U.S.
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  ___________________________
 
 FORM
10-Q
  ___________________________
 
 T
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the quarterly period ended  June 30, 2008
  £
              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  T No  £
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
      accelerated filer  £
              Accelerated
      filer  £
              Non-accelerated
      filer  £
              Smaller
      reporting company T
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
 
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of August 14, 2008: 3,931,328.







SouthCrest Financial Group, Inc.
 And
Subsidiaries
  INDEX
  
  PagePart
      I.
              
              FINANCIAL INFORMATIONItem
      1.
              Condensed Consolidated Financial
    StatementsCondensed Consolidated Balance Sheets – June 30, 2008 and
      December 31, 2007
              1Condensed Consolidated Statements of Income  - Three
      and Six Months Ended June 30, 2008 and 2007
              2Condensed Consolidated Statements of Comprehensive Income
      (Loss) - Three and Six Months Ended June 30, 2008 and
    2007
              3Condensed Consolidated Statement of Stockholders' Equity –
      Six  Months Ended June 30, 2008
              4Condensed Consolidated Statements of Cash Flows – Six Months
      Ended June 30, 2008 and 2007
              5Notes to Condensed Consolidated Financial
      Statements
              7Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              13Item
      3.
              Quantitative and Qualitative  Disclosures about
      Market Risk
              23Item
      4.
              Controls and Procedures
              23Part
      II.
              
              OTHER INFORMATION
              23Item
      1.
              Legal Proceedings
              23Item
      1A.
              Risk factors.
              23Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              23Item
      3.
              Defaults Upon Senior Securities
              23Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              24Item
      5.
              Other Information
              24Item
      6.
              Exhibits
              24Signatures
              25
 
 Index
 
 PART I - FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 
 SouthCrest Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Balance Sheets
 June
30, 2008 and December 31, 2007
 (Unaudited)
 (In
thousands, except share and per share data)
 
 June 30,
              
              
              December31,Assets
              
              2008
              
              
              
              2007*Cash
      and due from banks
              
              $
              16,690
              
              
              $
              16,060Interest-bearing
      deposits at other financial institutions
              
              
              15,909
              
              
              
              10,637Federal
      funds sold
              
              
              8,740
              
              
              
              9,316Securities
      available for sale
              
              
              92,556
              
              
              
              79,208Securities
      held to maturity (fair value $44,404 and $58,632)
              
              
              42,899
              
              
              
              58,885Restricted
      equity securities, at cost
              
              
              1,742
              
              
              
              2,008Loans
      held for sale
              
              
              222
              
              
              
              229Loans,
      net of unearned income
              
              
              382,490
              
              
              
              373,825Less
      allowance for loan losses
              
              
              6,206
              
              
              
              4,952Loans,
      net
              
              
              376,284
              
              
              
              368,873Bank-owned
      life insurance
              
              
              16,651
              
              
              
              16,302Premises
      and equipment, net
              
              
              19,301
              
              
              
              18,093Goodwill
              
              
              14,255
              
              
              
              14,255Intangible
      assets, net
              
              
              4,355
              
              
              
              4,792Other
      assets
              
              
              8,502
              
              
              
              7,351Total
      assets
              
              $
              618,106
              
              
              $
              606,009Liabilities,
      Redeemable Common Stock, and Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
              
              $
              81,590
              
              
              $
              80,685Interest-bearing
              
              
              447,138
              
              
              
              433,246Total
      deposits
              
              
              528,728
              
              
              
              513,931Short-term
      borrowed funds
              
              
              -
              
              
              
              3,055Long-term
      borrowed funds
              
              
              6,555
              
              
              
              6,555Other
      liabilities
              
              
              10,190
              
              
              
              9,656Total
      liabilities
              
              
              545,473
              
              
              
              533,197Commitments
      and contingenciesRedeemable
      common stock held by ESOP
              
              
              1,022
              
              
              
              1,091Stockholders'
      equity:Common
      stock, par value $1; 10,000,000 shares authorized, 3,931,528
      issued
              
              
              3,932
              
              
              
              3,932Additional
      paid-in capital
              
              
              49,760
              
              
              
              49,707Retained
      earnings
              
              
              18,447
              
              
              
              17,881Unearned
      compensation - ESOP
              
              
              (326
              )
              
              
              (349
              )Accumulated
      other comprehensive income (loss)
              
              
              (202
              )
              
              
              550Total
      stockholders' equity
              
              
              71,611
              
              
              
              71,721Total
      liabilities, redeemable common stock, and stockholders'
    equity
              
              $
              618,106
              
              
              $
              606,009
 
 See
Notes to Condensed Consolidated Financial Statements.
 *
Derived from audited consolidated financial statements.
 
 1
 Index
 
 SouthCrest Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Income
 For
The Three and Six Months Ended June 30, 2008 and 2007
 (Unaudited)
 (In
thousands, except share and per share data)
 
 Three Months
              
              
              Six Months2008
              
              
              2007
              
              
              2008
              
              
              2007Interest
      income:Loans
              
              $
              6,802
              
              
              $
              6,985
              
              
              $
              14,173
              
              
              $
              13,814Securities
      - taxable
              
              
              1,348
              
              
              
              1,325
              
              
              
              2,742
              
              
              
              2,642Securities
      - nontaxable
              
              
              229
              
              
              
              175
              
              
              
              458
              
              
              
              353Federal
      funds sold
              
              
              80
              
              
              
              109
              
              
              
              216
              
              
              
              257Interest-bearing
      deposits at other banks
              
              
              126
              
              
              
              90
              
              
              
              250
              
              
              
              173Total
      interest income
              
              
              8,585
              
              
              
              8,684
              
              
              
              17,839
              
              
              
              17,239Interest
      expense:Deposits
              
              
              3,250
              
              
              
              3,127
              
              
              
              6,832
              
              
              
              6,218Other
      borrowings
              
              
              74
              
              
              
              90
              
              
              
              208
              
              
              
              186Total
      interest expense
              
              
              3,324
              
              
              
              3,217
              
              
              
              7,040
              
              
              
              6,404Net
      interest income
              
              
              5,261
              
              
              
              5,467
              
              
              
              10,799
              
              
              
              10,835Provision
      for loan losses
              
              
              1,115
              
              
              
              77
              
              
              
              1,470
              
              
              
              226Net
      interest income after provision for loan losses
              
              
              4,146
              
              
              
              5,390
              
              
              
              9,329
              
              
              
              10,609Other
      income:Service
      charges on deposit accounts
              
              
              1,005
              
              
              
              920
              
              
              
              1,962
              
              
              
              1,735Other
      service charges and fees
              
              
              408
              
              
              
              345
              
              
              
              803
              
              
              
              617Net
      gain on sale of loans
              
              
              107
              
              
              
              110
              
              
              
              220
              
              
              
              238Net
      gain on sale and call of securities
              
              
              29
              
              
              
              -
              
              
              
              119
              
              
              
              -Income
      on bank-owned life insurance
              
              
              169
              
              
              
              133
              
              
              
              349
              
              
              
              260Other
      operating income
              
              
              123
              
              
              
              117
              
              
              
              309
              
              
              
              254Total
      other income
              
              
              1,841
              
              
              
              1,625
              
              
              
              3,762
              
              
              
              3,104Other
      expenses:Salaries
      and employee benefits
              
              
              2,903
              
              
              
              2,538
              
              
              
              5,743
              
              
              
              4,953Equipment
      and occupancy expenses
              
              
              615
              
              
              
              489
              
              
              
              1,209
              
              
              
              956Amortization
      of intangibles
              
              
              273
              
              
              
              254
              
              
              
              541
              
              
              
              498Other
      operating expenses
              
              
              1,471
              
              
              
              1,407
              
              
              
              2,901
              
              
              
              2,638Total
      other expenses
              
              
              5,262
              
              
              
              4,688
              
              
              
              10,394
              
              
              
              9,045Income
      before income taxes
              
              
              725
              
              
              
              2,327
              
              
              
              2,697
              
              
              
              4,668Income
      tax expense
              
              
              118
              
              
              
              728
              
              
              
              685
              
              
              
              1,464Net
      income
              
              $
              607
              
              
              $
              1,599
              
              
              $
              2,012
              
              
              $
              3,204Basic
      and diluted earnings per share
              
              $
              0.16
              
              
              $
              0.40
              
              
              $
              0.51
              
              
              $
              0.81Dividends
      per share
              
              $
              0.13
              
              
              $
              0.13
              
              
              $
              0.26
              
              
              $
              0.26Average
      shares outstanding - basic and diluted
              
              
              3,916,358
              
              
              
              3,952,328
              
              
              
