Exhibit
13.2


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Balance Sheets


December
31, 2007 and 2006


(Dollars
in thousands, except per share data)





Assets
            
            2007
            
            
            2006Cash
      and due from banks
            
            $
            16,060
            
            
            $
            16,926Interest-bearing
      deposits in other banks
            
            
            10,637
            
            
            
            4,881Federal
      funds sold
            
            
            9,316
            
            
            
            12,504Securities
      available for sale
            
            
            79,208
            
            
            
            61,519Securities
      held to maturity (fair value $58,632 and $66,036)
            
            
            58,885
            
            
            
            67,268Restricted
      equity securities, at cost
            
            
            2,008
            
            
            
            2,029Loans
      held for sale
            
            
            229
            
            
            
            446Loans,
      net of unearned income
            
            
            373,825
            
            
            
            335,006Less
      allowance for loan losses
            
            
            4,952
            
            
            
            4,480Loans,
      net
            
            
            368,873
            
            
            
            330,526Bank-owned
      life insurance
            
            
            16,302
            
            
            
            12,521Premises
      and equipment, net
            
            
            18,093
            
            
            
            15,324Goodwill
            
            
            14,255
            
            
            
            9,057Intangible
      assets, net
            
            
            4,792
            
            
            
            4,868Other
      assets
            
            
            7,351
            
            
            
            6,148Total
      assets
            
            $
            606,009
            
            
            $
            544,017Liabilities,
      Redeemable Common Stock, and Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
            
            $
            80,685
            
            
            $
            80,581Interest-bearing
            
            
            433,246
            
            
            
            382,041Total
      deposits
            
            
            513,931
            
            
            
            462,622Short-term
      borrowed funds
            
            
            3,055
            
            
            
            110Long-term
      borrowed funds
            
            
            6,555
            
            
            
            5,835Other
      liabilities
            
            
            9,656
            
            
            
            6,907Total
      liabilities
            
            
            533,197
            
            
            
            475,474Commitments
      and contingenciesRedeemable
      common stock held by ESOP
            
            
            1,091
            
            
            
            988Stockholders'
      equityCommon
      stock, par value $1; 10,000,000 shares authorized, 3,931,528 and 3,952,328
      issued
            
            
            3,932
            
            
            
            3,952Additional
      paid in capital
            
            
            49,707
            
            
            
            50,034Retained
      earnings
            
            
            17,881
            
            
            
            13,740Unearned
      compensation - ESOP
            
            
            (349
            )
            
            
            -Accumulated
      other comprehensive income (loss)
            
            
            550
            
            
            
            (171
            )Total
      stockholders' equity
            
            
            71,721
            
            
            
            67,555Total
      liabilities, redeemable common stock, and stockholders'
    equity
            
            $
            606,009
            
            
            $
            544,017








See
Notes to Consolidated Financial Statements.


F-1


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Statements of Income


December
31, 2007, 2006, and 2005


(Dollars
in thousands, except per share data)





2007
            
            
            2006
            
            
            2005Interest
      income:Loans
            
            $
            29,455
            
            
            $
            23,314
            
            
            $
            17,943Securities
      - taxable
            
            
            5,695
            
            
            
            4,859
            
            
            
            5,041Securities
      - nontaxable
            
            
            830
            
            
            
            551
            
            
            
            557Federal
      funds sold
            
            
            497
            
            
            
            509
            
            
            
            195Interest-bearing
      deposits in other banks
            
            
            382
            
            
            
            191
            
            
            
            157Total
      interest income
            
            
            36,859
            
            
            
            29,424
            
            
            
            23,893Interest
      expense:Deposits
            
            
            13,681
            
            
            
            9,608
            
            
            
            6,209Borrowed
      funds
            
            
            626
            
            
            
            625
            
            
            
            215Total
      interest expense
            
            
            14,307
            
            
            
            10,233
            
            
            
            6,424Net
      interest income
            
            
            22,552
            
            
            
            19,191
            
            
            
            17,469Provision
      for loan losses
            
            
            639
            
            
            
            839
            
            
            
            751Net
      interest income after provision for loan losses
            
            
            21,913
            
            
            
            18,352
            
            
            
            16,718Other
      income:Service
      charges on deposit accounts
            
            
            3,846
            
            
            
            3,304
            
            
            
            3,264Other
      service charges and fees
            
            
            1,336
            
            
            
            1,104
            
            
            
            930Net
      gain on sale of securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            320Impairment
      charge on investments
            
            
            -
            
            
            
            -
            
            
            
            (600
            )Loss
      on disposal of assets
            
            
            -
            
            
            
            -
            
            
            
            (184
            )Net
      gain on sale of loans
            
            
            416
            
            
            
            159
            
            
            
            148Income
      on bank-owned life insurance
            
            
            594
            
            
            
            340
            
            
            
            146Other
      operating income
            
            
            605
            
            
            
            457
            
            
            
            454Total
      other income
            
            
            6,797
            
            
            
            5,364
            
            
            
            4,478Other
      expenses:Salaries
      and employee benefits
            
            
            10,543
            
            
            
            8,073
            
            
            
            7,297Equipment
      and occupancy expenses
            
            
            2,120
            
            
            
            1,643
            
            
            
            1,559Amortization
      of intangibles
            
            
            926
            
            
            
            807
            
            
            
            963Other
      operating expenses
            
            
            6,045
            
            
            
            4,644
            
            
            
            4,377Total
      other expenses
            
            
            19,634
            
            
            
            15,167
            
            
            
            14,196Income
      before income taxes
            
            
            9,076
            
            
            
            8,549
            
            
            
            7,000Income
      tax expense
            
            
            2,776
            
            
            
            2,775
            
            
            
            2,156Net
      income
            
            $
            6,300
            
            
            $
            5,774
            
            
            $
            4,844Basic
      and diluted earnings per share
            
            $
            1.60
            
            
            $
            1.58
            
            
            $
            1.36








See
Notes to Consolidated Financial Statements.


F-2


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Statements of Comprehensive Income


Years
Ended December 31, 2007, 2006, and 2005


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005Net
      income
            
            $
            6,300
            
            
            $
            5,774
            
            
            $
            4,844Other
      comprehensive (loss):Unrealized
      holding gain (loss) on securities available for sale arising during
      period, net of taxes of $436, $144, and $179
            
            
            721
            
            
            
            328
            
            
            
            (263
            )Reclassification
      adjustment for gains included in net income, net of tax of $-0-, $-0-, and
      $146
            
            
            -
            
            
            
            -
            
            
            
            174Comprehensive
      income
            
            $
            7,021
            
            
            $
            6,102
            
            
            $
            4,755








See
Notes to Consolidated Financial Statements.


F-3


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Statements of Stockholders' Equity


December
31, 2007, 2006 and 2005


(Dollars
in thousands, except per share data)





AccumulatedAdditional
            
            
            
            
            
            Other
      Com-
            
            
            Unearned
            
            
            TotalCommon
      Stock
            
            
            Paid
      In
            
            
            Retained
            
            
            prehensive
            
            
            Compensation
            
            
            Stockholders'Shares
            
            
            Par Value
            
            
            Capital
            
            
            Earnings
            
            
            Income (Loss)
            
            
            (ESOP)
            
            
            EquityBalance,
      December 31, 2004
            
            
            3,571,556
            
            
            $
            3,572
            
            
            $
            40,647
            
            
            $
            6,931
            
            
            $
            (410
            )
            
            $
            -
            
            
            $
            50,740Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,844
            
            
            
            -
            
            
            
            -
            
            
            
            4,844Cash
      dividends declared, $.48 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,713
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,713
            )Purchase
      and retirement of stock
            
            
            (8,141
            )
            
            
            (8
            )
            
            
            (184
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (192
            )Shares
      issued
            
            
            17,778
            
            
            
            17
            
            
            
            383
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            400Adjustment
      for shares owned by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (534
            )
            
            
            -
            
            
            
            -
            
            
            
            (534
            )Unrealized
      loss on securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (89
            )
            
            
            -
            
            
            
            (89
            )Balance,
      December 31, 2005
            
            
            3,581,193
            
            
            $
            3,581
            
            
            $
            40,846
            
            
            $
            9,528
            
            
            $
            (499
            )
            
            $
            -
            
            
            $
            53,456Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,774
            
            
            
            -
            
            
            
            -
            
            
            
            5,774Adjustment
      resulting from adoption of Staff Acccounting BulletinNumber
      108
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            233
            
            
            
            -
            
            
            
            -
            
            
            
            233Cash
      dividends declared, $.50 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,791
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,791
            )Shares
      issued in business combination
            
            
            371,135
            
            
            
            371
            
            
            
            9,093
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,464Stock
      compensation
            
            
            -
            
            
            
            -
            
            
            
            95
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            95Adjustment
      for shares owned by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4
            )
            
            
            -
            
            
            
            -
            
            
            
            (4
            )Unrealized
      gain on securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            328
            
            
            
            -
            
            
            
            328Balance,
      December 31, 2006
            
            
            3,952,328
            
            
            $
            3,952
            
            
            $
            50,034
            
            
            $
            13,740
            
            
            $
            (171
            )
            
            $
            -
            
            
            $
            67,555Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,300
            
            
            
            -
            
            
            
            -
            
            
            
            6,300Cash
      dividends declared, $.52 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,056
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,056
            )Stock
      compensation
            
            
            -
            
            
            
            -
            
            
            
            106
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            106Purchase
      and retirement of stock
            
            
            (20,800
            )
            
            
            (20
            )
            
            
            (433
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (453
            )Adjustment
      for shares owned by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (103
            )
            
            
            -
            
            
            
            -
            
            
            
            (103
            )Change
      in unearned compensation -ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (349
            )
            
            
            (349
            )Unrealized
      gain on securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            721
            
            
            
            -
            
            
            
            721Balance,
      December 31, 2007
            
            
            3,931,528
            
            
            $
            3,932
            
            
            $
            49,707
            
            
            $
            17,881
            
            
            $
            550
            
            
            $
            (349
            )
            
            $
            71,721








See
Notes to Consolidated Financial Statements.


