****
 ****
 **UNITED STATES**
 **SECURITIES AND EXCHANGE COMMISSION**
 **Washington, D.C. 20549**
  _____________
  **FORM 10-Q**
 
 **Quarterly Report Pursuant to Section 13 or 15(d) of the**
 **Securities Exchange Act of 1934**
 
 For the Quarterly Period Ended September 30, 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 o
 
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 Yes x No o
 
 The number of shares outstanding of the registrants common stock at October 29, 2004 was 9,489,720 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 Condition and Results of Operations
12Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20Item 4.
Controls and Procedures
22PART II
OTHER INFORMATIONItem 1.
Legal Proceedings
NoneItem 2.
Unregistered Sales of Equity Securities, Use of Proceedsand Issuer Purchases of Equity Securities
22Item 3.
Defaults Upon Senior Securities
NoneItem 4.
Submission of Matters to a Vote of Security Holders
NoneItem 5.
Other Information
NoneItem 6.
Exhibits
23SIGNATURES
23
 -2-   **PART I. FINANCIAL INFORMATION**
 
 **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CONDITION****AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003****September 30,**

**December 31,****2004**

**2003****(Unaudited)****ASSETS**Cash and due from banks

$
20,483,742

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


577,070


505,409Federal funds sold


-


330,187Investment securities


134,393,205


126,825,013Loans


600,449,812


538,643,842Allowance for loan losses


(9,562,047
)

(10,139,114
)Net loans


590,887,765


528,504,728Premises and equipment, net


19,246,851


20,047,375Goodwill


5,984,604


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


10,652,130


10,422,078Foreclosed assets


4,310,433


4,577,824Other assets


10,561,917


10,623,956Total assets

$
797,097,717

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

$
94,765,232

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


217,877,804


202,753,493Time


263,131,632


259,280,172Total deposits


575,774,668


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


36,393,679


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


87,266,301


44,714,043Guaranteed preferred beneficial interests in debentures (trust preferred securities)


10,310,000


10,000,000Other liabilities


6,983,320


6,128,857Total liabilities


716,727,968


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,9,500,720 and 9,484,660 shares issued and outstanding


1,217,065


1,217,065Additional paid-in capital


29,245,757


29,314,700Retained earnings


49,677,114


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


229,813


(121,099
)Total stockholders equity


80,369,749


76,062,166Total liabilities and stockholders' equity

$
797,097,717

$
730,741,392See accompanying notes to consolidated financial statements.  -3-   **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF INCOME****(Unaudited)****Three Months Ended**

**Nine Months Ended****September 30,**

**September 30,****2004**

**2003**

**2004**

**2003****Interest income:**Interest and fees on loans

$
8,879,111

$
8,521,776

$
25,490,912

$
26,798,566Interest and dividends on investment securities:Taxable


1,345,486


1,247,202


3,661,634


3,197,544Nontaxable


83,842


93,317


255,372


265,731Other interest income


20,159


29,857


59,840


121,592Total interest income


10,328,598


9,892,152


29,467,758


30,383,433**Interest expense:**Interest on deposits


1,943,460


2,395,535


5,785,417


8,038,205Interest on Federal Home Loan Bank advances


430,823


373,072


960,034


1,214,891Interest on other borrowings


237,141


203,307


677,002


566,235Total interest expense


2,611,424


2,971,914


7,422,453


9,819,331Net interest income


7,717,174


6,920,238


22,045,305


20,564,102**Provision for loan losses**


-


-


-


-Net interest income after provision for loan losses


7,717,174


6,920,238


22,045,305


20,564,102**Other income:**Service charges on deposit accounts


1,157,557


1,223,377


3,317,728


3,757,416Other fee income


307,204


446,782


976,713


1,412,253Securities transactions, net


5,535


1,047,046


6,111


1,404,820Other noninterest income


143,294


147,926


609,069


338,678Total other income


1,613,590


2,865,131


4,909,621


6,913,167**Other expenses:**Salaries and employee benefits


4,139,622


3,473,576


11,053,589


11,284,981Occupancy expense of premises


491,289


452,580


1,392,828


1,330,486Furniture and equipment expense


531,878


595,558


1,581,787


1,797,473Loss on early retirement of debt


-


1,438,085


-


1,438,085Other noninterest expense


1,124,102


1,382,988


3,597,386


4,021,660Total other expenses


6,286,891


7,342,787


17,625,590


19,872,685Income before income tax expense


3,043,873


2,442,582


9,329,336


7,604,584**Income tax expense**


982,530


760,156


3,021,923


2,365,663Net income

$
2,061,343

$
1,682,426

$
6,307,413

$
5,238,921**Earnings per common share:**Basic

$
0.21

$
0.19

$
0.66

$
0.56Diluted

$
0.21

$
0.18

$
0.65

$
0.55See accompanying notes to consolidated financial statements. -4-
  **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME****(Unaudited)********Three Months Ended**

