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U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-QSB   þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 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   SOUTHCREST FINANCIAL GROUP, INC. (Exact name of small business issuer as specified in its charter)
   Georgia
    
    58-2256460(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 600 North Glynn St.
Suite B
Fayetteville, Georgia 30214
(Address of principal executive offices) (706) 647-5426
(Issuers telephone number) Upson Bankshares, Inc.
108 South Church Street
Thomaston, Georgia 30286-4104
(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.  Yeso  No  þ State the number of shares outstanding of each of the issuers classes of
common equity, as of November 15, 2004: 3,664,614; $1 par value. Transitional Small Business Disclosure Format  Yes  o  No  þ




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SOUTHCREST FINANCIAL GROUP, INC.
AND SUBSIDIARIESINDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheet  September 30, 2004
    
    
    3Consolidated Statements of Income  Three and
Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2004 and 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 4  Submission of Matters to a Vote of Security Holders
    
    
    17Item 6 - Exhibits
    
    
    17Signatures
    
    
    18EX-31.1 SECTION 302 CERTIFICATION TO THE PEOEX-31.2 SECTION 302 CERTIFICATION TO THE PFOEX-31.2 SECTION 906 CERTIFICATION TO THE PEOEX-32.2 SECTION 906 CERTIFICATION TO THE PFO
  2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheet
 September 30, 2004
(Unaudited)
 In ThousandsAssetsCash and due from banks
    
    $
    12,058Interest-bearing deposits in banks
    
    
    4,946Federal funds sold
    
    
    2,166Securities available-for-sale
    
    
    39,974Securities held-to-maturity (fair value $91,506)
    
    
    90,928Restricted equity securities, at cost
    
    
    1,012Loans held for sale
    
    
    Loans
    
    
    232,325Less allowance for loan losses
    
    
    3,204Loans, net
    
    
    229,121Premises and equipment
    
    
    8,908Intangible assets, net of amortization
    
    
    9,197Other assets
    
    
    9,015Total assets
    
    $
    407,325Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    54,735Interest-bearing
    
    
    295,078Total deposits
    
    
    349,813Federal funds purchased
    
    
    385Federal Home Loan Bank advances
    
    
    400Other liabilities
    
    
    4,653Total liabilities
    
    
    355,251Commitments and contingenciesRedeemable common stock held by ESOP
    
    
    384Stockholders equityCommon stock, par value $1; 10,000,000 shares
authorized; 3,671,782 issued
    
    
    3,672Additional paid in capital
    
    
    42,111Retained earnings
    
    
    6,247Accumulated other comprehensive loss
    
    
    (265
    )51,765Less cost of 7,168 shares of treasury stock
    
    
    (75
    )Total stockholders equity
    
    
    51,690Total liabilities and stockholders equity
    
    $
    407,325
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES 
 Consolidated Statements of Income
(Unaudited)
 Dollars in thousands except per share amountsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest incomeLoans, including fees
    
    $
    2,337
    
    
    $
    2,344
    
    
    $
    6,957
    
    
    $
    7,030Securities
    
    
    1,042
    
    
    
    913
    
    
    
    3,112
    
    
    
    3,025Federal funds sold
    
    
    17
    
    
    
    10
    
    
    
    35
    
    
    
    78Deposits in banks
    
    
    31
    
    
    
    35
    
    
    
    88
    
    
    
    89Total interest income
    
    
    3,427
    
    
    
    3,302
    
    
    
    10,192
    
    
    
    10,222Interest expenseDeposits
    
    
    856
    
    
    
    964
    
    
    
    2,545
    
    
    
    3,075Other borrowings
    
    
    4
    
    
    
    30
    
    
    
    22
    
    
    
    89Total interest expense
    
    
    860
    
    
    
    994
    
    
    
    2,567
    
    
    
    3,164Net interest income
    
    
    2,567
    
    
    
    2,308
    
    
    
    7,625
    
    
    
    7,058Provision for loan losses
    
    
    128
    
    
    
    81
    
    
    
    290
    
    
    
    243Net interest income after provision
for loan losses
    
    
    2,439
    
    
    
    2,227
    
    
    
    7,335
    
    
    
    6,815Other incomeService charges on deposit accounts
    
    
    523
    
    
    
    455
    
    
    
    1,473
    
    
    
    1,284Other service charges and fees
    
    
    70
    
    
    
    65
    
    
    
    212
    
    
    
