U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




___________________




FORM
10-Q




___________________




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended  September 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 ofincorporation
      or organization)
                (IRS
      EmployerIdentification
      No.)




600
North Glynn Street


Fayetteville,
GA 30214


(Address
of principal executive offices)




(770)-461-2781


(Issuer’s
telephone number)




_____________________________________________________________________


(Former
name, former address and former fiscal year, if changed since last
report)








Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90
days.    Yes   x    No    ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  £  No  S





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of November 14, 2008: 3,931,528.










SouthCrest
Financial Group, Inc.


And
Subsidiaries




INDEX






PagePart
      I.
                          FINANCIAL
      INFORMATIONItem
      1.
                          Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets – September 30, 2008
      and December 31, 2007
                          1Condensed Consolidated Statements of Income  - Three
      and Nine Months Ended September 30, 2008 and 2007
                          2Condensed Consolidated Statements of Comprehensive Income -
      Three and Nine Months Ended September 30, 2008 and
2007
                          3Condensed
      Consolidated Statements of Stockholders' Equity – Nine MonthsEnded
      September 30, 2008
                          4Condensed Consolidated Statements of Cash Flows – Nine Months
      Ended September 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
                          24Item
      4.
                          Controls and Procedures
                          24Part
      II.
                          OTHER
      INFORMATION
                          24Item
      1.
                          Legal Proceedings
                          24Item
      1A.
                          Risk Factors
                          24Item
      2.
                          Unregistered Sales of Equity Securities and Use of
      Proceeds
                          25Item
      3.
                          Defaults Upon Senior Securities
                          25Item
      4.
                          Submission of Matters to a Vote of Security
      Holders
                          25Item
      5.
                          Other Information
                          25Item
      6.
                          Exhibits
                          26Signatures
                          26


Index


PART
I - FINANCIAL INFORMATION


ITEM1. FINANCIAL STATEMENTS


SouthCrestFinancial Group, Inc. and Subsidiaries


Condensed
Consolidated Balance Sheets


September
30, 2008 and December 31, 2007


(Unaudited)


(In
thousands, except share and per share data)





September 30,
                                  
                                  
                                  December 31,Assets
                                  
                                  2008
                                  
                                  
                                  2007*Cash
      and due from banks
                                  
                                  $
                                  14,602
                                  
                                  
                                  $
                                  16,060Federal
      funds sold
                                  
                                  
                                  84
                                  
                                  
                                  
                                  9,316Interest-bearing
      deposits at other financial institutions
                                  
                                  
                                  16,861
                                  
                                  
                                  
                                  10,637Securities
      available for sale
                                  
                                  
                                  83,397
                                  
                                  
                                  
                                  79,208Securities
      held to maturity (fair value $42,223 and $58,632)
                                  
                                  
                                  42,468
                                  
                                  
                                  
                                  58,885Restricted
      equity securities, at cost
                                  
                                  
                                  2,414
                                  
                                  
                                  
                                  2,008Loans
      held for sale
                                  
                                  
                                  270
                                  
                                  
                                  
                                  229Loans,
      net of unearned income
                                  
                                  
                                  398,459
                                  
                                  
                                  
                                  373,825Less
      allowance for loan losses
                                  
                                  
                                  6,189
                                  
                                  
                                  
                                  4,952Loans,
      net
                                  
                                  
                                  392,270
                                  
                                  
                                  
                                  368,873Bank-owned
      life insurance
                                  
                                  
                                  16,821
                                  
                                  
                                  
                                  16,302Premises
      and equipment, net
                                  
                                  
                                  19,303
                                  
                                  
                                  
                                  18,093Goodwill
                                  
                                  
                                  14,255
                                  
                                  
                                  
                                  14,255Intangible
      assets, net
                                  
                                  
                                  4,096
                                  
                                  
                                  
                                  4,792Other
      assets
                                  
                                  
                                  13,694
                                  
                                  
                                  
                                  7,351Total
      assets
                                  
                                  $
                                  620,535
                                  
                                  
                                  $
                                  606,009Liabilities, Redeemable Common Stock, and
      Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
                                  
                                  $
                                  76,024
                                  
                                  
                                  $
                                  80,685Interest-bearing
                                  
                                  
                                  438,973
                                  
                                  
                                  
                                  433,246Total
      deposits
                                  
                                  
                                  514,997
                                  
                                  
                                  
                                  513,931Short-term
      borrowed funds
                                  
                                  
                                  15,582
                                  
                                  
                                  
                                  3,055Long-term
      borrowed funds
                                  
                                  
                                  6,555
                                  
                                  
                                  
                                  6,555Other
      liabilities
                                  
                                  
                                  10,466
                                  
                                  
                                  
                                  9,656Total
      liabilities
                                  
                                  
                                  547,600
                                  
                                  
                                  
                                  533,197Commitments
      and contingenciesRedeemable
      common stock held by ESOP
                                  
                                  
                                  1,061
                                  
                                  
                                  
                                  1,091Stockholders'
      equity:Common
      stock, par value $1; 10,000,000 shares authorized, 3,931,528
      issued
                                  
                                  
                                  3,932
                                  
                                  
                                  
                                  3,932Additional
      paid-in capital
                                  
                                  
                                  49,785
                                  
                                  
                                  
                                  49,707Retained
      earnings
                                  
                                  
                                  18,374
                                  
                                  
                                  
                                  17,881Unearned
      compensation - ESOP
                                  
                                  
                                  (326
                                  )
                                  
                                  
                                  (349
                                  )Accumulated
      other comprehensive income
                                  
                                  
                                  109
                                  
                                  
                                  
                                  550Total
      stockholders' equity
                                  
                                  
                                  71,874
                                  
                                  
                                  
                                  71,721Total
      liabilities, redeemable common stock, and stockholders'
    equity
                                  
                                  $
                                  620,535
                                  
                                  
                                  $
                                  606,009





See
Notes to Condensed Consolidated Financial Statements.


*
Derived from audited consolidated financial statements.


1
 Index




SouthCrestFinancial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Income


For
The Three and Nine Months Ended September 30, 2008 and 2007


(Unaudited)


(In
thousands, except share and per share data)





Three
      Months
                                  
                                  
                                  Nine
      Months2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2007Interest
      income:Loans
                                  
                                  $
                                  6,915
                                  
                                  
                                  $
                                  7,840
                                  
                                  
                                  $
                                  21,088
                                  
                                  
                                  $
                                  21,654Securities
      - taxable
                                  
                                  
                                  1,339
                                  
                                  
                                  
                                  1,548
                                  
                                  
                                  
                                  4,081
                                  
                                  
                                  
                                  4,190Securities
      - nontaxable
                                  
                                  
                                  230
                                  
                                  
                                  
                                  241
                                  
                                  
                                  
                                  688
                                  
                                  
                                  
                                  594Federal
      funds sold
                                  
                                  
                                  20
                                  
                                  
                                  
                                  94
                                  
                                  
                                  
                                  236
                                  
                                  
                                  
                                  351Interest-bearing
      deposits at other banks
                                  
                                  
                                  155
                                  
                                  
                                  
                                  92
                                  
                                  
                                  
                                  405
                                  
                                  
                                  
                                  265Total
      interest income
                                  
                                  
                                  8,659
                                  
                                  
                                  
                                  9,815
                                  
                                  
                                  
                                  26,498
                                  
                                  
                                  
                                  27,054Interest
      expense:Deposits
                                  
                                  
                                  3,028
                                  
                                  
                                  
                                  3,682
                                  
                                  
                                  
                                  9,860
                                  
                                  
                                  
                                  9,900Other
      borrowings
                                  
                                  
                                  122
                                  
                                  
                                  
                                  229
                                  
                                  
                                  
                                  330
                                  
                                  
                                  
                                  415Total
      interest expense
                                  
                                  
                                  3,150
                                  
                                  
                                  
                                  3,911
                                  
                                  
                                  
                                  10,190
                                  
                                  
                                  
                                  10,315Net
      interest income
                                  
                                  
                                  5,509
                                  
                                  
                                  
                                  5,904
                                  
                                  
                                  
                                  16,308
                                  
                                  
                                  
                                  16,739Provision
      for loan losses
                                  
                                  
                                  837
                                  
                                  
                                  
                                  212
                                  
                                  
                                  
                                  2,307
                                  
                                  
                                  
                                  438Net
      interest income after provision for loan losses
                                  
                                  
                                  4,672
                                  
                                  
                                  
                                  5,692
                                  
                                  
                                  
                                  14,001
                                  
                                  
                                  
                                  16,301Other
      income:Service
      charges on deposit accounts
                                  
                                  
                                  1,025
                                  
                                  
                                  
                                  1,036
                                  
                                  
                                  
                                  2,987
                                  
                                  
                                  
                                  2,771Other
      service charges and fees
                                  
                                  
                                  397
                                  
                                  
                                  
                                  340
                                  
                                  
                                  
                                  1,148
                                  
                                  
                                  
                                  957Net
      gain on sale of loans
                                  
                                  
                                  31
                                  
                                  
                                  