F-4


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


For
The Years Ended December 31, 2007, 2006, and 2005


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005OPERATING
      ACTIVITIESNet
      income
            
            $
            6,300
            
            
            $
            5,774
            
            
            $
            4,844Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
            
            
            1,097
            
            
            
            824
            
            
            
            772Amortization
      of intangibles
            
            
            926
            
            
            
            807
            
            
            
            963Other
      amortization
            
            
            234
            
            
            
            113
            
            
            
            253Provision
      for loan losses
            
            
            639
            
            
            
            839
            
            
            
            751Stock
      compensation expense
            
            
            106
            
            
            
            95
            
            
            
            -Impairment
      loss on investment securities
            
            
            -
            
            
            
            -
            
            
            
            600Gain
      on sale of securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            (320
            )Deferred
      income taxes
            
            
            (320
            )
            
            
            (312
            )
            
            
            (582
            )Income
      on bank-owned life insurance
            
            
            (594
            )
            
            
            (340
            )
            
            
            (146
            )Increase
      in interest receivable
            
            
            (113
            )
            
            
            (421
            )
            
            
            (454
            )Increase
      (decrease) in income taxes payable
            
            
            (28
            )
            
            
            (198
            )
            
            
            385Increase
      (decrease) in interest payable
            
            
            (360
            )
            
            
            1,069
            
            
            
            369Net
      gain on sale of loans
            
            
            (416
            )
            
            
            (159
            )
            
            
            (148
            )Originations
      of mortgage loans held for sale
            
            
            (12,046
            )
            
            
            (15,323
            )
            
            
            (13,092
            )Proceeds
      from sales of mortgage loans held for sale
            
            
            12,679
            
            
            
            15,341
            
            
            
            13,610Increase
      in mortgage servicing assets
            
            
            (266
            )
            
            
            -
            
            
            
            -Loss
      on disposal of equipment
            
            
            25
            
            
            
            -
            
            
            
            184(Increase)
      in other assets
            
            
            167
            
            
            
            (1,266
            )
            
            
            (444
            )Increase
      (decrease) in other liabilities
            
            
            (135
            )
            
            
            387
            
            
            
            (393
            )Net
      cash provided by operating activities
            
            
            7,895
            
            
            
            7,230
            
            
            
            7,152INVESTING
      ACTIVITIESPurchases
      of securities held to maturity
            
            
            -
            
            
            
            -
            
            
            
            (8,667
            )Proceeds
      from maturities of securities held to maturity
            
            
            8,319
            
            
            
            10,947
            
            
            
            18,061Purchases
      of securities available for sale
            
            
            (23,701
            )
            
            
            (11,243
            )
            
            
            (14,007
            )Proceeds
      from maturities of securities available for sale
            
            
            28,310
            
            
            
            8,725
            
            
            
            7,530Proceeds
      from sales of securities available for sale
            
            
            3,002
            
            
            
            -
            
            
            
            1,794Net
      increase (decrease) in restricted equity securities
            
            
            278
            
            
            
            362
            
            
            
            (1,650
            )Net
      (increase) decrease in interest-bearing deposits in other
      banks
            
            
            (5,575
            )
            
            
            254
            
            
            
            1,207Net
      decrease in federal funds sold
            
            
            11,288
            
            
            
            (5,003
            )
            
            
            5,633Net
      increase in loans
            
            
            (13,481
            )
            
            
            (24,529
            )
            
            
            (47,045
            )Purchase
      of premises and equipment
            
            
            (2,982
            )
            
            
            (3,393
            )
            
            
            (3,325
            )Proceeds
      from sale of other real estate owned
            
            
            584
            
            
            
            630
            
            
            
            400Purchase
      of bank-owned life insurance
            
            
            -
            
            
            
            (5,495
            )
            
            
            -Net
      cash acquired in (used in) business combination
            
            
            (14,247
            )
            
            
            940
            
            
            
            -Net
      cash (used in) investing activities
            
            
            (8,205
            )
            
            
            (27,805
            )
            
            
            (40,069
            )




F-5


SouthCrest
Financial Group, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


(Continued)


Years
Ended December 31, 2007, 2006 and 2005


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005FINANCING
      ACTIVITIESNet
      increase in deposits
            
            $
            1,637
            
            
            $
            32,692
            
            
            $
            25,648Proceeds
      from short-term borrowed funds
            
            
            -
            
            
            
            -
            
            
            
            15,000Principal
      repayments on short-term borrowed funds
            
            
            (110
            )
            
            
            (15,110
            )
            
            
            (110
            )Proceeds
      from long-term borrowed funds
            
            
            5,775
            
            
            
            11,280
            
            
            
            1,500Principal
      repayments on long-term borrowed funds
            
            
            (5,000
            )
            
            
            (5,500
            )
            
            
            (1,500
            )Purchase
      and retirement of stock
            
            
            (453
            )
            
            
            -
            
            
            
            (192
            )Increase
      in unearned compensation - ESOP
            
            
            (349
            )
            
            
            -
            
            
            
            -Proceeds
      from sale of stock
            
            
            -
            
            
            
            -
            
            
            
            400Dividends
      paid
            
            
            (2,056
            )
            
            
            (1,791
            )
            
            
            (1,713
            )Net
      cash provided by (used in) financing activities
            
            
            (556
            )
            
            
            21,571
            
            
            
            39,033Net
      increase (decrease) in cash and due from banks
            
            
            (866
            )
            
            
            996
            
            
            
            6,116Cash
      and due from banks at beginning of year
            
            
            16,926
            
            
            
            15,930
            
            
            
            9,814Cash
      and due from banks at end of period
            
            $
            16,060
            
            
            $
            16,926
            
            
            $
            15,930SUPPLEMENTAL
      DISCLOSURESCash
      paid for:Interest
            
            $
            14,207
            
            
            $
            9,164
            
            
            $
            6,055Income
      taxes
            
            
            2,982
            
            
            
            3,156
            
            
            
            2,576NONCASH
      TRANSACTIONSPrincipal
      balances of loans transferred to other real estate owned
            
            $
            704
            
            
            $
            506
            
            
            $
            533Increase
      in redeemable common stock held by ESOP
            
            
            103
            
            
            
            4
            
            
            
            534Unrealized
      gain (loss) on securities available for sale, net
            
            
            1,157
            
            
            
            472
            
            
            
            (122
            )BUSINESS
      COMBINATIONCash
      and due from banks
            
            $
            3,103
            
            
            $
            8,497
            
            
            $
            -Federal
      funds sold
            
            
            8,100
            
            
            
            3,204
            
            
            
            -Interest-bearing
      deposits in other banks
            
            
            181
            
            
            
            1,096
            
            
            
            -Securities
      available for sale
            
            
            24,046
            
            
            
            13,451
            
            
            
            -Restricted
      equity securities
            
            
            257
            
            
            
            121
            
            
            
            -Loans,
      net
            
            
            26,344
            
            
            
            33,229
            
            
            
            -Bank-owned
      life insurance
            
            
            3,187
            
            
            
            2,117
            
            
            
            -Premises
      and equipment
            
            
            909
            
            
            
            1,500
            
            
            
            -Goodwill
            
            
            5,198
            
            
            
            6,392
            
            
            
            -Core
      deposit intangible
            
            
            715
            
            
            
            1,052
            
            
            
            -Other
      assets
            
            
            1,254
            
            
            
            808
            
            
            
            -Total
      assets
            
            $
            73,294
            
            
            $
            71,467Deposits
            
            $
            49,672
            
            
            $
            52,030
            
            
            $
            -Short-term
      borrowed funds
            
            
            3,000
            
            
            
            -
            
            
            
            -Other
      liabilities
            
            
            3,272
            
            
            
            2,416
            
            
            
            -Total
      liabilities assumed
            
            
            55,944
            
            
            
            54,446Purchase
      price
            
            $
            17,350
            
            
            $
            17,021
            
            
            $
            -




F-6


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Operations





SouthCrest
Financial Group, Inc. (the “Company”) is a bank holding company whose principal
activity is the ownership and management of its wholly-owned subsidiary banks
(the “Banks”), Bank of Upson (“Upson”), First National Bank of Polk County (“FNB
Polk”), Peachtree Bank (“Peachtree”), and Bank of Chickamauga (“Chickamauga”).
Upson is a commercial bank located in Thomaston, Upson County, Georgia with
seven branches located in Thomaston, Manchester, Warm Springs, Luthersville,
Fayetteville, and Tyrone, Georgia. Upson provides a full range of banking
services in its primary market area of Upson, Meriwether, Fayette and the
surrounding counties. FNB Polk is a commercial bank located in Cedartown, Polk
County, Georgia with two branches in Cedartown and one in Rockmart, Georgia. FNB
Polk provides a full range of banking services in its primary market area of
Polk and the surrounding counties.  Peachtree is a commercial bank
located in Maplesville, Chilton County, Alabama and operates one branch in
Maplesville and one in Clanton, Alabama.  Chickamauga is a commercial
bank located in Chickamauga, Walker County, Georgia where it operates two
branches.  The Company considers its banking services to represent a
single reporting segment.





Basis
of Presentation and Accounting Estimates





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





In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the balance sheet date and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.





Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of foreclosed real
estate and contingent assets and liabilities. The determination of the adequacy
of the allowance for loan losses is based on estimates that are susceptible to
significant changes in the economic environment and market conditions. In
connection with the determination of the estimated losses on loans and the
valuation of foreclosed real estate, management obtains independent appraisals
for significant collateral.





Cash,
Due from Banks and Cash Flows





For
purposes of reporting cash flows, cash and due from banks include cash on hand,
cash items in process of collection and amounts due from banks. Cash flows from
loans, interest-bearing deposits in other financial institutions, federal funds
sold, and deposits are reported net.





The
Company’s subsidiaries are required to maintain reserve balances in cash or on
deposit with the Federal Reserve Bank, based on a percentage of deposits. The
total of those reserve balances was approximately $2,857,000 and $5,613,000 at
December 31, 2007 and 2006.





Securities





Debt
securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as available for sale and
recorded at fair value with unrealized gains and losses excluded from earnings
and reported in accumulated other comprehensive income, net of the related
deferred tax effect. Equity securities, including restricted equity securities,
without a readily determinable fair value are recorded at cost.


F-7


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Securities
(Continued)





The
amortization of premiums and accretion of discounts are recognized in interest
income using methods approximating the interest method over the life of the
securities. Realized gains and losses, determined on the basis of the cost of
specific securities sold, are included in earnings on the settlement date.
Declines in the fair value of held to maturity and available for sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term prospects
of the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.





Loans





Loans are
reported at their outstanding principal balances less unearned income, net
deferred fees, and the allowance for loan losses. Loans held for sale are
reported at the lower of cost or fair value, computed using outstanding
commitments to sell loans.  Interest income is accrued on the
outstanding principal balance. Loan fees collected and certain costs incurred
related to loan originations are deferred and amortized as an adjustment to
interest income over the life of the related loans using a method that
approximates a constant yield.  Deferred fees and costs are recorded
as an adjustment to loans outstanding.





The
accrual of interest on loans is discontinued when, in management’s opinion, the
borrower may be unable to meet payments as they become due, unless the loan is
well-secured. All interest accrued but not collected for loans that are placed
on nonaccrual or charged off is reversed against interest income, unless
management believes that the accrued interest is recoverable through the
liquidation of collateral. Interest income on nonaccrual loans is recognized on
the cash-basis or cost-recovery method, until the loans are returned to accrual
status. Loans are returned to accrual status when all the principal and interest
amounts are brought current and future payments are reasonably
assured.





A loan is
considered impaired when it is probable, based on current information and
events, that the Company will be unable to collect all principal and interest
payments due in accordance with the contractual terms of the loan agreement.
Impaired loans are measured by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. The amount of impairment, if any, and any subsequent changes are
included in the allowance for loan losses. Interest on accruing impaired loans
is recognized as long as such loans do not meet the criteria for nonaccrual
status.





Upson
services mortgage loans that it originates and sells to the Federal Home Loan
Mortgage Corporation (“Freddie Mac”). Upson’s servicing obligations include
receiving payments, maintaining escrow accounts and paying hazard insurance,
mortgage insurance, and taxes from such accounts, collecting past due fees,
resolving payment problems and disputes, generating coupon payment books, and
reporting loan balances to the Freddie Mac each month. Upson normally receives
servicing fees of one quarter of one percent (.0025) of the outstanding loan
balance of the loan servicing portfolio from the Freddie Mac. Upson accounts for
loan servicing revenues by booking such revenues as they are received. The
Company amortizes mortgage servicing rights over the estimated life of the
loans.





Allowance
for Loan Losses





The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loan losses are charged against the allowance when
management believes the collectability of the principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance.


