**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 June 30, 2006**
  **o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  **For
        the transition period from** **** **to** ****
  **Commission
        File Number: 000-51287**
  
 **SOUTHCREST
        FINANCIAL GROUP, INC.**
 **(Exact
        name of small business issuer as specified in its charter)**
  
 **Georgia**
              
              **58-2256460****(State
                  or other jurisdiction of****incorporation
                  or organization)**
              
              **(IRS
                  Employer****Identification
                  No.)**
  **600
        North Glynn Street**
 **Fayetteville,
        GA 30214**
 **(Address
        of principal executive offices)**
  **(770)-461-2781**
 **(Issuer’s
        telephone number)**
  **____________________________________________________**
 **(Former
        name, former address and former fiscal year, if changed since last report)**
  
 Check
        whether the issuer (1) has filed all reports required to be filed by Section
        13
        or 15(d) of the Exchange Act during the past 12 months (or for such shorter
        period that the registrant was required to file such reports) and (2) has
        been
        subject to such filing requirements for the past 90 days.   
Yes  **x**No **o**
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
        Accelerated Filer   **o**  Accelerated
        Filer  **o**  Non-Accelerated
        Filer   **x**
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).     Yes  **o**        No
        **x**
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of August 14, 2006: 3,581,193.
  
  **SouthCrest
        Financial Group, Inc.**
 **And
        Subsidiaries** ****
  **INDEX**
 PagePart
                    I.
                FINANCIAL
                    INFORMATIONItem
                    1.
                Condensed
                    Consolidated Financial
                    StatementsCondensed
                    Consolidated Balance Sheets - June 30,
                    2006 and December 31, 2005
                1Condensed
                    Consolidated Statements of Income -
                    Three and Six Months Ended June 30, 2006 and 2005
                2Condensed
                    Consolidated Statements of Comprehensive
                    Income - Three and Six Months Ended June 30, 2006 and
                    2005
                3Condensed
                    Consolidated Statements of Cash Flows - Six
                    Months Ended June 30, 2006 and 2005
                4Notes
                    to Condensed Consolidated Financial Statements
                6Item
                    2.
                Management’s
                    Discussion and Analysis of Financial Condition
                    and Results of Operations
                9Item
                    3.
                Quantitative
                    and Qualitative Disclosures about Market
                    Risk
                17Item
                    4.
                Controls
                    and Procedures
                17Part
                    II.
                OTHER
                    INFORMATION
                17Item
                    1.
                Legal
                    Proceedings
                17Item
                    1A.
                Risk
                    factors.
                17Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds
                17Item
                    3.
                Defaults
                    Upon Senior Securities
                17Item
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders
                18Item
                    5.
                Other
                    Information
                18Item
                    6.
                Exhibits
                18Signatures
                19
  *Index*
  **PART
        I- FINANCIAL INFORMATION**
 **ITEM
        1. FINANCIALSTATEMENTS**
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        Consolidated Balance
        Sheets**
 **June
        30, 2006 and December 31, 2005**
 **(Unaudited)**
 **(In
        thousands, except share and per share data)**
  **Assets**
              
              **June
                    30,**
                **2006**
              
              December
                    31,
                2005*Cash
                  and due from banks
              
              **$**
              **16,575**
              
              $
              15,930Interest-bearing
                  deposits at other financial institutions
              
              
              **3,544**
              
              
              4,039Federal
                  funds sold
              
              
              **1,102**
              
              
              4,297Securities
                  available for sale
              
              
              **47,296**
              
              
              45,190Securities
                  held to maturity (fair value $71,188 and $76,894)
              
              
              **74,169**
              
              
              78,321Restricted
                  equity securities, at cost
              
              
              **2,136**
              
              
              2,270Loans
                  held for sale
              
              
              **533**
              
              
              305Loans,
                  net of unearned income
              
              
              **287,003**
              
              
              276,475Less
                  allowance for loan losses
              
              
              **3,759**
              
              
              3,477Loans,
                  net
              
              
              **283,244**
              
              
              272,998Premises
                  and equipment, net
              
              
              **13,031**
              
              
              11,255Goodwill
              
              
              **2,665**
              
              
              2,665Intangible
                  assets, net
              
              
              **3,838**
              
              
              4,248Other
                  assets
              
              
              **13,086**
              
              
              9,330**Total
                  assets**
              
              **$**
              **461,219**
              
              $
              450,848**Liabilities,
                  Redeemable Common Stock, and Stockholders'
                  Equity**Liabilities:Deposits:Noninterest-bearing
              
              **$**
              **62,450**
              
              $
              60,157Interest-bearing
              
              
              **326,726**
              
              
              317,743Total
                  deposits
              
              
              **389,176**
              
              
              377,900Federal
                  Home Loan Bank advances
              
              
              **10,220**
              
              
              15,275Federal
                  funds purchased
              
              
              **1,595**
              
              
              **-**Other
                  liabilities
              
              
              **3,970**
              
              
              3,233**Total
                  liabilities**
              
              
              **404,961**
              
              
              396,408Commitments
                  and contingenciesRedeemable
                  common stock held by ESOP
              
              
              **1,005**
              
              
              984Stockholders'
                  equityCommon
                  stock, par value $1; 10,000,000 shares authorized, 3,581,193 and
                  3,581,193
                  issued, respectively
              
              
              **3,581**
              
              
              3,581Additional
                  paid-in capital
              
              
              **40,894**
              
              
              40,846Retained
                  earnings
              
              
              **11,443**
              
              
              9,528Accumulated
                  other comprehensive loss
              
              
              **(665**
              **)**
              
              (499
              )**Total
                  stockholders' equity**
              
              
              **55,253**
              
              
              53,456**Total
                  liabilities, redeemable common stock, and stockholders'
                  equity**
              
              **$**
              **461,219**
              
              $
              450,848
 **See
        Notes to Condensed Consolidated Financial Statements.**
 ***
        Derived from audited consolidated financial
        statements.**
  1
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of
        Income**
 **For
        The Three and Six Months Ended June 30, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands, except share and per share data)**
  **Three
                  Months**
              
              **Six
                  Months****2006**
              
              2005
              
              **2006**
              
              2005**Interest
                  income:**Loans
              
              **$**
              **5,524**
              
              $
              4,243
              
              **$**
              **10,715**
              
              $
              8,178Securities
                  - taxable
              
              
              **1,224**
              
              
              1,344
              
              
              **2,449**
              
              
              2,616Securities
                  - nontaxable
              
              
              **111**
              
              
              120
              
              
              **226**
              
              
              245Federal
                  funds sold
              
              
              **86**
              
              
              52
              
              
              **187**
              
              
              132Interest-bearing
                  deposits at other banks
              
              
              **50**
              
              
              38
              
              
              **88**
              
              
              71**Total
                  interest income**
              
              
              **6,995**
              
              
              5,797
              
              
              **13,665**
              
              
              11,242**Interest
                  expense:**Deposits
              
              
              **2,230**
              
              
              1,471
              
              
              **4,139**
              
              
              2,765Other
                  borrowings
              
              
              **141**
              
              
              11
              
              
              **321**
              
              
              16**Total
                  interest expense**
              
              
              **2,371**
              
              
              1,482
              
              
              **4,460**
              
              
              2,781**Net
                  interest income**
              
              
              **4,624**
              
              
              4,315
              
              
              **9,205**
              
              
              8,461**Provision
                  for loan losses**
              
              
              **133**
              
              
              152
              
              
              **241**
              
              
              273**Net
                  interest income after provision for loan losses**
              
              
              **4,491**
              
              
              4,163
              
              
              **8,964**
              
              
              8,188**Other
                  income:**Service
                  charges on deposit accounts
              
              
              **887**
              
              
              861
              
              
              **1,709**
              
              
              1,609Other
                  service charges and fees
              
              
              **289**
              
              
              250
              
              
              **549**
              
              
              476Impairment
                  charge on investments
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              (600
              )Net
                  gain on sale of loans
              
              
              **37**
              
              
              39
              
              
              **71**
              
              
              78Other
                  operating income
              
              
              **98**
              
              
              79
              
              
              **150**
              
              
              186**Total
                  other income**
              
              
              **1,311**
              
              
              1,229
              
              
              **2,479**
              
              
              1,749**Other
                  expenses:**Salaries
                  and employee benefits
              
