U.S.
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
  
  FORM
10-Q
  
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended  March 31, 2008
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the transition period from to
 Commission
File Number: 000-51287
 
 
  SouthCrest
Financial Group, Inc.
 (Exact
name of small business issuer as specified in its charter)
  
 Georgia
              58-2256460(State
      or other jurisdiction of  incorporation or
    organization)
              (IRS
      Employer Identification No.)
 
 600
North Glynn Street
 Fayetteville,
GA 30214
 (Address
of principal executive offices)
 
 (770)-461-2781
 (Issuer’s
telephone number)
 
 ____________________________________________________
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 
 Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes x No  ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 Large
      accelerated filer   ̈
              Accelerated
      filer   ̈
              Non-accelerated
      filer   ̈
              Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No x
 
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 10, 2008: 3,931,328.
  
 
  SouthCrest Financial Group, Inc.
 And
Subsidiaries
 
 INDEX
 
 
 PagePart
      I.
                FINANCIAL INFORMATIONItem
      1.
                Condensed Consolidated Financial
    StatementsCondensed Consolidated Balance Sheets – March 31, 2008 and
      December 31, 2007
                1Condensed Consolidated Statements of Income  -
      Three Months Ended March 31, 2008 and 2007
                2Condensed Consolidated Statements of Comprehensive Income -
      Three Months Ended March 31, 2008 and 2007
                3Condensed Consolidated Statements of Stockholders' Equity –
      Three Months Ended March 31, 2008
                4Condensed Consolidated Statements of Cash Flows – Three
      Months Ended March 31, 2008 and 2007
                5Notes to Condensed Consolidated Financial
      Statements
                7Item
      2.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                12Item
      3.
                Quantitative and Qualitative  Disclosures about
      Market Risk
                20Item
      4T.
                Controls and Procedures
                20Part
      II.
                OTHER INFORMATION
                20Item
      1.
                Legal Proceedings
                20Item
      1A.
                Risk factors.
                20Item
      2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                20Item
      3.
                Defaults Upon Senior Securities
                20Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                21Item
      5.
                Other Information
                21Item
      6.
                Exhibits
                21Signatures
                22
  Index
  PART I - FINANCIAL INFORMATION
 ITEM
1. FINANCIAL STATEMENTS
 
 SouthCrest Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Balance Sheets
 March
31, 2008 and December 31, 2007
 (Unaudited)
 (In
thousands, except share and per share data)
 
 Assets
                  
                  March
      31, 2008
                  
                  
                  December
      31, 2007*Cash
      and due from banks
                  
                  $
                  15,528
                  
                  
                  $
                  16,060Interest-bearing
      deposits at other financial institutions
                  
                  
                  10,511
                  
                  
                  
                  10,637Federal
      funds sold
                  
                  
                  16,579
                  
                  
                  
                  9,316Securities
      available for sale
                  
                  
                  91,889
                  
                  
                  
                  79,208Securities
      held to maturity (fair value $47,990 and $58,632)
                  
                  
                  47,587
                  
                  
                  
                  58,885Restricted
      equity securities, at cost
                  
                  
                  1,863
                  
                  
                  
                  2,008Loans
      held for sale
                  
                  
                  895
                  
                  
                  
                  229Loans,
      net of unearned income
                  
                  
                  377,295
                  
                  
                  
                  373,825Less
      allowance for loan losses
                  
                  
                  5,296
                  
                  
                  
                  4,952Loans,
      net
                  
                  
                  371,999
                  
                  
                  
                  368,873Bank-owned
      life insurance
                  
                  
                  16,483
                  
                  
                  
                  16,302Premises
      and equipment, net
                  
                  
                  18,852
                  
                  
                  
                  18,093Goodwill
                  
                  
                  14,255
                  
                  
                  
                  14,255Intangible
      assets, net
                  
                  
                  4,574
                  
                  
                  
                  4,792Other
      assets
                  
                  
                  7,450
                  
                  
                  
                  7,351Total
      assets
                  
                  $
                  618,465
                  
                  
                  $
                  606,009Liabilities,
      Redeemable Common Stock, and Stockholders' EquityLiabilities:Deposits:Noninterest-bearing
                  
                  $
                  81,464
                  
                  
                  $
                  80,685Interest-bearing
                  
                  
                  445,744
                  
                  
                  
                  433,246Total
      deposits
                  
                  
                  527,208
                  
                  
                  
                  513,931Short-term
      borrowed funds
                  
                  
                  -
                  
                  
                  
                  3,055Long-term
      borrowed funds
                  
                  
                  6,555
                  
                  
                  
                  6,555Other
      liabilities
                  
                  
                  11,067
                  
                  
                  
                  9,656Total
      liabilities
                  
                  
                  544,830
                  
                  
                  
                  533,197Commitments
      and contingenciesRedeemable
      common stock held by ESOP
                  
                  
                  861
                  
                  
                  
                  1,091Stockholders'
      equity:Common
      stock, par value $1; 10,000,000 shares authorized, 3,931,528
      issued
                  
                  
                  3,932
                  
                  
                  
                  3,932Additional
      paid-in capital
                  
                  
                  49,734
                  
                  
                  
                  49,707Retained
      earnings
                  
                  
                  18,512
                  
                  
                  
                  17,881Unearned
      compensation - ESOP
                  
                  
                  (349
                  )
                  
                  
                  (349
                  )Accumulated
      other comprehensive income
                  
                  
                  945
                  
                  
                  
                  550Total
      stockholders' equity
                  
                  
                  72,774
                  
                  
                  
                  71,721Total
      liabilities, redeemable common stock, and stockholders'
    equity
                  
                  $
                  618,465
                  
                  
                  $
                  606,009
   See
Notes to Condensed Consolidated Financial Statements.
 *
Derived from audited consolidated financial statements.
  1
 Index
  SouthCrest FinancialGroup, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Income
 For
The Three Months Ended March 31, 2008 and 2007
 (Unaudited)
 (In
thousands, except share and per share data)
 
 2008
                
                
                2007Interest
      income:Loans
                
                $
                7,371
                
                
                $
                6,829Securities
      - taxable
                
                
                1,394
                
                
                
                1,317Securities
      - nontaxable
                
                
                229
                
                
                
                178Federal
      funds sold
                
                
                136
                
                
                
                148Interest-bearing
      deposits at other banks
                
                
                124
                
                
                
                83Total
      interest income
                
                
                9,254
                
                
                
                8,555Interest
      expense:Deposits
                
                
                3,582
                
                
                
                3,091Other
      borrowings
                
                
                134
                
                
                
                96Total
      interest expense
                
                
                3,716
                
                
                
                3,187Net
      interest income
                
                
                5,538
                
                
                
                5,368Provision
      for loan losses
                
                
                355
                
                
                
                149Net
      interest income after provision for loan losses
                
                
                5,183
                
                
                
                5,219Other
      income:Service
      charges on deposit accounts
                
                
                957
                
                
                
                815Other
      service charges and fees
                
                
                395
                
                
                
                296Net
      gain on sale of loans
                
                
                113
                
                
                
                104Net
      gain on sale and call of securities
                
                
                90
                
                
                
                -Income
      on bank-owned life insurance
                
                
                181
                
                
                
                127Other
      operating income
                
                
                185
                
                
                
                137Total
      other income
                
                
                1,921
                
                
                
                1,479Other
      expenses:Salaries
      and employee benefits
                
                
                2,840
                
                
                
                2,415Equipment
      and occupancy expenses
                
                
                594
                
                
                