F-8


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Allowance
for Loan Losses (Continued)





The
allowance is an amount that management believes will be adequate to absorb
estimated losses relating to specifically identified loans, as well as probable
credit losses inherent in the balance of the loan portfolio, based on an
evaluation of the collectability of existing loans and prior loss experience.
This evaluation also takes into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, concentrations and current economic conditions that may
affect the borrower’s ability to pay. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses, and may require the
Company to make additions to the allowance based on their judgment about
information available to them at the time of their examinations.





The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.





Premises
and Equipment





Land is
carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets. The range of estimated useful
lives is as follows:





Building
      and improvements
            20–40
      YearsLeasehold
      improvements
            5–10
      YearsFurniture
      and equipment
            5–10
      YearsComputer
      and software
            3–5
      Years





Other
Real Estate Owned





Other
real estate owned represents properties acquired through or in lieu of loan
foreclosure and is initially recorded at fair value less estimated costs to
sell. Any write-down to fair value at the time of transfer to other real estate
owned is charged to the allowance for loan losses. Costs of improvements are
capitalized, whereas costs relating to holding other real estate owned and
subsequent adjustments to the value are expensed. The carrying amount of other
real estate owned at December 31, 2007 and 2006 was $256,000 and
$206,000.





Intangible
Assets





Intangible
assets consist of goodwill, core deposit premiums, and mortgage servicing
rights.  Goodwill and core deposit premiums are acquired in connection
with business combinations.  The core deposit premium is initially
recognized based on a valuation performed as of the consummation date. The core
deposit premium is amortized over the average remaining life of the acquired
customer deposits, normally 8 to 12 years, using an accelerated or straight-line
method, depending on the results of the initial valuation of the specific
intangibles.  Mortgage servicing rights are recognized as loans are
sold into the secondary market with servicing rights retained and are amortized
over the estimated life of underlying loans.  All intangible assets,
including goodwill, are tested annually for potential impairment.  No
impairment loss was required in 2007, 2006, or 2005.


F-9


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Income
Taxes





Deferred
income tax assets and liabilities are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary differences between the book and tax bases
of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.  A valuation allowance
may be recorded to reduce net deferred tax assets if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized.  Such valuation allowances were not required as of December
31, 2007 or 2006.





Stock-Based
Compensation





At the
Company’s annual shareholders’ meeting held May 12, 2005, shareholders approved
the adoption of the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan
(the “Stock Incentive Plan”), which provides for up to 549,000 shares of the
Company’s stock to be awarded in the form of stock options.





The
Company adopted SFAS No. 123(R), Accounting for Stock-Based
Compensation, on January 1, 2006 which requires that the estimated fair
value of such equity instruments be recognized as expense as services are
performed.





Prior to
the adoption of SFAS No. 123(R), the Company recorded stock option expense under
the intrinsic method; accordingly, no compensation expense was recognized if the
exercise price of the stock option was equivalent to the market price of the
Company’s common stock on the date of grant.  If under SFAS 123(R),
the Company determined compensation costs based on the fair value at the grant
date for its stock options, net income and earnings per share for the year ended
December 31, 2005 would have been reduced to the following pro forma
amounts:





2005Net
      income as reported
            
            $
            4,844Additional
      expense had the Company adopted SFAS 123
            
            
            (622
            )Related
      tax benefit
            
            
            235Pro
      forma net income
            
            $
            4,457Basic
      and diluted earnings per share-
      As reported
            
            $
            1.36-
      Pro forma
            
            $
            1.25





Responsive
to its plan of implementation of SFAS No. 123(R) and consistent with the
Company's long-term compensation strategies, the Board of Directors of the
Company approved the granting of 183,500 stock options in the fourth quarter of
2005, of which 104,000 were vested in 2005. The decision to vest these options
in 2005 was partially made to reduce non-cash compensation expenses that would
have been otherwise recorded in future periods following the
application of SFAS No. 123(R). Such non-cash compensation expense would have
aggregated approximately $622,000 over a period of future years. The
vesting of such options is reflected in the 2005 pro forma net income disclosure
and related pro forma earnings per share data.  A tax benefit is assumed
because the stock options that vested in 2005 are not tax
qualifying.





Profit-Sharing
Plan





Profit-sharing
plan costs are based on a percentage of individual employee’s salary, not to
exceed the amount that can be deducted for Federal income tax
purposes.





Earnings
Per Share





Basic
earnings per share are computed by dividing net income by the weighted-average
number of shares of common stock outstanding. Diluted earnings per share would
be computed by dividing net income by the sum of the weighted-average number of
shares of common stock outstanding and dilutive potential common shares, such
as


F-10


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Earnings
Per Share  (continued)





outstanding
stock options. Dilutive potential common shares are calculated in accordance
with the treasury stock method, which assumes that proceeds from the exercise of
all warrants and options are used to repurchase common stock at market
value.  The amount of shares remaining after the proceeds are
exhausted represents the potentially dilutive effect of the
securities.  If the price at which the option may be exercised is
greater than the average market price of the stock, then the option is assumed
to be nondilutive and therefore is not included in the computation of diluted
earnings per share.  In 2005, the Company issued 183,500 options under
the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Stock
Incentive Plan”), and in 2006 issued an additional 7,900 options.  The
options granted were nondilutive for 2005, 2006, and 2007.  The Stock
Incentive Plan is explained more fully in Note 10.  The weighted
average number of shares outstanding for the years ended December 31, 2007,
2006, and 2005  was 3,946,689,  3,643,218, and 3,572,720,
respectively.





Comprehensive
Income





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive
income.  The Company’s only component of comprehensive income is
unrealized gains and losses on available for sale securities.





Recent
Accounting Standards





In
December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based
Compensation (SFAS No. 123(R)).  SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services.  This Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions.  SFAS No. 123(R)
requires that the fair value of such equity instruments be recognized as an
expense in the historical financial statements as services are
performed.  Prior to SFAS No. 123(R), only certain pro forma
disclosures of fair value were required.  The provisions of this
Statement are effective for fiscal years beginning after December 15, 2005.
Accordingly, the Company adopted effective January 1, 2006 resulting in
additional compensation expense of $106,000 and $95,000 for the years ended
December 31, 2007 and 2006.





In March
2005, the SEC released Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, SAB
No. 107 expresses views of the SEC staff regarding the application of SFAS
No. 123(R). Among other things, SAB No. 107 provides interpretive
guidance related to the interaction between SFAS No. 123(R) and certain SEC
rules and regulations, as well as provides the staff’s view regarding the
valuation of share-based payment arrangements for public
companies.  The Company adopted SAB No. 107 effective January 1,
2006.





In March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140. This
statement requires that an entity recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset,
and that the servicing assets and servicing liabilities be initially measured at
fair value. The statement also permits an entity to choose a subsequent
measurement method for each class of separately recognized servicing assets and
servicing liabilities. The Company has elected to amortize its mortgage
servicing rights.  SFAS No. 156 is effective as of the beginning of
the first fiscal year that begins after September 15, 2006. The Company adopted
SFAS No. 156 as of January 1, 2007 and it did not have a material impact on the
Company’s financial condition or results of operations.




In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income
Taxes. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.  FIN 48
clarifies the accounting for uncertainty in income taxes recognized
in


F-11


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS










NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)







Recent
Accounting Standards (Continued)




financial
statements and requires the impact of a tax position to be recognized in the
financial statements if that position is more likely than not of being sustained
by the taxing authority.  The years 2004 through 2006 are still
subject to audit for the Company’s Federal, Georgia, and Alabama income tax
returns.  The Company adopted FIN 48 effective January 1, 2007, and
its adoption did not have a material effect on the Company’s consolidated
financial position or results of operation.  It is the Company’s
policy to recognize interest and penalties associated with uncertain tax
positions as components of income taxes.  There were no material
interest or penalties accrued during the year ended December 31,
2007.  No material tax uncertainties exist as of December 31,
2007.




In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements, but
clarifies and standardizes some divergent practices that have emerged since
prior guidance was issued. SFAS No. 157 creates a three-level hierarchy under
which individual fair value estimates are to be ranked based on the relative
reliability of the inputs used in the valuation. This hierarchy is the basis for
the disclosure requirements, with fair value estimates based on the least
reliable inputs requiring more extensive disclosures about the valuation method
used and the gains and losses associated with those estimates. The Company
adopted SFAS No. 157 on January 1, 2008, with no material impact on the
Company’s financial condition, results of operations, or liquidity.





In
September 2006, the FASB ratified EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. EITF Issue 06-4 addresses accounting for split-dollar life
insurance arrangements after the employer purchases a life insurance policy on
the covered employee. This Issue states that an obligation arises as a result of
a substantive agreement with an employee to provide future postretirement
benefits. Under Issue EITF 06-4, the obligation is not settled upon entering
into an insurance arrangement. Since the obligation is not settled, a liability
should be recognized in accordance with applicable authoritative guidance. Issue
EITF 06-4 is effective for fiscal years beginning after December 15, 2007. In
adopting EITF Issue 06-4, the Company will record a liability of $493,000 as of
January 1, 2008 with a corresponding offset against retained earnings, and will
record compensation expense in 2008 of approximately $100,000 relating to these
obligations.





In
September 2006, the FASB ratified EITF Issue 06-5, Accounting for Purchases of Life
Insurance—Determining the Amount That Could Be Realized in Accordance with FASB
Technical Bulletin (“FTB”) No. 85-4, Accounting for Purchases of Life
Insurance. This Issue addresses how an entity should determine the amount
that could be realized under the insurance contract at the balance sheet date in
applying FTB 85-4 and if the determination should be on an individual or group
policy basis. EITF Issue 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF Issue 06-5 did not have a material
effect on the Company’s financial statements.





In
September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB 108 was issued to clarify the appropriate treatment of
misstatements in audited financial statements.  There are two methods
for quantifying the effects of financial statement misstatements.  The
“rollover” method focuses primarily on the impact of the misstatement on the
income statement and, in some cases, considers the impact of reversing prior
year misstatements.  However, if the cause of the misstatement does
not reverse in the following year, the rollover method would result in the
accumulation of misstatements on the balance sheet.  The “iron
curtain” method focuses on the impact of the misstatements on the balance
sheet.





SAB 108
establishes an approach that requires quantification of effects of the financial
statement misstatements on the company’s financial statements and related
disclosures.  This dual approach requires consideration of the impact
of financial statement misstatements using both the iron curtain and the
rollover methods.  SAB 108 permits companies to either restate prior
period financial statements to reflect the dual approach method or to record the
cumulative effect of initially applying the dual approach by adjusting the
carrying value of assets and liabilities as of January 1, 2006 with an
offsetting adjustment to the opening balance of retained
earnings.