              
              **2,011**
              
              
              1,796
              
              
              **3,953**
              
              
              3,491Equipment
                  and occupancy expenses
              
              
              **380**
              
              
              381
              
              
              **753**
              
              
              748Amortization
                  of intangibles
              
              
              **202**
              
              
              206
              
              
              **410**
              
              
              551Other
                  operating expenses
              
              
              **1,092**
              
              
              1,030
              
              
              **2,114**
              
              
              2,024**Total
                  other expenses**
              
              
              **3,685**
              
              
              3,413
              
              
              **7,230**
              
              
              6,814**Income
                  before income taxes**
              
              
              **2,117**
              
              
              1,979
              
              
              **4,213**
              
              
              3,123**Income
                  tax expense**
              
              
              **691**
              
              
              621
              
              
              **1,381**
              
              
              946**Net
                  income**
              
              **$**
              **1,426**
              
              $
              1,358
              
              **$**
              **2,832**
              
              $
              2,177**Basic
                  and diluted earnings per share**
              
              **$**
              **0.40**
              
              $
              0.38
              
              **$**
              **0.79**
              
              $
              0.61**Dividends
                  per share**
              
              **$**
              **0.125**
              
              $
              0.120
              
              **$**
              **0.250**
              
              $
              0.240**Basic
                  and diluted average shares outstanding**
              
              
              **3,581,193**
              
              
              3,571,556
              
              
              **3,581,193**
              
              
              3,571,556
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  2
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        ConsolidatedStatements of Comprehensive
        Income**
 **For
        The Three and Six Months Ended June 30, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
  **Three
                  Months**
              
              **Six
                  Months****2006**
              
              2005
              
              **2006**
              
              2005**Net
                  income**
              
              **$**
              **1,426**
              
              $
              1,358
              
              **$**
              **2,832**
              
              $
              2,177**Other
                  comprehensive income:**Unrealized
                  holding gains (losses) on securities available for sale arising
                  during the
                  period, net of taxes of $(112), $133, $(100), and $267
              
              
              **(187**
              **)**
              
              222
              
              
              **(166**
              **)**
              
              375**Comprehensive
                  income**
              
              **$**
              **1,239**
              
              $
              1,580
              
              **$**
              **2,666**
              
              $
              2,552
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  3
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        ConsolidatedStatements of Cash
        Flows**
 **For
        The Six Months Ended June 30, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
 **2006**
              
              2005**OPERATING
                  ACTIVITIES**Net
                  income
              
              **$**
              **2,832**
              
              $
              2,177Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              **384**
              
              
              382Amortization
                  of intangibles
              
              
              **410**
              
              
              551Other
                  amortization
              
              
              **120**
              
              
              186Provision
                  for loan losses
              
              
              **241**
              
              
              273Impairment
                  loss on investment securities
              
              
              **-**
              
              
              600Stock
                  compensation expense
              
              
              **48**
              
              
              -Deferred
                  income taxes
              
              
              **(273**
              **)**
              
              (401
              )Income
                  on bank-owned life insurance
              
              
              **(92**
              **)**
              
              (76
              )Net
                  gain on sale of loans
              
              
              **(71**
              **)**
              
              (78
              )(Increase)
                  decrease in interest receivable
              
              
              **(117**
              **)**
              
              149Increase
                  (decrease) in income taxes payable
              
              
              **50**
              
              
              183Increase
                  in interest payable
              
              
              **338**
              
              
              130Originations
                  of mortgage loans held for sale
              
              
              **(7,159**
              **)**
              
              (5,942
              )Proceeds
                  from sales of mortgage loans held for sale
              
              
              **7,002**
              
              
              6,307Other
                  assets and liabilities, net
              
              
              **472**
              
              
              (439
              )Net
                  cash provided by operating activities
              
              
              **4,185**
              
              
              4,002**INVESTING
                  ACTIVITIES**Purchases
                  of securities held to maturity
              
              
              **-**
              
              
              (8,667
              )Proceeds
                  from maturities of securities held to maturity
              
              
              **4,096**
              
              
              8,411Purchases
                  of securities available for sale
              
              
              **(4,000**
              **)**
              
              (12,001
              )Proceeds
                  from maturities of securities available for sale
              
              
              **1,502**
              
              
              4,053Proceeds
                  from redemption of restricted equity securities
              
              
              **134**
              
              
              -Purchases
                  of restricted equity securities
              
              
              **-**
              
              
              (668
              )Net
                  decrease in interest-bearing deposits in banks
              
              
              **495**
              
              
              692Net
                  decrease in federal funds sold
              
              
              **3,195**
              
              
              9,930Net
                  increase in loans
              
              
              **(10,593**
              **)**
              
              (17,830
              )Purchase
                  of premises and equipment
              
              
              **(2,160**
              **)**
              
              (1,623
              )Proceeds
                  from sale of other real estate owned
              
              
              **472**
              
              
              113Purchase
                  of life insurance contracts
              
              
              **(3,601**
              **)**
              
              -Net
                  cash used in investing activities
              
              
              **(10,460**
              **)**
              
              (17,590
              )**FINANCING
                  ACTIVITIES**Net
                  increase in deposits
              
              
              **11,276**
              
              
              12,619Principal
                  repayments on Federal Home Loan Bank advances
              
              
              **(5,055**
              **)**
              
              (55
              )Net
                  increase in federal funds purchased
              
              
              **1,595**
              
              
              2,060Proceeds
                  from other borrowings
              
              
              **-**
              
              
              1,500Dividends
                  paid
              
              
              **(896**
              **)**
              
              (857
              )Net
                  cash provided by financing activities
              
              
              **6,920**
              
              
              15,267Net
                  increase in cash and due from banks
              
              
              **645**
              
              
              1,679Cash
                  and due from banks at beginning of year
              
              
              **15,930**
              
              
              9,814Cash
                  and due from banks at end of period
              
              **$**
              **16,575**
              
              $
              11,493
 **See
        Notes to Condensed Consolidated Financial Statements.**
  4
 *Index*
 
 **SouthCrest
        Financial Group, Inc. and Subsidiaries**
 **Condensed
        Consolidated Statements of Cash Flows (continued)**
 **For
        The Six Months Ended June 30, 2006 and 2005**
 **(Unaudited)**
 **(In
        thousands)**
  **2006**
              
              2005**SUPPLEMENTAL
                  DISCLOSURES**Cash
                  paid for:Interest
              
              **$**
              **4,122**
              
              $
              2,651Income
                  taxes
              
              
              **1,604**
              
              
              1,165**NONCASH
                  TRANSACTIONS**Principal
                  balances of loans transferred to other real estate owned
              
              **$**
              **166**
              
              $
              184Increase
                  in redeemable common stock held by ESOP
              
