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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 ________________ FORM 10-QSB _________________ x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____________ to _________ Commission File Number: 333-112845 ________________ Upson Bankshares, Inc. (Exact name of small business issuer as specified in its charter)
 ________________ Georgia
(State or other jurisdiction of
incorporation or organization)
    
    58-2256460
(IRS Employer
Identification No.)
 108 South Church Street
Thomaston, Georgia 30286-4104
(Address of principal executive offices) (706) 647-5426
(Issuers telephone number) N/A
(Former name, former address and former fiscal year, if changed since last report) _____________________ Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 o No x State the number of shares outstanding of each of the issuers classes of
common equity, as of September 20, 2004: 2,180,585; $1 par value. Transitional Small Business Disclosure Format Yes o No x




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UPSON BANKSHARES, INC.
AND SUBSIDIARY
INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated

Balance Sheet - June 30, 2004
    
    
    3Consolidated Statements of Income - Three Months Ended June 30, 2004 and 2003
    
    
    4Consolidated
Statements of Income - Six Months Ended June 30, 2004 and 2003
    
    
    5Consolidated
Statements of Comprehensive Income - Three Months Ended June 30, 2004 and 2003
    
    
    6Consolidated Statements of Comprehensive Income - Six Months Ended June 30, 2004 and 2003
    
    
    6Consolidated Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 6 - Exhibits and Reports on Form 8-KSignatures
    
    
    20EX-31.1 SECTION 302 CERTIFICATION OF THE CEO AND CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO
  2




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PART I - FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
 (UNAUDITED)
 In ThousandsAssetsCash and due from banks
    
    $
    7,873Interest-bearing deposits in banks
    
    
    4,948Federal funds sold
    
    
    Securities available-for-sale
    
    
    2,135Securities held-to-maturity (fair value $86,843)
    
    
    88,454Restricted equity securities, at cost
    
    
    980Loans held for sale
    
    
    158Loans
    
    
    131,445Less allowance for loan losses
    
    
    1,876Loans, net
    
    
    129,569Premises and equipment
    
    
    4,506Intangible assets, net of amortization
    
    
    3,298Other assets
    
    
    5,547Total assets
    
    $
    247,468Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    30,419Interest-bearing
    
    
    186,224Total deposits
    
    
    216,643Federal funds purchased
    
    
    695Federal Home Loan Bank advances
    
    
    440Other liabilities
    
    
    1,984Total liabilities
    
    
    219,762Commitments and contingenciesRedeemable common stock held by ESOP
    
    
    384Stockholders equityCommon stock, par value $1; 10,000,000 shares
authorized; 2,187,753 issued
    
    
    2,188Additional paid in capital
    
    
    19,167Retained earnings
    
    
    6,293Accumulated other comprehensive loss
    
    
    (251
    )27,397Less cost of 7,168 shares of treasury stock
    
    
    (75
    )Total stockholders equity
    
    
    27,322Total liabilities and stockholders equity
    
    $
    247,468
 3




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UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 In Thousands2004
    
    2003Interest incomeLoans, including fees
    
    $
    2,321
    
    
    $
    2,339Securities
    
    
    972
    
    
    
    1,032Federal funds sold
    
    
    10
    
    
    
    34Deposits in banks
    
    
    27
    
    
    
    28Total interest income
    
    
    3,330
    
    
    
    3,433Interest expenseDeposits
    
    
    825
    
    
    
    1,032Other borrowings
    
    
    10
    
    
    
    34Total interest expense
    
    
    835
    
    
    
    1,066Net interest income
    
    
    2,495
    
    
    
    2,367Provision for loan losses
    
    
    81
    
    
    
    81Net interest income after provision
for loan losses
    
    
    2,414
    
    
    
    2,286Other incomeService charges on deposit accounts
    
    
    509
    
    
    
    454Other service charges and fees
    
    
    113
    
    
    
    29Mortgage loan origination fees
    
    
    29
    
    
    
    76Net gain on sale of loans
    
    
    31
    
    
    
    135Other operating income
    
    
    85
    
    
    
    122Total other income
    
    
    767
    
    
    