                467Amortization
      of intangibles
                
                
                268
                
                
                
                244Other
      operating expenses
                
                
                1,430
                
                
                
                1,231Total
      other expenses
                
                
                5,132
                
                
                
                4,357Income
      before income taxes
                
                
                1,972
                
                
                
                2,341Income
      tax expense
                
                
                567
                
                
                
                736Net
      income
                
                $
                1,405
                
                
                $
                1,605Basic
      and diluted earnings per share
                
                $
                0.36
                
                
                $
                0.41Dividends
      per share
                
                $
                0.130
                
                
                $
                0.130Average
      shares outstanding - basic and diluted
                
                
                3,915,648
                
                
                
                3,952,328
   See
Notes to Condensed Consolidated Financial Statements.
  2
 Index
  Condensed Consolidated Statementsof Comprehensive
Income
 For
The Three Months Ended March 31, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 2008
                
                
                2007Net
      income
                
                $
                1,405
                
                
                $
                1,605Other
      comprehensive income:Unrealized
      holding gains on securities available for sale arising during the period,
      net of taxes of $242 and $65
                
                
                395
                
                
                
                105Comprehensive
      income
                
                $
                1,800
                
                
                $
                1,710
 
 See
Notes to Condensed Consolidated Financial Statements.
  3
 Index
 
 SouthCrest FinancialGroup, Inc.
 And
Subsidiaries
 Consolidated
Statements of Stockholders' Equity
 For
The Three Months Ended March 31, 2008
 (Unaudited)
 (In
thousands, except share and per share data)
 
 Common
      Stock
                
                
                Additional
      Paid-In
                
                
                Retained
                
                
                Accumulated
      Other Comprehensive
                
                
                Unearned
      Compensation
                
                
                Total
      Stockholders'Shares
                
                
                Par
                
                
                Capital
                
                
                Earnings
                
                
                Income
                
                
                (ESOP)
                
                
                EquityBalance,
      December 31, 2007
                
                
                3,931,528
                
                
                $
                3,932
                
                
                $
                49,707
                
                
                $
                17,881
                
                
                $
                550
                
                
                $
                (349
                )
                
                $
                71,721Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,405
                
                
                
                -
                
                
                
                -
                
                
                
                1,405Adjustment
      resulting from adoption of EITF Issue 06-4
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (493
                )
                
                
                -
                
                
                
                -
                
                
                
                (493
                )Cash
      dividends declared, $.13 per share
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (511
                )
                
                
                -
                
                
                
                -
                
                
                
                (511
                )Stock-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                27
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27Adjustment
      for shares owned by ESOP
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                230
                
                
                
                -
                
                
                
                -
                
                
                
                230Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                395
                
                
                
                -
                
                
                
                395Balance,
      March 31, 2008
                
                
                3,931,528
                
                
                $
                3,932
                
                
                $
                49,734
                
                
                $
                18,512
                
                
                $
                945
                
                
                $
                (349
                )
                
                $
                72,774
 
 
 See
Notes to Condensed Consolidated Financial Statements.
  4
 Index
  SouthCrest Financial Group, Inc.
 And
Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 For
The Three Months Ended March 31, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 2008
                
                
                2007OPERATING
      ACTIVITIESNet
      income
                
                $
                1,405
                
                
                $
                1,605Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                298
                
                
                
                244Amortization
      of intangibles
                
                
                268
                
                
                
                244Other
      amortization
                
                
                (14
                )
                
                
                (11
                )Provision
      for loan losses
                
                
                355
                
                
                
                149Stock
      compensation expense
                
                
                27
                
                
                
                27Deferred
      income taxes
                
                
                35
                
                
                
                (85
                )Income
      on bank-owned life insurance
                
                
                (181
                )
                
                
                (127
                )Gain
      on sales and calls of investment securities
                
                
                (90
                )
                
                
                -(Increase)
      decrease in interest receivable
                
                
                (397
                )
                
                
                30Increase
      in income taxes payable
                
                
                188
                
                
                
                884Increase
      (decrease) in interest payable
                
                
                217
                
                
                
                (6
                )Net
      gain on sale of loans
                
                
                (113
                )
                
                
                (104
                )Originations
      of mortgage loans held for sale
                
                
                (9,064
                )
                
                
                (3,072
                )Proceeds
      from sales of mortgage loans held for sale
                
                
                8,461
                
                
                
                3,269(Increase)
      decrease in other assets
                
                
                767
                
                
                
                (547
                )Increase
      in other liabilities
                
                
                513
                
                
                
                97Net
      cash provided by operating activities
                
                
                2,675
                
                
                
                2,597INVESTING
      ACTIVITIESProceeds
      from maturities of securities held to maturity
                
                
                11,335
                
                
                
                1,494Purchases
      of securities available for sale
                
                
                (21,873
                )
                
                
                (7,609
                )Proceeds
      from maturities of securities available for sale
                
                
                9,904
                
                
                
                2,955Proceeds
      from sales of securities available for sale
                
                
                -
                
                
                
                1,003Proceeds
      from redemption of restricted equity securities
                
                
                145
                
                
                
                48Net
      (increase) decrease in interest-bearing deposits in banks
                
                
                126
                
                
                
                (169
                )Net
      (increase) decrease in federal funds sold
                
                
                (7,263
                )
                
                
                1,606Net
      (increase) decrease in loans
                
                
                (4,188
                )
                
                
                2,753Purchase
      of premises and equipment
                
                
                (1,057
                )
                
                
                (661
                )Proceeds
      from sale of other real estate owned
                
                
                -
                
                
                
                105Net
      cash provided by (used in) investing activities
                
                
                (12,871
                )
                
                
                1,525FINANCING
      ACTIVITIESNet
      increase (decrease) in deposits
                
                
                13,230
                
                
                
                (8,886
                )Repayments
      of short-term borrowed funds
                
                
                (3,055
                )
                
                
                (55
                )Net
      increase in federal funds purchased
                
                
                -
                
                
                
                2,910Dividends
      paid
                
                
                (511
                )
                
                
                (513
                )Net
      cash provided by (used in) financing activities
                
                
                9,664
                
                
                
                (6,544
                )Net
      increase (decrease) in cash and due from banks
                
                
                (532
                )
                
                
                (2,422
                )Cash
      and due from banks at beginning of year
                
                
                16,060
                
                
                
                16,926Cash
      and due from banks at end of period
                
                $
                15,528
                
                
                $
                14,504
 
  See
Notes to Condensed Consolidated Financial Statements.
  5
 Index
  SouthCrest
Financial Group, Inc. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows (continued)
 For
The Three Months Ended March 31, 2008 and 2007
 (Unaudited)
 (In
thousands)
 
 2008
                
                
                2007SUPPLEMENTAL
      DISCLOSURESCash
      paid for:Interest
                
                $
                3,933
                
                
                $
                3,193Income
      taxes
                
                
                -
                
                
                
                -NONCASH
      TRANSACTIONSPrincipal
      balances of loans transferred to other real estate owned
                
                $
                743
                
                
                $
                137Increase
      in mortgage servicing rights
                
                
                50
                
                
                
                69Increase
      (decrease) in redeemable common stock held by ESOP
                
                
                (230
                )
                
                
                22Unrealized
      gain (loss) on securities available for sale, net
                
                
                637
                
                
                
                105
 
 
 See
Notes to Condensed Consolidated Financial Statements.
  6
 Index
  SouthCrest FinancialGroup, Inc.andSubsidiaries
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 
 NOTE 1 — NATURE OF
BUSINESSANDBASIS OF
PRESENTATION
 