              
              **21**
              
              
              35Unrealized
                  gain (loss) on securities available for sale, net
              
              
              **(166**
              **)**
              
              375
 
 **See
        Notes to Condensed Consolidated Financial Statements.**
  5
 *Index*
 
 **SOUTHCREST
        FINANCIAL GROUP, INC. AND SUBSIDIARIES**
 **Notes
        toCondensed Consolidated Financial Statements**
 **(Unaudited)**
  **NOTE
        1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION**
  SouthCrest
        Financial Group, Inc. (“SouthCrest or the “Company”) is a bank holding company
        whose principal activity is the ownership and management of its wholly owned
        subsidiary banks, Bank of Upson (“Upson”) and The First National Bank of Polk
        County (“FNB Polk”). Both banks are commercial banks that provide a full range
        of banking services within their primary market areas. Upson is headquartered
        in
        Thomaston, Upson County, Georgia with six branches located in Thomaston,
        Fayetteville, Manchester, Warm Springs and Luthersville, Georgia, serving
        its
        primary market area of Upson, Fayette, Meriwether and the surrounding counties.
        FNB Polk is located in Cedartown, Polk County, Georgia with two branches
        in
        Cedartown, Georgia and one branch in Rockmart, Georgia. FNB Polk primarily
        serves the market area of Polk County.
  The
        accompanying unaudited condensed consolidated financial statements of the
        Company have been prepared in accordance with generally accepted accounting
        principles for interim financial information. Accordingly, they do not include
        all the information and notes required by generally accepted accounting
        principles for complete financial statements. In the opinion of management,
        all
        adjustments (consisting of normal recurring adjustments) considered necessary
        for a fair presentation have been included. Operating results for the
        three-month and six month periods ended June 30, 2006 are not necessarily
        indicative of the results that may be expected for the year ended December31,
        2006. 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 December31, 2005 included in the Company’s annual report on
        Form 10-KSB (Registration
        No. 000-51287).
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries, Bank of Upson and The First National Bank of Polk
        County. All significant inter-company accounts and transactions have been
        eliminated in consolidation. Certain reclassifications to prior year balance
        sheets and income statements have been made to conform to current
        classifications. These reclassifications have no impact on net income or
        stockholders’ equity reported for the previous year.
  **NOTE
        2 - EARNINGS PER COMMON SHARE**
  Basic
        earnings per share is computed by dividing net income available to common
        stockholders by the weighted average number of shares outstanding during
        the
        period. Diluted earnings per share would be computed by dividing net income
        by
        the sum of the weighted-average number of shares of common stock outstanding
        and
        dilutive potential common shares, such as outstanding stock options. Dilutive
        potential common shares are calculated in accordance with the treasury stock
        method, which assumes that proceeds from the exercise of all options are
        used to
        repurchase common stock at market value. The amount of shares remaining after
        the proceeds are exhausted represents the potentially dilutive effect of
        the
        securities.
  In
        December, 2005, the Company granted 183,500 options under the SouthCrest
        Financial Group, Inc. 2005 Stock Incentive Plan. For the three and six month
        periods ended June 30, 2006, these options were nondilutive. There were no
        potential common shares outstanding at or during the period ended June 30,
        2005.
        The weighted average number of shares outstanding for the three and six month
        periods ended June 30, 2006 and 2005 were 3,581,193 and 3,571,556, respectively.
  **NOTE
        3 - STOCK BASED COMPENSATION**
 
 Effective
        January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
        Payment,” (“SFAS No. 123R”) which was issued by the Financial Accounting
        Standards Board (“FASB”) in December 2004. SFAS No. 123R revises SFAS No. 123
“Accounting for Stock Based Compensation,” and supersedes APB No. 25,
“Accounting for Stock Issued to Employees,” (APB No. 25) and its related
        interpretations. SFAS No. 123R requires recognition of the cost of employee
        services received in exchange for an award of equity instruments in the
        financial statements over the period the employee is required to perform
        the
        services in exchange for the award (presumptively the vesting period). SFAS
        No.
        123R also requires measurement of the cost of employee services received
        in
        exchange for an award based on the grant-date fair value of the award. SFAS
        No.
        123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess
        tax benefits be reported as financing cash inflows, rather than as a reduction
        of taxes paid, which is included within operating cash flows.
 
 The
        Company adopted SFAS No. 123R using the modified prospective application
        as
        permitted under SFAS No. 123R. Accordingly, prior period amounts have not
        been
        restated. Under this application, the Company is required to record compensation
        expense for all awards granted after the date of adoption and for the unvested
        portion of previously granted awards that remain outstanding at the date
        of
        adoption.
  6
 *Index*
  Prior
        to
        the adoption of SFAS No. 123R, the Company used the intrinsic value method
        as
        prescribed by APB No. 25 and thus recognized no compensation expense for
        options
        granted with exercise prices equal to the fair market value of the Company’s
        common stock on the date of grant.
 
 At
        June
        30, 2006, the Company maintained one share-based compensation plan, the
        SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Plan”),
        approved at the Company’s annual shareholders’ meeting held May 12, 2005. The
        only grant of options under this Plan was made in December, 2005. The
        compensation cost that has been charged against income for the Plan during
        the
        three and six month periods ending June 30, 2006 was $23,770 and $47,540,
        respectively. The Company recorded no deferred tax benefit in 2006 because
        all
        of the compensation cost was related to incentive (tax qualifying) stock
        options.
 
 The
        Plan
        provides for up to 549,000 shares of common stock to be awarded in the form
        of
        stock options. Options are granted at the fair market value of the Company’s
        common stock on the date of grant. All options under the Plan expire ten
        years
        from the date of grant. At December 31, 2005 183,500 options had been granted.
        Of these options, 104,000 were not tax qualifying and were fully vested on
        the
        date of grant, while 79,500 options were tax qualifying and vest over 60
        months.
        At June 30, 2006, 365,500 options were available for grant.
 
 The
        fair
        market value of each option award is estimated on the date of grant using
        the
        Black-Scholes option pricing model. The Company did not grant options during
        the
        three and six month periods ended June 30, 2006.
 
 A
        summary
        of option activity under the Plan as of June 30, 2006, and changes during
        the
        six month period ended June 30, 2006 is presented below:
 
 Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at December 31, 2005
              
              
              183,500
              
              $
              23.45
              
              
              9.75
              
              
              -Options
                  granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Options
                  forfeited
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  at June 30, 2006
              
              
              183,500
              
              $
              23.45
              
              
              9.75
              
              $
              -Exercisable
                  at June 30, 2006
              
              
              104,000
              
              $
              23.45
              
              
              9.75
              
              $
              -
 
 For
        the
        quarter ended June 30, 2006, no options were exercised or became vested.
  As
        of
        June 30, 2006, there was $427,870 of total unrecognized compensation cost
        related to non-vested share-based compensation arrangements. That cost is
        expected to be recognized over a weighted-average period of 4.50
        years.
 
 The
        adoption of SFAS 123R and its fair value compensation cost recognition
        provisions are different from the nonrecognition provisions under SFAS 123
        and
        the intrinsic value method for compensation cost allowed under APB 25. The
        effect (increase/(decrease)) of the adoption of SFAS 123R for the three and
        six
        month periods ending June 30, 2006 is as follows:
 
 Three
                  Months
              
              Six
                  MonthsIncome
                  before income tax expense
              
              $
              (23,770
              )
              $
              (47,540
              )Net
                  Income
              
              $
              (23,770
              )
              $
              (47,540
              )Cash
                  flow from operating activities
              
              $
              -0-
              
              $
              -0-Cash
                  flow from financing activities
              
              $
              -0-
              
              $
              -0-Basic
                  earnings per share
              
              $
              (0.01
              )
              $
              (0.01
              )Diluted
                  earnings per share
              
              $
              (0.01
              )
              $
              (0.01
              )
  There
        were no stock options outstanding as of June 30, 2005.
  7
 *Index*
  **NOTE
        4 — LOANS RECEIVABLE**
  The
        composition of loans at June 30, 2006 and December 31, 2005 is summarized
        as
        follows:
  *(dollars
                  in thousands)*
              
              **June
                  30, 2006**
              
              December
                  31, 2005Commercial,
                  financial, and agricultural
              
              **$**
              **18,730**
              
              $
              19,841Real
                  estate - construction
              
              
              **55,071**
              
              
              52,122Real
                  estate - mortgage
              
              
              **176,601**
              
              
              169,555Consumer
              
              
              **30,819**
              
              
              31,567Other
              
              
              **5,926**
              
              
              3,554**287,147**
              
              
              276,639Unearned
                  income
              
              
              **(144**
              **)**
              
              (164
              )Allowance
                  for loan losses
              
              
              **(3,759**
              **)**
              
              (3,477
              )Loans,
                  net
              
              **$**
              **283,244**
              
              $
              272,998
   **NOTE
        5 — NEW ACCOUNTING PRONOUNCEMENTS**
  In
        November 2005, the FASB issued Staff Position (FSP) FAS 115-1 and FAS 124-1, *the
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments,* which
        amends SFAS No.115, *Accounting
        for Certain Investments in Debt and Equity Securities,* and
        No.124, *Accounting
        for Certain Investments Held by Not-for-Profit Organizations,* and APB
        Opinion No.18, *The
        Equity Method of Accounting for Investments in Common Stock.* This FSP
        addresses the determination as to when an investment is considered impaired,
        whether the impairment is other than temporary, and the measurement of an
        impairment loss. FSP FAS 115-1 and FAS 124-1 also includes accounting
        considerations subsequent to the recognition of an other-than-temporary
        impairment and requires certain disclosures about unrealized losses that
        have
        not been recognized as other-than-temporary impairments. The guidance in
        this
        FSP is effective for reporting periods beginning after December15, 2005.
        The
        adoption of FSP FAS 115-1 and FAS 124-1 did not have a material impact on
        the
        Company’s financial condition or results of operations.
 
