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, 2009





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





For the transition period from to





Commission File Number: 000-51287








SouthCrest Financial Group, Inc.


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











Georgia

58-2256460(State or other jurisdiction ofincorporation or organization)

(IRS Employer Identification No.)





600 North Glynn Street


Fayetteville, GA  30214


(Address of principal executive offices)





(770)-461-2781


(Issuer’s telephone number)








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











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





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


Yes    ̈    No    ̈




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer   ̈
Accelerated filer   ̈
Non-accelerated filer   ̈
Smaller reporting company  x





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





State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 15, 2009: 3,931,528.













SouthCrest Financial Group, Inc.


And Subsidiaries





INDEX











PagePart I.
FINANCIAL INFORMATIONItem 1.
Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets – March 31, 2009 and December 31, 2008
1Condensed Consolidated Statements of Income  - Three Months Ended March 31, 2009 and 2008
2Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2009 and 2008
3Condensed Consolidated Statements of Stockholders' Equity – Three Months Ended March 31, 2009 and 2008
4Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2009 and 2008
5Notes to Condensed Consolidated Financial Statements
7Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 3.
Quantitative and Qualitative  Disclosures about Market Risk
24Item 4T.
Controls and Procedures
24Part II.
OTHER INFORMATION
24Item 1.
Legal Proceedings
24Item 1A.
Risk factors.
24Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24Item 3.
Defaults Upon Senior Securities
24Item 4.
Submission of Matters to a Vote of Security Holders
25Item 5.
Other Information
25Item 6.
Exhibits
25Signatures
26




Index




PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS





SouthCrest Financial Group, Inc. and Subsidiaries


Condensed Consolidated Balance Sheets


March 31, 2009 and December 31, 2008


(Unaudited)


(In thousands, except share and per share data)





Assets

March 31,
2009


December 31,
2008*Cash and due from banks

$
26,599


$
18,267Interest-bearing deposits at other financial institutions


21,402



16,763Federal funds sold


2,984



7,776Securities available for sale


87,810



78,910Securities held to maturity (fair value $36,939 and $40,302)


36,362



39,216Restricted equity securities, at cost


1,942



2,294Loans held for sale


1,785



349Loans, net of unearned income


398,698



395,788Less allowance for loan losses


7,490



7,285Loans, net


391,208



388,503Bank-owned life insurance


17,164



16,997Premises and equipment, net


19,623



19,373Goodwill


6,397



6,397Intangible assets, net


2,440



2,577Other real estate owned


6,055



5,592Other assets


7,921



7,537Total assets

$
629,692


$
610,551Liabilities, Redeemable Common Stock, and Stockholders' EquityLiabilities:Deposits:Noninterest-bearing

$
75,534


$
75,912Interest-bearing


470,342



443,789Total deposits


545,876



519,701Short-term borrowed funds


6,961



15,115Long-term borrowed funds


1,667



1,667Other liabilities


10,861



9,546Total liabilities


565,365



546,029Commitments and contingenciesRedeemable common stock held by ESOP


476



494Stockholders' equity:Common stock, par value $1; 10,000,000 shares authorized, 3,931,528 issued


3,932



3,932Preferred stock, no par value; 10,000,000 shares authorized, 0 shares issued


-



-Additional paid-in capital


49,839



49,812Retained earnings


9,594



9,700Unearned compensation - ESOP


(326
)


(326
)Accumulated other comprehensive income


812



910Total stockholders' equity


63,851



64,028Total liabilities, redeemable common stock, and stockholders' equity

$
629,692


$
610,551See Notes to Condensed Consolidated Financial Statements.* Derived from audited consolidated financial statements.





1
 Index




SouthCrest Financial Group, Inc. and Subsidiaries


Condensed Consolidated Statements of Income


For The Three Months Ended March 31, 2009 and 2008


(Unaudited)


(In thousands, except share and per share data)





2009


2008Interest income:Loans

$
6,408


$
7,371Securities - taxable


1,040



1,394Securities - nontaxable


264



229Federal funds sold


3



136Interest-bearing deposits at other banks


148



124Total interest income


7,863



9,254Interest expense:Deposits


2,612



3,582Other borrowings


66



134Total interest expense


2,678



3,716Net interest income


5,185



5,538Provision for loan losses


874



355Net interest income after provision for loan losses


4,311



5,183Other income:Service charges on deposit accounts


791



957Other service charges and fees


430



395Net gain on sale of loans


218



113Net gain on sale and call of securities


10



90Income on bank-owned life insurance


167



181Other operating income


181



185Total other income


1,797



1,921Other expenses:Salaries and employee benefits


3,266



2,840Equipment and occupancy expenses


643



594Amortization of intangibles


230



268Other operating expenses


1,616



1,430Total other expenses


5,755



5,132Income before income taxes


353



1,972Income tax (benefit) expense


(34
)


567Net income

$
387


$
1,405Basic and diluted earnings per share

$
0.10


$
0.36Dividends per share

$
0.130


$
0.130Average shares outstanding - basic and diluted


3,916,707



3,915,648





See Notes to Condensed Consolidated Financial Statements.





2
 Index




Condensed Consolidated Statements of Comprehensive Income


For The Three Months Ended March 31, 2009 and 2008


(Unaudited)


(In thousands)





2009


2008Net income

$
387


$
1,405Other comprehensive income (loss):Unrealized holding gains (losses) on securities available for sale arising during the period, net of taxes of ($60)and $242


(98
)


395Comprehensive income

$
289


$
1,800





See Notes to Condensed Consolidated Financial Statements.