              3,916,003
              
              
              
              3,952,328
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 2
 Index
 
 SouthCrest Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Comprehensive Income (Loss)
 For
The Three and Six Months Ended June 30, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 Three Months
              
              
              Six Months2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income
              
              $
              607
              
              
              $
              1,599
              
              
              $
              2,012
              
              
              $
              3,204Other
      comprehensive income (loss):Unrealized
      holding losses on securities available for sale arising during the period,
      net of taxes of  $(725), $(121), $(514), and
    $(56)
              
              
              (1,165
              )
              
              
              (195
              )
              
              
              (826
              )
              
              
              (90
              )Reclassification
      adjustment for gains included in net income, net of tax of $11, $-0-, $45
      and $-0-
              
              
              18
              
              
              
              -
              
              
              
              74
              
              
              
              -Comprehensive
      income (loss)
              
              $
              (540
              )
              
              $
              1,404
              
              
              $
              1,260
              
              
              $
              3,114
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 3
 Index
 
 SouthCrest Financial Group, Inc.
 And
Subsidiaries
 Consolidated
Statements of Stockholders' Equity
 For
The Six Months Ended June 30, 2008
 (Unaudited)
 (In
thousands, except share and per share data)
 
 AccumulatedAdditional
              
              
              
              
              
              Other
              
              
              Unearned
              
              
              TotalCommon Stock
              
              
              Paid-In
              
              
              Retained
              
              
              Comprehensive
              
              
              Compensation
              
              
              Stockholders'Shares
              
              
              Par
              
              
              Capital
              
              
              Earnings
              
              
              Income (Loss)
              
              
              (ESOP)
              
              
              EquityBalance,
      December 31, 2007
              
              
              3,931,528
              
              
              $
              3,932
              
              
              $
              49,707
              
              
              $
              17,881
              
              
              $
              550
              
              
              $
              (349
              )
              
              $
              71,721Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,012
              
              
              
              -
              
              
              
              -
              
              
              
              2,012Adjustment
      resulting from adoption of EITF Issue 06-4
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (493
              )
              
              
              -
              
              
              
              -
              
              
              
              (493
              )Cash
      dividends declared,$.13 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,022
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,022
              )Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              53
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              53Adjustment
      for shares owned by ESOP
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              69
              
              
              
              -
              
              
              
              -
              
              
              
              69ESOP
      Payment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              23
              
              
              
              23Other
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (752
              )
              
              
              -
              
              
              
              (752
              )Balance,
      June 30, 2008
              
              
              3,931,528
              
              
              $
              3,932
              
              
              $
              49,760
              
              
              $
              18,447
              
              
              $
              (202
              )
              
              $
              (326
              )
              
              $
              71,611
 
 4
 Index
 
 SouthCrest Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 For
The Six Months Ended June 30, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 2008
              
              
              2007OPERATING
      ACTIVITIESNet
      income
              
              $
              2,012
              
              
              $
              3,204Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
              
              
              602
              
              
              
              509Amortization
      of intangibles
              
              
              541
              
              
              
              498Other
      amortization
              
              
              (15
              )
              
              
              120Provision
      for loan losses
              
              
              1,470
              
              
              
              226Stock
      compensation expense
              
              
              53
              
              
              
              53Deferred
      income taxes
              
              
              417
              
              
              
              (226
              )Income
      on bank-owned life insurance
              
              
              (349
              )
              
              
              (260
              )Gain
      on sales and calls of investment securities
              
              
              (119
              )
              
              
              -(Increase)
      decrease in interest receivable
              
              
              (633
              )
              
              
              56(Decrease)
      increase in income taxes payable
              
              
              (606
              )
              
              
              116Increase
      in interest payable
              
              
              206
              
              
              
              94Net
      gain on sale of loans
              
              
              (220
              )
              
              
              (238
              )Originations
      of mortgage loans held for sale
              
              
              (10,236
              )
              
              
              (6,685
              )Proceeds
      from sales of mortgage loans held for sale
              
              
              10,359
              
              
              
              6,919Decrease
      in other assets
              
              
              356
              
              
              
              254Increase
      in other liabilities
              
              
              441
              
              
              
              141Net
      cash provided by operating activities
              
              
              4,279
              
              
              
              4,781INVESTING
      ACTIVITIESProceeds
      from maturities of securities held to maturity
              
              
              21,166
              
              
              
              3,006Purchases
      of securities held to maturity
              
              
              (5,113
              )Purchases
      of securities available for sale
              
              
              (31,662
              )
              
              
              (10,918
              )Proceeds
      from maturities of securities available for sale
              
              
              17,194
              
              
              
              8,070Proceeds
      from sales of securities available for sale
              
              
              -
              
              
              
              1,003Proceeds
      from redemption of restricted equity securities
              
              
              266
              
              
              
              48Net
      increase in interest-bearing deposits in banks
              
              
              (5,272
              )
              
              
              (130
              )Net
      decrease in federal funds sold
              
              
              576
              
              
              
              11,709Net
      increase in loans
              
              
              (9,956
              )
              
              
              (1,509
              )Purchase
      of premises and equipment
              
              
              (1,810
              )
              
              
              (1,992
              )Proceeds
      from sale of other real estate owned
              
              
              288
              
              
              
              -Net
      cash provided by (used in) investing activities
              
              
              (14,323
              )
              
              
              9,287FINANCING
      ACTIVITIESNet
      increase (decrease) in deposits
              
              
              14,728
              
              
              
              (15,599
              )Repayments
      of short-term borrowed funds
              
              
              (3,055
              )
              
              
              (55
              )Net
      increase in federal funds purchased
              
              
              -
              
              
              
              504Leveraged
      ESOP Transaction
              
              
              23
              
              
              
              -Dividends
      paid
              
              
              (1,022
              )
              
              
              (1,028
              )Net
      cash provided by (used in) financing activities
              
              
              10,674
              
              
              
              (16,178
              )Net
      increase (decrease) in cash and due from banks
              
              
              630
              
              
              
              (2,110
              )Cash
      and cash equivalents at beginning of year
              
              
              16,060
              
              
              
              16,926Cash
      and cash equivalents at end of period
              
              $
              16,690
              
              
              $
              14,816
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 5
 Index
 
 SouthCrest
Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (continued)
 For
The Six Months Ended June 30, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 2008
              
              
              2007SUPPLEMENTAL
      DISCLOSURESCash
      paid for:Interest
              
              $
              3,922
              
              
              $
              6,310Income
      taxes
              
              
              1,406
              
              
              
              1,416NONCASH
      TRANSACTIONSPrincipal
      balances of loans transferred to other real estate owned
              
              $
              1,451
              
              
              $
              296Increase
      in mortgage servicing rights
              
              
              104
              
              
              
              142Decrease
      in redeemable common stock held by ESOP
              
              
              (69
              )
              
              
              (65
              )Unrealized
      loss on securities available for sale, net
              
              
              (752
              )
              
              
              (90
              )
 
 See
Notes to Condensed Consolidated Financial Statements.
 
 6
 Index
 
 SouthCrest Financial Group, Inc.andSubsidiaries
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 
 NOTE 1 — NATURE OF
BUSINESSANDBASIS 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”), The First National Bank of
Polk County (“FNB Polk”), Peachtree Bank (“Peachtree”), and Bank of
Chickamauga (“Chickamauga”).  All of the subsidiary banks
(collectively, the “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 seven branches located in
Thomaston, Fayetteville, Tyrone 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 the market
area of Polk County.  Peachtree is headquartered in Maplesville,
Chilton County, Alabama with one branch in Maplesville and another in Clanton,
Alabama.  Chickamauga is headquartered in Chickamauga,
Walker County, Georgia where it maintains two branches.
 
 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 notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three and
six month periods ended June 30, 2008 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2008. For
further information, refer to the financial statements and notes included in the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 2007 included in the Company’s annual report on Form 10-K
(Registration No. 000-51287).
 
 The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Bank of Upson,  The First National Bank of
Polk County, Peachtree Bank, and Bank of Chickamauga.  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 – EARNINGSPERCOMMON
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.
 
 At June
30, 2008 and 2007, the Company had 191,400 and 183,500 options outstanding under
the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan.  For
the three and six month periods ended June 30, 2008 and 2007, these options were
nondilutive.   The Company’s ESOP has a loan from the holding
company secured by 15,880 shares of Company stock which have not been allocated
to participant accounts and are therefore not considered outstanding for
purposes of computing earnings per share.  The weighted average number
of shares outstanding for purposes of computing earnings per share was 3,916,358
and 3,952,328 for the three months ended June 30, 2008 and 2007, and 3,916,003
and 3,952,328 for the six months ended June 30, 2008 and 2007.
 
