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
 
  
 
 PAB BANKSHARES, INC.
   
 3250 North Valdosta Road, Valdosta, Georgia 31602
 Telephone number: (229) 241-2775
 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes x No o
 
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 Yes x No o
 
 The number of shares outstanding of the registrants common stock at April 30, 2004 was 9,516,360 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. Qualitative and Quantitative Disclosures About Market Risk
19Item 4. Controls and Procedures
21PART 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
21SIGNATURES

21CERTIFICATIONS

22
 
   2
   PART I.  FINANCIAL INFORMATION
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CONDITIONAS OF MARCH 31, 2004 AND DECEMBER 31, 2003March 31,

December 31,2004

**2003******(Unaudited)ASSETSCash and due from banks

$
17,929,965

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


755,067


505,409Federal funds sold


10,155,644


330,187Investment securities


116,412,666


126,825,013Loans


549,149,290


538,643,842Allowance for loan losses


(9,730,275
)

(10,139,114
)Net loans


539,419,015


528,504,728Premises and equipment, net


19,825,050


20,047,375Goodwill


5,984,604


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


10,520,312


10,422,078Foreclosed assets


4,376,124


4,577,824Other assets


9,920,117


10,623,956Total assets

$
735,298,564

$
730,741,392LIABILITIES AND STOCKHOLDERS' EQUITYDeposits:Noninterest-bearing demand

$
92,184,742

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


211,151,867


202,753,493Time


253,516,168


259,280,172Total deposits


556,852,777


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


31,677,119


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


51,426,381


44,714,043Guaranteed preferred beneficial interests in debentures


10,310,000


10,000,000Other liabilities


6,421,528


6,128,857Total liabilities


656,687,805


654,679,226Stockholders' equity:Preferred stock, no par value, 1,500,000 shares authorized, no shares issued


-


-Common stock, no par value, 98,500,000 shares authorized;9,514,240 and 9,484,660 shares issued and outstanding


1,217,065


1,217,065Additional paid-in capital


29,503,520


29,314,700Retained earnings


47,111,784


45,651,500Accumulated other comprehensive income (loss)


778,390


(121,099
)Total stockholders equity


78,610,759


76,062,166Total liabilities and stockholders' equity

$
735,298,564

$
730,741,392See accompanying notes to consolidated financial statements.
 
 
 3
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMETHREE MONTHS ENDED MARCH 31, 2004 AND 2003(Unaudited)2004

2003Interest income:Interest and fees on loans

$
8,251,198

$
9,323,149Interest and dividends on investment securities:Taxable


1,240,915


952,670Nontaxable


87,383


84,169Other interest income


7,788


56,648Total interest income


9,587,284


10,416,636Interest expense:Interest on deposits


1,954,982


2,963,568Interest on Federal Home Loan Bank advances


250,157


444,620Interest on other borrowings


224,912


185,090Total interest expense


2,430,051


3,593,278Net interest income


7,157,233


6,823,358Provision for loan losses


-


-Net interest income after provision for loan losses


7,157,233


6,823,358Other income:Service charges on deposit accounts


1,065,895


1,246,451Other fee income


380,410


511,892Securities transactions, net


1,596


250,575Other noninterest income


358,009


152,441Total other income


1,805,910


2,161,359Other expenses:Salaries and employee benefits


3,572,652


3,993,639Occupancy expense of premises


442,014


435,090Furniture and equipment expense


526,951


586,600Other noninterest expense


1,183,912


1,290,008Total other expenses


5,725,529


6,305,337Income before income tax expense


3,237,614


2,679,380Income tax expense


1,111,333


854,535Net income

$
2,126,281

$
1,824,845Earnings per common share:Basic

$
0.22

$
0.19Diluted

$
0.22

$
0.19See accompanying notes to consolidated financial statements.
  4
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMETHREE MONTHS ENDED MARCH 31, 2004 AND 2003(Unaudited)**2004**

**2003**Net income

$
2,126,281

$
1,824,845Other comprehensive income (loss):Unrealized holding gains (losses) arising during the period, net oftax (benefit) of $463,916 and ($142,560)


900,542


(276,736
)Reclassification adjustment for gains included innet income, net of tax of $543 and $85,196


(1,053
)