    193Mortgage loan origination fees
    
    
    17
    
    
    
    62
    
    
    
    73
    
    
    
    195Net gain on sale of loans
    
    
    29
    
    
    
    89
    
    
    
    114
    
    
    
    296Other operating income
    
    
    152
    
    
    
    121
    
    
    
    423
    
    
    
    356Total other income
    
    
    791
    
    
    
    792
    
    
    
    2,295
    
    
    
    2,324Other expensesSalaries and employee benefits
    
    
    1,028
    
    
    
    971
    
    
    
    3,133
    
    
    
    2,905Equipment and occupancy expenses
    
    
    255
    
    
    
    241
    
    
    
    734
    
    
    
    713Amortization of intangible
    
    
    138
    
    
    
    122
    
    
    
    413
    
    
    
    393Other operating expenses
    
    
    497
    
    
    
    510
    
    
    
    1,494
    
    
    
    1,491Total other expenses
    
    
    1,918
    
    
    
    1,844
    
    
    
    5,774
    
    
    
    5,502Income before income taxes
    
    
    1,312
    
    
    
    1,175
    
    
    
    3,856
    
    
    
    3,637Income tax expense
    
    
    424
    
    
    
    372
    
    
    
    1,171
    
    
    
    1,068Net income
    
    $
    888
    
    
    $
    803
    
    
    $
    2,685
    
    
    $
    2,569Earnings per share
    
    $
    0.40
    
    
    $
    0.37
    
    
    $
    1.23
    
    
    $
    1.18Dividends per share
    
    $
    0.115
    
    
    $
    0.115
    
    
    $
    0.345
    
    
    $
    0.345Weighted average shares outstanding
    
    
    2,196,716
    
    
    
    2,176,221
    
    
    
    2,186,001
    
    
    
    2,183,039
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES 
 Consolidated Statements of Comprehensive Income
(Unaudited)
 Dollars in thousandsThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Dollars in thousandsNet income
    
    $
    888
    
    
    $
    803
    
    
    $
    2,685
    
    
    $
    2,569Other comprehensive losses:Unrealized
holding losses on securities
available-for-sale, arising during
period, net of tax
    
    
    (14
    )
    
    
    (98
    )
    
    
    (41
    )
    
    
    (165
    )Comprehensive income
    
    $
    874
    
    
    $
    705
    
    
    $
    2,644
    
    
    $
    2,404
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30,
(Unaudited)
 In Thousands2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    2,685
    
    
    $
    2,569Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    319
    
    
    
    323Amortization of intangibles
    
    
    413
    
    
    
    303Provision for loan losses
    
    
    290
    
    
    
    243(Increase) Decrease in interest receivable
    
    
    55
    
    
    
    (99
    )(Decrease) in interest payable
    
    
    (198
    )
    
    
    (382
    )Net (increase) decrease in loans held for sale
    
    
    477
    
    
    
    (246
    )Net other operating activities
    
    
    (317
    )
    
    
    398Net cash provided by operating activities
    
    
    3,724
    
    
    
    3,109INVESTING ACTIVITIESPurchases of securities held-to-maturity
    
    
    (10,124
    )
    
    
    (75,970
    )Proceeds from maturities of securities held-to-maturity
    
    
    16,672
    
    
    
    62,326Purchases of restricted equity securities
    
    
    (90
    )
    
    
    (332
    )Net increase in interest-bearing deposits in banks
    
    
    (84
    )
    
    
    (1,254
    )Net cash acquired in business combination
    
    
    3,899
    
    
    
    Net decrease in federal funds sold
    
    
    7,900
    
    
    
    11,570Net (increase) decrease in loans
    
    
    (9,927
    )
    
    
    (5,600
    )Proceeds
from sale of other real estate
    
    
    120
    
    
    
    Purchase of premises and equipment
    
    
    (762
    )
    
    
    (571
    )Net cash provided by (used in) investing activities
    
    
    7,604
    
    
    
    (9,831
    )FINANCING ACTIVITIESNet increase (decrease) in deposits
    
    
    (6,077
    )
    
    
    5,206Net increase in federal funds purchased
    
    
    400
    
    
    
    Net (decrease) in other borrowings
    
    
    (110
    )
    
    
    (1,179
    )Proceeds from the sale of treasury shares
    
    
    
    
    
    
    88Purchase of treasury shares
    
    
    
    
    
    
    (134
    )Dividends paid
    
    
    (745
    )
    
