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, 2009





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





For
the transition period fromto





Commission
File Number: 000-51287





__________________________





SouthCrest
Financial Group, Inc.


(Exact
name of small business issuer as specified in its charter)





__________________________





Georgia
            58-2256460(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)





600
North Glynn Street


Fayetteville,
GA  30214


(Address
of principal executive offices)





(770)-461-2781


(Issuer’s
telephone number)





______________________________________________________________________


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




__________________________






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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes   ̈  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





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





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of November 14, 2009: 3,931,528.










SouthCrest Financial Group, Inc.


And
Subsidiaries





INDEX








PagePart
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            
            Condensed Consolidated Financial
    StatementsCondensed Consolidated Balance Sheets – September 30, 2009 and
      December 31, 2008
            1Condensed Consolidated Statements
      of Operations  - Nine Months Ended September 30, 2009 and
      2008
            2Condensed Consolidated Statements of Comprehensive Income
      (loss) - Nine Months Ended September 30, 2009 and 2008
            3Condensed Consolidated Statements of Stockholders' Equity -
      Nine Months Ended September 30, 2009
            4Condensed Consolidated Statements of Cash Flows - Nine
      Months Ended September 30, 2009 and 2008
            5Notes to Condensed Consolidated Financial
      Statements
            7Item
      2.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            19Item
      3.
            
            Quantitative and Qualitative  Disclosures about
      Market Risk
            31Item
      4.
            
            Controls and Procedures
            31Part
      II.
            OTHER
      INFORMATION
            31Item
      1.
            
            Legal Proceedings
            31Item
      1A.
            
            Risk
            31Item
      2.
            
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            31Item
      3.
            
            Defaults Upon Senior Securities
            31Item
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            32Item
      5.
            
            Other Information
            32Item
      6.
            
            Exhibits
            32Signatures
            33


Index


PART
I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS





SouthCrest
Financial Group, Inc. and Subsidiaries


Condensed Consolidated Balance Sheets


September
30, 2009 and December 31, 2008


(Unaudited)


(In
thousands, except share and per share data)





September
      30,
            
            
            December
      31,Assets
            
            2009
            
            
            
            2008*Cash
      and due from banks
            
            $
            23,021
            
            
            $
            18,267Federal
      funds sold
            
            
            2,300
            
            
            
            7,776Interest-bearing
      deposits at other financial institutions
            
            
            36,838
            
            
            
            16,763Securities
      available for sale
            
            
            93,106
            
            
            
            78,910Securities
      held to maturity (fair value $30,444 and $39,502)
            
            
            29,807
            
            
            
            39,216Restricted
      equity securities, at cost
            
            
            1,845
            
            
            
            2,294Loans
      held for sale
            
            
            251
            
            
            
            349Loans,
      net of unearned income
            
            
            391,741
            
            
            
            395,788Less
      allowance for loan losses
            
            
            8,660
            
            
            
            7,285Loans,
      net
            
            
            383,081
            
            
            
            388,503Bank-owned
      life insurance
            
            
            17,486
            
            
            
            16,997Premises
      and equipment, net
            
            
            19,897
            
            
            
            19,373Goodwill
            
            
            -
            
            
            
            6,397Intangible
      assets, net
            
            
            2,063
            
            
            
            2,577Other
      real estate owned
            
            
            9,580
            
            
            
            5,592Other
      assets
            
            
            8,261
            
            
            
            7,537Total
      assets
            
            $
            627,536
            
            
            $
            610,551Liabilities, Redeemable Common Stock, and
      Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
            
            $
            72,735
            
            
            $
            75,912Interest-bearing
            
            
            466,719
            
            
            
            443,789Total
      deposits
            
            
            539,454
            
            
            
            519,701Borrowed
      funds
            
            
            7,847
            
            
            
            16,782Other
      liabilities
            
            
            9,430
            
            
            
            9,546Total
      liabilities
            
            
            556,731
            
            
            
            546,029Commitments
      and contingenciesRedeemable
      common stock held by ESOP
            
            
            472
            
            
            
            494Stockholders'
      equity:Preferred
      stock, par value $1; 10,000,000 shares authorizedPreferred
      stock, Series A, no par value, 12,900 shares issued and outstanding at
      September 30, 2009
            
            
            12,203
            
            
            
            -Preferred
      stock, Series A, no par value, 645 shares issued and outstanding at
      September 30, 2009
            
            
            723
            
            
            
            -Common
      stock, par value $1; 10,000,000 shares authorized, 3,931,528
      issued
            
            
            3,932
            
            
            
            3,932Additional
      paid-in capital
            
            
            49,865
            
            
            
            49,812Retained
      earnings
            
            
            2,803
            
            
            
            9,700Unearned
      compensation - ESOP
            
            
            (303
            )
            
            
            (326
            )Accumulated
      other comprehensive income
            
            
            1,110
            
            
            
            910Total
      stockholders' equity
            
            
            70,333
            
            
            
            64,028Total
      liabilities, redeemable common stock, and stockholders'
    equity
            
            $
            627,536
            
            
            $
            610,551





See
Notes to Condensed Consolidated Financial Statements.


*
Derived from audited consolidated financial statements.


1
 Index


SouthCrest Financial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Operations


For
The Three and Nine Months Ended September 30, 2009 and 2008


(Unaudited)


(In
thousands, except share and per share data)





Three
      Months
            
            
            Nine
      Months2009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      income:Loans
            
            $
            6,259
            
            
            $
            6,915
            
            
            $
            19,030
            
            
            $
            21,088Securities
      - taxable
            
            
            1,061
            
            
            
            1,339
            
            
            
            3,246
            
            
            
            4,081Securities
      - nontaxable
            
            
            209
            
            
            
            230
            
            
            
            641
            
            
            
            688Federal
      funds sold
            
            
            1
            
            
            
            20
            
            
            
            6
            
            
            
            236Interest-bearing
      deposits at other banks
            
            
            161
            
            
            
            155
            
            
            
            455
            
            
            
            405Total
      interest income
            
            
            7,691
            
            
            
            8,659
            
            
            
            23,378
            
            
            
            26,498Interest
      expense:Deposits
            
            
            2,359
            
            
            
            3,028
            
            
            
            7,512
            
            
            
            9,860Other
      borrowings
            
            
            97
            
            
            
            122
            
            
            
            226
            
            
            
            330Total
      interest expense
            
            
            2,456
            
            
            
            3,150
            
            
            
            7,738
            
            
            
            10,190Net
      interest income
            
            
            5,235
            
            
            
            5,509
            
            
            
            15,640
            
            
            
            16,308Provision
      for loan losses
            
            
            875
            
            
            
            837
            
            
            
            3,112
            
            
            
            2,307Net
      interest income after provisionfor
      loan losses
            
            
            4,360
            
            
            
            4,672
            
            
            
            12,528
            
            
            
            14,001Other
      income:Service
      charges on deposit accounts
            
            
            938
            
            
            
            1,025
            
            
            
            2,621
            
            
            
            2,987Other
      service charges and fees
            
            
            407
            
            
            
            345
            
            
            
            1,273
            
            
            
            1,148Net
      gain on sale of loans
            
            
            78
            
            
            
            31
            
            
            
            523
            
            
            
            251Net
      gain (loss) on sale and call of securities
            
            
            4
            
            
            
            (570
            )
            
            
            (197
            )
            
            
            (451
            )Income
      on bank-owned life insurance
            
            
            159
            
            
            
            170
            
            
            
            489
            
            
            
            519Other
      operating income
            
            
            198
            
            
            
            169
            
            
            
            493
            
            
            
            478Total
      other income
            
            
            1,784
            
            
            
            1,170
            
            
            
            5,202
            
            
            
            4,932Other
      expenses:Salaries
      and employee benefits
            
            
            2,740
            
            
            
            2,940
            
            
            
            8,788
            
            
            
            8,683Equipment
      and occupancy expenses
            
            
            660
            
            
            
            655
            
            
            
            1,922
            
            
            
            1,864Goodwill
      impairment
            
            
            6,397
            
            
            
            -
            
            
            
            6,397
            
            
            
            -Amortization
      of intangibles
            
            
            241
            
            
            
            276
            
            
            
            742
            
            
            
            817Other
      operating expenses
            
            
            2,481
            
            
            
            1,517
            
            
            
            6,200
            
            
            
            4,418Total
      other expenses
            
            
            12,519
            
            
            
            5,388
            
            
            
            24,049
            
            
            
            15,782Income
      (loss) before income taxes
            
            
            (6,375
            )
            
            
            454
            
            
            
            (6,319
            )
            
            
            3,151Income
      tax (benefit) expense
            
            
            (175
            )
            
            
            (22
            )
            
            
            (395
            )
            
            
            663Net
      income (loss)
            
            $
            (6,200
            )
            
            $
            476
            
            
            $
            (5,924
            )
            
            $
            2,488Preferred
      dividends
            
            
            169
            
            
            
            -
            
            
            
            169
            
            
            
            -Net
      income (loss) available to common shareholders
            
            $
            (6,369
            )
            
            $
            476
            
            
            $
            (6,093
            )
            
            $
            2,488Basic
      and diluted earnings (loss) per share
            
            $
            (1.63
            )
            
            $
            0.12
            
            
            $
            (1.56
            )
            
            $
            0.64Dividends
      per share
            
            $
            0.04
            
            
            $
            0.13
            
            
            $
            0.21
            
            
            $
            0.39Average
      shares outstanding - basic and diluted
            
            
            3,917,765
            
            
            
            3,916,707
            
            
            
            3,917,408
            
            
            
            3,916,239





See
Notes to Condensed Consolidated Financial Statements.


2
 Index


SouthCrest Financial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Comprehensive Income (Loss)


For
The Three and Nine Months Ended September 30, 2009 and 2008


(Unaudited)


(In
thousands)





Three
      Months
            
            
            Nine
      Months2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      income (loss)
            
            $
            (6,200
            )
            
            $
            476
            
            
            $
            (5,924
            )
            
            $
            2,488Other
      comprehensive gain (loss):Unrealized
      holding gains (losses) on securities available for sale arising during the
      period, net of taxes of $424, $405, $48, and $(8)
            
            
            691
            
            
            
            665
            
            
            
            78
            
            
            
            (13
            )Impairment
      charge on investment securities, net of taxes of $0, $(216), $0, and
      $(216)
            
            
            -
            
            
            
            (354
            )
            
            
            -
            
            
            
            (354
            )Reclassification
      adjustment for (gains) losses included in net income, net of tax of $2,
      $-0-, $(75) and $45
            
            
            (2
            )
            
            
            -
            
            
            
            122
            
            
            
            (74
            )Comprehensive
      income (loss)
            
            $
            (5,511
            )
            
            $
            787
            
            
            $
            (5,724
            )
            
            $
            2,047





See
Notes to Condensed Consolidated Financial Statements.


3
 Index


SouthCrest Financial Group, Inc.