(165,379
)899,489


(442,115
)Comprehensive income

$
3,025,770

$
1,382,730See accompanying notes to consolidated financial statements.
   5
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYTHREE MONTHS ENDED MARCH 31, 2004 AND YEAR ENDED DECEMBER 31, 2003**Common Stock****Shares**

Par Value

AdditionalPaid-inCapital

**Retained
Earnings**

**AccumulatedOtherComprehensive
Income (Loss)**

TotalBalance, 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


-


-


529,224Balance, December 31, 2003


9,484,660


1,217,065


29,314,700


45,651,500


(121,099
)

76,062,166Net income


-


-


-


2,126,281


-


2,126,281Other comprehensive income


-


-


-


-


899,489


899,489Cash dividends declared,$.07 per share


-


-


-


(665,997
)

-


(665,997
)Stock options exercised


29,580


-


188,820


-


-


188,820Balance, March 31, 2004


9,514,240

$
1,217,065

$
29,503,520

$
47,111,784

$
778,390

$
78,610,759See accompanying notes to consolidated financial statements.
 
 6
 
 PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2004 AND 2003(Unaudited)2004

**2003**CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
2,126,281

$
1,824,845Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation, amortization and accretion, net


646,039


835,034Provision for deferred taxes


14,351


-Net realized gain on securities transactions


(1,596
)

(250,575
)Net gain on disposal of assets


(10,075
)

(5,303
)Increase in cash value of bank-owned life insurance


(98,234
)

(81,769
)Increase (decrease) in deferred compensation accrual


(50,864
)

34,513Decrease in retirement accruals


(98,271
)

(91,138
)Net change in taxes receivable and taxes payable


1,096,982


854,535Decrease in interest receivable


384,903


216,582Increase (decrease) in interest payable


45,952


(82,286
)Net increase in prepaid expenses and other assets


(514,585
)

(451,542
)Net decrease in accrued expenses and other liabilities


(836,685
)

(988,655
)Net cash provided by operating activities


2,704,198


1,814,241CASH FLOWS FROM INVESTING ACTIVITIES(Increase) decrease in interest-bearing deposits in other banks


(249,658
)

301,115(Increase) decrease in federal funds sold


(9,825,457
)

22,030,000Purchase of debt securities


-


(34,352,050
)Proceeds from sales and calls of debt securities


6,940,943


31,236,330Proceeds from maturities and paydowns of debt securities


4,997,794


4,548,804Purchase of equity investments


(324,700
)

-Redemption of equity investments


600


280,000Net (increase) decrease in loans


(11,286,498
)

6,439,664Purchase of premises and equipment


(278,337
)

(466,129
)Proceeds from disposal of assets


1,397,552


317,325Net cash provided by (used in) investing activities


(8,627,761
)

30,335,059CASH FLOWS FROM FINANCING ACTIVITIESNet decrease in deposits


(63,759
)

(19,011,601
)Net decrease in federal funds purchased andsecurities sold under repurchase agreements


(5,242,671
)

(1,912,335
)Advances from the Federal Home Loan Bank


6,848,400


-Payments on Federal Home Loan Bank advances


(136,062
)

(10,475,182
)Dividends paid


(661,418
)

(8,560
)Proceeds from the exercise of stock options


188,820


-Repurchase of preferred stock in REIT subsidiaries


-


(1,000
)Net cash provided by (used in) financing activities


933,310


(31,408,678
)
  7
  PAB BANKSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 31, 2004 AND 2003(Unaudited)2004

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

$
(4,990,253
)
$
740,622Cash and due from banks at beginning of period


22,920,218


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

$
17,929,965

$
25,939,900SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
2,384,099

$
3,675,564Taxes

$
-

$
-NONCASH INVESTING AND FINANCING TRANSACTIONSIncrease (decrease) in unrealized gains on securities available for sale

$
1,362,860

$
(669,869
)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 Locations

Number of OfficesSouth 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

1North Georgia Market:McDonough, Henry County, Georgia

1Oakwood, Hall County, Georgia

1Athens, Clarke County, Georgia

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

1St. Augustine, St. Johns County, Florida

1 (loan production office)
 
 The Company also owns PAB Bankshares Capital Trust I, a Delaware statutory business trust. This non-operating subsidiary was created in 2001 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company. 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 and $107,000 as of March 31, 2004 and December 31, 2003, respectively.
  