    
    (723
    )Net cash (used in) provided by financing activities
    
    
    (6,532
    )
    
    
    3,258Net increase (decrease) in cash and due from banks
    
    
    4,796
    
    
    
    (3,464
    )Cash and due from banks at beginning of period
    
    
    7,262
    
    
    
    10,349Cash and due from banks at end of period
    
    $
    12,058
    
    
    $
    6,885
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30,
(Unaudited) In Thousands2004
    
    2003SUPPLEMENTAL DISCLOSURESCash paid for:Interest
    
    $
    2,765
    
    
    $
    3,546Taxes
    
    $
    1,446
    
    
    $
    1,001NONCASH TRANSACTIONSPrincipal balances of loans transferred
to other real estate owned
    
    $
    106
    
    
    $
    171ACQUISITION OF SUBSIDIARYCommon stock issued
    
    $
    23,744
    
    
    $
    Assets acquired (liabilities assumed)Cash and due from banks
    
    $
    3,899
    
    
    $
    Federal funds sold
    
    
    2,166
    
    
    
    Securities available-for-sale
    
    
    37,861
    
    
    
    Restricted equity securities
    
    
    32
    
    
    
    Loans, net
    
    
    98,015
    
    
    
    Premises and equipment
    
    
    3,980
    
    
    
    Intangible assets
    
    
    6,037
    
    
    
    Other assets
    
    
    3,485
    
    
    
    Deposits
    
    
    (128,422
    )
    
    
    Other liabilities
    
    
    (3,309
    )
    
    
    $
    23,744
    
    
    $
    
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements
 (Unaudited)
 NOTE 1  NATURE OF BUSINESS AND BASIS OF PRESENTATION SouthCrest Financial Group, Inc. (SouthCrest, or the Company) is a bank
holding company whose principal activity is the ownership and management of its
wholly owned subsidiary banks, Bank of Upson (Upson) and The First National
Bank of Polk County (Polk). Both banks are commercial banks that provide a
full range of banking services within their primary market areas. Upson is
headquartered in Thomaston, Upson County, Georgia with five branches located in
Thomaston, Manchester, Warm Springs and Luthersville, Georgia, serving its
primary market area of Upson, Meriwether and the surrounding counties. Polk is
located in Cedartown, Polk County, Georgia with two branches in Cedartown,
Georgia and one branch in Rockmart, Georgia. Polk primarily serves its primary
market area of Polk County. 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 nine-month periods ended September 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 subsidiaries, Bank of Upson and The First National Bank of
Polk County. 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 2,196,716 for both the three months ended September 30,
2004, and 2,186,001 for the nine months ended September 30,2004; and 2,176,221
shares for the three months ended September 30, 2003 and 2,183,030 shares for
the nine months ended September 30, 2003. There are no common
stock equivalents. NOTE 3  LOANS RECEIVABLE Major classifications of loans and leases are as follows in thousands (000): SEPTEMBER 30, 2004
    
    DECEMBER 31, 2003Commercial Loans
    
    $
    23,059
    
    
    $
    9,757Real Estate  construction
    
    
    19,981
    
    
    
    9,021Real Estate  mortgage
    
    
    143,145
    
    
    
    68,154Consumer
    
    
    37,239
    
    
    
    32,352Other
    
    
    9,012
    
    
    
    4,009Total Loans
    
    
    232,436
    
    
    
    123,293Less: Unearned income
    
    
    111
    
    
    
    106Less: Allowance for loans
and lease losses
    
    
    3,204
    
    
    
    1,825Loans receivable, net
    
    $
    229,121
    
    
    $
    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  COMPLETION OF MERGER WITH FIRST POLK BANKSHARES, INC. On September 30, 2004 the Company completed its merger with First Polk
Bankshares, Inc., a bank holding company based in Cedartown, Georgia and the
parent company of The First National Bank of Polk County. In connection with
this merger, the Company issued 1,484,029 shares of common stock in exchange
for all the outstanding common shares of Polk Bankshares, Inc. Under the
merger agreement, shareholders of both companies could elect to redeem their
shares for cash at $16.00 per share, with the provision that the maximum
aggregate amount of cash that would be paid to shareholders electing cash would
be $1.5 million, or 93,750 shares. After the merger was completed on September
30, shareholders were allowed until November 8 to make their election to
receive cash or stock. As a result, the number of shares to be exchanged for
cash totaled 93,058 for a total of $1,488,928. The acquisition was accounted for under the purchase method of accounting and
did not result in the recognition of goodwill. The purchase price of
$24,217,000 was allocated to the fair values of First Polks assets and
liabilities, and resulted in the recording of a Core Deposit Intangible
totaling $5.6 million which will be amortized over its estimated life of 10
years. Results of operations for The First National Bank of Polk County will
be included in the results of operations of SouthCrest prospectively from the
date of merger. Therefore SouthCrests results of operations for the three
months and nine months ended September 30, 2004 do not include the operations
of The First National Bank of Polk County. The following schedule presents unaudited pro forma information for revenues
and net income as if the combination had occurred at the beginning of each
period. Three Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 20042004
    
