Back to GetFilings.com



 
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 March 31, 2005 - 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 April 29, 2005 was 9,525,428 shares.
 

TABLE OF CONTENTS

     
Page
PART I     FINANCIAL INFORMATION
  
Item 1.
  
Consolidated Financial Statements (Unaudited)
  
   
Statements of Condition
1
   
Statements of Income
2
   
Statements of Comprehensive Income
3
   
Statements of Stockholders’ Equity
4
   
Statements of Cash Flows
5
   
Notes to Consolidated Financial Statements
7
Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
Item 3.
  
Quantitative and Qualitative Disclosures About Market Risk
18
Item 4.
  
Controls and Procedures
19
     
 
PART II    OTHER INFORMATION
 
Item 1.
  
Legal Proceedings
19
Item 2.
  
Unregistered Sales of Equity Securities and Use of Proceeds
19
Item 3.
  
Defaults Upon Senior Securities
20
Item 4.
  
Submissions of Matters to a Vote of Security Holders
20
Item 5.
  
Other Information
20
Item 6.
  
Exhibits
20
     
 
SIGNATURES
20
 
i
 
PART I. FINANCIAL INFORMATION
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
           
   
March 31,
  
December 31,
  
   
2005
  
2004
  
   
(Unaudited)
      
ASSETS
          
Cash and due from banks
  
$
17,199,641
  
$
22,976,924
  
Interest-bearing deposits in other banks
    
16,320,672
   
984,737
 
Federal funds sold
    
31,711,854
   
32,616,121
 
Investment securities
    
125,241,277
   
128,683,829
 
               
Loans
    
679,608,193
   
646,149,340
 
Allowance for loan losses
    
(9,867,192
)
  
(9,066,566
)
Net loans
    
669,741,001
   
637,082,774
 
               
Premises and equipment, net
    
18,500,005
   
18,812,209
 
Goodwill
    
5,984,604
   
5,984,604
 
Cash value of bank-owned life insurance policies
    
10,816,703
   
10,737,204
 
Foreclosed assets
    
532
   
30,216
 
Other assets
    
11,614,879
   
11,066,368
 
               
Total assets
  
$
907,131,168
  
$
868,974,986
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Deposits:
              
Noninterest-bearing demand
  
$
104,633,976
  
$
99,627,825
  
Interest-bearing demand and savings
    
246,973,177
   
224,836,339
 
Time
    
349,434,144
   
333,086,272
 
Total deposits
    
701,041,297
   
657,550,436
 
               
Federal funds purchased and securities sold under agreements to repurchase
    
8,411,803
   
14,168,098
 
Advances from the Federal Home Loan Bank of Atlanta
    
98,737,694
   
99,001,125
 
Guaranteed preferred beneficial interests in debentures (trust preferred securities)
    
10,310,000
   
10,310,000
 
Other liabilities
    
7,044,779
   
6,945,443
 
Total liabilities
    
825,545,573
   
787,975,102
 
               
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; 9,525,428 and 9,495,320 shares issued and outstanding
    
1,217,065
   
1,217,065
 
Additional paid-in capital
    
29,213,206
   
29,143,017
 
Retained earnings
    
52,369,282
   
50,938,254
 
Accumulated other comprehensive loss
    
(1,213,958
)
  
(298,452
)
Total stockholders' equity
    
81,585,595
   
80,999,884
 
               
Total liabilities and stockholders' equity
  
$
907,131,168
  
$
868,974,986
  
 
See accompanying notes to consolidated financial statements.

1

PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
  
   
Three Months Ended March 31,
  
   
2005
  
2004
  
           
Interest income:
          
Interest and fees on loans
  
$
10,836,772
  
$
8,251,198
  
Interest and dividends on investment securities:
              
Taxable
    
1,296,825
   
1,240,915
 
Nontaxable
    
81,899
   
87,383
 
Other interest income
    
251,847
   
7,788
 
Total interest income
    
12,467,343
   
9,587,284
 
               
Interest expense:
              
Interest on deposits
    
3,013,561
   
1,954,982
 
Interest on Federal Home Loan Bank advances
    
682,882
   
250,157
 
Interest on other borrowings
    
197,850
   
224,912
 
Total interest expense
    
3,894,293
   
2,430,051
 
               
Net interest income
    
8,573,050
   
7,157,233
 
               
Provision for loan losses
    
460,200
   
-
 
Net interest income after provision for loan losses
    
8,112,850
   
7,157,233
 
               
Other income:
              