 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 ended March 31, 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 notes thereto 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 for the three months ended March 31, 2004 and 2003:
 
 2004


2003Basic earnings per share:Net income

$
2,126,281

$
1,824,845Weighted average common shares outstanding


9,500,031


9,430,413Earnings per common share

$
0.22

$
0.19Diluted earnings per share:Net income

$
2,126,281

$
1,824,845Weighted average common shares outstanding


9,500,031


9,430,413Effect of dilutive stock options


189,549


46,232Weighted average diluted commonshares outstanding


9,689,580


9,476,645Earnings per common share

$
0.22

$
0.19
 
 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 ended March 31, 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.
 
 2004


2003Net income, as reported

$
2,126,281

$
1,824,845Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(54,420
)

(56,437
)Pro forma net income

$
2,071,861

$
1,768,408Earnings per share:Basic  as reported

$
0.22

$
0.19Basic  pro forma

$
0.22

$
0.19Diluted  as reported

$
0.22

$
0.19Diluted  pro forma

$
0.21

$
0.19
 
 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, 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 OPERATIONS
 
 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.
 
 FINANCIAL CONDITION
 
 During the three months ended March 31, 2004, total assets grew $4.3 million, or 0.6%, from $730.7 million at the end of 2003 to $735.0 million at the end of the first quarter. Total loans increased $10.5 million, or 1.95%, and total deposits decreased $64,000 during the quarter. We borrowed $6.8 million in advances from the Federal Home Loan Bank of Atlanta (the FHLB) and used $11.9 million in cash flows from our investment portfolio to fund the increase in loans during the quarter. The balance of the investment cash flows has been temporarily invested in Fed Funds and will be used to meet liquidity needs, pay off debt, or reinvested in debt securities during the second quarter.
 
 Stockholders equity is 10.7% of total assets at quarter end. We declared a first quarter 2004 dividend of $0.07 per common share payable to stockholders of record on March 31, 2004.
 
 RESULTS OF OPERATIONS
 
 Net income for the three months ended March 31, 2004 was $2.13 million, or $0.22 per diluted share, as compared to $1.82 million, or $0.19 per diluted share, during the same period in 2003. The $301,000 increase in net income is the net result of a $334,000 increase in net interest income (or $336,000 on a taxable-equivalent basis), a $356,000 decrease in other income, a $580,000 decrease in other expenses, and a $257,000 increase in income tax expense. The reasons for these changes are discussed in more detail below.
  12
  Net Interest Income
 The primary component of a financial institutions profitability is net interest income, or the difference between the interest income earned on assets, primarily loans and investments, and interest paid on liabilities, primarily deposits and other borrowed funds. For the three months ended March 31, 2004, net interest income on a taxable-equivalent basis was $7.2 million, or $336,000 more than our net interest income for the first quarter of 2003.
 
 Total interest income on a taxable-equivalent basis was $9.63 million, a 7.9% decrease compared to $10.46 million earned during the same period in 2003. The decrease in interest income was due primarily to a 52 basis point decrease in the average yield earned on those earning assets between the periods.
 
 Total interest expense was $2.43 million, a 32.4% decrease compared to $3.59 million paid during the same period in 2003. The decrease in interest expense was due primarily to an 80 basis point decrease in the average rate paid on those interest-bearing liabilities between the periods. The decline in rates is the result of a continued downward repricing of our funding sources as interest rates have remained low over the past few years.
 
 The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin for the first quarter of 2004 was 4.34%, 19 basis points higher than our net interest margin of 4.15% during the same period in 2003. The improved margin is primarily the result of a lower cost of funds compared to the first quarter of 2003. In addition, the margin for the first quarter of 2004 was higher than the 4.14% margin earned during the fourth quarter of 2003. The increase from last quarter is due primarily to an increase in earning assets throughout the quarter.
 
