Exhibit
13.1




Selected
Financial Data




The
following tables present certain selected historical financial information for
SouthCrest Financial Group, Inc. and subsidiaries. The data should be read in
conjunction with the historical financial statements, including the notes
thereto, and other financial information concerning the Company.







SouthCrest
Financial Group, Inc. and Subsidiaries


Summary
Financial Data


For
the Periods Ended December 31,


(all
dollars in thousands except per share amounts)


2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Income
      StatementNet
      interest income
            
            $
            22,552
            
            
            $
            19,191
            
            
            $
            17,469
            
            
            $
            11,460
            
            
            $
            9,130Provision
      for loan losses
            
            
            639
            
            
            
            839
            
            
            
            751
            
            
            
            375
            
            
            
            324Net
      interest income after provision for loan losses
            
            
            21,913
            
            
            
            18,352
            
            
            
            16,718
            
            
            
            11,085
            
            
            
            8,806Other
      income
            
            
            6,797
            
            
            
            5,364
            
            
            
            4,478
            
            
            
            3,357
            
            
            
            3,511Other
      expense
            
            
            19,634
            
            
            
            15,167
            
            
            
            14,196
            
            
            
            8,925
            
            
            
            7,592Income
      taxes
            
            
            2,776
            
            
            
            2,775
            
            
            
            2,156
            
            
            
            1,660
            
            
            
            1,390Net
      income
            
            
            6,300
            
            
            
            5,774
            
            
            
            4,844
            
            
            
            3,857
            
            
            
            3,335Per
      Common ShareBasic
      and diluted earnings per share
            
            $
            1.60
            
            
            $
            1.58
            
            
            $
            1.36
            
            
            $
            1.52
            
            
            $
            1.53Cash
      dividends declared
            
            $
            0.52
            
            
            $
            0.50
            
            
            $
            0.48
            
            
            $
            0.46
            
            
            $
            0.46Dividend
      payout ratio
            
            
            32.5
            %
            
            
            31.4
            %
            
            
            35.3
            %
            
            
            30.3
            %
            
            
            30.1
            %Book
      value
            
            $
            18.24
            
            
            $
            17.09
            
            
            $
            14.93
            
            
            $
            14.21
            
            
            $
            11.94Average
      shares outstanding
            
            
            3,946,689
            
            
            
            3,643,218
            
            
            
            3,572,904
            
            
            
            2,545,724
            
            
            
            2,182,421Period
      EndTotal
      loans
            
            $
            374,054
            
            
            $
            335,452
            
            
            $
            276,475
            
            
            $
            229,232
            
            
            $
            123,187Net
      loans
            
            
            369,102
            
            
            
            330,972
            
            
            
            272,998
            
            
            
            226,071
            
            
            
            121,362Earning
      assets (1)
            
            
            534,108
            
            
            
            483,653
            
            
            
            410,897
            
            
            
            374,684
            
            
            
            237,239Assets
            
            
            606,009
            
            
            
            544,017
            
            
            
            450,848
            
            
            
            407,512
            
            
            
            256,205Deposits
            
            
            513,931
            
            
            
            462,622
            
            
            
            377,900
            
            
            
            352,252
            
            
            
            227,469Stockholders'
      equity
            
            
            71,721
            
            
            
            67,555
            
            
            
            53,456
            
            
            
            50,740
            
            
            
            26,045Common
      shares outstanding
            
            
            3,931,532
            
            
            
            3,952,328
            
            
            
            3,581,193
            
            
            
            3,571,556
            
            
            
            2,180,585Average
      BalancesLoans
            
            $
            353,581
            
            
            $
            293,489
            
            
            $
            249,394
            
            
            $
            156,003
            
            
            $
            119,676Earning
      assets (1)
            
            
            510,869
            
            
            
            430,630
            
            
            
            394,076
            
            
            
            269,651
            
            
            
            231,131Assets
            
            
            573,421
            
            
            
            473,173
            
            
            
            428,360
            
            
            
            292,446
            
            
            
            251,687Deposits
            
            
            483,484
            
            
            
            397,637
            
            
            
            366,877
            
            
            
            256,035
            
            
            
            222,463Borrowed
      funds
            
            
            10,829
            
            
            
            12,960
            
            
            
            4,695
            
            
            
            580
            
            
            
            1,892Stockholders’
      equity
            
            
            69,677
            
            
            
            57,456
            
            
            
            52,125
            
            
            
            33,062
            
            
            
            25,014Performance
      RatiosReturn
      on average assets
            
            
            1.10
            %
            
            
            1.22
            %
            
            
            1.13
            %
            
            
            1.32
            %
            
            
            1.32
            %Return
      on average stockholders' equity
            
            
            9.04
            %
            
            
            10.05
            %
            
            
            9.29
            %
            
            
            11.67
            %
            
            
            13.33
            %Net
      interest margin
            
            
            4.41
            %
            
            
            4.46
            %
            
            
            4.43
            %
            
            
            4.25
            %
            
            
            3.95
            %Average
      equity to average assets
            
            
            11.81
            %
            
            
            12.15
            %
            
            
            12.17
            %
            
            
            11.31
            %
            
            
            9.94
            %Average
      loans to average deposits
            
            
            73.13
            %
            
            
            73.81
            %
            
            
            67.98
            %
            
            
            60.93
            %
            
            
            53.79
            %





(1)
            Earning
      assets include interest-bearing deposits in banks, federal funds sold,
      securities available for sale, securities held to maturity, restricted
      equity securities, and loans net of unearned
  income.





1





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATIONS




The
purpose of the following discussion is to address information relating to the
financial condition and results of operations of SouthCrest Financial Group,
Inc. that may not be readily apparent from a review of the consolidated
financial statements and notes thereto. This discussion should be read in
conjunction with information provided in the Company’s consolidated financial
statements and accompanying footnotes.




Critical
Accounting Policies




Our
accounting and reporting policies are in accordance with accounting principles
generally accepted in the United States of America and conform to general
practices within the banking industry. Our significant accounting policies are
described in the notes to the consolidated financial statements. Certain
accounting policies require management to make significant estimates and
assumptions, which have a material impact on the carrying value of certain
assets and liabilities, and we consider these to be critical accounting
policies. The estimates and assumptions used are based on historical experience
and other factors that management believes to be reasonable under the
circumstances. Actual results could differ significantly from these estimates
and assumptions, which could have a material impact on the carrying value of
assets and liabilities at the balance sheet dates and results of operations for
the reporting periods.




We
believe the following are critical accounting policies that require the most
significant estimates and assumptions that are particularly susceptible to a
significant change in the preparation of our financial statements.





Allowance for Loan Losses.A
provision for loan losses is based on management’s opinion of an amount that is
adequate to absorb losses inherent in the existing loan portfolio. The allowance
for loan losses is established through a provision for losses based on
management’s evaluation of current economic conditions, volume and composition
of the loan portfolio, the fair market value or the estimated net realizable
value of underlying collateral, historical charge-off experience, the level of
nonperforming and past due loans, and other indicators derived from reviewing
the loan portfolio. The evaluation includes a review of all loans on which full
collection may not be reasonably assumed. Should the factors that are considered
in determining the allowance for loan losses change over time, or should
management’s estimates prove incorrect, a different amount may be reported for
the allowance and the associated provision for loan losses. For example, if
economic conditions in our market areas experience an unexpected and adverse
change, we may need to increase our allowance for loan losses by taking a charge
against earnings in the form of an additional provision for loan
loss.  Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Company’s allowance for
loan losses.  Such agencies may require adjustments to the allowance
for loan losses based on their judgments of information available to them at the
time of their examination.




Investment Securities.Investment securities are classified into three categories. Debt
securities that we have the intent and ability to hold to maturity are
classified as “held-to-maturity securities” and reported at amortized cost. Debt
and equity securities that are bought and held principally for the purpose of
selling in the near term are classified as “trading securities” and reported as
fair value, with unrealized gains and losses included in earnings. Debt
securities not classified as either held-to-maturity securities or trading
securities and equity securities not classified as trading securities are
classified as “available-for-sale securities” and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of other comprehensive income. We did not have any securities
classified as trading securities as of December 31, 2007 or 2006.




Premiums
and discounts related to securities are amortized or accreted over the life of
the related security as an adjustment to the yield using the effective interest
method and considering prepayment assumptions. Dividend and interest income is
recognized when earned.




Gains and
losses on sales and calls of securities are recognized on the settlement date
based on the adjusted cost basis of the specific security. The financial
statement impact of settlement date accounting versus trade date accounting is
not significant. Declines in fair value of individual held to maturity and
available for sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair
value.




Management
conducts regular reviews to assess whether the values of our investments are
impaired and if any impairment is other than temporary. If we determine that the
value of any investment is other than temporarily impaired, we record a charge
against earnings in the amount of the impairment. The determination of whether
other than temporary impairment has occurred involves significant assumptions,
estimates and judgments by management. Changing economic conditions — global,
regional or related to industries of specific issuers — could adversely affect
these values. Impairment losses recognized for securities totaled $-0-, $-0-,
and $600,000 for the years ending December 31, 2007, 2006, and
2005.





2




Recent
Accounting Pronouncements





Information
regarding accounting pronouncements affecting future periods are summarized in
Note 1, “Summary of Significant Accounting Policies” on page
F-11.




Business
Combinations





On July
1, 2007, the Company completed its acquisition of Bank of Chickamauga
(“Chickamauga”).  Under terms of the agreement, the shareholders of
Chickamauga were to receive approximately $18 million cash, less certain costs
related to the merger and the termination of the Chickamauga defined benefit
plan.  The 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 accrued by  Chickamauga as a liability to 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.




On
October 31, 2006, the Company completed its merger with Maplesville Bancorp
(“Maplesville”), the parent company of Peachtree Bank
(“Peachtree”).  Under terms of the 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 are
included in the results of operations of SouthCrest prospectively from the date
of merger, and the purchase price of $17.3 million was allocated to the fair
values of Maplesville’s assets and liabilities.  As a result, the
Company recorded a core deposit intangible of $1.1 million and goodwill of $6.4
million.  The core deposit intangible is being amortized on an
accelerated basis over the estimated life of the deposits.