 In
        May
        2005, the FASB issued SFAS No.154, *Accounting
        Changes and Error Corrections.* This
        statement replaces APB Opinion No.20, *Accounting
        Changes* and
        SFAS
        No.3, *Reporting
        Accounting Changes in Interim Financial Statements.* SFAS
        No.154 changes the requirements for the accounting for and reporting of a
        voluntary change in accounting principle. SFAS No.154 requires retrospective
        application to prior periods for changes in accounting principles or error
        corrections, unless it is impractical to determine the period-specific effects
        or when a pronouncement includes specific transition provisions. This Statement
        is effective for accounting changes and corrections of errors made in fiscal
        years beginning after December15, 2005. The adoption of SFAS No.154 (revised
        2004) did not have a material impact on its financial condition or results
        of
        operations of the Company.
  **NOTE
        6 -- IMPAIRMENT OF SECURITIES**
  In
        the
        quarter ended March 31, 2005, the Company recorded an impairment charge of
        $600,000 on $2.5 million of Federal Home Loan Mortgage Corporation (“Freddie
        Mac”) and Federal National Mortgage Association (“Fannie Mae”) perpetual
        preferred stock. The reclassification of an unrealized mark-to-market loss
        on
        these securities to an other-than-temporary impairment charge was based upon
        a
        detailed impairment analysis of these securities. Losses on the securities
        were
        previously recognized in the equity section of the balance sheet.
  8
 *Index*
  **SOUTHCREST
        FINANCIAL GROUP, INC. AND SUBSIDIARIES**
 **ITEM
                    2.**
                **Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations**
  The
        following is management’s discussion and analysis of certain significant factors
        which have affected the financial position and operating results of SouthCrest
        Financial Group, Inc. and its bank subsidiaries, Bank of Upson and the First
        National Bank of Polk County during the period included in the accompanying
        consolidated financial statements. The purpose of this discussion is to focus
        on
        information about our financial condition and results of operations that
        are not
        otherwise apparent from our consolidated financial statements. Reference
        should
        be made to those statements and the selected financial data presented elsewhere
        in this report for an understanding of the following discussion and
        analysis.
  **Forward
        Looking Statements**
  Some
        of
        the statements in this Report, including, without limitation, matters discussed
        under the caption “Management’s Discussion and Analysis of Financial Condition
        and Results of Operation,” of SouthCrest Financial Group, Inc. are
“forward-looking statements” within the meaning of the federal securities laws.
        Forward-looking statements include statements about the competitiveness of
        the
        banking industry, potential regulatory obligations, our entrance and expansion
        into other markets, integration of recently acquired banks, pending or proposed
        acquisitions, our other business strategies, our expectations with respect
        to
        our allowance for loan losses and impaired loans, anticipated capital
        expenditures for our operations center, and other statements that are not
        historical facts. When we use words like “anticipate”, “believe”, “intend”,
“expect”, “estimate”, “could”, “should”, “will”, and similar expressions, you
        should consider them as identifying forward-looking statements, although
        we may
        use other phrasing. These forward-looking statements involve risks and
        uncertainties and are based on our beliefs and assumptions, and on the
        information available to us at the time that these disclosures were prepared.
        Factors that may cause actual results to differ materially from those expressed
        or implied by such forward-looking statements include, among others, the
        following possibilities: (1) competitive pressures among depository and other
        financial institutions may increase significantly; (2) changes in the interest
        rate environment may reduce margins; (3) general economic conditions may
        be less
        favorable than expected, resulting in, among other things, a deterioration
        in
        credit quality and/or a reduction in demand for credit; (4) legislative or
        regulatory changes, including changes in accounting standards may adversely
        affect the businesses in which we are engaged; (5) costs or difficulties
        related
        to the integration of our businesses, may be greater than expected; (6) deposit
        attrition, customer loss or revenue loss following acquisitions may be greater
        than expected; (7) competitors may have greater financial resources and develop
        products that enable such competitors to compete more successfully than us;
        and
        (8) adverse changes may occur in the equity markets.
  Many
        of
        such factors are beyond our ability to control or predict, and readers are
        cautioned not to put undue reliance on such forward-looking statements. We
        disclaim any obligation to update or revise any forward-looking statements
        contained in this Report, whether as a result of new information, future
        events
        or otherwise.
  **Critical
        Accounting Estimates**
  We
        have
        adopted various accounting policies that govern the application of accounting
        principles generally accepted in the United States in the preparation of
        our
        financial statements. Our significant accounting policies are described in
        the
        notes to the consolidated financial statements for the year ended December
        31,
        2005 included in our Form 10-KSB (Registration No. 000-51287). Certain
        accounting policies involve significant judgments and assumptions by us that
        have a material impact on the carrying value of certain assets and liabilities.
        We consider these accounting judgments and assumptions to be our critical
        accounting estimates. The judgments and assumptions we use are based on
        historical experience and other factors, which we believe to be reasonable
        under
        the circumstances. Because of the nature of the judgments and assumptions
        we
        make, actual results could differ from these judgments and estimates which
        could
        have a material impact on our carrying values of assets and liabilities and
        our
        results of operations.
  We
        believe the allowance for loan losses is a critical accounting estimate that
        requires the most significant judgments and assumptions used in preparation
        of
        our consolidated financial statements. Because the allowance for loan losses
        is
        replenished through a provision for loan losses that is charged against
        earnings, our subjective determinations regarding the allowance affect our
        earnings directly. Refer to the portion of this discussion that addresses
        our
        allowance for loan losses for a description of our processes and methodology
        for
        determining our allowance for loan losses.
 
 The
        consolidated financial statements include certain accounting and disclosures
        that require management to make estimates about fair values. Estimates of
        fair
        value are used in the accounting for securities available for sale, loans
        held
        for sale, intangible assets, and acquisition purchase accounting adjustments.
        Estimates of fair values are used in disclosures regarding securities held
        to
        maturity, stock compensation, commitments, and the fair values of financial
        instruments. Fair values are estimated using relevant market information
        and
        other assumptions such as interest rates, credit risk, prepayments and other
        factors. The fair values of financial instruments are subject to change as
        influenced by market conditions.
  9
 *Index*
  **Financial
        Condition**
  During
        the six months ended June 30, 2006, our total assets increased $10.4 million
        to
        total assets of $461.2 million at June 30, 2006. During this period, total
        loans
        increased $10.5 million, or 3.8%, while loans held for sale increased $228,000.
        The increase in loans was due to the Company’s continued focus on loan growth.
        Securities available for sale increased $2.1 million while securities held
        to
        maturity decreased $4.2 million. Federal funds sold declined $3.2 million.
        Other
        assets increased $3.8 million as a result of a purchase of life insurance
        policies totaling $3.6 million in the first quarter. These policies were
        purchased in connection with new deferred compensation arrangements.
 
 Deposits
        increased $11.3 million or 3.0% while Federal Home Loan Bank advances decreased
        $5.1 million. At June 30, 2006 we had purchased $1.6 million in federal funds.
        During the current year, the Company has used cash flows from the increases
        in
        deposits along with maturities of securities in the held to maturity portfolio
        to fund the increases in our loan portfolio and to reduce our advances at
        the
        Federal Home Loan Bank. The Company monitors the growth in its loan portfolio
        and changes in its deposit levels, and seeks to maintain a proper mix of
        types,
        maturities, and interest rates. We believe that our cash flows and liquidity
        levels are adequate to support the Company’s loan growth.
 
