SouthCrest Financial Group, Inc. (SCSG) 10-Q 2007 Q2 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

¨ 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 or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨ Accelerated Filer  ¨ Non-Accelerated Filer  x

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 10, 2007: 3,952,328.

SouthCrest Financial Group, Inc.

And Subsidiaries

INDEX

			Page
Part I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets – June 30, 2007 and December 31, 2006	1
		Condensed Consolidated Statements of Income  - Three and Six Months Ended June 30, 2007 and 2006	2
		Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2007 and 2006	3
		Condensed Consolidated Statement of Stockholders' Equity – Six  Months Ended June 30, 2007	4
		Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2007 and 2006	5
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative  Disclosures about Market Risk	21
	Item 4.	Controls and Procedures	21
Part II.	OTHER INFORMATION		21
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk factors.	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	22
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
		Signatures	23

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SouthCrest Financial Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(Unaudited)
(In thousands, except share and per share data)
	June 30,			December 31,
Assets	2007				2006*
Cash and due from banks	$	14,816		$	16,926
Interest-bearing deposits at other financial institutions		5,011			4,881
Federal funds sold		795			12,504
Securities available for sale		63,232			61,519
Securities held to maturity (fair value $62,161 and $66,036)		64,230			67,268
Restricted equity securities, at cost		1,981			2,029
Loans held for sale		303			446
Loans, net of unearned income		336,147			335,006
Less allowance for loan losses		4,674			4,480
Loans, net		331,473			330,526
Bank-owned life insurance		12,781			12,521
Premises and equipment, net		16,807			15,324
Goodwill		9,057			9,057
Intangible assets, net		4,052			4,493
Other assets		6,932			6,523
Total assets	$	531,470		$	544,017
Liabilities, Redeemable Common Stock, and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	74,500		$	80,581
Interest-bearing		372,523			382,041
Total deposits		447,023			462,622
Federal Home Loan Bank advances		5,110			5,165
Federal funds purchased		504			-
Note payable		780			780
Other liabilities		7,371			6,907
Total liabilities		460,788			475,474
Commitments and contingencies
Redeemable common stock held by ESOP		923			988
Stockholders' equity:
Common stock, par value $1; 10,000,000 shares authorized, 3,952,328 issued		3,952			3,952
Additional paid-in capital		50,087			50,034
Retained earnings		15,981			13,740
Accumulated other comprehensive loss		(261	)		(171	)
Total stockholders' equity		69,759			67,555
Total liabilities, redeemable common stock, and stockholders' equity	$	531,470		$	544,017

See Notes to Condensed Consolidated Financial Statements.

* Derived from audited consolidated financial statements.

1

SouthCrest Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
For The Three and Six Months Ended June 30, 2007 and 2006
(Unaudited)
(In thousands, except share and per share data)
	Three Months				Six Months
	2007		2006		2007		2006
Interest income:
Loans	$	6,985	$	5,524	$	13,814	$	10,715
Securities - taxable		1,325		1,224		2,642		2,449
Securities - nontaxable		175		111		353		226
Federal funds sold		109		86		257		187
Interest-bearing deposits at other banks		90		50		173		88
Total interest income		8,684		6,995		17,239		13,665
Interest expense:
Deposits		3,127		2,230		6,218		4,139
Other borrowings		90		141		186		321
Total interest expense		3,217		2,371		6,404		4,460
Net interest income		5,467		4,624		10,835		9,205
Provision for loan losses		77		133		226		241
Net interest income after provision for loan losses		5,390		4,491		10,609		8,964
Other income:
Service charges on deposit accounts		920		859		1,735		1,651
Other service charges and fees		345		282		617		527
Net gain on sale of loans		82		37		186		71
Income on bank-owned life insurance		133		59		260		93
Other operating income		117		98		254		223
Total other income		1,597		1,335		3,052		2,565
Other expenses:
Salaries and employee benefits		2,538		2,011		4,953		3,953
Equipment and occupancy expenses		489		380		956		760
Amortization of intangibles		226		207		446		413
Other operating expenses		1,407		1,111		2,638		2,190
Total other expenses		4,660		3,709		8,993		7,316
Income before income taxes		2,327		2,117		4,668		4,213
Income tax expense		728		691		1,464		1,381
Net income	$	1,599	$	1,426	$	3,204	$	2,832
Basic and diluted earnings per share	$	0.40	$	0.40	$	0.81	$	0.79
Dividends per share	$	0.130	$	0.125	$	0.260	$	0.250
Average shares outstanding - basic and diluted		3,952,328		3,581,193		3,952,328		3,581,193

See Notes to Condensed Consolidated Financial Statements.

2

Condensed Consolidated Statements of Comprehensive Income
For The Three and Six Months Ended June 30, 2007 and 2006
(Unaudited)
(In thousands)
	Three Months						Six Months
	2007			2006			2007			2006
Net income	$	1,599		$	1,426		$	3,204		$	2,832
Other comprehensive income:
Unrealized holding gains (losses) on securities available for sale arising during the period, net of taxes of  $(121), $(112), $(56), and $(100)		(195	)		(187	)		(90	)		(166	)
Comprehensive income	$	1,404		$	1,239		$	3,114		$	2,666

See Notes to Condensed Consolidated Financial Statements.