The
mergers with Chickamauga and Maplesville are summarized in Note 2, “Business
Combinations” in the Notes to Consolidated Financial Statements on page
F-13.




Results
of Operations for the Years Ended December 31, 2007, 2006 and 2005




Net
income for 2007 was $6,300,000 or $1.60 per share compared to net income of
$5,774,000 or $1.58 per share for 2006, an increase of $526,000 or
9.1%.    The primary reasons for the increase in net income
in 2007 relate to the inclusion of the results of operations of Peachtree Bank
for a full year in 2007 compared to two months in 2006 as that merger was
completed on October 31, 2006, and the inclusion of six months of operations for
Bank of Chickamauga as that merger was completed on July 1, 2007.




For 2006,
net income was $5,774,000 or $1.58 per share compared to net income of
$4,844,000 or $1.36 per





3




share for
2005, an increase of $930,000 or 16.9%.  The primary reasons for the
increase in net income were an increase in net interest income of $1,722,000 and
an increase in other income of $886,000.




Certain
reclassifications to prior year balance sheets and income statements have been
made to conform to current classifications. These reclassifications have no
impact on net income or stockholders’ equity as previously
reported.




Net interest income.A
significant portion of SouthCrest’s results of operations are determined by its
ability to manage effectively interest income and expense. Since market forces
and economic conditions beyond the control of management determine interest
rates, the ability to generate net interest income is dependent upon
SouthCrest’s ability to maintain an adequate spread between the rate earned on
earning assets and the rate paid on interest-bearing liabilities, such as
deposits and borrowings. Thus, net interest income is the key performance
measure of income.




Table 1
below presents various components of assets and liabilities, interest income and
expense as well as their yield/cost for the fiscal years ended 2007, 2006 and
2005. In this table, amounts related to average balances and interest income and
interest expense for Chickamauga and Peachtree are included prospectively from
the dates of their respective mergers:





Table
1.  Average Consolidated Balance Sheets and Net Interest Income
Analysis


For
the Years Ended December 31,


(Dollars
in thousands)





For the Years Ended December 31,2007
              
              
              2006
              
              
              2005Average
                Balances(1)
              
              
              Income/
                Expense
              
              
              Yields/
                Rates
              
              
              Average
                Balances(1)
              
              
              Income/
                Expense
              
              
              Yields/
                Rates
              
              
              Average
                Balances(1)
              
              
              Income/
                Expense
              
              
              Yields
                RatesLoans
              
              $
              353,581
              
              
              $
              29,455
              
              
              
              8.33
              %
              
              $
              293,489
              
              
              $
              23,314
              
              
              
              7.94
              %
              
              $
              249,394
              
              
              $
              17,943
              
              
              
              7.19
              %Taxable
      securities
              
              
              118,846
              
              
              
              5,695
              
              
              
              4.79
              %
              
              
              111,511
              
              
              
              4,859
              
              
              
              4.36
              %
              
              
              121,260
              
              
              
              5,041
              
              
              
              4.16
              %Nontaxable
      securities(2)
              
              
              21,398
              
              
              
              830
              
              
              
              3.88
              %
              
              
              12,492
              
              
              
              551
              
              
              
              4.41
              %
              
              
              12,271
              
              
              
              557
              
              
              
              4.54
              %Federal
      funds sold
              
              
              10,207
              
              
              
              497
              
              
              
              4.87
              %
              
              
              9,569
              
              
              
              509
              
              
              
              5.32
              %
              
              
              6,642
              
              
              
              195
              
              
              
              2.94
              %Interest
      bearing deposits in banks
              
              
              6,837
              
              
              
              382
              
              
              
              5.59
              %
              
              
              3,569
              
              
              
              191
              
              
              
              5.35
              %
              
              
              4,509
              
              
              
              157
              
              
              
              3.48
              %Total
      earning assets
              
              
              510,869
              
              
              
              36,859
              
              
              
              7.21
              %
              
              
              430,630
              
              
              
              29,424
              
              
              
              6.83
              %
              
              
              394,076
              
              
              
              23,893
              
              
              
              6.06
              %Cash
      and due from banks
              
              
              13,930
              
              
              
              
              
              
              
              
              
              
              
              12,987
              
              
              
              
              
              
              
              
              
              
              
              10,861Allowance
      for loan losses
              
              
              (4,861
              )
              
              
              
              
              
              
              
              
              
              
              (3,832
              )
              
              
              
              
              
              
              
              
              
              
              (3,265
              )Other
      assets
              
              
              53,483
              
              
              
              
              
              
              
              
              
              
              
              33,388
              
              
              
              
              
              
              
              
              
              
              
              26,688Total
              
              $
              573,421
              
              
              
              
              
              
              
              
              
              
              $
              473,173
              
              
              
              
              
              
              
              
              
              
              $
              428,360Interest
      bearing demand (3)
              
              $
              132,690
              
              
              $
              2,461
              
              
              
              1.85
              %
              
              $
              116,232
              
              
              $
              1,900
              
              
              
              1.63
              %
              
              $
              116,852
              
              
              $
              1,242
              
              
              
              1.06
              %Savings
              
              
              40,163
              
              
              
              293
              
              
              
              0.73
              %
              
              
              34,454
              
              
              
              211
              
              
              
              0.61
              %
              
              
              36,845
              
              
              
              193
              
              
              
              0.52
              %Certificates
      of deposit
              
              
              231,194
              
              
              
              10,927
              
              
              
              4.73
              %
              
              
              183,650
              
              
              
              7,497
              
              
              
              4.08
              %
              
              
              154,857
              
              
              
              4,774
              
              
              
              3.08
              %Total
      interest bearing deposits
              
              
              404,047
              
              
              
              13,681
              
              
              
              3.39
              %
              
              
              334,336
              
              
              
              9,608
              
              
              
              2.87
              %
              
              
              308,554
              
              
              
              6,209
              
              
              
              2.01
              %Borrowed
      funds
              
              
              10,829
              
              
              
              626
              
              
              
              5.78
              %
              
              
              12,960
              
              
              
              625
              
              
              
              4.82
              %
              
              
              4,695
              
              
              
              215
              
              
              
              4.58
              %Total
      interest bearing liabilities
              
              
              414,876
              
              
              
              14,307
              
              
              
              3.45
              %
              
              
              347,296
              
              
              
              10,233
              
              
              
              2.95
              %
              
              
              313,249
              
              
              
              6,424
              
              
              
              2.05
              %Noninterest
      bearing demand deposits
              
              
              79,437
              
              
              
              
              
              
              
              
              
              
              
              63,301
              
              
              
              
              
              
              
              
              
              
              
              58,323Other
      liabilities
              
              
              8,427
              
              
              
              
              
              
              
              
              
              
              
              4,095
              
              
              
              
              
              
              
              
              
              
              
              4,030Redeemable
      common stock held by ESOP
              
              
              1,004
              
              
              
              
              
              
              
              
              
              
              
              1,025
              
              
              
              
              
              
              
              
              
              
              
              633Stockholders'
      equity
              
              
              69,677
              
              
              
              
              
              
              
              
              
              
              
              57,456
              
              
              
              
              
              
              
              
              
              
              
              52,125Total
              
              $
              573,421
              
              
              
              
              
              
              
              
              
              
              $
              473,173
              
              
              
              
              
              
              
              
              
              
              $
              428,360Net
      interest income
              
              
              
              
              
              $
              22,552
              
              
              
              
              
              
              
              
              
              
              $
              19,191
              
              
              
              
              
              
              
              
              
              
              $
              17,469Net
      interest yield on earning assets
              
              
              
              
              
              
              
              
              
              
              4.41
              %
              
              
              
              
              
              
              
              
              
              
              4.46
              %
              
              
              
              
              
              
              
              
              
              
              4.43
              %Net
      interest spread
              
              
              
              
              
              
              
              
              
              
              3.76
              %
              
              
              
              
              
              
              
              
              
              
              3.88
              %
              
              
              
              
              
              
              
              
              
              
              4.01
              %


(1)  Daily
averages


(2)  Tax-equivalent
yields are not provided as effect is deemed immaterial.


(3)  Includes
money market accounts







Table 2
presents a Rate/Volume Analysis of Net Interest Income. For each category of
interest ­earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) change in volume (change in volume
multiplied by old rate); (2) change in rate (change in rate multiplied by old
volume); and (3) a combination of change in rate and change in volume. The
changes in interest income and interest expense attributable to both volume and
rate have been allocated proportionately on a consistent basis to the change due
to volume and the change due to rate.





4





Table
2.  Changes In Interest Income and Expense


(Dollars
in thousands)





2007 Compared to 2006
            
            
            2006 Compared to 2005Increase (Decrease) Due to Changes In
            
            
            Increase (Decrease) Due to Changes InVolume
            
            
            Rate
            
            
            Total
            
            
            Volume
            
            
            Rate
            
            
            TotalLoans
            
            $
            4,952
            
            
            $
            1,189
            
            
            $
            6,141
            
            
            $
            3,378
            
            
            $
            1,993
            
            
            $
            5,371Taxable
      securities
            
            
            335
            
            
            
            501
            
            
            
            836
            
            
            
            (418
            )
            
            
            236
            
            
            
            (182
            )Nontaxable
      securities
            
            
            352
            
            
            
            (73
            )
            
            
            279
            
            
            
            10
            
            
            
            (16
            )
            
            
            (6
            )Federal
      funds sold
            
            
            33
            
            
            
            (45
            )
            
            
            (12
            )
            
            
            111
            
            
            
            203
            
            
            
            314Interest
      bearing deposits in banks
            
            
            182
            
            
            
            9
            
            
            
            191
            
            
            
            (38
            )
            
            
            72
            
            
            
            34Total
      earning assets
            
            
            5,854
            
            
            
            1,581
            
            
            
            7,435
            
            
            
            3,043
            
            
            
            2,488
            
            
            
            5,531Interest
      bearing demand
            
            
            287
            
            
            
            274
            
            
            
            561
            
            
            
            (7
            )
            
            
            665
            
            
            
            658Savings
            
            
            38
            
            
            