 Our
        total
        stockholders’ equity has increased by $1,797,000 since December 31, 2005,
        primarily due to net income for the year to date, net of dividends paid to
        shareholders. This increase was offset by a $166,000 reduction in the unrealized
        losses on securities available for sale, net of deferred taxes.
  **Loan
        Portfolio** *.* The
        following table presents various categories of loans contained in First National
        Bank of Polk County and Bank of Upson's loan portfolios as of June 30, 2006
        and
        December 31, 2005:
  *(dollars
                  in thousands)*
              
              **June
                  30, 2006**
              
              December
                  31, 2005Commercial,
                  financial, and agricultural
              
              **$**
              **18,730**
              
              $
              19,841Real
                  estate - construction
              
              
              **55,071**
              
              
              52,122Real
                  estate - mortgage
              
              
              **176,601**
              
              
              169,555Consumer
              
              
              **30,819**
              
              
              31,567Other
              
              
              **5,926**
              
              
              3,554**287,147**
              
              
              276,639Unearned
                  income
              
              
              **(144**
              **)**
              
              (164
              )Allowance
                  for loan losses
              
              
              **(3,759**
              **)**
              
              (3,477
              )Loans,
                  net
              
              **$**
              **283,244**
              
              $
              272,998
 
 **Nonaccrual,
        Past Due and Restructured Loans** *.* The
        following table presents various categories of nonaccrual, past due and
        restructured loans in the Banks’ loan portfolios as of June 30, 2006 and
        December 31, 2005:
 
 ***(Dollars
                  in thousands)***
              
              **June
                    30,**
                **2006**
              
              **December
                    31,**
                **2005**Nonaccrual
                  loans
              
              $
              1,032
              
              $
              232Loans
                  past due 90 days ormore
                  and still accruing
              
              $
              469
              
              $
              549Loans
                  restructured undertroubled
                  debt
              
              $
              21
              
              $
              153
 
 Nonaccrual
        loans increased $329,000 during the quarter ended June 30, increasing from
        $703,000 to $1,032,000. The increase primarily relates to $386,000 in loans
        to
        one borrower secured by various rental properties for which the Company has
        allocated $193,000 in reserves. Additionally, the Company has approximately
        $586,000 in loans secured by single family dwellings for which the Company
        believes there is limited risk of loss. In total, the Company has recorded
        a
        valuation allowance of $290,000 related to nonaccrual loans at June 30, 2006.
 
 Information
        regarding impaired loans as of June 30, 2006 and December 31, 2005 are as
        follows:
  10
 *Index*
  *(Dollars
                  in thousands)*
              
              **June
                    30,**
                **2006**
              
              **December
                    31,**
                **2005**Impaired
                  loans without a valuation allowance
              
              $
              -
              
              $
              -Impaired
                  loans with valuation allowances of $290 and $35,
                  respectively
              
              $
              1,032
              
              $
              232Average
                  investment in impaired loans for the period
              
              $
              656
              
              $
              323
 
 **Summary
        of Loan Loss Experience.** ** An
        analysis of SouthCrest’s loan loss experience is included in the following table
        for the periods ended June 30, 2006 and 2005 (dollars in
        thousands):
 
 **Analysis
        of Allowance for Loan Losses**
 **For
        The Three and Six Months Ended June 30,**
 ***(Dollars
        in thousands)***
 
 **Three
                  Months**
              
              **Six
                  Months****2006**
              
              **2005**
              
              **2006**
              
              **2005**Balance
                  at beginning of period
              
              $
              3,625
              
              $
              3,208
              
              $
              3,477
              
              $
              3,161ChargeoffsCommercial
                  loans
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate - construction
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              1
              
              
              11
              
              
              1
              
              
              11Consumer
              
              
              77
              
              
              189
              
              
              143
              
              
              287Other
              
              
              23
              
              
              4
              
              
              59
              
              
              84Total
                  Chargeoffs
              
              
              101
              
              
              204
              
              
              203
              
              
              382RecoveriesCommercial
                  loans
              
              
              -
              
              
              2
              
              
              -
              
              
              2Real
                  estate - construction
              
              
              5
              
              
              -
              
              
              5
              
              
              -Real
                  estate - mortgage
              
              
              -
              
              
              (2
              )
              
              4
              
              
              -Consumer
              
              
              76
              
              
              94
              
              
              172
              
              
              146Other
              
              
              21
              
              
              3
              
              
              63
              
              
              53Total
                  recoveries
              
              
              102
              
              
              97
              
              
              244
              
              
              201Net
                  (chargeoffs) recoveries
              
              
              1
              
              
              (107
              )
              
              41
              
              
              (181
              )Additions
                  charged to operations
              
              
              133
              
              
              152
              
              
              241
              
              
              273Balance
                  at end of period
              
              $
              3,759
              
              $
              3,253
              
              $
              3,759
              
              $
              3,253Annualized
                  ratio of net chargeoffs during the period to average loans outstanding
                  during the period
              
              
              0.00
              %
              
              0.18
              %
              
              (0.03
              %)
              
              0.16
              %
  11
 *Index*
  **Allowance
        for Loan Losses.** The
        allowance for loan losses as of June 30, 2006 was $3,759,000 compared to
        $3,477,000 at December31, 2005 and $3,253,000 at June 30, 2005. As a percentage
        of gross loans, the allowance for loan losses was 1.31% at June 30, 2006
        compared to 1.26% as of December31, 2005 and 1.31% at June 30, 2005. The
        provision for loan losses during the six-month period ended June 30, 2006
        of
        $241,000 was the result of management's assessment of risks inherent in the
        loan
        portfolio. Management’s estimate of the allowance for loan losses utilizes a
        loan grading system to assign a risk grade to each loan based on factors
        such as
        the quality of collateral securing a loan, the financial condition of the
        borrower and the payment history of each loan. Based on net charge-off history
        experienced for each category within the loan portfolio, as well as general
        economic factors affecting the lending market, management assigns an estimated
        allowance range for each risk grade within each of the loan categories.
        Management then estimates the required allowance, which may also include
        a
        portion that is not allocated to a specific category of the loan portfolio,
        but
        which management deems is necessary based on the overall risk inherent in
        the
        loan portfolio. The estimation of the allowance may change due to fluctuations
        in the factors noted above as well as changes in the trends of net charge-offs,
        past due loans, and general economic conditions of the markets served by
        the
        Company’s subsidiary banks.
  Management
        considers the allowance for loan losses to be adequate; however, there can
        be no
        assurance that charge-offs in future periods will not exceed the allowance
        for
        loan losses or that additional provisions of the allowance will not be required.
  **Results
        of Operations For The Three and Six Months Ended June 30, 2006 and 2005**
  Net
        income for the three-month period ended June 30, 2006 amounted to $1,426,000,
        or
        $0.40 basic and diluted earnings per share, compared to net income of $1,358,000
        or $0.38 basic and diluted earnings per share for the same three-month period
        in
        2005, an increase of $68,000, or 5.0%. For the six month periods, net income
        was
        $2,832,000, or $0.79 basic and diluted earnings per share, compared to net
        income of $2,177,000 or $0.61 basic and diluted earnings per share for the
        same
        six-month period in 2005, an increase of $655,000.
  **Net
        Interest Income** *.* Net
        interest income represents the difference between interest received on interest
        earning assets and interest paid on interest bearing liabilities.
  Net
        interest income for the three months ended June 30, 2006 increased $309,000
        or
        7.2% over the same period in 2005. The primary reason for the increase in
        net
        interest income is the growth in the average balance of the loan portfolio
        of
        $45.2 million during the quarter ended June 30, 2006 compared to the same
        period
        in 2005. This growth, along with an increase in the average yield on loans
        from
        7.18% in 2005 to 7.84% in 2006, resulted in a $1.3 million increase in interest
        income earned on loans in 2006 over 2005. Increases in the prime interest
        rate,
        resulting from Federal Reserve increases in the discount rate, contributed
        to
        the increase in the loan yield for the 2006 period compared to 2005. The
        portion
        of total earning assets comprised by loans increased from 61.1% for the 2005
        period to 67.8% for 2006. This change in the mix of our earning assets
        contributed to the 73 basis point increase in the average yield on earning
        assets as loans earn a higher rate of interest than investment securities
        and
        other earning assets.
  The
        average cost of funds increased 90 basis points to 2.84% for the three months
        ended June 30, 2006 compared to the same 2005 period. The Company has funded
        the
        growth in its loan portfolio with borrowed funds, primarily Federal Home
        Loan
        Bank advances, and with certificates of deposit. These sources of funds
        typically carry higher rates of interest than other sources of funds such
        as
        checking and money market accounts. In addition, interest rates on these
        funds
        have increased over last year as a result of increases in the Federal Reserve
        discount rate, and in case of certificates of deposits, competition from
        other
        banks for such funds.
  These
        changes resulted in the net yield on earning assets declining 2 basis points
        from 4.47% for the quarter ended June 30, 2005 to 4.45% for the same period
        in
        2006. The net interest spread decreased from 4.06% in 2005 to 3.89% in 2006.
  The
        following presents, for the three month periods ended June 30, 2006 and 2005,
        the main components of interest earning assets and interest bearing liabilities
        and related interest income and expense and effective yields and cost of
        funds.
  12
 *Index*
  Average
        Consolidated Balance Sheets and Net Interest Income Analysis
 For
        the
        Three Months Ended June 30,
 *(Dollars
        in thousands)*
 
