**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 
 
 **FORM
        10-Q**
 
 
 **x**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the quarterly period ended March 31, 2006**
 
 ** ̈**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **For
        the transition period from** **** **to** ****
 
 **Commission
        File Number: 000-51287**
 
 
 
 ****SOUTHCREST
        FINANCIAL GROUP, INC.****
 **(Exact
        name of small business issuer as specified in its charter)**
 
 
 **Georgia**
              
              **58-2256460****(State
                  or other jurisdiction of incorporation or organization)**
              
              **(IRS
                  Employer Identification No.)**
 
 **600
        North Glynn Street**
 **Fayetteville,
        GA 30214**
 **(Address
        of principal executive offices)**
 
 **(770)-461-2781**
 **(Issuer’s
        telephone number)**
 
 
 **(Former
        name, former address and former fiscal year, if changed since last report)**
 
 
 Check
        whether the issuer (1) has filed all reports required to be filed by Section
        13
        or 15(d) of the Exchange Act during the past 12 months (or for such shorter
        period that the registrant was required to file such reports) and (2) has
        been
        subject to such filing requirements for the past 90
        days.    Yes x No  ̈
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
                  Accelerated Filer ̈
              
              Accelerated
                  Filer ̈
              
              Non-Accelerated
                  Filerx
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes £ No S
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of May 11, 2006: 3,581,193.
  
 1
 **SOUTHCREST
          FINANCIAL GROUP, INC.**
 **AND
          SUBSIDIARIES** ****
 
 **INDEX**
 
 ________
              __________
              
              PagePart
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Condensed
                  Consolidated Financial StatementsCondensed
                  Consolidated Balance Sheets - March 31, 2006 and
                  December 31, 2005
              3Condensed
                  Consolidated Statements of Income - Three Months Ended
                  March 31, 2006 and 2005
              4Condensed
                  Consolidated Statements of Comprehensive Income -
                  Three Months Ended March 31, 2006 and 2006
              5Condensed
                  Consolidated Statements of Cash Flows - Three Months
                  Ended March 31, 2006 and 2006
              6Notes
                  to Condensed Consolidated Financial
                  Statements
              8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              17Item
                  4.
              Controls
                  and Procedures
              17Part
                  II.
              OTHER
                  INFORMATION
              17Item
                  1.
              Legal
                  Proceedings
              17Item
                  1A.
              Risk
                  factors.
              18Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              18Item
                  3.
              Defaults
                  Upon Senior Securities
              18Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              18Item
                  5.
              Other
                  Information
              18Item
                  6.
              Exhibits
              18Signatures
              19
  2
 *Index*
  **PART
        I - FINANCIAL INFORMATION**
  **ITEM1.
        FINANCIAL STATEMENTS**
  **SouthCrest
        Financial Group, Inc. and
        Subsidiaries**
 **Condensed
        Consolidated Balance Sheets**
 **March
        31, 2006 and December 31, 2005**
 **(Unaudited)**
 **(In
        thousands, except share and per share data)**
 
 **March
                  31,**
              
              December
                  31,**Assets**
              
              **2006**
              
              2005*Cash
                  and due from banks
              
              **$**
              **14,143**
              
              $
              15,930Interest-bearing
                  deposits at other financial institutions
              
              
              **4,133**
              
              
              4,039Federal
                  funds sold
              
              
              **-**
              
              
              4,297Securities
                  available for sale
              
              
              **45,484**
              
              
              45,190Securities
                  held to maturity (fair value $74,340 and $76,894)
              
              
              **76,039**
              
              
              78,321Restricted
                  equity securities, at cost
              
              
              **2,126**
              
              
              2,270Loans
                  held for sale
              
              
              **464**
              
              
              305Loans,
                  net of unearned income
              
              
              **279,712**
              
              
              276,475Less
                  allowance for loan losses
              
              
              **3,625**
              
              
              3,477Loans,
                  net
              
              
              **276,087**
              
              
              272,998Premises
                  and equipment, net
              
              
              **12,204**
              
              
              11,255Goodwill
              
              
              **2,665**
              
              
              2,665Intangible
                  assets, net
              
              
              **4,042**
              
              
              4,248Other
                  assets
              
              
              **12,555**
              
              
              9,330**Total
                  assets**
              
              **$**
              **449,942**
              
              $
              450,848**Liabilities,
                  Redeemable Common Stock, and Stockholders'
                  Equity**Liabilities:Deposits:Noninterest-bearing
              
              **$**
              **62,076**
              
              $
              60,157Interest-bearing
              
              
              **316,055**
              
              
              317,743Total
                  deposits
              
              
              **378,131**
              
              
              377,900Federal
                  Home Loan Bank advances
              
              
              **10,220**
              
              
              15,275Federal
                  funds purchased
              
              
              **2,274**
              
              
              **-**Other
                  liabilities
              
              
              **3,898**
              
              
              3,233**Total
                  liabilities**
              
              
              **394,523**
              
              
              396,408Commitments
                  and contingenciesRedeemable
                  common stock held by ESOP
              
              
              **1,005**
              
              
              984Stockholders'
                  equityCommon
                  stock, par value $1; 10,000,000 shares authorized, 3,581,193 and
                  3,581,193
                  issued, respectively
              
              
              **3,581**
              
              
              3,581Additional
                  paid-in capital
              
              
              **40,846**
              
              
              40,846Retained
                  earnings
              
              
              **10,465**
              
              
              9,528Accumulated
                  other comprehensive loss
              
              
              **(478**
              **)**
              
              (499
              )**Total
                  stockholders' equity**
              
              
              **54,414**
              
              
              53,456**Total
                  liabilities, redeemable common stock, and stockholders'
                  equity**
              
              **$**
              **449,942**
              
              $
              450,848
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
 ***
        Derived from audited consolidated financial
        statements.**
  3
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and
        Subsidiaries**
 **Condensed
        Consolidated Statements of Income**
 **For
        The Three Months Ended March 31, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands, except share and per share data)**
  **2006**
              
              2005**Interest
                  income:**Loans
              
              **$**
              **5,191**
              
              $
              3,935Securities
                  - taxable
              
              
              **1,225**
              
              
              1,272Securities
                  - nontaxable
              
              
              **115**
              
              
              125Federal
                  funds sold
              
              
              **101**
              
              
              80Interest-bearing
                  deposits at other banks
              
              
              **38**
              
              
              33**Total
                  interest income**
              
              
              **6,670**
              
              
              5,445**Interest
                  expense:**Deposits
              
              
              **1,909**
              
              
              1,294Other
                  borrowings
              
              
              **180**
              
              
              5**Total
                  interest expense**
              
              
              **2,089**
              
              
              1,299**Net
                  interest income**
              
              
              **4,581**
              
              
              4,146**Provision
                  for loan losses**
              
              
              **108**
              
              
              121**Net
                  interest income after provision for loan losses**
              
              
              **4,473**
              
              
              4,025**Other
                  income:**Service
                  charges on deposit accounts
              