And
Subsidiaries


Consolidated
Statements of Stockholders' Equity


For
The Nine Months Ended September 30, 2009 and 2008


(Unaudited)


(In
thousands, except share and per share data)





Preferred
      Stock
            
            
            Common
      Stock
            
            
            Additional
      Paid-In
            
            
            Retained
            
            
            Accumulated
      Other Comprehensive
            
            
            Unearned
      Compensation
            
            
            Total
      Stockholders'Series
      A
            
            
            Series
      B
            
            
            Shares
            
            
            Par
            
            
            Capital
            
            
            Earnings
            
            
            Income
            
            
            (ESOP)
            
            
            EquityBalance,
      December 31, 2008
            
            $
            -
            
            
            $
            -
            
            
            
            3,931,528
            
            
            $
            3,932
            
            
            $
            49,812
            
            
            $
            9,700
            
            
            $
            910
            
            
            $
            (326
            )
            
            $
            64,028Net
      loss
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5,924
            )
            
            
            -
            
            
            
            -
            
            
            
            (5,924
            )Issuance
      of preferred stock
            
            
            12,174
            
            
            
            726
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,900Common
      stock dividends declared,$0.25 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (826
            )
            
            
            -
            
            
            
            -
            
            
            
            (826
            )Preferred
      stock dividends  declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (143
            )
            
            
            -
            
            
            
            -
            
            
            
            (143
            )Amortization
      of preferred stock premiums and discounts
            
            
            29
            
            
            
            (3
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (26
            )
            
            
            -
            
            
            
            -
            
            
            
            -Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            53
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            53Adjustment
      for shares owned by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            22
            
            
            
            -
            
            
            
            -
            
            
            
            22Principal
      reduction of ESOP debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            23
            
            
            
            23Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200
            
            
            
            -
            
            
            
            200Balance,
      September 30, 2009
            
            $
            12,203
            
            
            $
            723
            
            
            
            3,931,528
            
            
            $
            3,932
            
            
            $
            49,865
            
            
            $
            2,803
            
            
            $
            1,110
            
            
            $
            (303
            )
            
            $
            70,333Balance,
      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,$0.39 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 income
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (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


SouthCrest Financial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows


For
The Nine Months Ended September 30, 2009 and 2008


(Unaudited)


(In
thousands)





2009
            
            
            2008OPERATING
      ACTIVITIESNet
      income (loss)
            
            $
            (5,924
            )
            
            $
            2,488Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
            
            
            984
            
            
            
            912Amortization
      of intangibles
            
            
            742
            
            
            
            817Impairment
      charges on goodwill
            
            
            6,397
            
            
            
            -Other
      amortization
            
            
            178
            
            
            
            43Provision
      for loan losses
            
            
            3,112
            
            
            
            2,307Impairment
      charges on investments
            
            
            -
            
            
            
            570Stock
      compensation expense
            
            
            53
            
            
            
            78Deferred
      income taxes
            
            
            201
            
            
            
            865Income
      on bank-owned life insurance
            
            
            (489
            )
            
            
            (519
            )Loss
      (gain) on sales and calls of investment securities
            
            
            197
            
            
            
            (119
            )(Increase)
      decrease in interest receivable
            
            
            134
            
            
            
            (711
            )Increase
      (decrease) in income taxes payable
            
            
            (513
            )
            
            
            747Increase
      (decrease) in interest payable
            
            
            152
            
            
            
            (561
            )Net
      gain on sale of loans
            
            
            (523
            )
            
            
            (251
            )Originations
      of mortgage loans held for sale
            
            
            (25,941
            )
            
            
            (12,278
            )Proceeds
      from sales of mortgage loans held for sale
            
            
            26,334
            
            
            
            12,367Loss
      on sale of other real estate
            
            
            447
            
            
            
            52Increase in
      other assets
            
            
            (1,180
            )
            
            
            (538
            )Increase
      in other liabilities
            
            
            157
            
            
            
            131Net
      cash provided by operating activities
            
            
            4,518
            
            
            
            6,400INVESTING
      ACTIVITIESProceeds
      from maturities of securities held to maturity
            
            
            9,610
            
            
            
            23,583Purchases
      of securities held to maturity
            
            
            (275
            )
            
            
            (7,170
            )Proceeds
      from maturities of securities available for sale
            
            
            (44,288
            )
            
            
            (31,479
            )Purchases
      of securities available for sale
            
            
            29,642
            
            
            
            26,114Proceeds
      from sales of securities available for sale
            
            
            350
            
            
            
            -Redemption
      (purchase) of restricted equity securities
            
            
            449
            
            
            
            (406
            )Net
      increase in interest-bearing deposits in banks
            
            
            (20,075
            )
            
            
            (6,224
            )Net
      increase in loans
            
            
            (3,860
            )
            
            
            (32,253
            )Purchase
      of premises and equipment
            
            
            (1,508
            )
            
            
            (2,122
            )Proceeds
      from sale of other real estate owned
            
            
            1,855
            
            
            
            852Net
      cash used in investing activities
            
            
            (28,100
            )
            
            
            (29,105
            )





See
Notes to Condensed Consolidated Financial Statements.


5
 Index


SouthCrest
Financial Group, Inc. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (continued)


For
The Nine Months Ended September 30, 2009 and 2008


(Unaudited)


(In
thousands)





2009
            
            
            2008FINANCING
      ACTIVITIESNet
      increase in deposits
            
            
            19,753
            
            
            
            997Repayments
      of borrowed funds
            
            
            (9,143
            )
            
            
            (3,055
            )Increase
      in borrowed funds
            
            
            208
            
            
            
            14,973Net
      increase in federal funds purchased
            
            
            -
            
            
            
            609Proceeds
      from issuance of preferred stock
            
            
            12,900
            
            
            
            -Leveraged
      ESOP transaction
            
            
            23
            
            
            
            23Common
      stock dividends paid
            
            
            (826
            )
            
            
            (1,532
            )Preferred
      stock dividends paid
            
            
            (55
            )
            
            
            -Net
      cash provided by financing activities
            
            
            22,860
            
            
            
            12,015Net
      decrease in cash and due from banks
            
            
            (722
            )
            
            
            (10,690
            )Cash
      and cash equivalents at beginning of period
            
            
            26,043
            
            
            
            25,376Cash
      and cash equivalents end of period
            
            $
            25,321
            
            
            $
            14,686SUPPLEMENTAL
      DISCLOSURESCash
      paid for:Interest
            
            $
            7,586
            
            
            $
            10,751Income
      taxes
            
            
            368
            
            
            
            1,718NONCASH
      TRANSACTIONSPrincipal
      balances of loans transferred to other real estate owned
            
            $
            6,290
            
            
            $
            6,595Increase
      in mortgage servicing rights
            
            
            227
            
            
            
            121Increase
      (decrease) in redeemable common stock held by ESOP
            
            
            22
            
            
            
            (30
            )Unrealized
      gain (loss) on securities available for sale, net
            
            
            200
            
            
            
            (441
            )Accrual
      of cumulative preferred dividends
            
            
            89
            
            
            
            -





See
Notes to Condensed Consolidated Financial Statements.


6
 Index


SouthCrest Financial Group, Inc. and
Subsidiaries


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE 1 — NATURE OF
BUSINESS AND BASIS OF PRESENTATION





SouthCrest
Financial Group, Inc. (“SouthCrest” or the “Company”) is a bank holding company
whose principal activity is the ownership and management of its wholly owned
subsidiary banks, Bank of Upson (“Upson”), 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 six full service branches located in
Thomaston, Tyrone Manchester, Warm Springs and Luthersville, Georgia, serving
its primary market area of Upson, Fayette, Meriwether and the surrounding
counties.  In April, 2009, Upson closed its full service branch in
Fayetteville and converted it to a Loan Production Office.  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 nine month
period ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2009. 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, 2008 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 period 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 periods.  Subsequent
events have been evaluated through November 16, 2009, which is the date of
financial statement issuance.





NOTE 2 – EARNINGS
PER COMMON SHARE





Basic
earnings per share is computed by dividing net income available to common
stockholders (net income (loss) adjusted for cumulative preferred stock
dividends) 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, 2009 and 2008, the Company had 185,400 and 191,400 options
outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive
Plan.  For the three and nine month periods ended September 30, 2009
and 2008, these options were nondilutive.   The Company’s ESOP
has a loan from the holding company secured by 13,763 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 3,917,765 and 3,916,707 for the three month
periods and 3,917,408 and 3,916,239 for the nine month periods ended September
30, 2009 and 2008.




7
 Index


NOTE 3 — INVESTMENT
SECURITIES





The
amortized cost and fair value of securities available for sale are as
follows:




(Dollars
      in thousands)
            
            Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      ValueSeptember
      30, 2009:U.S.
      Government and agency securities
            
            $
            40,512
            
            
            $
            476
            
            
            $
            (39
            )
            
            $
            40,949State
      and municipal securities
            
            
            17,134
            
            
            
            515
            
            
            
            (12
            )
            
            
            17,637Mortgage backed securities –
      residential -Government-sponsored enterprises
            
            
            31,089
            
            
            
            1,215
            
            
            
            (8
            )
            
            
            32,296Corporate
      bonds
            
            
            1,963
            
            
            
            3
            
            
            
            (309
            )
            
            
            1,657Equity
      Securities
            
            
            623
            
            
            
            -
            
            
            
            (56
            )
            
            
            567$
            91,321
            
            
            $
            2,209
            
            
            $
            (424
            )
            
            $
            93,106December
      31, 2008:U.S.
      Government and agency securities
            
            $
            25,702
            
            
            $
            509
            
            
            $
            -
            
            
            $
            26,211State
      and municipal securities
            
            
            16,648
            
            
            
            262
            
            
            
            (135
            )
            
            
            16,775Mortgage backed securities –
      residential -Government-sponsored enterprises
            
            
            32,035
            
            
            
            1,090
            
            
            
            (27
            )
            
            
            33,098Corporate
      bonds and equity securities
            
            
            3,083
            
            
            
            22
            
            
            
            (279
            )
            
            
            2,826$
            77,468
            
            
            $
            1,883
            
            
            $
            (441
            )
            
            $
            78,910





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


8
 Index





(Dollars
      in thousands)
            
            Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Fair
      ValueSecurities
      Held to MaturitySeptember
      30, 2009:U.S.
      Government and agency securities
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -State
      and municipal securities
            
            
            5,546
            
            
            
            189
            
            
            
            (27
            )
            
            
            5,708Mortgage backed securities -
      residential Government-sponsored enterprises
            
            
            23,261
            
            
            
            756
            
            
            
            (1
            )
            
            
            24,016Corporate
      bonds
            
            
            1,000
            
            
            
            -
            
            
            
            (279
            )
            
            
            721$
            29,807
            
            
            $
            945
            
            
            $
            (307
            )
            
            $
            30,445December
      31, 2008:U.S.
      Government and agency securities
            
            $
            1,990
            
            
            $
            28
            
            
            $
            -
            
            
            $
            2,018State
      and municipal securities
            
            
            6,579
            
            
            
            128
            
            
            
            (98
            )
            
            
            6,609Mortgage backed securities -
      residential Government-sponsored enterprises
            
            
            29,647
            
            
            
            369
            
            
            
            (187
            )
            
            
            29,829Corporate
      bonds
            
            
            1,000
            
            
            
            46
            
            
            
            -
            
            
            
            1,046$
            39,216
            
            
            $
            571
            
            
            $
            (285
            )
            
            $
            39,502





The
amortized cost and fair value of securities held to maturity and securities
available for sale as of September 30, 2009 by contractual maturity are shown
below. Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.




Securities
      Available For Sale
            
            
            Securities
      Held To Maturity(Dollars
      in thousands)
            
            Amortized
      Cost
            
            
            Fair
      Value
            
            
            Amortized
      Cost
            
            
            Fair
      ValueDue
      within one year
            
            $
            4,789
            
            
            $
            4,872
            
            
            $
            455
            
            
            $
            465Due
      from one to five years
            
            
            20,272
            
            
            
            20,655
            
            
            
            984
            
            
            
            996Due
      from five to ten years
            
            
            24,021
            
            
            
            24,382
            
            
            
            1,994
            
            
            
            2,103Due
      after ten years
            
            
            8,564
            
            
            
            8,677
            
            
            
            2,113
            
            
            
            2,144Government-sponsored
      enterprises
            
            
            31,089
            
            
            
            32,296
            
            
            
            23,261
            
            
            
            24,016Corporate
      bonds and equity securities
            
            
            2,586
            
            
            
            2,224
            
            
            
            1,000
            
            
            
            721$
            91,321
            
            
            $
            93,106
            
            
            $
            29,807
            
            
            $
            30,445




The
following table shows the gross unrealized losses and fair value of securities,
aggregated by category and length of time that securities have been in a
continuous unrealized loss position at September 30, 2009 and December 31,
2008.