3

SouthCrest Financial Group, Inc.
And Subsidiaries
Consolidated Statement of Stockholders' Equity
For The Six Months Ended June 30, 2007
(Unaudited)
(In thousands, except share and per share data)
										Accumulated
					Additional					Other			Total
	Common Stock				Paid-In		Retained			Comprehensive			Stockholders'
	Shares		Par		Capital		Earnings			Loss			Equity
Balance, December 31, 2006		3,952,328	$	3,952	$	50,034	$	13,740		$	(171	)	$	67,555
Net income		-		-		-		3,204			-			3,204
Cash dividends declared, $.26 per share		-		-		-		(1,028	)		-			(1,028	)
Stock-based compensation		-		-		53		-			-			53
Adjustment for shares owned by ESOP		-		-		-		65			-			65
Other comprehensive income		-		-		-		-			(90	)		(90	)
Balance, June 30, 2007		3,952,328	$	3,952	$	50,087	$	15,981		$	(261	)	$	69,759

See Notes to Condensed Consolidated Financial Statements.

4

SouthCrest Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2007 and 2006
(Unaudited)
(In thousands)
	2007			2006
OPERATING ACTIVITIES
Net income	$	3,204		$	2,832
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		509			384
Amortization of intangibles		446			410
Other amortization		120			60
Provision for loan losses		226			241
Stock compensation expense		53			48
Deferred income taxes		(226	)		(273	)
Income on bank-owned life insurance		(260	)		(92	)
(Increase) decrease in interest receivable		56			(117	)
Increase in income taxes payable		116			50
Increase in interest payable		94			338
Net gain on sale of loans		(134	)		(71	)
Originations of mortgage loans held for sale		(6,685	)		(7,159	)
Proceeds from sales of mortgage loans held for sale		6,962			7,002
Decrease in other assets		254			183
Increase in other liabilities		46			349
Net cash provided by operating activities		4,781			4,185
INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity		3,006			4,096
Purchases of securities available for sale		(10,918	)		(4,000	)
Proceeds from maturities of securities available for sale		8,070			1,502
Proceeds from sales of securities available for sale		1,003			-
Proceeds from redemption of restricted equity securities		48			134
Net (increase) decrease in interest-bearing deposits in banks		(130	)		495
Net decrease in federal funds sold		11,709			3,195
Net increase in loans		(1,509	)		(10,593	)
Purchase of premises and equipment		(1,992	)		(2,160	)
Proceeds from sale of other real estate owned		-			472
Purchase of life insurance contracts		-			(3,601	)
Net cash provided by (used in) investing activities		9,287			(10,460	)
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(15,599	)		11,276
Principal repayments on Federal Home Loan Bank advances		(55	)		(5,055	)
Net increase in federal funds purchased		504			1,595
Dividends paid		(1,028	)		(896	)
Net cash provided by (used in) financing activities		(16,178	)		6,920
Net increase (decrease) in cash and due from banks		(2,110	)		645
Cash and due from banks at beginning of year		16,926			15,930
Cash and due from banks at end of period	$	14,816		$	16,575

See Notes to Condensed Consolidated Financial Statements.

5

SouthCrest Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
For The Six Months Ended June 30, 2007 and 2006
(Unaudited)
(In thousands)
	2007			2006
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	6,310		$	4,122
Income taxes		1,416			1,604
NONCASH TRANSACTIONS
Principal balances of loans transferred to other real estate owned	$	296		$	166
(Decrease) increase in redeemable common stock held by ESOP		(65	)		21
Unrealized loss on securities available for sale, net		(90	)		(166	)

See Notes to Condensed Consolidated Financial Statements.

6

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”), and Peachtree Bank (“Peachtree”).  All of the subsidiary banks (collectively, the “Banks”) are commercial banks that provide a full range of banking services within their primary market areas.  Upson is headquartered in Thomaston, Upson County, Georgia with six branches located in Thomaston, Fayetteville, Manchester, Warm Springs and Luthersville, Georgia, serving its primary market area of Upson, Fayette, Meriwether and the surrounding counties.  FNB Polk is located in Cedartown, Polk County, Georgia with two branches in Cedartown, Georgia and one branch in Rockmart, Georgia.  FNB Polk primarily serves the market area of Polk County.  Peachtree is headquartered in Maplesville, Chilton County, Alabama with one branch in Maplesville and another in Clanton, Alabama.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. 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, 2006 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, and Peachtree Bank.  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 June 30, 2007 and 2006, the Company had 191,400 and 183,500 options outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan.  For the three and six month periods ended June 30, 2007 and 2006, these options were nondilutive.   The weighted average number of shares outstanding was 3,952,328 and 3,581,193 for the three and six month periods ended June 30, 2007 and 2006.

NOTE 3 - STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued by the Financial Accounting Standards Board (“FASB”) in December 2004.  SFAS No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and its related interpretations.  SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period).  SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award.  SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

7

The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R.  Accordingly, prior period amounts have not been restated.  Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.

At June 30, 2007, the Company maintained one share-based compensation plan, the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Plan”), approved at the Company’s annual shareholders’ meeting held on May 12, 2005.  The compensation cost that has been charged against income for the Plan was $26,330 and $23,770 for the three month periods ending June 30, 2007 and 2006, respectively, and $52,660 and $47,540 for the six month periods ending June 30, 2007 and 2006, respectively.  The Company recorded no deferred tax benefit in 2007 or 2006 because all of the compensation cost was related to incentive (tax qualifying) stock options.