              
              **844**
              
              
              760Other
                  service charges and fees
              
              
              **193**
              
              
              175Impairment
                  charge on investments
              
              
              **-**
              
              
              (600
              )Net
                  gain on sale of loans
              
              
              **34**
              
              
              39Other
                  operating income
              
              
              **104**
              
              
              146**Total
                  other income**
              
              
              **1,175**
              
              
              520**Other
                  expenses:**Salaries
                  and employee benefits
              
              
              **1,942**
              
              
              1,695Equipment
                  and occupancy expenses
              
              
              **380**
              
              
              367Amortization
                  of intangibles
              
              
              **208**
              
              
              345Other
                  operating expenses
              
              
              **1,022**
              
              
              994**Total
                  other expenses**
              
              
              **3,552**
              
              
              3,401**Income
                  before income taxes**
              
              
              **2,096**
              
              
              1,144**Income
                  tax expense**
              
              
              **690**
              
              
              325**Net
                  income**
              
              **$**
              **1,406**
              
              $
              819**Basic
                  and diluted earnings per share**
              
              **$**
              **0.39**
              
              $
              0.23**Dividends
                  per share**
              
              **$**
              **0.125**
              
              $
              0.120**Average
                  shares outstanding**
              
              
              **3,581,193**
              
              
              3,571,556**See
                  Notes to Condensed Consolidated Financial
                  Statements.**
  4
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and
        Subsidiaries**
 **Condensed
        Consolidated Statements of Comprehensive Income**
 **For
        The Three Months Ended March 31, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
 
 **2006**
              
              2005**Net
                  income**
              
              **$**
              **1,406**
              
              $
              819**Other
                  comprehensive income:**Unrealized
                  holding gains on securities available for sale arising during the
                  period,
                  net of taxes of $17 and $93
              
              
              **21**
              
              
              153**Comprehensive
                  income**
              
              **$**
              **1,427**
              
              $
              972
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  5
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and
        Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows**
 **For
        The Three Months Ended March 31, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
 
 **2006**
              
              2005**OPERATING
                  ACTIVITIES**Net
                  income
              
              **$**
              **1,406**
              
              $
              819Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              **192**
              
              
              187Amortization
                  of intangibles
              
              
              **206**
              
              
              345Other
                  amortization
              
              
              **(6**
              **)**
              
              15Provision
                  for loan losses
              
              
              **108**
              
              
              121Impairment
                  loss on investment securities
              
              
              **-**
              
              
              600Stock
                  compensation expense
              
              
              **24**
              
              
              -Deferred
                  income taxes
              
              
              **(157**
              **)**
              
              (339
              )Income
                  on bank-owned life insurance
              
              
              **(34**
              **)**
              
              (39
              )(Increase)
                  decrease in interest receivable
              
              
              **44**
              
              
              (88
              )Increase in
                  income taxes payable
              
              
              **718**
              
              
              668Increase
                  in interest payable
              
              
              **57**
              
              
              24Net
                  gain on sale of loans
              
              
              **(34**
              **)**
              
              (39
              )Originations
                  of mortgage loans held for sale
              
              
              **(2,947**
              **)**
              
              (2,375
              )Proceeds
                  from sales of mortgage loans held for sale
              
              
              **2,822**
              
              
              3,018Other
                  assets and liabilities, net
              
              
              **276**
              
              
              (514
              )Net
                  cash provided by operating activities
              
              
              **2,675**
              
              
              2,403**INVESTING
                  ACTIVITIES**Purchases
                  of securities held to maturity
              
              
              **-**
              
              
              (8,667
              )Proceeds
                  from maturities of securities held to maturity
              
              
              **2,255**
              
              
              4,469Purchases
                  of securities available for sale
              
              
              **(1,000**
              **)**
              
              (7,991
              )Proceeds
                  from maturities of securities available for sale
              
              
              **701**
              
              
              2,471Proceeds
                  from redemption of restricted equity securities
              
              
              **144**
              
              
              -Purchases
                  of restricted equity securities
              
              
              **-**
              
              
              (1
              )Net
                  (increase) decrease in interest-bearing deposits in banks
              
              
              **(94**
              **)**
              
              227Net
                  decrease in federal funds sold
              
              
              **4,297**
              
              
              6,296Net
                  increase in loans
              
              
              **(3,338**
              **)**
              
              (3,011
              )Purchase
                  of premises and equipment
              
              
              **(1,141**
              **)**
              
              (561
              )Proceeds
                  from sale of other real estate owned
              
              
              **313**
              
              
              215Purchase
                  of life insurance contracts
              
              
              **(3,601**
              **)**
              
              -Net
                  cash used in investing activities
              
              
              **(1,464**
              **)**
              
              (6,553
              )**FINANCING
                  ACTIVITIES**Net
                  increase in deposits
              
              
              **231**
              
              
              6,954Principal
                  repayments on Federal Home Loan Bank advances
              
              
              **(5,055**
              **)**
              
              (55
              )Net
                  increase in federal funds purchased
              
              
              **2,274**
              
              
              -Dividends
                  paid
              
              
              **(448**
              **)**
              
              (429
              )Net
                  cash provided by (used in) financing activities
              
              
              **(2,998**
              **)**
              
              6,470Net
                  increase (decrease) in cash and due from banks
              
              
              **(1,787**
              **)**
              
              2,320Cash
                  and due from banks at beginning of year
              
              
              **15,930**
              
              
              9,814Cash
                  and due from banks at end of period
              
              **$**
              **14,143**
              
              $
              12,134
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  6
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows (continued)**
 **For
        The Three Months Ended March 31, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
 
 **2006**
              
              2005**SUPPLEMENTAL
                  DISCLOSURES**Cash
                  paid for:Interest
              
              **$**
              **2,032**
              
              $
              1,275Income
                  taxes
              
              
              **129**
              
              
              4**NONCASH
                  TRANSACTIONS**Principal
                  balances of loans transferred to other real estate owned
              
              **$**
              **166**
              
              $
              -Increase
                  in redeemable common stock held by ESOP
              