                                  112
                                  
                                  
                                  
                                  251
                                  
                                  
                                  
                                  350Impairment
      charge on investment securities
                                  
                                  
                                  (570
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (570
                                  )
                                  
                                  
                                  -Net
      gain on sale and call of securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  119
                                  
                                  
                                  
                                  -Income
      on bank-owned life insurance
                                  
                                  
                                  170
                                  
                                  
                                  
                                  168
                                  
                                  
                                  
                                  519
                                  
                                  
                                  
                                  428Other
      operating income
                                  
                                  
                                  117
                                  
                                  
                                  
                                  132
                                  
                                  
                                  
                                  478
                                  
                                  
                                  
                                  386Total
      other income
                                  
                                  
                                  1,170
                                  
                                  
                                  
                                  1,788
                                  
                                  
                                  
                                  4,932
                                  
                                  
                                  
                                  4,892Other
      expenses:Salaries
      and employee benefits
                                  
                                  
                                  2,940
                                  
                                  
                                  
                                  2,841
                                  
                                  
                                  
                                  8,683
                                  
                                  
                                  
                                  7,794Equipment
      and occupancy expenses
                                  
                                  
                                  655
                                  
                                  
                                  
                                  552
                                  
                                  
                                  
                                  1,864
                                  
                                  
                                  
                                  1,508Amortization
      of intangibles
                                  
                                  
                                  276
                                  
                                  
                                  
                                  276
                                  
                                  
                                  
                                  817
                                  
                                  
                                  
                                  774Other
      operating expenses
                                  
                                  
                                  1,517
                                  
                                  
                                  
                                  1,451
                                  
                                  
                                  
                                  4,418
                                  
                                  
                                  
                                  4,089Total
      other expenses
                                  
                                  
                                  5,388
                                  
                                  
                                  
                                  5,120
                                  
                                  
                                  
                                  15,782
                                  
                                  
                                  
                                  14,165Income
      before income taxes
                                  
                                  
                                  454
                                  
                                  
                                  
                                  2,360
                                  
                                  
                                  
                                  3,151
                                  
                                  
                                  
                                  7,028Income
      tax (benefit) expense
                                  
                                  
                                  (22
                                  )
                                  
                                  
                                  710
                                  
                                  
                                  
                                  663
                                  
                                  
                                  
                                  2,174Net
      income
                                  
                                  $
                                  476
                                  
                                  
                                  $
                                  1,650
                                  
                                  
                                  $
                                  2,488
                                  
                                  
                                  $
                                  4,854Basic
      and diluted earnings per share
                                  
                                  $
                                  0.12
                                  
                                  
                                  $
                                  0.42
                                  
                                  
                                  $
                                  0.64
                                  
                                  
                                  $
                                  1.23Dividends
      per share
                                  
                                  $
                                  0.13
                                  
                                  
                                  $
                                  0.13
                                  
                                  
                                  $
                                  0.39
                                  
                                  
                                  $
                                  0.39Average
      shares outstanding - basic and diluted
                                  
                                  
                                  3,916,707
                                  
                                  
                                  
                                  3,952,328
                                  
                                  
                                  
                                  3,916,239
                                  
                                  
                                  
                                  3,952,328




See
Notes to Condensed Consolidated Financial Statements.


2
 Index




SouthCrestFinancial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Comprehensive Income


For
The Three and Nine Months Ended September 30, 2008 and 2007


(Unaudited)


(In
thousands)





Three
      Months
                
                
                Nine
      Months2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      income
                
                $
                476
                
                
                $
                1,650
                
                
                $
                2,488
                
                
                $
                4,854Other
      comprehensive income:Unrealized
      holding gains (losses) on securities available for sale arising during the
      period, net of taxes of  $405, $335, ($98), and
    $267
                
                
                665
                
                
                
                543
                
                
                
                (161
                )
                
                
                453Impairment
      charge on investment securities, net of taxes of  ($216), $-0-,
      ($216), and $-0-
                
                
                (354
                )
                
                
                -
                
                
                
                (354
                )
                
                
                -Reclassification
      adjustment for gains included in net income, net of tax of $-0-, $-0-,
      $45 and $-0-
                
                
                -
                
                
                
                -
                
                
                
                74
                
                
                
                -Comprehensive
      income
                
                $
                787
                
                
                $
                2,193
                
                
                $
                2,047
                
                
                $
                5,307





See
Notes to Condensed Consolidated Financial Statements.


3
 Index




SouthCrestFinancial Group, Inc.


And
Subsidiaries


Consolidated
Statement of Stockholders' Equity


For
The Nine Months Ended September 30, 2008


(Unaudited)


(In
thousands, except share and per share data)





Common
      Stock
                    
                    
                    Additional
      Paid-In
                    
                    
                    Retained
                    
                    
                    Accumulated
      Other Comprehensive
                    
                    
                    Unearned
      Compensation
                    
                    
                    Total
      Stockholders'Shares
                    
                    
                    Par
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Income
                    
                    
                    (ESOP)
                    
                    
                    EquityBalance,
      December 31, 2007
                    
                    
                    3,931,528
                    
                    
                    $
                    3,932
                    
                    
                    $
                    49,707
                    
                    
                    $
                    17,881
                    
                    
                    $
                    550
                    
                    
                    $
                    (349
                    )
                    
                    $
                    71,721Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,488
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,488Adjustment
      resulting from adoption of EITF Issue 06-4
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (493
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (493
                    )Cash
      dividends declared, $.39 per share
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,532
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,532
                    )Stock-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    78
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    78Adjustment
      for shares owned by ESOP
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30Principal
      reduction of ESOP Debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23
                    
                    
                    
                    23Other
      comprehensive loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (441
                    )
                    
                    
                    -
                    
                    
                    
                    (441
                    )Balance,
      September 30, 2008
                    
                    
                    3,931,528
                    
                    
                    $
                    3,932
                    
                    
                    $
                    49,785
                    
                    
                    $
                    18,374
                    
                    
                    $
                    109
                    
                    
                    $
                    (326
                    )
                    
                    $
                    71,874





See
Notes to Condensed Consolidated Financial Statements.


4
 Index




SouthCrestFinancial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows


For
The Nine Months Ended September 30, 2008 and 2007


(Unaudited)


(In
thousands)





2008
                
                
                2007OPERATING
      ACTIVITIESNet
      income
                
                $
                2,488
                
                
                $
                4,854Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                912
                
                
                
                778Amortization
      of intangibles
                
                
                817
                
                
                
                774Other
      amortization
                
                
                43
                
                
                
                84Provision
      for loan losses
                
                
                2,307
                
                
                
                438Impairment
      charges on investments
                
                
                570
                
                
                
                -Stock
      compensation expense
                
                
                78
                
                
                
                79Deferred
      income taxes
                
                
                865
                
                
                
                116Income
      on bank-owned life insurance
                
                
                (519
                )
                
                
                (428
                )Gain
      on sales and calls of investment securities
                
                
                (119
                )
                
                
                -Increase
      in interest receivable
                
                
                (711
                )
                
                
                (518
                )Increase
      in income taxes payable
                
                
                747
                
                
                
                195Decrease
      in interest payable
                
                
                (561
                )
                
                
                (215
                )Net
      gain on sale of loans
                
                
                (251
                )
                
                
                (259
                )Originations
      of mortgage loans held for sale
                
                
                (12,278
                )
                
                
                (9,307
                )Proceeds
      from sales of mortgage loans held for sale
                
                
                12,367
                
                
                
                9,583Net
      loss on sale of other real estate
                
                
                52
                
                
                
                -Increase
      in other assets
                
                
                (538
                )
                
                
                (1
                )Increase
      in other liabilities
                
                
                131
                
                
                
                613Net
      cash provided by operating activities
                
                
                6,400
                
                
                
                6,786INVESTING
      ACTIVITIESProceeds
      from maturities of securities held to maturity
                
                
                23,583
                
                
                
                4,913Purchases
      of securities held to maturity
                
                
                (7,170
                )
                
                
                -Purchases
      of securities available for sale
                
                
                (31,479
                )
                
                
                (15,429
                )Proceeds
      from maturities of securities available for sale
                
                
                26,114
                
                
                
                16,536Proceeds
      from sales of securities available for sale
                
                
                -
                
                
                
                1,003Net
      change in restricted equity securities
                
                
                (406
                )
                
                
                (65
                )Net
      increase in interest-bearing deposits in banks
                
                
                (6,224
                )
                
                
                (6,153
                )Net
      increase in loans
                
                
                (32,253
                )
                
                
                (15,332
                )Purchase
      of premises and equipment
                
                
                (2,122
                )
                
                
                (2,384
                )Proceeds
      from sale of other real estate owned
                
                
                852
                
                
                
                -Net
      cash and cash equivalents used in business combination
                
                
                -
                
                
                
                (6,147
                )Net
      cash used in investing activities
                
                
                (29,105
                )
                
                
                (23,058
                )Subtotal
      carried forward
                
                
                (22,705
                )
                
                
                (16,272
                )




See
Notes to Condensed Consolidated Financial Statements.