 SouthCrest
Financial Group, Inc. (“SouthCrest” or the “Company”) is a bank holding company
whose principal activity is the ownership and management of its wholly owned
subsidiary banks, Bank of Upson (“Upson”), The First National Bank of
Polk County (“FNB Polk”), Peachtree Bank (“Peachtree”), and Bank of
Chickamauga (“Chickamauga”).  All of the subsidiary banks
(collectively, the “Banks”) are commercial banks that provide a full range of
banking services within their primary market areas.  Upson is
headquartered in Thomaston, Upson County, Georgia with seven branches located in
Thomaston, Fayetteville, Tyrone Manchester, Warm Springs and
Luthersville, Georgia, serving its primary market area of Upson, Fayette,
Meriwether and the surrounding counties.  FNB Polk is located in
Cedartown, Polk County, Georgia with two branches in Cedartown, Georgia and one
branch in Rockmart, Georgia.  FNB Polk primarily serves the market
area of Polk County.  Peachtree is headquartered in Maplesville,
Chilton County, Alabama with one branch in Maplesville and another in Clanton,
Alabama.  Chickamauga is headquartered in Chickamauga,
Walker County, Georgia where it maintains two branches.
 
 The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2008 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2008. For further
information, refer to the financial statements and notes included in the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 2007 included in the Company’s annual report on Form 10-K
(Registration No. 000-51287).
 
 The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Bank of Upson,  The First National Bank of
Polk County, Peachtree Bank, and Bank of Chickamauga.  All significant
inter-company accounts and transactions have been eliminated in
consolidation.  Certain reclassifications to prior year balance sheets
and income statements have been made to conform to current
classifications.  These reclassifications have no impact on net income
or stockholders’ equity reported for the previous year.
 
 NOTE 2 – EARNINGSPERCOMMON
SHARE
 
 Basic
earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding during the
period.  Diluted earnings per share would be computed by dividing net
income by the sum of the weighted-average number of shares of common stock
outstanding and dilutive potential common shares, such as outstanding stock
options.  Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from the
exercise of all options are used to repurchase common stock at market
value.  The amount of shares remaining after the proceeds are
exhausted represents the potentially dilutive effect of the
securities.
 
 At March
31, 2008 and 2007, the Company had 191,400 and 183,500 options outstanding under
the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan.  For
the three month periods ended March 31, 2008 and 2007, these options were
nondilutive. The Company’s ESOP has a loan from the holding company secured by
15,880 shares of Company stock which have not been allocated to participant
accounts and are therefore not considered outstanding for purposes of computing
earnings per share.  The weighted average number of shares outstanding
for purposes of computing earnings per share was 3,915,648 and 3,952,328 for the
three month periods ended March 31, 2008 and 2007.
  7
 Index
  NOTE3— LOANS
RECEIVABLE
 
 The
composition of loans at March 31, 2008 and December 31, 2007 is summarized as
follows:
 (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Commercial,
      financial, and agricultural
                
                $
                22,331
                
                
                $
                22,595Real
      estate – construction
                
                
                71,247
                
                
                
                66,069Real
      estate – mortgage
                
                
                240,360
                
                
                
                241,316Consumer
                
                
                37,664
                
                
                
                38,834Other
                
                
                5,820
                
                
                
                5,162377,422
                
                
                
                373,976Unearned
      income
                
                
                (127
                )
                
                
                (151
                )Allowance
      for loan losses
                
                
                (5,296
                )
                
                
                (4,952
                )Loans,
      net
                
                $
                371,999
                
                
                $
                368,873
 
 Changes
in the allowance for loan losses are as follows:
 
 (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                March
      31, 2007Balance,
      beginning of year
                
                $
                4,952
                
                
                $
                4,480Provision
      for loan losses
                
                
                355
                
                
                
                149Loans
      charged off
                
                
                (189
                )
                
                
                (158
                )Recoveries
      of loans previously charged off
                
                
                178
                
                
                
                196Balance,
      end of period
                
                $
                5,296
                
                
                $
                4,667
 
 The
following is a summary of information pertaining to impaired loans:
  (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Impaired
      loans without a valuation allowance
                
                $
                -
                
                
                $
                -Impaired
      loans with a valuation allowance
                
                
                7,248
                
                
                
                1,633Total
      impaired loans
                
                $
                7,248
                
                
                $
                1,633Valuation
      allowance related to impaired loans
                
                $
                273
                
                
                $
                245Average
      investment in impaired loans
                
                $
                1,947
                
                
                $
                507
 
 There
were $7,248,000 and $1,633,000 loans on nonaccrual status at March 31, 2008 and
December 31, 2007.  Loans of $416,000 and $247,000 were past due
ninety days or more and still accruing interest at March 31, 2008 and December
31, 2007, respectively.
 
 (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Nonaccrual
      loans
                
                $
                7,248
                
                
                $
                1,633Loans
      past due 90 days or more and still accruing
                
                $
                416
                
                
                $
                247Loans
      restructured under troubled debt
                
                $
                -
                
                
                $
                -
 
 The
Company acquired certain loans for which there was, at acquisition, evidence of
deterioration of credit quality since the dates the loans were originated and
for which it was probable, at acquisition, that all contractually required
payments would not be collected.  Under the provisions of Statement of
Position 03-03, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (“SOP 03-03”), at the acquisition date
these loans were recorded at a carrying value of $376,000, which was net of a
nonaccretable adjustment of $183,000.  At March 31,
2008,  the carrying value for these loans had been reduced to $285,000
as a result of cash payments by the borrowers, chargeoff, or
repossession.
  8
 Index
  NOTE4—
DEPOSITS
 
 At March
31, 2008 and December 31, 2007, deposits were as follows:
 
 (Dollars
      In Thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Noninterest
      bearing deposits
                
                $
                81,464
                
                
                $
                80,685Interest
      checking
                
                
                87,418
                
                
                
                83,742Money
      market
                
                
                61,216
                
                
                
                55,687Savings
                
                
                44,569
                
                
                
                41,997Certificates
      of deposit
                
                
                252,541
                
                
                