    816Other expensesSalaries and employee benefits
    
    
    1,046
    
    
    
    984Equipment and occupancy expenses
    
    
    216
    
    
    
    303Amortization of intangible
    
    
    137
    
    
    
    134Other operating expenses
    
    
    541
    
    
    
    441Total other expenses
    
    
    1,940
    
    
    
    1,862Income before income taxes
    
    
    1,241
    
    
    
    1,240Income tax expense
    
    
    366
    
    
    
    344Net income
    
    $
    875
    
    
    $
    896Earnings per share
    
    $
    0.40
    
    
    $
    0.41Dividends per share
    
    $
    0.115
    
    
    $
    0.115Weighted average shares outstanding
    
    
    2,180,585
    
    
    
    2,186,218
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UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 In Thousands2004
    
    2003Interest incomeLoans, including fees
    
    $
    4,620
    
    
    $
    4,686Securities
    
    
    2,070
    
    
    
    2,112Federal funds sold
    
    
    18
    
    
    
    68Deposits in banks
    
    
    57
    
    
    
    54Total interest income
    
    
    6,765
    
    
    
    6,920Interest expenseDeposits
    
    
    1,689
    
    
    
    2,111Other borrowings
    
    
    18
    
    
    
    59Total interest expense
    
    
    1,707
    
    
    
    2,170Net interest income
    
    
    5,058
    
    
    
    4,750Provision for loan losses
    
    
    162
    
    
    
    162Net interest income after provision
for loan losses
    
    
    4,896
    
    
    
    4,588Other incomeService charges on deposit accounts
    
    
    950
    
    
    
    829Other service charges and fees
    
    
    142
    
    
    
    128Mortgage loan origination fees
    
    
    56
    
    
    
    133Net gain on sale of loans
    
    
    85
    
    
    
    207Other operating income
    
    
    271
    
    
    
    235Total other income
    
    
    1,504
    
    
    
    1,532Other expensesSalaries and employee benefits
    
    
    2,105
    
    
    
    1,934Equipment and occupancy expenses
    
    
    479
    
    
    
    472Amortization of intangible
    
    
    275
    
    
    
    271Other operating expenses
    
    
    997
    
    
    
    981Total other expenses
    
    
    3,856
    
    
    
    3,658Income before income taxes
    
    
    2,544
    
    
    
    2,462Income tax expense
    
    
    747
    
    
    
    696Net income
    
    $
    1,797
    
    
    $
    1,766Earnings per share
    
    $
    0.82
    
    
    $
    0.81Dividends per share
    
    $
    0.23
    
    
    $
    0.23Weighted average shares outstanding
    
    
    2,180,585
    
    
    
    2,186,505
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UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 In Thousands2004
    
    2003Net income
    
    $
    875
    
    
    $
    896Other comprehensive losses:Unrealized holding gains (losses) on securities
available-for-sale, arising during period, net of tax
    
    
    (43
    )
    
    
    15Comprehensive income
    
    $
    832
    
    
    $
    911
 UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 In Thousands2004
    
    2003Net income
    
    $
    1,797
    
    
    $
    1,766Other comprehensive losses:Unrealized holding gains (losses) on securities
available-for-sale, arising during period, net of tax
    
    
    (27
    )
    
    
    16Comprehensive income
    
    $
    1,770
    
    
    $
    1,782
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UPSON BANKSHARES, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
 In Thousands2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    1,797
    
    
    $
    1,766Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    213
    
    
    
    215Amortization of intangibles
    
    
    276
    
    
    
    172Provision for loan losses
    
    
    162
    
    
    
    162Decrease in interest receivable
    
    
    59
    
    
    
    37(Decrease) in interest payable
    
    
    (170
    )
    
    
    (296
    )Net (increase) decrease in loans held for sale
    
    
    320
    
    
    
    (1,400
    )Net other operating activities
    
    
    417
    
    
    
    144Net cash provided by operating activities
    
    
    3,074
    
    
    
    800INVESTING ACTIVITIESPurchases of securities held-to-maturity
    
    
    (4,095
    )
    
    
    (55,526
    )Proceeds from maturities of securities held-to-maturity
    
    
    13,182
    
    
    
