SouthCrest Financial Group, Inc. (SCSG) 10-Q 2008 Q2 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

___________________________

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

For the quarterly period ended  June 30, 2008

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

For the transition period from __________ to __________

Commission File Number: 000-51287

___________________________

SouthCrest Financial Group, Inc.

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

___________________________

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

600 North Glynn Street

Fayetteville, GA 30214

(Address of principal executive offices)

(770)-461-2781

(Issuer’s telephone number)

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

___________________________

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  T 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 T

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 14, 2008: 3,931,328.

SouthCrest Financial Group, Inc.

And Subsidiaries

INDEX

			Page
Part I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets – June 30, 2008 and December 31, 2007	1
		Condensed Consolidated Statements of Income  - Three and Six Months Ended June 30, 2008 and 2007	2
		Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2008 and 2007	3
		Condensed Consolidated Statement of Stockholders' Equity – Six  Months Ended June 30, 2008	4
		Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2008 and 2007	5
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative  Disclosures about Market Risk	23
	Item 4.	Controls and Procedures	23
Part II.	OTHER INFORMATION		23
	Item 1.	Legal Proceedings	23
	Item 1A.	Risk factors.	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Submission of Matters to a Vote of Security Holders	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	24
		Signatures	25

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SouthCrest Financial Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2008 and December 31, 2007

(Unaudited)

(In thousands, except share and per share data)

	June 30,			December31,
Assets	2008				2007*
Cash and due from banks	$	16,690		$	16,060
Interest-bearing deposits at other financial institutions		15,909			10,637
Federal funds sold		8,740			9,316
Securities available for sale		92,556			79,208
Securities held to maturity (fair value $44,404 and $58,632)		42,899			58,885
Restricted equity securities, at cost		1,742			2,008
Loans held for sale		222			229
Loans, net of unearned income		382,490			373,825
Less allowance for loan losses		6,206			4,952
Loans, net		376,284			368,873
Bank-owned life insurance		16,651			16,302
Premises and equipment, net		19,301			18,093
Goodwill		14,255			14,255
Intangible assets, net		4,355			4,792
Other assets		8,502			7,351
Total assets	$	618,106		$	606,009
Liabilities, Redeemable Common Stock, and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	81,590		$	80,685
Interest-bearing		447,138			433,246
Total deposits		528,728			513,931
Short-term borrowed funds		-			3,055
Long-term borrowed funds		6,555			6,555
Other liabilities		10,190			9,656
Total liabilities		545,473			533,197
Commitments and contingencies
Redeemable common stock held by ESOP		1,022			1,091
Stockholders' equity:
Common stock, par value $1; 10,000,000 shares authorized, 3,931,528 issued		3,932			3,932
Additional paid-in capital		49,760			49,707
Retained earnings		18,447			17,881
Unearned compensation - ESOP		(326	)		(349	)
Accumulated other comprehensive income (loss)		(202	)		550
Total stockholders' equity		71,611			71,721
Total liabilities, redeemable common stock, and stockholders' equity	$	618,106		$	606,009

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, 2008 and 2007

(Unaudited)

(In thousands, except share and per share data)

	Three Months				Six Months
	2008		2007		2008		2007
Interest income:
Loans	$	6,802	$	6,985	$	14,173	$	13,814
Securities - taxable		1,348		1,325		2,742		2,642
Securities - nontaxable		229		175		458		353
Federal funds sold		80		109		216		257
Interest-bearing deposits at other banks		126		90		250		173
Total interest income		8,585		8,684		17,839		17,239
Interest expense:
Deposits		3,250		3,127		6,832		6,218
Other borrowings		74		90		208		186
Total interest expense		3,324		3,217		7,040		6,404
Net interest income		5,261		5,467		10,799		10,835
Provision for loan losses		1,115		77		1,470		226
Net interest income after provision for loan losses		4,146		5,390		9,329		10,609
Other income:
Service charges on deposit accounts		1,005		920		1,962		1,735
Other service charges and fees		408		345		803		617
Net gain on sale of loans		107		110		220		238
Net gain on sale and call of securities		29		-		119		-
Income on bank-owned life insurance		169		133		349		260
Other operating income		123		117		309		254
Total other income		1,841		1,625		3,762		3,104
Other expenses:
Salaries and employee benefits		2,903		2,538		5,743		4,953
Equipment and occupancy expenses		615		489		1,209		956
Amortization of intangibles		273		254		541		498
Other operating expenses		1,471		1,407		2,901		2,638
Total other expenses		5,262		4,688		10,394		9,045
Income before income taxes		725		2,327		2,697		4,668
Income tax expense		118		728		685		1,464
Net income	$	607	$	1,599	$	2,012	$	3,204
Basic and diluted earnings per share	$	0.16	$	0.40	$	0.51	$	0.81
Dividends per share	$	0.13	$	0.13	$	0.26	$	0.26
Average shares outstanding - basic and diluted		3,916,358		3,952,328		3,916,003		3,952,328