    2003
    
    2004
    
    2003RevenueSouthCrest Financial
Group, Inc.
    
    $
    3,358
    
    
    $
    3,100
    
    
    $
    9,920
    
    
    $
    9,382First Polk Bankshares, Inc.
    
    
    2,256
    
    
    
    2,043
    
    
    
    6,649
    
    
    
    6,275Total Revenues
    
    $
    5,614
    
    
    $
    5,143
    
    
    $
    16,569
    
    
    $
    15,657Net IncomeSouthCrest Financial
Group, Inc.
    
    $
    888
    
    
    $
    803
    
    
    $
    2,685
    
    
    $
    2,569First Polk Bankshares, Inc.
    
    
    470
    
    
    
    497
    
    
    
    1,463
    
    
    
    1,571Total Net Income
    
    $
    1,358
    
    
    $
    1,300
    
    
    $
    4,148
    
    
    $
    4,140Earnings Per Share
    
    $
    0.37
    
    
    $
    0.36
    
    
    $
    1.13
    
    
    $
    1.13
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SOUTHCREST FINANCIAL GROUP, INC. AND SUBSIDIARIES 
 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
SouthCrest Financial Group, Inc. and its bank subsidiaries, Bank of Upson and
the First National Bank of Polk County 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 Some of the statements in this Report, including, without limitation,
matters discussed under the caption Managements Discussion and Analysis of
Financial Condition and Results of Operation, of SouthCrest Financial Group,
Inc. are forward-looking statements within the meaning of the federal
securities laws. Forward-looking statements include statements about the
competitiveness of the banking industry, potential regulatory obligations, our
entrance and expansion into other markets, integration of recently acquired
banks, pending or proposed acquisitions, our other business strategies, our
expectations with respect to our allowance for loan losses and impaired loans,
anticipated capital expenditures for our operations center, and other
statements that are not historical facts. When we use words like anticipate,
believe, intend, expect, estimate, could, should, will, and
similar expressions, you should consider them as identifying forward-looking
statements, although we may use other phrasing. These forward-looking
statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these
disclosures were prepared. Factors that may cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, among others, the following possibilities: (1) competitive pressures
among depository and other financial institutions may increase significantly;
(2) changes in the interest rate environment may reduce margins; (3) general
economic conditions may be less favorable than expected, resulting in, among
other things, a deterioration in credit quality and/or a reduction in demand
for credit; (4) legislative or regulatory changes, including changes in
accounting standards, may adversely affect the businesses in which we are
engaged; (5) costs or difficulties related to the integration of our
businesses, may be greater than expected; (6) deposit attrition, customer loss
or revenue loss following acquisitions may be greater than expected; (7)
competitors may have greater financial resources and develop products that
enable such competitors to compete more successfully than us; and (8) adverse
changes may occur in the equity markets. 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. 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
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. Because the allowance for loan losses
is replenished through a provision for loan losses that is charged against
earnings, our subjective determinations regarding the allowance affect our
earnings directly. Refer to the portion of 10




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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 September 30, 2004 we completed our merger with First Polk Bankshares, Inc.
(First Polk), whereby First Polk merged with and into Upson Bankshares, Inc.,
with the name of the surviving company changing to SouthCrest Financial Group,
Inc. The merger combined our business with that of First Polks under a
single holding company. As a result of the merger, SouthCrest owns two bank
subsidiaries: Bank of Upson and The First National Bank of Polk County. Our
combined company provides a full line of commercial and consumer services and
products and operates eight full-service bank offices located in Upson, Polk
and Meriwether Counties. Subsequent to the merger, shareholders of both companies could elect to redeem
their shares at a price of $16.00 per share, with the provision that the
maximum aggregate amount of cash that would be paid to shareholders electing
cash would be $1.5 million, or 93,750 shares. After the merger was completed
on September 30, shareholders were allowed until November 8 to make their
election to receive cash or stock. As a result, the number of shares to be
exchanged for cash totaled 93,058 for a total of $1,488,928. 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 September 30, 2004, we
believe our liquidity, as determined under guidelines established by regulatory
authorities and internal policies, was satisfactory. At September 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(Dollars in Thousands)Minimum
    