**Nine Months Ended****September 30,**

**September 30,****2004**

**2003**

**2004**

**2003**Net income

$
2,061,343

$
1,682,426

$
6,307,413

$
5,238,921Other comprehensive income (loss):Unrealized holding gains (losses) arising during theperiod, net of tax (benefit) of ($280,720) and($300,586) for the quarter and $182,849 and($173,381) for the year to date


(544,924
)

(583,491
)

354,945


(336,563
)Reclassification adjustment for gains included innet income, net of tax of $1,882 and $488,949for the quarter and $2,078 and $477,639for the year to date


(3,653
)

(949,136
)

(4,033
)

(927,181
)(548,577
)

(1,532,627
)

350,912


(1,263,744
)Comprehensive income

$
1,512,766

$
149,799

$
6,658,325

$
3,975,177See accompanying notes to consolidated financial statements. 
  -5-   
 **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY****NINE MONTHS ENDED SEPTEMBER 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


-


-


-


6,307,413


-


6,307,413Other comprehensive income


-


-


-


-


350,912


350,912Cash dividends declared,$.24 per share


-


-


-


(2,281,799
)

-


(2,281,799
)Stock acquired and cancelledunder stock repurchase plan


(35,300
)

-


(432,658
)

-


-


(432,658
)Stock options exercised


51,360


-


363,715


-


-


363,715**Balance, September 30, 2004**


9,500,720

$
1,217,065

$
29,245,757

$
49,677,114

$
229,813

$
80,369,749See accompanying notes to consolidated financial statements. -6-
  **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003****(Unaudited)****2004**

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

$
6,307,413

$
5,238,921Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation, amortization and accretion, net


1,963,190


2,662,479Provision for loan losses


-


-Net realized gain on securities transactions


(6,111
)

(1,404,820
)Net (gain) loss on disposal of assets


(27,484
)

231,725Increase in cash value of bank-owned life insurance


(230,052
)

(354,737
)Decrease in deferred compensation accrual


(8,894
)

(102,318
)Increase (decrease) in retirement accruals


370,458


(273,414
)(Increase) decrease in taxes receivable


(112,171
)

118,333Increase in taxes payable


-


512,330(Increase) decrease in interest receivable


(100,093
)

130,368Increase (decrease) in interest payable


175,649


(313,009
)Net increase in prepaid expenses and other assets


(420,695
)

(170,010
)Net decrease in accrued expenses and other liabilities


32,686


28,661Net cash provided by operating activities


7,943,896


6,304,509**CASH FLOWS FROM INVESTING ACTIVITIES**(Increase) decrease in interest-bearing deposits in other banks


(71,661
)

387,115Net decrease in Federal funds sold


330,187


30,705,495Purchase of securities available for sale


(34,315,808
)

(112,505,824
)Proceeds from sales and calls of securities available for sale


14,612,355


40,783,374Proceeds from maturities and paydowns of securities available for sale


14,260,827


29,066,126Purchase of restricted and other equity investments


(2,116,700
)

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


600


1,275,200(Increase) decrease in loans


(62,983,895
)

17,492,586Purchase of premises and equipment


(632,277
)

(793,544
)Proceeds from disposal of assets


1,717,899


1,555,392Net cash provided by (used in) investing activities


(69,198,473
)

6,521,220**CASH FLOWS FROM FINANCING ACTIVITIES**Increase (decrease) in deposits


18,858,132


(43,317,902
)Increase (decrease) in Federal funds purchased andsecurities sold under repurchase agreements


(526,111
)

19,477,961Advances from the Federal Home Loan Bank of Atlanta


42,848,400


36,000,000Payments on the Federal Home Loan Bank of Atlanta advances


(296,142
)

(27,322,232
)Dividends paid


(1,995,235
)

(567,617
)Proceeds from the exercise of stock options


363,715


209,756Acquisition of stock under stock repurchase plan


(432,658
)