 7
 Index
 
 NOTE3— LOANS
RECEIVABLE
 
 The
composition of loans at June 30, 2008 and December 31, 2007 is summarized as
follows:
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Commercial,
      financial, and agricultural
              
              $
              20,216
              
              
              $
              22,595Real
      estate – construction
              
              
              71,186
              
              
              
              66,069Real
      estate – mortgage
              
              
              246,398
              
              
              
              241,316Consumer
              
              
              37,676
              
              
              
              38,834Other
              
              
              7,128
              
              
              
              5,162382,604
              
              
              
              373,976Unearned
      income
              
              
              (114
              )
              
              
              (151
              )Allowance
      for loan losses
              
              
              (6,206
              )
              
              
              (4,952
              )Loans,
      net
              
              $
              376,284
              
              
              $
              368,873
 
 Changes
for the six months ended in the allowance for loan losses are as
follows:
 
 June 30,
              
              
              June30,(Dollars
      in thousands)
              
              2008
              
              
              2007Balance,
      beginning of year
              
              $
              4,952
              
              
              $
              4,480Provision
      for loan losses
              
              
              1,470
              
              
              
              226Loans
      charged off
              
              
              (506
              )
              
              
              (344
              )Recoveries
      of loans previously charged off
              
              
              290
              
              
              
              312Balance,
      end of period
              
              $
              6,206
              
              
              $
              4,674
 
 The
following is a summary of information pertaining to impaired loans:
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Impaired
      loans without a valuation allowance
              
              $
              -
              
              
              $
              -Impaired
      loans with a valuation allowance
              
              
              11,113
              
              
              
              1,633Total
      impaired loans
              
              $
              11,113
              
              
              $
              1,633Valuation
      allowance related to impaired loans
              
              $
              1,173
              
              
              $
              245Average
      investment in impaired loans
              
              $
              3,702
              
              
              $
              507
 
 There
were $11,113,000 and $1,633,000 loans on nonaccrual status at June 30, 2008 and
December 31, 2007.  Loans of $912,000 and $247,000 were past due
ninety days or more and still accruing interest at June 30, 2008 and December
31, 2007, respectively.
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Nonaccrual
      loans
              
              $
              11,113
              
              
              $
              1,633Loans
      past due 90 days or more and still accruing
              
              $
              912
              
              
              $
              247Loans
      restructured under troubled debt
              
              $
              -
              
              
              $
              -
 
 The
Company acquired certain loans for which there was, at acquisition, evidence of
deterioration of credit quality since the dates the loans were originated and
for which it was probable, at acquisition, that all contractually required
payments would not be collected.  Under the provisions of Statement of
Position 03-03, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (“SOP 03-03”), at the acquisition date
these loans were recorded at a carrying value of $376,000, which was net of a
nonaccretable adjustment of $183,000.  At June 30, 2008, the carrying
value for these loans had been reduced to $275,000 as a result of cash payments
by the borrowers, chargeoff, or foreclosure.
 
 8
 Index
 
 NOTE4—
DEPOSITS
 
 At June
30, 2008 and December 31, 2007, deposits were as follows:
 
 June 30,
              
              
              December31,(Dollars
      In Thousands)
              
              2008
              
              
              2007Noninterest
      bearing deposits
              
              $
              81,590
              
              
              $
              80,685Interest
      checking
              
              
              90,909
              
              
              
              83,742Money
      market
              
              
              58,222
              
              
              
              55,687Savings
              
              
              44,847
              
              
              
              41,997Certificates
      of deposit
              
              
              253,160
              
              
              
              251,820$
              528,728
              
              
              $
              513,931
 
 NOTE5— NEW ACCOUNTING
PRONOUNCEMENTS
 
 In
September 2006, the FASB ratified EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. EITF Issue 06-4 addresses accounting for split-dollar life
insurance arrangements after the employer purchases a life insurance policy on
the covered employee. This Issue states that an obligation arises as a result of
a substantive agreement with an employee to provide future postretirement
benefits. Under Issue EITF 06-4, the obligation is not settled upon entering
into an insurance arrangement. Since the obligation is not settled, a liability
should be recognized in accordance with applicable authoritative guidance. Issue
EITF 06-4 is effective for fiscal years beginning after December 15, 2007. In
adopting EITF Issue 06-4, the Company recorded a liability of $493,000 as of
January 1, 2008 with a corresponding offset against retained earnings, and in
the three months and six months ended June 30, 2008 recorded compensation
expense of approximately $25,000 and $50,000, respectively, relating to these
obligations.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair ValueOption for Financial Assets and
Liabilities.  SFAS No. 159 allows an entity to elect to measure
certain financial assets and liabilities at fair value with changes in fair
value recognized in the income statement each period.  The statement
also requires additional disclosures to identify the effects of an entity’s fair
value election on its earnings.  The Company adopted SFAS No. 159 on
January 1, 2008, with no material impact on the financial condition, results of
operations, or liquidity.   The Company did not elect fair value
for any assets or liabilities.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) will significantly change how entities apply the acquisition method
to business combinations. The most significant changes affecting how the Company
will account for business combinations under this Statement include: the
acquisition date will be date the acquirer obtains control; all (and only)
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in the acquiree will be stated at fair value on the acquisition date; assets or
liabilities arising from noncontractual contingencies will be measured at their
acquisition date fair value only if it is more likely than not that they meet
the definition of an asset or liability on the acquisition date; adjustments
subsequently made to the provisional amounts recorded on the acquisition date
will be made retroactively during a measurement period not to exceed one year;
acquisition-related restructuring costs that do not meet the criteria in SFAS
No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, will be expensed as
incurred; transaction costs will be expensed as incurred; reversals of deferred
income tax valuation allowances and income tax contingencies will be recognized
in earnings subsequent to the measurement period; and the allowance for loan
losses of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS No. 141(R) will require new and modified disclosures
surrounding subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward.
 
 The
Company will be required to prospectively apply SFAS No. 141(R) to all business
combinations completed on or after January 1, 2009. Early adoption is not
permitted. For business combinations in which the acquisition date was before
the effective date, the provisions of SFAS No. 141(R) will apply to the
subsequent accounting for deferred income tax valuation allowances and income
tax contingencies and will require any changes in those amounts to be recorded
in earnings. At June 30, 2008, the Company had no acquired deferred income tax
valuation allowances and income tax contingencies.  Management is
currently evaluating the effects that SFAS 141(R) will have on the
financial condition, results of operations, liquidity, and the disclosures that
will be presented in the consolidated financial statements.
 
 In
November 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings, which expressed the staff’s view that,
consistent with FASB Statement No. 156, Accounting for Servicing of
Financial Assets, and FASB Statement No. 159, The Fair Value Option of Financial
Assets and Financial Liabilities, the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings.  SAB No. 109 is effective for all written loan
commitments recorded at fair value that are entered into, or substantially
modified, in fiscal quarters beginning after December 15, 2007.  The
staff expects registrants to apply the views of SAB No. 109 on a prospective
basis.  The effect of adoption during the first quarter of 2008 did
not have a material impact on the Company’s results of operations.
 
 9
 Index
 
 In April
2008, the FASB issued FASB Staff Position ("FSP") No. SFAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). This FSP applies to all intangible assets, whether
acquired in a business combination or otherwise and shall be effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years and applied prospectively to
intangible assets acquired after the effective date. Early adoption is
prohibited. The Company will adopt the provisions of FSP No. SFAS 142-3 in the
first quarter of 2009, as required, but does not expect the impact to be
material to the Company’s financial condition or results of
operations.
 
 In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.  This FSP addresses whether such instruments are
participating securities prior to vesting and, therefore, need to be included in
the EPS calculation under the two-class method described in paragraphs 60 and 61
of SFAS No. 128, Earnings per
Share. This FSP is effective for fiscal years beginning after December
15, 2008. Management does not expect the adoption of FSP EITF 03-6-1 to have an
impact on the consolidated financial statements of the Company.
 
 
 NOTE
6 - FAIR VALUE
 
 On
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements, (SFAS No. 157), which defines fair value, establishes a
framework for measuring fair value under accounting principles generally
accepted in the United States, and enhances disclosures about fair value
measurements.  SFAS No. 157 clarifies that fair value should be based on
the assumptions market participants would use when pricing an asset or liability
and establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions.
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures. 
Available for sale securities are recorded at fair value on a recurring
basis.  Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets.  These
nonrecurring fair value adjustments would typically involve application of lower
of cost or market accounting or write-downs of individual assets.
 
 SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:
 
 Level
      1
              Observable
      inputs such as quoted prices in active
markets;
 Level
      2
              Inputs,
      other than the quoted prices in active markets, that are observable either
      directly or indirectly; and
 Level
      3
              Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 Following
is a description of valuation methodologies used for assets recorded at fair
value.
 
 Investment
Securities
 
 Securities
available for sale and securities held to maturity are valued on a recurring
basis at quoted market prices where available.  If quoted market prices are
not available, fair values are based on quoted market prices of comparable
securities.  Level 1 securities include those traded on an active exchange,
such as the New York Stock Exchange, U.S. Treasury securities that are traded by
dealers or brokers in active over-the-counter markets and money market
funds.  Level 2 securities include mortgage-backed securities and
debentures issued by government sponsored entities, municipal bonds and
corporate debt securities.  Securities classified as Level 3 include
asset-backed securities in less liquid markets such as some common stock not
traded on a national exchange.    Securities held to maturity are
valued at quoted market prices or dealer quotes, similar to securities available
for sale.  The carrying value of Federal Reserve Bank and Federal Home Loan
Bank stock approximates fair value based on their redemption
provisions.
 
 10
 Index
 
 Loans
Held for Sale
 
 Loans
held for sale, consisting of mortgages to be sold in the secondary market, are
carried at the lower of cost or market value.  The fair values of mortgage
loans held for sale are based on commitments on hand from investors within the
secondary market for loans with similar characteristics.  As such, the fair
value adjustments for mortgage loans held for sale is nonrecurring Level
2.
 
 Loans
 
 The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan may be considered impaired and an allowance for loan losses
may be established.  Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, Accounting by
Creditors for Impairment of a Loan, (“SFAS No. 114”). The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows.  Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans.  At June 30,
2008, all of the total impaired loans were evaluated based on the fair value of
the collateral.  In accordance with SFAS No. 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When an appraised
value is not available or management determines the fair value of the collateral
is further impaired below the appraised value and there is no observable market
price, the Company records the impaired loan as nonrecurring Level
3.
 
 Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
 
 The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
 
 (Dollars in thousands)
              
              Fair
      Value June 30, 2008
              
              
              Quoted
      Prices In Active Markets for Identical Assets
                (Level 1)
              
              
              Significant
      Other Observable Inputs
                (Level 2)
              
              
              Significant
      Unobservable Inputs
                (Level 3)Securities
      available for sale
              
              $
              92,556
              
              
              $
              31
              
              
              $
              92,344
              
              
              $
              181
 
 There
were no gains or losses for the three and six months ended June 30, 2008
included in earnings that are attributable to the change in unrealized gains or
losses of the Company’s securities available for sale at June 30,
2008.
 
 For those
securities available for sale with fair values that are determined by reliance
on significant unobservable inputs, the following table identifies the factors
causing the change in fair value from January 1, 2008 to June 30,
2008:
 
 Investment
      SecuritiesAvailable For SaleBeginning
      balance, January 1, 2008
              
              $
              280Total
      gains (losses) realized or unrealizedIncluded
      in earnings
              
              
              -Included
      in other comprehensive income
              
              
              (99
              )Transfers
      in (out) of Level 3
              
              
              -Ending
      balance, June 30, 2008
              
              $
              181
 
 The table
below presents the recorded amount of assets and liabilities measured at fair
value on a nonrecurring basis.
 
 (Dollars in thousands)
              
              Fair
      Value June 30, 2008
              
              
              Quoted Prices
      In Active Markets for Identical Assets
                (Level 1)
              
              
              Significant
      Other Observable Inputs
                (Level 2)
              
              
              Significant
      Unobservable Inputs
                (Level 3)Impaired
      loans
              
              $
              9,940
              
              
              $
              -
              
              
              $
              -
              
              
              $
              9,940
 
 11
 Index
 
 The
values of loans held for sale are based on prices observed for similar pools of
loans, appraisals provide by third parties and prices determined based on terms
of investor purchase commitments. The value of impaired loans is determined by
the estimated collateral value or by the discounted present value of the
expected cash flows.
 
 
 NOTE7—BORROWED
FUNDS
  At June
30, 2008, the Company had $6,555,000 outstanding on its line of credit with
Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our
subsidiary banks is pledged as collateral for this loan.  The loan contains
certain restrictive covenants including, among others, a requirement for each
subsidiary bank to maintain certain minimum capital levels as well as maximum
ratios related to the levels of nonperforming assets.  At June 30, 2008,
the ratio of nonperforming assets (which includes nonaccrual loans, loans 90
days or more past due and still accruing, and other real estate) to total assets
for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in
excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The
Company is working with Silverton Bank to obtain a waiver of this
covenant.  If the Company remains outside this covenant and is unable to
obtain a waiver or amendment of the loan agreement, Silverton Bank would have
the right to give notice of default. If the Company is unable to cure the
default within fifteen days of notice, then Silverton Bank would have the right
to declare the entire balance of the loan due and payable, which could have a
material adverse effect on the Company's liquidity and ability to pay dividends.
Management intends to continue to vigorously pursue a favorable resolution to
this issue, which in addition to the alternatives above, would include repayment
of the loan through a payment of special dividends from the subsidiary banks,
obtaining financing from another lender, or a combination of the
two.
 12
 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, The First
National Bank of Polk County, Peachtree Bank, and Bank of Chickamauga 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.
  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,
2007 included in our Form 10-K (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, stock compensation,
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.  Goodwill must be periodically evaluated for potential
impairment based on fair value assessments.
 
 13
 Index
 
 Financial
Condition
  During
the six months ended June 30, 2008, our total assets increased $12.1 million to
$618.1 million at June 30, 2008.  During this period, total loans
increased $8.7 million, or 2.3%.  Securities available for sale
increased $13.3 million due primarily to purchases made during the period while
securities held to maturity decreased $16.0 million due to
maturities.  Interest bearing deposits at other financial institutions
increased $5.3 million, or 49.6%.  At June 30, 2008 the Company owned
$14.4 million in certificates of deposits in other financial institutions, which
are structured so that all principal and accrued interest remain fully insured
under FDIC deposit insurance.  The Company limits these deposits so
that, at maturity, the principal value plus interest earned are less than
$100,000.  Federal funds sold decreased $576,000.
 
 During
the year to date period ended June 30, 2008, deposits increased $14.8 million or
2.9%.  Changes in deposits are summarized below:
 
 June 30,
              
              
              December31,(Dollars
      In Thousands)
              
              2008
              
              
              2007
              
              
              ChangeNoninterest
      bearing deposits
              
              $
              81,590
              
              
              $
              80,685
              
              
              $
              905Interest
      checking
              
              
              90,909
              
              
              
              83,742
              
              
              
              7,167Money
      market
              
              
              58,222
              
              
              
              55,687
              
              
              
              2,535Savings
              
              
              44,847
              
              
              
              41,997
              
              
              
              2,850Certificates
      of deposit
              
              
              253,160
              
              
              
              251,820
              
              
              
              1,340$
              528,728
              
              
              $
              513,931
              
              
              $
              14,797
 
 Since
December 31, 2007, short-term borrowed funds declined $3.1 million due to
maturities of Federal Home Loan Bank advances during the first
quarter.  At June 30, 2008 we had not purchased any federal
funds.  The Company monitors changes in its loan portfolio and changes
in its deposit levels, and seeks to maintain a proper mix of types, maturities,
and interest rates.
 
 Our total
stockholders’ equity declined by $110,000 since December 31, 2007, primarily due
to $1,022,000 of dividends paid, a $493,000 adjustment to beginning retained
earnings related to the implementation of EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements, and a $752,000 decrease in the
unrealized gain on securities available for sale, net of deferred taxes,
partially offset by net income of $2,012,000 for the
period.
 