3
 Index




SouthCrest Financial Group, Inc.


And Subsidiaries


Consolidated Statements of Stockholders' Equity


For The Three Months Ended March 31, 2009 and 2008


(Unaudited)


(In thousands, except share and per share data)





AccumulatedAdditional





Other


Unearned


TotalCommon Stock


Paid-In


Retained


Comprehensive


Compensation


Stockholders'Shares


Par


Capital


Earnings


Income


(ESOP)


EquityBalance, December 31, 2008


3,931,528


$
3,932


$
49,812


$
9,700


$
910


$
(326
)

$
64,028Net income


-



-



-



387



-



-



387Cash dividends declared, $.13 per share


-



-



-



(511
)


-



-



(511
)Stock-based compensation


-



-



27



-



-



-



27Adjustment for shares owned by ESOP


-



-



-



18



-



-



18Other comprehensive income (loss)


-



-



-



-



(98
)


-



(98
)Balance, March 31, 2009


3,931,528


$
3,932


$
49,839


$
9,594


$
812


$
(326
)

$
63,851Balance, 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


-



-



-



(735
)


-



-



(735
)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


$
18,270


$
945


$
(349
)

$
72,532





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, 2009 and 2008


(Unaudited)


(In thousands)





2009


2008OPERATING ACTIVITIESNet income

$
387


$
1,405Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


332



298Amortization of intangibles


230



268Other amortization


27



(14
)Provision for loan losses


874



355Stock compensation expense


27



27Deferred income taxes


(226
)


35Income on bank-owned life insurance


(167
)


(181
)Gain on sales and calls of investment securities


(10
)


(90
)Decrease (increase) in interest receivable


2



(397
)Increase in income taxes payable


229



188Increase in interest payable


277



217Net gain on sale of loans


(218
)


(113
)Originations of mortgage loans held for sale


(13,103
)


(9,064
)Proceeds from sales of mortgage loans held for sale


11,792



8,461Loss on sale of other real estate


11



-(Increase) decrease in other assets


(98
)


767Increase in other liabilities


809



513Net cash provided by operating activities


1,175



2,675INVESTING ACTIVITIESProceeds from maturities of securities held to maturity


2,841



11,335Purchases of securities available for sale


(18,195
)


(21,873
)Proceeds from maturities of securities available for sale


9,091



9,904Proceeds from redemption of restricted equity securities


352



145Net (increase) decrease in interest-bearing deposits in banks


(4,639
)


126Net increase in loans


(4,103
)


(4,188
)Purchase of premises and equipment


(582
)


(1,057
)Proceeds from sale of other real estate owned


90



-Net cash used in investing activities


(15,145
)


(5,608
)FINANCING ACTIVITIESNet increase in deposits


26,175



13,230Repayments of short-term borrowed funds


(8,154
)


(3,055
)Dividends paid


(511
)


(511
)Net cash provided by financing activities


17,510



9,664Net increase in cash and due from banks


3,540



6,731Cash and cash equivalents at beginning of year


26,043



25,376Cash and cash equivalents end of period

$
29,583


$
32,107





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, 2009 and 2008


(Unaudited)


(In thousands)





2009


2008SUPPLEMENTAL DISCLOSURESCash paid for:Interest

$
2,401


$
3,499Income taxes


164



-NONCASH TRANSACTIONSPrincipal balances of loans transferred to other real estate owned

$
564


$
743Increase in mortgage servicing rights


93



50Decrease in redeemable common stock held by ESOP


(18
)


(230
)Unrealized gain (loss) on securities available for sale, net


(158
)


637





See Notes to Condensed Consolidated Financial Statements.





6
 Index




SouthCrest Financial Group, Inc. and Subsidiaries


Notes to Condensed Consolidated Financial Statements


(Unaudited)




NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION




SouthCrest Financial Group, Inc. (“SouthCrest” or the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary banks, Bank of Upson (“Upson”), The First National Bank of Polk County (“FNB Polk”), Peachtree Bank (“Peachtree”),
and Bank of Chickamauga (“Chickamauga”).  All of the subsidiary banks (collectively, the “Banks”) are commercial banks that provide a full range of banking services within their primary market areas.  Upson is headquartered in Thomaston, Upson County, Georgia with 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, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. For further information, refer to the financial statements and notes included in the Company's consolidated financial statements and notes thereto for the year ended December 31,
2008 included in the Company’s annual report on Form 10-K (Registration No. 000-51287).




The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Bank of Upson,  The First National Bank of Polk County, Peachtree Bank, and Bank of Chickamauga.  All significant inter-company accounts and transactions have been eliminated in consolidation.  Certain
reclassifications to prior year balance sheets and income statements have been made to conform to current classifications.  These reclassifications have no impact on net income or stockholders’ equity reported for the previous year.




NOTE 2 – EARNINGS PER COMMON SHARE




Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period.  Diluted earnings per share would be computed by dividing net income by the sum of the weighted-average number of shares of common stock outstanding and dilutive potential
common shares, such as outstanding stock options.  Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value.  The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.