-Issuance of preferred stock in REIT subsidiaries


-


14,000Repurchase of preferred stock in REIT subsidiaries


(2,000
)

(5,000
)Net cash provided by (used in) financing activities


58,818,101


(15,511,034
) -7-
  **PAB BANKSHARES, INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003****(Unaudited)****2004**

**2003**Net decrease in cash and due from banks

$
(2,436,476
)
$
(2,685,305
)Cash and due from banks at beginning of period


22,920,218


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

$
20,483,742

$
22,513,973**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION**Cash paid during the period for:Interest

$
7,246,804

$
10,132,340Taxes

$
3,134,094

$
1,735,000**NONCASH INVESTING AND FINANCING TRANSACTIONS**Increase (decrease) in unrealized gains on securities available for sale

$
531,683

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

$
-

$
551,269Transfer of loans to foreclosed assets

$
600,858

$
4,451,775See 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 conducted primarily by its wholly-owned commercial bank subsidiary, The Park Avenue Bank (the Bank). The Bank is a state-chartered, member bank of the Federal Reserve System that was founded in 1956 in Valdosta, Lowndes County, Georgia. Through the Bank, the Company offers a broad range of commercial and consumer banking products and services to customers located primarily in the local market areas listed below. The Company and the Bank are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.
 
 **Banking Locations**
**Number of Offices****South Georgia Market:**Valdosta, Lowndes County, Georgia
3 (including the main office)Lake Park, Lowndes County, Georgia
1Adel, Cook County, Georgia
1Bainbridge, Decatur County, Georgia
3Cairo, Grady County, Georgia
1Statesboro, Bulloch County, Georgia
2Baxley, Appling County, Georgia
1Hazlehurst, Jeff Davis County, Georgia
1**North Georgia Market:**McDonough, Henry County, Georgia
1Stockbridge, Henry County, Georgia
1Oakwood, Hall County, Georgia
1Athens, Clarke County, Georgia
1 (loan production office)**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 PAB Bankshares Capital Trust I. 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 (each a REIT) and two intermediate REIT holding companies as subsidiaries of the Bank. The REITs were established to realize state income tax benefits and to provide the Bank with ready access to capital markets if additional capital were needed. The REIT holding companies were established to provide assistance in managing the Companys investment in the REITs. To comply with federal tax law, a minority interest in the non-voting, cumulative preferred stock of the REITs was issued to certain directors, officers and employees of the Company. The $500 par value preferred stock pays an 8% annual dividend. The total minority interest of the REITs included in other liabilities was $115,000 and $117,000 as of September 30, 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 and nine months ended September 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**

**Nine Months Ended****September 30,**

**September 30,****2004**

**2003**

**2004**

**2003**Basic earnings per share:Net income

$
2,061,343

$
1,682,426

$
6,307,413

$
5,238,921Weighted average common shares outstanding


9,491,439


9,445,852


9,502,263


9,436,026Earnings per common share

$
0.21

$
0.19

$
0.66

$
0.56Diluted earnings per share:Net income

$
2,061,343

$
1,682,426

$
6,307,413

$
5,238,921Weighted average common shares outstanding


9,491,439


9,445,852


9,502,263


9,436,026Effect of dilutive stock options


116,921


170,000


144,120


111,239Weighted average diluted commonshares outstanding


9,608,360


9,615,852


9,646,383


9,547,265Earnings per common share

$
0.21

$
0.18

$
0.65

$
0.55 
 -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 nine months ended September 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**

**Nine Months Ended****September 30,**

**September 30,****2004**

**2003**

**2004**

**2003**Net income, as reported

$
2,061,343

$
1,682,426

$
6,307,413

$
5,238,921Deduct:Total stock-based employee compensation expensedetermined under fair value based method for allawards, net of related tax effects


(54,005
)

(60,537
)

(168,176
)

(176,021
)Pro forma net income

$
2,007,338

$
1,621,889

$
6,139,237

$
5,062,900Earnings per share:Basic - as reported

$
0.21

$
0.19

$
0.66

$
0.56Basic - pro forma

$
0.21

$
0.17

$
0.65

$
0.54Diluted - as reported

$
0.21

$
0.18

$
0.65

$
0.55Diluted - pro forma

$
0.21

$
0.17

$
0.64

$
0.53 -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 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. Our offices in Marion and St. Johns counties are collectively referred to as our Florida market. In addition, our corporate assets, correspondent account balances, investment portfolio, out-of-market participation loans, insider loans and insider deposits, etc. are reported at the corporate level, in what we refer to as the Treasury.
 