            44
            
            
            
            82
            
            
            
            (13
            )
            
            
            31
            
            
            
            18Certificates
      of deposit
            
            
            2,123
            
            
            
            1,307
            
            
            
            3,430
            
            
            
            992
            
            
            
            1,731
            
            
            
            2,723Total
      deposits
            
            
            2,448
            
            
            
            1,625
            
            
            
            4,073
            
            
            
            972
            
            
            
            2,427
            
            
            
            3,399Borrowed
      funds
            
            
            (112
            )
            
            
            113
            
            
            
            1
            
            
            
            398
            
            
            
            12
            
            
            
            410Total
      interest bearing liabilities
            
            
            2,336
            
            
            
            1,738
            
            
            
            4,074
            
            
            
            1,370
            
            
            
            2,439
            
            
            
            3,809Net
      interest income
            
            $
            3,518
            
            
            $
            (157
            )
            
            $
            3,361
            
            
            $
            1,673
            
            
            $
            49
            
            
            $
            1,722




Net
interest income increased $3,361,000, or 17.5%, to $22,552,000 for
2007.  Interest income increased $7,435,000 due mostly to an increase
of $6,141,000 in interest income on loans.  The average balance
outstanding of loans during 2007 increased $60.1 million over 2006 of which $51
million resulted from the addition of Peachtree and Chickamauga, and this growth
contributed approximately $4,952,000 to the increase in interest income earned
on loans.  The average yield earned on loans increased from 7.94% in
2006 to 8.33% in 2007 primarily due to a 20 basis point increase in the average
prime rate for 2007 over 2006.  In addition, the inclusion of
Peachtree and Chickamauga also increased the yield as the average yield of the
loan portfolios of these banks for 2007 was 8.70%.  The total increase
in yield for 2007 accounted for approximately $1,189,000 of the increase in
interest income on loans.  The increase in interest income was
partially offset by an increase in interest expense of
$4,074,000.  The primary reason for the increase in interest expense
is the increase of $3,430,000 in interest on certificate
accounts.   The growth in the average balance of these accounts
of $47.5 million accounted for $2,123,000 of the increase in interest expense,
and the increase in rate from 4.08% for 2006 to 4.73% for 2007 accounted for
$1,307,000 of the increase in interest expense on certificates.  The
increase in the average rate paid on certificate accounts results from
competition for this type of deposit in the markets served by the
Company.  In general, the growth in the loan portfolio has been funded
with certificate accounts.  In 2007, certificates represented 55.7% of
interest bearing liabilities compared to 52.9% in 2006.




In 2006,
net interest income increased $1,722,000 to $19,191,000.  Of this
amount, $420,000 relates to the inclusion of Peachtree for the final two months
of the fiscal year.  Interest income increased $5,531,000 due
primarily to an increase of $5,371,000 in interest income earned on
loans.  Of this increase in income earned on loans, $3,378,000 relates
to the growth in the average balances outstanding of $44.1 million in 2006 over
2005.  In addition, the average rate earned on loans increased from
7.19% in 2005 to 7.94% in 2006.  This increase in yield accounts for
an increase of $1,993,000 in interest income on loans.  The increase
in interest income was offset by an increase in interest expense of
$3,809,000.  The growth experienced in the Company’s loan portfolio
was funded primarily by increases in certificates of deposit and other borrowed
funds.  As a result, the average rate paid on all interest bearing
liabilities increased from 2.05% in 2005 to 2.95% in 2006.




For 2007,
the net interest yield on earning assets was 4.41% compared to 4.46% earned in
2006 and 4.43% in 2005.  The average yield on earning assets was 7.21%
in 2007 compared to 6.83% in 2006 and 6.06% in 2005, while the average rate paid
on interest bearing liabilities was 3.45% for 2007, 2.95% for 2006, and 2.05% in
2005.  The increases in the average yield on earning assets relates to
the increase in loans as a percentage of total earning assets from 63.2% in 2005
to 68.2% in 2006 and 69.2% in 2007 coupled with the increased average market
interest rates in the respective 2007 and 2006 periods.  Loans
generally earn a higher rate of interest than other earning
assets.  In addition, as a result of increases in interest rates
during the year, the average yield earned on loans increased from 7.19% in 2005
to 7.94% in 2006 and 8.33% in 2007.  These average yields are higher
than that earned on taxable securities of 4.36% earned in 2006 and 4.79% earned
in 2007.  The increase in the average rate paid on interest bearing
liabilities is primarily the result of increases in rates paid on certificates
of deposit, which increased from 3.08% for 2005 to 4.08% for 2006 and 4.73% in
2007.





5




Provision for Loan Losses.The
provision for loan losses for 2007 was $639,000 compared to $839,000 for 2006
and $751,000 provided in 2005. In 2007, the Company charged-off loans, net of
recoveries, totaling $531,000 or 0.15% of average loans outstanding compared to
net chargeoffs in 2006 of $467,000, or 0.16% of average loans
outstanding,  and net chargeoffs in 2005 of $435,000, or 0.17% of
average loans.




The
provision for loan losses is determined primarily by management’s evaluation
concerning the level of the allowance for loan losses. For further discussion,
refer to the discussion below titled “Allowance for Loan Losses.”




Other Income.Total other
income in 2007 was $6,797,000 compared to $5,364,000 in 2006, an increase of
$1,433,000 or 26.7%.  Other income in 2005 was
$4,478,000.




Service
charges (including NSF and overdraft charges) on deposit accounts were
$3,846,000 in 2007 compared to $3,304,000 in 2006 and $3,264,000 for 2005, an
increase of $542,000 or 16.4%.  As a percent of the average balances
of interest-bearing checking and noninterest-bearing checking accounts, these
service charges were 2.50% of such accounts for 2007, 2.64% for 2006 and 2.70%
for 2005.  In 2007, NSF fee income
increased  $67,000.  Generally, these service charges have
declined due to customers maintaining higher balances which enable them to avoid
such fees and charges.




Other
service charges were $1,336,000 in 2007 compared to $1,104,000 in 2006 and
$930,000 in 2005, an increase of $232,000 in the current year.  Of the
increase from 2006 to 2007, $74,000 relates to increased fee income from debit
cards.  Of the increase from 2005 to 2006, $120,000 relates to
increased fees from debit cards.




The net
gain on the sale of loans was $416,000, $159,000, and $148,000 for 2007, 2006,
and 2005, respectively.  The gain in 2007 includes $266,000 in the
recognition of mortgage servicing rights.  Mortgage volume was $12.3
million, $15.2 million, and $13.5 million for 2007, 2006, and 2005,
respectively.  The average profit margin on loans sold improved in
2007 in a more steady mortgage interest rate environment.




Income
from bank-owned life insurance was $594,000, $340,000, and $146,000 for the
years ended December 31, 2007, 2006, and 2005, respectively, which represents
increases of $254,000 in 2007 and $194,000 in 2006.  The increases in
2006 relate to purchases of $5.5 million while the increases in 2007 relate
primarily to bank-owned life insurance policies assumed in the acquisitions of
Peachtree and Chickamauga.   The weighted average earnings yields
earned on these policies were 4.13%, 4.34%, and 3.27% for 2007, 2006, and 2005,
respectively.




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 to earnings 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.   This plan was
completed during the quarter, resulting in gains of $71,000 which are included
in net gains on sale of securities available for sale.




In
addition to the gain mentioned above, gain on sale of securities available for
sale in 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.   In 2005, the Company also recorded a $184,000 loss on
the disposal of equipment related to data processing equipment and software that
was rendered obsolete as a result of our consolidation of computer systems in
November, 2005.




The
following table provides information about our other income.





6




Table
3.  Summary of Other Income


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005Service
      charges on deposits
            
            $
            1,004
            
            
            $
            529
            
            
            $
            416NSF
      and overdraft charges
            
            
            2,842
            
            
            
            2,775
            
            
            
            2,848Other
      service charges
            
            
            1,336
            
            
            
            1,104
            
            
            
            930Net
      gain on sale of loans
            
            
            416
            
            
            
            159
            
            
            
            148Income
      from bank-owned life insurance
            
            
            594
            
            
            
            340
            
            
            
            146Impairment
      charge on investments
            
            
            -
            
            
            
            -
            
            
            
            (600
            )Gain
      on sale of securities available for sale
            
            
            -
            
            
            
            -
            
            
            
            320Loss
      on disposal of assets
            
            
            -
            
            
            
            -
            
            
            
            (184
            )Other
      operating income
            
            
            605
            
            
            
            457
            
            
            
            454$
            6,797
            
            
            $
            5,364
            
            
            $
            4,478




Other Expenses.  For
2007, other expenses were $19,634,000, an increase of $4,467,000 or 29.5% over
2006 expenses of $15,167,000.  Approximately $2,874,000 of the
increase in 2007 relates to the acquisition of Peachtree and
Chickamauga.  Total expenses in 2006 increased $971,000 over 2005
expenses of $14,196,000.  The largest component of other expenses,
salaries and benefits, increased $2,470,000 from 2006 to
$10,543,000.  In 2006, salaries and benefits increased $776,000 to
$8,073,000.  In addition to the increases caused by the acquisitions
of Peachtree and Chickamauga, the Company added staffing in anticipation of
opening the new branch in Tyrone, Georgia.  In 2006, salaries and
benefits increased $776,000 over 2005, the largest component of the which was an
increase of $321,000 in incentive compensation related to the increase in
profits for the year.




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 “Plan”), which provides for up to 549,000 shares of the Company’s stock to
be awarded in the form of stock options. In December, 2005 the Company awarded
183,500 stock options to officers of the Company and the Banks.  Prior
to 2006, the Company had elected to follow APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its employee stock
options.  Accordingly, no compensation expense was recognized in the
Company’s consolidated financial statements because the exercise price of the
options equaled the market price of the Company’s common stock on the date of
grant.  In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based
Compensation (SFAS No. 123(R)), which the Company adopted in
2006.  SFAS No. 123(R) requires that the fair value of equity
instruments such as stock options be recognized as an expense in the historical
financial statements as services are performed.   Of the 183,500
options awarded in 2005, 104,000 were exercisable immediately while 79,500 will
vest over a five year period beginning in 2006 and will therefore be subject to
the expensing requirements under SFAS 123(R).  The Company also
awarded 7,900 stock options in December 2006 which will be subject to the
requirements of SFAS 123(R).  The Company recorded compensation
expenses of $106,000 and $95,000 in 2007 and 2006, respectively relating
to  stock options.  No tax benefit was recorded because all
of the related stock options were considered tax qualifying.  The
accounting implications of the stock option plan are more fully explained in
Notes 1 and 10 of Notes to Consolidated Financial Statements.