    45,519Purchases of restricted equity securities
    
    
    (90
    )
    
    
    (332
    )Net
(increase) in interest-bearing deposits in banks
    
    
    (86
    )
    
    
    (1,551
    )Net decrease in federal funds sold
    
    
    7,900
    
    
    
    7,620Net (increase) decrease in loans
    
    
    (8,360
    )
    
    
    568Purchase of premises and equipment
    
    
    (233
    )
    
    
    (515
    )Net cash provided by (used in) investing activities
    
    
    8,218
    
    
    
    (4,217
    )FINANCING ACTIVITIESNet increase (decrease) in deposits
    
    
    (10,827
    )
    
    
    4,592Net increase in federal funds purchased
    
    
    695
    
    
    
    Net (decrease) in other borrowings
    
    
    (55
    )
    
    
    (1,124
    )Proceeds from the sale of treasury shares
    
    
    
    
    
    
    36Purchase of treasury shares
    
    
    
    
    
    
    (118
    )Dividends paid
    
    
    (494
    )
    
    
    (483
    )Net cash (used in) provided by financing activities
    
    
    (10,681
    )
    
    
    2,903Net increase (decrease) in cash and due from banks
    
    
    611
    
    
    
    (514
    )Cash and due from banks at beginning of period
    
    
    7,262
    
    
    
    10,349Cash and due from banks at end of period
    
    $
    7,873
    
    
    $
    9,835
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UPSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 and 2003
(UNAUDITED) In Thousands2004
    
    2003SUPPLEMENTAL DISCLOSURESCash paid for:Interest
    
    $
    1,876
    
    
    $
    2,465Taxes
    
    $
    369
    
    
    $
    553NONCASH TRANSACTIONSPrincipal balances of loans transferred
to other real estate owned
    
    $
    105
    
    
    $
    73
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UPSON BANKSHARES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1  NATURE OF BUSINESS AND BASIS OF PRESENTATION Upson Bankshares, Inc. (the Company) is a bank holding company whose
principal activity is the ownership and management of its wholly owned
subsidiary, Bank of Upson (the Bank). The Bank is a commercial bank located
in Thomaston, Upson County, Georgia with five branches located in Thomaston,
Manchester, Warm Springs and Luthersville, Georgia. The Bank provides a full
range of banking services in its primary market area of Upson, Meriwether and
the surrounding counties. The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three-
and six-month periods ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. For further
information, refer to the financial statements and footnotes included in the
Companys consolidated financial statements and footnotes thereto for the year
ended December 31, 2003 included in Amendment No. 3 to the Companys
Registration Statement on Form S-4 (Registration No. 333-112845). The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Bank of Upson. All significant inter-company
accounts and transactions have been eliminated in consolidation. NOTE 2  EARNINGS PER COMMON SHARE Earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of share outstanding during the
period, which totaled 2,180,585 for both the three and six months ended June
30, 2004, and 2,186,218 shares for the three months ended June 30, 2003 and
2,186,505 shares for the six months ended June 30, 2003. NOTE 3  LOANS RECEIVABLE Major classifications of loans and leases are as follows in thousands (000): JUNE 30, 2004
    
    DECEMBER 31, 2003Commercial Loans
    
    $
    10,973
    
    
    $
    9,757Real Estate  construction
    
    
    9,338
    
    
    
    9,021Real Estate  mortgage
    
    
    74,303
    
    
    
    68,154Consumer
    
    
    28,218
    
    
    
    32,352Other
    
    
    8,726
    
    
    
    4,009Total Loans
    
    
    131,558
    
    
    
    123,293Less: Unearned income
    
    
    113
    
    
    
    106Less: Allowance for loans and
lease losses
    
    
    1,876
    
    
    