 **FINANCIAL CONDITION**
 
 During the nine months ended September 30, 2004, total assets grew $66.4 million, or 9.1%, from $730.7 million to $797.1 million. Total loans increased $61.8 million, or 11.5%, investment securities increased $7.6 million, or 5.9%, and total deposits increased $18.9 million, or 3.4%, during the same period. Of the $18.9 million net growth in deposits for the year, $17 million is from the purchase of brokered deposits. We used $42.8 million in new advances from the Federal Home Loan Bank of Atlanta (the FHLB), cash flows from our investment portfolio, and the brokered deposits to fund the increase in loans and investments during the nine months ended September 30, 2004.
 -12- Loans in our North Georgia market increased $47.6 million (26.6%) since year-end with the majority of the growth being in construction and development loans. Loans in South Georgia increased $7.3 million (2.6%) since year-end, loans in Florida increased $7.7 million (18.4%) since year-end and loans in Treasury decreased $800,000 (5.0%) for the same period. Summarized by market, the loan portfolio consists of $226.9 million (37.8%) in North Georgia, $293.7 million (48.9%) in South Georgia, $49.7 million (8.3%) in Florida, and $30.2 million (5.0%) in the Treasury as of September 30, 2004.
 
 The following table highlights the changes in the composition of the loan portfolio over the past nine months.
 
 As of Quarter End

Sep-04

% of Total

Dec-03

% of Total(Dollars In Thousands)Commercial and financial

$
54,472


9.1
%
$
53,849


10.0
%Agricultural (including loans secured by farmland)


30,076


5.0
%

24,071


4.5
%Real estate - construction


142,744


23.8
%

100,150


18.6
%Real estate - mortgage (commercial and residential)


351,547


58.5
%

332,004


61.6
%Installment loans to individuals and other loans


22,366


3.7
%

29,366


5.5
%601,205


100.1
%

539,440


100.1
%Unearned income, net


(755
)

-0.1
%

(796
)

-0.1
%600,450


100.0
%

538,644


100.0
%Allowance for loan losses


(9,562
)

-1.6
%

(10,139
)

-1.9
%$
590,888


98.4
%
$
528,505


98.1
%
 
 Stockholders equity was 10.1% of total assets at quarter end. Total equity increased $4.3 million, or 5.7%, since December 31, 2003. This increase is primarily the net result of $6.3 million in earnings, less $2.3 million in dividends, and a $351,000 increase in the market value of our securities portfolio. We declared a third quarter 2004 dividend of $0.10 per common share payable to stockholders of record on September 30, 2004. We announced a stock buyback plan of 400,000 shares during the second quarter of 2004, and we have repurchased and cancelled a combined 35,300 shares of our common stock under the plan during the second and third quarters of 2004.
 
 **RESULTS OF OPERATIONS**
 
 Net income for the three months ended September 30, 2004 was $2.06 million, or $0.21 per diluted share, as compared to $1.68 million, or $0.18 per diluted share, during the same period in 2003. The $380,000 increase in net income is the net result of an $800,000 increase in net interest income (or $790,000 on a taxable-equivalent basis), a $1.3 million decrease in other income, a $1.1 million decrease in other expenses, and a $220,000 increase in income tax expense.
 
 Net income for the nine months ended September 30, 2004 was $6.3 million, or $0.65 per diluted share, as compared to $5.2 million, or $0.55 per diluted share, during the same period in 2003. The $1.1 million increase in net income is the net result of a $1.5 million increase in net interest income (or $1.47 million on a taxable-equivalent basis), a $2.0 million decrease in other income, a $2.3 million decrease in other expenses, and a $700,000 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 September 30, 2004, our net interest income on a taxable-equivalent basis was $7.8 million, an 11.4% increase over the $7.0 million in net interest income for the third quarter of 2003. For the nine months ended September 30, 2004, net interest income on a taxable-equivalent basis was $22 million, a 7.1% increase over the $20.7 million in net interest income for the same period in 2003.
 -13-   *Rate / Volume Analysis*
 The following table shows a summary of the changes in interest income and interest expense on a fully taxable equivalent basis resulting from changes in volume and changes in rates for each category of interest-earning assets and liabilities. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the previous period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Thus, changes that are not solely due to volume have been consistently attributed to rate.
 