F-12


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Recent
Accounting Standards (Continued)





Prior to
the adoption of SAB 108, the Company quantified the impact of misstatements
using the rollover method and management determined the impact of those
misstatements was not material to the consolidated financial
statements.  The prior misstatements resulted from not capitalizing
loan servicing rights on mortgage loans sold when future servicing rights were
retained.  The Company adopted SAB 108 effective January 1, 2006 and
elected to record the cumulative effect of the change, which resulted in the
recognition of mortgage servicing rights of $375,000, a $142,000 adjustment to
deferred income tax liabilities, and a $233,000 adjustment to retained
earnings.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities.  SFAS No. 159 allows an entity to elect
to measure certain financial assets and liabilities at fair value with changes
in fair value recognized in the income statement each period.  The
statement also requires additional disclosures to identify the effects of an
entity’s fair value election on its earnings.  The Company adopted
SFAS No. 159 on January 1, 2008, with no material impact on the financial
condition, results of operations, or liquidity.   The Company
does not anticipate electing fair value to any assets or
liabilities.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations.
SFAS No. 141(R) will significantly change how entities apply the
acquisition method to business combinations. The most significant changes
affecting how the Company will account for business combinations under this
Statement include: the acquisition date will be date the acquirer obtains
control; all (and only) identifiable assets acquired, liabilities assumed, and
noncontrolling interests in the acquiree will be stated at fair value on the
acquisition date; assets or liabilities arising from noncontractual
contingencies will be measured at their acquisition date fair value only if it
is more likely than not that they meet the definition of an asset or liability
on the acquisition date; adjustments subsequently made to the provisional
amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; acquisition-related restructuring
costs that do not meet the criteria in SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, will be expensed as incurred; transaction
costs will be expensed as incurred; reversals of deferred income tax valuation
allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period; and the allowance for loan losses of an
acquiree will not be permitted to be recognized by the acquirer. Additionally,
SFAS No. 141(R) will require new and modified disclosures surrounding
subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward.







The
Company will be required to prospectively apply SFAS No. 141(R) to all
business combinations completed on or after January 1, 2009. Early adoption
is not permitted. For business combinations in which the acquisition date was
before the effective date, the provisions of SFAS No. 141(R) will apply to the
subsequent accounting for deferred income tax valuation allowances and income
tax contingencies and will require any changes in those amounts to be recorded
in earnings. At December 31, 2007, the Company had no acquired deferred
income tax valuation allowances and income tax
contingencies.  Management is currently evaluating the effects that
SFAS 141(R) will have on the financial condition, results of operations,
liquidity, and the disclosures that will be presented in the consolidated
financial statements.





Reclassification
of Certain Items





Certain
reclassifications to the prior year’s consolidated balance sheets and statements
of income have been made to conform to current classification.  These
reclassifications have no impact on net income, stockholders’ equity, or cash
flows from operations, investing activities, or financing activities as
previously reported.





NOTE
2. BUSINESS COMBINATIONS





On July
1, 2007 the Company completed its acquisition of Bank of Chickamauga pursuant to
the definitive agreement entered into on February 23, 2007.  Bank of
Chickamauga is a community bank located in the City of Chickamauga, Walker
County, Georgia where it maintains two offices.  The City of
Chickamauga is located in the


F-13


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2. BUSINESS COMBINATIONS (Continued)





Chattanooga,
Tennessee metropolitan area, and completing this merger allows the Company to
enter a new market.  Under terms of the definitive agreement, the
shareholders of Chickamauga were to receive $18 million cash, less certain costs
related to the merger and the termination of the Chickamauga defined benefit
plan, in exchange for 100% of the voting stock of Bank of
Chickamauga.  At the completion of the acquisition, Chickamauga
shareholders received $17.2 million in cash with an additional $687,000 being
placed in a reserve account to fund the costs related to terminating the
Chickamauga defined benefit plan that are in excess of the $568,500 that was
recorded on the books of Chickamauga as accrued pension expense but not yet
transferred into the pension plan.  The reserve account is recorded as
a liability in the financial statements.  Any funds remaining after
the termination of the defined benefit plan will be distributed to the
Chickamauga shareholders, which will increase the purchase amount recorded at
acquisition.  The timing of the plan termination is dependent on
approval by the Internal Revenue Service.  Management anticipates that
the termination of the plan could occur in the second or third quarter of
2008.





The
merger was accounted for under the purchase method of accounting. Accordingly,
results of operations for Bank of Chickamauga are included in the results of
operations of SouthCrest prospectively from the date of merger, and the purchase
price of $17.35 million, which includes merger costs of $150,000 but does not
include the $687,000 reserve established for the defined benefit plan
termination, was allocated to the fair values of Chickamauga’s assets and
liabilities.  As a result, the Company recorded a core deposit
intangible of $715,000 and goodwill of $5,198,000.  The core deposit
intangible is being amortized on an accelerated basis over the estimated life of
the deposits.  Because of the uncertainty of the final disposition of
the defined benefit plan and the resulting distribution from the reserve
account, the purchase price and the resulting allocation have not been
finalized.





Statement
of Position 03-03, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”)
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities (loans) acquired in a transfer if those differences are
attributable, at least in part, to credit quality.  It includes loans
acquired in purchase business combinations.  The SOP does not apply to
loans originated by the entity.  At July 1, 2007 the Company identified
$559,000 in loans to which the application of the provisions of SOP 03-03 was
required.  The carrying amount of these loans was reduced to $376,000
at July 1, 2007, representing a nonaccretable adjustment of
$183,000.  Because the Company could not reasonably estimate cash
flows expected to be collected from these loans, interest income is only
recognized when cash payments are received on such loans.  The
purchase accounting adjustments reflect a reduction in loans for $183,000
related to Chickamauga’s impaired loans, thus reducing the carrying value of
these loans to $376,000 as of July 1, 2007.  At December 31, 2007, the
carrying value of these loans had been reduced to $366,000 due to cash payments
received from the borrowers.  Interest income recognized on such loans
is not material for the six month period ended December 31, 2007.





To fund
the payments to the Chickamauga shareholders, the Company’s subsidiary banks
paid $15 million in special dividends to the parent.  Additionally,
the Company received an increase in its line of credit from $5.5 million to $8.0
million on the same terms and conditions as previously existed on the
loan.  The interest rate for the line of credit is Prime minus
0.50%.  The Company drew $4 million on this line in connection with
the merger.





On
October 31, 2006, the Company completed its merger with Maplesville Bancorp.
(“Maplesville”), a Maplesville, Alabama based bank holding company and the
parent company of Peachtree Bank (“Peachtree”).  In connection with
this merger, shareholders of Maplesville received approximately 371,135 shares
of SouthCrest stock and $7,557,000 in cash.  The merger was accounted
for using the purchase method of accounting.  Accordingly, results of
operations for Peachtree Bank are included in the results of operations of
SouthCrest prospectively from the date of merger, and the purchase price of
$17.3 million, which includes merger costs of $254,000, was allocated to the
fair values of Maplesville’s assets and liabilities.  As a result, the
Company recorded a core deposit intangible of $1,052,000 and goodwill of
$6,392,000.  The core deposit intangible is being amortized on an
accelerated basis over the estimated life of the deposits.





Results
of operations for Maplesville and Chickamauga are included in the Company’s
results of operations prospectively from the dates of their respective
merger.  The following schedule presents pro forma information for
revenues and net income as if the combinations with Maplesville and Chickamauga
had occurred on January 1, 2006.


F-14


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
2. BUSINESS COMBINATIONS (Continued)





Revenues
and net income of both acquired entities for periods prior to the dates of
acquisition are added to actual results of SouthCrest for each of the periods
indicated in the table.  Revenues include interest income plus other
income less proforma merger adjustments affecting revenues. Net income includes
the net income less the proforma effect of merger adjustments, including the
amortization of intangibles:








(Dollars in thousands except per share amounts)
            
            2007
            
            
            2006Revenues
            
            $
            45,476
            
            
            $
            40,612Net
      Income
            
            $
            6,229
            
            
            $
            6,158Earnings
      per share
            
            $
            1.58
            
            
            $
            1.56








The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition including subsequent adjustments
to the allocation of purchase price:





Assets
Acquired and Liabilities Assumed


(Dollars
in thousands)





Chickamauga
            
            
            MaplesvilleCash
      and due from banks
            
            $
            3,103
            
            
            $
            8,497Federal
      funds sold
            
            
            8,100
            
            
            
            3,204Interest
      bearing deposits in other banks
            
            
            181
            
            
            
            1,096Securities
      available for sale
            
            
            24,046
            
            
            
            13,451Restricted
      equity securities
            
            
            257
            
            
            
            121Loans,
      net
            
            
            26,344
            
            
            
            33,229Bank-owned
      life insurance
            
            
            3,187
            
            
            
            2,117Premises
      and equipment
            
            
            909
            
            
            
            1,500Goodwill
            
            
            5,198
            
            
            
            6,392Intangible
      assets
            
            
            715
            
            
            
            1,052Other
      assets
            
            
            1,254
            
            
            
            808Total
      assets acquired
            
            $
            73,294
            
            
            $
            71,467Deposits
            
            $
            49,672
            
            
            $
            52,030Short-term
      borrowed funds
            
            
            3,000
            
            
            
            -Other
      liabilities
            
            
            3,272
            
            
            
            2,416Total
      liabilities assumed
            
            
            55,944
            
            
            
            54,446Purchase
      price
            
            $
            17,350
            
            
            $
            17,021





NOTE
3. SECURITIES





The
amortized cost and fair value of securities are summarized as
follows:


F-15


NOTE
3. SECURITIES (Continued)





(Dollars
      in thousands)
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueSecurities
      Available for SaleDecember
      31, 2007:U.S.
      Government and agency securities
            
            $
            30,254
            
            
            $
            305
            
            
            $
            (4
            )
            
            $
            30,555State
      and municipal securities
            
            
            17,958
            
            
            
            276
            
            
            
            (8
            )
            
            
            18,226Mortgage-backed
      securities
            
            
            28,350
            
            
            
            371
            
            
            
            (120
            )
            
            
            28,601Equity
      securities
            
            
            1,763
            
            
            
            90
            
            
            
            (27
            )
            
            
            1,826$
            78,325
            
            
            $
            1,042
            
            
            $
            (159
            )
            
            $
            79,208December
      31, 2006:U.S.
      Government and agency securities
            
            $
            34,762
            
            
            $
            34
            
            
            $
            (263
            )
            
            $
            34,533State
      and municipal securities
            
            
            11,079
            
            
            
            7
            
            
            
            (28
            )
            
            
            11,058Mortgage-backed
      securities
            
            
            14,589
            
            
            
            4
            
            
            
            (395
            )
            
            
            14,198Equity
      securities
            
            
            1,363
            
            
            
            367
            
            
            
            -
            
            
            
            1,730$
            61,793
            
            
            $
            412
            
            
            $
            (686
            )
            
            $
            61,519Securities
      Held to MaturityDecember
      31, 2007:U.S.
      Government and agency securities
            
            $
            20,289
            
            
            $
            45
            
            
            $
            (143
            )
            
            $
            20,191State
      and municipal securities
            
            
            6,773
            
            
            
            142
            
            
            
            (18
            )
            
            
            6,897Mortgage-backed
      securities
            
            
            30,823
            
            
            
            56
            
            
            
            (388
            )
            
            
            30,491Corporate
      bonds
            
            
            1,000
            
            
            
            53
            
            
            
            -
            
            
            
            1,05358,885
            
            
            
            296
            
            
            
            (549
            )
            
            
            58,632December
      31, 2006:U.S.
      Government and agency securities
            
            $
            22,216
            
            
            $
            34
            
            
            $
            (538
            )
            
            $
            21,712State
      and municipal securities
            
            
            7,387
            
            
            
            175
            
            
            
            (5
            )
            
            
            7,557Mortgage-backed
      securities
            
            
            36,665
            
            
            
            25
            
            
            
            (923
            )
            
            
            35,767Corporate
      bonds
            
            
            1,000
            
            
            
            -
            
            
            
            -
            
            
            
            1,00067,268
            
            
            
            234
            
            
            
            (1,466
            )
            
            
            66,036





The
amortized cost and fair value of securities held to maturity and securities
available for sale as of December 31, 2007 by contractual maturity are shown
below. Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.