    WellRegulatory
    
    CapitalizedActual
    
    Requirement
    
    RequirementLeverage capital ratiosConsolidated
    
    
    10.9
    %
    
    
    4.0
    %
    
    
    5.0
    %Bank of Upson
    
    
    9.8
    %
    
    
    4.0
    %
    
    
    5.0
    %First National Bank of Polk County
    
    
    12.2
    %
    
    
    4.0
    %
    
    
    5.0
    %Tier 1 capital to risk weighted assetsConsolidated
    
    
    17.2
    %
    
    
    4.0
    %
    
    
    6.0
    %Bank of Upson
    
    
    14.3
    %
    
    
    4.0
    %
    
    
    6.0
    %First National Bank of Polk County
    
    
    19.5
    %
    
    
    4.0
    %
    
    
    6.0
    %Total risk-based capital to risk weighted assetsConsolidated
    
    
    18.4
    %
    
    
    8.0
    %
    
    
    10.0
    %Bank of Upson
    
    
    15.4
    %
    
    
    8.0
    %
    
    
    10.0
    %First National Bank of Polk County
    
    
    20.8
    %
    
    
    8.0
    %
    
    
    10.0
    %
 These ratios may decline as asset growth continues, but are expected to
continue to exceed minimum regulatory requirements. As discussed under -Recent Developments, as of September 30, 2004 we
completed our merger with First Polk whereby First Polk merged with Upson to
form SouthCrest Financial Group, Inc. Based on managements expectations
regarding growth of the combined company following the merger, management
believes that SouthCrest will have adequate capital resources to remain
classified as well capitalized by the regulatory agencies. 11




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##### Table of Contents



Both Bank of Upson and The First National Bank of Polk County plan to undertake
branch construction projects in the near future. Upson expects to rebuild its
main banking office in downtown Thomaston at an expected cost ranging from
$4.00 to $4.75 million. This project will replace the current facility and
will increase the square footage from approximately 16,000 square feet to
approximately 26,000 square feet. Management anticipates that construction
will be completed in phases, and should require about eighteen months.
Construction is not expected to begin until the first quarter of 2005. The
First National Bank of Polk County will undertake a project to double the size
of its Rockmart branch, increasing its size from approximately 4,200 square
feet to 9,200 square feet. The project is estimated to cost approximately
$850,000 and will require six months to complete. Construction is expected to
begin in the fourth quarter of 2004. Both banks anticipate funding the
construction with their available liquidity. In November, 2004 Upson will open a new full-service branch office in
Fayetteville, Fayette County, Georgia operating under the name of SouthCrest
Bank. The branch is located in a leased facility and is subject to a
five-year lease. Other than the items 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. 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 September 30, 2004 is as follows (dollars in thousands): Commitments to extend credit
    
    $
    23,356Letters of credit
    
    
    164$
    23,520
 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 September 30, 2004, we had
federal funds lines of credit totaling $18.9 million in place with three banks,
and a $27.4 million line of credit with the Federal Home Loan Bank of Atlanta. Financial Condition Our total assets increased from $256.2 million at December 31, 2003 to $407.3
million at September 30, 2004, an increase of $151.1 million, or 58.98%. This
increase relates to the acquisition of First Polk, which accounted for an
addition to total assets of $155.2 million. Exclusive of the merger, total
assets would have declined $4.1 million, or 1.60%. During the period, total
loans and loans held for sale increased $9.4 million, or 7.59% exclusive of the
effect of the Polk acquisition. 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. 12