 Loan Portfolio.The following table
presents various categories of loans contained in the loan portfolios of the
subsidiary banks as of June 30, 2008 and December 31, 2007:
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Commercial,
      financial, and agricultural
              
              $
              20,216
              
              
              $
              22,595Real
      estate – construction
              
              
              71,186
              
              
              
              66,069Real
      estate – mortgage
              
              
              246,398
              
              
              
              241,316Consumer
              
              
              37,676
              
              
              
              38,834Other
              
              
              7,128
              
              
              
              5,162382,604
              
              
              
              373,976Unearned
      income
              
              
              (114
              )
              
              
              (151
              )Allowance
      for loan losses
              
              
              (6,206
              )
              
              
              (4,952
              )Loans,
      net
              
              $
              376,284
              
              
              $
              368,873
 
 Nonaccrual, Past Due and Restructured
Loans.The
following table presents various categories of nonaccrual, past due, potential
problem loans,  and restructured loans in the Banks’ loan portfolios
as of June 30, 2008 and December 31, 2007:
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Nonaccrual
      loans
              
              $
              11,113
              
              
              $
              1,633Loans
      past due 90 days or more and still accruing
              
              $
              912
              
              
              $
              247Loans
      restructured under troubled debt
              
              $
              -
              
              
              $
              -
 
 14
 Index
 
 Nonaccrual
loans increased $3,865,000 during the quarter ended June 30, 2008 increasing
from $7,248,000 at March 31, 2008 to $11,113,000.  Since December
31, 2007, nonaccrual loans have increased $9,480,000.  Nonaccrual
loans at June 30, 2008 include a $5.75 million residential real estate
development loan, a $3.57 million loan for the construction and development of
an apartment complex, $905,000 in nonresidential real estate, and $812,000 in
loans secured by first mortgage loans on single family dwellings, the largest of
which was $318,000, and $76,000 in consumer loans.  The Company
believes that there is limited risk of loss for the nonaccrual loans secured by
single family dwellings.  The $5.75 million residential development
loan was classified as nonaccrual at March 31, 2008 and is secured by 96
developed and 24 partially developed lots in a golf course development.  In
total, the Company has recorded a valuation allowance of $1,173,000 related to
nonaccrual loans at June 30, 2008.
 
 Information
regarding impaired loans as of June 30, 2008 and December 31, 2007 are as
follows:
 
 June 30,
              
              
              December31,(Dollars
      in thousands)
              
              2008
              
              
              2007Impaired
      loans without a valuation allowance
              
              $
              -
              
              
              $
              -Impaired
      loans with a valuation allowance
              
              
              11,113
              
              
              
              1,633Total
      impaired loans
              
              $
              11,113
              
              
              $
              1,633Valuation
      allowance related to impaired loans
              
              $
              1,173
              
              
              $
              245Average
      investment in impaired loans
              
              $
              3,702
              
              
              $
              507
 
 In
addition to the above, the Company had at June 30, 2008 $11,699,000 in potential
problem loans.  Potential  problem loans are loans which are
currently performing but as to which  information  about the
borrowers'  possible  credit  problems causes 
management  to have doubts  about their  ability to comply with
current repayment terms.  Management has downgraded these loans and
closely monitors their continued performance.  The following is a
summary of our potential problem loans at June 30, 2008:
 
 (Dollars
      in thousands)Construction
      and development loans
              
              $
              1,641First
      mortgage
              
              
              6,745Second
      mortgage and home equity line of credit
              
              
              369Nonresidential
      mortgage
              
              
              2,107Commercial
              
              
              269Consumer
              
              
              568Total
              
              $
              11,699
 
 
 Construction
and development loans consist of eight loans, the largest of which is a
$1,470,000 loan secured by 74 lots in a townhome development.  First
mortgage loans are composed of 95 loans, the largest of which is
$250,000.  There are 22 loans whose balance is greater than $100,000,
which account for $3,525,000 of the total.   Loans secured by
nonresidential real estate are composed of 12 loans, the largest of which
represents 2 loans to one borrower totaling $1,076,000.
  Other Real Estate.Included in other
assets was other real estate of $1,290,000 and $256,000 as of June 30, 2008 and
December 31, 2007, respectively.  The increase in other real estate is
generally attributable to slowing economic conditions resulting in increased
foreclosures.  Balances consist primarily of residential
properties.
  Summary of Loan Loss
Experience.An analysis of
SouthCrest’s loan loss experience is included in the following table for the
periods ended June 30, 2008 and 2007:
 
 15
 Index
 
 Analysis
of Allowance for Loan Losses
 For
The Three and Six Months Ended June 30
 (Dollars
      in thousands)
              
              Three Months
              
              
              Six Months2008
              
              
              2007
              
              
              2008
              
              
              2007Balance
      at beginning of period
              
              $
              5,345
              
              
              $
              4,669
              
              
              $
              4,952
              
              
              $
              4,480ChargeoffsCommercial
      loans
              
              
              21
              
              
              
              47
              
              
              
              41
              
              
              
              47Real
      estate - construction
              
              
              22
              
              
              
              -
              
              
              
              22
              
              
              
              -Real
      estate - mortgage
              
              
              104
              
              
              
              -
              
              
              
              104
              
              
              
              -Consumer
              
              
              176
              
              
              
              173
              
              
              
              280
              
              
              
              239Other
              
              
              25
              
              
              
              22
              
              
              
              59
              
              
              
              58Total
      Chargeoffs
              
              
              348
              
              
              
              242
              
              
              
              506
              
              
              
              344RecoveriesCommercial
      loans
              
              
              3
              
              
              
              26
              
              
              
              7
              
              
              
              26Real
      estate - construction
              
              
              24
              
              
              
              -
              
              
              
              24
              
              
              
              -Real
      estate - mortgage
              
              
              37
              
              
              
              -
              
              
              
              41
              
              
              
              4Consumer
              
              
              18
              
              
              
              137
              
              
              
              174
              
              
              
              233Other
              
              
              12
              
              
              
              7
              
              
              
              44
              
              
              
              49Total
      recoveries
              
              
              94
              
              
              
              170
              
              
              
              290
              
              
              
              312Net
      chargeoffs
              
              
              (254
              )
              
              
              (72
              )
              
              
              (216
              )
              
              
              (32
              )Additions
      charged to operations
              
              
              1,115
              
              
              
              77
              
              
              
              1,470
              
              
              
              226Balance
      at end of period
              
              $
              6,206
              
              
              $
              4,674
              
              
              $
              6,206
              
              
              $
              4,674Annualized
      ratio of net chargeoffs during the period to average loans outstanding
      during the period
              
              
              0.27
              %
              
              
              0.09
              %
              
              
              0.12
              %
              
              
              0.02
              %
 
 Allowance for Loan
Losses.The allowance for loan losses as of June 30, 2008 was
$6,206,000 compared to $4,952,000 at December 31, 2007 and $4,674,000 at June
30, 2007.   As a percentage of gross loans, the allowance for
loan losses was 1.62% at June 30, 2008 compared to 1.32% as of December 31, 2007
and 1.39% at June 30, 2007. The provision for loan losses during the six-month
periods ended June 30, 2008 of $1,470,000 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 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.
 
 Results
of Operations For The Three and Six Months Ended June 30, 2008 and
2007
 
 Net
income for the three-month period ended June 30, 2008 amounted to $607,000, or
$0.16 basic and diluted earnings per share, compared to net income of $1,599,000
or $0.40 basic and diluted earnings per share for the same three-month period in
2007, a decrease of $992,000, or 62.0%.  Results of operations for
2007 did not include Bank of Chickamauga as the Company’s acquisition of
Chickamauga did not take place until July 1, 2007.  Net income for the
six-month period ended June 30, 2008 amounted to $2,012,000, or $0.51 basic and
diluted earnings per share, compared to net income of $3,204,000 or $0.81 basic
and diluted earnings per share for the same six-month period in 2007, a decrease
of $1,192,000, or 37.2%.
 
 16
 Index
 
 Net Interest Income.Net interest income
represents the difference between interest received on interest earning assets
and interest paid on interest bearing liabilities.
 
 Net
interest income for the three months ended June 30, 2008 decreased $206,000
or 3.8% over the same period in 2007.  Excluding the impact of the
Bank of Chickamauga acquisition, net interest income would have declined
$786,000.
 
 The
change in net interest income attributable to changes in the general level of
interest rates totaled $767,000.  Beginning in August 2007, the
Federal Reserve has announced several reductions in the discount rate, with the
result being that the average discount rate for the period ending June 30,
2008 was approximately 300 basis points lower than the same period in
2007.  These reductions have contributed to a reduction in the average
yield on earning assets from 7.35% during the three month period
ending June 30, 2007 to 6.31% in the same period in 2008.  The
average cost of funds declined from 3.43% in 2007 to 2.93% in
2008.  The net yield on earning assets declined 76 basis points from
4.63% for the quarter ended June 30, 2007 to 3.87% for the current year
period.  The net interest spread decreased from 3.92% in 2007 to 3.38%
in 2008.   The decline attributable to changes in interest rates
was offset by an increase of $561,000 attributable to increases in the average
balances of interest earning assets and interest bearing
liabilities.
 