                251,820$
                527,208
                
                
                $
                513,931
 
 NOTE5— NEW ACCOUNTING
PRONOUNCEMENTS
 
 In
September 2006, the FASB ratified EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. EITF Issue 06-4 addresses accounting for split-dollar life
insurance arrangements after the employer purchases a life insurance policy on
the covered employee. This Issue states that an obligation arises as a result of
a substantive agreement with an employee to provide future postretirement
benefits. Under Issue EITF 06-4, the obligation is not settled upon entering
into an insurance arrangement. Since the obligation is not settled, a liability
should be recognized in accordance with applicable authoritative guidance. Issue
EITF 06-4 is effective for fiscal years beginning after December 15, 2007. In
adopting EITF Issue 06-4, the Company recorded a liability of $493,000 as of
January 1, 2008 with a corresponding offset against retained earnings, and in
the three months ended March 31, 2008 recorded compensation expense of
approximately $25,000 relating to these obligations.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair ValueOption for Financial Assets and
Liabilities.  SFAS No. 159 allows an entity to elect to measure
certain financial assets and liabilities at fair value with changes in fair
value recognized in the income statement each period.  The statement
also requires additional disclosures to identify the effects of an entity’s fair
value election on its earnings.  The Company adopted SFAS No. 159 on
January 1, 2008, with no material impact on the financial condition, results of
operations, or liquidity.   The Company did not elect fair value
for any assets or liabilities.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) will significantly change how entities apply the acquisition method
to business combinations. The most significant changes affecting how the Company
will account for business combinations under this Statement include: the
acquisition date will be date the acquirer obtains control; all (and only)
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in the acquiree will be stated at fair value on the acquisition date; assets or
liabilities arising from noncontractual contingencies will be measured at their
acquisition date fair value only if it is more likely than not that they meet
the definition of an asset or liability on the acquisition date; adjustments
subsequently made to the provisional amounts recorded on the acquisition date
will be made retroactively during a measurement period not to exceed one year;
acquisition-related restructuring costs that do not meet the criteria in SFAS
No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, will be expensed as
incurred; transaction costs will be expensed as incurred; reversals of deferred
income tax valuation allowances and income tax contingencies will be recognized
in earnings subsequent to the measurement period; and the allowance for loan
losses of an acquiree will not be permitted to be recognized by the acquirer.
Additionally, SFAS No. 141(R) will require new and modified disclosures
surrounding subsequent changes to acquisition-related contingencies, contingent
consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and
an enhanced goodwill rollforward.
 
 The
Company will be required to prospectively apply SFAS No. 141(R) to all business
combinations completed on or after January 1, 2009. Early adoption is not
permitted. For business combinations in which the acquisition date was before
the effective date, the provisions of SFAS No. 141(R) will apply to the
subsequent accounting for deferred income tax valuation allowances and income
tax contingencies and will require any changes in those amounts to be recorded
in earnings. At March 31, 2008, the Company had no acquired deferred income tax
valuation allowances and income tax contingencies.  Management is
currently evaluating the effects that SFAS 141(R) will have on the
financial condition, results of operations, liquidity, and the disclosures that
will be presented in the consolidated financial statements.
 
 In
November 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at
Fair Value Through Earnings, which expressed the staff’s view that,
consistent with FASB Statement No. 156, Accounting for Servicing of
Financial Assets, and FASB Statement No. 159, The Fair Value Option of Financial
Assets and Financial Liabilities, the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings.  SAB No. 109 is effective for all written loan
commitments recorded at fair value that are entered into, or substantially
modified, in fiscal quarters beginning after December 15, 2007.  The
staff expects registrants to apply the views of SAB No. 109 on a prospective
basis.  The effect of adoption during the first quarter of 2008 did
not have a material impact on the Company’s results of
operations.
  9
 Index
  NOTE
6 -- FAIR VALUE
 
 On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements,” (SFAS 157), which defines fair value,
establishes a framework for measuring fair value under accounting principles
generally accepted in the United States, and enhances disclosures about fair
value measurements.  SFAS 157 clarifies that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions.
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value
disclosures.  Available for sale securities are recorded at fair value
on a recurring basis.  Additionally, from time to time, the Company
may be required to record at fair value other assets on a nonrecurring basis,
such as loans held for sale, loans held for investment and certain other
assets.  These nonrecurring fair value adjustments would typically
involve application of lower of cost or market accounting or write-downs of
individual assets
 
 SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:
 
 Level
      1
                Observable
      inputs such as quoted prices in active
markets;
 Level
      2
                Inputs,
      other than the quoted prices in active markets, that are observable either
      directly or indirectly; and
 Level
      3
                Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 Following
is a description of valuation methodologies used for assets recorded at fair
value.
 
 Investment
Securities
 
 Securities
available for sale and securities held to maturity are valued on a recurring
basis at quoted market prices where available.  If quoted market
prices are not available, fair values are based on quoted market prices of
comparable securities.  Level 1 securities include those traded on an
active exchange, such as the New York Stock Exchange, U.S. Treasury securities
that are traded by dealers or brokers in active over-the-counter markets and
money market funds.  Level 2 securities include mortgage-backed
securities and debentures issued by government sponsored entities, municipal
bonds and corporate debt securities.  Securities classified as Level 3
include asset-backed securities in less liquid markets such as some common stock
not traded on a national exchange.    Securities held to
maturity are valued at quoted market prices or dealer quotes, similar to
securities available for sale.  The carrying value of Federal Reserve
Bank and Federal Home Loan Bank stock approximates fair value based on their
redemption provisions.
 
 Loans
Held for Sale
 
 Loans
held for sale, consisting of mortgages to be sold in the secondary market, are
carried at the lower of cost or market value.  The fair values of
mortgage loans held for sale are based on commitments on hand from investors
within the secondary market for loans with similar
characteristics.  As such, the fair value adjustments for mortgage
loans held for sale is nonrecurring Level 2.
 
 Loans
 
 The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan may be considered impaired and an allowance for loan losses
may be established.  Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
114, Accounting by Creditors
for Impairment of a Loan, (“SFAS 114”). The fair value of impaired loans
is estimated using one of several methods, including collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash
flows.  Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans.  At March 31, 2008, all of the
total impaired loans were evaluated based on the fair value of the
collateral.  In accordance with SFAS 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy.  When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records the impaired loan as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring
Level 3.
  10
 Index
  Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
 
 The table
below presents the recorded amount of assets and liabilities measured at fair
value on a recurring basis.
 
 Fair
      Value March 31,
                
                Quoted
      Prices In Active Markets for Identical Assets
                
                Significant
      Other Observable Inputs
                
                Significant
      Unobservable Inputs(Dollars
      in thousands)
                
                2008
                
                (Level
      1)
                
                (Level
      2)
                
                (Level
      3)Securities
      available for sale
                
                
                $
                91,889
                
                
                $
                31
                
                
                $
                91,578
                
                
                $
                280Impaired
      loans
                
                
                
                6,975
                
                
                
                -
                
                
                
                -
                
                
                
                6,975
 
 There
were no gains or losses for the three months ended March 31, 2008 included in
earnings that are attributable to the change in unrealized gains or losses of
the Company’s securities available for sale at March 31, 2008.
 
 For those
securities available for sale and impaired loans with fair values that are
determined by reliance on significant unobservable inputs, the following table
identifies the factors causing the change in fair value from January 1, 2008 to
March 31, 2008:
 
 Investment Securities
      Available For SaleBeginning
      balance, January 1, 2008
                
                $
                280Total
      gains (losses) realized or unrealizedIncluded
      in earnings
                
                
                -Included
      in other comprehensive income
                
                
                -Transfers
      in (out) of Level 3
                
                
                -Ending
      balance, March 31, 2008
                
                $
                280
  11
 Index
  SouthCrest
Financial Group, Inc. and Subsidiaries
 
 ITEM2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
 
 The
following is management’s discussion and analysis of certain significant factors
which have affected the financial position and operating results of SouthCrest
Financial Group, Inc. and its bank subsidiaries, Bank of Upson, The First
National Bank of Polk County, Peachtree Bank, and Bank of Chickamauga during the
period included in the accompanying consolidated financial
statements.   The purpose of this discussion is to focus on
information about our financial condition and results of operations that are not
otherwise apparent from our consolidated financial statements.
 