See Notes to Condensed Consolidated Financial Statements.

2

SouthCrest Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

For The Three and Six Months Ended June 30, 2008 and 2007

(Unaudited)

(In thousands)

	Three Months						Six Months
	2008			2007			2008			2007
Net income	$	607		$	1,599		$	2,012		$	3,204
Other comprehensive income (loss):
Unrealized holding losses on securities available for sale arising during the period, net of taxes of  $(725), $(121), $(514), and $(56)		(1,165	)		(195	)		(826	)		(90	)
Reclassification adjustment for gains included in net income, net of tax of $11, $-0-, $45 and $-0-		18			-			74			-
Comprehensive income (loss)	$	(540	)	$	1,404		$	1,260		$	3,114

See Notes to Condensed Consolidated Financial Statements.

3

SouthCrest Financial Group, Inc.

And Subsidiaries

Consolidated Statements of Stockholders' Equity

For The Six Months Ended June 30, 2008

(Unaudited)

(In thousands, except share and per share data)

										Accumulated
					Additional					Other			Unearned			Total
	Common Stock				Paid-In		Retained			Comprehensive			Compensation			Stockholders'
	Shares		Par		Capital		Earnings			Income (Loss)			(ESOP)			Equity
Balance, December 31, 2007		3,931,528	$	3,932	$	49,707	$	17,881		$	550		$	(349	)	$	71,721
Net income		-		-		-		2,012			-			-			2,012
Adjustment resulting from adoption of EITF Issue 06-4		-		-		-		(493	)		-			-			(493	)
Cash dividends declared,$.13 per share		-		-		-		(1,022	)		-			-			(1,022	)
Stock-based compensation		-		-		53		-			-			-			53
Adjustment for shares owned by ESOP		-		-		-		69			-			-			69
ESOP Payment		-		-		-					-			23			23
Other comprehensive loss		-		-		-		-			(752	)		-			(752	)
Balance, June 30, 2008		3,931,528	$	3,932	$	49,760	$	18,447		$	(202	)	$	(326	)	$	71,611

4

SouthCrest Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For The Six Months Ended June 30, 2008 and 2007

(Unaudited)

(In thousands)

	2008			2007
OPERATING ACTIVITIES
Net income	$	2,012		$	3,204
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		602			509
Amortization of intangibles		541			498
Other amortization		(15	)		120
Provision for loan losses		1,470			226
Stock compensation expense		53			53
Deferred income taxes		417			(226	)
Income on bank-owned life insurance		(349	)		(260	)
Gain on sales and calls of investment securities		(119	)		-
(Increase) decrease in interest receivable		(633	)		56
(Decrease) increase in income taxes payable		(606	)		116
Increase in interest payable		206			94
Net gain on sale of loans		(220	)		(238	)
Originations of mortgage loans held for sale		(10,236	)		(6,685	)
Proceeds from sales of mortgage loans held for sale		10,359			6,919
Decrease in other assets		356			254
Increase in other liabilities		441			141
Net cash provided by operating activities		4,279			4,781
INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity		21,166			3,006
Purchases of securities held to maturity		(5,113	)
Purchases of securities available for sale		(31,662	)		(10,918	)
Proceeds from maturities of securities available for sale		17,194			8,070
Proceeds from sales of securities available for sale		-			1,003
Proceeds from redemption of restricted equity securities		266			48
Net increase in interest-bearing deposits in banks		(5,272	)		(130	)
Net decrease in federal funds sold		576			11,709
Net increase in loans		(9,956	)		(1,509	)
Purchase of premises and equipment		(1,810	)		(1,992	)
Proceeds from sale of other real estate owned		288			-
Net cash provided by (used in) investing activities		(14,323	)		9,287
FINANCING ACTIVITIES
Net increase (decrease) in deposits		14,728			(15,599	)
Repayments of short-term borrowed funds		(3,055	)		(55	)
Net increase in federal funds purchased		-			504
Leveraged ESOP Transaction		23			-
Dividends paid		(1,022	)		(1,028	)
Net cash provided by (used in) financing activities		10,674			(16,178	)
Net increase (decrease) in cash and due from banks		630			(2,110	)
Cash and cash equivalents at beginning of year		16,060			16,926
Cash and cash equivalents at end of period	$	16,690		$	14,816