The Plan provides for up to 549,000 shares of common stock to be awarded in the form of stock options. Options are granted at the fair market value of the Company’s common stock on the date of grant. All options under the Plan expire ten years from the date of grant.  At June 30, 2007, 191,400 options had been granted.  Of these options, 104,000 were not tax qualifying and were fully vested on the date of grant, while 87,400 options were tax qualifying and vest over 60 months.  At June 30, 2007, 357,600 options were available for grant.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.  The Company did not grant options during the six month periods ended June 30, 2007 and 2006.

A summary of option activity under the Plan as of June 30, 2007, and changes during the three month period ended June 30, 2007 is presented below:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Shares		Price		Term		Value
Outstanding at December 31, 2006		191,400	$	23.44
Options granted		-		-
Options exercised		-		-
Options forfeited		-		-
Outstanding at June 30, 2007		191,400	$	23.44		8.47	$	108,000
Exercisable at June 30, 2007		119,900	$	23.45		8.47	$	66,000

For the quarter ended June 30, 2007, no options were granted, exercised or became fully vested.

As of June 30, 2007, there was $378,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements.  That cost is expected to be recognized over a weighted-average period of 3.6 years.

8

NOTE 4 — LOANS RECEIVABLE

The composition of loans at June 30, 2007 and December 31, 2006 is summarized as follows:

	June 30,			December 31,
(Dollars In Thousands)	2007			2006
Commercial, financial, and agricultural	$	23,769		$	23,996
Real estate – construction		69,270			59,745
Real estate – mortgage		203,598			211,676
Consumer		33,061			33,690
Other		6,605			6,058
		336,303			335,165
Unearned income		(156	)		(159	)
Allowance for loan losses		(4,674	)		(4,480	)
Loans, net	$	331,473		$	330,526

Changes in the allowance for loan losses are as follows:

	June 30,			December 31,
(Dollars In Thousands)	2007			2006
Balance, beginning of year	$	4,480		$	3,477
Provision for loan losses		226			839
Loans charged off		(344	)		(903	)
Recoveries of loans previously charged off		312			436
Allowance acquired in business combination		-			631
Balance, end of year	$	4,674		$	4,480

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

	June 30,		December 31,
(Dollars In Thousands)	2007		2006
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		178		479
Total impaired loans	$	178	$	479
Valuation allowance related to impaired loans	$	27	$	38
Average investment in impaired loans	$	235	$	614

There were $178,000 and $479,000 loans on nonaccrual status at June 30, 2007 and December 31, 2006.  Loans of  $368,000 and $1,015,000 were past due ninety days or more and still accruing interest at June 30, 2007 and December 31, 2006, respectively.

9

NOTE 5 — DEPOSITS

At June 30, 2007 and December 31, 2006, deposits were as follows:

	June 30,		December 31,
(Dollars In Thousands)	2007		2006
Noninterest bearing deposits	$	74,500	$	80,581
Interest checking		66,643		72,386
Money market		61,781		56,461
Savings		35,553		35,542
Certificates of deposit		208,546		217,652
	$	447,023	$	462,622

NOTE 6 — NEW ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This statement requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset, and that the servicing assets and servicing liabilities be initially measured at fair value. The statement also permits an entity to choose a subsequent measurement method for each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 156 as of January 1, 2007 and it did not have a material impact on the Company’s financial condition or results of operations.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 effective January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.  The years 2003 through 2006 are still subject to audit for our Federal, Georgia, and Alabama income tax returns.  The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operation.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides for enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is applicable under other accounting pronouncements that either require or permit fair value measurements and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet evaluated the impact of the implementation of SFAS No. 157.

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. The Company has not yet evaluated the impact of the implementation of EITF Issue 06-4.

In September 2006, the FASB ratified EITF Issue 06-5, Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin (“FTB”) No. 85-4, Accounting for Purchases of Life Insurance. This Issue addresses how an entity should determine the amount that could be realized under the insurance contract at the balance sheet date in applying FTB 85-4 and if the determination should be on an individual or group policy basis. EITF Issue 06-5 is effective for fiscal years beginning after December 15, 2006. The Company’s adoption EITF Issue 06-5 effective January 1, 2007 did not have a material effect on the Company’s financial statements.

10

In February 2007, the FASB issued SFAS No. 159, TheFair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this standard is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of fiscal years beginning after November 15, 2007, with early adoption permitted under certain circumstances. The Company did not choose to early adopt this standard.

NOTE 7 – COMPLETION OF MERGER WITH MAPLESVILLE BANCORP

On October 31, 2006, the Company completed its merger with Maplesville Bancorp. (“Maplesville”), a Maplesville, Alabama based bank holding company and the parent company of Peachtree Bank (“Peachtree”).  In connection with the merger,  shareholders of Maplesville received approximately 371,135 shares of SouthCrest stock and $7,557,000 in cash.  The merger was accounted for using the purchase method of accounting.  Accordingly, results of operations for Peachtree Bank are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $17.3 million, which includes merger costs of $254,000, was allocated to the fair values of Maplesville’s assets and liabilities.  As a result, the Company recorded a core deposit intangible of $1,052,000 and goodwill of $6,392,000.  The core deposit intangible is being amortized on an accelerated basis over the estimated life of the deposits.