 Forward
Looking Statements
  Some of
the statements in this Report, including, without limitation, matters discussed
under the caption “Management’s Discussion and Analysis of Financial Condition
and Results of Operation,” of SouthCrest Financial Group, Inc. are
“forward-looking statements” within the meaning of the federal securities
laws.  Forward-looking statements include statements about the
competitiveness of the banking industry, potential regulatory obligations, our
entrance and expansion into other markets, integration of recently acquired
banks, pending or proposed acquisitions, our other business strategies, our
expectations with respect to our allowance for loan losses and impaired loans,
anticipated capital expenditures for our operations center, and other statements
that are not historical facts.  When we use words like “anticipate,”
“believe,” “intend,” “expect,” “estimate,” “could,” “should,” “will,” and
similar expressions, you should consider them as identifying forward-looking
statements, although we may use other phrasing.  These forward-looking
statements involve risks and uncertainties and are based on our beliefs and
assumptions, and on the information available to us at the time that these
disclosures were prepared.  Factors that may cause actual results to differ
materially from those expressed or implied by such forward-looking statements
include, among others, the following possibilities: (1) competitive pressures
among depository and other financial institutions may increase significantly;
(2) changes in the interest rate environment may reduce margins; (3) general
economic conditions may be less favorable than expected, resulting in, among
other things, a deterioration in credit quality and/or a reduction in demand for
credit; (4) legislative or regulatory changes, including changes in accounting
standards may adversely affect the businesses in which we are engaged; (5) costs
or difficulties related to the integration of our businesses, may be greater
than expected; (6) deposit attrition, customer loss or revenue loss following
acquisitions may be greater than expected; (7) competitors may have greater
financial resources and develop products that enable such competitors to compete
more successfully than us; and (8) adverse changes may occur in the equity
markets.
 
 Many of
such factors are beyond our ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking statements.  We
disclaim any obligation to update or revise any forward-looking statements
contained in this Report, whether as a result of new information, future events
or otherwise.
 
 Critical
Accounting Estimates
 
 We have
adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States in the preparation of our
financial statements. Our significant accounting policies are described in the
notes to the consolidated financial statements for the year ended December 31,
2007 included in our Form 10-K (Registration No.
000-51287).   Certain accounting policies involve significant
judgments and assumptions by us that have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting judgments
and assumptions to be our critical accounting estimates. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and our results of operations.
 
 We
believe the allowance for loan losses is a critical accounting estimate that
requires the most significant judgments and assumptions used in preparation of
our consolidated financial statements.  Because the allowance for loan
losses is replenished through a provision for loan losses that is charged
against earnings, our subjective determinations regarding the allowance affect
our earnings directly.   Refer to the portion of this discussion
that addresses our allowance for loan losses for a description of our processes
and methodology for determining our allowance for loan losses.
 
 The
consolidated financial statements include certain accounting and disclosures
that require management to make estimates about fair
values.  Estimates of fair value are used in the accounting for
securities available for sale, loans held for sale, stock compensation,
intangible assets, and acquisition purchase accounting
adjustments.  Estimates of fair values are used in disclosures
regarding securities held to maturity, stock compensation, commitments, and the
fair values of financial instruments.  Fair values are estimated using
relevant market information and other assumptions such as interest rates, credit
risk, prepayments and other factors.  The fair values of financial
instruments are subject to change as influenced by market
conditions.
  12
 Index
  Financial
Condition
 
 During
the three months ended March 31, 2008, our total assets increased $12.5 million
to $618.5 million at March 31, 2008.  During this period, total loans
increased $3.5 million, or 0.9%, while loans held for sale increased
$666,000.  Securities available for sale increased $12.7 million due
primarily to purchases made during the quarter while securities held to maturity
decreased $11.3 million due to maturities.  Federal funds sold
increased $7.3 million.
 
 During
the year to date period ended March 31, 2008, deposits increased $13.3 million
or 2.6%.  Changes in deposits are summarized below:
 
 (Dollars
      In Thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007
                
                
                ChangeNoninterest
      bearing deposits
                
                $
                81,464
                
                
                $
                80,685
                
                
                $
                779Interest
      checking
                
                
                87,418
                
                
                
                83,742
                
                
                
                3,676Money
      market
                
                
                61,216
                
                
                
                55,687
                
                
                
                5,529Savings
                
                
                44,569
                
                
                
                41,997
                
                
                
                2,572Certificates
      of deposit
                
                
                252,541
                
                
                
                251,820
                
                
                
                721$
                527,208
                
                
                $
                513,931
                
                
                $
                13,277
 
 Since
December 31, 2007, short-term borrowed funds declined $3.1 million due to
maturities of Federal Home Loan Bank advances during the quarter.  At
March 31, 2008 we had not purchased any federal funds.  The Company
monitors changes in its loan portfolio and changes in its deposit levels, and
seeks to maintain a proper mix of types, maturities, and interest
rates.
 
 Our total
stockholders’ equity has increased by $1.1 million since December 31, 2007,
primarily due to net income for the period, net of dividends paid to
shareholders.  In addition, the Company experienced a $395,000
increase in the unrealized gain on securities available for sale, net of
deferred taxes.   These increases were offset by dividends paid
during the quarter of $511,000 and a $493,000 adjustment to beginning retained
earnings related to the implementation of EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.
 
 Loan Portfolio.The following table
presents various categories of loans contained in the loan portfolios of the
subsidiary banks as of March 31, 2008 and December 31, 2007:
 
 (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Commercial,
      financial, and agricultural
                
                $
                22,331
                
                
                $
                22,595Real
      estate – construction
                
                
                71,247
                
                
                
                66,069Real
      estate – mortgage
                
                
                240,360
                
                
                
                241,316Consumer
                
                
                37,664
                
                
                
                38,834Other
                
                
                5,820
                
                
                
                5,162377,422
                
                
                
                373,976Unearned
      income
                
                
                (127
                )
                
                
                (151
                )Allowance
      for loan losses
                
                
                (5,296
                )
                
                
                (4,952
                )Loans,
      net
                
                $
                371,999
                
                
                $
                368,873
 
 Nonaccrual, Past Due and Restructured
Loans.The
following table presents various categories of nonaccrual, past due, potential
problem loans,  and restructured loans in the Banks’ loan portfolios
as of March 31, 2008 and December 31, 2007:
 
 (Dollars
      in thousands)
                
                March
      31,2008
                
                
                December
      31, 2007Nonaccrual
      loans
                
                $
                7,248
                
                
                $
                1,633Loans
      past due 90 days or   more and still
    accruing
                
                $
                416
                
                
                $
                247Loans
      restructured under troubled debt
                
                $
                -
                
                
                $
                -
  13
 Index
  Nonaccrual
loans increased $5,615,000 during the quarter ended March 31, 2008 increasing
from $1,633,000 to $7,248,000.  Nonaccrual loans at March 31, 2008
include a $5.7 million residential real estate development loan and $1,007,000
in loans secured by first mortgage loans on single family dwellings, the largest
of which was $42,000.  The Company believes that there is limited risk
of loss for the nonaccrual loans secured by single family
dwellings.  The residential development loan is secured by 96
developed and 24 partially developed lots in a golf course
development.  In total, the Company has recorded a valuation allowance
of $273,000 related to nonaccrual loans at March 31, 2008.
 