    1,825Loans receivable, net
    
    $
    129,569
    
    
    $
    121,362
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NOTE 4  NEW ACCOUNTING PRONOUNCEMENTS ACCOUNTING PRONOUNCEMENTS AFFECTING FUTURE PERIODS There are no recent accounting pronouncements that have had, or are expected to
have, a material effect on the Companys financial statements. NOTE 5  MERGER AGREEMENT WITH FIRST POLK BANKSHARES, INC. On November 24, 2003, the Company and First Polk Bankshares, Inc., a bank
holding company based in Cedartown, Georgia, entered into an Agreement and Plan
of Merger whereby First Polk Bankshares, Inc. will merge with and into the
Company. First Polks shareholders will receive one share of Company common
stock for each share of First Polk common stock they own, resulting in an
expected issuance of approximately 1.5 million shares of Company common stock
on a fully diluted basis. The merger is subject to various terms and
conditions, including shareholder and regulatory approvals and is expected to
close by the end of the third quarter of 2004. The merger will be accounted for
as a purchase. 10




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UPSON BANKSHARES, INC. AND SUBSIDIARY 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations The following is managements discussion and analysis of certain significant
factors which have affected the financial position and operating results of
Upson Bankshares, Inc. and its bank subsidiary, Bank of Upson, during the
period included in the accompanying consolidated financial statements. The
purpose of this discussion is to focus on information about our financial
condition and results of operations that are not otherwise apparent from our
consolidated financial statements. Reference should be made to those
statements and the selected financial data presented elsewhere in this report
for an understanding of the following discussion and analysis. Forward Looking Statements We may from time to time make written or oral forward-looking statements,
including statements contained in our filings with the Securities and Exchange
Commission and our reports to stockholders. Statements made, other than those
concerning historical information, should be considered forward-looking and
subject to various risks and uncertainties. Such forward-looking statements are
made based upon managements belief as well as assumptions made by, and
information currently available to, management pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our actual
results may differ materially from the results anticipated in forward-looking
statements due to a variety of factors, including the following:  
    
    the effects of competition in the banking business from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions, securities brokerage
firms, insurance companies, money market funds and other financial institutions operating
in our market area and elsewhere, including institutions operating through the Internet;
    
    changes in the interest rate environment which could reduce anticipated or actual margins;
    
    changes in political conditions or the legislative or regulatory environment;
    
    general economic conditions, either nationally or regionally and especially in primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
    
    changes occurring in business conditions and inflation;
    
    deposit levels, loan demand, and loan collateral values;
    
    changes in monetary and tax policies;
    
    changes in technology;
    
    our ability to retain key personnel;
    
    changes in the securities markets; and
    
    Other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission. We caution that such factors are not exclusive. We do not undertake to update
any forward-looking statements. Critical Accounting Estimates We have adopted various accounting policies that govern the application of
accounting principles generally accepted in the United States in the
preparation of our financial statements. Our significant accounting policies
are described in the footnotes to the financial statements for the year ended
December 31, 2003 included in Amendment No. 3 to the Companys Registration
Statement on Form S-4 (Registration No. 333-112845). Certain accounting
policies involve significant judgments and assumptions by us that have a 11




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material impact on the carrying value of certain assets and liabilities. We
consider these accounting judgments and assumptions to be our critical
accounting estimates. The judgments and assumptions we use are based on
historical experience and other factors, which we believe to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
we make, actual results could differ from these judgments and estimates which
could have a material impact on our carrying values of assets and liabilities
and our results of operations. We believe the allowance for loan losses is a critical accounting estimate that
requires the most significant judgments and assumptions used in preparation of
our consolidated financial statements. Refer to the portion of this discussion
that addresses our allowance for loan losses for a description of our processes
and methodology for determining our allowance for loan losses. Recent Developments On November 24, 2003, we entered into a merger agreement with First Polk
Bankshares, Inc. (First Polk), whereby First Polk will merge with and into
Upson Bankshares. The merger will combine our business with that of First
Polks under a single holding company named SouthCrest Financial Group, Inc.
As a result of the merger, we will own First Polks national bank subsidiary,
The First National Bank of Polk County. After the merger, our combined company
will provide a full line of commercial and consumer services and products and
will operate eight full-service bank offices located in Polk, Upson and
Meriwether Counties. Completion of the merger is subject to satisfaction of a
number of conditions, including approval of our shareholders and the
shareholders of First Polk. The merger has been approved by applicable bank
regulatory authorities, including the Federal Reserve. Liquidity and Capital Resources Liquidity is our ability to meet deposit withdrawals immediately while also
providing for the credit needs of our customers. We monitor our liquidity
resources on an ongoing basis. Our liquidity also is monitored on a periodic
basis by State and Federal regulatory authorities. As of June 30, 2004, we
believe our liquidity, as determined under guidelines established by regulatory
authorities and internal policy, was satisfactory. At June 30, 2004, our capital ratios were adequate based on regulatory minimum
capital requirements. The minimum capital requirements and the actual capital
ratios on a consolidated and bank-only basis are as follows: Actual