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, 2008 and 2007

(Unaudited)

(In thousands)

	2008			2007
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	3,922		$	6,310
Income taxes		1,406			1,416
NONCASH TRANSACTIONS
Principal balances of loans transferred to other real estate owned	$	1,451		$	296
Increase in mortgage servicing rights		104			142
Decrease in redeemable common stock held by ESOP		(69	)		(65	)
Unrealized loss on securities available for sale, net		(752	)		(90	)

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”), 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 and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the financial statements and notes included in the Company's consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s annual report on Form 10-K (Registration No. 000-51287).

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

NOTE 2 – 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, 2008 and 2007, the Company had 191,400 and 183,500 options outstanding under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan.  For the three and six month periods ended June 30, 2008 and 2007, these options were nondilutive.   The Company’s ESOP has a loan from the holding company secured by 15,880 shares of Company stock which have not been allocated to participant accounts and are therefore not considered outstanding for purposes of computing earnings per share.  The weighted average number of shares outstanding for purposes of computing earnings per share was 3,916,358 and 3,952,328 for the three months ended June 30, 2008 and 2007, and 3,916,003 and 3,952,328 for the six months ended June 30, 2008 and 2007.

7

NOTE 3 — LOANS RECEIVABLE

The composition of loans at June 30, 2008 and December 31, 2007 is summarized as follows:

	June 30,			December31,
(Dollars in thousands)	2008			2007
Commercial, financial, and agricultural	$	20,216		$	22,595
Real estate – construction		71,186			66,069
Real estate – mortgage		246,398			241,316
Consumer		37,676			38,834
Other		7,128			5,162
		382,604			373,976
Unearned income		(114	)		(151	)
Allowance for loan losses		(6,206	)		(4,952	)
Loans, net	$	376,284		$	368,873

Changes for the six months ended in the allowance for loan losses are as follows:

	June 30,			June30,
(Dollars in thousands)	2008			2007
Balance, beginning of year	$	4,952		$	4,480
Provision for loan losses		1,470			226
Loans charged off		(506	)		(344	)
Recoveries of loans previously charged off		290			312
Balance, end of period	$	6,206		$	4,674

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

	June 30,		December31,
(Dollars in thousands)	2008		2007
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		11,113		1,633
Total impaired loans	$	11,113	$	1,633
Valuation allowance related to impaired loans	$	1,173	$	245
Average investment in impaired loans	$	3,702	$	507

There were $11,113,000 and $1,633,000 loans on nonaccrual status at June 30, 2008 and December 31, 2007.  Loans of $912,000 and $247,000 were past due ninety days or more and still accruing interest at June 30, 2008 and December 31, 2007, respectively.

	June 30,		December31,
(Dollars in thousands)	2008		2007
Nonaccrual loans	$	11,113	$	1,633
Loans past due 90 days or more and still accruing	$	912	$	247
Loans restructured under troubled debt	$	-	$	-

The Company acquired certain loans for which there was, at acquisition, evidence of deterioration of credit quality since the dates the loans were originated and for which it was probable, at acquisition, that all contractually required payments would not be collected.  Under the provisions of Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-03”), at the acquisition date these loans were recorded at a carrying value of $376,000, which was net of a nonaccretable adjustment of $183,000.  At June 30, 2008, the carrying value for these loans had been reduced to $275,000 as a result of cash payments by the borrowers, chargeoff, or foreclosure.