5
 Index




SouthCrestFinancial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (continued)


For
The Nine Months Ended September 30, 2008 and 2007


(Unaudited)


(In
thousands)





2008
                    
                    
                    2007Subtotal
      brought forward
                    
                    $
                    (22,705
                    )
                    
                    $
                    (16,272
                    )FINANCING
      ACTIVITIESNet
      increase (decrease) in deposits
                    
                    
                    997
                    
                    
                    
                    (263
                    )Repayments
      of short-term borrowed funds
                    
                    
                    (3,055
                    )
                    
                    
                    (110
                    )Increase
      in short-term borrowed funds
                    
                    
                    14,973
                    
                    
                    
                    2,500Net
      increase in federal funds purchased
                    
                    
                    609
                    
                    
                    
                    772Leveraged
      ESOP Transaction
                    
                    
                    23
                    
                    
                    
                    -Proceeds
      from other borrowings
                    
                    
                    -
                    
                    
                    
                    4,000Dividends
      paid
                    
                    
                    (1,532
                    )
                    
                    
                    (1,542
                    )Net
      cash provided by financing activities
                    
                    
                    12,015
                    
                    
                    
                    5,357Net
      decrease in cash and cash equivalents
                    
                    
                    (10,690
                    )
                    
                    
                    (10,915
                    )Cash
      and cash equivalents at beginning of year
                    
                    
                    25,376
                    
                    
                    
                    29,430Cash
      and cash equivalents at end of period
                    
                    $
                    14,686
                    
                    
                    $
                    18,515SUPPLEMENTAL
      DISCLOSURESCash
      paid for:Interest
                    
                    $
                    9,629
                    
                    
                    $
                    10,100Income
      taxes
                    
                    
                    1,718
                    
                    
                    
                    2,185NONCASH
      TRANSACTIONSPrincipal
      balances of loans transferred to other real estate owned
                    
                    $
                    6,595
                    
                    
                    $
                    422Increase
      in mortgage servicing rights
                    
                    
                    121
                    
                    
                    
                    202(Decrease)
      increase in redeemable common stock held by ESOP
                    
                    
                    (30
                    )
                    
                    
                    129Unrealized
      (loss) gain on securities available for sale, net
                    
                    
                    (441
                    )
                    
                    
                    453BUSINESS
      COMBINATIONCash
      and due from banks, net of cash paid
                    
                    $
                    -
                    
                    
                    $
                    3,103Federal
      funds sold
                    
                    
                    -
                    
                    
                    
                    8,100Interest
      bearing deposits at other financial institutions
                    
                    
                    -
                    
                    
                    
                    181Securities
      available for sale
                    
                    
                    -
                    
                    
                    
                    24,046Restricted
      equity securities
                    
                    
                    -
                    
                    
                    
                    257Loans,
      net
                    
                    
                    -
                    
                    
                    
                    26,344Bank-owned
      life insurance
                    
                    
                    -
                    
                    
                    
                    3,187Premises
      and equipment
                    
                    
                    -
                    
                    
                    
                    909Goodwill
                    
                    
                    -
                    
                    
                    
                    5,198Core
      deposit intangible
                    
                    
                    -
                    
                    
                    
                    715Other
      assets
                    
                    
                    -
                    
                    
                    
                    1,254Total
      assets
                    
                    $
                    -
                    
                    
                    $
                    73,294Deposits
                    
                    $
                    -
                    
                    
                    $
                    49,672Federal
      Home Loan Bank advances
                    
                    
                    -
                    
                    
                    
                    3,000Other
      liabilities
                    
                    
                    -
                    
                    
                    
                    3,272Total
      liabilities assumed
                    
                    
                    -
                    
                    
                    
                    55,944Purchase
      price
                    
                    $
                    -
                    
                    
                    $
                    17,350




See
Notes to Condensed Consolidated Financial Statements.


6
 Index




SouthCrestFinancial Group, Inc. and Subsidiaries


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
nine month periods ended September 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
September 30, 2008 and 2007, the Company had 191,400  options
outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive
Plan.  For the three and nine month periods ended September 30, 2008
and 2007, these options were nondilutive.   The Company’s ESOP
has a loan from the holding company secured by 14,821 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 3,916,707 and 3,952,328 for the three months
ended September 30, 2008 and 2007, and 3,916,239 and 3,952,328 for the nine
months ended September 30, 2008 and 2007.


7
 Index




NOTE3— LOANS
RECEIVABLE




The
composition of loans at September 30, 2008 and December 31, 2007 is summarized
as follows:




September 30,
                  
                  
                  December 31,(Dollars
      in thousands)
                  
                  2008
                  
                  
                  2007Commercial,
      financial, and agricultural
                  
                  $
                  24,134
                  
                  
                  $
                  22,595Real
      estate – construction
                  
                  
                  69,574
                  
                  
                  
                  66,069Real
      estate – mortgage
                  
                  
                  259,934
                  
                  
                  
                  241,316Consumer
                  
                  
                  37,050
                  
                  
                  
                  38,834Other
                  
                  
                  7,781
                  
                  
                  
                  5,162398,473
                  
                  
                  
                  373,976Unearned
      income
                  
                  
                  (14
                  )
                  
                  
                  (151
                  )Allowance
      for loan losses
                  
                  
                  (6,189
                  )
                  
                  
                  (4,952
                  )Loans,
      net
                  
                  $
                  392,270
                  
                  
                  $
                  368,873




Changes
for the nine months ended in the allowance for loan losses are as
follows:




September 30,
                    
                    
                    September 30,(Dollars
      in thousands)
                    
                    2008
                    
                    
                    2007Balance,
      beginning of year
                    
                    $
                    4,952
                    
                    
                    $
                    4,480Provision
      for loan losses
                    
                    
                    2,307
                    
                    
                    
                    438Loans
      charged off
                    
                    
                    (1,516
                    )
                    
                    
                    (600
                    )Recoveries
      of loans previously charged off
                    
                    
                    446
                    
                    
                    
                    472Allowance
      acquired in business combination
                    
                    
                    -
                    
                    
                    
                    344Balance,
      end of period
                    
                    $
                    6,189
                    
                    
                    $
                    5,134




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




September 30,
                    
                    
                    December 31,(Dollars
      in thousands)
                    
                    2008
                    
                    
                    2007Impaired
      loans without a valuation allowance
                    
                    $
                    -
                    
                    
                    $
                    -Impaired
      loans with a valuation allowance
                    
                    
                    5,654
                    
                    
                    
                    1,633Total
      impaired loans
                    
                    $
                    5,654
                    
                    
                    $
                    1,633Valuation
      allowance related to impaired loans
                    
                    $
                    908
                    
                    
                    $
                    245Average
      investment in impaired loans
                    
                    $
                    5,109
                    
                    
                    $
                    507




There
were $5,654,000 and $1,633,000 loans on nonaccrual status at September 30, 2008
and December 31, 2007.  Loans of $454,000 and $247,000 were past due
ninety days or more and still accruing interest at September 30, 2008 and
December 31, 2007, respectively.




September 30,
                  
                  
                  December 31,(Dollars
      in thousands)
                  
                  2008
                  
                  
                  2007Nonaccrual
      loans
                  
                  $
                  5,654
                  
                  
                  $
                  1,633Loans
      past due 90 days or more and still accruing
                  
                  $
                  454
                  
                  
                  $
                  247Loans
      restructured under troubled debt
                  
                  $
                  163
                  
                  
                  $
                  -




NOTE
4 — INVESTMENT SECURITIES IMPAIRMENT




In the
quarter ended September 30, 2008, the Company recorded an impairment charge of
$570,000 on $640,000 of Federal National Mortgage Association
(“Fannie Mae”) perpetual preferred stock. The reclassification of an
unrealized mark-to-market loss on these securities to an other-than-temporary
impairment charge was the result of action taken by the federal government to
take Fannie Mae into conservatorship. Losses on the securities were
previously recognized in the equity section of the balance sheet.




8
 Index




NOTE5—
DEPOSITS




At
September 30, 2008 and December 31, 2007, deposits were as follows:




September 30,
                  
                  
                  December 31,(Dollars
      In Thousands)
                  
                  2008
                  
                  
                  2007Noninterest
      bearing deposits
                  
                  $
                  76,024
                  
                  
                  $
                  80,685Interest
      checking
                  
                  
                  95,823
                  
                  
                  
                  83,742Money
      market
                  
                  
                  54,060
                  
                  
                  
                  55,687Savings
                  
                  
                  43,371
                  
                  
                  
                  41,997Certificates
      of deposit
                  
                  
                  245,719
                  
                  
                  
                  251,820$
                  514,997
                  
                  
                  $
                  513,931




NOTE6— 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 nine months ended September 30, 2008 recorded compensation
expense of approximately $25,000 and $75,000, 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, Accountingfor 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 September 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.


9
 Index





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.





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.