The following schedule presents pro forma information for revenues and net income as if the combination with Maplesville had occurred on January 1, 2006. Revenues include interest income plus other income less proforma merger adjustments affecting revenues. Net income includes the net income of the two entities less the proforma affect of merger adjustments, including the amortization of intangibles:

(Dollars in thousands except per share amounts)
	Three Months				Six Months
	2007		2006		2007		2006
Revenues	$	10,281	$	9,399	$	20,291	$	18,182
Net income	$	1,599	$	1,662	$	3,204	$	3,279
Earnings per share	$	0.40	$	0.42	$	0.81	$	0.83

NOTE 8 – SUBSEQUENT EVENT

On July 1, 2007 the Company completed its acquisition of Bank of Chickamauga pursuant to the definitive agreement entered into on February 23, 2007.  The shareholders of Chickamauga will received an aggregate of $18 million cash, less certain costs related to the termination of the Chickamauga defined benefit plan.  The merger will be accounted for under the purchase method of accounting. Accordingly, assets and liabilities of Bank of Chickamauga and its results of operations will only be recorded in the consolidated financial statements of the Company prospectively from the date of merger. The Company estimates that goodwill of approximately $3.7 million will be recorded in connection with the merger.

To fund the payments to the Chickamauga shareholders, the Company’s subsidiary banks paid $15 million in special dividends to the parent.  Additionally, the Company received an increase in its line of credit from $5.5 million to $8.0 million on the same terms and conditions as previously existed on the loan.  The interest rate for the line of credit is Prime minus 0.50%.  The Company drew $3 million on this line in connection with the merger.

Chickamauga maintains two offices in the City of Chickamauga.  Chickamauga is located in Walker County, Georgia.  At June 30, 2007, Chickamauga had approximately $67.2 million in assets, $49.8 million in deposits, and capital of $13.8 million.

11

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, and Peachtree Bank, during the period included in the accompanying consolidated financial statements.   The purpose of this discussion is to focus on information about our financial condition and results of operations that are not otherwise apparent from our consolidated financial statements.  Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.

Forward Looking Statements

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

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

Critical Accounting Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements for the year ended December 31, 2006 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, 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.

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Financial Condition

During the six months ended June 30, 2007, our total assets decreased $12.5 million to $531.5 million at June 30,  2007.   This decline in total assets was primarily the result of a decline in deposits which resulted in a reduction of our federal funds sold.

During the year to date period, total loans increased $1.1 million, or 0.3%, while loans held for sale decreased $143,000.  Securities available for sale increased $1.7 million while securities held to maturity decreased $3.0 million due to maturities.  Federal funds sold declined $11.7 million.

During the year to date period ended June 30, 2007 deposits decreased $15.6 million or 3.4%.  Significant components of the decline included a $6.1 million decline in noninterest bearing deposits, a $5.7 million decrease in interest checking accounts, and a $9.1 million decline in certificates of deposit.  Money market accounts increased $5.3 million.  The decline in noninterest bearing accounts is attributable to declines in deposits of local governments.  The decline in certificate accounts is primarily due to the maturity of a certificate issued to a local government.  At June 30, 2007 we had purchased $504,000 million 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. We believe that our cash flows and liquidity levels are adequate to support the Company’s loan growth.

Our total stockholders’ equity has increased by $2.2 million since December 31, 2006, primarily due to net income for the quarter, net of dividends paid to shareholders.  In addition, the Company experienced a $90,000 increase in the unrealized losses on securities available for sale, net of deferred taxes.

Loan Portfolio. The following table presents various categories of loans contained in the loan portfolios of the subsidiary banks as of June 30, 2007 and December 31, 2006:

	June 30,			December 31,
(Dollars In Thousands)	2007			2006
Commercial, financial, and agricultural	$	23,769		$	23,996
Real estate – construction		69,270			59,745
Real estate – mortgage		203,598			211,676
Consumer		33,061			33,690
Other		6,605			6,058
		336,303			335,165
Unearned income		(156	)		(159	)
Allowance for loan losses		(4,674	)		(4,480	)
Loans, net	$	331,473		$	330,526

Nonaccrual, Past Due and Restructured Loans. The following table presents various categories of nonaccrual, past due and restructured loans in the Banks’ loan portfolios as of June 30, 2007 and December 31, 2006:

	June 30,		December 31,
(Dollars In Thousands)	2007		2006
Nonaccrual loans	$	178	$	479
Loans past due 90 days or more and still accruing	$	368	$	1,015
Loans restructured under troubled debt	$	-	$	-

Nonaccrual loans decreased $148,000 during the quarter ended June 30, 2007 decreasing from $326,000 to $178,000.  Nonaccrual loans at June 30, 2007 included $273,000 in loans secured by first mortgage loans on single family dwellings.  The largest of these loans was $119,000.  The Company believes that there is limited risk of loss for the nonaccrual loans secured by single family dwellings.  In total, the Company has recorded a valuation allowance of $27,000 related to nonaccrual loans at June 30, 2007.