8

NOTE 4 — DEPOSITS

At June 30, 2008 and December 31, 2007, deposits were as follows:

	June 30,		December31,
(Dollars In Thousands)	2008		2007
Noninterest bearing deposits	$	81,590	$	80,685
Interest checking		90,909		83,742
Money market		58,222		55,687
Savings		44,847		41,997
Certificates of deposit		253,160		251,820
	$	528,728	$	513,931

NOTE 5 — NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB ratified EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF Issue 06-4 addresses accounting for split-dollar life insurance arrangements after the employer purchases a life insurance policy on the covered employee. This Issue states that an obligation arises as a result of a substantive agreement with an employee to provide future postretirement benefits. Under Issue EITF 06-4, the obligation is not settled upon entering into an insurance arrangement. Since the obligation is not settled, a liability should be recognized in accordance with applicable authoritative guidance. Issue EITF 06-4 is effective for fiscal years beginning after December 15, 2007. In adopting EITF Issue 06-4, the Company recorded a liability of $493,000 as of January 1, 2008 with a corresponding offset against retained earnings, and in the three months and six months ended June 30, 2008 recorded compensation expense of approximately $25,000 and $50,000, respectively, relating to these obligations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities.  SFAS No. 159 allows an entity to elect to measure certain financial assets and liabilities at fair value with changes in fair value recognized in the income statement each period.  The statement also requires additional disclosures to identify the effects of an entity’s fair value election on its earnings.  The Company adopted SFAS No. 159 on January 1, 2008, with no material impact on the financial condition, results of operations, or liquidity.   The Company did not elect fair value for any assets or liabilities.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) will significantly change how entities apply the acquisition method to business combinations. The most significant changes affecting how the Company will account for business combinations under this Statement include: the acquisition date will be date the acquirer obtains control; all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair value on the acquisition date; assets or liabilities arising from noncontractual contingencies will be measured at their acquisition date fair value only if it is more likely than not that they meet the definition of an asset or liability on the acquisition date; adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R) will require new and modified disclosures surrounding subsequent changes to acquisition-related contingencies, contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill rollforward.

The Company will be required to prospectively apply SFAS No. 141(R) to all business combinations completed on or after January 1, 2009. Early adoption is not permitted. For business combinations in which the acquisition date was before the effective date, the provisions of SFAS No. 141(R) will apply to the subsequent accounting for deferred income tax valuation allowances and income tax contingencies and will require any changes in those amounts to be recorded in earnings. At June 30, 2008, the Company had no acquired deferred income tax valuation allowances and income tax contingencies.  Management is currently evaluating the effects that SFAS 141(R) will have on the financial condition, results of operations, liquidity, and the disclosures that will be presented in the consolidated financial statements.

In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings, which expressed the staff’s view that, consistent with FASB Statement No. 156, Accounting for Servicing of Financial Assets, and FASB Statement No. 159, The Fair Value Option of Financial Assets and Financial Liabilities, the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.  SAB No. 109 is effective for all written loan commitments recorded at fair value that are entered into, or substantially modified, in fiscal quarters beginning after December 15, 2007.  The staff expects registrants to apply the views of SAB No. 109 on a prospective basis.  The effect of adoption during the first quarter of 2008 did not have a material impact on the Company’s results of operations.

9

In April 2008, the FASB issued FASB Staff Position ("FSP") No. SFAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This FSP applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company will adopt the provisions of FSP No. SFAS 142-3 in the first quarter of 2009, as required, but does not expect the impact to be material to the Company’s financial condition or results of operations.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.  This FSP addresses whether such instruments are participating securities prior to vesting and, therefore, need to be included in the EPS calculation under the two-class method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per Share. This FSP is effective for fiscal years beginning after December 15, 2008. Management does not expect the adoption of FSP EITF 03-6-1 to have an impact on the consolidated financial statements of the Company.

NOTE 6 - FAIR VALUE

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS No. 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 No. 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.

10

Loans Held for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, (“SFAS No. 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 June 30, 2008, all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with SFAS No. 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 June 30, 2008		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Securities available for sale	$	92,556	$	31	$	92,344	$	181

There were no gains or losses for the three and six months ended June 30, 2008 included in earnings that are attributable to the change in unrealized gains or losses of the Company’s securities available for sale at June 30, 2008.

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, 2008 to June 30, 2008:

	Investment Securities
	Available For Sale
Beginning balance, January 1, 2008	$	280
Total gains (losses) realized or unrealized
Included in earnings		-
Included in other comprehensive income		(99	)
Transfers in (out) of Level 3		-
Ending balance, June 30, 2008	$	181

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

(Dollars in thousands)	Fair Value June 30, 2008		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	9,940	$	-	$	-	$	9,940

11

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.