 Average
                  Balances (1)
              
              Yields
                  / Rates
              
              Income
                  / Expense
              
              Increase
              
              Change
                  Due to2006
              
              2005
              
              2006
              
              2005
              
              2006
              
              2005
              
              (Decrease)
              
              Rate
              
              Volume**Assets**Loans,
                  including fee income
              
              $
              282,696
              
              $
              237,533
              
              
              7.84
              %
              
              7.18
              %
              $
              5,524
              
              $
              4,243
              
              $
              1,281
              
              $
              418
              
              $
              863Taxable
                  securities
              
              
              111,707
              
              
              127,032
              
              
              4.39
              %
              
              4.26
              %
              
              1,224
              
              
              1,344
              
              
              (120
              )
              
              239
              
              
              (359
              )Nontaxable
                  securities
              
              
              11,634
              
              
              12,413
              
              
              3.83
              %
              
              3.89
              %
              
              111
              
              
              120
              
              
              (9
              )
              
              (2
              )
              
              (7
              )Federal
                  funds sold
              
              
              7,253
              
              
              6,907
              
              
              4.76
              %
              
              3.03
              %
              
              86
              
              
              52
              
              
              34
              
              
              31
              
              
              3Interest
                  bearing deposits in banks
              
              
              3,805
              
              
              4,781
              
              
              5.27
              %
              
              3.20
              %
              
              50
              
              
              38
              
              
              12
              
              
              56
              
              
              (44
              )Total
                  earning assets
              
              
              417,095
              
              
              388,666
              
              
              6.73
              %
              
              6.00
              %
              
              6,995
              
              
              5,797
              
              
              1,198
              
              
              742
              
              
              456Cash
                  and due from banks
              
              
              11,243
              
              
              10,218Allowance
                  for loan losses
              
              
              (3,686
              )
              
              (3,195
              )Other
                  assets
              
              
              29,720
              
              
              26,446Total
              
              $
              454,372
              
              $
              422,135**Liabilities
                  and Equity**Interest
                  bearing demand (2)
              
              $
              112,058
              
              $
              116,727
              
              
              1.62
              %
              
              0.94
              %
              $
              452
              
              $
              273
              
              $
              179
              
              $
              253
              
              $
              (74
              )Savings
              
              
              35,092
              
              
              37,684
              
              
              0.58
              %
              
              0.48
              %
              
              51
              
              
              45
              
              
              6
              
              
              23
              
              
              (17
              )Certificates
                  of deposit
              
              
              176,705
              
              
              152,194
              
              
              3.92
              %
              
              3.05
              %
              
              1,727
              
              
              1,153
              
              
              574
              
              
              367
              
              
              207Total
                  interest bearing deposits
              
              
              323,855
              
              
              306,605
              
              
              2.76
              %
              
              1.93
              %
              
              2,230
              
              
              1,471
              
              
              759
              
              
              643
              
              
              116Borrowed
                  funds
              
              
              11,137
              
              
              884
              
              
              5.08
              %
              
              5.00
              %
              
              141
              
              
              11
              
              
              130
              
              
              -
              
              
              130Total
                  interest bearing liabilities
              
              
              334,992
              
              
              307,489
              
              
              2.84
              %
              
              1.94
              %
              
              2,371
              
              
              1,482
              
              
              889
              
              
              643
              
              
              246Noninterest
                  bearing demand deposits
              
              
              62,038
              
              
              58,698Other
                  liabilities
              
              
              1,605
              
              
              3,662Redeemable
                  common stock held by ESOP
              
              
              1,018
              
              
              481Shareholders'
                  equity
              
              
              54,719
              
              
              51,805Total
              
              $
              454,372
              
              $
              422,135Net
                  interest income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,624
              
              $
              4,315
              
              $
              309
              
              $
              99
              
              $
              210Net
                  interest yield on earning assets
              
              
              
              
              
              
              
              
              4.45
              %
              
              4.47
              %Net
                  interest spread
              
              
              
              
              
              
              
              
              3.89
              %
              
              4.06
              %
 
 (1)
              Daily
                  averages. Loans include nonaccrual
                  loans.
 (2)
              Includes
                  money market accounts
  For
        the
        six months ended June 30, 2006, net interest income increased $744,000 or
        8.8%
        over the same period in 2005. The primary reason for the increase in net
        interest income is the growth in the average balance of the loan portfolio
        of
        $46.2 million for during the six months ended June 30, 2006 compared to the
        same
        period in 2005. The average yield on loans increased from 7.07% in 2005 to
        7.73%
        in 2006. As a result of the loan growth and the increase in yields, interest
        income on loans increased $2.5 million in 2006 over 2005. The average yield
        on
        earning assets increased 75 basis points to 6.65%, as the portion of total
        earning assets comprised by loans increased from 60.7% for the 2005 period
        to
        67.4% for 2006.
  The
        average cost of funds increased 86 basis points to 2.70%. This increase is
        primarily the result of rate increases along with the Company’s increased
        utilization of Federal Home Loan Bank advances and certificates of deposits
        to
        fund its loan growth.
  13
 *Index*
  For
        the
        six months ended June 30, 2006, the net yield on earning assets increased
        4
        basis points, increasing from 4.44% for the period ended June 30, 2005 to
        4.48%
        for the same period in 2006. The net interest spread decreased from 4.06%
        in
        2005 to 3.95% in 2006.
  The
        following presents, for the six month periods ended June 30, 2006 and 2005,
        the
        main components of interest earning assets and interest bearing liabilities
        and
        related interest income and expense and effective yields and cost of funds.
  Average
        Consolidated Balance Sheets and Net Interest Income Analysis
 For
        the
        Six Month Periods Ended June 30,
 *(Dollars
        in thousands)*
 
 Average
                  Balances (1)
              
              Yields
                  / Rates
              
              Income
                  / Expense
              
              Increase
              
              Change
                  Due to2006
              
              2005
              
              2006
              
              2005
              
              2006
              
              2005
              
              (Decrease)
              
              Rate
              
              Volume**Assets**Loans,
                  including fee income
              
              $
              279,406
              
              $
              233,226
              
              
              7.73
              %
              
              7.07
              %
              $
              10,715
              
              $
              8,178
              
              $
              2,537
              
              $
              813
              
              $
              1,724Taxable
                  securities
              
              
              112,726
              
              
              123,212
              
              
              4.38
              %
              
              4.28
              %
              
              2,449
              
              
              2,616
              
              
              (167
              )
              
              157
              
              
              (324
              )Nontaxable
                  securities
              
              
              11,648
              
              
              12,651
              
              
              3.91
              %
              
              3.91
              %
              
              226
              
              
              245
              
              
              (19
              )
              
              -
              
              
              (19
              )Federal
                  funds sold
              
              
              7,090
              
              
              10,028
              
              
              5.32
              %
              
              2.65
              %
              
              187
              
              
              132
              
              
              55
              
              
              163
              
              
              (108
              )Interest
                  bearing deposits in banks
              
              
              3,621
              
              
              4,901
              
              
              4.90
              %
              
              2.92
              %
              
              88
              
              
              71
              
              
              17
              
              
              66
              
              
              (49
              )Total
                  earning assets
              
              
              414,491
              
              
              384,018
              
              
              6.65
              %
              
              5.90
              %
              
              13,665
              
              
              11,242
              
              
              2,423
              
              
              1,199
              
              
              1,224Cash
                  and due from banks
              
              
              11,920
              
              
              10,853Allowance
                  for loan losses
              
              
              (3,621
              )
              