Equipment
and occupancy expenses increased $477,000 in 2007 and $84,000 in
2006.  The addition of Peachtree and Chickamauga accounts for $240,000
of the increase in 2007.  Depreciation expense increased $273,000 in
2007 of which $97,000 results from the acquisitions.  Amortization of
intangibles increased $119,000 in 2007 due to the addition of Peachtree and
Chickamauga, but decreased $156,000 in 2006 due to reduced amortization of the
core deposit intangible recorded in connection with the merger with FNB
Polk.  Other operating expenses increased $1,401,000 in 2007 and
$267,000 in 2006.  The addition of Peachtree and Chickamauga accounted
for $889,000 of the increase in 2007.  In 2007, the Company recorded
losses on the sale of OREO totaling $138,000.




Other
expenses amounted to 3.42% of average assets in 2007 compared to 3.21% of
average assets in 2006 and 3.31% in 2005. The following table provides
information about our other expenses.





7





Table
4.  Summary of Other Expenses


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005Salaries
      and benefits
            
            $
            10,543
            
            
            $
            8,073
            
            
            $
            7,297Equipment
      and occupancy
            
            
            2,120
            
            
            
            1,650
            
            
            
            1,559Amortization
      of intangibles
            
            
            926
            
            
            
            807
            
            
            
            963Professional
      fees
            
            
            620
            
            
            
            439
            
            
            
            477Postage
      and supplies
            
            
            692
            
            
            
            527
            
            
            
            513Telephone
            
            
            325
            
            
            
            197
            
            
            
            187Advertising
            
            
            337
            
            
            
            261
            
            
            
            130Director
      fees
            
            
            409
            
            
            
            370
            
            
            
            343Data
      processing expenses
            
            
            1,454
            
            
            
            1,222
            
            
            
            1,087Other
      operating expenses
            
            
            2,208
            
            
            
            1,621
            
            
            
            1,640$
            19,634
            
            
            $
            15,167
            
            
            $
            14,196




In the
table above, professional fees increased $181,000 in 2007 of which $104,000 is
attributable to the addition of Peachtree and Chickamauga.  Postage
and supplies increased $165,000 of which $141,000 is attributable to Peachtree
and Chickamauga.  Advertising increased $76,000 of which $40,000
relates to Peachtree and Chickamauga.  Director fees increased $39,000
because of Peachtree and Chickamauga.  Data processing fees, which
include ATM expenses, increased $232,000 and telephone expenses increased
$128,000, primarily as a result of the acquisitions.




Income Tax Expense.Income tax
expense in 2007 was $2,776,000 compared to $2,775,000 in 2006
and  $2,156,000 in 2005. The Company’s effective tax rate was 30.6%
for 2007 compared to 32.5% for 2006 and 30.8% for 2005. The decline in the
effective tax rate from 2006 to 2007 results from the addition of Peachtree and
Chickamauga, as both banks have higher levels of tax exempt income relative to
pretax income than do Upson and FNB Polk.  The Company’s effective tax
rate is lower than statutory tax rates due primarily to certain elements of
income that are not subject to taxation, such as the Banks’ earnings from
tax-exempt securities and income on bank-owned life insurance.




FINANCIAL
CONDITION




Management
regularly monitors the financial condition of the Company in order to protect
depositors, monitor asset quality and increase current and future earnings. At
December 31, 2007 total assets were $606.0 million compared to $544.0 million at
December 31, 2006, an increase of $62.0 million of which $73.3 million is
attributable to the acquisition of Chickamauga.   The loan
portfolio grew from $335.4 million at December 31, 2006 to $374.0 million at
December 31, 2007, an increase of $38.6 million of which $26.7 is the result of
the addition of Chickamauga.




Securities
available for sale increased $17.7 million to $79.2 million of which $24.0
million relates to the acquisition of Chickamauga.  Excluding the
impact of Chickamauga, securities available for sale declined by $6.4
million.  Securities held to maturity declined $8.4 million to $58.9
million.




Fixed
assets increased $2.8 million to $18.1 million at December 31,
2007.  The addition of Chickamauga  accounted for $0.9
million of the increase.  The remainder of the increase relates
primarily to three projects:  the completion of a project in which
Bank of Upson rebuilt its main office in Thomaston, Georgia, increasing its size
from 16,000 to 26,000 square feet; leasehold improvements at a new SouthCrest
Bank branch in Tyrone, Georgia; and a new project undertaken in the fourth
quarter of 2007 to build a 12,500 square foot operations center in Thomaston to
house the Company’s computer center.




Deposits
increased $51.3 million, from $462.6 million at December 31, 2006 to $513.9
million December 31, 2007.  The addition of Chickamauga accounted for
$49.7 million of this increase.  Noninterest bearing deposits
increased $104,000, interest-bearing checking accounts increased $11.4 million,
savings accounts increased $6.5 million, and certificate accounts increased
$34.2 million.  Money market accounts declined
$774,000.  Federal Home Loan Bank advances declined $2.1
million.  In December 2007, the Company used some of its excess funds
to prepay a $5.0 million advance maturing in 2009.  Other borrowed
funds relate to a line of credit maintained by the holding company, which
increased $5.8 million due to the acquisition of Chickamauga.




Stockholders’
equity increased $4.2 million due primarily to net income retained of $6.3
million less cash dividends of $2.1 million.  Equity also increased by
$721,000 due to increases in the fair value of securities available for sale,
net of deferred taxes.





8




The
Company provides an Employee Stock Ownership Plan (“ESOP”) for its
employees.  Because the ESOP provides for the participants to have the
option to diversify their account balances or to receive all or a portion of
their account balance in cash upon termination, accounting rules require that
the fair value of allocated shares held by the ESOP be classified on the balance
sheet as a liability and therefore reflected as a reduction of retained
earnings.  The ESOP owned 67,054 and 42,773 shares at December 31,
2007 and 2006, respectively, and the fair values of these shares were $1,091,000
and $988,000 at those dates.  In the fourth quarter of 2007, the ESOP
purchased 15,880 shares of stock which was funded by a $349,000 loan from the
Company.  The loan carries interest at Prime minus 0.50% and is for a
term of fifteen years.  The current balance of the loan is carried as
a reduction of stockholders’ equity.




Securities.As of December 31,
2007, investment securities comprised 22.8% of the Company’s total assets
compared to 23.7% at December 31, 2006, while federal funds sold and
interest-bearing deposits in banks comprised approximately 3.3% of total assets
at December 31, 2007 and 3.2% of total assets at December 31,
2006.  As the Company’s loan portfolio has grown, investment
securities and other earning assets represent a smaller portion of the Company’s
balance sheet.




The
following table presents, for the periods indicated, the carrying value of the
Company’s investments. All securities classified as held to maturity are
presented at adjusted cost while securities classified as available for sale are
presented at their fair values. There are no securities classified as trading
securities. For all securities classified as held to maturity, the Company has
the intent and ability to hold them until they mature.





Table
5.  Composition of Securities Portfolio





As of December 31,2007
            
            
            2006
            
            
            2005(Dollars in thousands)Securities
      held to maturity (at amortized cost):U.S.
      Treasuries and Agency bonds
            
            $
            20,289
            
            
            $
            22,216
            
            
            $
            25,185State
      and municipal bonds
            
            
            6,773
            
            
            
            7,387
            
            
            
            7,814Mortgage
      backed securities
            
            
            30,823
            
            
            
            36,665
            
            
            
            44,322Corporate
      bonds
            
            
            1,000
            
            
            
            1,000
            
            
            
            1,000Total
      securities held to maturity
            
            
            58,885
            
            
            
            67,268
            
            
            
            78,321Securities
      available for sale (at estimated fair value):U.S.
      Treasuries and Agency bonds
            
            
            30,555
            
            
            
            34,533
            
            
            
            25,580State
      and municipal bonds
            
            
            18,226
            
            
            
            11,058
            
            
            
            3,945Mortgage
      backed securities
            
            
            28,601
            
            
            
            14,198
            
            
            
            14,594Equity
      securities
            
            
            1,826
            
            
            
            1,730
            
            
            
            1,071Total
      securities available for sale
            
            
            79,208
            
            
            
            61,519
            
            
            
            45,190Total
      securities
            
            $
            138,093
            
            
            $
            128,787
            
            
            $
            123,511




The
decline in held to maturity securities is the result of maturities and monthly
principal payments received on mortgage-backed securities being in excess of
securities purchased. In 2006 and 2007, these principal reductions were used to
fund increases in the loan portfolio.  The increase in securities
available for sale from 2006 to 2007 is the result of securities acquired in the
addition of Chickamauga.  The following table indicates, at December
31, 2007, the Company’s security portfolio segregated by major category with
maturity and average yields presented:





9





Table
6.  Maturity of Securities Portfolio


(Dollars
in Thousands)







Within One Year
            
            
            One to Five Years
            
            
            Five to Ten Years
            
            
            Over Ten Years
            
            
            Total$
            
            
            %
            
            
            $
            
            
            %
            
            
            $
            
            
            %
            
            
            $
            
            
            %
            
            
            $
            
            
            %U.S.
      Government Agencies
            
            $
            12,789
            
            
            
            4.57
            %
            
            $
            16,609
            
            
            
            5.03
            %
            
            $
            8,467
            
            
            
            5.13
            %
            
            $
            12,978
            
            
            
            4.58
            %
            
            $
            50,843
            
            
            
            4.82
            %State
      and municipal bonds (1)
            
            
            3,549
            
            
            
            4.54
            %
            
            
            7,080
            
            
            
            4.23
            %
            
            
            7,486
            
            
            
            4.11
            %
            
            
            6,885
            
            
            
            5.09
            %
            
            
            25,000
            
            
            
            4.48
            %Mortgage-backed
      securities (2)
            
            
            734
            
            
            
            3.94
            %
            
            
            5,889
            
            
            
            4.17
            %
            
            
            11,702
            
            
            
            4.39
            %
            
            
            41,099
            
            
            
            5.04
            %
            
            
            59,424
            
            
            
            4.81
            %Other
      securities (3)
            
            
            -
            
            
            
            0.00
            %
            
            
            401
            
            
            
            8.02
            %
            
            
            1,000
            
            
            
            6.25
            %
            
            
            1,425
            
            
            
            5.88
            %
            
            
            2,826
            
            
            
            6.31
            %Total
            
            $
            17,072
            
            
            
            4.53
            %
            
            $
            29,979
            
            
            
            4.71
            %
            
            $
            28,655
            
            
            
            4.60
            %
            
            $
            62,387
            
            
            
            4.97
            %
            
            $
            138,093
            
            
            
            4.78
            %





Notes


(1)
            Yields
      on state and municipal bonds are not calculated on a tax-equivalent
      basis.