 Total
interest income decreased $99,000 to $8,585,000 for the quarter ended June 30,
2008.  Interest income earned on loans decreased $183,000 composed of
a $1,151,000 reduction in interest due to the reduction in the average yield of
the loan portfolio from 8.49% to 7.17%, offset by a $968,000 increase that
relates to a $47.8 million growth in the average balance of
loans.  The reduction in the average yield on loans results from a
significant portion of the loan portfolio having variable interest rates that
are tied to the prime rate.
 
 Interest
expense increased $107,000 to $3,324,000 for the quarter ended June 30,
2008.  The main component of the increase in interest expense was a
$199,000 increase in interest paid on certificates of deposits.  Since
2005, the Company has generally funded the growth in its loan portfolio with
borrowed funds, primarily Federal Home Loan Bank advances, and with certificates
of deposit.  These sources of funds typically carry higher rates of
interest than other sources of funds such as checking and money market
accounts.  The average rate on certificates of deposits typically lags
the changes in the discount rate due to the longer term of the accounts and to
competition from other banks for such funds.
 
 The
following presents, for the three month periods ended June 30, 2008 and 2007,
the main components of interest earning assets and interest bearing liabilities
and related interest income and expense and effective yields and cost of
funds.
 
 17
 Index
 
 Average
Consolidated Balance Sheets and Net Interest Income Analysis
 For the
Three Month Periods Ended June 30,
 (Dollars
in thousands)
 
 Average
      Balances (1)
              
              
              Yields
      / Rates
              
              
              Income
      / Expense
              
              
              Increase
              
              
              Change
      Due to2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              (Decrease)
              
              
              Rate
              
              
              VolumeAssetsLoans,
      including fee income
              
              $
              381,479
              
              
              $
              333,674
              
              
              
              7.17
              %
              
              
              8.49
              %
              
              $
              6,802
              
              
              $
              6,985
              
              
              $
              (183
              )
              
              $
              (1,151
              )
              
              $
              968Taxable
      securities
              
              
              113,626
              
              
              
              114,207
              
              
              
              4.77
              %
              
              
              4.71
              %
              
              
              1,348
              
              
              
              1,325
              
              
              
              23
              
              
              
              26
              
              
              
              (3
              )Nontaxable
      securities
              
              
              23,157
              
              
              
              18,194
              
              
              
              3.98
              %
              
              
              3.90
              %
              
              
              229
              
              
              
              175
              
              
              
              54
              
              
              
              4
              
              
              
              50Federal
      funds sold
              
              
              15,018
              
              
              
              8,019
              
              
              
              2.14
              %
              
              
              5.51
              %
              
              
              80
              
              
              
              109
              
              
              
              (29
              )
              
              
              (92
              )
              
              
              63Interest
      bearing deposits in banks
              
              
              14,010
              
              
              
              5,282
              
              
              
              3.62
              %
              
              
              6.91
              %
              
              
              126
              
              
              
              90
              
              
              
              36
              
              
              
              (59
              )
              
              
              95Total
      earning assets
              
              
              547,290
              
              
              
              479,376
              
              
              
              6.31
              %
              
              
              7.35
              %
              
              
              8,585
              
              
              
              8,684
              
              
              
              (99
              )
              
              
              (1,272
              )
              
              
              1,173Cash
      and due from banks
              
              
              14,949
              
              
              
              12,554Allowance
      for loan losses
              
              
              (5,312
              )
              
              
              (4,668
              )Other
      assets
              
              
              61,906
              
              
              
              48,806Total
              
              $
              618,833
              
              
              $
              536,068Liabilities
      and EquityInterest bearing demand (2)
              
              $
              150,092
              
              
              $
              127,651
              
              
              
              1.37
              %
              
              
              1.92
              %
              
              $
              513
              
              
              $
              605
              
              
              $
              (92
              )
              
              $
              (191
              )
              
              $
              99Savings
              
              
              44,491
              
              
              
              36,035
              
              
              
              0.71
              %
              
              
              0.70
              %
              
              
              78
              
              
              
              62
              
              
              
              16
              
              
              
              1
              
              
              
              15Certificates
      of deposit
              
              
              254,338
              
              
              
              210,396
              
              
              
              4.20
              %
              
              
              4.74
              %
              
              
              2,659
              
              
              
              2,460
              
              
              
              199
              
              
              
              (297
              )
              
              
              496Total
      interest bearing deposits
              
              
              448,921
              
              
              
              374,082
              
              
              
              2.91
              %
              
              
              3.39
              %
              
              
              3,250
              
              
              
              3,127
              
              
              
              123
              
              
              
              (487
              )
              
              
              610Borrowed
      funds
              
              
              6,610
              
              
              
              6,457
              
              
              
              4.50
              %
              
              
              5.65
              %
              
              
              74
              
              
              
              90
              
              
              
              (16
              )
              
              
              (18
              )
              
              
              2Total
      interest bearing liabilities
              
              
              455,531
              
              
              
              380,539
              
              
              
              2.93
              %
              
              
              3.43
              %
              
              
              3,324
              
              
              
              3,217
              
              
              
              107
              
              
              
              (505
              )
              
              
              612Noninterest
      bearing demand deposits
              
              
              79,533
              
              
              
              78,128Other
      liabilities
              
              
              10,332
              
              
              
              7,324Redeemable
      common stock held by ESOP
              
              
              895
              
              
              
              996Shareholders'
      equity
              
              
              72,542
              
              
              
              69,081Total
              
              $
              618,833
              
              
              $
              536,068Net
      interest income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              5,261
              
              
              $
              5,467
              
              
              $
              (206
              )
              
              $
              (767
              )
              
              $
              561Net
      interest yield on earning assets
              
              
              
              
              
              
              
              
              
              
              3.87
              %
              
              
              4.63
              %Net
      interest spread
              
              
              
              
              
              
              
              
              
              
              3.38
              %
              
              
              3.92
              %
 
 (1)  Daily
averages.  Loans includes nonaccrual loans.
 (2)  Includes
money market accounts.
 
 The
following presents, for the six month periods ended June 30, 2008 and 2007, the
main components of interest earning assets and interest bearing liabilities and
related interest income and expense and effective yields and cost of
funds.
 
 18
 Index
 
 Average
Consolidated Balance Sheets and Net Interest Income Analysis
 For the
Six Month Periods Ended June 30,
 (Dollars
in thousands)
 
 Average
      Balances (1)
              
              
              Yields
      / Rates
              
              
              Income
      / Expense
              
              
              Increase
              
              
              Change
      Due to2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              (Decrease)
              
              
              Rate
              
              
              VolumeAssetsLoans,
      including fee income
              
              $
              377,609
              
              
              $
              333,302
              
              
              
              7.55
              %
              
              
              8.36
              %
              
              $
              14,173
              
              
              $
              13,814
              
              
              $
              359
              
              
              $
              (1,410
              )
              
              $
              1,769Taxable
      securities
              
              
              113,990
              
              
              
              114,432
              
              
              
              4.84
              %
              
              
              4.66
              %
              
              
              2,742
              
              
              
              2,642
              
              
              
              100
              
              
              
              109
              
              
              
              (9
              )Nontaxable
      securities
              
              
              23,466
              
              
              
              18,234
              
              
              
              3.92
              %
              
              
              3.90
              %
              
              
              458
              
              
              
              353
              
              
              
              105
              
              
              
              2
              
              
              
              103Federal
      funds sold
              
              
              16,504
              
              
              
              9,273
              
              
              
              2.63
              %
              
              
              5.59
              %
              
              
              216
              
              
              
              257
              
              
              
              (41
              )
              
              
              (180
              )
              
              
              139Interest
      bearing deposits in banks
              
              
              12,928
              
              
              
              5,097
              
              
              
              3.89
              %
              
              
              6.84
              %
              
              
              250
              
              
              
              173
              
              
              
              77
              
              
              
              (100
              )
              
              
              177Total
      earning assets
              
              
              544,497
              
              
              
              480,338
              
              
              
              6.59
              %
              
              
              7.24
              %
              
              
              17,839
              
              
              
              17,239
              
              
              
              600
              
              
              
              (1,579
              )
              
              
              2,179Cash
      and due from banks
              
              
              14,968
              
              
              
              13,118Allowance
      for loan losses
              
              
              (5,167
              )
              
              
              (4,626
              )Other
      assets
              
              
              61,317
              
              
              
              48,441Total
              
              $
              615,615
              
              
              $
              537,271Liabilities
      and EquityInterest
      bearing demand (2)
              
              $
              147,922
              
              
              $
              127,268
              
              
              
              1.54
              %
              
              
              1.84
              %
              
              $
              1,133
              
              
              $
              1,160
              
              
              $
              (27
              )
              
              $
              (204
              )
              
              $
              177Savings
              
              
              43,911
              
              
              