NOTE 7 — BORROWED FUNDS

At June 30, 2008, the Company had $6,555,000 outstanding on its line of credit with Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our subsidiary banks is pledged as collateral for this loan.  The loan contains certain restrictive covenants including, among others, a requirement for each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets.  At June 30, 2008, the ratio of nonperforming assets (which includes nonaccrual loans, loans 90 days or more past due and still accruing, and other real estate) to total assets for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The Company is working with Silverton Bank to obtain a waiver of this covenant.  If the Company remains outside this covenant and is unable to obtain a waiver or amendment of the loan agreement, Silverton Bank 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 Bank 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 vigorously 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.

12

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, 2007 included in our Form 10-K (Registration No. 000-51287).   Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting judgments and assumptions to be our critical accounting estimates. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

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

13

Financial Condition

During the six months ended June 30, 2008, our total assets increased $12.1 million to $618.1 million at June 30, 2008.  During this period, total loans increased $8.7 million, or 2.3%.  Securities available for sale increased $13.3 million due primarily to purchases made during the period while securities held to maturity decreased $16.0 million due to maturities.  Interest bearing deposits at other financial institutions increased $5.3 million, or 49.6%.  At June 30, 2008 the Company owned $14.4 million in certificates of deposits in other financial institutions, which are structured so that all principal and accrued interest remain fully insured under FDIC deposit insurance.  The Company limits these deposits so that, at maturity, the principal value plus interest earned are less than $100,000.  Federal funds sold decreased $576,000.

During the year to date period ended June 30, 2008, deposits increased $14.8 million or 2.9%.  Changes in deposits are summarized below:

	June 30,		December31,
(Dollars In Thousands)	2008		2007		Change
Noninterest bearing deposits	$	81,590	$	80,685	$	905
Interest checking		90,909		83,742		7,167
Money market		58,222		55,687		2,535
Savings		44,847		41,997		2,850
Certificates of deposit		253,160		251,820		1,340
	$	528,728	$	513,931	$	14,797

Since December 31, 2007, short-term borrowed funds declined $3.1 million due to maturities of Federal Home Loan Bank advances during the first quarter.  At June 30, 2008 we had not purchased any federal funds.  The Company monitors changes in its loan portfolio and changes in its deposit levels, and seeks to maintain a proper mix of types, maturities, and interest rates.

Our total stockholders’ equity declined by $110,000 since December 31, 2007, primarily due to $1,022,000 of dividends paid, a $493,000 adjustment to beginning retained earnings related to the implementation of EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, and a $752,000 decrease in the unrealized gain on securities available for sale, net of deferred taxes, partially offset by net income of $2,012,000 for the period.   

Loan Portfolio. The following table presents various categories of loans contained in the loan portfolios of the subsidiary banks as of June 30, 2008 and December 31, 2007:

	June 30,			December31,
(Dollars in thousands)	2008			2007
Commercial, financial, and agricultural	$	20,216		$	22,595
Real estate – construction		71,186			66,069
Real estate – mortgage		246,398			241,316
Consumer		37,676			38,834
Other		7,128			5,162
		382,604			373,976
Unearned income		(114	)		(151	)
Allowance for loan losses		(6,206	)		(4,952	)
Loans, net	$	376,284		$	368,873

Nonaccrual, Past Due and Restructured Loans. The following table presents various categories of nonaccrual, past due, potential problem loans,  and restructured loans in the Banks’ loan portfolios as of June 30, 2008 and December 31, 2007:

	June 30,		December31,
(Dollars in thousands)	2008		2007
Nonaccrual loans	$	11,113	$	1,633
Loans past due 90 days or more and still accruing	$	912	$	247
Loans restructured under troubled debt	$	-	$	-

14

Nonaccrual loans increased $3,865,000 during the quarter ended June 30, 2008 increasing from $7,248,000 at March 31, 2008 to $11,113,000.  Since December 31, 2007, nonaccrual loans have increased $9,480,000.  Nonaccrual loans at June 30, 2008 include a $5.75 million residential real estate development loan, a $3.57 million loan for the construction and development of an apartment complex, $905,000 in nonresidential real estate, and $812,000 in loans secured by first mortgage loans on single family dwellings, the largest of which was $318,000, and $76,000 in consumer loans.  The Company believes that there is limited risk of loss for the nonaccrual loans secured by single family dwellings.  The $5.75 million residential development loan was classified as nonaccrual at March 31, 2008 and is secured by 96 developed and 24 partially developed lots in a golf course development.  In total, the Company has recorded a valuation allowance of $1,173,000 related to nonaccrual loans at June 30, 2008.