(2)
            Mortgage
      backed securities are presented according to their final stated
      maturity.  Their weighted average maturity is shorter because of
      monthly repayments of principal.


(3)
            Includes
      corporate bonds and various equity
securities.




Loan Portfolio.  The
following table presents various categories of loans contained in the Company’s
loan portfolio for the periods indicated.





Table
7.  Composition of Loan Portfolio


As
of December 31,


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Types
      of LoansCommercial,
      financial and agricultural
            
            $
            22,595
            
            
            $
            23,996
            
            
            $
            19,841
            
            
            $
            18,560
            
            
            $
            9,757Real
      estate — construction
            
            
            66,069
            
            
            
            59,745
            
            
            
            52,122
            
            
            
            25,265
            
            
            
            9,021Real
      estate — mortgage
            
            
            241,316
            
            
            
            211,676
            
            
            
            169,555
            
            
            
            145,413
            
            
            
            68,154Consumer
            
            
            38,834
            
            
            
            33,690
            
            
            
            31,567
            
            
            
            35,680
            
            
            
            32,352Other
      loans
            
            
            5,162
            
            
            
            6,058
            
            
            
            3,554
            
            
            
            4,415
            
            
            
            4,009Subtotal
            
            
            373,976
            
            
            
            335,165
            
            
            
            276,639
            
            
            
            229,333
            
            
            
            123,293Less:
      Unearned income
            
            
            151
            
            
            
            159
            
            
            
            164
            
            
            
            101
            
            
            
            106Less:
      Allowance for loan losses
            
            
            4,952
            
            
            
            4,480
            
            
            
            3,477
            
            
            
            3,161
            
            
            
            1,825Total
      (net of allowance)
            
            $
            368,873
            
            
            $
            330,526
            
            
            $
            272,998
            
            
            $
            226,071
            
            
            $
            121,362




The
following presents an analysis of maturities of the Company’s loans as of
December 31, 2007, including the dollar amount of the loans maturing subsequent
to the year ending December 31, 2008 distinguished between those with
predetermined interest rates and those with variable interest
rates:








10





Table
8.  Loan Maturity Schedule


(Dollars
in thousands)





Due in one
              year or less
            
            
            Due in
              one through
              five years
            
            
            Due after
              five years
            
            
            TotalCommercial,
      financial, and agricultural
            
            $
            12,143
            
            
            $
            9,872
            
            
            $
            580
            
            
            $
            22,595Real
      estate — construction
            
            
            34,106
            
            
            
            29,915
            
            
            
            2,048
            
            
            
            66,069Real
      estate — mortgage
            
            
            56,046
            
            
            
            84,246
            
            
            
            101,024
            
            
            
            241,316Consumer
            
            
            10,505
            
            
            
            27,199
            
            
            
            1,130
            
            
            
            38,834Other
      loans
            
            
            791
            
            
            
            471
            
            
            
            3,900
            
            
            
            5,162Total
            
            $
            113,591
            
            
            $
            151,703
            
            
            $
            108,682
            
            
            $
            373,976Loans
      maturing after one year with:Fixed
      interest rates
            
            
            
            
            
            $
            126,724
            
            
            $
            41,282
            
            
            $
            128,006Floating
      or adjustable interest rates
            
            
            
            
            
            
            24,979
            
            
            
            67,400
            
            
            
            92,379Total
            
            
            
            
            
            $
            151,703
            
            
            $
            108,682
            
            
            $
            220,385







Nonaccrual, Past Due and Restructured
Loans.  The following table presents various categories of
nonaccrual, past due and restructured loans in the Company’s loan portfolio as
of the dates indicated.





Table
9.  Nonaccrual, Past Due, and Restructured Loans


As
of December 31,


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Nonaccrual
      loans
            
            $
            1,633
            
            
            $
            479
            
            
            $
            232
            
            
            $
            190
            
            
            $
            -Loans
      past due 90 days or more and still accruing
            
            $
            247
            
            
            $
            1,015
            
            
            $
            549
            
            
            $
            186
            
            
            $
            118Loans
      restructured under troubled debt
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -




Impaired
loans and the average investment in impaired loans was as follows:





Table
10.  Impaired Loans


As
of December 31,


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Impaired
      loans without a valuation allowance
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Impaired
      loans with valuation allowances of $245, $72, $35 and $29,
      respectively
            
            $
            1,633
            
            
            $
            479
            
            
            $
            232
            
            
            $
            190
            
            
            $
            -Average
      investment in impaired loans for the period
            
            $
            507
            
            
            $
            659
            
            
            $
            323
            
            
            $
            47
            
            
            $
            32




At
December 31, 2007, 2006, 2005, and 2004, the Company had $1,633,000, $479,000,
$232,000 and $190,000 in impaired loans with a valuation allowance and no
impaired loans without a valuation allowance. The Company had no impaired loans
at December 31, 2003. The average investment in impaired loans during 2007,
2006, 2005 and 2004 was $507,000, $659,000, $323,000 and $47,000, respectively.
Interest income recognized on impaired loans for the years ended December 31,
2007, 2006, 2005, 2004, and 2003 was not material.




Accrual
of interest is discontinued on a loan when management determines, upon
consideration of economic and business factors affecting collection efforts,
that collection of interest or principal is not reasonably
expected.




Allowance for Loan Losses.The
allowance for loan losses at December 31, 2007 was $4,952,000 compared to
$4,480,000 at December 31, 2006 and $3,477,000 at December 31, 2005. The
allowance for loan losses, as a percentage of total gross loans, at December 31,
2007 was 1.32% compared to 1.34% at December 31, 2006 and 1.26% as of December
31, 2005. The increase in this percentage from 2005 to 2006 relates primarily to
the addition reserves acquired through the merger with Peachtree and to the
provision for loan losses exceeding the net chargeoffs





11




during
2006.  The provision for loan losses during the years ended December
31, 2007, 2006 and 2005 was $639,000, $839,000, and $751,000.




In 2005,
the Company changed the way it estimates its allowance for loan
losses.  In making this estimate, management utilizes a loan grading
system to assign a risk grade to each loan based on factors such as the quality
of collateral securing a loan, the financial condition of the borrower and the
payment history of each loan.  Based on net charge-off history
experienced for each category within the loan portfolio, as well as general
economic factors affecting the lending market, management assigns an estimated
allowance range for each risk grade within each of the loan
categories.  Management then estimates the required
allowance.  Included in this estimate of the allowance may be a
portion that is not allocated to a specific category of the loan portfolio, but
which management deems is necessary based on the overall risk inherent in the
loan portfolio.  The estimation of the allowance may change due to
fluctuations in any and all of the above factors.  In addition, as
trends change in terms of net charge-offs, past due loans, and generally
economic conditions of the market areas served by the Company’s subsidiary
banks, the assumptions will be adjusted appropriately and these adjustments are
reflected in the quarterly analysis of the adequacy of the reserve.




The loan
concentrations within the loan portfolio have changed in recent years, both due
to changes in the lending practices of Bank of Upson, FNB Polk, and more
recently, as a result of the mergers with Peachtree and Chickamauga. The portion
of the gross loan portfolio represented by real estate loans have gradually
increased, from 55% as of December 31, 2003 to 63% as of December 31, 2006 and
65% at December 31, 2007. Construction loans have increased from 8% of loans at
December 31, 2003 to 18% at December 31, 2006 and 2007.  The portion
represented by consumer loans declined from 26% of gross loans as of December
31, 2003 to 10% at December 31, 2006 and 2007. Finally, the portion represented
by commercial loans decreased from 8% of gross loans as of December 31, 2003 to
7% of loans at December 31, 2006 and  6% of loans at December 31,
2007.




Management
considers the allowance for loan losses to be adequate; however, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional provisions for loan losses will not be
required.




Summary of Loan Loss Experience.An analysis of the Company’s loan loss experience is included in the
following table for the periods indicated.