    
    MinimumRegulatoryConsolidated
    
    Bank
    
    RequirementLeverage capital ratios
    
    
    9.77
    %
    
    
    9.49
    %
    
    
    4.00
    %Risk-based capital ratios:Tier 1 capital
    
    
    15.47
    
    
    
    15.04
    
    
    
    4.00Total risk-based capital
    
    
    16.62
    
    
    
    16.19
    
    
    
    8.00
 These ratios may decline as asset growth continues, but are expected to exceed
the minimum regulatory requirements. As discussed under -Recent Developments, we have entered into a merger
agreement with First Polk whereby First Polk will merge with Upson to form
SouthCrest Financial Group, Inc. Based on preliminary discussions with the
Federal Reserve and managements expectations regarding growth of the combined
company following the merger, management believes that the combined entity will
have adequate capital resources to remain classified as well capitalized by
the regulatory agencies. Upson expects that the merger with First Polk will
result in an increase in deposit liabilities and a corresponding increase in
loan demand. Other than the pending merger and as described above, we are not aware of any
trends, demands, commitments, events or uncertainties that will result, or are
reasonably likely to result, in our liquidity increasing or decreasing in any
material way. 12




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Off-Balance Sheet Arrangements We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve, to varying degrees, elements of credit
risk and interest rate risk in excess of the amount recognized in the balance
sheets. Our exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments. A summary of
our commitments as of June 30, 2004 is as follows (dollars in thousands): Commitments to extend credit
    
    $
    16,191Letters of credit
    
    
    137$
    16,328
 Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. Those letters of credit are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral is required in
instances which we deem necessary. If needed, we have the ability on a short-term basis to borrow and purchase
Federal funds from other financial institutions. At June 30, 2004, we had
federal funds lines of credit totaling $12.8 million in place with three banks,
and a $33.7 million line of credit with the Federal Home Loan Bank of Atlanta. Financial Condition Our total assets declined from $256.2 million at December 31, 2003 to $247.5
million at June 30, 2004, a reduction of $8.7 million, or 3.41%. During the
period, loans increased $8.3 million, or 6.70% while total deposits declined by
$10.8 million, or 4.76%. The increase in loans was due to a focus on loan
growth with the opening of a new branch in Thomaston and the acquisition of the
branch in Luthersville in 2002. The reductions in deposits was the result of
Upson allowing higher rate deposit accounts to be closed because management
believe that the Bank had a sufficiently strong liquidity position such that
the higher-rate deposits were not needed to support loan growth. This
reduction in higher-rate deposits led to the overall interest rate on deposits
decreasing from 2.26% for the six months ended June 30, 2003 to 1.78% for the
six months ended June 30, 2004. This change had a positive impact on the net
yield on earning assets, which increased from 4.13% for the six months ended
June 30,2003 to 4.35% for the six months ended June 30, 2004. The increase in
loans and the decrease in deposits were funded by decreases of $7.9 million in
federal funds sold and $9.3 million in scheduled cash flows received on
investment securities held to maturity net of purchases. The Company monitors
the growth in its loan portfolio and changes in its deposit levels, and seeks
to maintain a proper mix of types, maturities, and interest rates. We believe
that our cash flows and liquidity levels are adequate to support the Companys
loan growth. Our total stockholders equity increased by $1.3 million during the six months
ended June 30, 2004, due primarily to net income of $1,797,000 for the period.
Total equity was negatively affected by a decline in unrealized losses on
securities available for sale in the amount of $27,000 for the six months ended
June 30, 2004. Loan Portfolio.The following table presents various categories of loans
contained in Bank of Upsons loan portfolio for the period ended June 30, 2004. 13