F-16


NOTE
3. SECURITIES (Continued)





Securities Available For Sale
            
            
            Securities Held To MaturityAmortized
            
            
            Fair
            
            
            Amortized
            
            
            FairCost
            
            
            Value
            
            
            Cost
            
            
            ValueDue
      within one year
            
            $
            16,240
            
            
            $
            16,283
            
            
            $
            55
            
            
            $
            55Due
      from one to five years
            
            
            19,715
            
            
            
            20,045
            
            
            
            3,644
            
            
            
            3,697Due
      from five to ten years
            
            
            8,380
            
            
            
            8,494
            
            
            
            8,459
            
            
            
            8,596Due
      after ten years
            
            
            3,877
            
            
            
            3,959
            
            
            
            15,904
            
            
            
            15,793Mortgage-backed
      securities
            
            
            28,350
            
            
            
            28,601
            
            
            
            30,823
            
            
            
            30,491Equity
      securities
            
            
            1,763
            
            
            
            1,826
            
            
            
            -
            
            
            
            -$
            78,325
            
            
            $
            79,208
            
            
            $
            58,885
            
            
            $
            58,632








Securities
with a carrying value of $72,884,000 and $85,567,000 at December 31, 2007 and
2006, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.





The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2007.





Less Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedDescription
      of securities
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government and agency securities
            
            $
            1,987
            
            
            $
            (2
            )
            
            $
            12,835
            
            
            $
            (145
            )
            
            $
            14,822
            
            
            $
            (147
            )State
      and municipal securities
            
            
            703
            
            
            
            (8
            )
            
            
            627
            
            
            
            (18
            )
            
            
            1,330
            
            
            
            (26
            )Mortgage-backed
      securities
            
            
            4,645
            
            
            
            (27
            )
            
            
            30,234
            
            
            
            (481
            )
            
            
            34,879
            
            
            
            (508
            )Equity
      securities
            
            
            613
            
            
            
            (27
            )
            
            
            -
            
            
            
            -
            
            
            
            613
            
            
            
            (27
            )Total
            
            $
            7,948
            
            
            $
            (64
            )
            
            $
            43,696
            
            
            $
            (644
            )
            
            $
            51,644
            
            
            $
            (708
            )








The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at December 31, 2006.





Less Than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedDescription
      of securities
            
            Value
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesU.S.
      Government and agency securities
            
            $
            3,979
            
            
            $
            (10
            )
            
            $
            40,469
            
            
            $
            (791
            )
            
            $
            44,448
            
            
            $
            (801
            )State
      and municipal securities
            
            
            2,325
            
            
            
            (2
            )
            
            
            4,110
            
            
            
            (31
            )
            
            
            6,435
            
            
            
            (33
            )Mortgage-backed
      securities
            
            
            3,725
            
            
            
            (10
            )
            
            
            43,652
            
            
            
            (1,308
            )
            
            
            47,377
            
            
            
            (1,318
            )Total
            
            $
            10,029
            
            
            $
            (22
            )
            
            $
            88,231
            
            
            $
            (2,130
            )
            
            $
            98,260
            
            
            $
            (2,152
            )





These
unrealized losses are considered temporary because of acceptable investment
grades on each security,  the likelihood of the market value
increasing to the initial cost basis of the security, and the intent and ability
of the Company to hold these securities until recovery of the market
values.  During the first quarter of 2005, the Company recorded an
impairment charge of $600,000 on $2.5 million of Federal Home Loan Mortgage
Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie
Mae”) perpetual preferred stock. The reclassification of an unrealized
mark-to-market loss on these securities to an other-than-temporary charge was
based upon a detailed impairment analysis of these
securities.  Previous losses on the securities were recognized in the
equity section of the balance sheet.  The Company’s conclusion
considered the duration and severity of the unrealized loss, the financial
condition and near-term prospects of the issuers, and the likelihood of the
market value of these instruments increasing to our initial cost basis within a
reasonable period of time.  During the third quarter of 2005, the
Company initiated a plan to sell a portion of these securities in which the
securities would be sold slowly in small blocks.   Certain
portions of this investment were sold during 2005, resulting in gains of $71,000
which is included in net gains on sale of securities available for
sale.


F-17


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
3. SECURITIES (Continued)





In
addition to the gain mentioned above, gain on sale of securities available for
sale during 2005 also included a $249,000 gain realized on the sale of a common
stock investment. The Company’s cost basis in that investment was
$200,000.





NOTE
4. LOANS





The
composition of loans is summarized as follows:


Years Ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006Commercial,
      financial, and agricultural
            
            $
            22,595
            
            
            $
            23,996Real
      estate – construction
            
            
            66,069
            
            
            
            59,745Real
      estate – mortgage
            
            
            241,316
            
            
            
            211,676Consumer
            
            
            38,834
            
            
            
            33,690Other
            
            
            5,162
            
            
            
            6,058373,976
            
            
            
            335,165Unearned
      income
            
            
            (151
            )
            
            
            (159
            )Allowance
      for loan losses
            
            
            (4,952
            )
            
            
            (4,480
            )Loans,
      net
            
            $
            368,873
            
            
            $
            330,526




Loans
serviced for others totaled $83,856,000 and $79,680,000 at December 31, 2007 and
2006, respectively.





Changes
in the allowance for loan losses are as follows:





Years Ended December 31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Balance,
      beginning of year
            
            $
            4,480
            
            
            $
            3,477
            
            
            $
            3,161Provision
      for loan losses
            
            
            639
            
            
            
            839
            
            
            
            751Loans
      charged off
            
            
            (1,142
            )
            
            
            (903
            )
            
            
            (893
            )Recoveries
      of loans previously charged off
            
            
            611
            
            
            
            436
            
            
            
            458Allowance acquired
      in business combination
            
            
            364
            
            
            
            631
            
            
            
            -Balance,
      end of year
            
            $
            4,952
            
            
            $
            4,480
            
            
            $
            3,477





The
following is a summary of information pertaining to impaired loans:





As
      of and for the Years EndedDecember
      31,(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Impaired
      loans without a valuation allowance
            
            $
            -
            
            
            $
            -
            
            
            $
            -Impaired
      loans with a valuation allowance
            
            
            1,633
            
            
            
            479
            
            
            
            232Total
      impaired loans
            
            $
            1,633
            
            
            $
            479
            
            
            $
            232Valuation
      allowance related to impaired loans
            
            $
            245
            
            
            $
            72
            
            
            $
            35Average
      investment in impaired loans
            
            $
            507
            
            
            $
            659
            
            
            $
            323





Interest
income recognized on impaired loans for the years ended December 31, 2007, 2006,
and 2005 was immaterial.





There
were $1,633,000, and $479,000 loans on nonaccrual status at December 31, 2007
and 2006. Loans of $247,000 and $1,015,000 were past due ninety days or more and
still accruing interest at December 31, 2007 and 2006,
respectively.


F-18


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
4. LOANS (Continued)





In the
ordinary course of business, the Company has granted loans to certain related
parties, including executive officers, directors and their affiliates. The
interest rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the type of
loan. Changes in related party loans for the year ended December 31, 2007 are as
follows:





(Dollars
      in thousands)Balance,
      beginning of year
            
            
            5,239Advances
            
            
            156Repayments
            
            
            (4,546
            )Increase
      due to business combination
            
            
            259Balance,
      end of year
            
            
            1,108





NOTE
5. PREMISES AND EQUIPMENT





Premises
and equipment are summarized as follows:


December
      31,(Dollars
      In Thousands)
            
            2007
            
            
            2006Land
            
            $
            3,125
            
            
            $
            2,241Buildings
            
            
            12,720
            
            
            
            10,342Leasehold
      improvements
            
            
            532
            
            
            
            19Construction
      in progress
            
            
            393
            
            
            
            1,284Equipment
            
            
            5,845
            
            
            
            4,88422,615
            
            
            
            18,770Accumulated
      Depreciation
            
            
            (4,522
            )
            
            
            (3,446
            )$
            18,093
            
            
            $
            15,324





Construction
in progress amounts at December 31, 2007 relate to the construction of the
Company’s operations center in Thomaston, Georgia, and at December 31, 2006 to
additions and renovations to Upson’s main office in Thomaston. The project was
to be completed in two phases, with the first phase completed in the third
quarter of 2006 and the second phase completed in the second quarter of
2007.  The final cost of the project was  approximately
$4,869,000.  In 2007 the Company began operating a branch office in a
leased facility in Tyrone, Georgia which is subject to a ten year
lease.  Leasehold improvements for the office amounted to
$513,000.





Leases:


In 2004
the Company leased a branch office location in Fayetteville, Georgia. The lease
is for a term of five years.  In 2007, the Company leased a second
branch office in Tyrone, Georgia for a term of ten years with certain renewal
options.





Rental
expense under all operating leases amounted to $114,000, $91,000, and $66,000
for the years ended December 31, 2007, 2006 and 2005, respectively. Commitments
for lease obligations are as follows:





(Dollars In Thousands)2008
            
            $
            1412009
            
            
            1192010
            
            
            752011
            
            
            772012
            
            
            79Thereafter
            
            
            388$
            879


F-19


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
6. INTANGIBLE ASSETS





Following
is a summary of information related to intangible assets:





As of December 31, 2007
            
            
            As of December 31, 2006Gross
            
            
            
            
            
            GrossCarrying
            
            
            Accumulated
            
            
            Carrying
            
            
            Accumulated(Dollars
      In Thousands)
            
            Amount
            
            
            Amortization
            
            
            Amount
            
            
            AmortizationGoodwill
            
            $
            14,255
            
            
            
            -
            
            
            $
            9,057
            
            
            
            -Core
      deposit intangible
            
            $
            9,441
            
            
            $
            (5,159
            )
            
            $
            8,726
            
            
            $
            (4,233
            )Mortgage
      servicing rights
            
            
            863
            
            
            
            (353
            )
            
            
            597
            
            
            
            (222
            )Total
      other intangible assets
            
            $
            10,304
            
            
            $
            (5,512
            )
            
            $
            9,323
            
            
            $
            (4,455
            )





Annually,
intangible assets are reviewed for impairment.  During 2007, no
charges for impairment were required.





Amortization
expense for the core deposit intangibles was $926,000, $807,000 and $963,000 for
the years ended December 31, 2007, 2006 and 2005,
respectively.  Amortization expense for the mortgage servicing rights
was $131,000 for the year ended December 31, 2007.  The estimated
amortization expense of all intangible assets in future years is as
follows:





(Dollars
      In Thousands)2008
            
            $
            1,0742009
            
            
            1,0382010
            
            
            7852011
            
            
            4652012
            
            
            432Thereafter
            
            
            998$
            4,792





NOTE
7. DEPOSITS





Deposits
are as follows:


December
      31,(Dollars
      In Thousands)
            
            2007
            
            
            2006Noninterest
      bearing deposits
            
            $
            80,685
            
            
            $
            80,581Interest
      checking
            
            
            83,742
            
            
            
            72,386Money
      market
            
            
            55,687
            
            
            
            56,461Savings
            
            
            41,997
            
            
            
            35,542Certificates
      of deposit
            
            
            251,820
            
            
            
            217,652513,931
            
            
            
            462,622





The
aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2007 and 2006 was $84,616,000 and $63,708,000, respectively. The
scheduled maturities of time deposits at December 31, 2007 are as
follows:





(Dollars
      In Thousands)2008
            
            $
            201,0612009
            
            
            20,2312010
            
            
            16,4752011
            
            
            6,9662012
            
            
            6,873Thereafter
            
            
            214$
            251,820


F-20


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
7. DEPOSITS (Continued)





Overdraft
demand deposits reclassified to loans totaled $272,000 and $252,000 at December
31, 2007 and 2006, respectively.