              
              **21**
              
              
              50Unrealized
                  gain (loss) on securities available for sale, net
              
              
              **21**
              
              
              (153
              )
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  7
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and
        Subsidiaries**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**
  **NOTE
        1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION**
  SouthCrest
        Financial Group, Inc. (“SouthCrest or the “Company”) is a bank holding company
        whose principal activity is the ownership and management of its wholly owned
        subsidiary banks, Bank of Upson (“Upson”) and The First National Bank of Polk
        County (“FNB Polk”). Both banks are commercial banks that provide a full range
        of banking services within their primary market areas. Upson is headquartered
        in
        Thomaston, Upson County, Georgia with six branches located in Thomaston,
        Fayetteville, Manchester, Warm Springs and Luthersville, Georgia, serving
        its
        primary market area of Upson, Fayette, Meriwether and the surrounding counties.
        FNB Polk is located in Cedartown, Polk County, Georgia with two branches
        in
        Cedartown, Georgia and one branch in Rockmart, Georgia. FNB Polk primarily
        serves its primary market area of Polk County.
  The
        accompanying unaudited condensed consolidated financial statements of the
        Company have been prepared in accordance with generally accepted accounting
        principles for interim financial information. Accordingly, they do not include
        all the information and footnotes required by generally accepted accounting
        principles for complete financial statements. In the opinion of management,
        all
        adjustments (consisting of normal recurring adjustments) considered necessary
        for a fair presentation have been included. Operating results for the
        three-month period ended March 31, 2006 are not necessarily indicative of
        the
        results that may be expected for the year ended December 31, 2006. For
        further information, refer to the financial statements and footnotes included
        in
        the Company's consolidated financial statements and footnotes thereto for
        the
        year ended December 31, 2005 included in the Company’s annual report on
        Form 10-KSB (Registration
        No. 000-51287).
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries, Bank of Upson and The First National Bank of Polk
        County. All significant inter-company accounts and transactions have been
        eliminated in consolidation. 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 reported for the previous year.
  **NOTE
        2 - EARNINGS PER COMMON SHARE**
  Basic
        earnings per share is computed by dividing net income available to common
        stockholders by the weighted average number of shares outstanding during
        the
        period. Diluted earnings per share would be computed by dividing net income
        by
        the sum of the weighted-average number of shares of common stock outstanding
        and
        dilutive potential common shares, such as outstanding stock options. Dilutive
        potential common shares are calculated in accordance with the treasury stock
        method, which assumes that proceeds from the exercise of all options are
        used to
        repurchase common stock at market value. The amount of shares remaining after
        the proceeds are exhausted represents the potentially dilutive effect of
        the
        securities.
  In
        December, 2005, the Company granted 183,500 options under the SouthCrest
        Financial Group, Inc. 2005 Stock Incentive Plan. Because the options’ exercise
        price of $23.45 was greater that the average market price during the three
        month
        period ended March 31, 2006, these options were nondilutive. There were no
        potential common shares outstanding at March 31, 2005. The weighted average
        number of shares outstanding for the three month periods ended March 31,
        2006
        and 2005 were 3,581,193 and 3,571,556, respectively.
  **NOTE
        3 - STOCK BASED COMPENSATION**
 
 Effective
        January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
        Payment,” (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS
        No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,” and
        supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25)
        and its related interpretations. SFAS No. 123R requires recognition of the
        cost
        of employee services received in exchange for an award of equity instruments
        in
        the financial statements over the period the employee is required to perform
        the
        services in exchange for the award (presumptively the vesting period). SFAS
        No.
        123R also requires measurement of the cost of employee services received
        in
        exchange for an award based on the grant-date fair value of the award. SFAS
        No.
        123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess
        tax benefits be reported as financing cash inflows, rather than as a reduction
        of taxes paid, which is included within operating cash flows.
 
 The
        Company adopted SFAS No. 123R using the modified prospective application
        as
        permitted under SFAS No. 123R. Accordingly, prior period amounts have not
        been
        restated. Under this application, the Company is required to record compensation
        expense for all awards granted after the date of adoption and for the unvested
        portion of previously granted awards that remain outstanding at the date
        of
        adoption.
  8
 *Index*
  Prior
        to
        the adoption of SFAS No. 123R, the Company used the intrinsic value method
        as
        prescribed by APB No. 25 and thus recognized no compensation expense for
        options
        granted with exercise prices equal to the fair market value of the Company’s
        common stock on the date of grant.
 
 At
        March
        31, 2006, the Company maintained one share-based compensation plan, the
        SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Plan”),
        approved at the Company’s annual shareholders’ meeting held May 12, 2005. The
        only grant of options under this Plan was made in December, 2005. The
        compensation cost that has been charged against income for the Plan was $23,770
        for the three months ended March 31, 2006. The Company recorded no deferred
        tax
        benefit in the first quarter of 2006 because all of the compensation cost
        was
        related to incentive (tax qualifying) stock options.
 
 The
        Plan
        provides for up to 549,000 shares of common stock to be awarded in the form
        of
        stock options. Options are granted at the fair market value of the Company’s
        common stock on the date of grant. All options under the Plan expire expire
        ten
        years from the date of grant. At December 31, 2005 183,500 options had been
        granted. Of these options, 104,000 were not tax qualifying and were fully
        vested
        on the date of grant, while 79,500 options were tax qualifying and vest over
        60
        months. At March 31, 2006, 365,500 options were available for
        grant.
 
 The
        fair
        market value of each option award is estimated on the date of grant using
        the
        Black-Scholes option pricing model. The Company did not grant options during
        the
        quarter ended March 31, 2006.
 
 A
        summary
        of option activity under the Plan as of March 31, 2006, and changes during
        the
        three month period ended March 31, 2006 is presented below:
 
 Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contractual Term
              
              Aggregate
                  Intrinsic ValueOutstanding
                  at December 31, 2005
              
              
              183,500
              
              $
              23.45
              
              
              9.75
              
              
              -Options
                  granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at March 31, 2006
              
              
              183,500
              
              $
              23.45
              
              
              9.75
              
              $
              -Exercisable
                  at March 31, 2006
              
              
              104,000
              
              $
              23.45
              
              
              9.75
              
              $
              -
 
 For
        the
        quarter ended March 31, 2006, no options were exercised or became vested.
  As
        of
        March 31, 2006, there was $451,640 of total unrecognized compensation cost
        related to non-vested share-based compensation arrangements. That cost is
        expected to be recognized over a weighted-average period of 4.75
        years.
 