In
October 2008, the FASB issued FSP No. 157-3 , Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.  This
FSP clarifies the application of SFAS No. 157 in a market that is not active and
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with Statement 157. This
FSP also provides an example to illustrate key considerations in determining the
fair value of a financial asset when the market for that financial asset is not
active. This FSP was effective upon issuance on October 10, 2008 and includes
periods for which financial statements have not yet been issued. The adoption of
FSP No. 157-3 did not have a material impact on the consolidated financial
statements of the Company.




NOTE
7 - 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.


10
 Index




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 and 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.




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, Accountingby 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 September 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.




Fair Value
      September 30,
                  
                  
                  Quoted Prices
      In Active Markets for Identical Assets
                  
                  
                  Significant
      Other Observable Inputs
                  
                  
                  Significant
      Unobservable Inputs(Dollars in thousands)
                  
                  2008
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Securities
      available for sale
                  
                  $
                  83,397
                  
                  
                  $
                  29
                  
                  
                  $
                  83,187
                  
                  
                  $
                  181




The
securities measured as Level 3 include investment in the common stock of a bank
holding company that is not listed on an exchange.  Its fair value is
measured as a factor of book value.  There were no gains or losses for
the three and nine months ended September 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 September 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 September 30,
2008:


11
 Index




Investment
      SecuritiesAvailable
      For SaleBeginning
      balance, January 1, 2008
                      
                      $
                      280Total
      gains (losses) realized or unrealized Included in earnings
                      
                      
                      -Included
      in other comprehensive income
                      
                      
                      (99
                      )Transfers
      in (out) of Level 3
                      
                      
                      -Ending
      balance, September 30, 2008
                      
                      $
                      181





The table
below presents the recorded amount of assets and liabilities measured at fair
value on a nonrecurring basis.





Fair Value
      September 30,
                
                
                Quoted Prices
      In Active Markets for Identical Assets
                
                
                Significant
      Other Observable Inputs
                
                
                Significant
      Unobservable Inputs(Dollars in thousands)
                
                2008
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Impaired
      loans
                
                $
                4,746
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,746




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.




NOTE8—BORROWED
FUNDS




At
September 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 September 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  the four bank subsidiaries ranged from 1.39% to 2.11%
which was in excess of the 1.00% allowed under the Loan and Stock Pledge
Agreement.  At June 30, 2008, the Company was in violation of the covenant,
and the Company obtained a waiver of covenant from Silverton
Bank.  The Company is working with Silverton to obtain a waiver for
the quarter ended September 30, 2008.  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





ITEM2. 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 nine months ended September 30, 2008, our total assets increased $14.5
million to $620.5 million at September 30, 2008.  During this period,
total loans increased $23.4 million, or 6.3%. Securities available for sale
increased $5.8 million due primarily to purchases made during the period while
securities held to maturity decreased $18.1 million due to
maturities.  Interest bearing deposits at other financial institutions
increased $6.2 million, or 58.5%.  At September 30, 2008 the
Company owned $15.4 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 $9.2
million.





During
the year to date period ended September 30, 2008, deposits increased $1.1
million or 0.2%.  Changes in deposits are summarized
below:





September 30,
                    
                    
                    December 31,(Dollars
      In Thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    ChangeNoninterest
      bearing deposits
                    
                    $
                    76,024
                    
                    
                    $
                    80,685
                    
                    
                    $
                    (4,661
                    )Interest
      checking
                    
                    
                    95,823
                    
                    
                    
                    83,742
                    
                    
                    
                    12,081Money
      market
                    
                    
                    54,060
                    
                    
                    
                    55,687
                    
                    
                    
                    (1,627
                    )Savings
                    
                    
                    43,371
                    
                    
                    
                    41,997
                    
                    
                    
                    1,374Certificates
      of deposit
                    
                    
                    245,719
                    
                    
                    
                    251,820
                    
                    
                    
                    (6,101
                    )$
                    514,997
                    
                    
                    $
                    513,931
                    
                    
                    $
                    1,066





At
September 30, 2008, short-term borrowed funds consist of $14,973,000 in Federal
Home Loan Bank advances and $609,000 of federal funds purchased.  At
December 31, 2007, short-term borrowed funds consisted of $3,055,000 in Federal
Home Loan Bank advances which were repaid in the current year.  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 increased by $153,000 since December 31, 2007, due to net
income of $2,488,000 offset by dividends paid of $1,533,000, a $493,000
adjustment to beginning retained earnings related to the implementation of EITF
Issue 06-4, Accountingfor Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangement, and a $441,000 decrease in the unrealized gain on securities
available for sale, net of deferred taxes.




Loan Portfolio.The following table
presents various categories of loans contained in the loan portfolios of the
subsidiary banks as of September 30, 2008 and December 31, 2007:




September 30,
                  
                  
                  December 31,(Dollars
      in thousands)
                  
                  2008
                  
                  
                  2007Commercial,
      financial, and agricultural
                  
                  $
                  24,134
                  
                  
                  $
                  22,595Real
      estate – construction
                  
                  
                  69,574
                  
                  
                  
                  66,069Real
      estate – mortgage
                  
                  
                  259,934
                  
                  
                  
                  241,316Consumer
                  
                  
                  37,050
                  
                  
                  
                  38,834Other
                  
                  
                  7,781
                  
                  
                  
                  5,162398,473
                  
                  
                  
                  373,976Unearned
      income
                  
                  
                  (14
                  )
                  
                  
                  (151
                  )Allowance
      for loan losses
                  
                  
                  (6,189
                  )
                  
                  
                  (4,952
                  )Loans,
      net
                  
                  $
                  392,270
                  
                  
                  $
                  368,873


14
 Index




Nonaccrual, Past Due and Restructured
Loans .




September 30,
                  
                  
                  December 31,(Dollars
      in thousands)
                  
                  2008
                  
                  
                  2007Nonaccrual
      loans
                  
                  $
                  5,654
                  
                  
                  $
                  1,633Loans
      past due 90 days or more and still accruing
                  
                  $
                  454
                  
                  
                  $
                  247Loans
      restructured under troubled debt
                  
                  $
                  163
                  
                  
                  $
                  -





Nonaccrual
loans decreased $5,459,000 during the quarter ended September 30,
2008, declining from $11,113,000 at June 30, 2008 to $5,654,000 at
September 30, 2008.  Since December 31, 2007, nonaccrual loans have
increased $4,021,000. The decrease in nonaccrual loans for the quarter is
attributed to the transfer of a $5.5 million residential real estate development
loan to other real estate.  Nonaccrual loans at September 30,
2008 include a $3.45 million loan for the construction and development of
an apartment complex, a $376,000 nonresidential construction loan, a $663,000
residential development loan secured by a property in Arizona, and $1,415,000 in
loans secured by first mortgage loans on single family dwellings, the largest of
which was $249,000.  In total, the Company has recorded a valuation
allowance of $908,000 related to nonaccrual loans at September 30,
2008.





Information
regarding impaired loans as of September 30, 2008 and December 31, 2007 are as
follows:





September 30,
                    
                    
                    December 31,(Dollars
      in thousands)
                    
                    2008
                    
                    
                    2007Impaired
      loans without a valuation allowance
                    
                    $
                    -
                    
                    
                    $
                    -Impaired
      loans with a valuation allowance
                    
                    
                    5,654
                    
                    
                    
                    1,633Total
      impaired loans
                    
                    $
                    5,654
                    
                    
                    $
                    1,633Valuation
      allowance related to impaired loans
                    
                    $
                    908
                    
                    
                    $
                    245Average
      investment in impaired loans
                    
                    $
                    5,109
                    
                    
                    $
                    507





In
addition to the above, the Company had at September 30, 2008 $15,579,000 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 September 30, 2008:





(Dollars
      in thousands)Construction
      and development loans
                      
                      $
                      5,049First
      mortgage - residential
                      
                      
                      5,532Second
      mortgage and home equity line of credit
                      
                      
                      275Nonresidential
      mortgage
                      
                      
                      4,028Commercial
                      
                      
                      227Consumer
                      
                      
                      468Total
                      
                      $
                      15,579





Construction
and development loans includes a $2,000,000 loan for the development of a retail
shopping center.  Subsequent to September 30, 2008, the developer for
the project filed for involuntary bankruptcy.  The Company believes
the loan is adequately collateralized.  In addition, construction and
development loans includes a $1,470,000 loan secured by 74 lots in a townhome
development.  First mortgage residential loans are composed of 81
loans, the largest of which is $227,000.  There are 20 loans whose
balance is greater than $100,000, which account for $2,975,000 of the
total.   Loans secured by nonresidential real estate are composed
of 15 loans, the largest of which is a $2,600,000 loan secured by a retail
shopping center.





Other Real Estate.Included in other
assets was other real estate of $5,947,000 and $256,000 as of September 30, 2008
and December 31, 2007, respectively.  The increase in other real
estate is generally attributable to slowing economic conditions resulting in
increased foreclosures.  At September 30, 2008 $4,925,000 of the other
real estate includes property composed of 96 developed and 24 partially
developed lots in a golf course development.  This property was
foreclosed in September, 2008 and related to a loan that was classified as
nonaccrual at March 31 and June 30, 2008.  The remainder of other real
estate consists of six residential properties, the largest having a balance of
$316,000.