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##### Table of Contents



Deposits increased $122.3 million during the first nine months of 2004. This
increase reflects a $128.4 increase in deposits attributable to the acquisition
of First Polk; excluding the effect of the acquisition, deposits would have
declined $6.1 million, or 2.67%. The reduction in deposits was the result of
Upson allowing higher rate deposit accounts to be closed based on managements
assessment 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 2.23% for the nine months ended September 30, 2003 to 1.79% for
the nine months ended September 30, 2004. This change had a positive impact on
the net yield on earning assets, which increased from 4.09% for the nine months
ended September 30, 2003 to 4.37% for the nine months ended September 30, 2004.
The increase in loans and the decrease in deposits were funded by decreases of
$7.9 million in federal funds sold (excluding the impact of Polk) and $6.8
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 $25.6 million during the nine
months ended September 30, 2004, of which $23.7 million relates to equity
issued as a result of our merger with First Polk. Loan Portfolio.The following table presents various categories of loans
contained in The Companys loan portfolio as of September 30,
2004. September 30, 2004In thousands (000)Types of LoansCommercial loans
    
    $
    23,059Real estate  construction
    
    
    19,981Real estate  mortgage
    
    
    143,145Consumer
    
    
    37,239Other loans
    
    
    9,012Subtotal
    
    
    232,436Less: Unearned income
    
    
    111Less: Allowance for possible
loan losses
    
    
    3,204Total (net of allowance)
    
    $
    229,121
 Nonaccrual, Past Due and Restructured Loans.The following table presents
various categories of nonaccrual, past due and restructured loans in the Banks
loan portfolios as of September 30, 2004: September 30, 2004In thousands (000)Nonaccrual loans
    
    $
    121Loans past due 90 days or more and still accruing
    
    $
    520Loans restructured under troubled debt
    
    $
    178
 13




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##### Table of Contents



Summary of Loan Loss Experience.An analysis of SouthCrests loan loss
experience is included in the following table for the period ended September
30, 2004. September 30,2004In thousands (000)Balance at beginning of period
    
    $
    1,825Charge-offs:Commercial loans
    
    
    (25
    )Real estate  construction
    
    
    Real estate  mortgage
    
    
    (23
    )Consumer
    
    
    (192
    )Other
    
    
    (131
    )Total Charge-offs
    
    
    (371
    )Recoveries:Commercial loans
    
    
    24Real estate  construction
    
    
    Real estate  mortgage
    
    
    31Consumer
    
    
    87Other
    
    
    57Total Recoveries
    
    
    199Net Charge-offs
    
    
    (172
    )Additions charged to operations
    
    
    290Increase in reserves due to acquisition of First Polk
    
    
    1,261Balance at end of period
    
    $
    3,204Ratio of net charge-offs during the period to average
loans outstanding during the period
    
    
    0.13
    %
 Allowance for Loan Losses.The allowance for loan losses as of September
30, 2004 was $3,204,000 compared to $1,825,000 as of December 31, 2003. The
Polk acquisition accounts for $1.3 million of this increase. The allowance for
loan losses, as a percentage of total gross loans, for September 30, 2004 was
1.38%, as compared to 1.48% as of December 31, 2003. The provision for loan
losses during the nine months ended September 30, 2004, of $290,000 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 Banks primary regulatory agency, and other information
known to the Banks Boards of Directors, are utilized by the Boards of
Directors to monitor, on a quarterly basis, the loan portfolio. Specifically,
the Banks Boards of Directors attempt 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. 14




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##### Table of Contents



Results of Operations For The Three Months and Nine Months Ended September 30, 2004 and 2003 Net income for the three-month period ended September 30, 2004 amounted to
$888,000 or $0.40 per share, compared to net income of $803,000,
or $0.37 per share, for the same three-month period in 2003, an
increase of 10.59%. For the nine months ended September 30, 2004, net income
was $2,685,000 or $1.23 per share, compared to net income of
$2,569,000 or $1.18 per share, an increase of 4.52%. 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 September
30, 2004 increased $259,000 or 11.22% 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 an average of $10.4 million over the same quarter in
2003, 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 42
basis points. The following presents, for the three month periods ended
September 30, 2004 and 2003, the main components of interest earning assets and
interest bearing liabilities and related interest income and expense and the
effective yields and cost of funds as well as the changes in income and expense
attributable to changes in volume and changes in average rates (dollars in
thousands). Analysis of Net Interest Income and Rate / Volume Variance
For the Three Months Ended September 30, 2004 and 2003 Average Balances
    
    Yields / Cost
    
    Income / Expense
    
    Increase
    
    Change Due To2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    Decrease
    
    Rate
    
    VolumeAssetsInterest-bearing
deposits in banks
    
    $
    4,879
    
    
    $
    4,965
    
    
    
    2.54
    %
    
    
    2.82
    %
    
    $
    31
    
    
    $
    35
    
    
    $
    (4
    )
    