9
 Index




(Dollars
      in thousands)
              
              Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              UnrealizedDescription
      of securities
              
              Value
              
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              LossesSeptember
      30, 2009U.S.
      Government and agency securities
              
              $
              2,462
              
              
              $
              (39
              )
              
              $
              -
              
              
              $
              -
              
              
              
              2,462
              
              
              
              (39
              )State
      and municipal securities
              
              
              405
              
              
              
              -
              
              
              
              611
              
              
              
              (39
              )
              
              
              1,016
              
              
              
              (39
              )Mortgage backed securities -
      residential government-sponsored enterprises
              
              
              1,399
              
              
              
              (8
              )
              
              
              130
              
              
              
              (1
              )
              
              
              1,529
              
              
              
              (9
              )Equity
      securities
              
              
              -
              
              
              
              -
              
              
              
              167
              
              
              
              (56
              )
              
              
              167
              
              
              
              (56
              )Corporate
      bonds
              
              
              720
              
              
              
              (279
              )
              
              
              640
              
              
              
              (309
              )
              
              
              1,360
              
              
              
              (588
              )Total
              
              $
              4,986
              
              
              $
              (326
              )
              
              $
              1,548
              
              
              $
              (405
              )
              
              $
              6,534
              
              
              $
              (731
              )(Dollars
      in thousands)
              
              Less
      Than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
              
              
              Unrealized
              
              
              Fair
              
              
              Unrealized
              
              
              Fair
              
              
              UnrealizedDescription
      of securities
              
              Value
              
              
              Losses
              
              
              Value
              
              
              Losses
              
              
              Value
              
              
              LossesDecember
      31, 2008U.S.
      Government and agency securities
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -State
      and municipal securities
              
              
              2,940
              
              
              
              (147
              )
              
              
              364
              
              
              
              (86
              )
              
              
              3,304
              
              
              
              (233
              )Mortgage
      backed securities - residential government-sponsored
      enterprises
              
              
              6,587
              
              
              
              (71
              )
              
              
              5,858
              
              
              
              (143
              )
              
              
              12,445
              
              
              
              (214
              )Equity
      securities
              
              
              1,021
              
              
              
              (102
              )
              
              
              -
              
              
              
              -
              
              
              
              1,021
              
              
              
              (102
              )Corporate
      bonds
              
              
              767
              
              
              
              (177
              )
              
              
              -
              
              
              
              -
              
              
              
              767
              
              
              
              (177
              )Total
              
              $
              11,315
              
              
              $
              (497
              )
              
              $
              6,222
              
              
              $
              (229
              )
              
              $
              17,537
              
              
              $
              (726
              )
  These
unrealized losses are considered temporary because of acceptable investment
grades on each security, the likelihood of the market value increasing to the
initial cost basis of the security, and the intent and ability of the Company to
hold these securities until recovery of the market values.  During the
nine month period ended September 30, 2009, the Company incurred $197,000 in
losses on sales and calls of securities.  Gross gains on sales and
calls of securities totaled $19,000 and total gross losses totaled
$216,000.  Of incurred losses, $150,000 represented a loss on
redemption of preferred stock having an original cost of
$500,000.  The loss occurred as the Company accepted a tender offer
made by the issuing bank to redeem the stock.  In addition, the
Company incurred a loss of $66,000 relating to common stock in Silverton Bank,
N.A. On May 1, 2009, the Office of the Comptroller of the Currency closed
Silverton Bank, and the FDIC was appointed as Receiver for Silverton
Bank.





Our
restricted equity securities are comprised of our investments in Federal Reserve
Bank stock and Federal Home Loan Bank of Atlanta (“FHLB”) stock, each with no
readily determinable market value.  The amortized cost and fair value
of all these securities are equal at period end. As of September 30, 2009, the
investment in Federal Reserve Bank Stock totaled $588,000.  Recovery
of this amount is reasonably expected.   As of September 30,
2009, the investment in FHLB stock represented approximately $1.26 million, or
0.20% as a percentage of total assets.  In determining the carrying
amount of the FHLB stock, we have evaluated and considered that the FHLB Banks
appear to be in stable operational positions and are meeting all of their debt
obligations.  Also, given the capital levels and expectations that
several of the FHLB Banks have a very high degree of government support, it
appears that the FHLB has the ability to absorb economic
losses.  Further, the Company has access to adequate sources of
liquidity in order to meet our operational needs in the foreseeable
future.  We would therefore not have the need to dispose of this stock
below the recorded amount.





NOTE 4 — LOANS
RECEIVABLE





The
composition of loans at September 30, 2009 and December 31, 2008 is summarized
as follows:


10
 Index





September
      30,
            
            
            December
      31,(Dollars
      in thousands)
            
            2009
            
            
            2008Commercial,
      financial, and agricultural
            
            $
            16,864
            
            
            $
            18,740Real
      estate – construction
            
            
            70,388
            
            
            
            74,095Real
      estate – mortgage
            
            
            262,416
            
            
            
            261,866Consumer
            
            
            32,922
            
            
            
            35,552Other
            
            
            9,157
            
            
            
            5,547391,747
            
            
            
            395,800Unearned
      income
            
            
            (6
            )
            
            
            (12
            )Allowance
      for loan losses
            
            
            (8,660
            )
            
            
            (7,285
            )Loans,
      net
            
            $
            383,081
            
            
            $
            388,503





Changes
in the allowance for loan losses are as follows:





(Dollars
      in thousands)
            
            September 30,
              2009
            
            
            December 31,
              2008Balance,
      beginning of year
            
            $
            7,285
            
            
            $
            4,952Provision
      for loan losses
            
            
            3,112
            
            
            
            4,002Loans
      charged off
            
            
            (2,112
            )
            
            
            (2,244
            )Recoveries
      of loans previously charged off
            
            
            375
            
            
            
            575Balance,
      end of year
            
            $
            8,660
            
            
            $
            7,285





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





(Dollars
      in thousands)
            
            September 30,
              2009
            
            
            December 31,
              2008Impaired
      loans without a valuation allowance
            
            $
            2,213
            
            
            $
            -Impaired
      loans with a valuation allowance
            
            
            11,608
            
            
            
            9,164Total
      impaired loans
            
            $
            13,821
            
            
            $
            9,164Valuation
      allowance related to impaired loans
            
            $
            1,681
            
            
            $
            1,603Average
      investment in impaired loans
            
            $
            8,399
            
            
            $
            5,920





There
were $6,031,000 and $9,164,000 loans on nonaccrual status at September 30, 2009
and December 31, 2008.  Loans of $890,000 and $779,000 were past due
ninety days or more and still accruing interest at September 30, 2009 and
December 31, 2008, respectively.  Loans restructured under troubled
debt were $2,043,000 and $-0- at September 30, 2009 and December 31, 2008,
respectively.





NOTE 5 —
DEPOSITS





At
September 30, 2009 and December 31, 2008, deposits were as
follows:


11
 Index





(Dollars
      In Thousands)
            
            September 30,2009
            
            
            December 31,2008Noninterest
      bearing deposits
            
            $
            72,735
            
            
            $
            75,912Interest
      checking
            
            
            107,306
            
            
            
            95,979Money
      market
            
            
            56,637
            
            
            
            54,545Savings
            
            
            45,216
            
            
            
            42,651Certificates
      of deposit
            
            
            257,560
            
            
            
            250,614$
            539,454
            
            
            $
            519,701





NOTE 6 — NEW
ACCOUNTING PRONOUNCEMENTS





In April
2009, the Financial Accounting Standards Board ("FASB") issued
authoritative guidance for the recognition and presentation of
other-than-temporary impairments. The guidance changes existing guidance for
determining whether impairment of debt securities is other than temporary and
requires other-than-temporary impairment to be separated into the amount
representing the decrease in cash flows expected to be collected from a security
(referred to as credit losses), which is recognized in earnings, and the amount
related to other factors, which is recognized in other comprehensive income. The
non-credit loss component of the impairment can only be classified in other
comprehensive income if the holder of the security concludes (1) that it does
not intend to sell the security and (2) that it is more likely than not that it
will not be required to sell the security before the security recovers its
value. If these two conditions are not met, the non-credit loss component of the
impairment must also be recognized in earnings.





Upon
adoption of this guidance, the entity is required to record a cumulative-effect
adjustment, as of the beginning of the period of adoption, to reclassify the
non-credit loss component of previously recognized other-than-temporary
impairment from retained earnings to accumulated other comprehensive income. The
guidance is effective, as of June 30, 2009, with early adoption permitted as of
March 31, 2009. The Company did not elect to early-adopt the standard nor did it
have a material impact on the consolidated financial statements of the Company
when adopted.





In April
2009, the FASB issued authoritative guidance for determining fair value when the
volume and level of activity for the asset or liability have significantly
decreased and for identifying transactions that are not orderly. The guidance,
while emphasizing the objective of fair value measurement, provides additional
guidance for determining whether market activity for a financial asset or
liability has significantly decreased, as well as for identifying circumstances
that indicate that transactions are not orderly.





This
guidance reiterates that if a market is determined to be inactive and the
related market price is deemed to be reflective of a "distressed sale" price,
then further analysis is required to estimate fair value. The guidance
identifies factors to be considered when determining whether or not a market is
inactive. The guidance is effective, as of June 30, 2009, with early adoption
permitted as of March 31, 2009. The Company did not elect to early-adopt the
guidance nor did it have a material impact on the consolidated financial
statements of the Company when adopted.





In April
2009, the FASB issued authoritative guidance for interim disclosures about fair
value of financial instruments that was effective as of June 30, 2009, with
early adoption permitted as of March 31, 2009. This guidance amends previously
issued accounting standards to require disclosures about fair values of
financial instruments in all interim financial statements. Once adopted, the
disclosures required by the guidance are to be provided prospectively. The
Company did not elect to early-adopt the guidance and provided the required
disclosures beginning as of June 30, 2009.





In April
2009, the FASB issued authoritative guidance for accounting for assets acquired
and liabilities assumed in a business combination that arise from contingencies
that is effective for business combinations occurring after January 1, 2009.
This guidance amends and clarifies the earlier provisions of the standards
for  accounting for business combinations, with respect to the initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies associated with
a business combination. The impact of adoption of the guidance on the
consolidated financial statements will depend on the nature, terms and size of
future business combinations.





In April
2009, the FASB issued authoritative guidance for subsequent
events.  The Company adopted the guidance during the quarter ended
June 30, 2009.  This guidance sets forth the circumstances under which
an entity should recognize events occurring after the balance sheet date and the
disclosures that should be made.  Also, this guidance requires
disclosure of the date through which the entity has evaluated subsequent events
(for public companies, and other companies that expect to widely distribute
their financial statements, this date is the date of financial statement
issuance, and for nonpublic companies, the date the financial statements are
available to be issued).  The adoption of this guidance did not have a
material impact on the consolidated financial statements of the
Company.


12
 Index


In June
2009, the FASB issued authoritative guidance for accounting for transfers of
financial assets.  This guidance eliminates the concept of a
qualifying special purpose entity ("QSPE"), changes the requirements for
derecognizing financial assets, and requires additional disclosures, including
information about continuing exposure to risks related to transferred financial
assets.  This guidance is effective for financial asset transfers
occurring after the beginning of fiscal years beginning after November 15,
2009.  The disclosure requirements must be applied to transfers that
occurred before and after the effective date.  The Company is
currently evaluating the impact of adoption on the consolidated financial
statements, but does not believe that adoption will have a material
impact.