15
 Index





Summary of Loan Loss
Experience.An analysis of
SouthCrest’s loan loss experience is included in the following table for the
periods ended September 30, 2008 and 2007:





Analysis
of Allowance for Loan Losses


For
The Three and Six Months Ended September 30





(Dollars
      in thousands)
                      
                      Three
      Months
                      
                      
                      Nine
      Months2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Balance
      at beginning of period
                      
                      $
                      6,206
                      
                      
                      $
                      4,674
                      
                      
                      $
                      4,952
                      
                      
                      $
                      4,480ChargeoffsCommercial
      loans
                      
                      
                      3
                      
                      
                      
                      25
                      
                      
                      
                      44
                      
                      
                      
                      72Real
      estate - construction
                      
                      
                      616
                      
                      
                      
                      -
                      
                      
                      
                      638
                      
                      
                      
                      -Real
      estate - mortgage
                      
                      
                      76
                      
                      
                      
                      41
                      
                      
                      
                      180
                      
                      
                      
                      41Consumer
                      
                      
                      286
                      
                      
                      
                      158
                      
                      
                      
                      566
                      
                      
                      
                      397Other
                      
                      
                      29
                      
                      
                      
                      32
                      
                      
                      
                      88
                      
                      
                      
                      90Total
      Chargeoffs
                      
                      
                      1,010
                      
                      
                      
                      256
                      
                      
                      
                      1,516
                      
                      
                      
                      600RecoveriesCommercial
      loans
                      
                      
                      12
                      
                      
                      
                      1
                      
                      
                      
                      19
                      
                      
                      
                      27Real
      estate - construction
                      
                      
                      1
                      
                      
                      
                      40
                      
                      
                      
                      25
                      
                      
                      
                      40Real
      estate - mortgage
                      
                      
                      2
                      
                      
                      
                      8
                      
                      
                      
                      43
                      
                      
                      
                      12Consumer
                      
                      
                      120
                      
                      
                      
                      101
                      
                      
                      
                      294
                      
                      
                      
                      334Other
                      
                      
                      21
                      
                      
                      
                      10
                      
                      
                      
                      65
                      
                      
                      
                      59Total
      recoveries
                      
                      
                      156
                      
                      
                      
                      160
                      
                      
                      
                      446
                      
                      
                      
                      472Net
      chargeoffs
                      
                      
                      (854
                      )
                      
                      
                      (96
                      )
                      
                      
                      (1,070
                      )
                      
                      
                      (128
                      )Additions
      charged to operations
                      
                      
                      837
                      
                      
                      
                      212
                      
                      
                      
                      2,307
                      
                      
                      
                      438Additions
      to allowance resulting from business combination
                      
                      
                      -
                      
                      
                      
                      344
                      
                      
                      
                      -
                      
                      
                      
                      344Balance
      at end of period
                      
                      $
                      6,189
                      
                      
                      $
                      5,134
                      
                      
                      $
                      6,189
                      
                      
                      $
                      5,134Annualized
      ratio of net chargeoffs during the period to average loans outstanding
      during the period
                      
                      
                      0.89
                      %
                      
                      
                      0.10
                      %
                      
                      
                      0.37
                      %
                      
                      
                      0.05
                      %





Allowance for Loan
Losses.The allowance for loan losses as of September 30, 2008
was $6,189,000 compared to $4,952,000 at December 31, 2007 and $5,134,000
at September 30, 2007.   As a percentage of gross loans, the
allowance for loan losses was 1.55% at September 30, 2008 compared to 1.32% as
of December 31, 2007 and 1.36% at September 30, 2007. During the current
quarter, chargeoffs totaled $1,010,000 which includes $616,000 relating to a
loan secured by residential lots foreclosed in
September.  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 Nine Months Ended September 30, 2008 and
2007




Net
income for the three-month period ended September 30, 2008 amounted to $476,000,
or $0.12 basic and diluted earnings per share, compared to net income of
$1,650,000 or $0.42 basic and diluted earnings per share for the same
three-month period in 2007, a decrease of $1,174,000, or 71.2%.  Net
income for the nine-month period ended September 30, 2008 amounted to
$2,488,000, or $0.64 basic and diluted earnings per share, compared to net
income of $4,854,000 or $1.23 basic and diluted earnings per share for the same
nine-month period in 2007, a decrease of $2,366,000, or 48.7%.  For
both the three-month and nine-month period, the decline in net income is
generally attributable to reductions in net interest income, increases in the
provision for loan losses, and an other than temporary impairment loss on
investment securities.




16
 Index




The
acquisition of Bank of Chickamauga was made on July 1, 2007 and results of
operations for Chickamauga are only included in consolidated results
prospectively from the date of merger.  Therefore, the year to date
results of operations for 2007 do not include Chickamauga for the first six
months of the year.




Net Interest Income.Net interest income
represents the difference between interest received on interest earning assets
and interest paid on interest bearing liabilities.   The
following presents, for the three month periods ended September 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.




Average
Consolidated Balance Sheets and Net Interest Income Analysis


For the
Three Month Periods Ended September 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
                                          
                                          $
                                          385,974
                                          
                                          
                                          $
                                          369,857
                                          
                                          
                                          
                                          7.13
                                          %
                                          
                                          
                                          8.41
                                          %
                                          
                                          $
                                          6,915
                                          
                                          
                                          $
                                          7,840
                                          
                                          
                                          $
                                          (925
                                          )
                                          
                                          $
                                          (1,246
                                          )
                                          
                                          $
                                          321Taxable
      securities
                                          
                                          
                                          112,558
                                          
                                          
                                          
                                          126,625
                                          
                                          
                                          
                                          4.73
                                          %
                                          
                                          
                                          4.77
                                          %
                                          
                                          
                                          1,339
                                          
                                          
                                          
                                          1,521
                                          
                                          
                                          
                                          (182
                                          )
                                          
                                          
                                          (13
                                          )
                                          
                                          
                                          (169
                                          )Nontaxable
      securities
                                          
                                          
                                          23,480
                                          
                                          
                                          
                                          24,489
                                          
                                          
                                          
                                          3.90
                                          %
                                          
                                          
                                          3.90
                                          %
                                          
                                          
                                          230
                                          
                                          
                                          
                                          241
                                          
                                          
                                          
                                          (11
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (11
                                          )Federal
      funds sold
                                          
                                          
                                          9,957
                                          
                                          
                                          
                                          8,175
                                          
                                          
                                          
                                          0.80
                                          %
                                          
                                          
                                          5.87
                                          %
                                          
                                          
                                          20
                                          
                                          
                                          
                                          121
                                          
                                          
                                          
                                          (101
                                          )
                                          
                                          
                                          (122
                                          )
                                          
                                          
                                          21Interest
      bearing deposits in banks
                                          
                                          
                                          15,141
                                          
                                          
                                          
                                          7,029
                                          
                                          
                                          
                                          4.07
                                          %
                                          
                                          
                                          5.19
                                          %
                                          
                                          
                                          155
                                          
                                          
                                          
                                          92
                                          
                                          
                                          
                                          63
                                          
                                          
                                          
                                          (24
                                          )
                                          
                                          
                                          87Total
      earning assets
                                          
                                          
                                          547,110
                                          
                                          
                                          
                                          536,175
                                          
                                          
                                          
                                          6.30
                                          %
                                          
                                          
                                          7.26
                                          %
                                          
                                          
                                          8,659
                                          
                                          
                                          
                                          9,815
                                          
                                          
                                          
                                          (1,156
                                          )
                                          
                                          
                                          (1,405
                                          )
                                          
                                          
                                          249Cash
      and due from banks
                                          
                                          
                                          15,031
                                          
                                          
                                          
                                          15,379Allowance
      for loan losses
                                          
                                          
                                          (5,781
                                          )
                                          
                                          
                                          (5,059
                                          )Other
      assets
                                          
                                          
                                          62,159
                                          
                                          
                                          
                                          56,239Total
                                          
                                          $
                                          618,519
                                          
                                          
                                          $
                                          602,734Liabilities
      and EquityInterest
      bearing demand (2)
                                          
                                          $
                                          149,593
                                          
                                          
                                          $
                                          133,037
                                          
                                          
                                          
                                          1.39
                                          %
                                          
                                          
                                          1.87
                                          %
                                          
                                          $
                                          524
                                          
                                          
                                          $
                                          628
                                          
                                          
                                          $
                                          (104
                                          )
                                          
                                          $
                                          (174
                                          )
                                          
                                          $
                                          70Savings
                                          
                                          
                                          44,141
                                          
                                          
                                          
                                          45,393
                                          
                                          
                                          
                                          0.70
                                          %
                                          
                                          
                                          0.75
                                          %
                                          
                                          
                                          78
                                          
                                          
                                          
                                          86
                                          
                                          
                                          
                                          (8
                                          )
                                          