    $
    (3
    )
    
    $
    (1
    )Federal funds sold
    
    
    3,848
    
    
    
    4,150
    
    
    
    1.77
    
    
    
    0.96
    
    
    
    17
    
    
    
    10
    
    
    
    7
    
    
    
    12
    
    
    
    (5
    )Securities
    
    
    92,389
    
    
    
    100,723
    
    
    
    4.51
    
    
    
    3.51
    
    
    
    1,042
    
    
    
    913
    
    
    
    129
    
    
    
    548
    
    
    
    (419
    )Loans
    
    
    131,477
    
    
    
    121,120
    
    
    
    7.11
    
    
    
    7.74
    
    
    
    2,337
    
    
    
    2,344
    
    
    
    (7
    )
    
    
    (785
    )
    
    
    778Total earning assets
    
    
    232,593
    
    
    
    230,958
    
    
    
    5.89
    
    
    
    5.72
    
    
    
    3,427
    
    
    
    3,302
    
    
    
    125
    
    
    
    (228
    )
    
    
    353LiabilitiesInterest bearing
deposits
    
    
    189,607
    
    
    
    177,367
    
    
    
    1.81
    
    
    
    2.17
    
    
    
    856
    
    
    
    964
    
    
    
    (108
    )
    
    
    (452
    )
    
    
    344Federal funds and
other borrowed
funds
    
    
    640
    
    
    
    727
    
    
    
    2.50
    
    
    
    16.51
    
    
    
    4
    
    
    
    30
    
    
    
    (26
    )
    
    
    (23
    )
    
    
    (3
    )Total interest
bearing liabilities
    
    $
    190,247
    
    
    $
    178,094
    
    
    
    1.81
    
    
    
    2.23
    
    
    
    860
    
    
    
    994
    
    
    
    (134
    )
    
    
    (475
    )
    
    
    341Net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,567
    
    
    $
    2,308
    
    
    $
    259
    
    
    $
    247
    
    
    $
    12Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.08
    
    
    
    3.49Net yield on
earning assets
    
    
    
    
    
    
    
    
    
    
    4.41
    
    
    
    4.00
 For the nine months ended September 30, 2004, net interest income
increased $567,000, or 8.03%. This increase was the result of the Companys
ability to grow its loan portfolio by $11.7 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 48 basis points. The
following presents, for the nine month periods ended September 30, the main
components of interest earning assets and interest bearing liabilities along
with related interest income and expense and the effective yields and cost of
funds, as well as the changes
in income and expense attributable to changes in volume and changes in average
rates (dollars in thousands). 15




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##### Table of Contents



Analysis of Net Interest Income and Rate / Volume Variance
For the Nine Months Ended September 30, 2004 and 2003 Average Balances
    
    Yields / Cost
    
    Income / Expense
    
    Increase
    
    Change Due To2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    Decrease
    
    Rate
    
    VolumeAssetsInterest-bearing
deposits in banks
    
    $
    4,879
    
    
    $
    4,479
    
    
    
    2.40
    %
    
    
    2.65
    %
    
    $
    88
    
    
    $
    89
    
    
    $
    (1
    )
    
    $
    (12
    )
    
    $
    11Federal funds sold
    
    
    3,881
    
    
    
    9,205
    
    
    
    1.20
    
    
    
    1.13
    
    
    
    35
    
    
    
    78
    
    
    
    (43
    )
    
    
    7
    
    
    
    (50
    )Securities
    
    
    93,323
    
    
    
    97,573
    
    
    
    4.45
    
    
    
    4.13
    
    
    
    3,112
    
    
    
    3,025
    
    
    
    87
    
    
    
    281
    
    
    
    (194
    )Loans
    
    
    130,657
    
    
    
    118,969
    
    
    
    7.10
    
    
    
    7.88
    
    
    
    6,957
    
    
    
    7,030
    
    
    
    (73
    )
    
    
    (961
    )
    
    
    888Total earning assets
    
    
    232,740
    
    
    
    230,226
    
    
    
    5.84
    
    
    
    5.92
    
    
    
    10,192
    
    
    
    10,222
    
    
    
    (30
    )
    
    
    (685
    )
    
    
    655LiabilitiesInterest bearing
deposits
    
    
    189,977
    
    
    
    183,840
    
    
    
    1.79
    
    
    
    2.23
    
    
    
    2,545
    
    
    
    3,075
    
    
    
    (530
    )
    