              (3,189
              )Other
                  assets
              
              
              28,613
              
              
              26,226Total
              
              $
              451,403
              
              $
              417,908**Liabilities
                  and Equity**Interest
                  bearing demand (2)
              
              $
              112,606
              
              $
              115,790
              
              
              1.51
              %
              
              0.90
              %
              $
              845
              
              $
              518
              
              $
              327
              
              $
              370
              
              $
              (43
              )Savings
              
              
              35,467
              
              
              36,903
              
              
              0.59
              %
              
              0.49
              %
              
              103
              
              
              89
              
              
              14
              
              
              24
              
              
              (10
              )Certificates
                  of deposit
              
              
              171,597
              
              
              150,841
              
              
              3.75
              %
              
              2.89
              %
              
              3,191
              
              
              2,158
              
              
              1,033
              
              
              706
              
              
              327Total
                  interest bearing deposits
              
              
              319,670
              
              
              303,534
              
              
              2.61
              %
              
              1.84
              %
              
              4,139
              
              
              2,765
              
              
              1,374
              
              
              1,100
              
              
              274Borrowed
                  funds
              
              
              13,175
              
              
              629
              
              
              4.91
              %
              
              5.13
              %
              
              321
              
              
              16
              
              
              305
              
              
              (2
              )
              
              307Total
                  interest bearing liabilities
              
              
              332,845
              
              
              304,163
              
              
              2.70
              %
              
              1.84
              %
              
              4,460
              
              
              2,781
              
              
              1,679
              
              
              1,098
              
              
              581Noninterest
                  bearing demand deposits
              
              
              61,338
              
              
              57,994Other
                  liabilities
              
              
              1,878
              
              
              3,885Redeemable
                  common stock held by ESOP
              
              
              999
              
              
              478Shareholders'
                  equity
              
              
              54,343
              
              
              51,388Total
              
              $
              451,403
              
              $
              417,908Net
                  interest income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              9,205
              
              $
              8,461
              
              $
              744
              
              $
              101
              
              $
              643Net
                  interest yield on earning assets
              
              
              
              
              
              
              
              
              4.48
              %
              
              4.44
              %Net
                  interest spread
              
              
              
              
              
              
              
              
              3.95
              %
              
              4.06
              %
 
 (1)
              Daily
                  averages. Loans includes nonaccrual
                  loans.
 (2)
              Includes
                  money market accounts
  14
 *Index*
  **Other
        Income** *.* Total
        other income for the three-month period ended June 30, 2006 amounted to
        $1,311,000, compared to $1,229,000 for the same period in 2005, an increase
        of
        $82,000. For the six month period ended June 30, 2006, total other income
        was
        $2,479,000 compared to $1,749,000 in 2005, an increase of $730,000. This
        increase is principally due to an impairment charge recorded in the first
        quarter of 2005 in the amount of $600,000 on $2.5 million of Federal Home
        Loan
        Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association
        (“Fannie Mae”) perpetual preferred stock. The reclassification of an unrealized
        mark-to-market loss on these securities to an other-than-temporary charge
        was
        based upon a detailed impairment analysis of these securities. Previous losses
        on the securities were recognized in the equity section of the balance sheet.
        The Company’s conclusion considered the duration and severity of the unrealized
        loss, the financial condition and near-term prospects of the issuers, and
        the
        likelihood of the market value of these instruments increasing to our initial
        cost basis within a reasonable period of time. Excluding the impairment charge,
        other income for the six months would have increased $130,000 over the same
        period last year.
  The
        gain
        on sale of loans for the three month period was $37,000 in 2006 compared
        to
        $39,000 a year ago, and $71,000 for the six month period in 2006 compared
        to
        $78,000 for the same period a year ago. Upson originated and sold mortgage
        loans
        totaling $4.1 million during the second quarter of 2006 without recourse
        compared with $3.2 million for the second quarter of 2005, and $6.9 million
        during the six month period ended June 30, 2006 compared with $6.2 million
        for
        the same period in 2005. Service charges on deposit accounts were $887,000
        for
        the three-month period in 2006 compared to $861,000 for the same period in
        2005,
        an increase of $26,000, or 3.0%, but for the year to date period have increased
        $100,000 or 6.2% to $1,709,000. The primary component of this increase was
        a
        $89,000 increase in overdraft and NSF fee income. Other service charges and
        fees
        increased $39,000 to $289,000 for the quarter and $73,000 to $549,000 for
        the
        six-month period primarily due to increases in debit card fees.
  **Other
        Expenses.** Other
        expenses for the three-month period ended June 30, 2006 amounted to $3,685,000
        compared to $3,413,000 for the same period in 2005, an increase of $272,000
        or
        8.0%. For the six months ended June 30, 2006, other expenses grew $416,000,
        or
        6.1%, to $7,230,000.
  The
        largest component of other expenses is salaries and employee benefits, which
        increased $215,000, or 12.0% for the quarter and $462,000 or 13.2% for the
        six
        month period. For the quarter, higher compensation costs were primarily
        attributable to a $129,000 increase in incentive compensation, $35,000 in
        higher
        benefit costs, and $24,000 in costs related to the expensing of stock options
        (described below). For the six month period, the primary components of the
        increase were $191,000 in increased incentive compensation, $75,000 in higher
        benefit costs, and $48,000 in costs related to the expensing of stock options.
  Effective
        January 1, 2006, the Company adopted SFAS No. 123R “Share-Based Payment.” SFAS
        No. 123R requires recognition of the cost of employee services received in
        exchange for an award of equity instruments in the financial statements over
        the
        period the employee is required to perform the services in exchange for the
        award (presumptively the vesting period). The Company adopted SFAS No. 123R
        using the modified prospective application as permitted under SFAS No. 123R.
        Accordingly, prior period amounts have not been restated. Under this
        application, the Company is required to record compensation expense for all
        awards granted after the date of adoption and for the unvested portion of
        previously granted awards that remain outstanding at the date of adoption.
        Prior
        to the adoption of SFAS No. 123R, the Company used the intrinsic value method
        as
        prescribed by APB No. 25 and thus recognized no compensation expense for
        options
        granted with exercise prices equal to the fair market value of the Company’s
        common stock on the date of grant. The compensation cost that was charged
        against income for our stock option plans for the three and six months ended
        June 30, 2006 was $23,770 and $47,540, respectively. No options were outstanding
        at or for the three- and six-month periods ended June 30, 2005. The total
        compensation cost related to nonvested awards not yet recognized at June
        30,
        2006 is $427,870 which will be recognized over the weighted average period
        of
        approximately 4.50 years. See “Note 3 - Stock Compensation Plans” in the notes
        to condensed consolidated financial statements for further
        information.
  For
        the
        six month period ended June 30, 2006, amortization of intangibles declined
        $138,000, or 25.1% due to reductions in the amount of scheduled amortization
        of
        the core deposit intangible asset recorded in connection with the merger
        with
        First Polk Bankshares, Inc. Other operating expenses increased $62,000 for
        the
        quarter of which $25,000 relates to higher data processing costs. For the
        year
        to date, other operating expenses increased $90,000 of which $33,000 relates
        to
        higher data processing charges and $19,000 relates to costs associated with
        disposal of foreclosed property.
  **Income
        Taxes.** The
        Company recorded income taxes totaling $691,000 and $621,000 for the three-month
        periods ending June 30, 2006 and 2005, respectively. Effective tax rates
        for the
        periods were 32.6% and 31.4%, respectively. For the six-month periods, taxes
        totaled $1,381,000 and $946,000 for 2006 and 2005, respectively, with effective
        tax rates of 32.8% and 30.3%. Tax-exempt interest income and income on
        bank-owned life insurance are the primary reasons that the Company’s effective
        tax rates are less than the statutory tax rate of 34%. While the Company’s
        pretax income has increased in 2006, the amounts of tax-exempt income mentioned
        above have declined, resulting in higher effective tax rates in 2006 than
        in
        2005. Additionally, in 2005 the Company was able to utilize approximately
        $37,000 in certain state income tax credits.
  **Liquidity
        and Capital Resources**
  Liquidity
        is our ability to meet deposit withdrawals immediately while also providing
        for
        the credit needs of our customers. We monitor our liquidity resources on
        an
        ongoing basis. State and Federal regulatory authorities also monitor our
        liquidity on a periodic basis. As of June 30, 2006, we believe our liquidity,
        as
        determined under guidelines established by regulatory authorities and internal
        policies, was satisfactory.
  15
 *Index*
  If
        needed, we have the ability on a short-term basis to borrow and purchase
        Federal
        funds from other financial institutions. At June 30, 2006, we had available
        to
        us additional federal funds lines of credit totaling $19.4 million in place
        with
        three banks and $43.3 million of available funds on our line of credit with
        the
        Federal Home Loan Bank of Atlanta.
 