Table
11.  Analysis of Allowance for Loan Losses


For
the Periods Ended December 31,


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
      at beginning of period
            
            $
            4,480
            
            
            $
            3,477
            
            
            $
            3,161
            
            
            $
            1,825
            
            
            $
            1,943Charge-offsCommercial
      loans
            
            
            80
            
            
            
            102
            
            
            
            31
            
            
            
            50
            
            
            
            32Real
      estate - construction
            
            
            110
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Real
      estate - mortgage
            
            
            188
            
            
            
            263
            
            
            
            50
            
            
            
            46
            
            
            
            87Consumer
            
            
            626
            
            
            
            393
            
            
            
            613
            
            
            
            334
            
            
            
            461Other
            
            
            138
            
            
            
            145
            
            
            
            199
            
            
            
            175
            
            
            
            177Total
      Charge-offs
            
            
            1,142
            
            
            
            903
            
            
            
            893
            
            
            
            605
            
            
            
            757RecoveriesCommercial
      loans
            
            
            28
            
            
            
            6
            
            
            
            42
            
            
            
            25
            
            
            
            6Real
      estate - construction
            
            
            40
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Real
      estate - mortgage
            
            
            20
            
            
            
            10
            
            
            
            1
            
            
            
            30
            
            
            
            18Consumer
            
            
            448
            
            
            
            328
            
            
            
            310
            
            
            
            172
            
            
            
            191Other
            
            
            75
            
            
            
            92
            
            
            
            105
            
            
            
            78
            
            
            
            100Total
      recoveries
            
            
            611
            
            
            
            436
            
            
            
            458
            
            
            
            305
            
            
            
            315Net
      (charge-offs)
            
            
            (531
            )
            
            
            (467
            )
            
            
            (435
            )
            
            
            (300
            )
            
            
            (442
            )Additions
      charged to operations
            
            
            639
            
            
            
            839
            
            
            
            751
            
            
            
            375
            
            
            
            324Addition
      to reserves resulting from business combination
            
            
            364
            
            
            
            631
            
            
            
            -
            
            
            
            1,261
            
            
            
            -Balance
      at end of period
            
            $
            4,952
            
            
            $
            4,480
            
            
            $
            3,477
            
            
            $
            3,161
            
            
            $
            1,825Ratio
      of net charge-offs during theperiod to average loans outstanding during
      the period
            
            
            0.15
            %
            
            
            0.16
            %
            
            
            0.17
            %
            
            
            0.19
            %
            
            
            0.37
            %




12




The
following table summarizes the Company’s allowances for loan losses at year-end
for 2007, 2006, 2005, 2004, and 2003.





Table
12.  Allocation of Allowance For Loan Losses


At
December 31,


(Dollars
in thousands)





2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Amount
              
              
              %
      of
                total
                loan
              
              
              Amount
              
              
              %
      of
                total
                loan
              
              
              Amount
              
              
              %
      of
                total
                loan
              
              
              Amount
              
              
              %
      of
                total
                loan
              
              
              Amount
              
              
              %
      of
                total
                loanLoan
      CategoryCommercial
              
              $
              450
              
              
              
              6
              
              
              $
              477
              
              
              
              7
              
              
              $
              296
              
              
              
              7
              
              
              $
              1,019
              
              
              $
              8
              
              
              $
              456
              
              
              
              8Real
      estate – construction
              
              
              1,420
              
              
              
              18
              
              
              
              896
              
              
              
              18
              
              
              
              782
              
              
              
              19
              
              
              
              76
              
              
              
              11
              
              
              
              -
              
              
              
              8Real
      estate – mortgage
              
              
              2,130
              
              
              
              65
              
              
              
              1,895
              
              
              
              63
              
              
              
              1,418
              
              
              
              61
              
              
              
              582
              
              
              
              63
              
              
              
              91
              
              
              
              55Consumer
              
              
              796
              
              
              
              10
              
              
              
              928
              
              
              
              10
              
              
              
              778
              
              
              
              11
              
              
              
              1,283
              
              
              
              16
              
              
              
              1,095
              
              
              
              26Other
              
              
              87
              
              
              
              1
              
              
              
              94
              
              
              
              2
              
              
              
              72
              
              
              
              2
              
              
              
              201
              
              
              
              2
              
              
              
              183
              
              
              
              3Unallocated
              
              
              69
              
              
              
              -
              
              
              
              190
              
              
              
              -
              
              
              
              131
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              4,952
              
              
              
              
              
              
              $
              4,480
              
              
              
              
              
              
              $
              3,477
              
              
              
              
              
              
              $
              3,161
              
              
              
              
              
              
              $
              1,825







Management
believes commercial loans generally pose a higher level of risk per loan than
other categories in the loan portfolio, such as real estate ­mortgage loans.
Management believes that, like consumer loans, commercial loans are more
susceptible to risks associated with local economic and employment conditions.
In addition, the credit quality of a commercial loan is also often dependent on
the borrower’s management and its ability to adapt to changes in the
marketplace, both of which are difficult to gauge at the time a loan is made.
Given management’s belief regarding the increased risk associated with
commercial loans and the Company’s historical loan losses associated with
commercial loans, management has traditionally allocated a significant portion
of the allowance for loan losses to commercial loans. For the five year period
from 2003 through 2007, commercial loans charged off represented 6.9% of total
chargeoffs.  Management allocated 9.1% of the allowance for loan
losses to commercial loans at December 31, 2007, to reflect management’s belief
regarding general risk in the loan category and the Company’s historical losses
with respect to commercial loans.




Real
estate construction lending has been a significant source of growth for the
Company’s loan portfolio in from 2004 through 2007, increasing from $9.0 million
at year-end 2003 to $59.7 million at year-end 2006 and $66.1 million at year-end
2007.  The growth in loans real estate construction lending has
primarily been for the construction and development of commercial real estate,
which generally carries more risk than the construction of a single family
dwelling due to the size of the loan and complexity of the
project.   Because of this, the Company utilizes architectural
firms independent of the contractor in determining the timing and amount of
funds advanced for the various projects.




During
the latter part of 2007, real estate construction lending in the Atlanta
metropolitan area experienced a marked increase in the levels foreclosures and
loans designated as nonperforming.  At December 31, 2007, the
Company’s construction loans secured by single family dwellings accounted for
$5.3 million of this total.  In addition, at December 31, 2007 the
Company had $26.8 million in loans outstanding for the purpose of residential
development.




In 2007,
the Company had $110,000 in construction loan chargeoffs which relates to two
single family construction loans to one builder.  This is the only
chargeoff for this type of loan that the Company has experienced since
2003.  While this chargeoff only represents 2.6% of all chargeoffs
over the last five years, management still increased its allocation of the
allowance for loan losses to this category of loans in recognition of the
changes in the real estate market caused by reduced demand, particularly in the
residential market, and slower economic conditions that began to develop in the
latter part of 2007.




Real
estate mortgage loans represent real estate mortgages secured by both
residential and commercial properties.  At December 31, 2007, loans in
this category totaled $241.3 million which represented 65% of total
loans.  Loans secured by first liens on 1-4 family dwellings totaled
$117.1 million with second mortgages and home equity line of credits totaling
$20.1 million.  Loans secured by commercial real estate totaled $93.4
million with all other real estate loans, including those secured by multifamily
dwellings and farmland, totaling $10.7 million.  Management allocated
43.0% of the total allowance for loan losses to these loans.




Consumer
loans  have historically comprised a high percentage of the Company’s
loan charge-offs, comprising





13




56.4% of
total chargeoffs over the past five years, including 43.5% of total chargeoffs
in 2006 and 54.8% of total chargeoffs in 2007. Management believes that the
increased risk of loss in this loan category is a result of dependence on the
borrower’s financial stability and the nature of the collateral for such loans,
generally automobiles, boats and other personal property, which may make it more
difficult to recover losses on such loans compared to loans in other categories,
such as real estate-mortgage loans. As a result, management has allocated more
of the allowance for loan losses to the consumer loan category than its relative
composition of the entire portfolio.  Management allocated 20.7% of
the allowance for loan losses to these loans while they only comprise 10.4% of
the portfolio.  The amount of the allowance allocated to this portion
of the portfolio declined as management aligned its reserves more closely to
historical chargeoffs and portfolio duration.




The
Company had unallocated reserves of approximately $69,000 at December 31, 2007
and $190,000 at December 31, 2006.  While not allocated to any
particular category of loans, Management believes it should be included in its
estimation of the allowance based on the overall risk inherent in the loan
portfolio.




Deposits.Table 1
on Page 6 contains average amounts of the Company’s deposit accounts and the
weighted average interest rates paid on those accounts. As illustrated in Table
1, the Company’s average balance of interest-bearing deposits increased by
approximately $69.7 million from 2006 to 2007 and $25.8 million from 2005 to
2006.   Of the $69.7 million increase from 2006 to 2007, $60.1
million relates to the inclusion Peachtree for the entire twelve month period in
2007 compared to only two months in 2007, and to the inclusion
of  Chickamauga for six months in 2007.   For 2007,
certificates of deposit represented approximately 57.2% of total
interest-bearing deposits, compared to 54.8% for 2006 and 50.2% for
2005.




The
following table indicates amounts outstanding of time certificates of deposit of
$100,000 or more and their respective maturities at December 31,
2007:





Table
13.  Maturity of Certificates of Deposit


With
Balances $100,000 Or More


(Dollars
in thousands)





Three
      months or less
            
            $
            21,119Three
      through six months
            
            
            15,897Six
      through twelve months
            
            
            27,496Over
      one year
            
            
            20,104Total
            
            $
            84,616




At
December 31, 2007, the Company had no deposit relationships that represented
concentrations and no brokered deposits.




Return on Equity and
Assets.Returns
on average consolidated assets and average consolidated equity presented
below.







Table
14.  Selected Performance Measures





2007
            
            
            2006
            
            
            2005Return
      on average assets
            
            
            1.10
            %
            
            
            1.22
            %
            
            
            1.13
            %Return
      on average stockholders' equity
            
            
            9.04
            %
            
            
            10.05
            %
            
            
            9.29
            %Dividend
      payout ratio
            
            
            32.5
            %
            
            
            31.6
            %
            
            
            35.3
            %Average
      equity to average assets
            
            
            11.81
            %
            
            
            12.15
            %
            
            
            12.17
            %





Short-term borrowings.The table below provides
information about short-term borrowed funds.





14





Table
15.  Short-term Borrowed Funds


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005Amount
      outstanding at year-end
            
            $
            3,055
            
            
            $
            110
            
            
            $
            15,000Average
      rate
            
            
            5.51
            %
            
            
            6.25
            %
            
            
            4.52
            %Average
      amounts outstanding during the year
            
            $
            2,288
            
            
            $
            7,627
            
            
            $
            4,372Average
      rate
            
            
            5.52
            %
            
            
            5.15
            %
            
            
            4.46
            %Maximum
      amount outstanding at any month-end during the year
            
            $
            5,550
            
            
            $
            10,000
            
            
            $
            18,700




Liquidity and Interest Rate
Sensitivity.   Net interest income, the Company’s primary
source of earnings, fluctuates with significant interest rate movements. To
lessen the impact of these margin swings,  management strives to
structure the balance sheet so that repricing opportunities exist for both
assets and liabilities in roughly equivalent amounts at approximately the same
time intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.