In June
2009, the FASB issued authoritative guidance for the way entities account for
securitizations and special-purpose entities which contains new criteria for
determining the primary beneficiary, eliminates the exception to consolidating
QSPEs, requires continual reconsideration of conclusions reached in determining
the primary beneficiary, and requires additional disclosures.  This
guidance is effective as of the beginning of fiscal years beginning after
November 15, 2009 and is applied using a cumulative effect adjustment to
retained earnings for any carrying amount adjustments (e.g., for
newly-consolidated Variable Interest Entities).  The Company is
currently evaluating the impact of adoption on the consolidated financial
statements, but does not believe that adoption will have a material
impact.





In June
2009, the FASB issued authoritative guidance for the FASB accounting standards
codification and the hierarchy of generally accepted accounting
principles.  The Codification will become the source of authoritative
US GAAP recognized by the FASB to be applied by nongovernmental entities and
will supersede all non-SEC accounting and reporting standards.  This
statement is effective for financial statements issued for interim periods and
annual financial statements for periods ending after September 15,
2009.  The adoption of this guidance did not have a material impact on
the consolidated financial statements of the Company.





NOTE
7 -- FAIR VALUE





Accounting
standards establish a framework for measuring fair value under accounting
principles generally accepted in the United States, and enhances disclosures
about fair value measurements.  Accounting standards clarify 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.




Accounting
standards establish a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows:




Level
      1
            Observable
      inputs such as quoted prices in active
markets;


Level
      2
            Inputs,
      other than the quoted prices in active markets, that are observable either
      directly or indirectly; and


Level
      3
            Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.





Following
is a description of valuation methodologies used for assets recorded at fair
value.




Investment
Securities




Securities
available for sale and securities held to maturity are valued on a recurring
basis at quoted market prices where available.  If quoted market
prices are not available, fair values are based on quoted market prices of
comparable securities.  Level 1 securities include those traded on an
active exchange, such as the New York Stock Exchange, U.S. Treasury securities
that are traded by dealers or brokers in active over-the-counter markets and
money market funds.  Level 2 securities include mortgage-backed
securities and debentures issued by government sponsored entities, municipal
bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets such as some common stock
not traded on a national exchange.    Securities held to
maturity are valued at quoted market prices or dealer quotes, similar to
securities available for sale.  The carrying value of Federal Reserve
Bank and Federal Home Loan Bank stock approximates fair value based on their
redemption provisions.


13
 Index


Loans
Held for Sale




Loans
held for sale, consisting of mortgages to be sold in the secondary market, are
carried at the lower of cost or market value.  The fair values of
mortgage loans held for sale are based on commitments on hand from investors
within the secondary market for loans with similar
characteristics.  As such, the fair value adjustments for mortgage
loans held for sale is nonrecurring Level 2.




Loans




The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan may be considered impaired and an allowance for loan losses
may be established.  Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures for impairment. 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, 2009, all of the total impaired loans were evaluated based on the
fair value of the collateral.  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.


14
 Index





(Dollars
      in thousands)
            
            Fair
      Value
            
            
            Quoted
      Prices In Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Observable Inputs (Level 3)As
      of September 30, 2009U.S.
      Government and agency securities
            
            $
            40,949
            
            
            $
            -
            
            
            $
            40,949
            
            
            $
            -State
      and municipal securities
            
            
            17,637
            
            
            
            -
            
            
            
            17,637
            
            
            
            -Mortgage-backed
      securities
            
            
            32,296
            
            
            
            -
            
            
            
            32,296
            
            
            
            -Corporate
      bonds
            
            
            1,657
            
            
            
            -
            
            
            
            1,657
            
            
            
            -Equity
      securities
            
            
            567
            
            
            
            26
            
            
            
            -
            
            
            
            541$
            93,106
            
            
            $
            26
            
            
            $
            92,539
            
            
            $
            541As
      of December 31, 2008U.S.
      Government and agency securities
            
            $
            26,211
            
            
            $
            -
            
            
            $
            26,211
            
            
            $
            -State
      and municipal securities
            
            
            16,775
            
            
            
            -
            
            
            
            16,775
            
            
            
            -Mortgage-backed
      securities
            
            
            33,098
            
            
            
            -
            
            
            
            33,098
            
            
            
            -Corporate
      bonds
            
            
            1,805
            
            
            
            -
            
            
            
            1,805
            
            
            
            -Equity
      securities
            
            
            1,021
            
            
            
            27
            
            
            
            -
            
            
            
            994$
            78,910
            
            
            $
            27
            
            
            $
            77,889
            
            
            $
            994





The
securities measured as Level 3 include investment in the common stock of a bank
holding company that is not listed on an exchange.




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, 2009 to
September  30, 2009:




Investment
      Securities Available For SaleBeginning
      balance, January 1, 2009
            
            $
            994Total
      gains (losses) realized or unrealizedIncluded
      in earnings
            
            
            (150
            )Included
      in other comprehensive income
            
            
            47Purchases,
      issuances, sales and settlements, net
            
            
            (350
            )Transfers
      in (out) of Level 3
            
            
            -Ending
      balance, September 30, 2009
            
            $
            541




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


15
 Index





(Dollars
      in thousands)
            
            Fair
              Value
            
            Quoted
      Prices
              In
      Active
              Markets
              for
      Identical
              Assets
              (Level
      1)
            
            Significant
              Other
              Observable
              Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)As
      of September 30, 2009Impaired
      loans
            
            
            $
            9,927
            
            
            $
            -
            
            
            $
            -
            
            
            $
            9,927Other
      real estate
            
            
            
            9,580
            
            
            
            -
            
            
            
            -
            
            
            
            9,580As
      of December 31, 2008Impaired
      loans
            
            
            $
            7,561
            
            
            $
            -
            
            
            $
            -
            
            
            $
            7,561Other
      real estate
            
            
            
            5,592
            
            
            
            -
            
            
            
            -
            
            
            
            5,592





Other
real estate owned is initially accounted for at fair value, less estimated costs
to dispose of the property. Any excess of the recorded investment over fair
value, less costs to dispose, is charged to the allowance for loan and lease
losses at the time of foreclosure. A provision is charged to earnings and a
related valuation account for subsequent losses on other real estate owned is
established when, in the opinion of Management, such losses have occurred. The
ability of the Company to recover the carrying value of real estate is based
upon future sales of the real estate. Our ability to effect such sales is
subject to market conditions and other factors, all of which are beyond our
control. The recognition of sales and sales gains is dependent upon whether the
nature and terms of the sales, including possible future involvement of the
Company, if any, meet certain defined requirements. If those requirements are
not met, sale and gain recognition is deferred.





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





September
      30, 2009
            
            
            December
      31, 2008(Dollars
      in thousands)
            
            Carrying
      Amount
            
            
            Fair
      Value
            
            
            Carrying
      Amount
            
            
            Fair
      ValueFinancial
      assetsCash,
      due from banks, interest bearing deposits in other banks, and federal
      funds sold
            
            $
            62,159
            
            
            $
            62,159
            
            
            $
            42,806
            
            
            $
            42,806Securities
            
            
            122,913
            
            
            
            123,550
            
            
            
            118,149
            
            
            
            118,412Restricted
      equity securities
            
            
            1,845
            
            
            
            1,845
            
            
            
            2,294
            
            
            
            2,294Loans
      and loans held for sale, net
            
            
            391,992
            
            
            
            400,143
            
            
            
            396,136
            
            
            
            399,408Accrued
      interest receivable
            
            
            2,805
            
            
            
            2,805
            
            
            
            2,939
            
            
            
            2,939Bank-owned
      life insurance
            
            
            17,486
            
            
            
            17,486
            
            
            
            16,997
            
            
            
            16,997Financial
      liabilitiesDeposits
            
            
            539,454
            
            
            
            544,133
            
            
            
            519,701
            
            
            
            524,136Borrowed
      funds
            
            
            7,847
            
            
            
            7,856
            
            
            
            16,782
            
            
            
            16,802Accrued
      interest payable
            
            
            2,079
            
            
            
            2,079
            
            
            
            1,927
            
            
            
            1,927





NOTE 8— BORROWED
FUNDS





At
September 30, 2009, the Company had $5,972,000 outstanding on its line of credit
with Silverton Bridge Bank, N.A. (formerly Silverton Bank, N.A.).  On
May 1, 2009, the Office of the Comptroller of the Currency closed Silverton
Bank. The FDIC was appointed as Receiver for Silverton Bank, and Silverton
Bridge Bank, N.A. has been formed to take over the operations of Silverton Bank.
The stock of our subsidiary banks is pledged as collateral for this
loan.  The terms of the line of credit contain certain restrictive
covenants including, among others, a requirement of each subsidiary bank to
maintain certain minimum capital levels as well as maximum ratios related to the
levels of nonperforming assets, to be measured quarterly.  At the
inception of the loan, the restriction relative to maximum levels of
nonperforming assets required that these assets not exceed 1% of each
subsidiary’s total assets.  The Company was in violation of this
covenant for the second and third quarters of 2008 for which it received waivers
from the lender.  The Company and the lender agreed to amend the
covenants such that each subsidiary’s nonperforming assets may not exceed 5% of
total assets as of December 31, 2008 and for each quarter of
2009.  Thereafter, this ratio would reduce by 1% during each quarter
in 2010 so that the maximum ratio returns to 1% of total assets by December 31,
2010.  At September 30, 2009, this ratio for the subsidiary banks
ranged from 0.41% to 3.73%.


16
 Index


At
December 31, 2008, as a result of its impairment of its goodwill and core
deposit intangible assets, the Company was not in compliance with its covenant
to maintain a minimum debt service coverage ratio, defined as net income of
subsidiary banks for the prior four quarters multiplied by 50%, divided by the
annual debt service of the Company.  In order to remedy this covenant
violation, in June, 2009, the covenants and the note were amended such that the
debt service covenant was replaced by a liquidity covenant in which the Parent
would maintain cash balances of $800,000, which the Company maintains as demand
deposits at its subsidiary banks.  In addition, the interest rate of
the note was changed from Prime minus 0.5% to Prime plus 1% through July 1,
2010, Prime plus 2% through July 1, 2011, and Prime plus 3% through July 1,
2012.  On July 1, 2012, the remaining balance outstanding on the note,
estimated to be $4.2 million, would become payable as a balloon
payment.  As of September 30, 2009, the Company believes it was in
compliance with all covenants as amended in June 2009.





NOTE
9.  FDIC SPECIAL ASSESSMENT





The FDIC
imposed an emergency special assessment on insured depository institutions as of
June 30, 2009. The FDIC collected this assessment on September 30, 2009. For the
Company, the special assessment was 5 basis points of the Bank's total assets
less its Tier 1 capital. The Company accrued $284,000 for this special
assessment as of June 30, 2009. The FDIC may impose an additional emergency
special assessment after June 30, 2009, of up to 5 basis points if necessary to
maintain public confidence in federal deposit insurance.  In November
2009, the FDIC approved a rule that, in lieu of a further special assessment in
2009, will require all insured depository institutions, with limited exceptions,
to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also proposed to
adopt a uniform three basis point increase in assessment rates effective on
January 1, 2011. If the rule is finalized as proposed, the Company expects to be
required to prepay approximately $2.8 million in risk-based
assessments.





