PAB BANKSHARES INC - 10-Q Quarterly Report

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

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
	Statements of Condition	3
	Statements of Income	4
	Statements of Comprehensive Income	5
	Statements of Stockholders’ Equity	6
	Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	22

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	None
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds
	and Issuer Purchases of Equity Securities	22
Item 3.	Defaults Upon Senior Securities	None
Item 4.	Submission of Matters to a Vote of Security Holders	None
Item 5.	Other Information	None
Item 6.	Exhibits	23

SIGNATURES		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		$	22,920,218
Interest-bearing deposits in other banks		577,070			505,409
Federal funds sold		-			330,187
Investment securities		134,393,205			126,825,013

Loans		600,449,812			538,643,842
Allowance for loan losses		(9,562,047	)		(10,139,114	)
Net loans		590,887,765			528,504,728

Premises and equipment, net		19,246,851			20,047,375
Goodwill		5,984,604			5,984,604
Cash value of bank-owned life insurance policies		10,652,130			10,422,078
Foreclosed assets		4,310,433			4,577,824
Other assets		10,561,917			10,623,956

Total assets	$	797,097,717		$	730,741,392

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	94,765,232		$	94,882,871
Interest-bearing demand and savings		217,877,804			202,753,493
Time		263,131,632			259,280,172
Total deposits		575,774,668			556,916,536

Federal funds purchased and securities sold under agreements to repurchase		36,393,679			36,919,790
Advances from the Federal Home Loan Bank of Atlanta		87,266,301			44,714,043
Guaranteed preferred beneficial interests in debentures (trust preferred securities)		10,310,000			10,000,000
Other liabilities		6,983,320			6,128,857
Total 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			1,217,065
Additional paid-in capital		29,245,757			29,314,700
Retained earnings		49,677,114			45,651,500
Accumulated other comprehensive income (loss)		229,813			(121,099	)
Total stockholders’ equity		80,369,749			76,062,166

Total liabilities and stockholders' equity	$	797,097,717		$	730,741,392

See 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	$	26,798,566
Interest and dividends on investment securities:
Taxable		1,345,486		1,247,202		3,661,634		3,197,544
Nontaxable		83,842		93,317		255,372		265,731
Other interest income		20,159		29,857		59,840		121,592
Total 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		8,038,205
Interest on Federal Home Loan Bank advances		430,823		373,072		960,034		1,214,891
Interest on other borrowings		237,141		203,307		677,002		566,235
Total interest expense		2,611,424		2,971,914		7,422,453		9,819,331

Net 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		3,757,416
Other fee income		307,204		446,782		976,713		1,412,253
Securities transactions, net		5,535		1,047,046		6,111		1,404,820
Other noninterest income		143,294		147,926		609,069		338,678
Total 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		11,284,981
Occupancy expense of premises		491,289		452,580		1,392,828		1,330,486
Furniture and equipment expense		531,878		595,558		1,581,787		1,797,473
Loss on early retirement of debt		-		1,438,085		-		1,438,085
Other noninterest expense		1,124,102		1,382,988		3,597,386		4,021,660
Total other expenses		6,286,891		7,342,787		17,625,590		19,872,685

Income 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		2,365,663

Net income	$	2,061,343	$	1,682,426	$	6,307,413	$	5,238,921

Earnings per common share:
Basic	$	0.21	$	0.19	$	0.66	$	0.56
Diluted	$	0.21	$	0.18	$	0.65	$	0.55

See 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		$	5,238,921

Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the
period, 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 in
net income, net of tax of $1,882 and $488,949
for the quarter and $2,078 and $477,639
for 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		$	3,975,177

See 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		$	71,264,738
Net income		-			-		-			7,125,518			-			7,125,518
Other 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	)		76,062,166
Net income		-			-		-			6,307,413			-			6,307,413
Other comprehensive income		-			-		-			-			350,912			350,912
Cash dividends declared,
$.24 per share		-			-		-			(2,281,799	)		-			(2,281,799	)
Stock acquired and cancelled
under 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		$	80,369,749



See 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		$	5,238,921
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion, net		1,963,190			2,662,479
Provision for loan losses		-			-
Net realized gain on securities transactions		(6,111	)		(1,404,820	)
Net (gain) loss on disposal of assets		(27,484	)		231,725
Increase 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	)		118,333
Increase in taxes payable		-			512,330
(Increase) decrease in interest receivable		(100,093	)		130,368
Increase (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			28,661
Net 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	)		387,115
Net decrease in Federal funds sold		330,187			30,705,495
Purchase of securities available for sale		(34,315,808	)		(112,505,824	)
Proceeds from sales and calls of securities available for sale		14,612,355			40,783,374
Proceeds from maturities and paydowns of securities available for sale		14,260,827			29,066,126
Purchase 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	)		17,492,586
Purchase of premises and equipment		(632,277	)		(793,544	)
Proceeds from disposal of assets		1,717,899			1,555,392
Net 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 and
securities sold under repurchase agreements		(526,111	)		19,477,961
Advances from the Federal Home Loan Bank of Atlanta		42,848,400			36,000,000
Payments 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			209,756
Acquisition of stock under stock repurchase plan		(432,658	)		-
Issuance of preferred stock in REIT subsidiaries		-			14,000
Repurchase 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			25,199,278