Information regarding impaired loans as of June 30, 2007 and December 31, 2006 are as follows:

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	June 30,		December 31,
(Dollars In Thousands)	2007		2006
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		178		479
Total impaired loans	$	178	$	479
Valuation allowance related to impaired loans	$	27	$	38
Average investment in impaired loans	$	235	$	614

Summary of Loan Loss Experience. An analysis of SouthCrest’s loan loss experience is included in the following table for the periods ended June 30, 2007 and 2006:

Analysis of Allowance for Loan Losses
For The Three and Six Months Ended June 30, 2007
(Dollars In Thousands)	Three Months						Six Months
	2007			2006			2007			2006
Balance at beginning of period	$	4,667		$	3,625		$	4,480		$	3,477
Chargeoffs
Commercial loans		27			-			47			-
Real estate - construction		-			-			-			-
Real estate - mortgage		-			1			-			1
Consumer		135			77			239			143
Other		24			23			58			59
Total Chargeoffs		186			101			344			203
Recoveries
Commercial loans		22			-			26			-
Real estate - construction		-			5			-			5
Real estate - mortgage		-			-			4			4
Consumer		77			76			233			172
Other		17			21			49			63
Total recoveries		116			102			312			244
Net (chargeoffs) recoveries		(70	)		1			(32	)		41
Additions charged to operations		77			133			226			241
Balance at end of period	$	4,674		$	3,759		$	4,674		$	3,759
Annualized ratio of net chargeoffs (recoveries)  during the period to average loans outstanding during the period		0.08	%		0.00	%		0.02	%		-0.03	%

Allowance for Loan Losses.  The allowance for loan losses as of June 30, 2007 was $4,674,000 compared to $4,480,000 at December 31, 2006 and $3,759,000 at June 30, 2006.  Of the increase in the allowance since June 30, 2006, $643,000 relates to addition to the allowance attributable to the merger with Maplesville Bancorp in the fourth quarter of 2006.  As a percentage of gross loans, the allowance for loan losses was 1.39% at June 30, 2007 compared to 1.34% as of December 31, 2006 and 1.30% at June 30, 2006. The provision for loan losses during the six-month period ended June 30, 2007 of $226,000 was the result of management's assessment of risks inherent in the loan portfolio.  Management’s estimate of the allowance for loan losses utilizes a loan grading system to assign a risk grade to each loan based on factors such as the quality of collateral securing a loan, the financial condition of the borrower and the payment history of each loan.  Based on net charge-off history experienced for each category within the loan portfolio, as well as general economic factors affecting the lending market, management assigns an estimated allowance range for each risk grade within each of the loan categories.  Management then estimates the required allowance, which may also include a portion that is not allocated to a specific category of the loan portfolio, but which management deems is necessary based on the overall risk inherent in the loan portfolio.  The estimation of the allowance may change due to fluctuations in the factors noted above as well as changes in the trends of net charge-offs, past due loans, and general economic conditions of the markets served by the Company’s subsidiary banks.

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

Results of Operations For The Three and Six Months Ended June 30, 2007 and 2006

Net income for the three-month period ended June 30, 2007 amounted to $1,599,000, or $0.40 basic and diluted earnings per share, compared to net income of $1,426,000 or $0.40 basic and diluted earnings per share for the same three-month period in 2006, an increase of $176,000, or 12.1%.  Of this increase, approximately $231,000 is attributable to the net earnings of Peachtree Bank.  Net income for the six-month period ended June 30, 2007 amounted to $3,204,000, or $0.81 basic and diluted earnings per share, compared to net income of $2,832,000 or $0.79 basic and diluted earnings per share for the same six-month period in 2006, an increase of $372,000, or 13.1%.  Of this increase, approximately $448,000 is attributable to the net earnings of Peachtree Bank.       Results of operations for Peachtree Bank are not included in the results for the periods ended June 30, 2006 as its net earnings are only included prospectively from the October 31, 2006 merger date with Maplesville Bancorp.

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

Net interest income for the three months ended June 30, 2007 increased $843,000 or 18.2% over the same period in 2006.  Excluding the impact of Peachtree, net interest income would have increased $194,000 or 4.2%.  The primary reason for the increase in net interest income is the growth in the average balance of the loan portfolio of $51.0 million during the quarter ended June 30, 2007 compared to the same period in 2006.  This growth, along with an increase in the average yield on loans from 7.84% in 2006 to 8.40% in 2007, resulted in a $1.5 million increase in interest income earned on loans in 2007 over 2006.  Increases in the prime interest rate, resulting from Federal Reserve increases in the discount rate, contributed to the increase in the loan yield for the 2007 period compared to 2006.  The portion of total earning assets comprised by loans increased from 67.8% for the 2006 period to 69.6% for 2007.  This change in the mix of our earning assets contributed to the 54 basis point increase in the average yield on earning assets as loans earn a higher rate of interest than investment securities and other earning assets.

The average cost of funds increased 55 basis points to 3.39% for the three months ended June 30, 2007 compared to the same period in 2006.  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.  In addition, interest rates on these funds have increased over last year as a result of increases in the Federal Reserve discount rate, and in case of certificates of deposits, competition from other banks for such funds.

These changes resulted in the net yield on earning assets increasing 12 basis points from 4.45% for the quarter ended June 30, 2006 to 4.57% for the current year period.  The net interest spread decreased from 3.89% in 2006 to 3.88% in 2007.

The following presents, for the three month periods ended June 30, 2007 and 2006, the main components of interest earning assets and interest bearing liabilities and related interest income and expense and effective yields and cost of funds.