 In
addition to the above, the Company had at March 31, 2008 $10,508,000 in
potential problem loans.  Potential  problem loans are loans as
to which  information  about the borrowers'  possible 
credit  problems causes  management  to have serious 
doubts  about their  ability to comply with current repayment
terms
 
 Information
regarding impaired loans as of March 31, 2008 and December 31, 2007 are as
follows:
  (Dollars
      in thousands)
                
                March
      31, 2008
                
                
                December
      31, 2007Impaired
      loans without a valuation allowance
                
                $
                -
                
                
                $
                -Impaired
      loans with a valuation allowance
                
                
                7,248
                
                
                
                1,633Total
      impaired loans
                
                $
                7,248
                
                
                $
                1,633Valuation
      allowance related to impaired loans
                
                $
                273
                
                
                $
                245Average
      investment in impaired loans
                
                $
                1,947
                
                
                $
                507
 
 In
addition to the above, the Company had at March 31, 2008 $10,508,000 in
potential problem loans.  Potential  problem loans are loans
which are currently performing but as to which  information  about the
borrowers'  possible  credit  problems causes 
management  to have doubts  about their  ability to comply
with current repayment terms.  Management has downgraded these
loans and closely monitors their continued performance.  The following
is a summary of our potential problem loans at March 31, 2008:
 
 (Dollars
      in thousands)Construction
      and development loans
                
                $
                1,811First
      mortgage
                
                
                5,704Second
      mortgage and home equity line of credit
                
                
                297Nonresidential
      mortgage
                
                
                2,052Commercial
                
                
                140Consumer
                
                
                412Total
                
                $
                10,416
 
 Construction
and development loans consist of six loans, the largest of which is a $1,470,000
loan secured by 74 lots in a townhome development.  First mortgage
loans are composed of 72 loans, the largest of which is
$250,000.  There are 16 loans whose balance is greater than $100,000,
which account for $2,661,000 of the total.   Loans secured by
nonresidential real estate are composed of 16 loans, the largest of which
represents 2 loans to one borrower totaling $1,088,000.
 
 Summary of Loan Loss
Experience.An analysis of
SouthCrest’s loan loss experience is included in the following table for the
periods ended March 31, 2008 and 2007:
  14
 Index
 
 Analysis
      of Allowance for Loan LossesFor
      The Three Months Ended March 31(Dollars
      in thousands)
                
                Three
      Months2008
                
                
                2007Balance
      at beginning of period
                
                $
                4,952
                
                
                $
                4,480ChargeoffsCommercial
      loans
                
                
                7
                
                
                
                20Real
      estate - construction
                
                
                22
                
                
                
                -Real
      estate - mortgage
                
                
                28
                
                
                
                -Consumer
                
                
                99
                
                
                
                104Other
                
                
                33
                
                
                
                34Total
      Chargeoffs
                
                
                189
                
                
                
                158RecoveriesCommercial
      loans
                
                
                5
                
                
                
                4Real
      estate - construction
                
                
                24
                
                
                
                -Real
      estate - mortgage
                
                
                16
                
                
                
                4Consumer
                
                
                103
                
                
                
                156Other
                
                
                30
                
                
                
                32Total
      recoveries
                
                
                178
                
                
                
                196Net
      (chargeoffs) recoveries
                
                
                (11
                )
                
                
                38Additions
      charged to operations
                
                
                355
                
                
                
                149Balance
      at end of period
                
                $
                5,296
                
                
                $
                4,667Annualized
      ratio of net chargeoffs (recoveries) to average loans
      outstanding
                
                
                0.01
                %
                
                
                (0.05
                )%
 
 Allowance for Loan
Losses.The allowance for loan losses as of March 31, 2008 was
$5,296,000 compared to $4,952,000 at December 31, 2007 and $4,667,000 at March
31, 2007.   As a percentage of gross loans, the allowance for
loan losses was 1.40% at March 31, 2008 compared to 1.32% as of December 31,
2007 and 1.40% at March 31, 2007. The provision for loan losses during the
three-month period ended March 31, 2008 of $355,000 was the result of
management's assessment of risks inherent in the loan
portfolio.  Management’s estimate of the allowance for loan losses
utilizes a loan grading system to assign a risk grade to each loan based on
factors such as the quality of collateral securing a loan, the financial
condition of the borrower and the payment history of each loan.  Based
on net charge-off history experienced for each category within the loan
portfolio, as well as general economic factors affecting the lending market,
management assigns an estimated allowance for each risk grade within each of the
loan categories.  Management then estimates the required allowance,
which may also include a portion that is not allocated to a specific category of
the loan portfolio, but which management deems is necessary based on the overall
risk inherent in the loan portfolio.  The estimation of the allowance
may change due to fluctuations in the factors noted above as well as changes in
the trends of net charge-offs, past due loans, and general economic conditions
of the markets served by the Company’s subsidiary banks.
 
 Management
considers the allowance for loan losses to be adequate; however, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional provisions of the allowance will not be
required.
  Results
of Operations For The Three Months Ended March 31, 2008 and 2007
 
 Net
income for the three-month period ended March 31, 2008 amounted to $1,405,000,
or $0.36 basic and diluted earnings per share, compared to net income of
$1,605,000 or $0.41 basic and diluted earnings per share for the same
three-month period in 2007, a decrease of $200,000, or 12.5%.  Results
of operations for Bank of Chickamauga were not included in 2007 net income as
the Company’s acquisition of Chickamauga did not take place until July 1,
2007.
 
 Net Interest Income.Net interest income
represents the difference between interest received on interest earning assets
and interest paid on interest bearing liabilities.
  15
 Index
  Net
interest income for the three months ended March 31, 2008 increased $170,000 or
3.25% over the same period in 2007.  The increase in net interest
income is primarily driven by a $60.4 million increase in the average balances
in earning assets.  This growth accounted for an increase in net
interest income of $477,000 and is primarily the result of the acquisitions of
Chickamauga.  Offsetting the increase in net interest income
attributable to the growth in the balance sheet was a $307,000 reduction in net
interest income attributable to changes in the general level of interest
rates.  Beginning in August 2007, the Federal Reserve has announced
several reductions in the discount rate, with the result being that the average
discount rate for the period ending March 31, 2008 was approximately 250 basis
points lower than the same period in 2007.  These reductions have
contributed to a reduction in the average yield on earning assets from 7.21%
during the period ending March 31, 2007 to 6.87% in the same period in
2008.  During the same period, the average cost of funds declined from
3.37% in 2007 to 3.31% in 2008.  The net yield on earning assets
declined 41 basis points from 4.52% for the period ended March 31, 2007 to 4.11%
for the current year period.  The net interest spread decreased from
3.84% in 2007 to 3.56% in 2008.
 
 Total
interest income increased $699,000 to $9,254,000 for the quarter ended March 31,
2008.  Interest income earned on loans increased
$542,000.  Of this increase, $862,000 relates to a $40.1 million
growth in the average balance of loans.  Offsetting this increase was
a $320,000 reduction in interest due to the reduction in the average yield of
the loan portfolio from 8.32% to 7.93%.  The reduction in the average
yield on loans results from a significant portion of the loan portfolio having
variable interest rates that are tied to the prime rate.
 
 Interest
expense increased $529,000 to $3,716,000 for the quarter ended March 31,
2008.  The main component of the increase in interest expense was a
$409,000 increase in interest paid on certificates of deposits.  Since
2005, the Company has generally funded the growth in its loan portfolio with
borrowed funds, primarily Federal Home Loan Bank advances, and with certificates
of deposit.  These sources of funds typically carry higher rates of
interest than other sources of funds such as checking and money market
accounts.  The average rate on certificates of deposits typically lag
the changes in the discount rate due to the longer term of the accounts and to
competition from other banks for such funds.
 
 Excluding
the impact of Chickamauga, net interest income would have declined $398,000 or
7.4%.
 