 The
        adoption of SFAS 123R and its fair value compensation cost recognition
        provisions are different from the nonrecognition provisions under SFAS 123
        and
        the intrinsic value method for compensation cost allowed under APB 25. The
        effect (increase/(decrease)) of the adoption of SFAS 123R is as
        follows:
 
 Income
                  before income tax expense
              
              $
              (23,770
              )Net
                  Income
              
              $
              (23,770
              )Cash
                  flow from operating activities
              
              $
              23,770Cash
                  flow from financing activities
              
              $
              -0-Basic
                  earnings per share
              
              $
              (0.01
              )Diluted
                  earnings per share
              
              $
              (0.01
              )
  There
        were no stock options outstanding as of March 31, 2005.
  9
 *Index*
  **NOTE
        4 — LOANS RECEIVABLE**
  The
        composition of loans at March 31, 2006 and December 31, 2005 is summarized
        as
        follows:
  *(dollars
                  in thousands)*
              
              **March
                  31, 2006**
              
              December
                  31, 2005Commercial,
                  financial, and agricultural
              
              **$**
              **17,462**
              
              $
              19,841Real
                  estate - construction
              
              
              **56,600**
              
              
              52,122Real
                  estate - mortgage
              
              
              **169,217**
              
              
              169,555Consumer
              
              
              **30,611**
              
              
              31,567Other
              
              
              **5,965**
              
              
              3,554**279,855**
              
              
              276,639Unearned
                  income
              
              
              **(143**
              **)**
              
              (164
              )Allowance
                  for loan losses
              
              
              **(3,625**
              **)**
              
              (3,477
              )Loans,
                  net
              
              **$**
              **276,087**
              
              $
              272,998
  **NOTE
        5 — NEW ACCOUNTING PRONOUNCEMENTS**
  In
        November 2005, the Financial Accounting Standards Board (FASB) issued Staff
        Position (FSP) FAS 115-1 and FAS 124-1, *the
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments,* which
        amends SFAS No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities,* and
        No. 124, *Accounting
        for Certain Investments Held by Not-for-Profit Organizations,* and APB
        Opinion No. 18, *The
        Equity Method of Accounting for Investments in Common Stock.* This FSP
        addresses the determination as to when an investment is considered impaired,
        whether the impairment is other than temporary, and the measurement of an
        impairment loss. FSP FAS 115-1 and FAS 124-1 also includes accounting
        considerations subsequent to the recognition of an other-than-temporary
        impairment and requires certain disclosures about unrealized losses that
        have
        not been recognized as other-than-temporary impairments. The guidance in
        this
        FSP is effective for reporting periods beginning after December 15, 2005.
        The adoption of FSP FAS 115-1 and FAS 124-1 did not have a material impact
        on
        the Company’s financial condition or results of operations.
  In
        May
        2005, the FASB issued SFAS No. 154, *Accounting
        Changes and Error Corrections.* This
        statement replaces APB Opinion No. 20, *Accounting
        Changes* and
        SFAS
        No. 3, *Reporting
        Accounting Changes in Interim Financial Statements.* SFAS
        No. 154 changes the requirements for the accounting for and reporting of a
        voluntary change in accounting principle. SFAS No. 154 requires
        retrospective application to prior periods for changes in accounting principles
        or error corrections, unless it is impractical to determine the period-specific
        effects or when a pronouncement includes specific transition provisions.
        This
        Statement is effective for accounting changes and corrections of errors made
        in
        fiscal years beginning after December 15, 2005. The adoption of SFAS
        No. 154 (revised 2004) did not have a material impact on its financial
        condition or result of operations of the Company.
  **NOTE
        6 -- IMPAIRMENT OF SECURITIES**
  In
        the
        quarter ended March 31, 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 impairment charge was based upon
        a
        detailed impairment analysis of these securities. Losses on the securities
        were
        previously recognized in the equity section of the balance sheet.
  10
 *Index*
  **SOUTHCREST
        FINANCIAL GROUP, INC. AND SUBSIDIARIES** ****
 ****
 **ITEM
        2. Management’s Discussion and Analysis of Financial Condition
        and Results of Operations**
 
 The
        following is management’s discussion and analysis of certain significant factors
        which have affected the financial position and operating results of SouthCrest
        Financial Group, Inc. and its bank subsidiaries, Bank of Upson and the First
        National Bank of Polk County during the period included in the accompanying
        consolidated financial statements. The purpose of this discussion is to focus
        on
        information about our financial condition and results of operations that
        are not
        otherwise apparent from our consolidated financial statements. Reference
        should
        be made to those statements and the selected financial data presented elsewhere
        in this report for an understanding of the following discussion and
        analysis.
 
 **Forward
        Looking Statements**
 
 Some
        of the statements in this Report, including, without limitation, matters
        discussed under the caption “Management’s Discussion and Analysis of Financial
        Condition and Results of Operation,” of SouthCrest Financial Group, Inc. are
“forward-looking statements” within the meaning of the federal securities
        laws.  Forward-looking statements include statements about the
        competitiveness of the banking industry, potential regulatory obligations,
        our
        entrance and expansion into other markets, integration of recently acquired
        banks, pending or proposed acquisitions, our other business strategies, our
        expectations with respect to our allowance for loan losses and impaired loans,
        anticipated capital expenditures for our operations center, and other statements
        that are not historical facts.  When we use words like “anticipate”,
“believe”, “intend”, “expect”, “estimate”, “could”, “should”, “will”, and
        similar expressions, you should consider them as identifying forward-looking
        statements, although we may use other phrasing.  These forward-looking
        statements involve risks and uncertainties and are based on our beliefs and
        assumptions, and on the information available to us at the time that these
        disclosures were prepared.  Factors that may cause actual results to differ
        materially from those expressed or implied by such forward-looking statements
        include, among others, the following possibilities: (1) competitive pressures
        among depository and other financial institutions may increase significantly;
        (2) changes in the interest rate environment may reduce margins; (3) general
        economic conditions may be less favorable than expected, resulting in, among
        other things, a deterioration in credit quality and/or a reduction in demand
        for
        credit; (4) legislative or regulatory changes, including changes in accounting
        standards, may adversely affect the businesses in which we are engaged; (5)
        costs or difficulties related to the integration of our businesses, may be
        greater than expected; (6) deposit attrition, customer loss or revenue loss
        following acquisitions may be greater than expected; (7) competitors may
        have
        greater financial resources and develop products that enable such competitors
        to
        compete more successfully than us; and (8) adverse changes may occur in the
        equity markets.
 
 Many
        of
        such factors are beyond our ability to control or predict, and readers are
        cautioned not to put undue reliance on such forward-looking statements.  We
        disclaim any obligation to update or revise any forward-looking statements
        contained in this Report, whether as a result of new information, future
        events
        or otherwise.
 
