/Balance

Expense

Rate

Balance

Expense

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

$
551,675

$
8,361


6.10
%
$
541,836

$
8,954


6.63
%Investment securities:Taxable


103,222


1,075


4.19
%

105,155


998


3.81
%Nontaxable


8,611


127


5.96
%

8,578


133


6.25
%Other short-term investments


14,019


32


0.92
%

11,893


35


1.18
%Total interest-earning assets

$
677,527

$
9,595


5.70
%
$
667,462

$
10,120


6.08
%Interest-bearing liabilities:Demand deposits

$
169,654

$
256


0.61
%
$
165,803

$
378


0.92
%Savings deposits


42,448


56


0.53
%

39,438


76


0.77
%Time deposits


253,012


1,575


2.50
%

285,368


2,225


3.13
%FHLB advances


55,614


279


2.02
%

45,102


397


3.53
%Notes payable


10,310


140


5.45
%

10,000


128


5.13
%Other short-term borrowings


26,483


75


1.14
%

16,010


50


1.25
%Total interest-bearing liabilities

$
557,521

$
2,381


1.72
%
$
561,721

$
3,254


2.32
%Interest rate spread








3.98
%







3.76
%Net interest income




$
7,214







$
6,866Net interest margin








4.28
%







4.13
%


- 14 -







For the Six Months Ended June 30,



2004





2003Interest

Average



Interest

AverageAverage


Income/


Yield/


Average


Income/


Yield/Balance


Expense


Rate


Balance


Expense


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

$
546,612

$
16,612


6.11
%
$
548,202

$
18,277


6.72
%Investment securities:Taxable


108,340


2,316


4.30
%

97,513


1,950


4.03
%Nontaxable


8,706


260


6.00
%

8,307


261


6.34
%Other short-term investments


8,863


39


0.90
%

15,461


92


1.20
%Total interest-earning assets

$
672,521

$
19,227


5.75
%
$
669,483

$
20,580


6.20
%Interest-bearing liabilities:Demand deposits

$
167,453

$
510


0.61
%
$
168,576

$
828


0.99
%Savings deposits


41,561


112


0.54
%

38,913


157


0.81
%Time deposits


254,102


3,220


2.55
%

290,564


4,658


3.23
%FHLB advances


50,743


529


2.10
%

39,743


842


4.27
%Notes payable


10,310


266


5.19
%

10,000


258


5.22
%Other short-term borrowings


30,516


174


1.14
%

16,402


104


1.28
%Total interest-bearing liabilities

$
554,685

$
4,811


1.74
%
$
564,198

$
6,847


2.45
%Interest rate spread








4.01
%







3.75
%Net interest income




$
14,416







$
13,733Net interest margin








4.31
%







4.14
%





*Provision for Loan Losses*


For the three and six months ended June 30, 2004 and June 30, 2003, there were no provisions for loan losses recorded. Based on our monthly assessments of the allowance for loan losses during the quarter, no provisions were needed. As an integral part of our credit risk management process, we regularly review loans in our portfolio for credit quality and documentation of collateral. As outlined below, our levels of nonperforming loans and loan losses have improved over recent years. In addition, our loans past due 30 days or more was down to 0.72% of total loans at June 30, 2004, a significant improvement compared to our ratios in the three to four percent range from two years ago. The economy is growing and commercial loan demand is improving. However, we continue to be concerned with the levels of consumer debt and the high level of consumer bankruptcies in our markets. We recognize the potential risk that rising interest rates and inflation could have a negative impact on both our consumer and commercial borrowers. We also recognize the potential risks associated with the growing concentration of construction and development loans in our loan portfolio, and we have made adjustments for those environmental factors in our determination of the adequacy of the allowance for loan losses at June 30, 2004.





At June 30, 2004, the allowance for loan losses as a percent of total loans was 1.73%, compared to 1.88% at December 31, 2003. We consider the current level of the allowance for loan losses adequate to absorb losses from loans in the portfolio. 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.