 The
following presents, for the three month periods ended March 31, 2008 and 2007,
the main components of interest earning assets and interest bearing liabilities
and related interest income and expense and effective yields and cost of
funds.
  16
 Index
  Average
Consolidated Balance Sheets and Net Interest Income Analysis
 For the
Three Month Periods Ended March 31,
 (Dollars
in thousands)
 
 Average
      Balances (1)
                
                
                Yields
      / Rates
                
                
                Income
      / Expense
                
                
                Increase
                
                
                Change
      Due to2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                (Decrease)
                
                
                Rate
                
                
                VolumeAssetsLoans,
      including fee income
                
                $
                373,739
                
                
                $
                332,926
                
                
                
                7.93
                %
                
                
                8.32
                %
                
                $
                7,371
                
                
                $
                6,829
                
                
                $
                542
                
                
                $
                (320
                )
                
                $
                862Taxable
      securities
                
                
                114,354
                
                
                
                114,659
                
                
                
                4.90
                %
                
                
                4.66
                %
                
                
                1,394
                
                
                
                1,317
                
                
                
                77
                
                
                
                80
                
                
                
                (3
                )Nontaxable
      securities
                
                
                23,775
                
                
                
                18,274
                
                
                
                3.87
                %
                
                
                3.95
                %
                
                
                229
                
                
                
                178
                
                
                
                51
                
                
                
                (4
                )
                
                
                55Federal
      funds sold
                
                
                17,990
                
                
                
                10,541
                
                
                
                3.04
                %
                
                
                5.69
                %
                
                
                136
                
                
                
                148
                
                
                
                (12
                )
                
                
                (89
                )
                
                
                77Interest
      bearing deposits in banks
                
                
                11,846
                
                
                
                4,910
                
                
                
                4.21
                %
                
                
                6.86
                %
                
                
                124
                
                
                
                83
                
                
                
                41
                
                
                
                (43
                )
                
                
                84Total
      earning assets
                
                
                541,704
                
                
                
                481,310
                
                
                
                6.87
                %
                
                
                7.21
                %
                
                
                9,254
                
                
                
                8,555
                
                
                
                699
                
                
                
                (376
                )
                
                
                1,075Cash
      and due from banks
                
                
                14,987
                
                
                
                13,688Allowance
      for loan losses
                
                
                (5,022
                )
                
                
                (4,584
                )Other
      assets
                
                
                60,728
                
                
                
                48,072Total
                
                $
                612,397
                
                
                $
                538,486Liabilities
      and EquityInterest
      bearing demand (2)
                
                $
                145,752
                
                
                $
                126,881
                
                
                
                1.71
                %
                
                
                1.77
                %
                
                $
                620
                
                
                $
                555
                
                
                $
                65
                
                
                $
                (19
                )
                
                $
                84Savings
                
                
                43,331
                
                
                
                36,045
                
                
                
                0.75
                %
                
                
                0.72
                %
                
                
                81
                
                
                
                64
                
                
                
                17
                
                
                
                3
                
                
                
                14Certificates
      of deposit
                
                
                252,674
                
                
                
                213,928
                
                
                
                4.59
                %
                
                
                4.69
                %
                
                
                2,881
                
                
                
                2,472
                
                
                
                409
                
                
                
                (52
                )
                
                
                461Total
      interest bearing deposits
                
                
                441,757
                
                
                
                376,854
                
                
                
                3.26
                %
                
                
                3.33
                %
                
                
                3,582
                
                
                
                3,091
                
                
                
                491
                
                
                
                (68
                )
                
                
                559Borrowed
      funds
                
                
                9,498
                
                
                
                6,785
                
                
                
                5.67
                %
                
                
                5.74
                %
                
                
                134
                
                
                
                96
                
                
                
                38
                
                
                
                (1
                )
                
                
                39Total
      interest bearing liabilities
                
                
                451,255
                
                
                
                383,639
                
                
                
                3.31
                %
                
                
                3.37
                %
                
                
                3,716
                
                
                
                3,187
                
                
                
                529
                
                
                
                (69
                )
                
                
                598Noninterest
      bearing demand deposits
                
                
                77,653
                
                
                
                78,564Other
      liabilities
                
                
                10,472
                
                
                
                7,503Redeemable
      common stock held by ESOP
                
                
                951
                
                
                
                940Shareholders'
      equity
                
                
                72,066
                
                
                
                67,840Total
                
                $
                612,397
                
                
                $
                538,486Net
      interest income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                5,538
                
                
                $
                5,368
                
                
                $
                170
                
                
                $
                (307
                )
                
                $
                477Net
      interest yield on earning assets
                
                
                
                
                
                
                
                
                
                
                4.11
                %
                
                
                4.52
                %Net
      interest spread
                
                
                
                
                
                
                
                
                
                
                3.56
                %
                
                
                3.84
                %
 
 (1)  Daily
averages.  Loans includes nonaccrual loans.
 (2)  Includes
money market accounts
 
 Other Income.Total other income for the
three-month period ended March 31, 2008 amounted to $1,921,000, compared to
$1,479,000 for the same period in 2007, an increase of $441,000.  The
addition of Chickamauga accounted for $195,000 of this increase.
 
 Service
charges (including NSF and overdraft charges) on deposit accounts increased
$142,000 or 17.4%.  These fees were 2.34% of interest-bearing and
non-interest bearing checking accounts in 2008 compared to 2.25% in
2007.  For the three month periods ended March 31, 2008, other service
charges and fees increased $99,000, or $56,000 exclusive of acquisitions, and
results primarily from a $26,000 increase in debit card fees and a $14,000
increase in ATM fee income.
  17
 Index
  For the
three months ended March 31, 2008, gain on sale of loans was $113,000 compared
to $104,000 in 2007 due to increased volume of loans sold.  Included
in the gain on sale of loans are mortgage servicing rights of $50,000 and
$69,000 for the three month periods ended March 31, 2008 and 2007,
respectively.  The following presents the activity in the Company’s
mortgage servicing rights in 2008 and 2007:
 
 (dollars
      in thousands)
                
                2008
                
                
                2007Beginning
      balance
                
                $
                510
                
                
                $
                375Servicing
      rights recognized
                
                
                50
                
                
                
                69Amortization
      expense
                
                
                (27
                )
                
                
                (24
                )Ending
      balance
                
                $
                533
                
                
                $
                420
 
 During
the quarter, the Company recorded $90,000 in gains from calls of
securities.  The securities were called as the reduction in the levels
of interest rates made it advantageous for the issuers of the debt securities to
redeem the securities.  Income from bank-owned life insurance
increased $54,000 of which $44,000 relates to the insurance policies assumed in
the acquisition of Chickamauga.  Other income increased $48,000, or
34.3%, to $185,000.  Excluding the impact of the
Chickamauga acquisition, other income increased $26,000 for the
quarter.
 
 Other
Expenses.  Other expenses for the three-month period ended
March 31, 2008 amounted to $5,132,000 compared to $4,357,000 for the same
period in 2007, an increase of $775,000 or 17.8%.  Excluding the
impact of acquisitions, these expenses increased $248,000 or 5.7%.
 
 The
largest component of other expenses is salaries and employee benefits, which
excluding the impact of acquisitions increased $146,000, or 6.1%.  Of
this increase, $25,000 represents increased costs associated with the the
implementation of EITF Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.Other increases are related to merit increases and branch
expansion.  The compensation cost that was charged against income for
our stock option plans was $27,000 for each of the three month periods ended
March 31, 2008 and 2007.  The total compensation cost related to
nonvested awards not yet recognized at March 31, 2008 is $299,000 which will be
recognized over the weighted average period of approximately 2.88
years.
 