At March 31, 2009 and 2008, the Company had 185,400 and 191,400 options outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan.  For the three month periods ended March 31, 2009 and 2008, these options were nondilutive.   The Company’s ESOP has a loan from the holding company secured
by 14,821 shares of Company stock which have not been allocated to participant accounts and are therefore not considered outstanding for purposes of computing earnings per share.  The weighted average number of shares outstanding for purposes of computing earnings per share was 3,916,707 and 3,915,648 for the three month periods ended March 31, 2009 and 2008.





7
 Index




NOTE 3 — LOANS RECEIVABLE




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




(Dollars in thousands)

March 31,
2009


December 31,
2008Commercial, financial, and agricultural

$
17,922


$
18,740Real estate – construction


80,161



74,095Real estate – mortgage


261,324



261,866Consumer


33,147



35,552Other


6,154



5,547398,708



395,800Unearned income


(10
)


(12
)Allowance for loan losses


(7,490
)


(7,285
)Loans, net

$
391,208


$
388,503




Changes in the allowance for loan losses are as follows:




(Dollars in thousands)

March 31,
2009


March 31,
2008Balance, beginning of year

$
7,285


$
4,952Provision for loan losses


874



355Loans charged off


(804
)


(189
)Recoveries of loans previously charged off


135



178Balance, end of period

$
7,490


$
5,296




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




(Dollars in thousands)

March 31,
2009


December 31,
2008Impaired loans without a valuation allowance

$
-


$
-Impaired loans with a valuation allowance


9,225



9,164Total impaired loans

$
9,225


$
9,164Valuation allowance related to impaired loans

$
1,122


$
1,603Average investment in impaired loans

$
9,195


$
5,920




There were $9,225,000 and $9,164,000 loans on nonaccrual status at March 31, 2009 and December 31, 2008.  Loans of $539,000 and $779,000 were past due ninety days or more and still accruing interest at March 31, 2009 and December 31, 2008, respectively.




(Dollars in thousands)

March 31,
2009


December 31,
2008Nonaccrual loans

$
9,225


$
9,164Loans past due 90 days or more and still accruing

$
539


$
779Loans restructured under troubled debt

$
2,276


$
-




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, 2009,  the carrying value for these loans had been reduced to $265,000 as a result of cash payments by the borrowers, chargeoff, or repossession.





8
 Index




NOTE 4 — DEPOSITS




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




(Dollars In Thousands)

March 31,
2009


December 31,
2008Noninterest bearing deposits

$
75,535


$
75,912Interest checking


90,761



95,979Money market


58,398



54,545Savings


44,918



42,651Certificates of deposit


276,264



250,614$
545,876


$
519,701




NOTE 5 — NEW ACCOUNTING PRONOUNCEMENTS




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, 2009, the Company had no acquired deferred income tax valuation allowances and income tax contingencies.




In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The FSP changes existing guidance for determining whether impairment of debt securities is other than temporary. The FSP requires other-than-temporary
impairment to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses), which is recognized in earnings, and the amount related to other factors, which is recognized in other comprehensive income. The non-credit loss component of the impairment can only be classified in other comprehensive income if the holder of the security concludes (1) that it does not intend to sell the security and (2) that it is more likely than
not that it will not be required to sell the security before the security recovers its value. If these two conditions are not met, the non-credit loss component of the impairment must also be recognized in earnings.




Upon adoption of the FSP, the entity is required to record a cumulative-effect adjustment, as of the beginning of the period of adoption, to reclassify the non-credit loss component of previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. The FSP is effective, as of June 30,
2009, with early adoption permitted as of March 31, 2009. The Company did not elect to early-adopt the FSP, and the Company is currently evaluating the impact of adoption on the consolidated financial statements, but the Company does not believe that adoption will have a material impact.





In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The FSP, while emphasizing that the objective of fair
value measurement described in SFAS No. 157, Fair Value Measurements, provides additional guidance for determining whether market activity for a financial asset or liability has significantly decreased, as well as for identifying circumstances that indicate that transactions are not orderly.





9
 Index




The FSP reiterates that if a market is determined to be inactive and the related market price is deemed to be reflective of a "distressed sale" price, then further analysis is required to estimate fair value. The FSP identifies factors to be considered when determining whether or not a market is inactive. The FSP is effective, as of
June 30, 2009, with early adoption permitted as of March 31, 2009. The Company did not elect to early-adopt the FSP. It is currently evaluating the impact of adoption on the consolidated financial statements, but does not believe that adoption will have a material impact.




In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures About Fair Value of Financial Instruments, and Accounting
Principles Board Opinion No. 28, Interim Financial Reporting, to require disclosures about fair values of financial instruments in all interim financial statements. Once adopted, the disclosures required by the FSP are to be provided prospectively. The FSP's requirements would be effective, as of June 30, 2009, with early adoption permitted as of March 31, 2009.




In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP amends and clarifies the provisions of SFAS No. 141(R), Business
Combinations, with respect to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies associated with a business combination. The provisions of the FSP are effective for business combinations occurring after January 1, 2009. The impact of adoption of the FSP on the consolidated financial statements will depend on the nature, terms and size of future business combinations.




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.





10
 Index





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, 2009, 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.