Cash 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		$	10,132,340
Taxes	$	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	$	-		$	551,269
Transfer of loans to foreclosed assets	$	600,858		$	4,451,775

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 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	1
Adel, Cook County, Georgia	1
Bainbridge, Decatur County, Georgia	3
Cairo, Grady County, Georgia	1
Statesboro, Bulloch County, Georgia	2
Baxley, Appling County, Georgia	1
Hazlehurst, Jeff Davis County, Georgia	1
North Georgia Market:
McDonough, Henry County, Georgia	1
Stockbridge, Henry County, Georgia	1
Oakwood, Hall County, Georgia	1
Athens, Clarke County, Georgia	1 (loan production office)
Florida Market:
Ocala, Marion County, Florida	1
St. 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 o r 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, respective ly.


	-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	$	5,238,921

Weighted average common shares outstanding		9,491,439		9,445,852		9,502,263		9,436,026

Earnings per common share	$	0.21	$	0.19	$	0.66	$	0.56

Diluted earnings per share:
Net income	$	2,061,343	$	1,682,426	$	6,307,413	$	5,238,921

Weighted average common shares outstanding		9,491,439		9,445,852		9,502,263		9,436,026
Effect of dilutive stock options		116,921		170,000		144,120		111,239
Weighted average diluted common
shares outstanding		9,608,360		9,615,852		9,646,383		9,547,265

Earnings 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 Co mpensation, 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		$	5,238,921
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, 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		$	5,062,900

Earnings per share:
Basic - as reported	$	0.21		$	0.19		$	0.66		$	0.56
Basic - pro forma	$	0.21		$	0.17		$	0.65		$	0.54
Diluted - as reported	$	0.21		$	0.18		$	0.65		$	0.55
Diluted - 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 environmen t 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 s tatements 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. 2003
	Increase			Changes Due To						Increase			Changes Due To
	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
	(Dollars In Thousands)									(Dollars In Thousands)
Increase (decrease) in
income from earning assets:
Loans	$	357		$	(322	)	$	679		$	(1,308	)	$	(2,011	)	$	703
Taxable securities		98			204			(106	)		464			369			95
Nontaxable securities		(14	)		(3	)		(11	)		(16	)		(17	)		1
Other short-term investments		(10	)		6			(16	)		(61	)		(5	)		(56	)
Total interest income		431			(115	)		546			(921	)		(1,664	)		743
Increase (decrease) in
expense from interest-bearing liabilities:
Demand deposits		23			(1	)		24			(294	)		(320	)		26
Savings deposits		(3	)		(9	)		6			(48	)		(65	)		17
Time deposits		(473	)		(302	)		(171	)		(1,911	)		(1,160	)		(751	)
FHLB advances		58			(106	)		164			(255	)		(671	)		416
Notes payable		25			21			4			32			20			12
Other short-term borrowings		9			20			(11	)		79			10			69
Total 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							2003
			Interest		Average					Interest		Average
	Average		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						$	6,968
Net interest margin						4.35	%						4.02	%


For the Nine Months Ended September 30,				2004							2003
				Interest		Average					Interest		Average
		Average		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						$	20,701
Net 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 wi th 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		$	7,230
Accruing loans which are contractually past due
90 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			1,176
Total nonperforming loans	$	6,037		$	6,672		$	7,056		$	8,216		$	8,406
Total nonperforming loans as a percentage of
total 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 Date
	2004		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 fee s 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 Date
	2004			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. S upplies 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 than
Contractual Obligations	Total		1 year		Years		years		5 years
	(Dollars in Thousands)
FHLB Advances	$	87,267	$	10,931	$	30,882	$	4,680	$	40,774
Operating Lease Obligations		623		156		281		182		4
Guaranteed Preferred Beneficial Interests
in 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 ou r 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	$	84,533
Standby 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.

					Minimum
	Company				Regulatory
	Consolidated		Bank		Requirement
Total 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 p art 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	$	510,634
Rate Sensitive Liabilities (RSL)		321,177		397,118		500,059
RSA minus RSL (Gap)	$	129,292	$	83,794	$	10,575

Gap Ratio (RSA/RSL)		1.40		1.21		1.02

Management-Adjusted
Rate Sensitive Assets (RSA)	$	463,477	$	506,927	$	561,344
Rate Sensitive Liabilities (RSL)		149,359		225,300		394,452
RSA minus RSL (Gap)	$	314,118	$	281,627	$	166,892

Gap 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 ou r 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 Income
Rate 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%


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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 identifi ed 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 programs¹
July		7,600	$	12.20		7,600		372,400
August		-		-		-		-
September		7,700		12.82		7,700		364,700
Total		15,300	$	12.51		15,300		364,700

¹ On May 25, 2004, the Board of Directors authorized the purchase of 400,000 shares
of 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


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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.
Registrant

Date:	*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)


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