 For the Three Months Ended September 30,

For the Nine Months Ended September 30,2004 vs. 2003

2004 vs. 2003Increase

Changes Due To

Increase

Changes Due To(Decrease)

Rate

Volume

(Decrease)

Rate

Volume(Dollars In Thousands)

(Dollars In Thousands)Increase (decrease) inincome from earning assets:Loans

$
357

$
(322
)
$
679

$
(1,308
)
$
(2,011
)
$
703Taxable securities


98


204


(106
)

464


369


95Nontaxable securities


(14
)

(3
)

(11
)

(16
)

(17
)

1Other short-term investments


(10
)

6


(16
)

(61
)

(5
)

(56
)Total interest income


431


(115
)

546


(921
)

(1,664
)

743Increase (decrease) inexpense from interest-bearing liabilities:Demand deposits


23


(1
)

24


(294
)

(320
)

26Savings deposits


(3
)

(9
)

6


(48
)

(65
)

17Time deposits


(473
)

(302
)

(171
)

(1,911
)

(1,160
)

(751
)FHLB advances


58


(106
)

164


(255
)

(671
)

416Notes payable


25


21


4


32


20


12Other short-term borrowings


9


20


(11
)

79


10


69Total interest expense


(361
)

(377
)

16


(2,397
)

(2,186
)

(211
)Net interest income

$
792

$
262

$
530

$
1,476

$
522

$
954
 
 The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin for the third quarter of 2004 was 4.35%, 33 basis points higher than our net interest margin of 4.02% during the same period in 2003. For the nine months ended September 30, 2004, our net interest margin was 4.32%, 22 basis points higher than our net interest margin of 4.10% for the same period in 2003.
 
 For the quarter and year to date, we have utilized our lower cost deposits and other borrowings to fund the growth of the balance sheet. The average rate paid for interest-bearing liabilities in the third quarter of 2004 was 1.77%, 29 basis points lower than the 2.06% paid for funds in the third quarter of 2003. However, the 1.77% average rate paid in the third quarter of 2004 was five basis points higher than the 1.72% average rate paid for funds in the previous quarter. If interest rates continue to rise and we continue to grow our balance sheet, we expect the incremental cost of those additional funds needed for such growth to be higher than our current cost of funds.
 
 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 nine months ended September 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.
  -14-   For the Three Months Ended September 30,