Service charges on deposit accounts
    
922,055
   
1,065,895
 
Other fee income
    
300,708
   
380,410
 
Securities transactions, net
    
-
   
1,596
 
Other noninterest income
    
124,618
   
358,009
 
Total other income
    
1,347,381
   
1,805,910
 
               
Other expenses:
              
Salaries and employee benefits
    
3,490,325
   
3,572,652
 
Occupancy expense of premises
    
469,207
   
442,014
 
Furniture and equipment expense
    
503,152
   
526,951
 
Loss on early retirement of debt
    
-
   
-
 
Other noninterest expense
    
1,302,640
   
1,183,912
 
Total other expenses
    
5,765,324
   
5,725,529
 
               
Income before income tax expense
    
3,694,907
   
3,237,614
 
Income tax expense
    
1,216,258
   
1,111,333
 
               
Net income
  
$
2,478,649
  
$
2,126,281
  
               
Earnings per common share:
              
Basic
  
$
0.26
  
$
0.22
  
Diluted
  
$
0.26
  
$
0.22
  

See accompanying notes to consolidated financial statements.
 
2
 
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
 (Unaudited)  
   
Three Months Ended March 31,
  
   
2005
  
2004
  
           
Net income
  
$
2,478,649
  
$
2,126,281
  
               
Other comprehensive income (loss):
              
Unrealized holding gains (losses) arising during the period, net of tax (benefit) of ($471,625) and $463,916
    
(915,506
)
  
900,542
 
Reclassification adjustment for gains included in net income, net of tax of $0 and $543
    
-
   
(1,053
)
     
(915,506
)
  
899,489
 
               
Comprehensive income
  
$
1,563,143
  
$
3,025,770
  

See accompanying notes to consolidated financial statements.
 
3
 
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2005 (Unaudited) AND YEAR ENDED DECEMBER 31, 2004
   
                   
Accumulated
      
           
Additional
      
Other
      
   
Common Stock
  
Paid-in
  
Retained
  
Comprehensive
      
   
Shares
  
Par Value
  
Capital
  
Earnings
  
Loss
  
Total
  
                           
Balance, December 31, 2003
    
9,484,660
 
$
1,217,065
  
$
29,314,700
  
$
45,651,500
  
$
(121,099
)
$
76,062,166
  
Net income
    
-
   
-
   
-
   
8,518,085
   
-
   
8,518,085
 
Other comprehensive loss
    
-
   
-
   
-
   
-
   
(177,353
)
  
(177,353
)
Cash dividends declared, $.34 per share
    
-
   
-
   
-
   
(3,231,331
)
  
-
   
(3,231,331
)
Stock acquired and cancelled under stock repurchase plan
    
(46,300
)
  
-
   
(576,198
)
  
-
   
-
   
(576,198
)
Stock options exercised
    
56,960
   
-
   
404,515
   
-
   
-
   
404,515
 
Balance, December 31, 2004
    
9,495,320
   
1,217,065
   
29,143,017
   
50,938,254
   
(298,452
)
  
80,999,884
 
Net income
    
-
   
-
   
-
   
2,478,649
   
-
   
2,478,649
 
Other comprehensive loss
    
-
   
-
   
-
   
-
   
(915,506
)
  
(915,506
)
Cash dividends declared, $.11 per share
    
-
   
-
   
-
   
(1,047,621
)
  
-
   
(1,047,621
)
Stock acquired and cancelled under stock repurchase plan
    
(17,692
)
  
-
   
(249,988
)
  
-
   
-
   
(249,988
)
Stock options exercised
    
47,800
   
-
   
320,177
   
-
   
-
   
320,177
 
Balance, March 31, 2005
    
9,525,428
 
$
1,217,065
  
$
29,213,206
  
$
52,369,282
  
$
(1,213,958
)
$
81,585,595
  

See accompanying notes to consolidated financial statements.
 