NOTE
10. PARTICIPATION IN U.S. TREASURY CAPITAL PURCHASE PROGRAM





On July
17, 2009, The Company  issued 12,900 shares of cumulative perpetual
preferred stock (“Series A Preferred Stock”), no par value having a liquidation
amount equal to $1,000 per share, to the U.S. Treasury with an attached warrant
to purchase an additional 645 shares of cumulative perpetual preferred stock,
initial price $.01 per share having a liquidation amount equal to $1,000 per
share, for an aggregate price of $12,900,000. The warrants were exercised
immediately resulting in the issuance of 645 shares of cumulative perpetual
preferred stock (“Series B Preferred Stock) to the U.S. Treasury.





Series A
Preferred Stock is non-voting and pays cumulative dividends quarterly at a rate
of 5% per annum for the first five years and 9% per annum thereafter. The
preferred shares are redeemable at the option of the Company under certain
circumstances.





The terms
of the Series B Preferred Stock are substantially identical to those of the
Series A Preferred Stock. Differences include the payment under the Series B
Preferred Stock of cumulative dividends at a rate of 9% per year. In addition
such stock may not be redeemed while shares of the Series A Preferred Stock are
outstanding.





The net
proceeds were allocated between Preferred Stock Series A and Preferred Stock
Series B based on their relative fair values at the time of issuance. The
discount on Preferred Stock Series A and the premium on Preferred Stock Series B
resulting from the differences between the initial carrying amounts and the
liquidation amounts were calculated to be accreted or amortized over the
five-year period preceding the 9% perpetual dividend, using the effective yield
method.





No
dividends may be paid on common stock unless dividends have been paid on the
senior preferred stock. Also, benefit plans and certain employment arrangements
must be modified to comply with the issuance of the cumulative perpetual
preferred stock as required by the U.S. Treasury.





NOTE
11 GOODWILL IMPAIRMENT





Goodwill
impairment testing is performed annually or more frequently if events or
circumstances indicate possible impairment.  The evaluation of
goodwill for impairment uses both the income and market approaches to value the
reporting units of the Company.  The income approach consists of
discounting projected long-term future cash flows (earnings), which are derived
from internal forecasts and economic expectations for the Company and its
reporting units.  The significant inputs to the income approach
include the long-term target tangible equity to tangible assets ratio and the
discount rate, which is determined utilizing the Company’s cost of capital
adjusted for a company-specific risk factor.   The
company-specific risk factor is used to address the uncertainty of growth
estimates and earnings projections of management.  Under the market
approach, values are calculated from an analysis of comparable
acquisition transactions based on earnings, book value, assets and deposit
premium multiples from the sale of similar financial institutions and our own
market capitalization position.  The Company’s goodwill testing for
2009, conducted in the third quarter, indicated that the remaining goodwill
recorded at the time of acquisition of FNB Polk, Peachtree and Chickamauga were
impaired based on the substantial decline in the Company’s common stock price
and the economic outlook for the Company’s industry.  As a result, the
Company recorded a goodwill impairment charge of $6,397,000 during the quarter
ended September 30, 2009. While
there were insignificant updates to the underlying assumptions, the most
significant variable driving the impairment in the third quarter relates to the
decline in Company market capitalization and the duration of depressed stock
prices.


17
 Index


NOTE
12.  SUPPLEMENTARY FINANCIAL DATA





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





Three
      Months
            
            
            Nine
      Months(dollars
      in thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008FDIC
      special assessment
            
            $
            -
            
            
            $
            -
            
            
            $
            284
            
            
            $
            -FDIC
      premiums
            
            
            227
            
            
            
            55
            
            
            
            641
            
            
            
            81Professional
      fees
            
            
            311
            
            
            
            152
            
            
            
            740
            
            
            
            457Loss
      on sale of other real estate
            
            
            391
            
            
            
            27
            
            
            
            447
            
            
            
            27Director
      fees
            
            
            115
            
            
            
            98
            
            
            
            328
            
            
            
            319Telephone
            
            
            112
            
            
            
            89
            
            
            
            346
            
            
            
            274Postage
      and supplies
            
            
            166
            
            
            
            165
            
            
            
            427
            
            
            
            502Data
      processing expenses
            
            
            406
            
            
            
            364
            
            
            
            1,267
            
            
            
            1,061


18
 Index


SouthCrest
Financial Group, Inc. and Subsidiaries




ITEM 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations





The
following is management’s discussion and analysis of certain significant factors
which have affected the financial position and operating results of SouthCrest
Financial Group, Inc. and its bank subsidiaries, Bank of Upson, The First
National Bank of Polk County, Peachtree Bank, and Bank of Chickamauga during the
period included in the accompanying consolidated financial
statements.   The purpose of this discussion is to focus on
information about our financial condition and results of operations that are not
otherwise apparent from our consolidated financial statements.





Forward
Looking Statements





Some of
the statements in this Report, including, without limitation, matters discussed
under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operation,” of SouthCrest Financial Group, Inc. are
“forward-looking statements” within the meaning of the federal securities
laws.  Forward-looking statements include statements about the
competitiveness of the banking industry, potential regulatory obligations, our
entrance and expansion into other markets, integration of recently acquired
banks, pending or proposed acquisitions, our other business strategies, our
expectations with respect to our allowance for loan losses and impaired loans,
anticipated capital expenditures for our operations center, and other statements
that are not historical facts.  When we use words like “anticipate,”
“believe,” “intend,” “expect,” “estimate,” “could,” “should,” “will,” and
similar expressions, you should consider them as identifying forward-looking
statements, although we may use other phrasing.  These forward-looking
statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these
disclosures were prepared.  Factors that may cause actual results to
differ materially from those expressed or implied by such forward-looking
statements include, among others, the following possibilities: (1) competitive
pressures among depository and other financial institutions may increase
significantly; (2) changes in the interest rate environment may reduce margins;
(3) general economic conditions may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality and/or a reduction in
demand for credit; (4) legislative or regulatory changes, including changes in
accounting standards may adversely affect the businesses in which we are
engaged; (5) costs or difficulties related to the integration of our businesses,
may be greater than expected; (6) deposit attrition, customer loss or revenue
loss following acquisitions may be greater than expected; (7) competitors may
have greater financial resources and develop products that enable such
competitors to compete more successfully than us; and (8) adverse changes may
occur in the equity markets.





Many of
such factors are beyond our ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking
statements.  We disclaim any obligation to update or revise any
forward-looking statements contained in this Report, whether as a result of new
information, future events or otherwise.





Critical
Accounting Estimates





We have
adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States in the preparation of our
financial statements. Our significant accounting policies are described in the
notes to the consolidated financial statements for the year ended December 31,
2008 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.





Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired.  Other intangible assets include core deposit
intangibles recognized in bank and branch acquisitions, and mortgage servicing
rights recognized in connection with the sale of mortgage loans in which the
Company retains the servicing rights.    Goodwill impairment
testing is performed annually or more frequently if events or circumstances
indicate possible impairment.  The evaluation of goodwill for
impairment uses both the income and market approaches to value the reporting
units of the Company.  The income approach consists of discounting
projected long-term future cash flows (earnings), which are derived from
internal forecasts and economic expectations for the Company and its reporting
units.  The significant inputs to the income approach include the
long-term target tangible equity to tangible assets ratio and the discount rate,
which is determined utilizing the Company’s cost of capital adjusted for a
company-specific risk factor.   The company-specific risk factor
is used to address the uncertainty of growth estimates and earnings projections
of management.  Under the market approach, values
are calculated from an analysis of comparable acquisition transactions
based on earnings, book value, assets and deposit premium multiples from the
sale of similar financial institutions and our own market capitalization
position.  Our goodwill testing for 2009, which was updated as of
September 30, 2009, indicated that the goodwill recorded at the time of
acquisition of FNB Polk, Peachtree and Chickamauga were impaired based on the
substantial decline in our common stock price and the economic outlook for our
industry.  As a result, the Company recorded goodwill impairment
charge of $6,397,000 during the quarter ended September 30, 2009. While
there were insignificant updates to the underlying assumptions, the most
significant variable driving the impairment in the third quarter relates to the
decline in Company market capitalization and the duration of depressed stock
prices.


19
 Index


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,
goodwill, other 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.





Financial
Condition





During
the nine months ended September 30, 2009, our total assets increased $17.0
million to $627.5 million at September 30, 2009.  During this period,
total loans decreased $4.0 million, while loans held for sale decreased $98,000
from December 31, 2008.  Securities available for sale increased $14.2
million due primarily to purchases made during the period while securities held
to maturity decreased $9.4 million due to maturities.  Federal funds
sold decreased $5.5 million.   Interest bearing deposits at other
financial institutions increased $20.1 million due to purchases of certificates
of deposits in financial institutions.  These certificates are
purchased in amounts such that at all times, the principal and accrued interest
are fully insured by the FDIC.   Intangible assets declined $6.9
million due primarily to a $6.4 million impairment charge related to the
Company’s goodwill.





During
the year to date period ended September 30, 2009, deposits increased $19.8
million or 3.8%.  Changes in deposits are summarized
below:





(Dollars
      In Thousands)
            
            September 30,
              2009
            
            
            December 31,
              2008
            
            
            ChangeNoninterest
      bearing deposits
            
            $
            72,735
            
            
            $
            75,912
            
            
            $
            (3,177
            )Interest
      checking
            
            
            107,306
            
            
            
            95,979
            
            
            
            11,327Money
      market
            
            
            56,637
            
            
            
            54,545
            
            
            
            2,092Savings
            
            
            45,216
            
            
            
            42,651
            
            
            
            2,565Certificates
      of deposit
            
            
            257,560
            
            
            
            250,614
            
            
            
            6,946$
            539,454
            
            
            $
            519,701
            
            
            $
            19,753





Since
December 31, 2008, borrowed funds declined $9.0 million primarily due to
repayments of Federal Home Loan Bank advances totaling $8,287,000 and $317,000
in principal reductions against of our line of credit.  During the
second quarter of  2009, the terms of our line of credit were amended
in response to the Company’s violation of the loan covenant related to certain
minimum debt service ratios.  This covenant noncompliance was the
result of the impairment losses recorded at December 31, 2008 related to
goodwill and core deposit intangible assets.  The covenants were
amended by eliminating the debt service covenant and instituting a liquidity
covenant whereby the Parent Company must maintain cash reserves of at least
$800,000.  In addition, the interest rate was changed from prime minus
0.5% to Prime plus 1% through July 1, 2010, Prime plus 2% through July 1, 2011,
and Prime plus 3% through July 1, 2012 at which time the remaining balance of
the loan (projected to be $3.4 million) would become due in a lump sum
payment.





At
September 30, 2009, the Company had not purchased federal funds.  The
Company monitors changes in its loan portfolio and changes in its deposit
levels, and seeks to maintain a proper mix of types, maturities, and interest
rates.





Our total
stockholders’ equity has increased by $6.4 million since December 31, 2008,
primarily due to the $12.9 million received under the U.S. Treasury’s Capital
Purchase Program.  In addition, during the nine month period ended
September 30, 2009, the Company recorded a net loss of $5.9
million.