2004





2003Interest

Average



Interest

AverageAverage

Income/

Yield/

Average

Income/

Yield/Balance

Expense

Rate

Balance

Expense

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

$
572,102

$
8,879


6.17
%
$
529,761

$
8,522


6.38
%Investment securities:Taxable


123,586


1,345


4.33
%

135,096


1,247


3.66
%Nontaxable


8,603


127


5.87
%

9,341


141


6.01
%Other short-term investments


6,117


20


1.31
%

13,131


30


0.90
%Total interest-earning assets

$
710,408

$
10,371


5.81
%
$
687,329

$
9,940


5.74
%Interest-bearing liabilities:Demand deposits

$
177,919

$
312


0.70
%
$
163,995

$
289


0.70
%Savings deposits


43,432


60


0.55
%

39,760


63


0.63
%Time deposits


252,464


1,571


2.48
%

275,564


2,044


2.94
%FHLB advances


76,533


431


2.24
%

53,126


373


2.79
%Notes payable


10,310


147


5.67
%

10,000


122


4.85
%Other short-term borrowings


26,700


90


1.34
%

30,865


81


1.04
%Total interest-bearing liabilities

$
587,358

$
2,611


1.77
%
$
573,310

$
2,972


2.06
%Interest rate spread








4.04
%







3.68
%Net interest income




$
7,760







$
6,968Net interest margin








4.35
%







4.02
%For the Nine Months Ended September 30,





2004








2003Interest


Average





Interest


AverageAverage


Income/


Yield/


Average


Income/


Yield/Balance


Expense


Rate


Balance


Expense


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

$
556,197

$
25,491


6.12
%
$
541,987

$
26,799


6.61
%Investment securities:Taxable


113,459


3,661


4.31
%

110,178


3,197


3.88
%Nontaxable


8,672


387


5.96
%

8,656


403


6.22
%Other short-term investments


7,941


60


1.01
%

14,676


121


1.11
%Total interest-earning assets

$
686,269

$
29,599


5.76
%
$
675,497

$
30,520


6.04
%Interest-bearing liabilities:Demand deposits

$
170,967

$
822


0.64
%
$
167,033

$
1,116


0.89
%Savings deposits


42,189


172


0.54
%

39,199


220


0.75
%Time deposits


253,552


4,791


2.52
%

285,509


6,702


3.14
%FHLB advances


59,403


960


2.16
%

44,252


1,215


3.67
%Notes payable


10,310


413


5.36
%

10,000


381


5.09
%Other short-term borrowings


29,235


264


1.20
%

21,276


185


1.16
%Total interest-bearing liabilities

$
565,656

$
7,422


1.75
%
$
567,269

$
9,819


2.31
%Interest rate spread








4.01
%







3.73
%Net interest income




$
22,177







$
20,701Net interest margin








4.32
%







4.10
%
 -15-   *Provision for Loan Losses*
 At September 30, 2004, the allowance for loan losses as a percent of total loans was 1.59%, 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. As an integral part of our credit risk management process, we regularly review loans in our portfolio for credit quality and documentation of collateral. We have a comprehensive methodology for determining the adequacy of our allowance for loan losses. This methodology includes an assessment for specific valuations on larger loan lines and nonperforming loans, and an assessment based on environmental factors applied to other homogenous groups of otherwise performing loans.
 
 The environmental factors considered in developing our loss measurements include:
 ·
levels of and trends in delinquencies and impaired loans; ·
levels of and trends in charge-offs and recoveries; ·
trends in volume and terms of loans; ·
effects of any changes in risk selection and underwriting standards and other changes in lending policies, procedures, and practices; ·
experience, ability, and depth of lending management and other relevant staff; ·
national and local economic trends and conditions; ·
industry conditions; and ·
effects of changes in credit concentrations. 
 This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While we use the best information available to make the evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or other environmental factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
 
 For the three and nine months ended September 30, 2004 and September 30, 2003, there were no provisions for loan losses recorded. 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 0.90% of total loans at September 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 September 30, 2004.
 
 The table below summarizes our levels of nonperforming loans over the past five quarters.
 As of Quarter End

Sep-04

Jun-04

Mar-04

Dec-03

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

$
3,857

$
4,484

$
4,868

$
7,048

$
7,230Accruing loans which are contractually past due90 days or more as to principal or interest payments


10


9


-


-


-Troubled debt restructurings not included above


2,170


2,179


2,188


1,168


1,176Total nonperforming loans

$
6,037

$
6,672

$
7,056

$
8,216

$
8,406Total nonperforming loans as a percentage oftotal loans


1.01
%

1.20
%

1.28
%

1.53
%

1.58
%
 
 For the nine month period ended September 30, 2004, we recorded $1,228,000 in loan losses and we recovered $651,000 in previously charged-off loans, for a net loss of $577,000, or 0.14% 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 nine month period ended September 30, 2003, we recorded $2,091,000 in loan losses and we recovered $419,000 in previously charged-off loans, for a net loss of $1,672,000, or 0.41% of average loans on an annualized basis.
 -16-   *Other Income*
 A summary of noninterest income follows:
 
 Third Quarter



Year To Date2004

2003

Pct. Chg.

2004

2003

Pct. Chg.(Dollars in Thousands)Noninterest income:Service charges on deposit account

$
1,158

$
1,223


-5.3
%
$
3,318

$
3,757


-11.7
%Mortgage origination fees


143


185


-22.7
%

379


616


-38.5
%Brokerage commissions and fees


-


103


-100.0
%

-


306


-100.0
%Securities transactions, net


6


1,047


-99.4
%

6


1,405


-99.6
%Gain on sale of financial services operation


-


-


-


200


-


-Earnings on bank-owned life insurance


86


117


-26.5
%

230


355


-35.2
%Gain (loss) on disposal of assets


7


(35
)

120.0
%

28


(229
)

112.2
%Other noninterest income


214


225


-4.9
%

749


703


6.5
%Total noninterest income

$
1,614

$
2,865


-43.7
%
$
4,910

$
6,913


-29.0
%
 
 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. Gains on the sale of securities were down compared to the third quarter of 2003 due to a $1.0 million gain on the sale of stock in Community Financial Services, Inc. taken last year. Earnings on bank-owned life insurance decreased primarily as a result of a lower rate of return 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 brokerage fees is due to the disposal of our financial services operation during the first quarter of 2004 and the corresponding absence of brokerage fees earned.
 