Interest
rate sensitivity refers to the responsiveness of interest-bearing assets and
liabilities to changes in market interest rates. The rate sensitive position, or
gap, is the difference in the volume of rate sensitive assets and liabilities,
at a given time interval. The general objective of gap management is to manage
actively rate sensitive assets and liabilities so as to reduce the impact of
interest rate fluctuations on the net interest margin. Management generally
attempts to maintain a balance between rate sensitive assets and liabilities as
the exposure period is lengthened to minimize the Company’s overall interest
rate risks.




The asset
mix of the balance sheet is continually evaluated in terms of several variables:
yield, credit quality, appropriate funding sources and liquidity. To effectively
manage the liability mix of the balance sheet, there should be a focus on
expanding the various funding sources. The interest rate sensitivity position at
year-end 2007 is presented in the following table. The difference between rate
sensitive assets and rate sensitive liabilities, or the interest rate
sensitivity gap, is shown at the bottom of the table. Since all interest rates
and yields do not adjust at the same velocity, the gap is only a general
indicator of rate sensitivity.




Table
16.  Interest Sensitivity Gap Analysis


(Dollars
in thousands)





0-3 months
            
            
            3-12 months
            
            
            1-5 years
            
            
            After 5 years
            
            
            TotalsRATE
      SENSITIVE ASSETSLoans
            
            $
            127,666
            
            
            $
            68,213
            
            
            $
            150,257
            
            
            $
            27,840
            
            
            $
            373,976Securities
            
            
            3,807
            
            
            
            13,265
            
            
            
            29,979
            
            
            
            91,042
            
            
            
            138,093Federal
      funds sold
            
            
            9,316
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,316Interest
      bearing deposits in other banks
            
            
            5,983
            
            
            
            4,555
            
            
            
            99
            
            
            
            -
            
            
            
            10,637Total
      rate sensitive assets
            
            $
            146,772
            
            
            $
            86,033
            
            
            $
            180,335
            
            
            $
            118,882
            
            
            $
            532,022RATE
      SENSITIVE LIABILITIESInterest
      bearing demand and savings deposits
            
            $
            -
            
            
            $
            -
            
            
            $
            181,426
            
            
            $
            -
            
            
            $
            181,426Certificates
      less than $100 thousand
            
            
            35,149
            
            
            
            101,400
            
            
            
            30,441
            
            
            
            214
            
            
            
            167,204Certificates
      $100 thousand and over
            
            
            21,119
            
            
            
            43,393
            
            
            
            20,104
            
            
            
            -
            
            
            
            84,616Borrowed
      funds
            
            
            3,055
            
            
            
            -
            
            
            
            2,624
            
            
            
            3,931
            
            
            
            9,610Total
      rate sensitive liabilities
            
            $
            59,323
            
            
            $
            144,793
            
            
            $
            234,595
            
            
            $
            4,145
            
            
            $
            442,856Interest-sensitivity
      gap
            
            $
            87,449
            
            
            $
            (58,760
            )
            
            $
            (54,260
            )
            
            $
            114,737
            
            
            $
            89,166Cumulative
      interest-sensitivity gap
            
            $
            87,449
            
            
            $
            28,689
            
            
            $
            (25,571
            )
            
            $
            89,166Interest-sensitivity
      gap ratio
            
            
            247.4
            %
            
            
            59.4
            %
            
            
            76.9
            %
            
            
            2,868.1
            %
            
            
            120.1
            %Cumulative
      interest-sensitivity gap ratio
            
            
            247.4
            %
            
            
            114.1
            %
            
            
            94.2
            %
            
            
            120.1
            %




As
evidenced by the table above, as of December 31, 2007, SouthCrest was
cumulatively asset sensitive within one year. In an increasing interest rate
environment, an asset sensitive position (a gap ratio greater than 100%) is
generally advantageous as interest earning assets reprice sooner than interest
bearing liabilities. Conversely, in a decreasing interest rate environment, an
asset sensitive position is generally not favorable since interest earning
assets reprice to the lower interest rates sooner than interest bearing
liabilities. With respect to SouthCrest, an increase in





15




interest
rates could result in higher net interest income while a decline in interest
rates could result in decreased net interest income. This, however, assumes that
all other factors affecting income remain constant. It also assumes no
substantial prepayments in the loan or investment portfolios. In the table
above, maturities in the investment portfolio are shown by their stated
maturity. The Company’s mortgage­-backed securities portfolio, for example,
provides the Company with monthly returns of principal while the balances are
shown in the above table are included according to their stated maturity. Also,
the table above assumes that interest bearing demand and savings deposits are
not assumed to reprice in the short-term and are therefore included in the one
to five year period as those accounts may not actually reprice in the event of a
general increase in interest rates. Finally, if interest rates remain constant,
it is possible for some of the Company’s certificate accounts to reprice at
rates that are higher or lower than their current rates, as rates in effect at
the time the certificates were opened may be different than those in effect
currently.




SouthCrest
generally structures its rate sensitivity position to hedge against rapidly
rising or falling interest rates. The Asset/Liability Committees of the Banks
meet regularly to analyze each bank’s position with respect to interest rate
risk and develops future strategies for managing that risk. Such strategy
includes anticipation of future interest rate movements.  At December
31, 2007, based on an interest rate risk simulation prepared by an independent
firm, the Company estimates that if interest rates rose 200 basis points, net
interest income over the next twelve months would increase by
2.03%.  Conversely, if interest rates declined by 200 basis points,
the Company’s net interest income would decline by 3.36% over the next twelve
months.




The
Company, if needed, has the ability to cash out certificates with asset cash
flow under normal circumstances. In the event that abnormal circumstances arise,
the Banks have federal funds lines of credit in place totaling $21.0 million. In
addition, if needed for both short-term and longer-term funding needs, the Banks
have available lines of credit with the Federal Home Loan Bank of Atlanta on
which $51.6 million was available at December 31, 2007.  The parent
company also has an $8.5 million line of credit on which it may draw funds as
needed until October 16, 2008, after which date the outstanding principal will
be due in ten annual installments.  The line of credit is secured by
the common stock of the Company’s subsidiary banks and carries an interest rate
of prime rate minus 0.50%. Interest is payable quarterly. The agreement contains
restrictions concerning the maintenance of certain minimum capital levels and
regulatory capital ratios, loan loss reserves, and profitability ratios. The
primary purpose of the line is to provide funds that may be needed by the
holding company from time to time.  At December 31, 2007, $6,555,000
was outstanding on this line of credit.




Liquidity
represents the ability to provide steady sources of funds for loan commitments
and investment activities, as well as to maintain sufficient funds to cover
deposit withdrawals and payment of debt and operating obligations. These funds
can be obtained by converting assets to cash or by attracting new deposits.
SouthCrest’s primary source of liquidity comes from its ability to maintain and
increase deposits through its banks. Below are the pertinent liquidity balances
and ratios for the periods ended December 31, 2007, 2006, and 2005.





Table
17.  Liquid Assets and Liquidity Measures


(Dollars
in thousands)





2007
            
            
            2006
            
            
            2005Cash
      and due from banks
            
            $
            16,060
            
            
            $
            16,926
            
            
            $
            15,930Interest
      bearing deposits in banks
            
            
            10,637
            
            
            
            4,881
            
            
            
            4,039Federal
      funds sold
            
            
            9,316
            
            
            
            12,054
            
            
            
            4,297Securities
            
            
            138,093
            
            
            
            128,787
            
            
            
            123,511Ratio
      of CDs> $100 thousand to total deposits
            
            
            16.46
            %
            
            
            13.77
            %
            
            
            11.01
            %Loan
      to deposit ratio
            
            
            72.78
            %
            
            
            72.41
            %
            
            
            73.16
            %Brokered
      deposits
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A




At
December 31, 2007, large denomination certificates accounted for 16.46% of total
deposits compared with 13.77% at December 31, 2006 and 11.01% at December, 31,
2005. Large denomination CDs are generally more volatile than other deposits. As
a result, management monitors the competitiveness of the rates it pays on its
large denomination CDs and periodically adjusts its rates in accordance with
market demands. Despite the increase, SouthCrest is not heavily dependent on
large deposits in relation to industry averages for institutions of similar
size.




Cash and
cash equivalents are the primary source of liquidity. At December 31, 2007, cash
and due from banks amounted to $16.1 million, representing 2.7% of total
assets.  Overnight federal funds sold totaled $9.3 million or 1.5% of
total assets and interest-bearing deposits in other financial institutions
totaled $10.6 million or 1.8% of total assets. Securities available for sale
provide a secondary source of liquidity. Also securities that are classified as
held to maturity provide liquidity through cash flows of maturing securities and
monthly principal payments on mortgage-backed securities.





16




Brokered
deposits are deposit instruments, such as certificates of deposit, deposit
notes, bank investment contracts and certain municipal investment contracts that
are issued through brokers and dealers who then offer and/or sell these deposit
instruments to one or more investors. As of December 31, 2007, SouthCrest had no
brokered deposits in its portfolio.




Capital Adequacy.There are
two primary measures of capital adequacy for banks and bank holding companies:
(i) risk-based capital guidelines and (ii) the leverage ratio.




The
risk-based capital guidelines measure the amount of a bank’s required capital in
relation to the degree of risk perceived in its assets and its off-balance sheet
items. Note that under the risk-based capital guidelines, capital is divided
into two “tiers.” Tier 1 capital consists of common shareholders’ equity,
non-cumulative and cumulative (bank holding companies only) perpetual preferred
stock and minority interest. Goodwill and other intangible assets are subtracted
from the total. Tier 2 capital consists of the allowance for loan losses, hybrid
capital instruments, term subordinated debt and intermediate term preferred
stock. Banks are required to maintain a minimum risk-based capital (tier 1 plus
tier 2) ratio of 8.0%, with at least 4.0% consisting of Tier 1
capital.




The
second measure of capital adequacy relates to the leverage ratio. The leverage
ratio is computed by dividing Tier 1 capital into average total
assets.




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.