As of Quarter End

Jun-04
Mar-04
Dec-03
Sep-03
Jun-03(Dollars in Thousands)Loans accounted for on a nonaccrual basis

$
4,484

$
4,868

$
7,048

$
7,230

$
9,842Accruing loans which are contractually past due90 days or more as to principal or interest payments


9


-


-


-


-Troubled debt restructurings not included above


2,179


2,188


1,168


1,176


1,188Total nonperforming loans

$
6,672

$
7,056

$
8,216

$
8,406

$
11,030Total nonperforming loans as a percentage oftotal loans


1.20
%

1.28
%

1.53
%

1.58
%

2.08
%





For the six month period ended June 30, 2004, we recorded $1,057,000 in loan losses and we recovered $527,000 in previously charged-off loans, for a net loss of $530,000, or 0.19% of average loans on an annualized basis. This is an improvement in both the levels of charge-offs and recoveries over the same period in 2003. For the six month period ended June 30, 2003, we recorded $1,677,000 in loan losses and we recovered $308,000 in previously charged-off loans, for a net loss of $1,369,000, or 0.50% of average loans on an annualized basis.








*Other Income*


A summary of noninterest income follows:





Second Quarter

Year To Date2004
2003
Pct. Chg.
2004
2003
Pct. Chg.(Dollars in Thousands)Noninterest income:Service charges on deposit account

$
1,094

$
1,288


-15.0
%
$
2,160

$
2,534


-14.8
%Mortgage origination fees


133


201


-33.7
%

236


431


-45.3
%Securities transactions, net


(1
)

107


-100.9
%

1


358


-99.7
%Gain on sale of financial services operation


-


-


-


200


-


-Earnings on bank-owned life insurance


46


156


-70.5
%

144


238


-39.5
%Gain (loss) on disposal of assets


10


(189
)

105.3
%

20


(194
)

110.3
%Other noninterest income


208


324


-35.9
%

535


681


-21.5
%Total noninterest income

$
1,490

$
1,887


-21.0
%
$
3,296

$
4,048


-18.6
%





Service charges on deposit accounts decreased due to a decrease in volume of overdraft and non-sufficient funds charges. Mortgage origination fees decreased due to a decline in the volume of mortgage originations and refinancings as mortgage rates have risen. Earnings on bank-owned life insurance decreased primarily as a result of decreased earnings on these policies compared to 2003. Gains on disposal of assets improved from a net loss in 2003 to a net gain in 2004 due to a decrease in the volume of foreclosed asset transactions and the subsequent recording of losses associated with their disposition. The decrease in other noninterest income is primarily due to the disposal of our financial services operation during the first quarter of 2004 and the corresponding absence of brokerage fees earned.




- 16 -








*Other Expenses*





A summary of noninterest expense follows:





Second Quarter

Year To Date2004
2003
Pct. Chg.
2004
2003
Pct. Chg.(Dollars in Thousands)Noninterest expenses:Salaries and wages

$
2,821

$
3,137


-10.1
%
$
5,709

$
6,338


-9.9
%Deferred loan cost


(185
)

(98
)

88.8
%

(355
)

(217
)

63.6
%Employee benefits


705


779


-9.5
%

1,560


1,690


-7.7
%Net occupancy expense of premises


460


443


3.8
%

902


878


2.7
%Furniture and equipment expense


523


615


-15.0
%

1,050


1,202


-12.6
%Advertising and business development


104


102


2.0
%

212


201


5.5
%Supplies and printing


99


148


-33.1
%

220


300


-26.7
%Telephone and internet charges


89


115


-22.6
%

167


257


-35.0
%Postage and courier


140


141


-0.7
%

282


281


0.4
%Legal and accounting fees


105


171


-38.6
%

165


281


-41.3
%Other noninterest expense


752


672


11.9
%

1,427


1,319


8.2
%Total noninterest expense

$
5,613

$
6,225


-9.8
%
$
11,339

$
12,530


-9.5
%





Salaries and wages expense and employee benefits were down due primarily to a 6% decline in the number of employees from 295 (full-time equivalents) as of June 30, 2003 to 277 as of June 30, 2004. Deferred loan cost, a credit against salaries and wages, increased and resulted in a decrease in expense reported during the period. The increase in the deferral of direct loan costs is due to an increase in loan volume experienced during 2004 compared to the same period in 2003. Furniture and equipment expense decreased primarily as a result of decreased depreciation expense. Occupancy costs are up primarily as a result of increases in insurance, maintenance costs, and property taxes. Supplies and printing costs decreased as a result of tighter cost control measures and centralized purchasing. Telephone and internet charges have decreased as a result of technological investments. Legal and accounting fees decreased from the higher expenses incurred in 2003 on the collection and recovery of problem loans and regulatory matters.