                                          
                                          (6
                                          )
                                          
                                          
                                          (2
                                          )Certificates
      of deposit
                                          
                                          
                                          252,144
                                          
                                          
                                          
                                          246,868
                                          
                                          
                                          
                                          3.83
                                          %
                                          
                                          
                                          4.77
                                          %
                                          
                                          
                                          2,426
                                          
                                          
                                          
                                          2,968
                                          
                                          
                                          
                                          (542
                                          )
                                          
                                          
                                          (603
                                          )
                                          
                                          
                                          61Total
      interest bearing deposits
                                          
                                          
                                          445,878
                                          
                                          
                                          
                                          425,298
                                          
                                          
                                          
                                          2.70
                                          %
                                          
                                          
                                          3.43
                                          %
                                          
                                          
                                          3,028
                                          
                                          
                                          
                                          3,682
                                          
                                          
                                          
                                          (654
                                          )
                                          
                                          
                                          (783
                                          )
                                          
                                          
                                          129Borrowed
      funds
                                          
                                          
                                          11,124
                                          
                                          
                                          
                                          15,614
                                          
                                          
                                          
                                          4.36
                                          %
                                          
                                          
                                          5.82
                                          %
                                          
                                          
                                          122
                                          
                                          
                                          
                                          229
                                          
                                          
                                          
                                          (107
                                          )
                                          
                                          
                                          (50
                                          )
                                          
                                          
                                          (57
                                          )Total
      interest bearing liabilities
                                          
                                          
                                          457,002
                                          
                                          
                                          
                                          440,912
                                          
                                          
                                          
                                          2.74
                                          %
                                          
                                          
                                          3.52
                                          %
                                          
                                          
                                          3,150
                                          
                                          
                                          
                                          3,911
                                          
                                          
                                          
                                          (761
                                          )
                                          
                                          
                                          (833
                                          )
                                          
                                          
                                          72Noninterest
      bearing demand deposits
                                          
                                          
                                          78,477
                                          
                                          
                                          
                                          81,835Other
      liabilities
                                          
                                          
                                          10,170
                                          
                                          
                                          
                                          281Redeemable
      common stock held by ESOP
                                          
                                          
                                          712
                                          
                                          
                                          
                                          1,062Shareholders'
      equity
                                          
                                          
                                          72,158
                                          
                                          
                                          
                                          78,644Total
                                          
                                          $
                                          618,519
                                          
                                          
                                          $
                                          602,734Net
      interest income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          5,509
                                          
                                          
                                          $
                                          5,904
                                          
                                          
                                          $
                                          (395
                                          )
                                          
                                          $
                                          (572
                                          )
                                          
                                          $
                                          177Net
      interest margin
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4.01
                                          %
                                          
                                          
                                          4.37
                                          %Net
      interest spread
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3.56
                                          %
                                          
                                          
                                          3.74
                                          %


17
 Index




Net
interest income for the three months ended September 30, 2008 decreased
$395,000 or 6.7% over the same period in 2007.  The $395,000 decline
in net interest income attributable to a $572,000 reduction attributable to
changes in interest rates was offset by an increase of $177,000 attributable to
increases in the average balances of interest earning assets and interest
bearing liabilities. 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 September 30, 2008 was
approximately 250 basis points lower than the same period in
2007.  These reductions have contributed to a reduction in the average
yield on earning assets from 7.26% during the three month period ending
September 30, 2007 to 6.30% in the same period in 2008.  The average
cost of funds declined from 3.52% in 2007 to 2.74% in 2008.  The net
interest margin declined 36 basis points from 4.37% for the quarter ended
September 30, 2007 to 4.01% for the current year period.  The net
interest spread decreased from 3.74% in 2007 to 3.56% in
2008.   Total interest income decreased $1,156,000 to $8,659,000
for the quarter ended September 30, 2008.  Interest income earned on
loans decreased $925,000 composed of a $1,246,000 reduction in interest due to
the reduction in the average yield of the loan portfolio from 8.41% to 7.13%,
offset by a $321,000 increase that relates to a $16.1 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.   We expect that
our net interest margin and net interest spread to face continued pressure as
the Federal Reserve further reduces the discount rate.




Interest
expense decreased $761,000 to $3,150,000 for the quarter ended September 30,
2008.  The main component of the decrease in interest expense was a
$542,000 decrease 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 nine month periods ended September 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 Nine Month Periods Ended September 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
                                    
                                    $
                                    383,165
                                    
                                    
                                    $
                                    345,621
                                    
                                    
                                    
                                    7.35
                                    %
                                    
                                    
                                    8.38
                                    %
                                    
                                    $
                                    21,088
                                    
                                    
                                    $
                                    21,654
                                    
                                    
                                    $
                                    (566
                                    )
                                    
                                    $
                                    (2,806
                                    )
                                    
                                    $
                                    2,240Taxable
      securities
                                    
                                    
                                    113,039
                                    
                                    
                                    
                                    118,541
                                    
                                    
                                    
                                    4.82
                                    %
                                    
                                    
                                    4.73
                                    %
                                    
                                    
                                    4,081
                                    
                                    
                                    
                                    4,190
                                    
                                    
                                    
                                    (109
                                    )
                                    
                                    
                                    82
                                    
                                    
                                    
                                    (191
                                    )Nontaxable
      securities
                                    
                                    
                                    23,475
                                    
                                    
                                    
                                    20,342
                                    
                                    
                                    
                                    3.91
                                    %
                                    
                                    
                                    3.90
                                    %
                                    
                                    
                                    688
                                    
                                    
                                    
                                    594
                                    
                                    
                                    
                                    94
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    92Federal
      funds sold
                                    
                                    
                                    12,155
                                    
                                    
                                    
                                    8,903
                                    
                                    
                                    
                                    2.59
                                    %
                                    
                                    
                                    5.27
                                    %
                                    
                                    
                                    236
                                    
                                    
                                    
                                    351
                                    
                                    
                                    
                                    (115
                                    )
                                    
                                    
                                    (217
                                    )
                                    
                                    
                                    102Interest
      bearing deposits in banks
                                    
                                    
                                    14,398
                                    
                                    
                                    
                                    5,748
                                    
                                    
                                    
                                    3.76
                                    %
                                    
                                    
                                    6.16
                                    %
                                    
                                    
                                    405
                                    
                                    
                                    
                                    265
                                    
                                    
                                    
                                    140
                                    
                                    
                                    
                                    (135
                                    )
                                    
                                    
                                    275Total
      earning assets
                                    
                                    
                                    546,232
                                    
                                    
                                    
                                    499,155
                                    
                                    
                                    
                                    6.48
                                    %
                                    
                                    
                                    7.25
                                    %
                                    
                                    
                                    26,498
                                    
                                    
                                    
                                    27,054
                                    
                                    
                                    
                                    (556
                                    )
                                    
                                    
                                    (3,074
                                    )
                                    
                                    
                                    2,518Cash
      and due from banks
                                    
                                    
                                    15,010
                                    
                                    
                                    
                                    13,880Allowance
      for loan losses
                                    
                                    
                                    (5,575
                                    )
                                    
                                    
                                    (4,772
                                    )Other
      assets
                                    
                                    
                                    61,876
                                    
                                    
                                    
                                    51,069Total
                                    
                                    $
                                    617,543
                                    
                                    
                                    $
                                    559,332Liabilities
      and EquityInterest
      bearing demand (2)
                                    
                                    $
                                    149,032
                                    
                                    
                                    $
                                    129,212
                                    
                                    
                                    
                                    1.49
                                    %
                                    
                                    
                                    1.85
                                    %
                                    
                                    $
                                    1,657
                                    
                                    
                                    $
                                    1,788
                                    
                                    
                                    $
                                    (131
                                    )
                                    
                                    $
                                    (381
                                    )
                                    
                                    $
                                    250Savings
                                    
                                    
                                    44,064
                                    
                                    
                                    
                                    39,192
                                    
                                    
                                    
                                    0.72
                                    %
                                    
                                    
                                    0.72
                                    %
                                    
                                    
                                    237
                                    
                                    
                                    
                                    212
                                    
                                    
                                    
                                    25
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    25Certificates
      of deposit
                                    
                                    
                                    252,601
                                    
                                    
                                    
                                    223,851
                                    
                                    
                                    
                                    4.21
                                    %
                                    
                                    
                                    4.72
                                    %
                                    
                                    
                                    7,966
                                    
                                    
                                    
                                    7,900
                                    
                                    
                                    
                                    66
                                    
                                    
                                    
                                    (900
                                    )
                                    
                                    
                                    966Total
      interest bearing deposits
                                    
                                    
                                    445,697
                                    
                                    
                                    
                                    392,255
                                    
                                    
                                    
                                    2.96
                                    %
                                    
                                    
                                    3.37
                                    %
                                    
                                    
                                    9,860
                                    
                                    
                                    
                                    9,900
                                    
                                    
                                    
                                    (40
                                    )
                                    
                                    
                                    (1,281
                                    )
                                    