Loan Portfolio.The following table
presents various categories of loans contained in the loan portfolios of the
subsidiary banks as of September 30, 2009 and December 31,
2008:


20
 Index





September
      30,
            
            
            December
      31,(Dollars
      in thousands)
            
            2009
            
            
            2008Commercial,
      financial, and agricultural
            
            $
            16,864
            
            
            $
            18,740Real
      estate – construction
            
            
            70,388
            
            
            
            74,095Real
      estate – mortgage
            
            
            262,416
            
            
            
            261,866Consumer
            
            
            32,922
            
            
            
            35,552Other
            
            
            9,157
            
            
            
            5,547391,747
            
            
            
            395,800Unearned
      income
            
            
            (6
            )
            
            
            (12
            )Allowance
      for loan losses
            
            
            (8,660
            )
            
            
            (7,285
            )Loans,
      net
            
            $
            383,081
            
            
            $
            388,503





Nonaccrual, Past Due and Restructured
Loans.The
following table presents various categories of nonaccrual, past due, potential
problem loans,  and restructured loans in the Banks’ loan portfolios
as of September 30, 2009 and December 31, 2008:


21
 Index




(Dollars
      in thousands)
            
            September 30,
              2009
            
            
            December 31,
              2008Nonaccrual
      loans
            
            $
            6,031
            
            
            $
            9,164Loans
      past due 90 days or more and still accruing
            
            $
            890
            
            
            $
            779Loans
      restructured under troubled debt
            
            $
            2,043
            
            
            $
            -





As of
September 30, 2009 nonaccrual loans decreased $3.1 million from $9,164,000 at
December 31, 2008 to $6,031,000.  The decline results primarily to the
foreclosure in the third quarter of a of a $2.6 million loan secured by a
shopping center.  Impaired loans at September 30, 2009 consisted of
$4.5 million in construction and development loans and $760,000 in first
mortgages secured by single family dwellings, $59,000 in commercial real estate
loans, and $168,000 in second mortgages.  Impaired construction and
development loans include a $3.45 million loan secured by an apartment complex
for which a valuation allowance of $196,000 was established; a $698,000
residential development loan; a $604,000 residential development loan, and a
$376,000 construction loan secured by a partially completed office
building.    The valuation allowance for the apartment
complex was reduced from $846,000 at March 31, 2009 based on a more recent
appraisal received for the property.   Impaired first mortgage
loans consist of 28 loans, the largest of which is $135,000.





Information
regarding impaired loans as of September 30, 2009 and December 31, 2008 are as
follows:





(Dollars
      in thousands)
            
            September 30,
              2009
            
            
            December 31,
              2008Impaired
      loans without a valuation allowance
            
            $
            2,213
            
            
            $
            -Impaired
      loans with a valuation allowance
            
            
            11,608
            
            
            
            9,164Total
      impaired loans
            
            $
            13,821
            
            
            $
            9,164Valuation
      allowance related to impaired loans
            
            $
            1,681
            
            
            $
            1,603Average
      investment in impaired loans
            
            $
            8,399
            
            
            $
            5,920





Impaired
loans without a valuation allowance at September 30, 2009 consist of twenty two
loans secured by real estate, the largest of which is a $697,000 loan secured by
land.  The remaining loans are secured by single family dwelling, with
the largest loan having a balance of $247,000.





In
addition to the impaired loans in the table above, at September 30, 2009 the
Company had $37.4 million 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, 2009:





(Dollars
      in thousands)Construction
      and development loans
            
            $
            6,925First
      mortgage
            
            
            16,510Second
      mortgage and home equity line of credit
            
            
            652Nonresidential
      mortgage
            
            
            10,473Commercial
            
            
            1,800Consumer
            
            
            1,014Total
            
            $
            37,374





Other Real Estate.Other real estate
totaled $9,580,000 and $5,592,000 as of September 30, 2009 and December 31,
2008, respectively.  At September 30, 2009, the largest component
of other real estate was $4.9 million which represented the Company’s 75 percent
interest in foreclosed property consisting of 96 developed residential lots and
24 partially developed lots in a golf course development in Jackson County,
Georgia.  The Company sold a 25 percent participation interest at the
time the loan was originated.  In addition to the above, other real
estate includes a retail shopping center recorded a carrying amount of $2.6
million, a 20% interest in land zoned for retail shopping recorded at a carrying
amount of $500,000, and an office building under construction in Atlanta,
Georgia which was written down in the third quarter by $133,000 to
$394,000.   The remainder of other real estate consists of
thirteen properties, the largest having a balance of $245,000.


22
 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, 2009 and 2008:





Analysis
      of Allowance for Loan LossesFor
      The Three and Nine Months Ended September 30, 2009 and
2008(Dollars
      in thousands)
            
            Three
      Months
            
            
            Nine
      Months2009
            
            
            2008
            
            
            2009
            
            
            2008Balance
      at beginning of period
            
            $
            8,105
            
            
            $
            6,206
            
            
            $
            7,285
            
            
            $
            4,952ChargeoffsCommercial
      loans
            
            
            9
            
            
            
            3
            
            
            
            66
            
            
            
            44Real
      estate - construction
            
            
            137
            
            
            
            616
            
            
            
            1,021
            
            
            
            638Real
      estate - mortgage
            
            
            139
            
            
            
            76
            
            
            
            482
            
            
            
            180Consumer
            
            
            137
            
            
            
            286
            
            
            
            479
            
            
            
            566Other
            
            
            25
            
            
            
            29
            
            
            
            64
            
            
            
            88Total
      Chargeoffs
            
            
            447
            
            
            
            1,010
            
            
            
            2,112
            
            
            
            1,516RecoveriesCommercial
      loans
            
            
            28
            
            
            
            12
            
            
            
            44
            
            
            
            19Real
      estate - construction
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            25Real
      estate - mortgage
            
            
            18
            
            
            
            2
            
            
            
            28
            
            
            
            43Consumer
            
            
            81
            
            
            
            120
            
            
            
            266
            
            
            
            294Other
            
            
            -
            
            
            
            21
            
            
            
            37
            
            
            
            65Total
      recoveries
            
            
            127
            
            
            
            156
            
            
            
            375
            
            
            
            446Net
      chargeoffs
            
            
            (320
            )
            
            
            (854
            )
            
            
            (1,737
            )
            
            
            (1,070
            )Additions
      charged to operations
            
            
            875
            
            
            
            837
            
            
            
            3,112
            
            
            
            2,307Balance
      at end of period
            
            $
            8,660
            
            
            $
            6,189
            
            
            $
            8,660
            
            
            $
            6,189Annualized
      ratio of net chargeoffs during the period to average loans outstanding
      during the period
            
            
            0.33
            %
            
            
            0.89
            %
            
            
            0.59
            %
            
            
            0.37
            %




Allowance for Loan Losses.The allowance for
loan losses as of September 30, 2009 was $8,660,000 compared to $7,285,000 at
December 31, 2008 and $6,189,000 at September 30, 2008.   As a
percentage of gross loans, the allowance for loan losses was 2.21% at September
30, 2009 compared to 1.84% as of December 31, 2008 and 1.55% at September 30,
2008. The provisions for loan losses during the three and nine months ended
September 30, 2009 of $875,000 and $3,112,000, respectively, were the result of
management's assessment of risks inherent in the loan
portfolio.  Management’s estimate of the allowance for loan losses
utilizes a loan grading system to assign a risk grade to each loan based on
factors such as the quality of collateral securing a loan, the financial
condition of the borrower and the payment history of each loan.  Based
on net charge-off history experienced for each category within the loan
portfolio, as well as general economic factors affecting the lending market,
management assigns an estimated allowance for each risk grade within each of the
loan categories.  Management then estimates the required allowance,
which may also include a portion that is not allocated to a specific category of
the loan portfolio, but which management deems is necessary based on the overall
risk inherent in the loan portfolio.  The estimation of the allowance
may change due to fluctuations in the factors noted above as well as changes in
the trends of net charge-offs, past due loans, and general economic conditions
of the markets served by the Company’s subsidiary banks.





During
the nine months ended September 30, 2009, the Company recorded gross chargeoffs
of $2,112,000.  Of this total, $500,000 related to a loan secured by a
real estate development that was foreclosed in the first quarter and $348,000
related to a tract of land foreclosed in the second quarter.  The
$500,000 charged off in the first quarter represented the valuation allowance
established for this loan as of December 31, 2008.





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.


23
 Index


Results
of Operations For The Three and Nine Months Ended September 30, 2009 and
2008





The
results of operations for the three month period ended September 30, 2009
amounted to a net loss of $(6.2) million, or $(1.63) basic and diluted
earnings per share, compared to net income of $476,000 or $0.12 basic and
diluted earnings per share for the same three-month period in
2008.  Results for the nine month period ended September 30, 2009 was
a net loss of $(5.9) million, or $(1.56) basic and diluted earnings per share
compared to net income of $2,488,000 or $0.64 basic and diluted earnings per
share in 2008.    The primary reason for the decline is a
$6,397,000 impairment charge recorded in the current quarter related to the
Company’s goodwill.  This impairment charge eliminated the remaining
balance of goodwill.





Net Interest Income.Net interest income
represents the difference between interest received on interest earning assets
and interest paid on interest bearing liabilities.





Net
interest income for the three months ended September 30, 2009 decreased $274,000
or 5.0% over the same period in 2008.  This decline is the result of a
$193,000 reduction attributable to changes in interest rates and a decrease of
$81,000 attributable to declines 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, 2009 was approximately 175 basis points lower than the same period in
2008.  These reductions have contributed to a reduction in the average
yield on earning assets from 6.30% during the three month period ending
September 30, 2008 to 5.61% in the same period in 2009.  The average
cost of funds declined from 2.74% in 2008 to 2.04% in 2009.  The net
interest margin for the current year period decreased from 4.01% in 2008 to
3.82% in 2009.  The net interest spread increased from 3.56% in 2008
to 3.57% in 2009.   Total interest income decreased $968,000 to
$7,691,000 for the quarter ended September 30, 2009.  Interest income
earned on loans decreased $656,000 composed of a $788,000 reduction in interest
due to the reduction in the average yield of the loan portfolio from 7.13% to
6.31%, offset by a $132,000 increase that relates to a $7.6 million growth in
the average balance of loans.  The reduction in the average yield on
loans results from a significant portion of the loan portfolio having variable
interest rates that are tied to the prime rate.   Interest income
on taxable securities decreased $278,000 caused by a reduction in the average
yield from 4.73% in 2008 to 4.18% in 2009 and a reduction in the average balance
from $112.6 million in 2008 to $100.6 million in 2009.





Interest
expense decreased $694,000 to $2,456,000 for the quarter ended September 30,
2009.  The main component of the decrease in interest expense was a
$418,000 decrease in interest paid on certificates of deposit and is primarily
the result of a decrease in the average rate paid on such accounts from 3.83%
for the quarter ended September 30, 2008 to 2.98% for the same quarter in 2009
and is the result of declines in the general level of interest
rates.  The average rate on certificates of deposits typically lags
the changes in the discount rate due to the longer term of the accounts and to
competition from other banks for such funds.





The
following presents, for the three month periods ended September 30, 2009 and
2008, the main components of interest earning assets and interest bearing
liabilities and related interest income and expense and effective yields and
cost of funds.