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Average Consolidated Balance Sheets and Net Interest Income Analysis
For the Three Month Periods Ended June 30,
(Dollars in thousands)
	Average Balances (1)						Yields / Rates						Income / Expense				Increase			Change Due to
	2007			2006			2007			2006			2007		2006		(Decrease)			Rate			Volume
Assets
Loans, including fee income	$	333,674		$	282,696			8.40	%		7.84	%	$	6,985	$	5,524	$	1,461		$	414		$	1,047
Taxable securities		114,207			111,707			4.65	%		4.39	%		1,325		1,224		101			73			28
Nontaxable securities		18,194			11,634			3.86	%		3.83	%		175		111		64			1			63
Federal funds sold		8,019			7,253			5.45	%		4.76	%		109		86		23			13			10
Interest bearing deposits in banks		5,282			3,805			6.83	%		5.27	%		90		50		40			17			23
Total earning assets		479,376			417,095			7.27	%		6.73	%		8,684		6,995		1,689			518			1,171
Cash and due from banks		12,554			11,243
Allowance for loan losses		(4,668	)		(3,686	)
Other assets		48,806			29,721
Total	$	536,068		$	454,373
Liabilities and Equity
Interest bearing demand (2)	$	127,651		$	112,058			1.90	%		1.62	%	$	605	$	452	$	153		$	85		$	68
Savings		36,035			35,092			0.69	%		0.58	%		62		51		11			10			1
Certificates of deposit		210,396			176,705			4.69	%		3.92	%		2,460		1,727		733			372			361
Total interest bearing deposits		374,082			323,855			3.35	%		2.76	%		3,127		2,230		897			467			430
Borrowed funds		6,457			11,137			5.59	%		5.08	%		90		141		(51	)		82			(133	)
Total interest bearing liabilities		380,539			334,992			3.39	%		2.84	%		3,217		2,371		846			549			297
Noninterest bearing demand deposits		78,128			62,038
Other liabilities		7,324			1,606
Redeemable common stock held by ESOP		996			1,018
Shareholders' equity		69,081			54,719
Total	$	536,068		$	454,373
Net interest income													$	5,467	$	4,624	$	843		$	(31	)	$	874
Net interest yield on earning assets								4.57	%		4.45	%
Net interest spread								3.88	%		3.89	%

(1) Daily averages. Loans include nonaccrual loans.          

(2) Includes money market accounts                                 

The following presents, for the six month periods ended June 30, 2007 and 2006, the main components of interest earning assets and interest bearing liabilities and related interest income and expense and effective yields and cost of funds.

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Average Consolidated Balance Sheets and Net Interest Income Analysis
For the Six Month Periods Ended June 30,
(Dollars in thousands)
	Average Balances (1)						Yields / Rates						Income / Expense				Increase			Change Due to
	2007			2006			2007			2006			2007		2006		(Decrease)			Rate			Volume
Assets
Loans, including fee income	$	333,302		$	279,406			8.36	%		7.73	%	$	13,814	$	10,715	$	3,099		$	920		$	2,179
Taxable securities		114,432			112,726			4.66	%		4.38	%		2,642		2,449		193			156			37
Nontaxable securities		18,234			11,648			3.90	%		3.91	%		353		226		127			(2	)		129
Federal funds sold		9,273			7,090			5.59	%		5.32	%		257		187		70			10			60
Interest bearing deposits in banks		5,097			3,621			6.84	%		4.90	%		173		88		85			42			43
Total earning assets		480,338			414,491			7.24	%		6.65	%		17,239		13,665		3,574			1,126			2,448
Cash and due from banks		13,118			11,920
Allowance for loan losses		(4,626	)		(3,621	)
Other assets		48,441			28,613
Total	$	537,271		$	451,403
Liabilities and Equity
Interest bearing demand (2)	$	127,268		$	112,606			1.84	%		1.51	%	$	1,160	$	845	$	315		$	198		$	117
Savings		36,040			35,467			0.71	%		0.59	%		126		103		23			21			2
Certificates of deposit		212,152			171,597			4.69	%		3.75	%		4,932		3,191		1,741			896			845
Total interest bearing deposits		375,460			319,670			3.34	%		2.61	%		6,218		4,139		2,079			1,115			964
Borrowed funds		6,620			13,175			5.67	%		4.91	%		186		321		(135	)		121			(256	)
Total interest bearing liabilities		382,080			332,845			3.38	%		2.70	%		6,404		4,460		1,944			1,236			708
Noninterest bearing demand deposits		78,345			61,338
Other liabilities		7,414			1,878
Redeemable common stock held by ESOP		968			999
Shareholders' equity		68,464			54,343
Total	$	537,271		$	451,403
Net interest income													$	10,835	$	9,205	$	1,630		$	(110	)	$	1,740
Net interest yield on earning assets								4.55	%		4.48	%
Net interest spread								3.86	%		3.95	%

(1) Daily averages. Loans includes nonaccrual loans.          

(2) Includes money market accounts                                 

Net interest income for the six months ended June 30, 2007 increased $1,630,000 or 17.7% over the same period in 2006.  Excluding the impact of Peachtree, net interest income would have increased $356,000 or 3.9%.  The primary reason for the increase in net interest income is the growth in the average balance of the loan portfolio of $54.0 million during the quarter ended June 30, 2007 compared to the same period in 2006.  This growth, along with an increase in the average yield on loans from 7.73% in 2006 to 8.36% in 2007, resulted in a $3.1 million increase in interest income earned on loans in 2007 over 2006.  Increases in the prime interest rate, resulting from Federal Reserve increases in the discount rate, contributed to the increase in the loan yield for the 2007 period compared to 2006.  The portion of total earning assets comprised by loans increased from 67.4% for the 2006 period to 69.4% for 2007.  This change in the mix of our earning assets contributed to the 59 basis point increase in the average yield on earning assets as loans earn a higher rate of interest than investment securities and other earning assets.