 The following table details the average balance of interest-earning assets and interest-bearing liabilities, the amount of interest earned and paid, and the average yields and rates for the three months ended March 31, 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 Three Months Ended March 31,

2004

2003AverageBalance

InterestIncome/Expense

AverageYield/Rate

AverageBalance

InterestIncome/Expense

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

$
541,549

$
8,251


6.13
%
$
554,638

$
9,323


6.82
%Investment securities:Taxable


113,459


1,241


4.40
%

89,785


953


4.30
%Nontaxable


8,802


132


6.05
%

8,034


127


6.44
%Other short-term investments


3,707


8


0.85
%

19,070


57


1.20
%Total interest-earning assets

$
667,517

$
9,632


5.80
%
$
671,527

$
10,460


6.32
%Interest-bearing liabilities:Demand deposits

$
165,252

$
255


0.62
%
$
171,381

$
449


1.06
%Savings deposits


40,675


56


0.55
%

38,383


81


0.86
%Time deposits


255,192


1,645


2.59
%

295,817


2,433


3.34
%FHLB advances


45,873


250


2.19
%

34,324


445


5.25
%Notes payable


10,000


126


5.09
%

10,000


131


5.30
%Other short-term borrowings


34,549


98


1.14
%

16,799


54


1.31
%Total interest-bearing liabilities

$
551,541

$
2,430


1.77
%
$
566,704

$
3,593


2.57
%Interest rate spread








4.03
%







3.75
%Net interest income




$
7,202







$
6,867Net interest margin








4.34
%







4.15
%
  13
  Provision for Loan Losses
 For the three months ended March 31, 2004 and March 31, 2003, there was no provision for loan losses recorded. Based on our monthly assessments of the allowance for loan losses during the quarter, no provision was 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.
 
 At March 31, 2004, the allowance as a percent of total loans was 1.77%, 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:
 
 l
levels of and trends in delinquencies and impaired loans;l
levels of and trends in charge-offs and recoveries;l
trends in volume and terms of loans;l
effects of any changes in risk selection and underwriting standards and other changes in lending policies, procedures, and practices;l
experience, ability, and depth of lending management and other relevant staff;l
national and local economic trends and conditions;l
industry conditions; andl
effects of changes in credit concentrations.
 
 This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While we use the best information available to make the evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or other environmental factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
 
 The table below summarizes our levels of nonperforming loans over the past five quarters.
 
 As of Quarter End

Mar-04

Dec-03

Sep-03

Jun-03

Mar-03(Dollars in Thousands)Loans accounted for on a nonaccrual basis

$
4,868

$
7,048

$
7,230

$
9,842

$
10,301Accruing loans which are contractually past due90 days or more as to principal or interest payments


-


-


-


-


-Troubled debt restructurings not included above

2,188

1,168

1,176

1,188

1,200Other impaired loans


-Total nonperforming loans

$
7,056

$
8,216

$
8,406

$
11,030

$
11,501Total nonperforming loans as a percentage oftotal loans


1.28
%

1.53
%

1.58
%

2.08
%

2.10
%
 
 Net charge-offs of $409,000 during the first quarter was a 18.6% increase compared to $345,000 during the same period in 2003. When annualized, this level of charge-offs equates to 0.30% of average loans, compared to 0.25% for the 2003 fiscal year.
  14
 
 Other Income
 A summary of other noninterest income for the three months ended March 31, 2004 and 2003 follows:
 
 For the Three Months Ended March 31,

2004

2003Amount

Amount

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

$
1,066

$
1,246


-14.4
%Mortgage origination fees


103


231


-55.4
%Securities transactions, net


2


250


-99.2
%Gain on sale of financial services operation


200


-


100.0
%Earnings on bank-owned life insurance


98


82


19.5
%Gain (loss) on disposal of assets


10


(5
)

300.0
%Other noninterest income


327


357


-8.4
%Total noninterest income


$1,806


$2,161


-16.4
%Noninterest income as a percentageof average assets


0.25
%

0.30
%
  During the three months ended March 31, 2004, total other income was $1.8 million, a 16.4% decrease compared to the same period in 2003. This decrease is due primarily to the $180,000 decrease in service charges on deposit accounts and a $248,000 decrease in security transactions. Of the decrease in service charges, $173,000 is directly attributable to a decrease in overdraft and non-sufficient funds charges compared to first quarter 2003. In regards to the decrease in earnings from securities transactions, gains and losses taken on the sale of securities will fluctuate between periods based on market opportunities and liquidity needs.
 