 **Critical
        Accounting Estimates**
 
 We
        have
        adopted various accounting policies that govern the application of accounting
        principles generally accepted in the United States in the preparation of
        our
        financial statements. Our significant accounting policies are described in
        the
        notes to the consolidated financial statements for the year ended December
        31,
        2005 included in our Form 10-KSB (Registration No. 000-51287). Certain
        accounting policies involve significant judgments and assumptions by us that
        have a material impact on the carrying value of certain assets and liabilities.
        We consider these accounting judgments and assumptions to be our critical
        accounting estimates. The judgments and assumptions we use are based on
        historical experience and other factors, which we believe to be reasonable
        under
        the circumstances. Because of the nature of the judgments and assumptions
        we
        make, actual results could differ from these judgments and estimates which
        could
        have a material impact on our carrying values of assets and liabilities and
        our
        results of operations.
 
 We
        believe the allowance for loan losses is a critical accounting estimate that
        requires the most significant judgments and assumptions used in preparation
        of
        our consolidated financial statements. Because the allowance for loan losses
        is
        replenished through a provision for loan losses that is charged against
        earnings, our subjective determinations regarding the allowance affect our
        earnings directly. Refer to the portion of this discussion that addresses
        our
        allowance for loan losses for a description of our processes and methodology
        for
        determining our allowance for loan losses.
 
 The
        consolidated financial statements include certain accounting and disclosures
        that require management to make estimates about fair values. Estimates of
        fair
        value are used in the accounting for securities available for sale, loans
        held
        for sale, intangible assets, and acquisition purchase accounting adjustments.
        Estimates of fair values are used in disclosures regarding securities held
        to
        maturity, stock compensation, commitments, and the fair values of financial
        instruments. Fair values are estimated using relevant market information
        and
        other assumptions such as interest rates, credit risk, prepayments and other
        factors. The fair values of financial instruments are subject to change as
        influenced by market conditions.
  11
 *Index*
  **Financial
        Condition**
 
 Our
        total
        assets declined slightly during the quarter ended March 31, 2006, decreasing
        from $450.8 million at December 31, 2005 to $449.9 million at March 31, 2006.
        During the quarter, total loans increased $3.2 million, or 1.2%, while loans
        held for sale increased $159,000. The increase in loans was due to the Company’s
        continued focus on loan growth with the opening of a new branch in Fayetteville,
        Georgia. Securities available for sale increased $0.3 million while securities
        held to maturity decreased $2.3 million. Federal funds sold declined $4.3
        million. Other assets increased $3.2 million, or 34.6% as a result of a purchase
        of life insurance policies totaling $3.6 million.
 
 Deposits
        increased $0.2 million during the first quarter of 2005 while Federal Home
        Loan
        Bank advances decreased $5.1 million. At March 31, 2006 we had purchased
        $2.3
        million in federal funds. During the quarter, the Company used cash flows
        from
        maturities of securities in the held to maturity portfolio and federal funds
        sold to fund the increases in our loan portfolio and to reduce our advances
        at
        the Federal Home Loan Bank. The Company monitors the growth in its loan
        portfolio and changes in its deposit levels, and seeks to maintain a proper
        mix
        of types, maturities, and interest rates. We believe that our cash flows
        and
        liquidity levels are adequate to support the Company’s loan growth.
 
 Our
        total
        stockholders’ equity increased by $958,000 during the quarter. Of this increase,
        $21,000 was due to an improvement in unrealized losses on securities available
        for sale, net of deferred taxes, during the quarter ended March 31, 2006.
        The
        primary reason for the increase was the net income for the quarter, net of
        dividends paid to shareholders.
  **Loan
        Portfolio** *.* The
        following table presents various categories of loans contained in First National
        Bank of Polk County and Bank of Upson's loan portfolios as of March 31, 2006
        and
        December 31, 2005:
  *(dollars
                  in thousands)*
              
              **March
                  31, 2006**
              
              December
                  31, 2005Commercial,
                  financial, and agricultural
              
              **$**
              **17,462**
              
              $
              19,841Real
                  estate - construction
              
              
              **56,600**
              
              
              52,122Real
                  estate - mortgage
              
              
              **169,217**
              
              
              169,555Consumer
              
              
              **30,611**
              
              
              31,567Other
              
              
              **5,965**
              
              
              3,554**279,855**
              
              
              276,639Unearned
                  income
              
              
              **(143**
              **)**
              
              (164
              )Allowance
                  for loan losses
              
              
              **(3,625**
              **)**
              
              (3,477
              )Loans,
                  net
              
              **$**
              **276,087**
              
              $
              272,998
 
 **Nonaccrual,
        Past Due and Restructured Loans** *.* The
        following table presents various categories of nonaccrual, past due and
        restructured loans in the Banks’ loan portfolios as of March 31, 2006 and
        December 31, 2005:
 
 **March
                  31,**
              
              **December
                  31,*****(Dollars
                  in thousands)***
              
              **2006**
              
              **2005**Nonaccrual
                  loans
              
              $
              703
              
              $
              232Loans
                  past due 90 days or more and still accruing
              
              $
              53
              
              $
              549Loans
                  restructured under troubled debt
              
              $
              -
              
              $
              -
 
 Nonaccrual
        loans increased $471,000 during the quarter ended March 31 to $703,000. Of
        that
        amount, $600,000 represent loans secured by single family dwellings for which
        the Company believes there is limited risk of loss. The Company has recorded
        a
        valuation allowance of $105,000 related to nonaccrual loans at March 31,
        2006.
 
 Information
        regarding impaired loans as of March 31, 2006 and December 31, 2005 are as
        follows:
 
 **March
                  31,**
              
              **December
                  31,***(Dollars
                  in thousands)*
              
              **2006**
              
              **2005**Impaired
                  loans without a valuation allowance
              
              $
              -
              
              $
              -Impaired
                  loans with valuation allowances of $105 and $35,
                  respectively
              
              $
              703
              
              $
              232Average
                  investment in impaired loans for the period
              
              $
              468
              
              $
              323
  12
 *Index*
  **Summary
        of Loan Loss Experience.** ** An
        analysis of SouthCrest’s loan loss experience is included in the following table
        for the periods ended March 31, 2006 and 2005 (dollars in
        thousands):
 
 **2006**
              
              **2005**Balance
                  at beginning of period
              
              $
              3,477
              
              $
              3,161Charge-offsCommercial
                  loans
              
              
              -
              
              
              95Real
                  estate - construction
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              -
              
              
              -Consumer
              
              
              66
              
              
              3Other
              
              
              36
              
              
              80Total
                  charge-offs
              
              
              102
              
              
              178RecoveriesCommercial
                  loans
              
              
              -
              
              
              -Real
                  estate - construction
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              4
              