4
 
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
 (Unaudited)
  
   
Three Months Ended March 31,
  
   
2005
  
2004
  
           
CASH FLOWS FROM OPERATING ACTIVITIES
          
Net income
  
$
2,478,649
  
$
2,126,281
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation, amortization and accretion, net
    
545,317
   
646,039
 
Provision for loan losses
    
460,200
   
-
  
Provision for deferred taxes
    
-
   
14,351
 
Net realized gain on securities transactions
    
-
   
(1,596
)
(Gain) loss on disposal of assets
    
2,518
   
(10,075
)
Increase in cash value of bank-owned life insurance
    
(79,499
)
  
(98,234
)
Decrease in deferred compensation accrual
    
(3,682
)
  
(50,864
)
Decrease in retirement accruals
    
(88,838
)
  
(98,271
)
Net change in taxes receivable and taxes payable
    
1,216,258
   
1,096,982
 
(Increase) decrease in interest receivable
    
(210,983
)
  
384,903
 
Increase in interest payable
    
419,818
   
45,952
 
Net increase in prepaid expenses and other assets
    
(541,948
)
  
(514,585
)
Net decrease in accrued expenses and other liabilities
    
(877,489
)
  
(836,685
)
Net cash provided by operating activities
    
3,320,321
   
2,704,198
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
              
Increase in interest-bearing deposits in other banks
    
(15,335,935
)
  
(249,658
)
(Increase) decrease in federal funds sold
    
904,267
   
(9,825,457
)
Purchase of debt securities
    
(8,172,409
)
  
-
 
Proceeds from sales and calls of debt securities
    
6,800,000
   
6,940,943
 
Proceeds from maturities and paydowns of debt securities
    
3,604,600
   
4,997,794
 
Purchase of equity investments
    
(278,100
)
  
(324,700
)
Redemption of equity investments
    
-
   
600
 
Net increase in loans
    
(33,160,598
)
  
(11,286,498
)
Purchase of premises and equipment
    
(117,944
)
  
(278,337
)
Proceeds from disposal of assets
    
72,723
   
1,397,552
 
Net cash used in investing activities
    
(45,683,396
)
  
(8,627,761
)
               
CASH FLOWS FROM FINANCING ACTIVITIES
              
Net increase (decrease) in deposits
    
43,490,861
   
(63,759
)
Net decrease in federal funds purchased and securities sold under repurchase agreements
    
(5,756,295
)
  
(5,242,671
)
Advances from the Federal Home Loan Bank
    
1,470,000
   
6,848,400
 
Payments on Federal Home Loan Bank advances
    
(1,733,431
)
  
(136,062
)
Dividends paid
    
(949,532
)
  
(661,418
)
Proceeds from the exercise of stock options
    
320,177
   
188,820
 
Acquisition of stock under stock repurchase plans
    
(249,988
)
  
-
 
Repurchase of preferred stock in REIT subsidiaries
    
(6,000
)
  
-
 
Net cash provided by financing activities
    
36,585,792
   
933,310
 
 
5
 
PAB BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (Continued)
 (Unaudited)
  
   
Three Months Ended March 31,
  
   
2005
  
2004
  
           
Net decrease in cash and due from banks
  
$
(5,777,283
)
$
(4,990,253
)
               
Cash and due from banks at beginning of period
    
22,976,924
   
22,920,218
 
               
Cash and due from banks at end of period
  
$
17,199,641
  
$
17,929,965
  
               
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
              
Cash paid during the period for:
              
Interest
  
$
3,474,475
  
$
2,384,099
  
Taxes
  
$
-
  
$
-
  
               
               
NONCASH INVESTING AND FINANCING TRANSACTIONS
              
Increase (decrease) in unrealized gains on securities available for sale
  
$
(1,387,131
)
$
1,362,860
  
 
See accompanying notes to consolidated financial statements.
 
6

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)
 
Atlanta, Cobb County, Georgia *
  
1 (loan production office)
Florida Market:
    
 
Ocala, Marion County, Florida
  
1
 
St. Augustine, St. Johns County, Florida
  
1 (loan production office)
       
 
* opened April 1, 2005
    

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 Financial Accounting Standards Board (“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 adoption of FASB Interpretation No. 46R did not have a material effect on the Company’s financial condition or results of operations.

In 1998, the Company formed 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 $109,000 and $115,000 as of March 31, 2005 and December 31, 2004, respectively.

7

PAB BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 
NOTE 2. BASIS OF PRESENTATION

The accompanying consolidated financial information of the Company is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations. The results of operations for the three months ended March 31, 2005 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, 2004.

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances are eliminated in consolidation.