 At
        June
        30, 2006, our capital ratios were adequate based on regulatory minimum capital
        requirements. The minimum capital requirements and the actual capital ratios
        on
        a consolidated and bank-only basis are as follows:
  Minimum
                Required
              
              Minimum
                Required
                to
                  be Well
                Capitalized
              
              Consolidated
              
              Upson
              
              PolkRisk-based
                  capital ratiosTotal
                  risk based capital
              
              
              8.00
              %
              
              10.00
              %
              
              17.72
              %
              
              14.91
              %
              
              21.94
              %Tier
                  1
              
              
              4.00
              %
              
              6.00
              %
              
              16.50
              %
              
              13.75
              %
              
              20.69
              %Tier
                  1 leverage ratio
              
              
              4.00
              %
              
              5.00
              %
              
              11.41
              %
              
              10.07
              %
              
              12.56
              %
  These
        ratios may decline as asset growth continues, but are expected to continue
        to
        exceed minimum regulatory requirements.
  In
        the
        second quarter of 2005, Bank of Upson began a project to rebuild its main
        office
        in Thomaston, Georgia. This project will replace substantially all of its
        current facility, increasing its size from 16,000 to 26,000 square feet.
        Management expects that the first phase of construction will be completed
        in the
        second quarter at a cost of approximately $3.3 million, with the final phase
        to
        be completed in the fourth quarter of 2006. Total cost of the project is
        expected to be between $5.25 million and $5.75 million. Through June 30,
        2006,
        approximately $3.9 million had been disbursed for the project.
  Other
        than the items described above, we are not aware of any trends, demands,
        commitments, events or uncertainties that will result, or are reasonably
        likely
        to result, in our liquidity increasing or decreasing in any material
        way.
  **Off-Balance
        Sheet Arrangements**
  We
        are a
        party to financial instruments with off-balance sheet risk in the normal
        course
        of business to meet the financing needs of our customers. These financial
        instruments include commitments to extend credit and standby letters of credit.
        Such commitments involve, to varying degrees, elements of credit risk and
        interest rate risk in excess of the amount recognized in the balance sheets.
 
 Our
        exposure to credit loss in the event of nonperformance by the other party
        to the
        financial instrument for commitments to extend credit and standby letters
        of
        credit is represented by the contractual amount of those instruments. We
        use the
        same credit policies in making commitments and conditional obligations as
        we do
        for on-balance sheet instruments. A summary of our commitments as of June
        30,
        2006 and December 31, 2005 are as follows (dollars in thousands):
 
 *(dollars
                  in thousands)*
              
              **June
                  30, 2006**
              
              December
                  31, 2005Commitments
                  to extend credit
              
              **$**
              **35,229**
              
              $
              36,529Credit
                  card commitments
              
              
              **9,186**
              
              
              8,329Commercial
                  letters of credit
              
              
              **723**
              
              
              272**$**
              **45,138**
              
              $
              45,130
  Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Since many of the
        commitments are expected to expire without being drawn upon, the total
        commitment amounts do not necessarily represent future cash requirements.
  Commercial
        letters of credit are conditional commitments issued by us to guarantee the
        performance of a customer to a third party. Those letters of credit are
        primarily issued to support public and private borrowing arrangements. The
        credit risk involved in issuing letters of credit is essentially the same
        as
        that involved in extending loans to customers. Collateral is required in
        instances which we deem necessary.
  16
 *Index*
  **ITEM
                  3.**
              **Quantitative
                  and Qualitative Disclosures about Market
                  Risk**
  Pursuant
        to Instruction 1 to Item 305(c) of Regulation S-K, no response to this item
        is
        required until after December 31, 2006.
  **ITEM
                  4.**
              **Controls
                  and Procedures**
  As
        of the
        end of the period covered by this Quarterly Report on Form 10-Q, our principal
        executive officer and principal financial officer have evaluated the
        effectiveness of our “disclosure controls and procedures” (“Disclosure
        Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
        Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
        designed with the objective of ensuring that information required to be
        disclosed in our reports filed under the Exchange Act, such as this Quarterly
        Report, is recorded, processed, summarized and reported within the time periods
        specified in the Securities and Exchange Commission’s rules and forms.
        Disclosure Controls are also designed with the objective of ensuring that
        such
        information is accumulated and communicated to our management, including
        the CEO
        and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
 Our
        management, including the CEO and CFO, does not expect that our Disclosure
        Controls will prevent all error and all fraud. A control system, no matter
        how
        well conceived and operated, can provide only reasonable, not absolute,
        assurance that the objectives of the control system are met. Further, the
        design
        of a control system must reflect the fact that there are resource constraints,
        and the benefits of controls must be considered relative to their costs.
        Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues and instances of fraud,
        if any, within the company have been detected. These inherent limitations
        include the realities that judgments in decision-making can be faulty, and
        that
        breakdowns can occur because of simple error or mistake. The design of any
        system of controls also is based in part upon certain assumptions about the
        likelihood of future events, and there can be no assurance that any design
        will
        succeed in achieving its stated goals under all potential future conditions.
 
 Based
        upon their controls evaluation, our CEO and CFO have concluded that our
        Disclosure Controls are effective at a reasonable assurance level.
 
 There
        have been no changes in our internal controls over financial reporting during
        our second fiscal quarter that have materially affected, or are reasonably
        likely to materially affect, our internal control over financial
        reporting.
  **PART
        II- OTHER INFORMATION**
 
 **Item
                  1.**
              **Legal
                  Proceedings**
 
 The
        Company and its subsidiaries are subject to claims and suits arising in the
        ordinary course of business. In the opinion of management, the ultimate
        resolution of these pending claims and legal proceedings will not have a
        material adverse effect on the Company’s results of operations.
 
 **Item
                  1A.**
              **Risk
                  Factors**
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in Part I, "Item 1. Business" under the heading
        "Risk Factors" in our Annual Report on Form 10-KSB for the year ended December
        31, 2005, which could materially affect our business, financial condition
        or
        future results. The risks described in our Annual Report on Form 10-KSB are
        not
        the only risks facing our Company. Additional risks and uncertainties not
        currently known to us or that we currently deem to be immaterial also may
        materially adversely affect our business, financial condition and/or operating
        results.
  **Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
 
 The
        Company made no repurchases of its common stock during the quarter ended
        June
        30, 2006.
  **Item
                  3.**
              **Defaults
                  upon Senior Securities**
 
 None.
  17
 *Index*
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
 
 The
        Company held its annual meeting on May 11, 2006. The following directors
        were
        elected for three year terms to expire in 2009:
 
 Name
              Votes
                  For
              Votes
                  Withheld
              Broker
                  NonvotesZack
                  D. Cravey, Jr.
              2,691,538
              4,400
              -Larry
                  T. Kuglar
              2,686,758
              9,180
              -Michael
                  D. McRae
              2,691,538
              4,400
              -
  **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
  18
 *Index*
 
 **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly authorized.
  SOUTHCREST
        FINANCIAL GROUP, INC .
 (Registrant)
  DATE:
                  August 14, 2006
              BY:
              /s/
                  Larry T. KuglarLarry
                  T. Kuglar.President
                  and Chief Executive OfficerDATE:
                  August 14, 2006
              BY:
              /s/
                  Douglas J. HerthaDouglas
                  J. HerthaSenior
                  Vice President, Chief Financial Officer
   19