              
              2Consumer
              
              
              96
              
              
              52Other
              
              
              42
              
              
              50Total
                  recoveries
              
              
              142
              
              
              104Net
                  (charge-offs) recoveries
              
              
              40
              
              
              (74
              )Additions
                  charged to operations
              
              
              108
              
              
              121Balance
                  at end of period
              
              $
              3,625
              
              $
              3,208Annualized
                  ratio of net charge-offs (recoveries) during the period to average
                  loans
                  outstanding during the period
              
              
              (0.06
              %)
              
              0.13
              %
  **Allowance
        for Loan Losses.** The
        allowance for loan losses as of March 31, 2006 was $3,625,000 compared to
        $3,477,000 at December 31, 2005 and $3,208,000 at March 31, 2005. As a
        percentage of gross loans, the allowance for loan losses was 1.30% at March
        31,
        2006 compared to 1.26% as of December 31, 2005 and 1.38% at March 31, 2005.
        The provision for loan losses during the three-month period ended March 31,
        2006
        of $108,000 was the result of management's assessment of risks inherent in
        the
        loan portfolio. Management’s estimate of the allowance for loan losses 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, which may also include
        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 the factors noted above as well as changes in the trends of net charge-offs,
        past due loans, and general economic conditions of the markets served by
        the
        Company’s subsidiary banks.
  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 of the allowance will not be required.
  13
 *Index*
  **Results
        of Operations For The Three Months Ended March 31, 2006 and 2005**
  Net
        income for the three-month period ended March 31, 2006 amounted to $1,406,000,
        or $0.39 basic and diluted earnings per share, compared to net income of
        $819,000 or $0.23 basic and diluted earnings per share for the same three-month
        period in 2005, an increase of $587,000.
  **Net
        Interest Income** *.* Net
        interest income represents the difference between interest received on interest
        earning assets and interest paid on interest bearing liabilities. The following
        presents, for the three month periods ended March 31, 2006 and 2005, the
        main
        components of interest earning assets and interest bearing liabilities and
        related interest income and expense and effective yields and cost of funds.
  Average
        Consolidated Balance Sheets and Net Interest Income Analysis
 For
        the
        Three Month Periods Ended March 31,
 *(Dollars
        in thousands)*
 
 Average
                  Balances (1)
              
              Yields
                  / Rates
              
              Income
                  / Expense
              
              Increase2006
              
              2005
              
              2006
              
              2005
              
              2006
              
              2005
              
              (Decrease)**Assets**Loans,
                  including fee income
              
              $
              276,079
              
              $
              228,871
              
              
              7.63
              %
              
              6.97
              %
              $
              5,191
              
              $
              3,935
              
              $
              1,256Taxable
                  securities
              
              
              113,756
              
              
              119,350
              
              
              4.37
              %
              
              4.32
              %
              
              1,225
              
              
              1,272
              
              
              (47
              )Nontaxable
                  securities
              
              
              11,662
              
              
              12,892
              
              
              4.00
              %
              
              3.93
              %
              
              115
              
              
              125
              
              
              (10
              )Federal
                  funds sold
              
              
              6,925
              
              
              13,184
              
              
              5.91
              %
              
              2.46
              %
              
              101
              
              
              80
              
              
              21Interest
                  bearing deposits in banks
              
              
              3,435
              
              
              5,022
              
              
              4.49
              %
              
              2.66
              %
              
              38
              
              
              33
              
              
              5Total
                  earning assets
              
              
              411,857
              
              
              379,319
              
              
              6.57
              %
              
              5.82
              %
              
              6,670
              
              
              5,445
              
              
              1,225Cash
                  and due from banks
              
              
              12,605
              
              
              11,495Allowance
                  for loan losses
              
              
              (3,555
              )
              
              (3,183
              )Other
                  assets
              
              
              27,493
              
              
              26,004Total
              
              $
              448,400
              
              $
              413,635**Liabilities
                  and Equity**Interest
                  bearing demand(2)
              
              $
              113,160
              
              $
              114,843
              
              
              1.41
              %
              
              0.87
              %
              $
              393
              
              $
              245
              
              $
              148Savings
              
              
              35,846
              
              
              36,113
              
              
              0.59
              %
              
              0.49
              %
              
              52
              
              
              44
              
              
              8Certificates
                  of deposit
              
              
              166,432
              
              
              149,473
              
              
              3.57
              %
              
              2.73
              %
              
              1,464
              
              
              1,005
              
              
              459Total
                  interest bearing deposits
              
              
              315,438
              
              
              300,429
              
              
              2.45
              %
              
              1.75
              %
              
              1,909
              
              
              1,294
              
              
              615Borrowed
                  funds
              
              
              15,236
              
              
              371
              
              
              4.79
              %
              
              5.47
              %
              
              180
              
              
              5
              
              
              175Total
                  interest bearing liabilities
              
              
              330,674
              
              
              300,800
              
              
              2.56
              %
              
              1.75
              %
              
              2,089
              
              
              1,299
              
              
              790Noninterest
                  bearing demand deposits
              
              
              60,630
              
              
              57,282Other
                  liabilities
              
              
              2,153
              
              
              4,112Redeemable
                  common stock held by ESOP
              
              
              980
              
              
              475Shareholders'
                  equity
              
              
              53,963
              
              
              50,966Total
              
              $
              448,400
              
              $
              413,635Net
                  interest income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,581
              
              $
              4,146
              
              $
              435Net
                  interest yield on earning assets
              
              
              
              
              
              
              
              
              4.51
              %
              
              4.43
              %Net
                  interest spread
              
              
              
              
              
              
              