In preparing the consolidated 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 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 COMMON SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares of common stock outstanding and dilutive potential common shares. Potential common shares consist of stock options.

The components used to calculate basic and diluted earnings per share for the three months ended March 31, 2005 and 2004 follow.

   
Three Months Ended March 31,
  
   
2005
  
2004
  
Basic earnings per share:
          
Net income
  
$
2,478,649
  
$
2,126,281
  
               
Weighted average common shares outstanding
    
9,498,988
   
9,500,031
 
               
Earnings per common share
  
$
0.26
  
$
0.22
  
               
Diluted earnings per share:
              
Net income
  
$
2,478,649
  
$
2,126,281
  
               
Weighted average common shares outstanding
    
9,498,988
   
9,500,031
 
Effect of dilutive stock options
    
149,642
   
189,549
 
Weighted average diluted common shares outstanding
    
9,648,630
   
9,689,580
 
               
Earnings per common share
  
$
0.26
  
$
0.22
  
 
8

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 ended March 31, 2005 and 2004 if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

   
Three Months Ended March 31,
  
   
2005
  
2004
  
           
Net income, as reported
  
$
2,478,649
  
$
2,126,281
  
Deduct:
              
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    
(42,964
)
  
(54,420
)
Pro forma net income
  
$
2,435,685
  
$
2,071,861
  
               
Earnings per share:
              
Basic - as reported
  
$
0.26
  
$
0.22
  
Basic - pro forma
  
$
0.26
  
$
0.22
  
Diluted - as reported
  
$
0.26
  
$
0.22
  
Diluted - pro forma
  
$
0.25
  
$
0.21
  

9

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this Report, including, without limitation, statements made 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” within the meaning of Section 27A of the Securities Act of 1933, as amended. Forward-looking statements include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into higher growth markets, our other business strategies and other statements that are not historical facts. When we use words like “anticipate”, “believe”, “intend”, “plan”, “expect”, “estimate”, “could”, “should”, “will” and similar expressions, you should consider them as identifying forward-looking statements. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins or the volumes or values of loans made by The Park Avenue Bank; (3) general economic conditions (both generally and in our markets) 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 and compliance requirements, 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 we can; (6) adverse changes may occur in the bond and equity markets; (7) war or terrorist activities may cause deterioration in the economy or cause instability in credit markets; (8) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals; and (9) economic, governmental or other factors may prevent the projected population and commercial growth in the countries and cities in which we operate.  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 Consolidated Financial Statements and related Notes included in this Report as well as the Consolidated Financial Statements, related Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2004 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.

Our operating subsidiary, The Park Avenue Bank, is a $905 million community bank with 17 branches and three loan production offices in Georgia and Florida. We have offices in both smaller, rural communities as well as larger, metropolitan areas. We provide traditional banking products and services to commercial and individual customers in our markets. Competition, regulation, credit risk, and interest rate risk are the primary factors that we must manage in order to be successful.

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, Clarke and Cobb 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 bank account balances, investment portfolio, out-of-market participation loans, insider loans and insider deposits, borrowings, etc. are reported at the corporate level, in what we refer to as the “Treasury”.

10

FINANCIAL CONDITION

The Company’s total assets increased $38.2 million, or 4.4%, during the three months ended March 31, 2005 to $907.1 million. This growth was fueled by a $43.5 million, or 6.6%, increase in deposits. We had a $27.2 million, or 8.4%, increase in demand and savings deposit accounts during the quarter due to $5.1 million in additional municipal deposits and also an expanded effort that began early in the fourth quarter of 2004 to increase market share in our communities. In addition, we had a $16.3 million, or 4.9%, increase in time deposits during the quarter. The increase in time deposits is net of a $2.2 million decrease in brokered deposits. The additional deposits were used to fund $33.5 million, or 5.2%, in net new loan growth during the quarter. The loan growth came primarily from recording $32.0 million, or 19.2%, in additional construction and development loans during the quarter on strong demand in several of our markets. Total loans have increased $131.4 million, or 23.9%, since March 31, 2004.

The table below summarizes our loan portfolio by loan type as of the end of each of the last five quarters.