 *Other Expenses*
 A summary of noninterest expense follows:
 
 Third Quarter



Year To Date2004

2003

Pct. Chg.

2004

2003

Pct. Chg.(Dollars in Thousands)Noninterest expenses:Salaries and wages

$
3,649

$
2,883


26.6
%
$
9,357

$
9,222


1.5
%Deferred loan cost


(189
)

(111
)

70.3
%

(543
)

(329
)

65.0
%Employee benefits


679


702


-3.3
%

2,240


2,392


-6.4
%Net occupancy expense of premises


491


453


8.4
%

1,393


1,331


4.7
%Furniture and equipment expense


532


596


-10.7
%

1,582


1,797


-12.0
%Advertising and business development


101


115


-12.2
%

313


317


-1.3
%Supplies and printing


94


135


-30.4
%

314


435


-27.8
%Telephone and internet charges


88


108


-18.5
%

255


365


-30.1
%Postage and courier


144


138


4.3
%

425


419


1.4
%Legal and accounting fees


66


124


-46.8
%

231


401


-42.4
%Loss on early retirement of debt


-


1,438


-100.0
%

-


1,438


-100.0
%Other noninterest expense


632


762


-17.1
%

2,059


2,085


-1.2
%Total noninterest expense

$
6,287

$
7,343


-14.4
%
$
17,626

$
19,873


-11.3
%
 
 Salaries and wages expense and employee benefits were up for the quarter due primarily to a $686,000 accrual resulting from the retirement of former CEO, Michael E. Ricketson in August of this year. Excluding this accrual, salaries and wages for the quarter were up 2.7%. 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 rose due to the opening of a branch office in Stockbridge during the quarter and inflationary 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. During the third quarter of 2003, the Company incurred a $1.44 million loss on early retirement of debt in order to pay off higher rate FHLB borrowings, saving significant interest expense over the next few years.
  -17-   *Income Tax Expense*
 As a percentage of net income before taxes, income tax expense was 32.4% and 31.1% for the nine-month periods ending September 30, 2004 and September 30, 2003, respectively.
 
 
 **LIQUIDITY AND CAPITAL RESOURCES**
 
 Liquidity is an important factor in our financial condition and affects our ability to meet the borrowing needs and deposit withdrawal requirements of our customers. Assets, consisting primarily of loans and investment securities, are funded by customer deposits, borrowed funds, and retained earnings. Maturities in the investment and loan portfolios also provide a steady flow of funds for reinvestment. In addition, our liquidity continues to be enhanced by a relatively stable core deposit base and the availability of additional funding sources.
 
 At September 30, 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 18.71%, 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%.
 
 We funded the $71.7 million growth in loans and investments during the third quarter of 2004 by utilizing $12.5 million in federal funds sold from the beginning of the quarter and the addition of $15 million in brokered deposits, $28 million in FHLB advances, $11.9 million in repurchase agreements, and $3.5 million in Federal Funds purchased. We have begun more aggressive in-market deposit campaigns in an effort to reduce our dependency on funding from repurchase agreements and Federal Funds purchased.
 
 During the fourth quarter of 2004, the Bank will enter into a new borrowing agreement with the FHLB. This new agreement will allow the Bank to pledge qualifying commercial real estate loans, home equity loans, and multi-family residential mortgages as collateral on its advances in addition to the FHLBs current liens on our one-to-four family mortgages and our investment securities held in safekeeping by the FHLB. The pledge of additional collateral will give the Bank the ability to continue to use FHLB advances for future liquidity needs.
 
 There are no binding commitments for material cash expenditures outstanding at this time.
 
 *Contractual Obligations*
 Summarized below are our contractual obligations as of September 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

$
87,267

$
10,931

$
30,882

$
4,680

$
40,774Operating Lease Obligations


623


156


281


182


4Guaranteed Preferred Beneficial Interestsin Debentures


10,310


-


-


-


10,310$
98,200

$
11,087

$
31,163

$
4,862

$
51,088
 
  -18-   *Off Balance Sheet Arrangements*
 Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or when the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to a financial instrument for commitments to extend credit, standby letters of credit and credit card commitments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of September 30, 2004 and December 31, 2003 are as follows:
 
 Sep-04

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

$
117,924

$
84,533Standby letters of credit

$
3,195

$
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 our regulators. At September 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 September 30, 2004.
 