*Income Tax Expense*


As a percentage of net income before taxes, income tax expense was 32.4% and 31.1% for the six months ending June 30, 2004 and June 30, 2003, respectively. The increase in income tax expense for 2004 compared to the same periods in 2003 are a direct result of an increase in income before income tax expense.








**LIQUIDITY AND CAPITAL RESOURCES**





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





At June 30, 2004, 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 18.74%, compared to 19.90% at December 31, 2003. It is our policy to maintain a ratio of liquid assets to total assets of at least 15%.





The Company opened a new branch office in Stockbridge, Henry County, Georgia on July 1, 2004. We are leasing the office and will invest approximately $110,000 in leasehold improvements, furniture, fixtures and equipment. We are funding these expenditures with cash provided from operations in 2004. There are no additional binding commitments for material cash expenditures outstanding at this time.




- 17 -








*Contractual Obligations*


Summarized below are our contractual obligations as of June 30, 2004.





Less than
1 to 3
3 to 5
More thanContractual Obligations

Total
1 year
years
years
5 years(Dollars in Thousands)FHLB Advances

$
59,321

$
2,930

$
15,731

$
10,341

$
30,319Operating Lease Obligations


671


162


288


221


-Guaranteed Preferred Beneficial Interestsin Debentures


10,310


-


-


-


10,310$
70,302

$
3,092

$
16,019

$
10,562

$
40,629




*Off Balance Sheet Arrangements*


Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or 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 June 30, 2004 and December 31, 2003 are as follows:





Jun-04
Dec-03(Dollars in Thousands)Commitments to extend credit

$
99,257

$
84,533Standby letters of credit

$
3,075

$
2,755




*Stockholders Equity*


The Company maintains a ratio of stockholders equity to total assets that is considered adequate according to regulatory standards. The Company and the Bank are required to comply with capital adequacy standards established by banking regulators. At June 30, 2004, 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 June 30, 2004.





MinimumCompany

RegulatoryConsolidated
Bank
RequirementTotal Capital to Risk Weighted Assets
15.2%
14.5%
8.0%Tier 1 Capital to Risk Weighted Assets
14.0%
13.3%
4.0%Tier 1 Capital to Average Assets (Leverage Ratio)
11.4%
10.8%
4.0%




On May 25, 2004, the Company announced a plan to repurchase up to 400,000 shares of the Companys common stock over the next twelve-month period. The Company plans to use cash on hand to repurchase its shares on the open market. At June 30, 2004, the Company had $5.52 million cash on hand. As of June 30, 2004, 20,000 shares had been purchased for an average price of $12.06. The expiration date for this plan is May 25, 2005.




- 18 -








**CRITICAL ACCOUNTING ESTIMATES**





The preparation of financial statements and the related disclosures in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe that our determination of the allowance for loan losses and the fair value of assets, including the impairment of goodwill, affect our most significant judgments and estimates used in the preparation of our consolidated financial statements. The Companys accounting policies are described in detail in Note 1 of our Consolidated Financial Statements provided in Item 8 of our 2003 Annual Report on Form 10-K. The following is a brief description of the Companys critical accounting estimates involving significant management valuation judgment.





*Allowance for Loan Losses*


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





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





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





*Estimates of Fair Value*


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





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





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





**Recent Accounting Pronouncements**





In managements opinion, there are no recent accounting pronouncements that have had or will have had a material impact on our earnings or financial position as of or for the quarter and the six months ended June 30, 2004.