NOTE
8. BORROWED FUNDS





Other
borrowed funds consist of the following:





December
      31,(Dollars
      In Thousands)
            
            2006
            
            
            2005Short-term
      borrowed fundsFederal
      Home Loan Bank advance with a maturity of March 26,
      2008.  Interest is payable monthly at a rate of
      5.51%.
            
            $
            3,000
            
            
            $
            -Current
      portion of Federal Home Loan Bank advance with a maturity of March 5,
      2008.  Interest is payable monthly at a rate of
      6.25%.  Principal is due in semi-annual installments of
      $55,000.
            
            
            55
            
            
            
            110Total
      short-term borrowed funds
            
            
            3,055
            
            
            
            110Long-term
      borrowed fundsFederal
      Home Loan Bank advance due January 30, 2009.  Interest is
      payable monthly at 5.05%.
            
            
            -
            
            
            
            5,000Federal
      Home Loan Bank advance with a maturity of March 5, 2008.Interest
      is payable monthly at a rate of 6.25%.  Principal is due in
      semi-annual installments of $55,000.
            
            
            -
            
            
            
            55Line
      of credit maturing October 1, 2018 secured by common stock of subsidiary
      banks.  Principal balance outstanding at October 16, 2008 shall
      be due in ten annual payments beginning October 1, 2009.Interest
      is payable quarterly at Prime minus 0.50%.
            
            
            6,555
            
            
            
            780Total
      long-term borrowed funds
            
            
            6,555
            
            
            
            5,835Total
      borrowed funds
            
            $
            9,610
            
            
            $
            5,945





Contractual
maturities of other borrowings as of December 31, 2007 are as
follows:





(Dollars
      In Thousands)2008
            
            $
            3,0552009
            
            
            6562010
            
            
            6562011
            
            
            6562012
            
            
            656Thereafter
            
            
            3,931$
            9,610





Advances
are collateralized by a blanket floating lien on qualifying first mortgages,
pledges of certain securities and the Company’s Federal Home Loan Bank
stock.





The terms
of the line of credit require the maintenance of certain minimum capital levels
and regulatory capital ratios, allowance for loan losses, and profitability
ratios.  The Company believes it is in compliance with such terms at
December 31, 2007.





NOTE
9. EMPLOYEE BENEFIT PLANS





The
Company maintains two defined contribution retirement plans (the “Plans”) for
its officers and employees:  the SouthCrest Financial Group, Inc.
401(k) and Profit-Sharing Plan (the “401(k) Plan”) and the SouthCrest Financial
Group, Inc. Employee Stock Ownership Plan (the “ESOP”).  Annually, the
Company makes a determination of the


F-21


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
9. EMPLOYEE BENEFIT PLANS (Continued)





total
funds it will contribute to the Plans.  Once determined, funds are
first contributed to the 401(k) plan with the remainder contributed to the
ESOP.  For the years ended December 31, 2007, 2006, and 2005 the total
funds contributed approximated 8% of compensation less amounts paid as
incentives and bonuses.





401(k)
and Profit Sharing Plan





The
401(k) Plan is available to all eligible employees, subject to certain minimum
age and service requirements. For the years ended December 31, 2007 and 2006,
the Company contributed 6% of an employee’s compensation to the Plan without
regard to an employee’s level of participation.  For the year ended
December 31, 2005, the Company made a matching contribution of 75% of the first
8% of an employee’s contribution, for a maximum contribution of
6%.  The contributions expensed were $445,000, $391,000 and $257,000
for the years ended December 31, 2007, 2006 and 2005,
respectively.  These expenses are included in salaries and employee
benefits expense in the accompanying statements of income.





Employee
Stock Ownership Plan





The ESOP
is available to all eligible employees, subject to certain age and service
requirements.  For the years ended December 31, 2007, 2006 and 2005,
the Company contributed $182,000, $143,000 and $220,000, respectively, to the
ESOP. These expenses are included in salaries and employee benefits expense in
the accompanying statements of income.





In
accordance with the ESOP, the Company is expected to honor the rights of certain
participants to diversify their account balances or to liquidate their ownership
of the common stock in the event of termination. The purchase price of the
common stock would be based on the fair market value of the Company’s common
stock as of the annual valuation date, which precedes the date the put option is
exercised. No participant has exercised their right to diversify their account
balances since the inception of the ESOP, and no significant cash outlay is
expected during 2006. However, since the redemption of common stock is outside
the control of the Company, the Company’s maximum cash obligation based on the
approximate market prices of common stock as of the reporting date has been
presented outside stockholders’ equity. The amount presented as redeemable
common stock held by the ESOP in the consolidated balance sheet represents the
Company’s maximum cash obligation and has been reflected as a reduction of
retained earnings.





At
December 31, 2007 and 2006, the ESOP held 67,054 and 42,773 shares of the
Company stock. Shares held by the ESOP considered outstanding for purposes of
calculating the Company’s earnings per share were 51,174 and 42,773 shares as of
December 31, 2007 and 2006, respectively.  In November 2007, the ESOP
purchased 15,880 shares funded by a $349,000 direct loan from the
Company.  At December 31, 2007 the balance of the loan was $349,000
and is reported on the balance sheet as “Unearned Compensation – ESOP” and is a
reduction of  stockholders’ equity.  This loan carries an
interest rate of Prime minus 0.50% and is to be repaid over a term of fifteen
years.  At December 31, 2007 the shares secured by the loan had not
been allocated to participant accounts and therefore are not considered
outstanding for purposes of computing earnings per share.





Deferred
Compensation Plan





The
Company has a deferred compensation plan for death and retirement benefits for
certain key officers. The estimated amounts to be paid under the compensation
plan have been funded through the purchase of life insurance policies on the
officers. The balance of the policy cash surrender values included in other
assets at December 31, 2007 and 2006 is $16,302,000 and $12,521,000,
respectively. Income recognized on the policies amounted to $594,000, $340,000
and $146,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The balance of deferred compensation included in other liabilities at December
31, 2007 and 2006 is $4,139,000 and $2,765,000, respectively. Expense recognized
for deferred compensation amounted to $470,000, $251,000 and $325,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.  In
connection with its October 31, 2006 merger with Maplesville, the Company
acquired bank-owned life insurance contracts with a fair value of $2,117,000 and
assumed $1,483,000 in deferred compensation liabilities.  In
connection with its July 1, 2007 merger with Chickamauga, the Company acquired
bank-owned life insurance contracts with a fair value of $3,187,000 and assumed
$927,000 in deferred compensation liabilities.


F-22


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
9. EMPLOYEE BENEFIT PLANS (Continued)





Defined
Benefit Plan





In its
July 1, 2007 acquisition of Bank of Chickamauga, the Company assumed the Bank of
Chickamauga Defined Benefit Plan (the “Chickamauga Plan”).  In
accordance with the Merger Agreement, the Chickamauga Plan  was
terminated effective November 1, 2007, and the Company is awaiting Internal
Revenue Service approval of the plan termination.  When the
Chickamauga Plan is terminated, participants will have the option of receiving a
lump sum cash distribution or a private annuity that provides substantially the
same benefit as they would have received under the Chickamauga
Plan.   At December 31, 2007, the Accumulated Benefit Obligation
of the Chickamauga Plan was $2,510,000 and the plan assets were $1,879,000,
leaving a plan shortfall of $631,000.  The Accumulated Benefit
Obligation was calculated in accordance with IRS regulations governing plan
terminations which will be in effect in 2008 when the Chickamauga Plan is
terminated.  These regulations will require the use of multiple
discount rates correlating to various durations of the estimated plan
participant liabilities, resulting in an average discount rate of
4.85%.  At December 31, 2007 the Company had recorded on its books
accrued pension expense totaling $568,500 to be used to fund any shortfall in
plan assets at the time of the plan termination.  Any legal,
actuarial, administrative or benefit costs to terminate the plan in excess of
this amount will be funded from the $687,000 which was escrowed at the date of
merger.





NOTE
10. STOCK COMPENSATION PLAN





Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (“SFAS
No. 123(R)”) which was issued by the Financial Accounting Standards Board in
December 2004. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock Based
Compensation (“SFAS 123”), and supersedes APB No. 25, Accounting for Stock Issued to
Employees, (“APB No. 25”) and its related interpretations. SFAS No.
123(R) requires recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements over the
period the employee is required to perform the services in exchange for the
award (presumptively the vesting period). SFAS No. 123(R) also requires
measurement of the cost of employee services received in exchange for an award
based on the grant-date fair value of the award. SFAS No. 123(R) also amends
SFAS No. 95, Statement of Cash
Flows, to require that excess tax benefits be reported as financing cash
inflows, rather than as a reduction of taxes paid, which is included within
operating cash flows.




The
Company adopted SFAS No. 123(R) using the modified prospective application as
permitted under SFAS No. 123(R).  Accordingly, prior period amounts
have not been restated. Under this application, the Company is required to
record compensation expense for all awards granted after the date of adoption
and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption.  For the years ended December 31,
2007 and 2006, the Company recorded compensation expense related to stock
options of $106,000 and $95,000, respectively.





Prior to
the adoption of SFAS No. 123(R), the Company used the intrinsic value method as
prescribed by APB No. 25 and thus recognized no compensation expense for options
granted with exercise prices equal to the fair market value of the Company’s
common stock on the date of grant.




The
Company maintains the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan
(the “Stock Incentive Plan”), which provides for up to 549,000 shares of the
Company’s stock to be awarded in the form of stock options.  Both
incentive stock options and non-qualified options may be granted under the
Plan.  The exercise price of each option equals the market price of
the Company’s stock on the date of grant.  The incentive stock options
generally vest at the rate of 20% per year over five years, and expire after ten
years from the date of grant.  The Company immediately vested a grant
of 104,000 stock options in 2005.  At December 31, 2007, 392,100
shares remained available for future grant.  Compensation cost that
has been charged against income was approximately $106,000 and $95,000 for the
years ended December 31, 2007 and 2006, respectively.  Because all
options that are subject to expensing under SFAS No. 123(R) are tax qualifying,
it is not expected that recognized compensation expense relating to these stock
options will result in future tax benefits.