 Mortgage origination fees decreased $128,000, or 55.4%, due to a decline in the volume of mortgage originations and refinancings compared to the first quarter of 2003. In January 2004, we sold our interest in our financial services operation and recorded a gain of $200,000. Earnings on bank owned life insurance increased $16,000 from 2003.
 
 During January of 2004, we sold a former branch office in Ocala, Florida for $800,000, recording a gain of $27,000. This branch was closed in November of 2003, with our main branch in Ocala assuming the deposit and loan relationships at that time.
 
 15
 
 Other Expenses
 A summary of other noninterest expense for the three months ended March 31, 2004 and 2003 follows:
 
 For the Three Months Ended March 31,

2004

2003Amount

Amount

PercentChange(Dollars in Thousand)Noninterest expenses:Salaries and wages

$
2,886

$
3,213


-10.2
%Deferred loan costs


(169
)

(119
)

42.0
%Employee benefits


856


899


-4.8
%Net occupancy expense of premises


442


435


1.6
%Furniture and equipment expense


527


587


-10.2
%Advertising and business development


107


99


8.1
%Supplies and printing


121


152


-20.4
%Telephone and internet charges


78


142


-45.1
%Postage and courier


142


140


1.4
%Legal and accounting fees


60


110


-45.5
%Service charges and fees


118


120


-1.7
%Other noninterest expense


558


527


5.9
%Total noninterest expense

$
5,726

$
6,305


-9.2
%Noninterest expense as a percentageof average assets


0.79
%

0.86
%
  During the three months ended March 31, 2004, total other expense was $5.73 million, a 9.2% decrease compared to the same period in 2003. The majority of the decrease from 2003 is due to the 10.2% decrease in salaries and wages, the corresponding 4.8% decrease in employee benefits and the 42.0% increase in deferred loan costs. Salaries and wage expense and employee benefits is down due to the 10.0% decline in the number of employees from 304 (full-time equivalent) as of March 31, 2003 to 275 as of March 31, 2004. Deferred loan cost, a credit against salaries and wages, increased $50,000, from 2003 and resulted in a decrease in expense reported during the period. The decline in the deferral of direct loan costs is due to the increase in loan volume experienced in the first quarter of 2004 compared to the first quarter of 2003.
 
 Furniture and equipment expense decreased 10.2% or $60,000 compared to March 20, 2003. This decrease is a result of a $56,000 decrease in book depreciation expense. Telephone and internet charges were down $64,000 due to a redesign of our communications network, utilizing internet technology efficiencies. Legal and accounting fees were down 45.4% due to the expenses incurred in the first quarter of 2003 on the collection and recovery of problem loans and regulatory matters. The remaining expenses decreased due primarily to efficiencies gained from our charter consolidations and the centralization of back office operations and tighter cost controls.
 
 Income Tax Expense
 During the three months ended March 31, 2004, income tax expense was $1,111,000, a 30.1% increase compared to the same period in 2003. As a percentage of net income before taxes, income tax expense was 34.3% and 31.9% for the first quarters of 2004 and 2003, respectively.
  16
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 Liquidity is an important factor in our financial condition and affects our ability to meet the borrowing needs and deposit withdrawal requirements of our customers. Assets, consisting primarily of loans and investment securities, are funded by customer deposits, borrowed funds, and retained earnings. Maturities in the investment and loan portfolios also provide a steady flow of funds for reinvestment. In addition, our liquidity continues to be enhanced by a relatively stable core deposit base and the availability of additional funding sources.
 
 At March 31, 2004, 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 19.0%, compared to 19.9%, at December 31, 2003. It is our policy to maintain a ratio of liquid assets to total assets of at least 15%.
 
 The Company intends to open a new branch office in Stockbridge, Henry County, Georgia in June 2004. We will rent the office and expend approximately $110,000 on leasehold improvements, furniture, fixtures and equipment. We will fund these expenditures with cash provided from operations in 2004. There are no additional binding commitments for material cash expenditures outstanding at this time.
 
 Contractual Obligations
 Summarized below are our contractual obligations as of March 31, 2004.
 