24
 Index


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
            
            
            Increase2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            (Decrease)AssetsLoans,
      including fee income
            
            $
            393,374
            
            
            $
            385,974
            
            
            
            6.31
            %
            
            
            7.13
            %
            
            $
            6,259
            
            
            $
            6,915
            
            
            $
            (656
            )Taxable
      securities
            
            
            100,587
            
            
            
            112,558
            
            
            
            4.18
            %
            
            
            4.73
            %
            
            
            1,061
            
            
            
            1,339
            
            
            
            (278
            )Nontaxable
      securities
            
            
            22,649
            
            
            
            23,480
            
            
            
            3.66
            %
            
            
            3.90
            %
            
            
            209
            
            
            
            230
            
            
            
            (21
            )Federal
      funds sold
            
            
            3,470
            
            
            
            9,957
            
            
            
            0.11
            %
            
            
            0.80
            %
            
            
            1
            
            
            
            20
            
            
            
            (19
            )Interest
      bearing deposits in banks
            
            
            23,664
            
            
            
            15,141
            
            
            
            2.70
            %
            
            
            4.07
            %
            
            
            161
            
            
            
            155
            
            
            
            6Total
      earning assets
            
            
            543,744
            
            
            
            547,110
            
            
            
            5.61
            %
            
            
            6.30
            %
            
            
            7,691
            
            
            
            8,659
            
            
            
            (968
            )Cash
      and due from banks
            
            
            35,540
            
            
            
            15,031Allowance
      for loan losses
            
            
            (7,974
            )
            
            
            (5,781
            )Other
      assets
            
            
            61,237
            
            
            
            62,159Total
            
            $
            632,547
            
            
            $
            618,519Liabilities
      and EquityInterest
      bearing demand (2)
            
            $
            157,211
            
            
            $
            149,593
            
            
            
            0.75
            %
            
            
            1.39
            %
            
            $
            297
            
            
            $
            524
            
            
            $
            (227
            )Savings
            
            
            44,904
            
            
            
            44,141
            
            
            
            0.48
            %
            
            
            0.70
            %
            
            
            54
            
            
            
            78
            
            
            
            (24
            )Certificates
      of deposit
            
            
            267,208
            
            
            
            252,144
            
            
            
            2.98
            %
            
            
            3.83
            %
            
            
            2,008
            
            
            
            2,426
            
            
            
            (418
            )Total
      interest bearing deposits
            
            
            469,323
            
            
            
            445,878
            
            
            
            1.99
            %
            
            
            2.70
            %
            
            
            2,359
            
            
            
            3,028
            
            
            
            (669
            )Borrowed
      funds
            
            
            8,447
            
            
            
            11,124
            
            
            
            4.56
            %
            
            
            4.36
            %
            
            
            97
            
            
            
            122
            
            
            
            (25
            )Total
      interest bearing liabilities
            
            
            477,770
            
            
            
            457,002
            
            
            
            2.04
            %
            
            
            2.74
            %
            
            
            2,456
            
            
            
            3,150
            
            
            
            (694
            )Noninterest
      bearing demand deposits
            
            
            75,225
            
            
            
            78,477Other
      liabilities
            
            
            9,978
            
            
            
            10,170Redeemable
      common stock held by ESOP
            
            
            481
            
            
            
            712Shareholders'
      equity
            
            
            69,093
            
            
            
            72,158Total
            
            $
            632,547
            
            
            $
            618,519Net
      interest income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            5,235
            
            
            $
            5,509
            
            
            $
            (274
            )Net
      interest yield on earning assets
            
            
            
            
            
            
            
            
            
            
            3.82
            %
            
            
            4.01
            %Net
      interest spread
            
            
            
            
            
            
            
            
            
            
            3.57
            %
            
            
            3.56
            %





(1)  Daily
averages.  Loans includes nonaccrual loans.


(2)  Includes
money market accounts





The
following presents, for the nine month periods ended September 30, 2009 and
2008, the main components of interest earning assets and interest bearing
liabilities and related interest income and expense and effective yields and
cost of funds.


25
 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
            
            
            Increase2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            (Decrease)AssetsLoans,
      including fee income
            
            $
            394,463
            
            
            $
            383,165
            
            
            
            6.45
            %
            
            
            7.35
            %
            
            $
            19,030
            
            
            $
            21,088
            
            
            $
            (2,058
            )Taxable
      securities
            
            
            100,369
            
            
            
            113,039
            
            
            
            4.32
            %
            
            
            4.82
            %
            
            
            3,246
            
            
            
            4,081
            
            
            
            (835
            )Nontaxable
      securities
            
            
            22,735
            
            
            
            23,475
            
            
            
            3.77
            %
            
            
            3.91
            %
            
            
            641
            
            
            
            688
            
            
            
            (47
            )Federal
      funds sold
            
            
            3,771
            
            
            
            12,155
            
            
            
            0.21
            %
            
            
            2.59
            %
            
            
            6
            
            
            
            236
            
            
            
            (230
            )Interest
      bearing deposits in banks
            
            
            22,402
            
            
            
            14,398
            
            
            
            2.72
            %
            
            
            3.76
            %
            
            
            455
            
            
            
            405
            
            
            
            50Total
      earning assets
            
            
            543,740
            
            
            
            546,232
            
            
            
            5.75
            %
            
            
            6.48
            %
            
            
            23,378
            
            
            
            26,498
            
            
            
            (3,120
            )Cash
      and due from banks
            
            
            33,827
            
            
            
            15,010Allowance
      for loan losses
            
            
            (7,851
            )
            
            
            (5,575
            )Other
      assets
            
            
            60,570
            
            
            
            61,876Total
            
            $
            630,286
            
            
            $
            617,543Liabilities
      and EquityInterest
      bearing demand (2)
            
            $
            156,441
            
            
            $
            149,032
            
            
            
            0.82
            %
            
            
            1.49
            %
            
            $
            964
            
            
            $
            1,657
            
            
            $
            (693
            )Savings
            
            
            44,721
            
            
            
            44,064
            
            
            
            0.50
            %
            
            
            0.72
            %
            
            
            168
            
            
            
            237
            
            
            
            (69
            )Certificates
      of deposit
            
            
            267,237
            
            
            
            252,601
            
            
            
            3.19
            %
            
            
            4.21
            %
            
            
            6,380
            
            
            
            7,966
            
            
            
            (1,586
            )Total
      interest bearing deposits
            
            
            468,399
            
            
            
            445,697
            
            
            
            2.14
            %
            
            
            2.96
            %
            
            
            7,512
            
            
            
            9,860
            
            
            
            (2,348
            )Borrowed
      funds
            
            
            8,612
            
            
            
            10,093
            
            
            
            3.51
            %
            
            
            4.37
            %
            
            
            226
            
            
            
            330
            
            
            
            (104
            )Total
      interest bearing liabilities
            
            
            477,011
            
            
            
            455,790
            
            
            
            2.17
            %
            
            
            2.99
            %
            
            
            7,738
            
            
            
            10,190
            
            
            
            (2,452
            )Noninterest
      bearing demand deposits
            
            
            75,394
            
            
            
            78,516Other
      liabilities
            
            
            10,008
            
            
            
            10,247Redeemable
      common stock held by ESOP
            
            
            480
            
            
            
            782Shareholders'
      equity
            
            
            67,393
            
            
            
            72,208Total
            
            $
            630,286
            
            
            $
            617,543Net
      interest income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            15,640
            
            
            $
            16,308
            
            
            $
            (668
            )Net
      interest yield on earning assets
            
            
            
            
            
            
            
            
            
            
            3.85
            %
            
            
            3.99
            %Net
      interest spread
            
            
            
            
            
            
            
            
            
            
            3.58
            %
            
            
            3.49
            %




(1)  Daily
averages.  Loans includes nonaccrual loans.


(2)  Includes
money market accounts





Net
interest income for the nine months ended September 30, 2009 decreased $668,000
or 4.1% over the same period in 2008.  This decline is the result of a
$422,000 reduction attributable to changes in interest rates and a $246,000
reduction attributable to increases in the average balances of interest earning
assets and interest bearing liabilities.  The average Federal Reserve
discount rate for the period ending September 30, 2009 was approximately 227
basis points lower than the same period in 2008.  The resulting
reductions in the general level of interest rates have contributed to a
reduction in the average yield on earning assets from 6.48% during the nine
month period ending September 30, 2008 to 5.75% in the same period in
2009.  The average cost of funds declined from 2.99% in 2008 to 2.17%
in 2009.  The net interest margin for the current year period declined
14 basis points from 2008, decreasing from 3.99% in 2008 to 3.85% in
2009.  The net interest spread increased from 3.49% in 2008 to 3.58%
in 2009.   Total interest income decreased $3,120,000 to
$23,378,000 for the nine month period ended September 30,
2009.  Interest income earned on loans decreased $2,058,000 composed
of a $2,663,000 reduction in interest income due to the reduction in the average
yield of the loan portfolio from 7.35% to 6.45%, offset by a $605,000 increase
that relates to a $11.3 million growth in the average balance of
loans.  The reduction in the average yield on loans results from a
significant portion of the loan portfolio having variable interest rates that
are tied to the prime rate.   Interest income on taxable
securities decreased $835,000, of which $401,000 was caused by a reduction in
the average yield from 4.82% in 2008 to 4.32% in 2009 and $434,000 was caused by
a reduction in the average balance from $113.0 million in 2008 to $100.4 million
in 2009. The increase in nonperforming assets in 2009 has also decreased the net
interest margin.





Interest
expense decreased $2,452,000 to $7,738,000 for the nine month period ended
September 30, 2009.  The main component of the decrease in interest
expense was a $1,586,000 decrease in interest paid on certificates of deposit
and is primarily the result of a decrease in the average rate paid on such
accounts from 4.21% for the period ended September 30, 2008 to 3.19% for the
same period in 2009 and is the result of declines in the general level of
interest rates.  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.


26
 Index


Other Income.Total other income for the
three-month period ended September 30, 2009 amounted to $1,784,000 compared to
$1,170,000 for the same period in 2008, an increase of $614,000.  For
the nine-month period, other income was $5,202,000 in 2009 compared to
$4,932,000 in 2008, an increase of $270,000 or 5.5%.





The
primary cause of the increase in income relates to a charge of $600,000 recorded
in the previous year for a loss on investment securities.  For the
current year to date period, losses on securities totaled
$197,000.  Of the losses in 2009, $216,000 relate to losses realized
on common and preferred stocks, including a $66,000 loss on our common stock
investment in Silverton Bank, N.A.  For tax purposes, these are
capital losses for which the Company is not able to obtain a tax
benefit.





Service
charges (including NSF and overdraft charges) on deposit accounts decreased
$87,000 or 8.5% for the three month period and $366,000 or 12.3% for the nine
month period.  For the three month period, these fees were 1.61% of
interest-bearing and non-interest bearing checking accounts in 2009 compared to
1.80% in 2008.  NSF fees account for $77,000 of the $87,000 reduction,
declining from $889,000 in 2008 to $812,000 in 2009.  For the nine
month period, these fees were 1.51% of interest-bearing and non-interest bearing
checking accounts in 2009 compared to 1.75% in 2008.  Of the $366,000
decline in fees for the nine month fees, reductions in NSF fees accounted for
$312,000, reducing from $2,541,000 in 2008 to $2,229,000 in 2009.  In
general, the decline in these fees is believed to be the result of the current
economic recession in which consumers have generally reduced their spending
levels and maintain higher balances in their checking accounts, thus avoiding
service charges and NSF fees.





For the
three months ended September 30, 2009, gain on sale of loans was $77,000
compared to $31,000 in 2008 due to increased volume of loans sold as a result of
increased refinancing activity caused by declines in interest
rates.  The gain on sale of loans for the nine month periods ended
September 30, 2009 and 2008 were $522,000 and $251,000,
respectively.  Included in the gain on sale of loans are the
recognition of mortgage servicing rights of $31,000 and $17,000 for the three
month periods ended September 30, 2009 and 2008, respectively, and $227,000 and
$121,000 for the nine month periods ended September 30, 2009 and 2008,
respectively.   The following presents the activity in the
Company’s mortgage servicing rights in 2009 and 2008:




Three
      Months
            
            
            Nine
      Months(dollars
      in thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Beginning
      balance
            
            $
            601
            
            
            $
            556
            
            
            $
            525
            
            
            $
            510Servicing
      rights recognized
            
            
            31
            
            
            
            17
            
            
            
            227
            
            
            
            121Amortization
      expense
            
            
            (51
            )
            
            
            (34
            )
            
            
            (171
            )
            
            
            (92
            )Ending
      balance
            
            $
            581
            
            
            $
            539
            
            
            $
            581
            
            
            $
            539





Other
Expenses.  Other expenses for the three-month period ended
September 30, 2009 amounted to $12,519,000.  Excluding the $6,397,000
goodwill impairment charge, other expenses were increased $734,000 over the same
period in 2008.  For the nine month period, excluding the goodwill
impairment charge, other expenses increased $1,870,000 over the same period in
2008.