F-23


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
10. STOCK COMPENSATION PLAN (Continued)





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model.  The Company granted 7,900 and
183,500 stock options during the years ended December 31, 2006 and 2005,
respectively, with a fair value of $6.48 and $5.98, respectively, for each
option.  No options were granted for the year ended December 31,
2007.  The following table presents the assumptions for the
Black-Scholes model used in determining the fair value of options granted to
employees in the December, 2006 and 2005:





2006
            
            
            2005Dividend
      yield
            
            
            2.16
            %
            
            
            2.13
            %Risk-free
      interest rate
            
            
            4.58
            %
            
            
            4.40
            %Expected
      life
            
            6.5
      years
            
            
            6.5
      yearsVolatility
            
            
            26.34
            %
            
            
            23.31
            %





A summary
of activity in the Stock Incentive Plan is presented below:





Options
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at January 1, 2005
            
            
            -Granted
            
            
            183,500
            
            
            $
            23.45Exercised
            
            
            -Forfeited
            
            
            -Outstanding
      at December 31, 2005
            
            
            183,500
            
            
            $
            23.45Granted
            
            
            7,900
            
            
            
            23.10Exercised
            
            
            -Forfeited
            
            
            -Outstanding
      at December 31, 2006
            
            
            191,400
            
            
            $
            23.44Granted
            
            
            -Exercised
            
            
            -Forfeited
            
            
            -Outstanding
      at December 31, 2007
            
            
            191,400
            
            
            $
            23.44
            
            
            8
      years
            
            
            $
            -Options
      exercisable at December 31, 2007
            
            
            135,800
            
            
            $
            23.45
            
            
            8
      years
            
            
            $
            -





Since the
inception of the Stock Incentive Plan, no options have been
exercised.  Because the end of period stock price was less than or
equal to the exercise prices of options outstanding, the options outstanding and
exercisable at December 31, 2007 had no intrinsic value.  As of
December 31, 2007, there was $325,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements, which is expected
to be recognized over a weighted average life of 3.1 years.


F-24


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
10. STOCK COMPENSATION PLAN (Continued)








Options
outstanding at December 31, 2007 were as follows:





Outstanding
            
            ExercisableExercise
      Price
            
            
            Number of
              Options
            
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            Number
      of
              Options
            
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term$
            23.10
            
            
            
            7,900
            
            
            $
            23.10
            
            9
      years
            
            
            -
            
            
            $
            23.10
            
            9
      years$
            23.45
            
            
            
            183,500
            
            
            $
            23.45
            
            8
      years
            
            
            135,800
            
            
            $
            23.45
            
            8
      yearsTotal
            
            
            
            191,400
            
            
            
            
            
            
            
            
            135,800








NOTE
11. INCOME TAXES





The
components of income tax expense are as follows:





Years
      Ended December 31,(Dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005CurrentFederal
              
              $
              2,803
              
              
              $
              2,764
              
              
              $
              2,485State
              
              
              293
              
              
              
              323
              
              
              
              253Total
      current
              
              
              3,096
              
              
              
              3,087
              
              
              
              2,738DeferredFederal
              
              
              (276
              )
              
              
              (281
              )
              
              
              (491
              )State
              
              
              (44
              )
              
              
              (31
              )
              
              
              (91
              )Total
      deferred
              
              
              (320
              )
              
              
              (312
              )
              
              
              (582
              )$
              2,776
              
              
              $
              2,775
              
              
              $
              2,156





The
Company’s income tax expense differs from the amounts computed by applying the
Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:





Years
      Ended December 31,(Dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005Tax
      provision at statutory rate
              
              $
              3,086
              
              
              $
              2,907
              
              
              $
              2,380State
      income taxes, net of Federal benefit
              
              
              164
              
              
              
              193
              
              
              
              107Tax-exempt
      income
              
              
              (504
              )
              
              
              (358
              )
              
              
              (254
              )Stock
      option expense
              
              
              36
              
              
              
              33
              
              
              
              -Other
              
              
              (6
              )
              
              
              -
              
              
              
              (77
              )Income
      tax expense
              
              $
              2,776
              
              
              $
              2,775
              
              
              $
              2,156




F-25


NOTE
11. INCOME TAXES (Continued)





The
components of deferred income taxes are as follows:


Years Ended December 31,(Dollars
      in thousands)
            
            2006
            
            
            2005Deferred
      tax assets:Loan
      loss reserves
            
            $
            1,686
            
            
            $
            1,520Deferred
      compensation
            
            
            1,434
            
            
            
            696Securities
      available for sale
            
            
            -
            
            
            
            103Security
      impairment
            
            
            136
            
            
            
            136Intangibles
            
            
            674
            
            
            
            6743,930
            
            
            
            3,129Deferred
      tax liabilitiesIntangibles
            
            
            535
            
            
            
            846Securities
      available for sale
            
            
            334
            
            
            
            -Mortgage
      servicing rights
            
            
            192
            
            
            
            142Depreciation
            
            
            479
            
            
            
            4481,540
            
            
            
            1,436Net
      deferred tax assets
            
            $
            2,390
            
            
            $
            1,693





The years
2004 through 2006 are still subject to audit for the Company’s Federal, Georgia,
and Alabama income tax returns.  No material tax uncertainties exist
as of December 31, 2007.





NOTE
12. COMMITMENTS AND CONTINGENCIES LOAN COMMITMENTS





The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. They involve, to varying degrees, elements of credit risk and
interest rate risk in excess of the amount recognized in the balance sheets. The
majority of all commitments to extend credit and standby letters of credit are
variable rate instruments.





The
Company’s 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.
The Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments. A summary of the Company’s commitments is as
follows:





(Dollars
      in thousands)
            
            2007
            
            
            2006Commitments
      to extend credit
            
            $
            33,929
            
            
            $
            40,623Credit
      card commitments
            
            
            9,323
            
            
            
            9,125Commercial
      letters of credit
            
            
            1,282
            
            
            
            741$
            44,534
            
            
            $
            50,489





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. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management’s credit evaluation of
the party. Collateral held varies, but may include accounts receivable, crops,
livestock, inventory, property and equipment, residential real estate and
income-producing commercial properties.





Credit
card commitments are unsecured.


F-26


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
12. COMMITMENTS AND CONTINGENCIES LOAN COMMITMENTS (Continued)





Standby
letters of credit are conditional commitments issued by the Company 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 held varies and is
required in instances which the Company deems necessary.





Contingencies


In the
normal course of business, the Company is involved in various legal proceedings.
In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on the Company’s financial
statements.





NOTE
13. CONCENTRATIONS OF CREDIT





The
Company originates primarily commercial, residential, and consumer loans to
customers in its respective markets. The ability of the majority of the
Company’s customers to honor their contractual loan obligations is dependent on
the economy in the Company’s primary market area.





Eighty
two percent of the Company’s loan portfolio is concentrated in loans secured by
real estate of which a substantial portion is secured by real estate in the
Company’s primary market area. Accordingly, the ultimate collectibility of the
loan portfolio is susceptible to changes in market conditions in the Company’s
primary market area. The other significant concentrations of credit by type of
loan are set forth in Note 4.





The
Company, as a matter of policy, does not extend credit to any single borrower or
group of related borrowers in excess of regulatory limits, or approximately
$6,274,000 for Upson, $3,144,000 for FNB Polk, $2,612,000 for Peachtree, and
$1,308,000 for Chickamauga.








NOTE
14. REGULATORY MATTERS





The
Company’s bank subsidiaries are subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory approval. At December
31, 2007, approximately $1,991,000 of retained earnings was available for
dividend declaration without regulatory approval.





The
Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Banks must meet specific capital guidelines that involve
quantitative measures of the Company’s and Banks’ assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Banks to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets, as defined, and of Tier I capital to average
assets, as defined. Management believes, as of December 31, 2007 and 2006, the
Company and the Banks met all capital adequacy requirements to which they are
subject.





As of
December 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Banks’ category. Prompt corrective action provisions are not
applicable to bank holding companies.


F-27


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
14. REGULATORY MATTERS (Continued)





The
Company and the Banks’ actual capital amounts and ratios are presented in the
following table.





(Dollars in thousands)
            
            Actual
            
            
            For Capital
              Adequacy Purposes
            
            
            To Be Well
              Capitalized Under Prompt
              Corrective Action ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
      of December 31, 2007Total
      Capital to Risk Weighted AssetsConsolidated
            
            $
            59,423
            
            
            
            14.51
            %
            
            $
            32,770
            
            
            
            8.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            31,746
            
            
            
            14.53
            %
            
            
            17,480
            
            
            
            8.00
            %
            
            
            21,850
            
            
            
            10.00
            %FNB
      Polk County
            
            
            20,891
            
            
            
            18.84
            %
            
            
            8,871
            
            
            
            8.00
            %
            
            
            11,089
            
            
            
            10.00
            %Peachtree
      Bank
            
            
            6,083
            
            
            
            13.72
            %
            
            
            3,547
            
            
            
            8.00
            %
            
            
            4,434
            
            
            
            10.00
            %Bank
      of Chickamauga
            
            
            5,911
            
            
            
            16.68
            %
            
            
            2,834
            
            
            
            8.00
            %
            
            
            3,543
            
            
            
            10.00
            %Tier
      1 Capital to Risk Weighted AssetsConsolidated
            
            $
            54,604
            
            
            
            13.33
            %
            
            $
            16,385
            
            
            
            4.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            29,304
            
            
            
            13.41
            %
            
            
            8,740
            
            
            
            4.00
            %
            
            
            13,110
            
            
            
            6.00
            %FNB
      Polk County
            
            
            19,504
            
            
            
            17.59
            %
            
            
            4,436
            
            
            
            4.00
            %
            
            
            6,653
            
            
            
            6.00
            %Peachtree
      Bank
            
            
            5,536
            
            
            
            12.49
            %
            
            
            1,774
            
            
            
            4.00
            %
            
            
            2,660
            
            
            
            6.00
            %Bank
      of Chickamauga
            
            
            5,468
            
            
            
            8.75
            %
            
            
            1,417
            
            
            
            4.00
            %
            
            
            2,126
            
            
            
            6.00
            %Tier
      1 Capital to Average AssetsConsolidated
            
            $
            54,604
            
            
            
            9.14
            %
            
            $
            23,883
            
            
            
            4.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            29,304
            
            
            
            9.94
            %
            
            
            11,796
            
            
            
            4.00
            %
            
            
            14,745
            
            
            
            5.00
            %FNB
      Polk County
            
            
            19,504
            
            
            
            11.65
            %
            
            
            6,694
            
            
            
            4.00
            %
            
            
            8,368
            
            
            
            5.00
            %Peachtree
      Bank
            
            
            5,536
            
            
            
            8.75
            %
            
            
            2,531
            
            
            
            4.00
            %
            
            
            3,164
            
            
            
            5.00
            %Bank
      of Chickamauga
            
            
            5,468
            
            
            
            7.61
            %
            
            
            2,873
            
            
            
            4.00
            %
            
            
            3,591
            
            
            
            5.00
            %As
      of December 31, 2006Total
      Capital to Risk Weighted AssetsConsolidated
            
            $
            60,069
            
            
            
            15.97
            %
            
            $
            30,089
            
            
            
            8.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            32,120
            
            
            
            14.68
            %
            
            
            17,505
            
            
            
            8.00
            %
            
            
            21,881
            
            
            
            10.00
            %FNB
      Polk County
            
            
            21,975
            
            
            
            20.19
            %
            
            
            8,705
            
            
            
            8.00
            %
            
            
            10,882
            
            
            
            10.00
            %Peachtree
      Bank
            
            
            6,167
            
            
            
            12.83
            %
            
            
            3,844
            
            
            
            8.00
            %
            
            
            4,805
            
            
            
            10.00
            %Tier
      1 Capital to Risk Weighted AssetsConsolidated
            
            $
            55,555
            
            
            
            14.77
            %
            
            $
            15,044
            
            
            
            4.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            29,560
            
            
            
            13.51
            %
            
            
            8,752
            
            
            
            4.00
            %
            
            
            13,129
            
            
            
            6.00
            %FNB
      Polk County
            
            
            20,614
            
            
            
            18.94
            %
            
            
            4,353
            
            
            
            4.00
            %
            
            
            6,529
            
            
            
            6.00
            %Peachtree
      Bank
            
            
            5,574
            
            
            
            11.60
            %
            
            
            1,922
            
            
            
            4.00
            %
            
            
            2,883
            
            
            
            6.00
            %Tier
      1 Capital to Average AssetsConsolidated
            
            $
            55,555
            
            
            
            10.81
            %
            
            $
            20,555
            
            
            
            4.00
            %
            
            $
            N/A
            
            
            
            N/ABank
      of Upson
            
            
            29,560
            
            
            
            9.85
            %
            
            
            12,004
            
            
            
            4.00
            %
            
            
            15,005
            
            
            
            5.00
            %FNB
      Polk County
            
            
            20,614
            
            
            
            12.04
            %
            
            
            6,849
            
            
            
            4.00
            %
            
            
            8,561
            
            
            
            5.00
            %Peachtree
      Bank
            
            
            5,574
            
            
            
            9.04
            %
            
            
            2,465
            
            
            
            4.00
            %
            
            
            3,082
            
            
            
            5.00
            %




As a
result of the business combinations with Maplesville Bancorp in 2006 and First
Polk Bankshares in 2004, the Company recorded additions to its capital
representing the fair value of the shares issued to Maplesville and First Polk
shareholders. For regulatory capital purposes, the Company, as well as Peachtree
Bank and FNB Polk County, must deduct from its regulatory capital the net book
value of any intangible assets recorded in connection with the merger. The
effect of the purchase accounting adjustments on the regulatory capital
calculations is included above.