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The average cost of funds increased 68 basis points to 3.38% for the six months ended June 30, 2007 compared to the same period in 2006.  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.  In addition, interest rates on these funds have increased over last year as a result of increases in the Federal Reserve discount rate, and in case of certificates of deposits, competition from other banks for such funds.

These changes resulted in the net yield on earning assets increasing one basis point from 4.48% for the six months ended June 30, 2006 to 4.55% for the current year period.  The net interest spread decreased from 3.95% in 2006 to 3.86% in 2007.

Other Income. Total other income for the three-month period ended June 30, 2007 amounted to $1,597,000, compared to $1,335,000 for the same period in 2006, an increase of $262,000.  The addition of Peachtree accounted for $235,000 of this increase.  Other income for the six-month period ended June 30, 2007 amounted to $3,052,000, compared to $2,565,000 for the same period in 2006, an increase of $487,000.  The addition of Peachtree accounted for $379,000 of this increase.

For the three month period, service charges on deposit accounts declined $120,000 excluding the impact of Peachtree due to a $115,000 reduction in NSF fees earned.  For the six month period, service charges on deposit accounts declined $215,000 due to a $218,000 reduction in NSF fees earned.  For the three month periods ended June 30, 2007 other service charges and fees increased $61,000 exclusive of Peachtree and results primarily from a $16,000 increase in fees earned from brokerage services and a $9,000 increase in ATM fees.  For the six month period, other service charges and fees increased $87,000 exclusive of Peachtree and results primarily from a $39,000 increase in debit card fees, the result of increased usage by the banks’ customers, a $27,000 increase in brokerage services, and a $12,000 increase in ATM fees.

For the three months ended June 30, 2007, net gain on sale of loans increased $20,000 (excluding Peachtree) due to recognition of mortgage servicing rights of $44,000 in the current year.  For the six month period, net gain on sale of loans exclusive of Peachtree increased $90,000 due to recognition of mortgage servicing rights of $89,000.   The following presents the activity in the Company’s mortgage servicing rights in 2007:

	Three			Six
(Dollars In Thousands)	Months			Months
Beginning balance	$	418		$	375
Servicing rights recognized		74			142
Amortization		(76	)		(101	)
Balance at June 30, 2007	$	416		$	416

Exclusive of Peachtree, income recognized on bank-owned life insurance increased $53,000 for the three months ended June 30, 2007.  For the year to date period, income recognized on bank-owned life insurance increased $125,000 exclusive of Peachtree.  The higher income earned in 2007 results from insurance contracts purchased in the third and fourth quarters of 2006.  Exclusive of Peachtree, other income increased $13,000 for the three month period and $21,000 for the six month period.

Other Expenses.  Other expenses for the three-month period ended June 30, 2007 amounted to $4,660,000 compared to $3,709,000 for the same period in 2006, an increase of $951,000 or 25.6%.  Excluding the impact of Peachtree, these expenses increased $647,000 or 17.5%.  For the six months ended June 30, 2007, other expenses increased $384,000 exclusive of Peachtree, or 10.4%.

The largest component of other expenses is salaries and employee benefits, which excluding the impact of Peachtree increased $229,000 for the three month period and $465,000 for the six month period.  The significant causes of this increase include an increase in salaries of $144,000 (including cost of living and merit increases as well as costs attributable to new hires) and an increase in incentive expense of $68,000.  For the six month period, the increase in cost is attributable to increased salaries of  $297,000 higher incentive expense of $135,000.

The compensation cost that was charged against income for our stock option plans was $27,000 and $24,000 for the three months ended June 30, 2007 and 2006, respectively, and $53,000 and $48,000 for the six month periods ended June 30, 2007 and 2006.  The total compensation cost related to nonvested awards not yet recognized at June 30, 2007 is $378,000 which will be recognized over the weighted average period of approximately 3.6 years.  See “Note 3 – Stock Compensation Plans” in the notes to condensed consolidated financial statements for further information.

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For the three month period ended June 30, 2007, amortization of intangibles increased $19,000.  Amortization of the core deposit intangible recorded in conjunction with the acquisition of Peachtree Bank amounted to $33,000 for the quarter.  For the six month period, amortization expense increased $33,000 of which $66,000 relates to the Peachtree acquisition.  Occupancy expenses increased $109,000 for the quarter of which $44,000 relates to Peachtree.  Excluding the addition of Peachtree, occupancy expenses increased $65,000 which includes $52,000 of higher depreciation costs, due primarily to depreciation recorded in 2007 associated with the renovation of the main office of Bank of Upson which was still under construction during 2006.  For the six month period, occupancy expenses increased $196,000, or $104,000 exclusive of Peachtree, which includes $82,000 in higher depreciation costs.  Other operating expenses increased $296,000 for the three months or $104,000 excluding the impact of Peachtree.  For the six month period, other operating expenses increased $448,000 or $109,000 excluding the impact of Peachtree.