Assets and Liabilities Recorded at Fair Value on a Recurring Basis





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





(Dollars in thousands)

Fair
Value


Quoted Prices
In Active
Markets
for Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Unobservable
Inputs
(Level 3)As of March 31, 2009Securities available for sale

$
87,810


$
25


$
86,775


$
1,010As of December 31, 2008Securities available for sale

$
78,110


$
27


$
77,089


$
994





The securities measured as Level 3 include investment in the common stock of a bank holding company that is not listed on an exchange.  Its fair value is measured as a factor of book value.  There were no gains or losses for the three and nine months ended March 31, 2009 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, 2009.





For those securities available for sale with fair values that are determined by reliance on significant unobservable inputs, the following table identifies the factors causing the change in fair value from January 1, 2009 to March 31, 2009:





11
 Index




Investment Securities
Available For SaleBeginning balance, January 1, 2009

$
994Total gains (losses) realized or unrealizedIncluded in earnings


-Included in other comprehensive income


16Transfers in (out) of Level 3


-Ending balance, March 31, 2009

$
1,010





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





(Dollars in thousands)

Fair
Value


Quoted Prices
In Active
Markets
for Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Unobservable
Inputs
(Level 3)As of March 31, 2009Impaired loans

$
-


$
-


$
-


$
8,103Other real estate


-



-



-



6,055As of December 31, 2008Impaired loans

$
-


$
-


$
-


$
7,561Other real estate


-



-



-



5,592




The values of loans held for sale are based on prices observed for similar pools of loans, appraisals provide by third parties and prices determined based on terms of investor purchase commitments. The value of impaired loans is determined by the estimated collateral value or by the discounted present value of the expected cash flows.




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




NOTE 7 — BORROWED FUNDS




At March 31, 2009, the Company had $6,253,000 outstanding on its line of credit with Silverton Bank, N.A. (formerly The Bankers Bank).  On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank. The FDIC was appointed as Receiver for Silverton Bank, and Silverton Bridge Bank, N.A. has been formed to take over
the operations of Silverton Bank. The stock of our subsidiary banks is pledged as collateral for this loan.  The terms of the line of credit contain certain restrictive covenants including, among others, a requirement of each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets, to be measured quarterly.  At the inception of the loan, the restriction relative to maximum levels of nonperforming assets required that these
assets not exceed 1% of each subsidiary’s total assets.  The Company was in violation of this covenant for the second and third quarters of 2008 for which it received waivers from the lender.  The Company and the lender agreed to amend the covenants such that each subsidiary’s nonperforming assets may not exceed 5% of total assets as of December 31, 2008 and for each quarter of 2009.  Thereafter, this ratio would reduce by 1% during each quarter in 2010 so that the maximum
ratio returns to 1% of total assets by December 31, 2010.





12
 Index





At December 31, 2008, as a result of its impairment of its goodwill and core deposit intangible assets, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio, defined as net income of subsidiary banks for the prior four quarters multiplied by 50%, divided by the annual debt service of the Company.  The Company
is currently negotiating with Silverton Bridge Bank, N.A. to obtain a waiver for these covenant violations as well.  If the Company is in violation of covenants under the loan and is unable to obtain a waiver or amendment of the loan agreement, Silverton Bridge Bank, N.A. would have the right to give notice of default. If the Company is unable to cure the default within fifteen days of notice, then Silverton Bridge Bank, N.A. would have the right to declare the entire balance of the loan due and payable,
which could have a material adverse effect on the Company's liquidity and ability to pay dividends. Management intends to continue to pursue a favorable resolution to this issue, which in addition to the alternatives above, would include repayment of the loan through a payment of special dividends from the subsidiary banks, obtaining financing from another lender, or a combination of the two.




NOTE 8.  FDIC SPECIAL ASSESSMENT




On February 27, 2009, the FDIC proposed amendments to the restoration plan for the Deposit Insurance Fund. This amendment proposed the imposition of a 20 basis point emergency special assessment on insured depository institutions as of June 30, 2009. The FDIC proposes to collect this assessment on September 30, 2009. The interim rule would
also permit the FDIC to impose an emergency special assessment after June 30, 2009, of up to 20 basis points if necessary to maintain public confidence in federal deposit insurance. Based on the Company's average deposits for the fourth quarter, this special assessment, if implemented as proposed, would equal approximately $1.0 million. This special assessment, if implemented as proposed, will have a significant impact on the results of operations of the Company for 2009.




On March 5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special assessment from 20 basis points to 10 basis points. The approval of the cutback is contingent on whether Congress passes legislation that would expand the FDIC's line of credit with the Treasury to $100 billion. Legislation to increase the
FDIC's borrowing authority on a permanent basis is also expected to advance to Congress, which should aid in reducing the burden on the industry.




On May 6, 2009, the Senate passed a bill which expand the FDIC's line of credit with the Treasury to $100 billion. This bill is still subject to passage by the House of Representatives and signature by the President.




The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC. In addition, the bill expanding the FDIC's borrowing authority, also would allow the FDIC to levy bank holding companies for any systemic special assessment if they stand to benefit from government action,
such as the debt guarantee program.





13
 Index





SouthCrest Financial Group, Inc. and Subsidiaries







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





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





Forward Looking Statements




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





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





Critical Accounting Estimates





We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements for the year ended December 31, 2008 included in
our Form 10-K (Registration No. 000-51287).   Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting judgments and assumptions to be our critical accounting estimates. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and
assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.





We believe the allowance for loan losses is a critical accounting estimate that requires the most significant judgments and assumptions used in preparation of our consolidated financial statements.  Because the allowance for loan losses is replenished through a provision for loan losses that is charged against earnings, our subjective
determinations regarding the allowance affect our earnings directly.   Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.