 For the
three month period ended March 31, 2008, amortization of intangibles increased
$25,000.  Amortization of the core deposit intangible recorded in
conjunction with the acquisition Chickamauga amounted to $22,000 for the
quarter while amortization expense for mortgage servicing rights increased
$3,000.  Equipment and occupancy expenses increased $127,000 for the
quarter of which $37,000 relates to Chickamauga.  Excluding the impact
of acquisitions, occupancy expenses increased $90,000 for the three-month period
which includes $36,000 of higher depreciation costs and $23,000 in increased
rent expense relating to branch expansion.  Other operating expenses
increased $199,000 for the three months in 2008 of which $189,000 relates
to Chickamauga.
 
 Other
expenses amounted to 3.35% of average assets in 2008 compared to 3.25% of
average assets in 2007.
 
 Income Taxes.  The
Company recorded income taxes totaling $567,000 and $736,000 for the three-month
periods ending March 31, 2008 and 2007, respectively.  Effective tax
rates for the periods were 28.8% and 31.4%,
respectively.   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%.  The reason the
effective tax rate was lower in 2008 than in 2007 is that tax exempt income
represented 20.8% of income before income taxes in 2008 compared to 13.0% in
2007.
 
 Liquidity
and Capital Resources
 
 Liquidity
is our ability to meet deposit withdrawals immediately while also providing for
the credit needs of our customers.  We monitor our liquidity resources
on an ongoing basis. State and Federal regulatory authorities also monitor our
liquidity on a periodic basis. As of March 31, 2008, we believe our liquidity,
as determined under guidelines established by regulatory authorities and
internal policies, was satisfactory.
 
 If
needed, our banks have the ability on a short-term basis to borrow and purchase
federal funds from other financial institutions.  At March 31, 2008,
the banks had available additional federal funds lines of credit totaling $23.2
million in place with five banks and $54.6 million of available funds on their
lines of credit with the Federal Home Loan Bank of Atlanta.
 
 At March
31, 2008, our capital ratios were adequate based on regulatory minimum capital
requirements. The minimum capital requirements and the actual capital ratios on
a consolidated and bank-only basis are as follows:
  18
 Index
 
 Tier
      1 Leverage
                
                
                Tier
      1 Risk- Based
                
                
                Total
      Risk- BasedMinimum
      required
                
                
                4.00
                %
                
                
                4.00
                %
                
                
                8.00
                %Minimum
      required to be well capitalized
                
                
                5.00
                %
                
                
                6.00
                %
                
                
                10.00
                %Actual
      ratios at March 31, 2008Consolidated
                
                
                9.25
                %
                
                
                13.09
                %
                
                
                14.26
                %Bank
      of Upson
                
                
                10.01
                %
                
                
                12.74
                %
                
                
                13.86
                %The
      First National Bank of Polk County
                
                
                11.98
                %
                
                
                18.23
                %
                
                
                19.48
                %Peachtree
      Bank
                
                
                8.81
                %
                
                
                10.94
                %
                
                
                12.15
                %Bank
      of Chickamauga
                
                
                7.56
                %
                
                
                18.08
                %
                
                
                19.34
                %
 
 Capital
ratios may decline as asset growth continues, but are expected to continue to
exceed minimum regulatory requirements.
 
 Other
than the items described above, we are not aware of any trends, demands,
commitments, events or uncertainties that will result, or are reasonably likely
to result, in our liquidity increasing or decreasing in any material
way.
  Off-Balance-Sheet
Financing
  Our
financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business. These off-balance-sheet
financial instruments include commitments to extend credit and standby letters
of credit. These financial instruments are included in the financial statements
when funds are distributed or the instruments become payable. We use the same
credit policies in making commitments as we do for on-balance ­sheet
instruments. Our exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit,
standby letters of credit and credit card commitments is represented by the
contractual amount of those instruments. The table below contains a summary of
our contractual obligations and commitments as of March 31, 2008.
 
 Commitments
and Contractual Obligations
 (Dollars
in thousands)
 
 Less
      than one year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                Thereafter
                
                
                TotalContractual
      obligationsDeposits
      having no stated maturity
                
                $
                274,667
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                274,667Certificates
      of Deposit
                
                
                193,544
                
                
                
                41,102
                
                
                
                17,895
                
                
                
                -
                
                
                
                252,541FHLB
      advances andother
      borrowed funds
                
                
                -
                
                
                
                1,311
                
                
                
                1,311
                
                
                
                3,933
                
                
                
                6,555Deferred
      compensation
                
                
                43
                
                
                
                125
                
                
                
                500
                
                
                
                3,579
                
                
                
                4,247Construction
      commitments
                
                
                723
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                723Leases
                
                
                143
                
                
                
                198
                
                
                
                160
                
                
                
                398
                
                
                
                899Total
      contractal obligations
                
                $
                469,120
                
                
                $
                42,736
                
                
                $
                19,866
                
                
                $
                7,910
                
                
                $
                539,632CommitmentsCommitments
      to extend credit
                
                $
                32,198
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                32,198Credit
      card commitments
                
                
                9,545
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,545Commercial
      standby letters of credit
                
                
                955
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                955Total
      commitments
                
                $
                42,698
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                42,698
 
 Gross
payments to be made under the deferred compensation plans are estimated to be
$19,434,000.
  19
 Index
  ITEM
3.  Quantitative and Qualitative Disclosures about
Market Risk
 
 Pursuant
to the revised disclosure requirements for smaller reporting companies effective
February 4, 2008, no disclosure under this Item is required.
 
 ITEM
4T. Controls and Procedures
  As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”).  Disclosure Controls, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure Controls are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
 
 Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud.  A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.  The design
of any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions.
 
 Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.
 
 There
have been no changes in our internal controls over financial reporting during
our first fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
 
  PART
II- OTHER INFORMATION
 
 Item 1.
                Legal
      Proceedings
 
 The
Company and its subsidiaries are subject to claims and suits arising in the
ordinary course of business.  In the opinion of management, the
ultimate resolution of these pending claims and legal proceedings will not have
a material adverse effect on the Company’s results of operations.
 
 Item 1A.
                Risk
 
 In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, "Item 1. Business" under the heading
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31,
2007, which could materially affect our business, financial condition or future
results.  The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company.  Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
  Item
      2.
                Unregistered Sales of
      Equity Securities and Use of
Proceeds
 
 None.
 
 Item 3.
                Defaults upon Senior
      Securities
 
 None.
  20
 Index
  Item 4.
                Submission of Matters
      to a Vote of Security
Holders
 
 None.
 
 Item
      5.
                Other
      Information
 
 None.
 
 Item 6.
                Exhibits
 
 Exhibits
 
 Exhibit No. 31.1
                
                Chief Executive
      Officer Certification Pursuant to Rule
      13a-14(a)/15d-14(a)Exhibit No. 31.2
                
                Chief Financial
      Officer Certification Pursuant to Rule
      13a-14(a)/15d-14(a)Exhibit No. 32.1
                
                Chief Executive
      Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002Exhibit 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
  21
 Index
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 SouthCrest
Financial Group, Inc.
 (Registrant)
   DATE:  May
      15, 2008
                BY:
                /s/ Larry T. KuglarLarry T. Kuglar.President
      and Chief Executive OfficerDATE:  May
      15, 2008
                BY:
                /s/ Douglas J. HerthaDouglas J. HerthaSenior
      Vice President, Chief Financial
Officer




22