              36,040
              
              
              
              0.73
              %
              
              
              0.71
              %
              
              
              159
              
              
              
              126
              
              
              
              33
              
              
              
              4
              
              
              
              29Certificates
      of deposit
              
              
              253,506
              
              
              
              212,152
              
              
              
              4.39
              %
              
              
              4.69
              %
              
              
              5,540
              
              
              
              4,932
              
              
              
              608
              
              
              
              (329
              )
              
              
              937Total
      interest bearing deposits
              
              
              445,339
              
              
              
              375,460
              
              
              
              3.09
              %
              
              
              3.34
              %
              
              
              6,832
              
              
              
              6,218
              
              
              
              614
              
              
              
              (529
              )
              
              
              1,143Borrowed
      funds
              
              
              8,054
              
              
              
              6,620
              
              
              
              5.19
              %
              
              
              5.67
              %
              
              
              208
              
              
              
              186
              
              
              
              22
              
              
              
              (17
              )
              
              
              39Total
      interest bearing liabilities
              
              
              453,393
              
              
              
              382,080
              
              
              
              3.12
              %
              
              
              3.38
              %
              
              
              7,040
              
              
              
              6,404
              
              
              
              636
              
              
              
              (546
              )
              
              
              1,182Noninterest
      bearing demand deposits
              
              
              78,593
              
              
              
              78,345Other
      liabilities
              
              
              10,402
              
              
              
              7,414Redeemable
      common stock held by ESOP
              
              
              920
              
              
              
              968Shareholders'
      equity
              
              
              72,307
              
              
              
              68,464Total
              
              $
              615,615
              
              
              $
              537,271Net
      interest income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              10,799
              
              
              $
              10,835
              
              
              $
              (36
              )
              
              $
              (1,033
              )
              
              $
              997Net
      interest yield on earning assets
              
              
              
              
              
              
              
              
              
              
              3.99
              %
              
              
              4.55
              %Net
      interest spread
              
              
              
              
              
              
              
              
              
              
              3.47
              %
              
              
              3.86
              %
 
 (1)  Daily
averages.  Loans includes nonaccrual loans.
 (2)  Includes
money market accounts
 
 Net
interest income for the six months ended June 30, 2008 decreased $36,000 or
0.3% over the same period in 2007.  Excluding the impact of the Bank
of Chickamauga acquisition, net interest income would have declined by
$1,112,000.  The $36,000 decline in net interest income is
attributable to a $1,033,000 decline due to changes in interest rates offset by
a $997,000 increase relating to changes in the average balances of interest
earning assets and interest bearing liabilities.  As a result of
Federal Reserve reductions in the discount rate, the average discount rate for
the six-month period ending June 30, 2008 was approximately 314 basis points
lower than the same period in 2007.  These reductions have contributed
to a reduction in the average yield on earning assets from 7.24% during the six
month period ending June 30, 2007 to 6.59% in the same period in
2008.  During the same period, the average cost of funds declined from
3.38% in 2007 to 3.12% in 2008.  The net yield on earning assets
declined 56 basis points from 4.55% for the period ended June 30, 2007 to 3.99%
for the current year period.  The net interest spread decreased from
3.86% in 2007 to 3.47% in 2008.
 
 19
 Index
 
 Total
interest income increased $600,000 to $17.8 million for the six-month period
ended June 30, 2008.  Interest income earned on loans increased
$359,000.  Of this increase, $1,739,000 relates to a $44.3 million
growth in the average balance of loans.  Offsetting this increase was
a $1,410,000 reduction in interest due to the reduction in the average yield of
the loan portfolio from 8.36% to 7.55%.  The reduction in the average
yield on loans results from a significant portion of the loan portfolio having
variable interest rates that are tied to the prime rate.
 
 Interest
expense increased $636,000 to $7.0 million for the six-month period ended June
30, 2008.  The main component of the increase in interest expense was
a $608,000 increase in interest paid on certificates of
deposits.  While the average rate on these funds decreased from 4.69%
in 2007 to 4.39% for the 2008 period, the average balance increased $41.4
million.
 
 Other Income.Total other income for the
three-month period ended June 30, 2008 amounted to $1,841,000, compared to
$1,625,000 for the same period in 2007, an increase of $216,000.  For
the six-month period, total other income was $3,762,000 compared to $3,104,000
in 2007, an increase of $658,000.  The addition of Bank of Chickamauga
accounted for $137,000 of the increase for the three month period and $303,000
of the increase for  the six-month
period.
 
 Service
charges (including NSF and overdraft charges) on deposit accounts increased
$85,000 or 9.2% for the three-month period and $227,000 or 13.1% for the
six-month period.  As a percentage of interest-bearing and
non-interest bearing checking accounts, these service charges were 2.69% and
2.92% for the three-month periods ended June 30, 2008 and 2007 and 2.67% and
2.75% for the six-month periods in 2008 and 2007, respectively.  Other
service charges and fees increased $63,000 for the three-month period in 2008
and $186,000 for the six month periods.  For the three month period,
the increase results primarily from a $38,000 increase in debit card fees and a
$47,000 increase in ATM fee income. For the six month period, debit card
fees increased $64,000 and ATM fee income increased $61,000.
 
 Gain on
sale of loans was $107,000 for the three months ended June 30, 2008 compared to
$82,000 in 2007 due to increased volume of loans sold.  Included in
the gain on sale of loans are mortgage servicing rights of $54,000 and $73,000
for the three month periods ended June 30, 2008 and 2007,
respectively.  For the six-month period, gain on sale of loans was
$220,000 compared to $238,000 in 2007, including recognition of mortgage
servicing rights of $104,000 and $142,000.  The following presents the
activity in the Company’s mortgage servicing rights in 2008 and
2007:
 
 Three Months
              
              
              Six Months(dollars
      in thousands)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Beginning
      balance
              
              $
              533
              
              
              $
              420
              
              
              $
              510
              
              
              $
              375Servicing
      rights recognized
              
              
              54
              
              
              
              73
              
              
              
              104
              
              
              
              142Amortization
      expense
              
              
              (31
              )
              
              
              (28
              )
              
              
              (58
              )
              
              
              (52
              )Ending
      balance
              
              $
              556
              
              
              $
              465
              
              
              $
              556
              
              
              $
              465
 
 In 2008,
the Company recorded gains from calls of securities totaling $29,000 for the
three months ended June 30 and $119,000 for the six month period ended June
30.  The securities were called as the reduction in the levels of
interest rates made it advantageous for the issuers of the debt securities to
redeem the securities.  Income from bank-owned life insurance
increased $36,000 during the three-month period, of which $32,000 relates to the
insurance policies assumed in the acquisition of Chickamauga, and $89,000 for
the six-month period, of which $76,000 relates to Bank of
Chickamauga.
 
 Other
Expenses.  Other expenses for the three-month period ended June
30, 2008 amounted to $5,262,000 compared to $4,688,000 for the same period
in 2007, an increase of $574,000 or 12.2%.  For the six-month period,
total other expenses were $10,394,000 compared to $9,045,000 for the same period
in 2007, an increase of $1,349,000 or 14.9%.  Excluding the impact of
acquisitions, these expenses increased $6,000 for the three-month period and
$269,000 or 3.0% for the six month period.
 
 The
largest component of other expenses is salaries and employee benefits, which
excluding the impact of acquisitions increased $88,000, or 3.5% for the
three-month period and $234,000 or 4.7% for the six month period ended June 30,
2008.  Costs associated with the implementation of EITF Issue 06-4,
Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangementsaccounted for $25,000 of the increase for the three months and $50,000
for the six month period.Other increases are related to merit increases and branch
expansion.  The compensation cost that was charged against income for
our stock option plans was $27,000 for each of the three month periods ended
June 30, 2008 and 2007, and $53,000 for each of the six month
periods.  The total compensation cost related to nonvested awards not
yet recognized at June 30, 2008 is $273,000 which will be recognized over the
weighted average period of approximately 2.63 years.
 
 For the
three month period ended June 30, 2008, amortization of intangibles increased
$19,000.  Amortization of the core deposit intangible recorded in
conjunction with the acquisition of Bank of Chickamauga amounted to $22,000 for
the quarter.  For the six month period, amortization increased $43,000
due to $45,000 in amortization of intangibles in conjunction with Bank of
Chickamauga.  Equipment and occupancy expenses increased $126,000 for
the quarter and $253,000 for the year to date.  Of these increases,
expenses related to Bank of Chickamauga acquisition were $50,000 and $87,000 for
the three and six months, respectively.  Excluding the impact of
acquisitions, occupancy expenses increased $76,000 for the three-month period
which includes $36,000 of higher depreciation costs and $23,000 in increased
rent expense relating to branch expansion.  Other operating expenses
increased $64,000 for the three months in 2008 and $263,000 for the six month
period due to the acquisition of the Bank of Chickamauga.
 