              
              4.01
              %
              
              4.07
              %
  (1)
              Daily
                  averages. Loans includes nonaccrual
                  loans.
 (2)
              Includes
                  money market accounts
  14
 *Index*
  Net
        interest income for the three months ended March 31, 2006 increased $435,000
        or
        10.5% over the same period in 2005. The primary reason for the increase in
        net
        interest income is the growth in the average balance of the loan portfolio
        of
        $47.2 million for the quarter ended March 31, 2006 compared to the same period
        in 2005. This growth, along with an increase in the average yield on loans
        from
        6.97% in 2005 to 7.63% in 2006, resulted in interest income increasing $1.3
        million in 2006 over 2005. Increases in the prime interest rate, resulting
        from
        Federal Reserve increases in the discount rate, contributed to the increase
        in
        the loan yield for the 2006 period compared to 2005. Average yield on earning
        assets increased 75 basis points to 6.57%. The portion of total earning assets
        comprised by loans increased from 60.3% for the 2005 period to 67.0% for
        2006.
        This change in the mix of our earning assets contributed to the increase
        in the
        average yield on earning assets as loans earn a higher rate of interest than
        investment securities and other earning assets.
  The
        average cost of funds increased 81 basis points to 2.56%. The Company has
        faced
        increased funding costs with the increasing interest rate environment. The
        increased funding cost is the result of higher rates paid for federal funds
        purchased and Federal Home Loan Bank advances resulting from increases in
        the
        Federal Reserve discount rate, and higher rates paid for deposit accounts
        due to
        competition from other banks for such funds.
  These
        changes resulted in the net yield on earning assets increasing from 4.43%
        for
        the quarter ended March 31, 2005 to 4.51% for the same period in 2006. The
        net
        interest spread decreased from 4.07% in 2005 to 4.01% in 2006.
  **Other
        Income** *.* Total
        other income for the three-month period ended March 31, 2006 amounted to
        $1,175,000, compared to $520,000 for the same period in 2005, an increase
        of
        $655,000. This increase is principally due to an impairment charge recorded
        in
        the first quarter of 2005 in the amount of $600,000 on $2.5 million of Federal
        Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage
        Association (“Fannie Mae”) perpetual preferred stock. The reclassification of an
        unrealized mark-to-market loss on these securities to an other-than-temporary
        charge was based upon a detailed impairment analysis of these securities.
        Previous losses on the securities were recognized in the equity section of
        the
        balance sheet. The Company’s conclusion considered the duration and severity of
        the unrealized loss, the financial condition and near-term prospects of the
        issuers, and the likelihood of the market value of these instruments increasing
        to our initial cost basis within a reasonable period of time. Excluding the
        impairment charge, other income would have increased $55,000 over the same
        period last year.
  The
        gain
        on sale of loans was $34,000 compared to $39,000 a year ago. Upson originated
        and sold mortgage loans totaling $2.8 million during the first quarter of
        2006
        without recourse compared with 3.0 million for the first quarter of 2005.
        Service charges on deposit accounts were $844,000 for the year to date period
        in
        2006 compared to $760,000 for 2005, an increase of $84,000, or 11.1%. The
        primary component of this increase was a $65,000 increase in overdraft and
        NSF
        fee income. Other service charges and fees increased $18,000 or 10.3% to
        $193,000.
  **Other
        Expenses.** Other
        expenses for the three-month period ended March 31, 2006 amounted to $3,552,000
        compared to $3,401,000 for the same period in 2004, an increase of $151,000
        or
        4.4%. The largest component of other expenses is salaries and employee benefits,
        which grew $247,000, or 14.6% to $1,942,000. During 2006, the Company has
        recorded increased incentive compensation of $62,000, increased compensation
        expense of approximately $40,000 related to additional loan officers relating
        to
        the Company’s emphasis on loan origination and other business development, and
        increased benefit costs of $37,000.
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R “Share-Based Payment.” SFAS
        No. 123R requires recognition of the cost of employee services received in
        exchange for an award of equity instruments in the financial statements over
        the
        period the employee is required to perform the services in exchange for the
        award (presumptively the vesting period). The Company adopted SFAS No. 123R
        using the modified prospective application as permitted under SFAS No. 123R.
        Accordingly, prior period amounts have not been restated. Under this
        application, the Company is required to record compensation expense for all
        awards granted after the date of adoption and for the unvested portion of
        previously granted awards that remain outstanding at the date of adoption.
        Prior
        to the adoption of SFAS No. 123R, the Company used the intrinsic value method
        as
        prescribed by APB No. 25 and thus recognized no compensation expense for
        options
        granted with exercise prices equal to the fair market value of the Company’s
        common stock on the date of grant. The compensation cost that was charged
        against income for our stock option plans was $23,770 for the three months
        ended
        March 31, 2006. No options were outstanding at or for the three months ended
        March 31, 2005. The total compensation cost related to nonvested awards not
        yet
        recognized at March 31, 2006 is $451,640 which will be recognized over the
        weighted average period of approximately 4.75 years. See “Note 3 - Stock
        Compensation Plans” in the notes to condensed consolidated financial statements
        for further information.
  Amortization
        of intangibles declined $137,000, or 39.7% due to reductions in the amount
        of
        scheduled amortization of the core deposit intangible asset recorded in
        connection with the merger with First Polk Bankshares, Inc. Equipment and
        occupancy expenses increased $13,000 or 3.5%, while other operating expenses
        increased $28,000, or 2.8%.
  15
 *Index*
  **Income
        Taxes.** The
        Company recorded income taxes totaling $690,000 and $325,000 for the three-month
        periods ending March 31, 2006 and 2005, respectively. Effective tax rates
        for
        the periods were 32.9% and 28.4%, respectively. Tax-exempt interest income
        and
        income on bank-owned life insurance are the primary reasons that the Company’s
        effective tax rate is less than the statutory tax rate of 34%. The reason
        for
        the increase in the effective tax rate from 2005 to 2006 is the result of
        approximately $37,000 in certain state income tax credits which the Company
        was
        able to utilize in 2005.
  **Liquidity
        and Capital Resources**
 
 Liquidity
        is our ability to meet deposit withdrawals immediately while also providing
        for
        the credit needs of our customers. We monitor our liquidity resources on
        an
        ongoing basis. State and Federal regulatory authorities also monitor our
        liquidity on a periodic basis. As of March 31, 2006, we believe our liquidity,
        as determined under guidelines established by regulatory authorities and
        internal policies, was satisfactory.
 
 If
        needed, we have the ability on a short-term basis to borrow and purchase
        Federal
        funds from other financial institutions. At March 31, 2006, we had available
        to
        us additional federal funds lines of credit totaling $18.7 million in place
        with
        three banks a $26.8 million of available funds on our line of credit with
        the
        Federal Home Loan Bank of Atlanta.
 
 At
        March
        31, 2006, our capital ratios were adequate based on regulatory minimum capital
        requirements. The minimum capital requirements and the actual capital ratios
        on
        a consolidated and bank-only basis are as follows:
 
 Minimum
                  Required
              
              Minimum
                  Required to be Well Capitalized
              
              Consolidated
              
              Upson
              
              PolkRisk-based
                  capital ratiosTotal
                  risk based capital
              
              
              8.00
              %
              
              10.00
              %
              
              17.07
              %
              
              14.85
              %
              
              21.79
              %Tier
                  1
              
              
              4.00
              %
              
              6.00
              %
              
              15.88
              %
              
              13.71
              %
              
              20.54
              %Tier
                  1 leverage ratio
              
              
              4.00
              %
              
              5.00
              %
              
              10.91
              %
              
              9.94
              %
              
              12.67
              %
 
 These
        ratios may decline as asset growth continues, but are expected to continue
        to
        exceed minimum regulatory requirements.
  In
        the
        second quarter of 2005, Bank of Upson began a project to rebuild its main
        office
        in Thomaston, Georgia. This project will replace substantially all of its
        current facility, increasing its size from 16,000 to 26,000 square feet.
        Management expects that the first phase of construction will be completed
        in the
        second quarter at a cost of approximately $3.3 million, with the final phase
        to
        be completed in the fourth quarter of 2006. Total cost of the project is
        expected to be between $5.25 million and $5.75 million. Through March 31,
        2006,
        approximately $2.9 million had been disbursed for the project.
  In
        November, 2004 Upson opened a new full-service branch office in Fayetteville,
        Fayette County, Georgia operating under the name of “SouthCrest Bank.” The
        branch is located in a leased facility and is subject to a five-year lease.
 