The consolidated financial statements include certain accounting and disclosures that require management to make estimates about fair values.  Estimates of fair value are used in the accounting for securities available for sale, loans held for sale, stock compensation, goodwill, other intangible assets, and acquisition purchase
accounting adjustments.  Estimates of fair values are used in disclosures regarding securities held to maturity, stock compensation, commitments, and the fair values of financial instruments.  Fair values are estimated using relevant market information and other assumptions such as interest rates, credit risk, prepayments and other factors.  The fair values of financial instruments are subject to change as influenced by market conditions.





14
 Index





Financial Condition





During the three months ended March 31, 2009, our total assets increased $19.1 million to $629.7 million at March 31, 2009.  During this period, total loans increased $2.9 million, or 1.1%, while loans held for sale increased $1,436,000.  Securities available for sale increased $9.7 million due primarily to purchases
made during the quarter while securities held to maturity decreased $3.7 million due to maturities.  Federal funds sold decreased $4.8 million.





During the year to date period ended March 31, 2009, deposits increased $26.2 million or 5.0%.  Changes in deposits are summarized below:





(Dollars In Thousands)

March 31,
2009


December 31,
2008


ChangeNoninterest bearing deposits

$
75,534


$
75,912


$
(377
)Interest checking


90,762



95,979



(5,218
)Money market


58,398



54,545



3,853Savings


44,918



42,651



2,267Certificates of deposit


276,264



250,614



25,650$
545,876


$
519,701


$
26,175





Since December 31, 2008, short-term borrowed funds declined $8.2 million due to repayments of Federal Home Loan Bank advances during the quarter.  At March 31, 2009 we had purchased $83,000 in 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 decreased by $177,000 since December 31, 2008, primarily due to dividends paid to shareholders.  The Company’s net income of $387,000 was offset by dividends paid during the quarter of $511,000.  The Company also experienced a $98,000 decrease in the unrealized gain on securities
available for sale, net of deferred taxes.




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




(Dollars in thousands)

March 31,
2009


December 31,
2008Commercial, financial, and agricultural

$
17,922


$
18,740Real estate – construction


80,161



74,095Real estate – mortgage


261,324



261,866Consumer


33,147



35,552Other


6,154



5,547398,708



395,800Unearned income


(10
)


(12
)Allowance for loan losses


(7,490
)


(7,285
)Loans, net

$
391,208


$
388,503





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





(Dollars in thousands)

March 31,
2009


December 31,
2008Nonaccrual loans

$
9,225


$
9,164Loans past due 90 days or more and still accruing

$
539


$
779Loans restructured under troubled debt

$
2,276


$
-




15
 Index





Nonaccrual loans increased $61,000 during the quarter ended March 31, 2009 increasing from $9,164,000 to $9,225,000.  Impaired loans at March 31, 2009 consisted of $7.5 million in construction and development loans, $1.2 million in first mortgage loans secured by single family dwellings, $190,000 in second mortgages, $336,000 in nonresidential real estate, and
$31,000 in consumer loans.  Impaired construction and development loans include a $3.45 million loan secured by an apartment complex for which a valuation allowance of $846,000 was established; a $1.97 million loan by a the development of a retail shopping center; a $698,000 residential development loan; a $604,000 residential development loan, and a $376,000 construction loan secured by a partially completed office building and another $405,000 loan secured by a commercial office building. Impaired
first mortgage loans consist of 16 loans, the largest of which is $179,000.





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





(Dollars in thousands)

March 31,
2009


December 31,
2008Impaired loans without a valuation allowance

$
-


$
-Impaired loans with a valuation allowance


9,225



9,164Total impaired loans

$
9,225


$
9,164Valuation allowance related to impaired loans

$
1,122


$
1,603Average investment in impaired loans

$
9,195


$
5,920





In addition to the above, the Company had at March 31, 2009 $14,688,000 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, 2009:





(Dollars in thousands)Construction and development loans

$
1,736First mortgage


6,454Second mortgage and home equity line of credit


267Nonresidential mortgage


4,940Commercial


305Consumer


986Total

$
14,688




Other Real Estate.Other real estate totaled $6,055,000 and $5,592,000 as of March 31, 2009 and December 31, 2008, respectively.  At March 31, 2009, the largest component of other real estate was $4.9 million which
represented the Company’s 75 percent interest in foreclosed property consisting of 96 developed residential lots and 24 partially developed lots in a golf course development in Jackson County, Georgia.  The Company sold a 25 percent participation interest at the time the loan was originated.  The remainder of other real estate consists of ten properties, the largest having a balance of $245,000.





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, 2009 and 2008:





16
 Index




Analysis of Allowance for Loan Losses


For The Three Months Ended March 31


(Dollars in thousands)

Three Months2009


2008Balance at beginning of period

$
7,285


$
4,952ChargeoffsCommercial loans


16



7Real estate - construction


504



22Real estate - mortgage


105



28Consumer


160



99Other


19



33Total Chargeoffs


804



189RecoveriesCommercial loans


13



5Real estate - construction


-



24Real estate - mortgage


3



16Consumer


102



103Other


17



30Total recoveries


135



178Net (chargeoffs) recoveries


(669
)


(11
)Additions charged to operations


874



355Balance at end of period

$
7,490


$
5,296Annualized ratio of net chargeoffs (recoveries) to average loans outstanding


0.68
%


0.01
%





Allowance for Loan Losses.The allowance for loan losses as of March 31, 2009 was $7,490,000 compared to $7,285,000 at December 31, 2008 and $5,296,000 at March 31, 2008.   As a percentage of
gross loans, the allowance for loan losses was 1.88% at March 31, 2009 compared to 1.84% as of December 31, 2008 and 1.40% at March 31, 2008. The provision for loan losses during the three-month period ended March 31, 2009 of $874,000 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.