As of Quarter End
  
Mar-05
  
Dec-04
  
Sep-04
  
Jun-04
  
Mar-04
  
   
(Dollars In Thousands)
  
Commercial and financial
  
$
54,512
  
$
59,703
  
$
54,472
  
$
50,151
  
$
51,250
  
Agricultural (including loans secured by farmland)
    
27,237
   
26,704
   
30,076
   
27,005
   
24,091
 
Real estate - construction
    
198,815
   
166,854
   
142,744
   
114,794
   
114,907
 
Real estate - mortgage (commercial and residential)
    
380,180
   
375,222
   
351,547
   
340,081
   
334,879
 
Installment loans to individuals and other loans
    
20,585
   
19,552
   
22,366
   
23,193
   
24,845
 
     
681,329
   
648,035
   
601,205
   
555,224
   
549,972
 
Deferred loan fees and unearned interest, net
    
(1,721
)
  
(1,886
)
  
(755
)
  
(700
)
  
(823
)
     
679,608
   
646,149
   
600,450
   
554,524
   
549,149
 
Allowance for loan losses
    
(9,867
)
  
(9,066
)
  
(9,562
)
  
(9,609
)
  
(9,730
)
   
$
669,741
  
$
637,083
  
$
590,888
  
$
544,915
  
$
539,419
  
 
Stockholders’ equity was 9.0% of total assets at quarter end. Total equity increased $0.6 million, or 0.7%, since December 31, 2004. The $2.5 million in earnings was offset by $1.0 million in dividends and a $0.9 million decrease in the market value of our securities portfolio, net of tax, during the quarter. We declared an $0.11 per common share dividend for the first quarter 2005, a 10% increase over the $0.10 per common share dividend paid for the fourth quarter of 2004.

RESULTS OF OPERATIONS

Net income for the three months ended March 31, 2005 was $2.48 million, or $0.26 per diluted share, as compared to $2.13 million, or $0.22 per diluted share, during the same period in 2004. The $352,000, or 16.6%, increase in net income is the net result of a $1,416,000 increase in net interest income (or $1,413,000 on a taxable-equivalent basis) offset by a $460,000 increase in the provision for loan losses, a $459,000 decrease in other income, a $40,000 increase in other expenses, and a $105,000 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 March 31, 2005, our net interest income on a taxable-equivalent basis was $8.62 million, a 19.6% increase over the $7.20 million in net interest income for the first quarter of 2004. The increase in net interest income is due to an increase in volume and an increase in interest rates. During the first quarter of 2005, our average earning assets were 22.4% higher compared to the same period in 2004. The average balances of our interest-bearing liabilities increased by 26.4% to fund the asset growth. As short-term interest rates rose during the second half of 2004 and into the first quarter of 2005, the average yield on our earning assets increased 29 basis points from 5.80% during the first quarter of 2004, to 6.09% for the first quarter of 2005. However, the average rates paid for our funds increased 49 basis points from 1.77% during the first quarter of 2004, to 2.26% for the first quarter of 2005, and as a result, our net interest spread tightened by 20 basis points from 4.03% during the first quarter of 2004, to 3.83% for the same period in 2005.

11

The net interest margin is net interest income expressed as a percentage of average earning assets. Our net interest margin for the first quarter of 2005 was 4.19%, 4 basis points higher than our net interest margin of 4.15% for the fourth quarter of 2004, but 15 basis points lower than the 4.34% recorded for the first quarter of 2004 due to the tighter net interest spread mentioned above. As we grow the balance sheet, we expect to continue to have tighter net interest spreads. A flat interest rate curve and incrementally higher cost of funds needed for such growth will also have an impact on our profitability.

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 ended March 31, 2005 and 2004. Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% Federal tax rate. Loan average balances include loans on nonaccrual status.

For the Three Months Ended March 31,
  
2005
  
 
  
 
  
2004
  
 
  
       
Interest
  
Average
      
Interest
  
Average
  
   
Average
  
Income/
  
Yield/
  
Average
  
Income/
  
Yield/
  
 
  
Balance
  
Expense
  
Rate
  
Balance
  
Expense
  
Rate
  
   
(Dollars In Thousands)
  
Interest-earning assets:
                          
Loans
  
$
665,750
  
$
10,836
    
6.60
%
$
541,549
  
$
8,251
    
6.13
%
Investment securities:
                                      