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June 30, 2004Types of Loans
    
    In thousands (000)Commercial loans
    
    $
    10,973Real estate  construction
    
    
    9,338Real estate  mortgage
    
    
    74,303Consumer
    
    
    28,218Other loans
    
    
    8,726Subtotal
    
    
    131,558Less: Unearned income
    
    
    113Less: Allowance for possible
loan losses
    
    
    1,876Total (net of allowance)
    
    $
    129,569
 Nonaccrual, Past Due and Restructured Loans.The following table presents
various categories of nonaccrual, past due and restructured loans in Bank of
Upsons loan portfolio as of June 30, 2004: June 30, 2004In thousands (000)Nonaccrual loans
    
    $
    Loans past due 90 days or more and still accruing
    
    $
    163Loans restructured under troubled debt
    
    $
    
 There were no impaired loans at June 30, 2004. Summary of Loan Loss Experience.An analysis of Bank of Upsons loan loss
experience is included in the following table for the period ended June 30,
2004, as well as a breakdown of the allowance for loan losses. June 30, 2004In thousands (000)Balance at beginning of period
    
    $
    1,825Charge-offs:Commercial loans
    
    
    Real estate
 construction
    
    
    Real estate  mortgage
    
    
    (23
    )Consumer
    
    
    (158
    )Other
    
    
    (77
    )Total
    
    
    (258
    )Recoveries:
 14




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##### Table of Contents



June 30, 2004In thousands (000)Commercial loans
    
    
    Real estate
 construction
    
    
    Real estate  mortgage
    
    
    31Consumer
    
    
    76Other
    
    
    40Total
    
    
    147Net charge-offs
    
    
    (111
    )Additions charged to operations
    
    
    162Decrease in reserve due to disposal of finance company
    
    
    Balance at end of period
    
    $
    1,876Ratio of net charge-offs during the period to average
loans outstanding during the period
    
    
    0.09
    %
 Allowance for Loan Losses.The allowance for loan losses as of June 30,
2004 was $1,876,000 compared to $1,825,000 as of December 31, 2003. The
allowance for loan losses, as a percentage of total gross loans, for June 30,
2004 was 1.43%, as compared to 1.48% as of December 31, 2003. The provision for
loan losses during the six months ended June 30, 2004, of $162,000 was the
result of managements assessment of risks inherent in the loan portfolio.
Information provided from internal loan review procedures provided by
management and from the Banks primary regulatory agency, and other information
known to the Banks Board of Directors, are utilized by the Board of Directors
to monitor, on a quarterly basis, the loan portfolio. Specifically, the Banks
Board of Directors attempts to identify risks inherent in the loan portfolio
(e.g., problem loans, potential problem loans and loans to be charged off),
assess the overall quality and collectibility of the loan portfolio, and
determine amounts of the allowance for loan losses and the provision for loan
losses to be reported based on the results of their review. Management considers the allowance for loan losses to be adequate and
sufficient; however, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
provisions of the allowance will not be required. Results of Operations For The Three Months and Six Months Ended June 30, 2004
and 2003 Net income for the three-month period ended June 30, 2004 amounted to
$875,000 or $0.40 basic earnings per share, compared to net income of $896,000,
or $0.41 basic earnings per share, for the same three-month period in 2003, a
decline of 2.34%. For the six months ended June 30, 2004, net income was
$1,797,000 or $0.82 basic earnings per share, compared to net income of
$1,766,000 or $0.81 basic earnings per common share, an increase of 1.76%. The
following is a brief discussion of the more significant components of net
income during this period. Net Interest Income.Net interest income represents the difference between
interest received on interest earning assets and interest paid on interest
bearing liabilities. Net interest income for the three months ended June 30,
2004 increased $128,000 or 5.41% over the same period in 2003. This increase
was the result of two factors. First, the Company was able to grow its loan
portfolio by $14.9 million, shifting funds from the lower yielding federal
funds sold and investment portfolio. Second, the Company has been able to
reduce its cost of funds by 47 basis points. The following presents, in a
tabular form, the main components of interest earning assets and interest
bearing liabilities and related effective yields and cost of funds for the
three month periods ended June 30. 15