During the quarter ended March 31, 2009, the Company recorded gross chargeoffs of $804,000.  Of this total, $500,000 related to a loan secured by a real estate development that was foreclosed in the first quarter.  The $500,000 charged off represented the valuation allowance established for this loan as of December 31,
2008.




Management considers the allowance for loan losses to be adequate; however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions of the allowance will not be required.




Results of Operations For The Three Months Ended March 31, 2009 and 2008




Net income for the three-month period ended March 31, 2009 amounted to $387,000, or $0.10 basic and diluted earnings per share, compared to net income of $1,405,000 or $0.36 basic and diluted earnings per share for the same three-month period in 2008, a decrease of $1,018,000, or 72.5%.





17
 Index





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




Net interest income for the three months ended March 31, 2009 decreased $353,000 or 6.4% over the same period in 2008.  This decline is the result of a $418,000 reduction attributable to changes in interest rates, was offset by an increase of $65,000 attributable to increases in the average balances of interest earning assets
and interest bearing liabilities.  Beginning in August 2007, the Federal Reserve has announced several reductions in the discount rate, with the result being that the average discount rate for the period ending March 31, 2009 was approximately 250 basis points lower than the same period in 2008.  These reductions have contributed to a reduction in the average yield on earning assets from 6.87% during the three month period ending March 31, 2008 to 5.89% in the same period in 2009.  The
average cost of funds declined from 3.31% in 2008 to 2.31% in 2009.  The net interest margin declined 23 basis points from 4.11% for the quarter ended March 31, 2008 to 3.88% for the current year period.  The net interest spread increased from 3.56% in 2008 to 3.58% in 2009.   Total interest income decreased $1,391,000 to $7,863,000 for the quarter ended March 31, 2009.  Interest income earned on loans decreased $963,000 composed of a $1,378,000 reduction in interest
due to the reduction in the average yield of the loan portfolio from 7.93% to 6.56%, offset by a $415,000 increase that relates to a $22.7 million growth in the average balance of loans.  The reduction in the average yield on loans results from a significant portion of the loan portfolio having variable interest rates that are tied to the prime rate.




Interest expense decreased $1,038,000 to $2,678,000 for the quarter ended March 31, 2009.  The main component of the decrease in interest expense was a $674,000 decrease in interest paid on certificates of deposit and is primarily the result of a decrease in the average rate paid on such accounts from 4.59% for the quarter
ended March 31, 2008 to 3.41% for the same quarter in 2009 and is the result of declines in the general level of interest rates.  The average rate on certificates of deposits typically lags the changes in the discount rate due to the longer term of the accounts and to competition from other banks for such funds.




The following presents, for the three month periods ended March 31, 2009 and 2008, the main components of interest earning assets and interest bearing liabilities and related interest income and expense and effective yields and cost of funds.


18
 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 to2009


2008


2009


2008


2009


2008


(Decrease)


Rate


VolumeAssetsLoans, including fee income

$
396,398


$
373,739



6.56
%


7.93
%

$
6,408


$
7,371


$
(963
)

$
(1,378
)

$
415Taxable securities


96,690



114,354



4.36
%


4.90
%


1,040



1,394



(354
)


(147
)


(207
)Nontaxable securities


23,124



23,775



4.63
%


3.87
%


264



229



35



41



(6
)Federal funds sold


6,556



17,990



0.19
%


3.04
%


3



136



(133
)


(79
)


(54
)Interest bearing deposits in banks


18,758



11,846



3.20
%


4.21
%


148



124



24



(36
)


60Total earning assets


541,526



541,704



5.89
%


6.87
%


7,863



9,254



(1,391
)


(1,599
)


208Cash and due from banks


27,038



14,987Allowance for loan losses


(7,552
)


(5,022
)Other assets


58,174



60,728Total

$
619,186


$
612,397Liabilities and EquityInterest bearing demand (2)

$
155,092


$
145,752



0.90
%


1.71
%

$
346


$
620


$
(274
)

$
(312
)

$
38Savings


43,558



43,331



0.55
%


0.75
%


59



81



(22
)


(22
)


-Certificates of deposit


262,145



252,674



3.41
%


4.59
%


2,207



2,881



(674
)


(778
)


104Total interest bearing deposits


460,795



441,757



2.30
%


3.26
%


2,612



3,582



(970
)


(1,112
)


142Borrowed funds


9,569



9,498



2.80
%


5.67
%


66



134



(68
)


(69
)


1Total interest bearing liabilities


470,364



451,255



2.31
%


3.31
%


2,678



3,716



(1,038
)


(1,181
)


143Noninterest bearing demand deposits


75,040



77,653Other liabilities


9,376



10,472Redeemable common stock held by ESOP


475



951Shareholders' equity


63,931



72,066Total

$
619,186


$
612,397Net interest income

















$
5,185


$
5,538


$
(353
)

$
(418
)

$
65Net interest yield on earning assets










3.88
%


4.11
%Net interest spread










3.58
%


3.56
%





(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, 2009 amounted to $1,797,000, compared to $1,921,000 for the same period in 2008, a decrease of $124,000.