Taxable
    
117,117
   
1,297
   
4.49
%
  
113,459
   
1,241
   
4.40
%
Nontaxable
    
8,395
   
124
   
6.00
%
  
8,802
   
132
   
6.05
%
Other short-term investments
    
42,189
   
252
   
2.42
%
  
3,707
   
8
   
0.85
%
Total interest-earning assets
  
$
833,451
  
$
12,509
    
6.09
%
$
667,517
  
$
9,632
    
5.80
%
                                       
Interest-bearing liabilities:
                                      
Demand deposits
  
$
193,108
  
$
496
    
1.04
%
$
165,252
  
$
255
    
0.62
%
Savings deposits
    
42,453
   
63
   
0.60
%
  
40,675
   
56
   
0.55
%
Time deposits
    
343,035
   
2,454
   
2.90
%
  
255,192
   
1,645
   
2.59
%
FHLB advances
    
98,694
   
683
   
2.81
%
  
45,873
   
250
   
2.19
%
Notes payable
    
10,310
   
168
   
6.60
%
  
10,000
   
126
   
5.09
%
Other short-term borrowings
    
9,711
   
30
   
1.25
%
  
34,549
   
98
   
1.14
%
Total interest-bearing liabilities
  
$
697,311
  
$
3,894
    
2.26
%
$
551,541
  
$
2,430
    
1.77
%
                                       
Interest rate spread
                
3.83
%
              
4.03
%
                                       
Net interest income
        
$
8,615
              
$
7,202
        
                                       
Net interest margin
                
4.19
%
              
4.34
%

Provision for Loan Losses
At March 31, 2005, the allowance for loan losses as a percent of total loans was 1.45%, compared to 1.40% at December 31, 2004. The increase is due to the addition of $460,000 in provision expense and $340,000 in net recoveries of previous bad debts during the quarter. Our nonperforming assets increased $3.06 million, or 88%, during the quarter from $3.47 million at year end to $6.53 million as of March 31, 2005. The increase is due to the placing of a $5.7 million line on nonaccrual status during the quarter. We upgraded nearly $2 million in loans previously reported as troubled debt restructurings during the quarter due to their satisfactory performance over the past two years.

12

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.

The table below summarizes our levels of nonperforming loans over the past five quarters.

As of Quarter End
  
Mar-05
  
Dec-04
  
Sep-04
  
Jun-04
  
Mar-04
  
   
(Dollars In Thousands)
  
Loans accounted for on a nonaccrual basis
  
$
6,531
  
$
1,417
  
$
3,857
  
$
4,484
  
$
4,868
  
Accruing loans which are contractually past due 90 days or more as to principal or interest payments
    
6
   
11
   
10
   
9
   
-
 
Troubled debt restructurings not included above
    
-
   
2,045
   
2,170
   
2,179
   
2,188
 
Other impaired loans
    
-
   
-
   
-
   
-
   
-
 
Total nonperforming loans
  
$
6,537
  
$
3,473
  
$
6,037
  
$
6,672
  
$
7,056
  
                                 
Total nonperforming loans as a percentage of total loans
    
0.96
%
  
0.54
%
  
1.00
%
  
1.20
%
  
1.28
%

13

Other Income
A summary of noninterest income follows:

For the Three Months Ended March 31,
  
2005
  
2004
  
 
  
           
Percent
  
 
  
Amount
  
Amount
  
Change
  
   
(Dollars In Thousands)
  
Noninterest income:
              
Service charges on deposit accounts
  
$
922
  
$
1,066
    
-13.5
%
Mortgage origination fees
    
105
   
103
   
1.9
%
Securities transactions, net
    
-
   
2
   
-100.0
%
Gain on sale of financial services operation
    
-
   
200
   
-100.0
%
Earnings on bank-owned life insurance
    
79
   
98
   
-19.4
%
Gain (loss) on disposal of assets
    
(3
)
  
10
   
-130.0
%
Other noninterest income
    
244
   
327
   
-25.4
%
Total noninterest income
  
$
1,347
  
$
1,806
    
-25.4
%
                     
                     
Noninterest income (annualized) as a percentage of average assets
    
0.60
%
  
0.99
%
      

Service charges on deposit accounts decreased due to a continued decline in the volume of overdraft and non-sufficient funds charges. Earnings on bank-owned life insurance decreased primarily as a result of a lower rate of return on these policies compared to 2004. In February of 2004 we recorded a one-time gain of $200,000 on the sale of our financial services operation. We will, however, continue to receive a small portion of the commissions earned on a select list of accounts held by employees and directors of the Bank going forward. Other noninterest income decreased $83,000, due largely to the absence of income from our financial services operation, we recorded $116,000 in brokerage fees for the first quarter of 2004 and compared to $3,000 in the first quarter of 2005. Excluding the brokerage fees, other noninterest income increased $30,000 for the first quarter of 2005 compared to 2004.