    
    (688
    )
    
    
    158Federal funds and
other borrowed
funds
    
    
    639
    
    
    
    1,235
    
    
    
    4.59
    
    
    
    9.61
    
    
    
    22
    
    
    
    89
    
    
    
    (67
    )
    
    
    (35
    )
    
    
    (32
    )Total interest
bearing liabilities
    
    
    190,616
    
    
    
    185,075
    
    
    
    1.80
    
    
    
    2.28
    
    
    
    2,567
    
    
    
    3,164
    
    
    
    (597
    )
    
    
    (723
    )
    
    
    126Net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,625
    
    
    
    7,058
    
    
    
    567
    
    
    
    38
    
    
    
    529Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.04
    
    
    
    3.64Net yield on
earning assets
    
    
    
    
    
    
    
    
    
    
    4.37
    
    
    
    4.09
 Other Income.Total other income for the three-month period ended
September 30, 2004 amounted to $791,000, compared to $792,000 for the same
period in 2003. Upson originated and sold mortgage loans totaling $1.9 million
during the second quarter of 2004 without recourse compared with $12.9 million
for the second quarter of 2003. The profit from these sales was $29,000 in 2004
compared with $89,000 for the same period in 2003. Mortgage loan origination
fees of $17,000 for the three months ended September 30, 2004 compared to
$62,000 for the same period in 2003. Mortgage loan originations have slowed in
the current quarter due to an increase in mortgage loan interest rates in the
current year, and to Upsons strong mortgage production in the second and third
quarters of 2003 resulting from refinancings due to low mortgage loan interest
rates experienced at that time. Service charges on deposit accounts was
$523,000 or 74.97% of total other income for the three months ended September
30, 2004, compared with $455,000 or 65.66% 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 nine-month period ended September 30, 2004
amounted to $2,295,000, compared to $2,324,000 for the same period in 2003.
Mortgage loans originated and sold for the year to date totaled $13.2 million
for 2004 compared with $34.2 million for 2003. The profit from these sales was
$114,000 in 2004 compared with $296,000 for the same period in 2003. Mortgage
loan origination fees of $73,000 were recognized for the nine months ended
September 30, 2004 compared to $195,000 for 2003. Service charges on deposit
accounts were $1,473,000 or 73.42% of total other income for the nine months
ended September 30, 2004, compared with $1,284,000 or 63.55% for the same
period in 2003. Other Expenses.Other expenses for the three-month period ended September
30, 2004 amounted to $1,918,000 compared to $1,844,000 for the same period in
2003, an increase of $74,000 or 4.01%. The
largest component of other expenses are salaries and employee benefits, which
grew $57,000, or 5.87% to $1,028,000. 16




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##### Table of Contents



For the nine-months ended September 30, other expenses amounted to
$5,774,000 compared to $5,502,000 for the same period in 2003, an increase of
$272,000, or 4.94%. The largest component of these expenses for the period was
salaries and employee benefits, which increased $228,000 or 7.85%. 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 $424,000 and
$372,000 for the three-month periods ending September 30, 2004 and 2003,
respectively, and $1,171,000 and $1,068,000 for the nine-month periods ended
September 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 Officers, 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company has not implemented or terminated a stock repurchase program
relating to its common stock. The Company has not otherwise repurchased
any shares of its common stock during the quarter ended September 30,
2004. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On September 22, 2004 the Company held a Special Meeting of Shareholders
to approve the Agreement and Plan of Merger with First Polk Bankshares,
Inc. The matter was approved as follows: Shares voting Yes
    
    1,643,981
    
    
    75.39
    %Shares voting No
    
    0
    
    
    0.00
    %Shares Abstaining
    
    1,353
    
    
    0.06
    %Broker nonvotes
    
    0
    
    
    0.00
    %
 
 ITEM 6. EXHIBITS  31.1
    
    Rule 15d-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 15d-14(a) Certification of Principal Financial Officer32.1
    
    Section 1350 Certification of Principal Executive Officer32.2
    
    Section 1350 Certification of Principal Financial Officer 17




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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. SOUTHCREST FINANCIAL GROUP, INC.
(Registrant) DATE:  November 15, 2004
    BY:
    /s/ Larry T. KuglarLarry T. Kuglar.President and Chief Executive OfficerDATE:  November 15, 2004
    BY:
    /s/ Douglas J. HerthaDouglas J. HerthaSenior Vice President, Chief Financial Officer 18