 Other
        than the items described above, we are not aware of any trends, demands,
        commitments, events or uncertainties that will result, or are reasonably
        likely
        to result, in our liquidity increasing or decreasing in any material
        way.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        are a
        party to financial instruments with off-balance sheet risk in the normal
        course
        of business to meet the financing needs of our customers. These financial
        instruments include commitments to extend credit and standby letters of credit.
        Such commitments involve, to varying degrees, elements of credit risk and
        interest rate risk in excess of the amount recognized in the balance sheets.
 
 Our
        exposure to credit loss in the event of nonperformance by the other party
        to the
        financial instrument for commitments to extend credit and standby letters
        of
        credit is represented by the contractual amount of those instruments. We
        use the
        same credit policies in making commitments and conditional obligations as
        we do
        for on-balance sheet instruments. A summary of our commitments as of March
        31,
        2006 and December 31, 2005 are as follows (dollars in thousands):
  16
 *Index*
 
 *(dollars
                  in thousands)*
              
              **March
                  31, 2006**
              
              December
                  31, 2005Commitments
                  to extend credit
              
              **$**
              **30,750**
              
              $
              36,529Credit
                  card commitments
              
              
              **9,052**
              
              
              8,329Commercial
                  letters of credit
              
              
              **742**
              
              
              272**$**
              **40,544**
              
              $
              45,130
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Since many of the
        commitments are expected to expire without being drawn upon, the total
        commitment amounts do not necessarily represent future cash requirements.
 
 Commercial
        letters of credit are conditional commitments issued by us to guarantee the
        performance of a customer to a third party. Those letters of credit are
        primarily issued to support public and private borrowing arrangements. The
        credit risk involved in issuing letters of credit is essentially the same
        as
        that involved in extending loans to customers. Collateral is required in
        instances which we deem necessary.
  **ITEM
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
  Pursuant
        to Instruction 1 to Item 305(c) of Regulation S-K, no response to this item
        is
        required until after December 31, 2006.
  **ITEM
        4. Controls and Procedures**
  As
        of the
        end of the period covered by this Quarterly Report on Form 10-Q, our principal
        executive officer and principal financial officer have evaluated the
        effectiveness of our “disclosure controls and procedures” (“Disclosure
        Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
        Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
        designed with the objective of ensuring that information required to be
        disclosed in our reports filed under the Exchange Act, such as this Quarterly
        Report, is recorded, processed, summarized and reported within the time periods
        specified in the Securities and Exchange Commission’s rules and forms.
        Disclosure Controls are also designed with the objective of ensuring that
        such
        information is accumulated and communicated to our management, including
        the CEO
        and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
 Our
        management, including the CEO and CFO, does not expect that our Disclosure
        Controls will prevent all error and all fraud. A control system, no matter
        how
        well conceived and operated, can provide only reasonable, not absolute,
        assurance that the objectives of the control system are met. Further, the
        design
        of a control system must reflect the fact that there are resource constraints,
        and the benefits of controls must be considered relative to their costs.
        Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, within the company have been detected. These inherent limitations
        include the realities that judgments in decision-making can be faulty, and
        that
        breakdowns can occur because of simple error or mistake. The design of any
        system of controls also is based in part upon certain assumptions about the
        likelihood of future events, and there can be no assurance that any design
        will
        succeed in achieving its stated goals under all potential future conditions.
 
 Based
        upon their controls evaluation, our CEO and CFO have concluded that our
        Disclosure Controls are effective at a reasonable assurance level.
 
 There
        have been no changes in our internal controls over financial reporting during
        our first fiscal quarter that have materially affected, or are reasonably
        likely
        to materially affect, our internal control over financial
        reporting.
 ****
 **PART
        II - OTHER INFORMATION**
 
 **Item
                  1.**
              **Legal
                  Proceedings**
 
 The
        Company and its subsidiaries are subject to claims and suits arising in the
        ordinary course of business. In the opinion of management, the ultimate
        resolution of these pending claims and legal proceedings will not have a
        material adverse effect on the Company’s results of operations.
  17
 *Index*
  **Item1A.**
              **Risk
                  Factors**
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in Part I, "Item 1. Business" under the heading
        "Risk Factors" in our Annual Report on Form 10-KSB for the year ended December
        31, 2005, which could materially affect our business, financial condition
        or
        future results. The risks described in our Annual Report on Form 10-KSB are
        not
        the only risks facing our Company. Additional risks and uncertainties not
        currently known to us or that we currently deem to be immaterial also may
        materially adversely affect our business, financial condition and/or operating
        results.
  **Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
 
 The
        Company made no repurchases of its common stock during the quarter ended
        March
        31, 2006.
 
 **Item
                  3.**
              **Defaults
                  upon Senior Securities**
 
 None.
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
 
 None
 
 **Item
                  5.**
              **Other
                  Information**
 
 None.
 
 **Item6.**
              **Exhibits**
 
 Exhibits
 
 Exhibit
                  No. 31.1
              Chief
                  Executive Officer Certification Pursuant to Rule
                  13a-14(a)/15d-14(a)
 
 Exhibit
                  No. 31.2
              Chief
                  Financial Officer Certification Pursuant to Rule
                  13a-14(a)/15d-14(a)
 
 Exhibit
                  No. 32.1
              Chief
                  Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
                  as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002
 
 Exhibit
                  No. 32.2
              Chief
                  Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
                  as
                  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002
  18
 *Index*
 
 **SIGNATURES**
 
 In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 SOUTHCREST
          FINANCIAL GROUP, INC .
 (Registrant)
 
 DATE:
                  May 15, 2006
              
              BY:
              /s/
                  Larry T. KuglarLarry
                  T. Kuglar.President
                  and Chief Executive OfficerDATE:
                  May 15, 2006
              
              BY:
              /s/
                  Douglas J. HerthaDouglas
                  J. HerthaSenior
                  Vice President, Chief Financial Officer
 
 19