Service charges (including NSF and overdraft charges) on deposit accounts decreased $166,000 or 17.3%.  These fees were 1.88% of interest-bearing and non-interest bearing checking accounts in 2009 compared to 2.34% in 2008.  The decline in NSF and overdraft fees accounts for $145,000 of the decrease, and is believed
to be the result of the current economic recession in which consumers have generally reduced their spending levels.





19
 Index




For the three months ended March 31, 2009, gain on sale of loans was $218,000 compared to $113,000 in 2008 due to increased volume of loans sold resulting from increased refinancing activity caused by declines in interest rates.  Included in the gain on sale of loans are the recognition of mortgage servicing rights of $93,000
and $50,000 for the three month periods ended March 31, 2009 and 2008, respectively.  The following presents the activity in the Company’s mortgage servicing rights in 2009 and 2008:




(dollars in thousands)

2009


2008Beginning balance

$
525


$
510Servicing rights recognized


93



50Amortization expense


(40
)


(27
)Ending balance

$
578


$
533




During the quarter, the Company recorded $10,000 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 decreased $14,000 due to reduced
yields on insurance policies.  Other income decreased $4,000, or 2.2%, to $181,000.




Other Expenses.  Other expenses for the three-month period ended March 31, 2009 amounted to $5,755,000 compared to $5,132,000 for the same period in 2008, an increase of $623,000 or 12.1%.




The largest component of other expenses is salaries and employee benefits, which increased $426,000, or 15.0%.  Of this increase, $400,000 represents estimated costs incurred in the termination of Bank of Chickamauga’s Defined Benefit Plan, scheduled for June 1, 2009.  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, 2009 and 2008.  The total compensation cost related to nonvested awards not yet recognized at March 31, 2009 is $194,000 which will be recognized over the weighted average period of approximately 1.88 years.




For the three month period ended March 31, 2009, amortization of intangibles decreased $38,000.  Amortization of core deposit intangibles decreased by $51,000, the result of impairment charges recorded against these assets at December 31, 2008.  Amortization expense for mortgage servicing rights for the quarter increased
$13,000.  Equipment and occupancy expenses increased $49,000 or 8.25% due to $34,000 in increased depreciation expense relating to the completion of the Company’s operation center in September 2008.  Other operating expenses increased $186,000 for the three months in 2009 of which $133,000 relates to increased professional and consulting fees and $71,000 to increased FDIC premiums.




Other expenses amounted to 3.77% of average assets in 2009 compared to 3.35% of average assets in 2008.




Income Taxes.  The Company recorded an income tax benefit totaling $(34,000) and income tax expense of $567,000 for the three-month periods ending March 31, 2009 and 2008, respectively.  The effective tax rate for the periods were (9.7)% and 28.8%, 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%.




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




The Company, if needed, has the ability to cash out certificates with asset cash flow under normal circumstances. In the event that abnormal circumstances arise, the Banks have federal funds lines of credit in place totaling $22.9 million. In addition, if needed for both short-term and longer-term funding needs, the Banks have available
lines of credit with the Federal Home Loan Bank of Atlanta on which $47.4 million was available at March 31, 2009.





At March 31, 2009, 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:





20
 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, 2009Consolidated


9.07
%


12.91
%


14.16
%Bank of Upson


9.71
%


12.67
%


13.92
%The First National Bank of Polk County


11.78
%


18.04
%


19.30
%Peachtree Bank


9.04
%


12.62
%


13.87
%Bank of Chickamauga


7.45
%


14.24
%


15.49
%





Capital ratios may decline as asset growth continues, but are expected to continue to exceed minimum regulatory requirements.





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





On October 14, 2008, Secretary Paulson announced that the Department of the Treasury will purchase equity stakes in a wide variety of banks and thrifts.  Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), from the $700 billion authorized by
the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the Treasury will receive warrant preferred having an aggregate redemption value equal to 5% of the preferred investment.  Participating financial institutions will be required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity
issued under the TARP Capital Purchase Program.    Institutions that receive Treasury approval to participate in the TARP Capital Purchase Program have 30 days to satisfy all requirements for participation and to complete the issuance of the senior preferred shares to the Treasury.





Eligible financial institutions can generally apply to issue senior preferred shares to the U.S. Treasury in aggregate amounts between 1% to 3% of the institution’s risk-weighted assets. In the case of the Company, this would permit the Company to apply for an investment by the U.S. Treasury of between approximately $4.37 million
and $13.12 million.  On April 21, 2009, the Company was notified by the U.S. Treasury that it had been approved for up to $13.086 million.  The Company is currently  evaluating its capital position and has not yet made a decision to accept the capital.  We believe that our current capital levels will be adequate to sustain our operations and growth.