 20
 Index
 
 As a
percentage of average total assets, other expenses were 3.42% and 3.58% of for
the three month periods ended June 30, 2008 and 2007, and 3.40% and 3.41% for
the six-month periods ended June 30, 2008 and 2007,
respectively.
 
 Income Taxes. For the
three-month periods ended June 30, 2008 and 2007, the Company recorded income
taxes totaling $118,000 and $728,000, respectively.  Effective tax
rates for the periods were 16.3% and 31.3%, respectively.   For
the six-month periods ended June 30, 2008 and 2007, income tax expense was
$685,000 and $1,464,000, respectively, with effective tax rates of 25.4% and
31.4%.  Tax-exempt interest income and income on bank-owned life
insurance are the primary reasons that the Company’s effective tax rates are
less than the statutory tax rate of 34%.  Effective tax rates are
lower in 2008 than in 2007 as tax exempt income represented 54.9% of income
before income taxes for the three-month period in 2008 compared to 13.9% for the
same period in 2007, and 30.0% for the six-month period in 2008 compared to
13.1% for the same period in 2007.
 
 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 June 30, 2008, we believe our liquidity, as
determined under guidelines established by regulatory authorities and internal
policies, was satisfactory.
 
 If
needed, our banks have the ability on a short-term basis to borrow and purchase
federal funds from other financial institutions.  At June 30, 2008,
the banks had available additional federal funds lines of credit totaling $21.0
million in place with five banks and $53.3 million of available funds on their
lines of credit with the Federal Home Loan Bank of Atlanta.
 
 At June
30, 2008, 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:
 
 Tier
      1
              
              
              Tier
      1 Risk-
              
              
              Total
      Risk-Leverage
              
              
              Based
              
              
              BasedMinimum
      required
              
              
              4.00
              %
              
              
              4.00
              %
              
              
              8.00
              %Minimum
      required to be well capitalized
              
              
              5.00
              %
              
              
              6.00
              %
              
              
              10.00
              %Actual
      ratios at June 30, 2008Consolidated
              
              
              9.20
              %
              
              
              12.93
              %
              
              
              14.18
              %Bank
      of Upson
              
              
              9.80
              %
              
              
              12.68
              %
              
              
              13.93
              %The
      First National Bank of Polk County
              
              
              12.06
              %
              
              
              18.35
              %
              
              
              19.60
              %Peachtree
      Bank
              
              
              8.80
              %
              
              
              10.72
              %
              
              
              11.96
              %Bank
      of Chickamauga
              
              
              8.06
              %
              
              
              16.97
              %
              
              
              18.22
              %
 
 
 Capital
ratios may decline as asset growth continues, but are expected to continue to
exceed minimum regulatory requirements.  At June 30, 2008, the Banks
were considered “well capitalized” by regulatory definitions.
 
 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.
  At June
30, 2008, the Company had $6,555,000 outstanding on its line of credit with
Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our
subsidiary banks is pledged as collateral for this loan.  The loan contains
certain restrictive covenants including, among others, a requirement for each
subsidiary bank to maintain certain minimum capital levels as well as maximum
ratios related to the levels of nonperforming assets.  At June 30, 2008,
the ratio of nonperforming assets (which includes nonaccrual loans, loans 90
days or more past due and still accruing, and other real estate) to total assets
for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in
excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The
Company is working with Silverton Bank to obtain a waiver of this
covenant.  If the Company remains outside this covenant and is unable to
obtain a waiver or amendment of the loan agreement, Silverton Bank would have
the right to give notice of default. If the Company is unable to cure the
default within fifteen days of notice, then Silverton Bank would have the right
to declare the entire balance of the loan due and payable, which could have a
material adverse effect on the Company's liquidity and ability to pay dividends.
Management intends to continue to vigorously pursue a favorable resolution to
this issue, which in addition to the alternatives above, would include repayment
of the loan through a payment of special dividends from the subsidiary banks,
obtaining financing from another lender, or a combination of the
two.
 21
 Index
 
 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. The table below contains a summary of
our contractual obligations and commitments as of June 30, 2008.
 
 Commitments
and Contractual Obligations
 (Dollars
in thousands)
 Less
      thanone
      year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              Thereafter
              
              
              TotalContractual
      obligationsDeposits
      having no stated maturity
              
              $
              275,568
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              275,568Certificates
      of Deposit
              
              
              193,585
              
              
              
              42,912
              
              
              
              16,663
              
              
              
              -
              
              
              
              253,160FHLB
      advances and other borrowed funds
              
              
              -
              
              
              
              1,311
              
              
              
              1,311
              
              
              
              3,933
              
              
              
              6,555Deferred
      compensation
              
              
              43
              
              
              
              125
              
              
              
              500
              
              
              
              3,714
              
              
              
              4,382Construction
      commitments
              
              
              64
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              64Leases
              
              
              143
              
              
              
              165
              
              
              
              160
              
              
              
              398
              
              
              
              866Total
      contractal obligations
              
              $
              469,403
              
              
              $
              44,513
              
              
              $
              18,634
              
              
              $
              8,045
              
              
              $
              540,595CommitmentsCommitments
      to extend credit
              
              $
              31,216
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              31,216Credit
      card commitments
              
              
              9,664
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,664Commercial
      standby letters of credit
              
              
              902
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              902Total
      commitments
              
              $
              41,782
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              41,782
 
 22
 Index
 
 ITEM 3.  Quantitativeand Qualitative Disclosures about
Market Risk
 
 Pursuant
to the revised disclosure requirements for smaller reporting companies effective
February 4, 2008, no disclosure under this Item is required.
 
 ITEM 4. Controlsand 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 second fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 
 PART II - OTHERINFORMATION
 
 Item1.
              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.
 
 Item 1A.
              Risk
 
 The
Company may be unable to obtain a waiver or amendment to its outstanding line of
credit, which could have a material adverse effect on the Company’s liquidity
and ability to pay dividends.
 
 At June
30, 2008, the Company had $6,555,000 outstanding on its line of credit with
Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our
subsidiary banks is pledged as collateral for this loan.  The loan contains
certain restrictive covenants including, among others, a requirement for each
subsidiary bank to maintain certain minimum capital levels as well as maximum
ratios related to the levels of nonperforming assets.  At June 30, 2008,
the ratio of nonperforming assets (which includes nonaccrual loans, loans 90
days or more past due and still accruing, and other real estate) to total assets
for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in
excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The
Company is working with Silverton Bank to obtain a waiver of this
covenant.  If the Company remains outside this covenant and is unable to
obtain a waiver or amendment of the loan agreement, Silverton Bank would have
the right to give notice of default. If the Company is unable to cure the
default within fifteen days of notice, then Silverton Bank would have the right
to declare the entire balance of the loan due and payable, which could have a
material adverse effect on the Company's liquidity and ability to pay
dividends.
 
 Actions
by other financial institutions during a weakened economy could negatively
impact our financial performance.
 
 All
financial institutions are subject to the same risks resulting from a weakening
economy such as increased charge-offs and levels of past due loans and
nonperforming assets. As financial institutions in our market area continue to
dispose of problem assets, the already excess inventory of residential homes and
lots will continue to negatively impact home values and increase the time it
takes us or our borrowers to sell existing inventory. The perception that
troubled banking institutions (financial institutions that are not “in trouble”)
are risky institutions for purposes of regulatory compliance or safeguarding
deposits may cause depositors nonetheless to move their funds to other financial
institutions. If our depositors should move their funds based on events
happening at other financial institutions, our operating results would
suffer.
 
 Other
Risks.
 
 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-K for the year ended December 31,
2007, which could materially affect our business, financial condition or future
results.  The risks described in our Annual Report on Form 10-K 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.
 Item2.
              Unregistered Sales of
      Equity Securities and Use of
Proceeds
 
 None.
  Item3.
              Defaults upon Senior
      Securities
 
 None.
 
 23
 Index
 
 Item4.
              Submission of Matters
      to a Vote of Security
Holders
 
 None.
 
 Item5.
              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
 
 24
 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:  August
      14, 2008
              BY:
              /s/ Larry T.
      KuglarLarry T. Kuglar.President
      and Chief Executive OfficerDATE:  August
      14, 2008
              BY:
              /s/ Douglas J.
      HerthaDouglas J. HerthaSenior
      Vice President, Chief Financial
Officer
   25