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##### Table of Contents



Three Months Ended June 30, 2004(In thousands)Interest
    
    AnnualizedIncome/
    
    Yield/Average Balance
    
    Cost
    
    CostInterest-bearing deposits in banks
    
    $
    4,842
    
    
    $
    27
    
    
    
    2.23
    %Federal funds sold
    
    
    5,137
    
    
    
    10
    
    
    
    0.78
    %Securities
    
    
    90,551
    
    
    
    972
    
    
    
    4.29
    %Loans
    
    
    132,210
    
    
    
    2,321
    
    
    
    7.02
    %Total earning assets
    
    $
    232,740
    
    
    $
    3,330
    
    
    
    5.72
    %Interest-bearing deposits
    
    $
    189,179
    
    
    $
    825
    
    
    
    1.74
    %Other borrowings
    
    
    448
    
    
    
    10
    
    
    
    8.93
    %Total interest bearing
liabilities
    
    $
    189,627
    
    
    $
    835
    
    
    
    1.76
    %Net interest income
    
    
    
    
    
    $
    2,495Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.96
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    4.29
    %
 16




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##### Table of Contents



Three Months Ended June 30, 2003(In thousands)Interest
    
    AnnualizedIncome/
    
    Yield/Average Balance
    
    Cost
    
    CostInterest-bearing deposits in banks
    
    $
    4,849
    
    
    $
    28
    
    
    
    2.31
    %Federal funds sold
    
    
    11,320
    
    
    
    34
    
    
    
    1.20
    %Securities
    
    
    99,716
    
    
    
    1,032
    
    
    
    4.14
    %Loans
    
    
    117,279
    
    
    
    2,339
    
    
    
    7.98
    %Total earning assets
    
    $
    233,164
    
    
    $
    3,433
    
    
    
    5.89
    %Deposits
    
    $
    189,536
    
    
    $
    1,032
    
    
    
    2.18
    %Other borrowings
    
    
    1,341
    
    
    
    34
    
    
    
    10.14
    %Total interest bearing
liabilities
    
    $
    190,877
    
    
    $
    1,066
    
    
    
    2.23
    %Net interest income
    
    
    
    
    
    $
    2,367Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.66
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    4.06
    %
 For the six months ended June 30, 2004, net interest income increased
$308,000 or 6.48%. This increase was the result of the Companys ability to
grow its loan portfolio by $12.4 million, thereby shifting funds from the lower
yielding federal funds sold and investment portfolio; and the Company has been
able to reduce its cost of funds by 51 basis points. The following presents
the main components of interest earning assets and interest bearing liabilities
and related effective yields and cost of funds for the six month periods ended
June 30. 17




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##### Table of Contents



Six Months Ended June 30, 2004(In thousands)Interest
    
    AnnualizedIncome/
    
    Yield/Average Balance
    
    Cost
    
    CostInterest-bearing deposits in banks
    
    $
    4,880
    
    
    $
    57
    
    
    
    2.34
    %Federal funds sold
    
    
    3,898
    
    
    
    18
    
    
    
    0.92
    %Securities
    
    
    93,791
    
    
    
    2,070
    
    
    
    4.41
    %Loans
    
    
    130,248
    
    
    
    4,620
    
    
    
    7.09
    %Total earning assets
    
    $
    232,817
    
    
    $
    6,765
    
    
    
    5.81
    %Interest-bearing deposits
    
    $
    190,162
    
    
    $
    1,689
    
    
    
    1.78
    %Other borrowings
    
    
    639
    
    
    
    18
    
    
    
    5.63
    %Total interest bearing
liabilities
    
    $
    190,801
    
    
    $
    1,707
    
    
    
    1.79
    %Net interest income
    
    
    
    
    
    $
    5,058Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.02
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    4.35
    %
 18




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##### Table of Contents



Six Months Ended June 30, 2003(In thousands)Interest
    
    AnnualizedIncome/
    
    Yield/Average Balance
    
    Cost
    
    CostInterest-bearing deposits in banks
    
    $
    4,236
    
    
    $
    54
    
    
    