The
largest component of other expenses is salaries and employee benefits, which
decreased $200,000, or 6.8% for the three month period and increased $105,000 or
1.2% for the nine month period.  During 2009, the Company has
instituted measures to reduce its costs, including eliminating incentives and
bonuses, reducing retirement expenses, and increasing its cost cutting measures,
and combining job duties when possible as employees resign.  For the
nine month period, the primary component of the increase in cost was a $400,000
accrual in the first quarter for the cost of the termination of Bank of
Chickamauga’s Defined Benefit Plan, which occurred in the second
quarter.  The compensation cost that was charged against income for
our stock option plans was $2,000 and $26,000 for the three month periods ended
September 30, 2009 and 2008, respectively, and $52,000 and $78,000 for the nine
month periods ended September 30, 2009 and 2008, respectively.  The
total compensation cost related to nonvested awards not yet recognized at
September 30, 2009 is $131,000 which will be recognized over the weighted
average period of approximately 1.40 years.





For the
three month period ended September 30, 2009, amortization of intangibles
decreased $35,000.  Amortization of core deposit intangibles decreased
by $52,000 as impairment charges recorded against these assets at December 31,
2008 reduced required future amortization.  Amortization expense for
mortgage servicing rights for the quarter increased $17,000.  For the
nine month period ended September 30, 2009, amortization of intangibles
decreased $75,000.  Amortization of core deposit intangibles decreased
by $154,000 while amortization expense for mortgage servicing rights increased
$79,000.  Equipment and occupancy expenses increased $5,000 for the
three month period and $58,000 for the nine month period.  The
increase for the nine month period relates to a $72,000 increase in depreciation
expense over 2008.  FDIC premiums increased $172,000 for the three
month period and $844,000 for the nine month period due to increases in premiums
assessed by the FDIC, including $284,000 accrued in the second quarter for the
FDIC’s Special Assessment.  Professional fees increased
$159,000 for the three month period and  $283,000 for the nine
months primarily
because of increased collection costs of nonperforming assets, costs associated
with the special proxy statement and goodwill assessment
costs.  Loss on sale of real estate increased $364,000 for the
three month period and $420,000 for the nine month period.   The
increase primarily relates to a $212,000 loss on the sale of a tract of land
sold in the third quarter and a $150,000 writedown of the carrying value of an
office building previously foreclosed.


27
 Index


Income Taxes.  The
Company recorded an income tax benefit totaling $(175,000) and (22,000) for the
three-month periods ending September 30, 2009 and 2008,
respectively.  The effective tax rate for the periods was (2.75)% and
(4.85)%, respectively.   For the nine month period, the Company
recorded an income tax benefit totaling $(395,000) and income tax expense of
$663,000, respectively, resulting in effective tax rates for the periods
of  (6.25)% and 21.1%, respectively.  Tax-exempt interest
income, income on bank-owned life insurance and the impairment charge on
goodwill are the primary reasons that the Company’s effective tax rates differ
from the statutory tax rate of 34%.




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, 2009, we believe our
liquidity, as determined under guidelines established by regulatory authorities
and internal policies, was satisfactory.





The
Company, if needed, has the ability to cash out certificates with asset cash
flow under normal circumstances. In the event that abnormal circumstances arise,
the Banks have federal funds lines of credit in place totaling $5.1 million. In
addition, if needed for both short-term and longer-term funding needs, the Banks
have available lines of credit with the Federal Home Loan Bank of Atlanta on
which $44.8 million was available at September 30, 2009.





At
September 30, 2009, our capital ratios met regulatory minimum capital
requirements for “well-capitalized” categorization. The minimum capital
requirements and the actual capital ratios on a consolidated and bank-only basis
are as follows:





Tier
      1
              Leverage
            
            
            Tier
      1 Risk-
              Based
            
            
            Total
      Risk-
              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, 2009Consolidated
            
            
            10.83
            %
            
            
            16.23
            %
            
            
            17.49
            %Bank
      of Upson
            
            
            9.57
            %
            
            
            13.47
            %
            
            
            14.73
            %The
      First National Bank of Polk County
            
            
            11.21
            %
            
            
            17.22
            %
            
            
            18.48
            %Peachtree
      Bank
            
            
            8.67
            %
            
            
            13.44
            %
            
            
            14.69
            %Bank
      of Chickamauga
            
            
            8.83
            %
            
            
            17.77
            %
            
            
            19.03
            %





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 “CPP”), 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 warrant preferred having
an aggregate redemption value equal to 5% 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 CPP.    Institutions that receive Treasury approval to
participate in the CPP have 30 days to satisfy all requirements for
participation and to complete the issuance of the senior preferred shares to the
Treasury. On April 21, 2009, the Company was notified by the U.S. Treasury that
it had been approved to participate in the program, and the Company elected to
participate in the CPP in July 2009.  On July 17, 2009 the Company
issued and sold to the Treasury (i) 12,900 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference
of $1,000 per share (Preferred Stock Series A) and (ii) a Warrant to purchase
645 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series B, having a liquidation preference of $1,000 per share (Preferred Stock
Series B) at an initial price of $0.01 per share (the “Warrant”), all for an
aggregate purchase price of $12,900,000 in cash. The Warrant was exercised by
the Treasury immediately on July 31, 2009 pursuant to a cashless exercise, and
645 shares of Preferred Stock Series B were issued to the Treasury and the
Warrant was cancelled.


28
 Index


The
Preferred Stock Series A pays cumulative dividends at a rate of 5% per annum for
the first five years, and 9% per annum thereafter, but will be paid only if, as,
and when declared by the Company’s Board of Directors. The Preferred Stock
Series A has no maturity date and ranks senior to the Company’s common stock
with respect to the payment of dividends and distributions and amounts payable
upon the liquidation and dissolution and the winding up of the Company. The
Preferred Stock Series A is generally non-voting.   The Company
may redeem the Preferred Stock Series A at par at any time.




The terms
of the Preferred Stock Series B are substantially identical to those of the
Preferred Stock Series A. Differences include the payment under the Preferred
Stock Series B of cumulative dividends at a rate of 9% per year, and such stock
may not be redeemed while shares of the Preferred Stock Series A are
outstanding.





At
September 30, 2009, the Company had $5,972,000 outstanding on its line of credit
with Silverton Bridge Bank, N.A. (formerly The Bankers Bank and Silverton Bank
N.A.).  On May 1, 2009, the Office of the Comptroller of the Currency
closed Silverton Bank. The FDIC was appointed as Receiver for Silverton Bank,
and Silverton Bridge Bank, N.A. was formed to take over the operations of
Silverton Bank. The stock of our subsidiary banks is pledged as collateral for
this loan.  The terms of the line of credit contain certain
restrictive covenants including, among others, a requirement of each subsidiary
bank to maintain certain minimum capital levels as well as maximum ratios
related to the levels of nonperforming assets, to be measured
quarterly.  At the inception of the loan, the restriction relative to
maximum levels of nonperforming assets required that these assets not exceed 1%
of each subsidiary’s total assets.  The Company was in violation of
this covenant for the second and third quarters of 2008 for which it received
waivers from the lender.  The Company and the lender agreed to amend
the covenants such that each subsidiary’s nonperforming assets may not exceed 5%
of total assets as of December 31, 2008 and for each quarter of
2009.  Thereafter, this ratio would reduce by 1% during each quarter
in 2010 so that the maximum ratio returns to 1% of total assets by December 31,
2010.




At
December 31, 2008, as a result of its impairment of its goodwill and core
deposit intangible assets, the Company was not in compliance with its covenant
to maintain a minimum debt service coverage ratio, defined as net income of
subsidiary banks for the prior four quarters multiplied by 50%, divided by the
annual debt service of the Company.  During the second quarter
of  2009, the terms of the line of credit were amended in response to
this covenant noncompliance by eliminating the debt service covenant and
instituting a liquidity covenant whereby the Parent Company must maintain cash
reserves of at least $800,000.  In addition, the interest rate was
changed from prime minus 0.5% to Prime plus 1% through July 1, 2010, Prime plus
2% through July 1, 2011, and Prime plus 3% through July 1, 2012 on which date
the unpaid balance of the loan (projected to be $3.4 million) would become due
in a lump sum payment.





FDIC
Special Assessment





The FDIC
imposed an emergency special assessment on insured depository institutions as of
June 30, 2009. The FDIC collected this assessment on September 30, 2009. For the
Company, the special assessment was 5 basis points of the Bank's total assets
less its Tier 1 capital. The Company accrued $284,000 for this special
assessment as of June 30, 2009. The FDIC may impose an additional emergency
special assessment in the future of up to 5 basis points if necessary
to maintain public confidence in federal deposit insurance.  In
November 2009, the FDIC approved a rule that, in lieu of a further special
assessment in 2009, will require all insured depository institutions, with
limited exceptions, to prepay their estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also
proposed to adopt a uniform three basis point increase in assessment rates
effective on January 1, 2011. If the rule is finalized as proposed, the Company
expects to be required to prepay approximately $2.8 million in risk-based
assessments.





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,
2009.


29
 Index


Commitments
and Contractual Obligations


(Dollars
in thousands)





Less
      than one year
            
            
            1-3
      years
            
            
            3-5
      years
            
            
            Thereafter
            
            
            TotalContractual
      obligationsDeposits
      having no stated maturity
            
            $
            281,894
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            281,894Certificates
      of Deposit
            
            
            198,170
            
            
            
            38,841
            
            
            
            20,549
            
            
            
            -
            
            
            
            257,560Long-term
      borrowed funds
            
            
            1,489
            
            
            
            2,353
            
            
            
            4,006
            
            
            
            -
            
            
            
            7,848Deferred
      compensation
            
            
            43
            
            
            
            289
            
            
            
            588
            
            
            
            4,505
            
            
            
            5,425Leases
            
            
            77
            
            
            
            159
            
            
            
            165
            
            
            
            274
            
            
            
            675Total
      contractual obligations
            
            $
            481,673
            
            
            $
            41,642
            
            
            $
            25,308
            
            
            $
            4,779
            
            
            $
            553,402CommitmentsCommitments
      to extend credit
            
            $
            24,006
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            24,006Credit
      card commitments
            
            
            5,803
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,803Commercial
      standby letters of credit
            
            
            803
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            803Total
      commitments
            
            $
            30,612
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            30,612


30
 Index


ITEM 3.  Quantitativeand Qualitative Disclosures about
Market Risk





Pursuant
to the revised disclosure requirements for smaller reporting companies effective
February 4, 2008, no disclosure under this Item is required.





ITEM4T. Controls and Procedures





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





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





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





There
have been no changes in our internal controls over financial reporting during
our first fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.




PART
II - OTHER INFORMATION





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





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,
2008, 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.




Item
      2.
            Unregistered Sales of
      Equity Securities and Use of
Proceeds





None.





Item3.
            Defaults upon Senior
      Securities





None.


31
 Index


Item4.
            Submission of Matters
      to a Vote of Security
Holders





None.





Item 5.
            Other
      Information





None.





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


32
 Index


SIGNATURES





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





SouthCrest Financial Group,
Inc.


(Registrant)








DATE:  November
      16, 2009
            BY:
            /s/ Larry T. KuglarLarry
      T. Kuglar.President
      and Chief Executive OfficerDATE:  November
      16, 2009
            BY:
            /s/ Douglas J. HerthaDouglas
      J. HerthaSenior
      Vice President, Chief Financial
Officer






33