Other Expenses
A summary of noninterest expense follows:

For the Three Months Ended March 31,
  
2005
  
2004
  
 
  
           
Percent
  
 
  
Amount
  
Amount
  
Change
  
   
(Dollars In Thousands)
  
Noninterest expenses:
              
Salaries and wages
  
$
3,125
  
$
2,886
    
8.3
%
Deferred loan costs
    
(391
)
  
(169
)
  
131.4
%
Employee benefits
    
756
   
856
   
-11.7
%
Net occupancy expense of premises
    
469
   
442
   
6.1
%
Furniture and equipment expense
    
503
   
527
   
-4.6
%
Advertising and business development
    
127
   
107
   
18.7
%
Supplies and printing
    
115
   
121
   
-5.0
%
Telephone and internet charges
    
85
   
78
   
9.0
%
Postage and courier
    
175
   
142
   
23.2
%
Legal and accounting fees
    
107
   
60
   
78.3
%
Service charges and fees
    
127
   
118
   
7.6
%
Other noninterest expense
    
567
   
558
   
1.6
%
Total noninterest expense
  
$
5,765
  
$
5,726
    
0.7
%
                     
                     
Noninterest expense (annualized) as a percentage of average assets
    
2.58
%
  
3.14
%
      
 
14
 
Salaries and wages expense and employee benefits were up for the quarter due primarily to the increase in the number of full-time equivalents from 275 in March of 2004 to 287 in March of 2005. We have hired several experienced lenders in our high-growth markets as we continue our growth in these areas. 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 2005 compared to the same period in 2004.

Furniture and equipment expense decreased primarily due to a $42,000 decrease in depreciation expense from March 31, 2004 to March 31, 2005. Occupancy costs as of March 31, 2005 increased from March 31, 2004 because of the combination of opening a branch office in Stockbridge Georgia during the second half of 2004 and annual inflationary-type increases in insurance, maintenance costs, and property taxes.

Advertising and business development expense increased due to our focus on marketing and growing our franchise. Legal and accounting fees increased due to expenses associated with higher audit fees and Sarbanes-Oxley legislation.

Other noninterest expense increased 1.6% from the first quarter of 2004 to the first quarter of 2005. However, various expenses that comprise this line item changed more significantly. The cost of acquiring, maintaining and repairing foreclosed other real estate owned and other repossessed property included in other noninterest expense decreased $106,000, or 93.8%. This decline is due to the slow down in the number of repossessions and foreclosures on real estate during the period. Directors’ fees and expenses increased $21,000, or 27.6%, due to a new quarterly director compensation plan started in 2005. Outside consulting fees increased $44,000, or 169.2%, due primarily to pre-employment recruiting fees of $48,000 spent in the first quarter of 2005 to hire the new employees mentioned above, compared to $6,000 spent in the first quarter of 2004.

Income Tax Expense
As a percentage of net income before taxes, income tax expense was 32.9% and 34.3% for the three-month periods ended March 31, 2005 and 2004, 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 March 31, 2005, 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 20.11%, compared to 18.71% at December 31, 2004. It is our policy to maintain a ratio of liquid assets to total assets of at least 15%.

We funded the $33.5 million growth in loans and a $5.8 million decrease in repurchase agreements during the first quarter of 2005 by utilizing $43.5 million in deposit growth, and a $3.4 million decrease in investments, thus increasing our cash, interest bearing deposits and federal funds by $8.7 million. We will continue our strategy of being more aggressive with our in-market deposit campaigns in an effort to reduce our dependency on non-core funding.

During the fourth quarter of 2004, the Bank entered into a new borrowing agreement with the FHLB. This new agreement has allowed 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 has given 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.
 
15

Contractual Obligations
Summarized below are our contractual obligations as of March 31, 2005.
       