 MinimumCompany



RegulatoryConsolidated

Bank

RequirementTotal Capital to Risk Weighted Assets

14.4
%

13.9
%

8.0
%Tier 1 Capital to Risk Weighted Assets

13.1
%

12.6
%

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

11.0
%

10.6
%

4.0
%
 
 On May 25, 2004, the Company announced a plan to repurchase up to 400,000 shares of the Companys common stock over the next twelve-month period. The Company plans to use cash on hand to repurchase its shares on the open market. At September 30, 2004, the Company had $5.63 million in cash on hand. Through September 30, 2004, 35,300 shares had been purchased at an average price of $12.26. The expiration date for this plan is May 25, 2005.
  **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.
 -19-   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 nine months ended September 30, 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 the current environment of rising interest rates, the Company has exceeded policy limits by adjusting the balance sheet to a more asset-sensitive position. At September 30, 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 the increase in interest rates.
 -20-The table below has two gap ratio measurements, regulatory and management-adjusted. The regulatory gap ratio considers only contractual maturities or repricings. The management-adjusted gap ratio includes assumptions regarding prepayment speeds on certain rate sensitive assets, the repricing frequency of interest-bearing demand and savings accounts, and the stability of core deposit levels, all of which are adjusted periodically as market conditions change. We believe the management-adjusted gap ratio is a more accurate reflection of the interest rate risk in our balance sheet. The management-adjusted gap ratio indicates we are highly asset sensitive in relation to changes in market interest rates in the short-term. Being asset sensitive would result in net interest income increasing in a rising rate environment and decreasing in a declining rate environment.
 
 3-Month

6-Month

1-Year(Dollars in thousands)*Regulatory Defined*Rate Sensitive Assets (RSA)

$
450,469

$
480,912

$
510,634Rate Sensitive Liabilities (RSL)


321,177


397,118


500,059RSA minus RSL (Gap)

$
129,292

$
83,794

$
10,575Gap Ratio (RSA/RSL)


1.40


1.21


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

$
463,477

$
506,927

$
561,344Rate Sensitive Liabilities (RSL)


149,359


225,300


394,452RSA minus RSL (Gap)

$
314,118

$
281,627

$
166,892Gap Ratio (RSA/RSL)


3.10


2.25


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 10.3% 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 16.6% 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 1.75%. If market rates immediately fell by 100 basis points, a more possible but still unlikely scenario, our model projected net interest income to decrease 6.1% over the next year. During the third quarter of 2004, the federal funds rate was increased twice by 25 basis points, from 1.25% to 1.75%. 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

11.18%
14.47%+200 bps

9.17%
10.27%+100 bps

5.20%
5.58%-100 bps

-5.63%
-6.14%
 -21-   **ITEM 4. CONTROLS AND PROCEDURES**
 
 A review and evaluation was performed by the Companys management, including the Companys Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that review and evaluation, the CEO and CFO have concluded that the Companys current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Companys internal controls over financial reporting or in other factors that could significantly affect the Companys internal controls subsequent to the date of their evaluation. There were no material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.
 
 
 
 **PART II. OTHER INFORMATION**
 
 **ITEM 1. LEGAL PROCEEDINGS**
 
 None
 
 
 **ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**
 
 Issuer Purchases of Equity Securities in the quarter ended September 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 programs1July


7,600

$
12.20


7,600


372,400August


-


-


-


-September


7,700


12.82


7,700


364,700Total


15,300

$
12.51


15,300


364,7001On 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**
 
 None
 
 **ITEM 5. OTHER INFORMATION**
 
 None
  -22-   **ITEM 6. EXHIBITS**
 
 10.12
Employment Contract Termination Agreement, dated August 9, 2004, by and between Michael E. Ricketson, the Registrant, and the Bank. 
 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 
 **SIGNATURES**
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 **PAB BANKSHARES, INC.**RegistrantDate:
***November 9, 2004***

By:
***/s/ James L. Dewar, Jr.***James L. Dewar, Jr.President and Chief Executive Officer(principal executive officer of the registrant)Date:
***November 9, 2004***

By:
***/s/ Donald J. Torbert, Jr.***Donald J. Torbert, Jr.Executive Vice President and Chief Financial Officer(principal financial officer of the registrant) -23-