                                    
                                    1,241Borrowed
      funds
                                    
                                    
                                    10,093
                                    
                                    
                                    
                                    9,651
                                    
                                    
                                    
                                    4.37
                                    %
                                    
                                    
                                    5.75
                                    %
                                    
                                    
                                    330
                                    
                                    
                                    
                                    415
                                    
                                    
                                    
                                    (85
                                    )
                                    
                                    
                                    (103
                                    )
                                    
                                    
                                    18Total
      interest bearing liabilities
                                    
                                    
                                    455,790
                                    
                                    
                                    
                                    401,906
                                    
                                    
                                    
                                    2.99
                                    %
                                    
                                    
                                    3.43
                                    %
                                    
                                    
                                    10,190
                                    
                                    
                                    
                                    10,315
                                    
                                    
                                    
                                    (125
                                    )
                                    
                                    
                                    (1,384
                                    )
                                    
                                    
                                    1,259Noninterest
      bearing demand deposits
                                    
                                    
                                    78,516
                                    
                                    
                                    
                                    79,521Other
      liabilities
                                    
                                    
                                    10,247
                                    
                                    
                                    
                                    5,011Redeemable
      common stock held by ESOP
                                    
                                    
                                    782
                                    
                                    
                                    
                                    1,054Shareholders'
      equity
                                    
                                    
                                    72,208
                                    
                                    
                                    
                                    71,840Total
                                    
                                    $
                                    617,543
                                    
                                    
                                    $
                                    559,332Net
      interest income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    16,308
                                    
                                    
                                    $
                                    16,739
                                    
                                    
                                    $
                                    (431
                                    )
                                    
                                    $
                                    (1,690
                                    )
                                    
                                    $
                                    1,259Net
      interest margin
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3.99
                                    %
                                    
                                    
                                    4.48
                                    %Net
      interest spread
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3.49
                                    %
                                    
                                    
                                    3.82
                                    %





(1)  Daily
averages.  Loans includes nonaccrual loans.


(2)  Includes
money market accounts




Net
interest income for the nine months ended September 30, 2008 decreased
$431,000 or 0.3% over the same period in 2007.  The $431,000
decline in net interest income is attributable to a $1,690,000 decline relating
to changes in interest rates offset by a $1,259,000 increase in interest expense
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 nine-month
period ending September 30, 2008 was approximately 344 basis points lower than
the same period in 2007.  These reductions have contributed to a
reduction in the average yield on earning assets from 7.25% during the nine
month period ending September 30, 2007 to 6.48% in the same period in
2008.  During the same period, the average cost of funds declined from
3.43% in 2007 to 2.99% in 2008.  The net interest margin declined 49
basis points from 4.48% for the period ended September 30, 2007 to 3.99% for the
current year period.  The net interest spread decreased from 3.82% in
2007 to 3.49% in 2008.   We expect that our net interest margin
and net interest spread to face continued pressure as the Federal Reserve
further reduces the discount rate.




19
 Index




Total
interest income decreased $556,000 to $26.5 million for the nine-month period
ended September 30, 2008.  Interest income earned on loans decreased
$566,000.  Of this decrease, $2,806,000 relates to reduction in
interest due to the reduction in the average yield of the loan portfolio from
8.38% to 7.35%, caused by a significant portion of the loan portfolio having
variable interest rates that are tied to the prime rate.  Offsetting this
decrease was a $2,240,000 increase in interest due to the $37.5 million growth
in the average balance of loans.




Interest
expense decreased $125,000 to $10.2 million for the nine-month period ended
September 30, 2008 primarily due to reductions in the levels of rates paid for
funds.  The main component of the decrease in interest expense was a
decrease in interest paid on interest bearing demand deposits.  The
average rate on these funds decreased from 1.85% in 2007 to 1.49% for the 2008
period, and the average balance increased $19.8 million.




Other Income.Total other income for the
three-month period ended September 30, 2008 amounted to $1,170,000, compared to
$1,788,000 for the same period in 2007, a decrease of $618,000.  For
the nine-month period, total other income was $4,932,000 compared to $4,892,000
in 2007, an increase of $40,000.  The addition of Bank of Chickamauga
accounted for $303,000 of additional other income for the nine-month
period.




Service
charges (including NSF and overdraft charges) on deposit accounts decreased
$11,000 or 1.1% for the three-month period and increased $216,000 or 7.8% for
the nine-month period.  As a percentage of interest-bearing and
non-interest bearing checking accounts, these service charges were 1.79% and
1.92% for the three-month periods ended September 30, 2008 and 2007 and
1.75% and 1.77% for the nine-month periods in 2008 and 2007,
respectively.  Other service charges and fees increased $57,000 for
the three-month period in 2008 and $191,000 for the nine month
period.  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 nine month period, debit card fees increased
$96,000 and ATM fee income increased $28,000. The change applicable to the
addition of Chickamauga accounted for approximately $50,000 of the
increase.




Gain on
sale of loans was $31,000 for the three months ended September 30, 2008 compared
to $112,000 in 2007 due to decreased volume of loans sold.  Included
in the gain on sale of loans are mortgage servicing rights of $17,000 and
$72,000 for the three month periods ended September 30, 2008 and 2007,
respectively.  For the nine-month period, gain on sale of loans was
$251,000 compared to $350,000 in 2007, including recognition of mortgage
servicing rights of $121,000 and $202,000.  The following presents the
activity in the Company’s mortgage servicing rights in 2008 and
2007:




Three
      Months
                    
                    
                    Nine
      Months(dollars
      in thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Beginning
      balance
                    
                    $
                    556
                    
                    
                    $
                    465
                    
                    
                    $
                    510
                    
                    
                    $
                    375Servicing
      rights recognized
                    
                    
                    17
                    
                    
                    
                    60
                    
                    
                    
                    121
                    
                    
                    
                    202Amortization
      expense
                    
                    
                    (34
                    )
                    
                    
                    (39
                    )
                    
                    
                    (92
                    )
                    
                    
                    (91
                    )Ending
      balance
                    
                    $
                    539
                    
                    
                    $
                    486
                    
                    
                    $
                    539
                    
                    
                    $
                    486




In the
third quarter, the Company recorded a $570,000 impairment loss on its investment
of preferred stock of the Federal National Mortgage Association
(“Fannie Mae”).  The loss was recognized as Fannie Mae was
taken into conservatorship by the federal government in
September.  The securities were written down to their estimated fair
value as of September 30.  In 2008, the Company recorded gains calls
of securities of $-0- and $119,000 for the three and nine month periods ended
September 30, 2008.  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 $2,000 during the three-month period,
and $91,000 for the nine-month period.  The increase for the
nine-month period includes $76,000 which relates to the insurance policies
assumed in the acquisition of Bank of Chickamauga.




Other
Expenses.  Other expenses for the three-month period ended
September 30, 2008 amounted to $5,388,000 compared to $5,120,000 for the same
period in 2007, an increase of $268,000 or 5.2%.  For the nine-month
period, total other expenses were $15,782,000 compared to $14,165,000 for the
same period in 2007, an increase of $1,617,000 or 11.4%.  The
acquisition of Chickamauga accounted for $1,080,000 of the increase for the nine
month period.




The
largest component of other expenses is salaries and employee benefits, which
increased $99,000, or 3.5%, for the three-month period and $889,000 or 11.4% for
the nine month period ended September 30, 2008.  The acquisition of
Chickamauga accounted for $556,000 of the increase for the nine month
period.   Excluding the impact of acquisitions, salaries and
employee benefits increased 532,000 or 6.8% for the nine month
period.  Costs associated with the implementation of EITF Issue 06-4,
Accountingfor Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangementsaccounted for $25,000 of the increase for the three months
and $75,000 for the nine 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 $26,000 for each of
the three month periods ended September 30, 2008 and 2007, and $79,000 for each
of the nine month periods.  The total compensation cost related to
nonvested awards not yet recognized at September 30, 2008 is $246,000 which
will be recognized over the weighted average period of approximately 2.38
years.


20
 Index




Amortization
of intangibles did not change for the three month periods and increased $43,000
for the nine month periods due to the acquisition of
Chickamauga.   Equipment and occupancy expenses increased
$103,000 for the quarter and $356,000 for the year to date.  The
acquisition of Chickamauga accounts for $87,000 of the year to date
increase.  Occupancy expenses increased $103,000 for the three-month
period which includes $41,000 of higher depreciation costs and $23,000 in
increased rent expense relating to branch expansion.  For the year to
date periods, depreciation expense increased $134,000.  Other
operating expenses increased $66,000 for the three month period and $329,000 for
the nine month period.  For the nine month period, $389,000 relates to
the acquisition of the Bank of Chickamauga.




As a
percentage of average total assets, other expenses were 3.47% and 3.38% of for
the three month periods ended September 30, 2008 and 2007, and 3.41% and 3.38%
for the nine-month periods ended September 30, 2008 and 2007,
respectively.