Income Taxes.  The Company recorded income taxes totaling $728,000 and $691,000 for the three-month periods ending June 30, 2007 and 2006, respectively.  Effective tax rates for the periods were 31.3% and 32.6%, respectively.  For the six months ended June 30, 2007 and 2006, income taxes totaled $1,464,000 and $1,381,000, respectively.  Effective tax rates were 31.4% and 32.8%, 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 June 30, 2007, we believe our liquidity, as determined under guidelines established by regulatory authorities and internal policies, was satisfactory.

If needed, we have the ability on a short-term basis to borrow and purchase Federal funds from other financial institutions.  At June 30, 2007, we had available to us additional federal funds lines of credit totaling $22.3 million in place with three banks and  $37.0 million of available funds on our line of credit with the Federal Home Loan Bank of Atlanta.

As disclosed in Note 8 of Notes to Condensed Consolidated Financial Statements, on July 1, 2007 the Company completed its acquisition of Bank of Chickamauga for $18 million in cash less certain costs related to the termination of the Bank of Chickamauga defined benefit plan.  To fund the acquisition, the Company borrowed $3 million against its line of credit and obtained $15 million in special dividends from its subsidiary banks, including $8 million from the Bank of Chickamauga and $3.5 million each from Upson and FNB Polk.  The banks were able to pay these special dividends from their existing liquidity.

At June 30, 2007, our capital ratios were adequate based on regulatory minimum capital requirements. The minimum capital requirements and the actual capital ratios on a consolidated and bank-only basis are as follows:

				Minimum
				Required
	Minimum			to be Well
	Required			Capitalized			Consolidated			Upson			Polk			Peachtree
Risk-based capital ratios
Total risk based capital		8.00	%		10.00	%		16.95	%		15.34	%		20.94	%		15.14	%
Tier 1		4.00	%		6.00	%		15.69	%		14.10	%		19.69	%		13.90	%
Tier 1 leverage ratio		4.00	%		5.00	%		11.12	%		10.50	%		12.69	%		9.85	%

The capital ratios shown above do not reflect the special dividend paid by Upson or FNB Polk in connection with the Chickamauga acquisition as described above.  After payment of those dividends, both Upson and FNB Polk remained well-capitalized.

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 June 30, 2007.

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Commitments and Contractual Obligations
(Dollars in thousands)
	Less than
	one year		1-3 years		3-5 years		Thereafter		Total
Contractual obligations
Deposits having no stated maturity	$	238,477	$	-	$	-	$	-	$	238,477
Certificates of Deposit		172,269		26,375		9,902		-		208,546
Federal funds purchased		504		-		-		-		504
FHLB advances and other borrowed funds		110		5,156		156		468		5,890
Deferred compensation		23		46		236		2,646		2,951
Leases		114		230		164		335		843
Total contractual obligations	$	411,497	$	31,807	$	10,458	$	3,449	$	457,211
Commitments
Commitments to extend credit	$	39,927	$	-	$	-	$	-	$	39,927
Credit card commitments		9,293		-		-		-		9,293
Commercial standby letters of credit		925		-		-		-		925
Total commitments	$	50,145	$	-	$	-	$	-	$	50,145

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ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of June 30, 2007, SouthCrest’s market risk profile has not changed significantly from December 31, 2006. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.

ITEM 4. Controls and Procedures

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

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

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

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

As disclosed in Notes 7 and 8 of the Notes to Condensed Consolidated Financial Statements, on October 31, 2006 SouthCrest completed its acquisition of Maplesville Bancorp, the parent of Peachtree Bank, and on July 1, 2007 it completed its acquisition of Bank of Chickamauga (collectively “the acquired banks” or “the acqisitions”).  If SouthCrest does not successfully integrate the acquired banks into its business, SouthCrest may not realize the expected benefits from its acquisitions.    SouthCrest may encounter unforeseen expenses, as well as difficulties and complications in integrating the operations of the acquired banks with its overall operations.  SouthCrest expects that it be able to maintain most of the acquired banks’ key customers and personnel and integrate their operating systems and procedures with those of SouthCrest with a minimal amount of costs and diversion of management time and attention.  If SouthCrest is unable to integrate the acquired banks in a timely manner or experiences disruptions with their customer relationships, the anticipated benefits of the acquisitions may not be realized and SouthCrest’s results of operations may be adversely affected.

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, 2006, 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.

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

 The Company made no repurchases of its common stock during the quarter ended June 30, 2007.

Item 3. Defaults upon Senior Securities

 None.

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

The Company held its annual meeting on May 12, 2007.  The following directors were elected as for terms to expire as indicated:

Name	Term to Expire	Votes For	Votes Withheld	Broker Nonvotes
Harvey Clapp	2008	3,130,443	6,000	259,196
Joan B. Cravey	2010	3,122,665	13,778	259,196
Dr. Warren Patrick	2010	3,132,043	4,400	259,196
Harold W. Wyatt, Jr.	2010	3,132,043	4,400	259,196

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

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SIGNATURES

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

SOUTHCREST FINANCIAL GROUP, INC.

(Registrant)

DATE:  August 14, 2007	BY:	/s/ Larry T. Kuglar
		Larry T. Kuglar.
		President and Chief Executive Officer
DATE:  August 14, 2007	BY:	/s/ Douglas J. Hertha
		Douglas J. Hertha
		Senior Vice President, Chief Financial Officer

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