Less than
  
1 to 3
  
3 to 5
  
More than
  
Contractual Obligations
  
Total
  
1 year
  
years
  
years
  
5 years
  
   
(Dollars In Thousands)
  
Federal Home Loan Bank of Atlanta Advances
  
$
98,738
  
$
16,885
  
$
14,208
  
$
15,408
  
$
52,237
  
Operating Lease Obligations
    
606
   
141
   
314
   
151
   
-
 
Guaranteed Preferred Beneficial Interests in Debentures
    
10,310
   
-
   
-
   
-
   
10,310
 
   
$
109,654
  
$
17,026
  
$
14,522
  
$
15,559
  
$
62,547
  

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 March 31, 2005 and December 31, 2004 are as follows:

   
Mar-05
  
Dec-04
  
Commitments to extend credit
  
$
144,871,000
  
$
118,155,000
  
Standby letters of credit
  
$
5,595,000
  
$
5,735,000
  

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 March 31, 2005, the Company and the Bank were in compliance with those standards. There are no conditions or events since quarter end that we believe have materially changed our regulatory capital ratios.

The following table summarizes the regulatory capital ratios of the Company and the Bank at March 31, 2005.

           
Minimum
  
   
Company
      
Regulatory
  
 
  
Consolidated
  
Bank
  
Requirement
  
Total Capital to Risk Weighted Assets
    
13.1
%
  
12.8
%
  
8.0
%
Tier 1 Capital to Risk Weighted Assets
    
11.8
%
  
11.6
%
  
4.0
%
Tier 1 Capital to Average Assets (Leverage Ratio)
    
9.8
%
  
9.6
%
  
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 March 31, 2005, the Company had $4.15 million in cash on hand. During the first quarter of 2005, 17,692 shares had been repurchased at an average price of $14.13. The expiration date for this plan is May 25, 2005.

16

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 2004 Annual Report on Form 10-K. The following is a brief description of the Company’s critical accounting estimates involving significant management valuation judgment.

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

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

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

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

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

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

Recent Accounting Pronouncements

In management’s opinion, there are no recent accounting pronouncements that have had or will have had a material impact on our earnings or financial position as of or for the quarter ended March 31, 2005.

17

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 March 31, 2005, our one-year management-adjusted gap ratio of 1.65 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.

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)
  
$
617,123
  
$
625,629
  
$
637,735
  
Rate Sensitive Liabilities (RSL)
    
543,869
   
563,389
   
588,258
 
RSA minus RSL (Gap)
  
$
73,254
  
$
62,240
  
$
49,477
  
                     
Gap Ratio (RSA/RSL)
    
1.13
   
1.11
   
1.08
 
 
                    
Management-Adjusted
                    
Rate Sensitive Assets (RSA)
  
$
548,248
  
$
593,731
  
$
655,503
  
Rate Sensitive Liabilities (RSL)
    
160,140
   
218,071
   
396,630
 
RSA minus RSL (Gap)
  
$
388,108
  
$
375,660
  
$
258,873
  
                     
Gap Ratio (RSA/RSL)
    
3.42
   
2.72
   
1.65
 

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 14.56% 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 19.88% 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. If market rates immediately fell by 100 basis points, a more possible but still unlikely scenario, our model projected net interest income to decrease 7.76% over the next year. During the first quarter of 2005, the federal funds rate was increased twice by 25 basis points, from 2.25% to 2.75%. As our interest sensitivity analysis shows, we expect the rise in rates will help to increase our net interest income in future periods.

18

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
Rate Change
Effect on Net Interest Income
Gradual
Immediate
+300 bps
14.34%
20.41%
+200 bps
12.05%
14.56%
+100 bps
6.87%
7.39%
-100 bps
-7.13%
-7.76%
 
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

 
  
 
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
  
January
    
-
 
$
-
    
-
   
-
 
February
    
-
   
-
   
-
   
-
 
March
    
17,692
   
14.13
   
17,692
   
336,008
 
Total
    
17,692
 
$
14.13
    
17,692
   
336,008
 

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.

19

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

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:
May 10, 2005
  
By:
/s/ M. Burke Welsh, Jr.
         
M. Burke Welsh, Jr.
         
President and Chief Executive Officer
         
(principal executive officer of the registrant)
             
             
 
Date:
May 10, 2005
  
By:
/s/ Donald J. Torbert, Jr.
         
Donald J. Torbert, Jr.
         
Executive Vice President and Chief Financial Officer
         
(principal financial officer of the registrant)
 
20