- 19 -








****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 steep shape of the interest rate curve, the Company has exceeded policy limits by adjusting the balance sheet to a more asset-sensitive position. At June 30, 2004, our one-year management-adjusted gap ratio of 1.43 was outside of our policy guidelines, however, this exception to policy was part of 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 Analysis**3-Month
6-Month
1-Year(Dollars in thousands)*Regulatory Defined*Rate Sensitive Assets (RSA)

$
380,049

$
403,739

$
449,770Rate Sensitive Liabilities (RSL)


315,763


357,252


461,503RSA minus RSL (Gap)

$
64,286

$
46,487

$
(11,733
)Gap Ratio (RSA/RSL)


1.20


1.13


0.97*Management-Adjusted*Rate Sensitive Assets (RSA)

$
390,669

$
424,774

$
490,799Rate Sensitive Liabilities (RSL)


118,596


160,085


343,402RSA minus RSL (Gap)

$
272,073

$
264,689

$
147,397Gap Ratio (RSA/RSL)


3.29


2.65


1.43





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 4.5% over the next year if market rates immediately rose by 200 basis points. On the other hand, the model projected net interest





- 20 -








income to decrease 20.9% 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 needs to be considered in conjunction with the fact that 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 possible but still unlikely scenario, our model projected net interest income to decrease 9.7% over the next year. On June 30, 2004, the federal funds rate was raised to 1.25% from 1.00%. As our interest sensitivity analysis shows, we expect the rise in rates will help to increase our net interest income in future periods.





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

5.29%

5.33%+200 bps

4.52%

4.46%+100 bps

2.63%

2.32%-100 bps

-9.13%

-9.73%


****ITEM 4**. CONTROLS AND PROCEDURES**





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





- 21 -








****PART II**. OTHER INFORMATION**





****ITEM 1**.  LEGAL PROCEEDINGS**





None








****ITEM 2**.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**





Issuer Purchases of Equity Securities in the quarter ended June 30, 2004:Total number of shares
purchased


Average price
paid per share


Number of shares purchased as part of publicly announced plans or programs

Maximum number of shares that may yet be purchased under the plans or programs1April


-

$
-


-

-May


-


-


-

-June


20,000


12.06


20,000

380,000Total


20,000

$
12.06


20,000

380,000
1On May 25, 2004, the Board of Directors authorized the purchase of 400,000 sharesof the Company's common stock. The plan will expire May 25, 2005


****ITEM 3**. DEFAULTS UPON SENIOR SECURITIES**





None








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





At the annual meeting of stockholders held on May 25, 2004, one item was voted upon. The vote was for the appointment of four directors to hold office until the 2007 annual meeting of stockholders and until their successors are dully elected and qualified or until their earlier death, resignation, incapacity to serve, or removal:





Name
Votes For
Votes Against
Votes AbstainedBill J. Jones
7,226,405
0
88,592James B. Lanier, Jr.
7,227,994
0
87,003F. Ferrell Scruggs, Sr.
7,221,141
0
93,856John M. Simmons
7,227,860
0
87,137





The following directors will continue in office:





R. Bradford Burnette, Kennith D. McLeod, Paul E. Parker, James L. Dewar, Jr., Michael E. Ricketson,


Joe P. Singletary, Jr., Walter W. Carroll, II, and Michael H. Godwin





****ITEM 5**. OTHER INFORMATION**





None





- 22 -








****ITEM 6**. EXHIBITS AND REPORTS ON FORM 8-K**





(a)
Exhibits.





31.1
Rule 13a-14(a) Certification of CEO





31.2
Rule 13a-14(a) Certification of CFO




32.1
Section 1350 Certification of CEO





| | 32.2 | Section 1350 Certification of CFO
| | ---- | ---------------------------------



(b)
Reports on Form 8-K.





1.
Press Release dated May 3, 2004 Announcing First Quarter 2004 Earnings




| | 2. | Press Release dated May 25, 2004 Announcing Second Quarter 2004 Dividend and Stock Buyback Plan
| | -- | -----------------------------------------------------------------------------------------------






****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:  ***August 9, 2004***
By:
***/s/ Michael E. Ricketson***Michael E. Ricketson,
President and Chief Executive Officer Date:  ***August 9, 2004***
By:
***/s/ Donald J. Torbert, Jr.***Donald J. Torbert, Jr.
Executive Vice President and Chief Financial Officer  - 23 -