 Contractual Obligations

Total

Less than1 year

1 to 3years

3 to 5years

More than5 years(Dollars in Thousands)Federal Home Loan Bank of AtlantaAdvances

$
51,426

$
1,930

$
8,787

$
10,350

$
30,359Operating Lease Obligations


713


166


290


253


4Guaranteed Preferred Beneficial Interestsin Debentures


10,310


-


-


-


10,310$
62,449

$
2,096

$
9,077

$
10,603

$
40,673
 
 
 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 March 31, 2004 and December 31, 2003 are as follows:
 
 Mar-04

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

$
96,966

$
84,533Standby letters of credit

$
2,840

$
2,755
  17
 
 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 March 31, 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 March 31, 2004.
 
  CompanyConsolidated

Bank

MinimumRegulatoryRequirementTotal Capital to Risk Weighted Assets


15.2
%

14.3
%

8.0
%Tier 1 Capital to Risk Weighted Assets


13.9
%

13.0
%

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


11.4
%

10.6
%

4.0
%
   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 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 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.
 
 18
 
 Estimates of Fair Value
 The estimation of fair value is significant to a number of the Companys assets, including, but not limited to, investment securities, goodwill, other real estate owned, and other repossessed assets. These are all recorded at either fair value or at the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Our estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
 
 Fair values for most investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments. The fair values of other real estate owned are typically determined based on appraisals by third parties, less estimated costs to sell.
 
 Estimates of fair value are also required in performing an impairment analysis of goodwill. The Company reviews goodwill for impairment on at least an annual basis and whenever events or circumstances indicate the carrying value may not be recoverable. An impairment would be indicated if the carrying value exceeds the fair value of a reporting unit.
 
 Recent Accounting Pronouncements
 
 In managements opinion, there are no recent accounting pronouncements that have had or will have had a material impact on our earnings or financial position as of or for the quarter ended March 31, 2004.
 
 ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We are subject to exposure to U.S. dollar interest rate changes and accordingly, we manage our exposure by considering the possible changes in the net interest margin. We do not engage in trading activity nor do we classify any portion of the investment portfolio as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities, which are commonly held pass through securities. Finally, we have no material direct exposure to foreign currency exchange rate risk, commodity price risk, and other market risks.
 
 Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as interest rate risk. The repricing of interest earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as gap management. It is our policy to maintain a gap ratio in the one-year time horizon between 0.80 and 1.20. However, with interest rates at historic lows and the shape of the interest rate curve, the Company has exceeded policy limits by adjusting the balance sheet to a more asset-sensitive position. At March 31, 2004, our one-year management-adjusted gap ratio of 1.42 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.
 
 19
 
 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)

$
387,823

$
380,434

$
419,826Rate Sensitive Liabilities (RSL)


330,287


386,615


454,417RSA minus RSL (Gap)

$
57,536

$
(6,181
)
$
(34,591
)Gap Ratio (RSA/RSL)


1.17


0.98


0.92Management-AdjustedRate Sensitive Assets (RSA)

$
398,962

$
433,268

$
490,158Rate Sensitive Liabilities (RSL)


136,189


182,718


344,092RSA minus RSL (Gap)

$
262,773

$
250,550

$
146,066Gap Ratio (RSA/RSL)


2.93


2.37


1.42
 
 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 5.2% 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 23.7% 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 1.00%. If market rates immediately fell by 100 basis points, a more plausible but still unlikely scenario, our model projected net interest income to decrease 10.44% 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.
 
  Effect on Net Interest IncomeMarket
Rate Change

Gradual

Immediate+300 bps


5.75
%

6.48
%+200 bps


5.03
%

5.20
%+100 bps


2.91
%

2.72
%-100 bps


-9.37
%

-10.44
%
 
  20
  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.
 
 PART II.   OTHER INFORMATION
 
 ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
 
 (a)  Exhibits.
 
 31.1
Rule 13a-14(a) Certification of CEO31.2
Rule 13a-14(a) Certification of CFO32.1
Section 1350 Certification of CEO32.2
Section 1350 Certification of CFO
  
 (b)  Reports on Form 8-K.
 
 1. Press Release dated February 3, 2004 Announcing 2003 Fourth Quarter and Full Year Results
 
 
 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:
May 10, 2004

By:

*/s/ Michael E. Ricketson*Michael E. Ricketson,President and Chief Executive OfficerDate:
May 10, 2004

By:

*/s/ Donald J. Torbert, Jr*Donald J. Torbert, Jr.Executive Vice President and Chief Financial Officer
 
 21