At March 31, 2009, the Company had $6,253,000 outstanding on its line of credit with Silverton Bank, N.A. (formerly The Bankers Bank).  On May 1, 2009, the Office of the Comptroller of the Currency closed Silverton Bank. The FDIC was appointed as Receiver for Silverton Bank, and Silverton Bridge Bank, N.A. has been formed to take over
the operations of Silverton Bank.The stock of our subsidiary banks is pledged as collateral for this loan.  The terms of the line of credit contain certain restrictive covenants including, among others, a requirement of each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets, to be measured quarterly.  At the inception of the loan, the restriction relative to maximum levels of nonperforming assets required that these
assets not exceed 1% of each subsidiary’s total assets.  The Company was in violation of this covenant for the second and third quarters of 2008 for which it received waivers from the lender.  The Company and the lender agreed to amend the covenants such that each subsidiary’s nonperforming assets may not exceed 5% of total assets as of December 31, 2008 and for each quarter of 2009.  Thereafter, this ratio would reduce by 1% during each quarter in 2010 so that the maximum
ratio returns to 1% of total assets by December 31, 2010.





At December 31, 2008, as a result of its impairment of its goodwill and core deposit intangible assets, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio, defined as net income of subsidiary banks for the prior four quarters multiplied by 50%, divided by the annual debt service of the
Company.  The Company is currently negotiating with Silverton Bridge Bank, N.A. to obtain a waiver for these covenant violations as well.  If the Company is in violation of covenants under the loan and is unable to obtain a waiver or amendment of the loan agreement, Silverton Bridge Bank, N.A. would have the right to give notice of default. If the Company is unable to cure the default within fifteen days of notice, then Silverton Bridge Bank, N.A. would have the right to declare the entire
balance of the loan due and payable, which could have a material adverse effect on the Company's liquidity and ability to pay dividends. Management intends to continue to pursue a favorable resolution to this issue, which in addition to the alternatives above, would include repayment of the loan through a payment of special dividends from the subsidiary banks, obtaining financing from another lender, or a combination of the two.





21
 Index




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.





Special Meeting of Shareholders





On January 27, 2009, the Company held its Special Meeting of Shareholders at which time the shareholders approved a proposal to amend its articles of incorporation to authorize a class of ten million (10,000,000) shares of preferred stock, no par value.  This amendment will give the Company the capability to participate in the
U.S. Treasury’s TARP Capital Purchase Program should it elect to do so.





FDIC Special Assessment





On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund. The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment system, and increased
regular premium rates for 2009, which banks must pay on top of the special assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009 payable on September 30, 2009. As a result of the special assessment and increased regular assessments, the Company projects it will experience an increase in FDIC assessment expense by approximately $1.5 million from 2008 to 2009. The 20 basis point special assessment represents $1.0 million of this increase.





On March 5, 2009, the FDIC Chairman announced that the FDIC would consider lowering  the special assessment from 20 basis points to 10 basis points if Congress passes legislation that would expand the FDIC’s line of credit with the Treasury to $100 billion. Legislation to this end is currently before Congress.    If
approved, the special assessment cost to the Company would be reduced by approximately $520,000.




On May 6, 2009, the Senate passed a bill which expand the FDIC's line of credit with the Treasury to $100 billion. This bill is still subject to passage by the House of Representatives and signature by the President.




The assessment rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC. In addition, the bill expanding the FDIC's borrowing authority, also would allow the FDIC to levy bank holding companies for any systemic special assessment if they stand to benefit from government action,
such as the debt guarantee program.






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, 2009.





22
 Index




Commitments and Contractual Obligations


(Dollars in thousands)





Less than
one year


1-3 years


3-5 years


Thereafter


TotalContractual obligationsDeposits having no stated maturity

$
269,611


$
-


$
-


$
-


$
269,611Certificates of Deposit


205,221



51,729



19,320



-



276,270Federal funds purchased


83



-



-



-



83Short-term borrowed funds


1,667



-



-



-



1,667Long-term borrowed funds


-



2,592



1,311



2,976



6,879Deferred compensation


43



289



588



4,086



5,006Construction commitments


614



-



-



-



614Leases


139



157



164



295



755Total contractal obligations

$
477,378


$
54,767


$
21,383


$
7,357


$
560,885CommitmentsCommitments to extend credit

$
25,033


$
-


$
-


$
-


$
25,033Credit card commitments


9,483



-



-



-



9,483Commercial standby letters of credit


987



-



-



-



987Total commitments

$
35,503


$
-


$
-


$
-


$
35,503




23
 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, 2008, which could materially affect our business, financial condition or future results.  The
risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.





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





None.





Item 3.
Defaults upon Senior Securities





None.





24
 Index




Item 4.
Submission of Matters to a Vote of Security Holders





On January 27, 2009, the Company held its Special Meeting of Shareholders at which time the shareholders approved a proposal to amend its articles of incorporation to authorize a class of ten million (10,000,000) shares of preferred stock, no par value.  This amendment will give the Company the capability to participate in the
U.S. Treasury’s TARP Capital Purchase Program should it elect to do so.  Proxies from 2,220,507 shares, representing 56.48% of total shares, voted as follows:  2,106,791 voted yes, 113,248 voted no, and 468 abstained.  There were no broker non-votes.





Item 5.
Other Information





None.





Item 6.
Exhibits





Exhibits





Exhibit No. 31.1
Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)





Exhibit No. 31.2
Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)





Exhibit No. 32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





Exhibit No. 32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




25
 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, 2009
BY:
/s/ Larry T. KuglarLarry T. Kuglar.President and Chief Executive OfficerDATE:  May 15, 2009
BY:
/s/ Douglas J. HerthaDouglas J. HerthaSenior Vice President, Chief Financial Officer







26