The table
below illustrates the regulatory capital ratios of SouthCrest, Bank of Upson,
The First National Bank of Polk County, Peachtree Bank and Bank of Chickamauga
as of December 31, 2007.





Table
18.  Regulatory Capital Ratios at December 31, 2007





Minimum
              Required
            
            
            Minimum
              Required
              to be Well
              Capitalized
            
            
            Consolidated
            
            
            Upson
            
            
            Polk
            
            
            Peachtree
            
            
            ChickamaugaRegulatory
      capital ratiosTotal
      risk-based capital
            
            
            8.00
            %
            
            
            10.00
            %
            
            
            14.51
            %
            
            
            14.53
            %
            
            
            18.84
            %
            
            
            13.72
            %
            
            
            16.68
            %Tier
      1 risk-based capital
            
            
            4.00
            %
            
            
            6.00
            %
            
            
            13.33
            %
            
            
            13.41
            %
            
            
            17.59
            %
            
            
            12.49
            %
            
            
            8.75
            %Tier
      1 leverage capital
            
            
            4.00
            %
            
            
            5.00
            %
            
            
            9.14
            %
            
            
            9.94
            %
            
            
            11.65
            %
            
            
            8.75
            %
            
            
            7.61
            %




Fourth
Quarter Analysis




In the
quarter ended December 31, 2007, the Company recorded net income of $1,446,000
or $0.37 per share compared to $1,493,000 or $0.39 per share, for the same
period in 2006, a decline of $47,000.   In comparison to the
previous quarter ended September 30, 2007, net income declined $204,000, or
$0.05 per share, from earnings of $1,650,000, or $0.42 per share.  Net
interest income decline $92,000 due to reductions in the net interest margin;
increased depreciation expense of $50,000 relating to completed construction
projects; and a $138,000 loss on the sale of OREO in the fourth quarter related
the sale of four properties.  Table 19 contains a summary of our
quarterly financial results for 2007 and 2006.





17




Table
19.  Quarterly Financial Results


(Dollars
in thousands except share and per share amounts)





For the three months ended3/31/2007
            
            
            6/30/2007
            
            
            9/30/2007
            
            
            12/31/2007Summary
      of OperationsInterest
      income
            
            $
            8,555
            
            
            $
            8,684
            
            
            $
            9,815
            
            
            $
            9,805Interest
      expense
            
            
            3,187
            
            
            
            3,217
            
            
            
            3,911
            
            
            
            3,992Net
      interest income
            
            
            5,368
            
            
            
            5,467
            
            
            
            5,904
            
            
            
            5,813Provision
      for loan losses
            
            
            149
            
            
            
            77
            
            
            
            212
            
            
            
            201Other
      income
            
            
            1,479
            
            
            
            1,625
            
            
            
            1,788
            
            
            
            1,905Other
      expense
            
            
            4,357
            
            
            
            4,688
            
            
            
            5,120
            
            
            
            5,469Income
      tax expense
            
            
            736
            
            
            
            728
            
            
            
            710
            
            
            
            602Net
      income
            
            
            1,605
            
            
            
            1,599
            
            
            
            1,650
            
            
            
            1,446Basic
      and diluted earnings per share
            
            $
            0.41
            
            
            $
            0.40
            
            
            $
            0.42
            
            
            $
            0.37Dividends
      per share
            
            $
            0.13
            
            
            $
            0.13
            
            
            $
            0.13
            
            
            $
            0.13Average
      shares outstanding
            
            
            3,952,328
            
            
            
            3,952,328
            
            
            
            3,952,328
            
            
            
            3,929,956For the three months ended3/31/2006
            
            
            6/30/2006
            
            
            9/30/2006
            
            
            12/31/2006Summary
      of OperationsInterest
      income
            
            $
            6,670
            
            
            $
            6,995
            
            
            $
            7,409
            
            
            $
            8,350Interest
      expense
            
            
            2,089
            
            
            
            2,371
            
            
            
            2,668
            
            
            
            3,105Net
      interest income
            
            
            4,581
            
            
            
            4,624
            
            
            
            4,741
            
            
            
            5,245Provision
      for loan losses
            
            
            108
            
            
            
            133
            
            
            
            267
            
            
            
            331Other
      income
            
            
            1,230
            
            
            
            1,334
            
            
            
            1,344
            
            
            
            1,456Other
      expense
            
            
            3,607
            
            
            
            3,708
            
            
            
            3,663
            
            
            
            4,189Income
      tax expense
            
            
            690
            
            
            
            691
            
            
            
            706
            
            
            
            688Net
      income
            
            
            1,406
            
            
            
            1,426
            
            
            
            1,449
            
            
            
            1,493Basic
      and diluted earnings per share
            
            $
            0.39
            
            
            $
            0.40
            
            
            $
            0.42
            
            
            $
            0.39Dividends
      per share
            
            $
            0.125
            
            
            $
            0.125
            
            
            $
            0.125
            
            
            $
            0.125Average
      shares outstanding
            
            
            3,581,193
            
            
            
            3,581,193
            
            
            
            3,581,193
            
            
            
            3,827,272







Effects
of Inflation and Changing Prices




Inflation
generally increases the cost of funds and operating overhead, and to the extent
loans and other assets bear variable rates, the yields on such assets. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the performance of a financial
institution than the effects of general levels of inflation. Although interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services, increases in inflation generally have resulted in
increased interest rates. In addition, inflation affects financial institutions’
increased costs of goods and services purchased, the cost of salaries and
benefits, occupancy expense, and similar items. Inflation and related increases
in interest rates generally decrease the market value of shareholders’ equity.
Mortgage originations and refinancings tend to slow as interest rates increase,
and can reduce SouthCrest’s earnings from such activities and the income from
the sale of residential mortgage loans in the secondary market.




Off-Balance-Sheet
Financing




Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance-sheet
financial instruments include commitments to extend credit and standby letters
of credit. These financial instruments are included in the financial statements
when funds are distributed or the instruments become payable. We use the same
credit policies in making commitments as we do for on-balance ­sheet
instruments. Our exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit,
standby letters of credit and credit card commitments is represented by the
contractual amount of those instruments. Table 20 below contains a summary of
our contractual obligations and commitments as of December 31,
2007.





18





Table
20.  Commitments and Contractual Obligations


(Dollars
in thousands)





Less
      than
              one year
            
            
            1-3 years
            
            
            3-5 years
            
            
            Thereafter
            
            
            TotalContractual
      obligationsDeposits
      having no stated maturity
            
            $
            262,111
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            262,211Certificates
      of Deposit
            
            
            201,061
            
            
            
            36,704
            
            
            
            13,841
            
            
            
            214
            
            
            
            251,820Borrowed
      funds
            
            
            3,055
            
            
            
            1,312
            
            
            
            1,312
            
            
            
            3,931
            
            
            
            9,610Deferred
      compensation
            
            
            43
            
            
            
            125
            
            
            
            500
            
            
            
            19,241
            
            
            
            19,909Construction
      in progress
            
            
            1,607
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,607Leases
            
            
            141
            
            
            
            194
            
            
            
            156
            
            
            
            388
            
            
            
            879Total
      contractual obligations
            
            $
            468,018
            
            
            $
            38,335
            
            
            $
            15,809
            
            
            $
            23,774
            
            
            $
            545,936CommitmentsCommitments
      to extend credit
            
            $
            33,929
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            33,929Credit
      card commitments
            
            
            9,323
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,323Commercial
      standby letters of credit
            
            
            1,282
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,282Total
      commitments
            
            $
            44,534
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            44,534







Stock
Performance and Dividend Information




After the
merger with First Polk Bankshares on September 30, 2004, the Company’s common
stock began trading on the over-the-counter market under the symbol
“SCSG.”  The graph below compares our total return performance against
the Russell 2000 index and the SNL Pink Bank Index, an index of community banks
whose stock trades in the over the counter market.  The graph reflects
the performance of a $100 investment in the common stock of SouthCrest and the
applicable stock indices since January 18, 2005, the first recorded trade in
2005.  The graph assumes reinvestment of all dividends in the common
stock of SouthCrest or in the applicable stock index.









Source :
SNL Financial LC,  Charlottesville, VA  ©
2008




Period
      EndingIndex
            
            01/18/05
            
            
            12/31/05
            
            
            06/30/06
            
            
            12/31/06
            
            
            06/30/07
            
            
            12/31/07SouthCrest
      Financial Group, Inc.
            
            
            100.00
            
            
            
            130.01
            
            
            
            134.30
            
            
            
            133.36
            
            
            
            140.07
            
            
            
            119.56Russell
      2000
            
            
            100.00
            
            
            
            108.99
            
            
            
            117.94
            
            
            
            129.01
            
            
            
            137.32
            
            
            
            126.98SNL
      Bank Pink Index
            
            
            100.00
            
            
            
            108.18
            
            
            
            113.38
            
            
            
            118.44
            
            
            
            117.12
            
            
            
            107.49




19





The table
below provides the high and low trading prices for transactions during the given
quarters for the previous two years on the Over-the-Counter Bulletin Board, as
well as dividends paid in those quarters.





2007
            
            
            2006High
            
            
            Low
            
            
            Dividends
            
            
            High
            
            
            Low
            
            
            DividendsFirst
      Quarter
            
            $
            22.10
            
            
            $
            19.50
            
            
            $
            0.13
            
            
            $
            24.00
            
            
            $
            21.50
            
            
            $
            0.125Second
      Quarter
            
            $
            23.50
            
            
            $
            21.40
            
            
            $
            0.13
            
            
            $
            24.50
            
            
            $
            23.50
            
            
            $
            0.125Third
      Quarter
            
            $
            25.50
            
            
            $
            23.00
            
            
            $
            0.13
            
            
            $
            26.00
            
            
            $
            22.20
            
            
            $
            0.125Fourth
      Quarter
            
            $
            24.80
            
            
            $
            23.02
            
            
            $
            0.13
            
            
            $
            25.50
            
            
            $
            22.80
            
            
            $
            0.125





The
Company generally declares a dividend on the first business day of each quarter
to be paid on the last business day of that month to the shareholders of record
two weeks prior to the payment date.





20