    2.55
    %Federal funds sold
    
    
    11,732
    
    
    
    68
    
    
    
    1.16
    %Securities
    
    
    95,998
    
    
    
    2,112
    
    
    
    4.40
    %Loans
    
    
    117,894
    
    
    
    4,686
    
    
    
    7.95
    %Total earning assets
    
    $
    229,860
    
    
    $
    6,920
    
    
    
    6.02
    %Deposits
    
    $
    187,076
    
    
    $
    2,111
    
    
    
    2.26
    %Other borrowings
    
    
    1,489
    
    
    
    59
    
    
    
    7.92
    %Total interest
bearing liabilities
    
    $
    188,565
    
    
    $
    2,170
    
    
    
    2.30
    %Net interest income
    
    
    
    
    
    $
    4,750Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.72
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    4.13
    %
 Other Income.Total other income for the three-month period ended June
30, 2004 amounted to $767,000, compared to $816,000 for the same period in
2003. Upson originated and sold mortgage loans totaling $6.0 million during the
second quarter of 2004 without recourse compared with $12.5 million for the
second quarter of 2003. The profit from these sales was $31,000 in 2004
compared with $135,000 for the same period in 2003. Mortgage loan origination
fees of $29,000 for the three months ended June 30, 2004 compared to $76,000
for the same period in 2003. With home mortgage interest rates beginning to
increase mortgage loan originations are also expected to decline. Service
charges on deposit accounts was $509,000 or 81.10% of total other income for
the three months ended June 30, 2004, compared with $454,000 or 59.19% of total
other income for the same period in 2003. Most of Upsons deposit customers
are consumers and maintain balances at levels less than that which prevents
service charges. Total other income for the six-month period ended June 30, 2004 amounted
to $1,504,000, compared to $1,532,000 for the same period in 2003. Mortgage
loans originated and sold for the year to date totaled $11.4 million for 2004
compared with $21.3 million for 2003. The profit from these sales was $85,000
in 2004 compared with $207,000 for the same period in 2003. Mortgage loan
origination fees of $56,000 were recognized for the six months ended June 30,
2004 compared to $133,000 for 2003. Service charges on deposit accounts were
$950,000 or 72.61% of total other income for the six months ended June 30,
2004, compared with $829,000 or 62.47% for the same period in 2003. Other Expenses.Other expenses for the three-month period ended June 30,
2004 amounted to $1,940,000 compared to $1,862,000 for the same period in 2003,
an increase of $78,000 or 4.19%. The largest component of other expenses are
salaries and employee benefits, which grew $62,000, or 6.3% to $1,046,000. 19




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##### Table of Contents



For the six-months ended June 30, other expenses amounted to $3,856,000
compared to $3,658,000 for the same period in 2003, an increase of $198,000, or
5.41%. The largest component of these expenses for the period was salaries and
employee benefits, which increased $171,000 or 8.84%. Other operating expenses
increases were the result of normal changes in operations relative to growth in
the institution. Income Taxes.Upson has recorded income taxes totaling $366,000 and
$344,000 for the three-month periods ending June 30, 2004 and 2003,
respectively, and $747,000 and $696,000 for the six-month periods ended June
30, 2004 and 2003, respectively. 
 ITEM 3. Controls and Procedures A review and evaluation was performed by the Companys management, including
the Companys Principal Executive and Financial Officer, 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, management has concluded that the Companys current
disclosure controls and procedures, as designed and implemented, were
effective. There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect the Companys
internal controls subsequent to the date of their evaluation. There were no
material weaknesses identified in the course of such review and evaluation and,
therefore, no corrective measures were taken. 
 PART II - OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    
    Exhibits.  31.1
    
    Rule 15d-14(a) Certification of Principal Executive and Financial Officer32.1
    
    Section 1350 Certification of Principal Executive and Financial Officer  (b)
    
    Reports on Form 8-K.  None. 20




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized. UPSON BANKSHARES, INC.
(Registrant) DATE:
September 20, 2004
    
    BY:
    
    /s/ Daniel W. BrinksDaniel W. Brinks, President and C.E.O.
(Principal Executive , Financial, and
Accounting Officer)