Income Taxes. The Company
recorded an income tax benefit of $22,000 and income tax expense of $710,000 for
the three month periods ended September 30, 2008 and 2007.  Effective
tax rates for the three month periods ended September 30, 2008 and 2007 were
(4.8%) and 30.6%, respectively.   For the nine-month periods
ended September 30, 2008 and 2007, income tax expense was $663,000 and
$2,174,000, respectively, with effective tax rates of 21.0% and
31.3%. 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 88.1% of income before income taxes for
the three-month period in 2008 compared to 17.3% for the same period in 2007,
and 38.3% for the nine-month period in 2008 compared to 14.5% for the same
period in 2007.   During the quarter ended September 30, 2008 the
Company recorded a tax benefit related to the other than temporary impairment
charge for the Fannie Mae preferred stock as the Company had sufficient capital
gains to carryback and capital gain tax planning strategies to offset the
loss.




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 September 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 September 30,
2008, the banks had available additional federal funds lines of credit totaling
$23.0 million in place with five banks and $49.7 million of available funds on
their lines of credit with the Federal Home Loan Bank of Atlanta.





At
September 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 September 30, 2008Consolidated
                
                
                9.27
                %
                
                
                12.75
                %
                
                
                13.98
                %Bank
      of Upson
                
                
                9.47
                %
                
                
                12.48
                %
                
                
                13.69
                %The
      First National Bank of Polk County
                
                
                12.16
                %
                
                
                17.92
                %
                
                
                19.18
                %Peachtree
      Bank
                
                
                9.31
                %
                
                
                10.81
                %
                
                
                12.05
                %Bank
      of Chickamauga
                
                
                8.49
                %
                
                
                15.82
                %
                
                
                17.08
                %




Capital
ratios may decline as asset growth continues, but are expected to continue to
exceed minimum regulatory requirements.  At September 30, 2008, the
Banks were considered “well capitalized” by regulatory
definitions.


21
 Index




In
response to the financial crisis affecting the banking system and financial
markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008
(the “EESA”) was signed into law.  Pursuant to the EESA, the U.S.
Treasury will have the authority to, among other things, purchase up to $700
billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.





On
October 14, 2008, Secretary Paulson announced that the Department of the
Treasury will purchase equity stakes in a wide variety of banks and
thrifts.  Under this program, known as the Troubled Asset Relief
Program Capital Purchase Program (the “TARP Capital Purchase Program”), from the
$700 billion authorized by the EESA, the Treasury will make $250 billion of
capital available to U.S. financial institutions in the form of preferred stock.
In conjunction with the purchase of preferred stock, the Treasury will receive
warrants to purchase common stock with an aggregate market price equal to 15% of
the preferred investment.  Participating financial institutions will
be required to adopt the Treasury’s standards for executive compensation and
corporate governance for the period during which the Treasury holds equity
issued under the TARP Capital Purchase Program.





Treasury
has announced that publicly traded institutions that wish to participate in the
TARP Capital Purchase Program must apply before 5:00 p.m. (EST) on November 14,
2008, but that it intends to extend the deadline and promulgate different
investment terms for institutions that are not publicly
traded.  Institutions that receive Treasury approval to participate in
the TARP Capital Purchase Program have 30 days to satisfy all requirements for
participation and to complete the issuance of the senior preferred shares to the
Treasury.





Eligible
financial institutions can generally apply to issue senior preferred shares to
the U.S. Treasury in aggregate amounts between 1% to 3% of the institution’s
risk-weighted assets. In the case of the Company, this would permit the Company
to apply for an investment by the U.S. Treasury of between approximately $4.37
million and $13.12 million.  We believe that our current capital
levels will be adequate to sustain our operations and
growth.  However, given the uncertainties present in the economy, the
Company has elected to apply for the maximum capital of $13.12
million.





Also, on
October 14, 2008, after receiving a recommendation from the boards of the FDIC
and the Federal Reserve, and consulting with the President, Secretary Paulson
signed the systemic risk exception to the FDIC Act, enabling the FDIC to
temporarily provide a 100% guarantee of the unsecured senior debt of all
FDIC-insured institutions and their holding companies, as well as deposits in
non-interest bearing transaction deposit accounts under a Temporary Liquidity
Guarantee Program.  Coverage under the Temporary Liquidity Guarantee
Program is available for 30 days without charge and thereafter at a cost of 75
basis points per annum for senior unsecured debt and 10 basis points per annum
for non-interest bearing transaction deposits. All institutions are covered
automatically under the Temporary Liquidity Guarantee Program until the opt out
deadline of December 5, 2008.  The Company is currently is evaluating
whether to opt out of the Temporary Liquidity Guarantee
Program.




At
September 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 September 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  the four bank subsidiaries ranged from 1.39% to 2.11%
which was in excess of the 1.00% allowed under the Loan and Stock Pledge
Agreement.  At June 30, 2008, the Company was in violation of the covenant,
and the Company obtained a waiver of covenant from Silverton
Bank.  The Company is working with Silverton to obtain a waiver for
the quarter ended September 30, 2008.  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.




Other
than the items described above, we are not aware of any trends, demands,
commitments, events or uncertainties that will result, or are reasonably likely
to result, in our liquidity increasing or decreasing in any material
way.




Off-Balance-Sheet
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 September 30,
2008.


22
 Index




Commitments
and Contractual Obligations


(Dollars
in thousands)





Less
      thanone
      year
                    
                    
                    1-3
      years
                    
                    
                    3-5
      years
                    
                    
                    Thereafter
                    
                    
                    TotalContractual
      obligationsDeposits
      having no stated maturity
                    
                    $
                    269,278
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    269,278Certificates
      of Deposit
                    
                    
                    182,344
                    
                    
                    
                    44,223
                    
                    
                    
                    19,152
                    
                    
                    
                    -
                    
                    
                    
                    245,719Federal
      funds purchased
                    
                    
                    609
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    609Short-term
      borrowed funds
                    
                    
                    14,973
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,973Long-term
      borrowed funds
                    
                    
                    -
                    
                    
                    
                    1,311
                    
                    
                    
                    1,311
                    
                    
                    
                    3,933
                    
                    
                    
                    6,555Deferred
      compensation
                    
                    
                    43
                    
                    
                    
                    125
                    
                    
                    
                    500
                    
                    
                    
                    3,947
                    
                    
                    
                    4,615Construction
      commitments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Leases
                    
                    
                    137
                    
                    
                    
                    156
                    
                    
                    
                    168
                    
                    
                    
                    330
                    
                    
                    
                    791Total
      contractual obligations
                    
                    $
                    467,384
                    
                    
                    $
                    45,815
                    
                    
                    $
                    21,131
                    
                    
                    $
                    8,210
                    
                    
                    $
                    542,540CommitmentsCommitments
      to extend credit
                    
                    $
                    29,986
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    29,986Credit
      card commitments
                    
                    
                    8,974
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,974Commercial
      standby letters of credit
                    
                    
                    882
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    882Total
      commitments
                    
                    $
                    39,842
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    39,842


23
 Index




ITEM3.  Quantitative and 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.




ITEM4. Controls and Procedures




As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”).  Disclosure Controls, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure Controls are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.





Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud.  A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.  The design
of any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.





Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.





There
have been no changes in our internal controls over financial reporting during
our third 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.




Item1A.
            Risk
      Factors




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
September 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 September 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  the four bank subsidiaries ranged from 1.39% to 2.11%
which was in excess of the 1.00% allowed under the Loan and Stock Pledge
Agreement.  At June 30, 2008, the Company was in violation of the covenant,
and the Company obtained a waiver of covenant from Silverton
Bank.  The Company is working with Silverton to obtain a waiver for
the quarter ended September 30, 2008.  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.




24
 Index




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.  While the
Company and all of its subsidiary banks are considered “well capitalized”
according to regulatory definition, the perception of the banking industry has
weakened in the market place.  In this environment, there has been
heightened attention on coverage amounts of FDIC Insurance.  If our
deposit customers should move a portion of their funds based on applicable
deposit levels, our operating results would be affected.





The Emergency
Economic Stabilization Act of 2008 (“EESA”) may not stabilize the financial
services industry.





The EESA,
which was signed into law on October 3, 2008, is intended to alleviate the
financial crisis affecting the U.S. banking system.  A number of
programs are being developed and implemented under EESA.  The EESA may
not have the intended effect, however, and as a result, the condition of the
financial services industry could decline instead of improve.  The
failure of the EESA to improve the condition of the U.S. banking system could
significantly adversely affect our access to funding or capital, the trading
price of our stock, and other elements of our business, financial condition, and
results of operations.




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.




Item4.
            Submission of Matters
      to a Vote of Security
Holders





None.





Item5.
            Other
      Information





None.





25
 Index




Item
      6.
            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








SIGNATURES




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




SouthCrest
Financial Group, Inc.


(Registrant)




DATE:  November
      14, 2008
                      BY:
                      /s/ Larry T. KuglLarry
      T. Kuglar.President
      and Chief Executive OfficerDATE:  November
      14, 2008
                      BY:
                      /s/ Douglas J. HerthaDouglas
      J. HerthaSenior
      Vice President, Chief Financial
Officer






26