NOTE
15. FAIR VALUE OF FINANCIAL INSTRUMENTS





The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based upon quoted market prices. However, in many instances, there
are no quoted market prices for the Company’s various financial instruments. In
cases where quoted market prices are not available, fair value is based on
discounted cash flows or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument.


F-28


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)





SFAS No.
107, Disclosure about Fair
Values of Financial Instruments,excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.





The
following methods and assumptions were used by the Company, in estimating the
fair value of its financial instruments:





Cash, Due From Banks,
Interest-Bearing Deposits at Other Banks and Federal Funds
Sold:The carrying amount of cash, due from banks,
interest-bearing deposits at other banks and federal funds sold
approximates fair value.





Securities:Fair value of
securities is based on available quoted market prices. The carrying amount of
equity securities with no readily determinable fair value, including restricted
equity securities, approximates fair value.





Loans:The carrying amount of
variable-rate loans that reprice frequently and have no significant change in
credit risk approximates fair value. The fair value of fixed-rate loans is
estimated based on discounted contractual cash flows, using interest rates
currently being offered for loans with similar terms to borrowers with similar
credit quality. The fair value of impaired loans is estimated based on
discounted contractual cash flows or underlying collateral values, where
applicable.





Deposits:The carrying amount
of demand deposits, savings deposits, and variable-rate certificates of deposit
approximates fair value. The fair value of fixed-rate certificates of deposit is
estimated based on discounted contractual cash flows using interest rates
currently being offered for certificates of similar remaining
maturities.





Short-Term and Long-Term Borrowed
Funds:The carrying amount of variable-rate notes payable and
short-term Federal Home Loan Bank advances approximates fair value.
The fair value of fixed rate Federal Home Loan Bank advances are estimated
based on discounted contractual cash flows using the current incremental
borrowing rates for similar type borrowing arrangements.





Accrued Interest:The carrying
amount of accrued interest approximates fair value.





Bank-Owned Life Insurance:The
cash surrender value of bank-owned life insurance approximates its fair
value.





Off-Balance Sheet Instruments:The carrying amount of commitments to extend credit and standby letters
of credit approximates fair value. The carrying amount of the off-balance sheet
financial instruments is based on fees charged to enter into such
agreements.


F-29


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)





The
estimated fair values and related carrying amounts of the Company’s financial
instruments were as follows:







2007
            
            
            2006Carrying
            
            
            Fair
            
            
            Carrying
            
            
            Fair(Dollars
      in thousands)
            
            Amount
            
            
            Value
            
            
            Amount
            
            
            ValueFinancial
      assetsCash,
      due from banks, interest bearing deposits in other banks, and federal
      funds sold
            
            $
            36,013
            
            
            $
            36,013
            
            
            $
            34,311
            
            
            $
            34,311Securities
            
            
            138,093
            
            
            
            137,840
            
            
            
            128,787
            
            
            
            127,556Restricted
      equity securities
            
            
            2,008
            
            
            
            2,008
            
            
            
            2,029
            
            
            
            2,029Loans
      and loans held for sale, net
            
            
            369,102
            
            
            
            378,367
            
            
            
            330,972
            
            
            
            334,960Accrued
      interest receivable
            
            
            3,901
            
            
            
            3,901
            
            
            
            3,445
            
            
            
            3,445Bank-owned
      life insurance
            
            
            16,302
            
            
            
            16,302
            
            
            
            12,521
            
            
            
            12,521Financial
      liabilitiesDeposits
            
            
            513,931
            
            
            
            517,638
            
            
            
            462,622
            
            
            
            463,143Short-term
      borrowings
            
            
            3,055
            
            
            
            3,059
            
            
            
            110
            
            
            
            110Long-term
      borrowings
            
            
            6,555
            
            
            
            6,555
            
            
            
            5,835
            
            
            
            5,832Accrued
      interest payable
            
            
            2,975
            
            
            
            2,975
            
            
            
            2,875
            
            
            
            2,875








NOTE
16. SUPPLEMENTAL FINANCIAL DATA





Components
of other operating expenses in excess of 1% of revenue are as
follows:





Years
      Ended December 31,2007
            
            
            2006
            
            
            2005Data
      processing fees
            
            $
            1,454,000
            
            
            $
            1,222,000
            
            
            $
            1,087,000Professional
      fees
            
            
            620,000
            
            
            
            439,000
            
            
            
            477,000Postage
      and supplies
            
            
            692,000
            
            
            
            527,000
            
            
            
            513,000Director
      fees
            
            
            409,000
            
            
            
            370,000
            
            
            
            343,000




F-30


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
17. PARENT COMPANY FINANCIAL INFORMATION





The
following information presents the condensed balance sheets of SouthCrest
Financial Group, Inc. as of December 31, 2007 and 2006 and the condensed
statements of income and cash flows for each of the three years ended December
31, 2007:





CONDENSED
BALANCE SHEETS





(Dollars
      in thousands)
            
            2007
            
            
            2006AssetsCash
            
            $
            1,001
            
            
            $
            119Investment
      in subsidiaries
            
            
            78,072
            
            
            
            68,642Securities
      available for sale
            
            
            313
            
            
            
            380Other
      assets
            
            
            152
            
            
            
            297Total
      assets
            
            $
            79,538
            
            
            $
            69,438Liablities,
      redeemable common stock and stockholders' equityNote
      payable
            
            $
            6,555
            
            
            $
            780Other
      liabilities
            
            
            171
            
            
            
            115Redeemable
      common stock and stockholders' equityRedeemable
      common stock held by ESOP
            
            
            1,091
            
            
            
            988Stockholders'
      equity
            
            
            71,721
            
            
            
            67,555Total
      liabilties, redeemable common stock and stockholders'
    equity
            
            $
            79,538
            
            
            $
            69,438








CONDENSED
STATEMENTS OF INCOME





(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Dividend
      income from subsidiaries
            
            $
            17,942
            
            
            $
            9,120
            
            
            $
            1,950Gain
      on securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            249Total
      income
            
            
            17,942
            
            
            
            9,120
            
            
            
            2,199Interest
      expense
            
            
            191
            
            
            
            4
            
            
            
            -Other
      expense
            
            
            902
            
            
            
            750
            
            
            
            484Total
      expenses
            
            
            1,093
            
            
            
            754
            
            
            
            484Income
      before income taxes and equity in undisributed income of
      subsidiaries
            
            
            16,849
            
            
            
            8,366
            
            
            
            1,715Income
      tax benefits
            
            
            (382
            )
            
            
            (250
            )
            
            
            (83
            )Income
      before equity in undistributed income of subsidiaries
            
            
            17,231
            
            
            
            8,616
            
            
            
            1,798Equity
      in undistributed income (excess of distributions over income) of
      subsidiaries
            
            
            (10,931
            )
            
            
            (2,842
            )
            
            
            3,046Net
      income
            
            $
            6,300
            
            
            $
            5,774
            
            
            $
            4,844




F-31


SOUTHCREST
FINANCIAL GROUP, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
17. PARENT COMPANY FINANCIAL INFORMATION (Continued)





CONDENSED
STATEMENTS OF CASH FLOWS








(Dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005OPERATING
      ACTIVITIESNet
      income
            
            $
            6,300
            
            
            $
            5,774
            
            
            $
            4,844Adjustments
      to reconcile net income to net cash provided by operating
      activities(Undistributed
      income) excess distributions over income of subsidiaries
            
            
            10,931
            
            
            
            2,842
            
            
            
            (3,046
            )Gain
      on sale of securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            (249
            )Stock
      option expense
            
            
            106
            
            
            
            95Change
      in other assets
            
            
            145
            
            
            
            (167
            )
            
            
            (89
            )Change
      in other liabilities
            
            
            83
            
            
            
            115
            
            
            
            (33
            )Net
      cash provided by operating activities
            
            
            17,565
            
            
            
            8,659
            
            
            
            1,427INVESTING
      ACTIVITIESProceeds
      from sale of securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            449Investment
      in subsidiaries
            
            
            (2,250
            )
            
            
            -
            
            
            
            -Cash
      paid in business combination
            
            
            (17,350
            )
            
            
            (7,987
            )
            
            
            -Net
      cash provided by (used in) investing activities
            
            
            (19,600
            )
            
            
            (7,987
            )
            
            
            449FINANCING
      ACTIVITIESProceeds
      from long-term borrowed funds
            
            
            5,775
            
            
            
            6,280
            
            
            
            1,500Repayment
      of long-term borrowed funds
            
            
            -
            
            
            
            (5,500
            )
            
            
            (1,500
            )Common
      stock issued to ESOP
            
            
            -
            
            
            
            -
            
            
            
            400Increase
      in unearned compensation - ESOP
            
            
            (349
            )
            
            
            -
            
            
            
            -Purchase
      and retirement of stock
            
            
            (453
            )
            
            
            -
            
            
            
            (192
            )Dividends
      paid
            
            
            (2,056
            )
            
            
            (1,791
            )
            
            
            (1,713
            )Net
      cash provided by (used in) financing activities
            
            
            2,917
            
            
            
            (1,011
            )
            
            
            (1,505
            )Net
      increase (decrease) in cash
            
            
            882
            
            
            
            (339
            )
            
            
            371Cash
      at beginning of year
            
            
            119
            
            
            
            458
            
            
            
            87Cash
      at end of year
            
            $
            1,001
            
            
            $
            119
            
            
            $
            458Noncash
      transactions:Common
      stock issued in business combination
            
            $
            -
            
            
            $
            9,464
            
            
            $
            -Unrealized
      gain on securities available for sale
            
            
            (67
            )
            
            
            66
            
            
            
            -




F-32











REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM








BOARD OF
DIRECTORS AND STOCKHOLDERS


SOUTHCREST
FINANCIAL GROUP, INC.




We have
audited the accompanying consolidated balance sheets of SouthCrest Financial
Group, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, comprehensive income, stockholders’ equity
and cash flows for each of the years in the three-year period ended December 31,
2007. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company’s internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SouthCrest Financial Group,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.








/s/ Dixon
Hughes PLLC





Atlanta,
Georgia


March
31, 2008







F-33