Information regarding impaired loans as of June 30, 2008 and December 31, 2007 are as follows:

	June 30,		December31,
(Dollars in thousands)	2008		2007
Impaired loans without a valuation allowance	$	-	$	-
Impaired loans with a valuation allowance		11,113		1,633
Total impaired loans	$	11,113	$	1,633
Valuation allowance related to impaired loans	$	1,173	$	245
Average investment in impaired loans	$	3,702	$	507

In addition to the above, the Company had at June 30, 2008 $11,699,000 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 June 30, 2008:

(Dollars in thousands)
Construction and development loans	$	1,641
First mortgage		6,745
Second mortgage and home equity line of credit		369
Nonresidential mortgage		2,107
Commercial		269
Consumer		568
Total	$	11,699

Construction and development loans consist of eight loans, the largest of which is a $1,470,000 loan secured by 74 lots in a townhome development.  First mortgage loans are composed of 95 loans, the largest of which is $250,000.  There are 22 loans whose balance is greater than $100,000, which account for $3,525,000 of the total.   Loans secured by nonresidential real estate are composed of 12 loans, the largest of which represents 2 loans to one borrower totaling $1,076,000.

Other Real Estate.Included in other assets was other real estate of $1,290,000 and $256,000 as of June 30, 2008 and December 31, 2007, respectively.  The increase in other real estate is generally attributable to slowing economic conditions resulting in increased foreclosures.  Balances consist primarily of residential properties.

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, 2008 and 2007:

15

Analysis of Allowance for Loan Losses

For The Three and Six Months Ended June 30

(Dollars in thousands)	Three Months						Six Months
	2008			2007			2008			2007
Balance at beginning of period	$	5,345		$	4,669		$	4,952		$	4,480
Chargeoffs
Commercial loans		21			47			41			47
Real estate - construction		22			-			22			-
Real estate - mortgage		104			-			104			-
Consumer		176			173			280			239
Other		25			22			59			58
Total Chargeoffs		348			242			506			344
Recoveries
Commercial loans		3			26			7			26
Real estate - construction		24			-			24			-
Real estate - mortgage		37			-			41			4
Consumer		18			137			174			233
Other		12			7			44			49
Total recoveries		94			170			290			312
Net chargeoffs		(254	)		(72	)		(216	)		(32	)
Additions charged to operations		1,115			77			1,470			226
Balance at end of period	$	6,206		$	4,674		$	6,206		$	4,674
Annualized ratio of net chargeoffs during the period to average loans outstanding during the period		0.27	%		0.09	%		0.12	%		0.02	%

Allowance for Loan Losses.  The allowance for loan losses as of June 30, 2008 was $6,206,000 compared to $4,952,000 at December 31, 2007 and $4,674,000 at June 30, 2007.   As a percentage of gross loans, the allowance for loan losses was 1.62% at June 30, 2008 compared to 1.32% as of December 31, 2007 and 1.39% at June 30, 2007. The provision for loan losses during the six-month periods ended June 30, 2008 of $1,470,000 was the result of management's assessment of risks inherent in the loan portfolio.  Management’s estimate of the allowance for loan losses utilizes a loan grading system to assign a risk grade to each loan based on factors such as the quality of collateral securing a loan, the financial condition of the borrower and the payment history of each loan.  Based on net charge-off history experienced for each category within the loan portfolio, as well as general economic factors affecting the lending market, management assigns an estimated allowance for each risk grade within each of the loan categories.  Management then estimates the required allowance, which may also include a portion that is not allocated to a specific category of the loan portfolio, but which management deems is necessary based on the overall risk inherent in the loan portfolio.  The estimation of the allowance may change due to fluctuations in the factors noted above as well as changes in the trends of net charge-offs, past due loans, and general economic conditions of the markets served by the Company’s subsidiary banks.

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

Results of Operations For The Three and Six Months Ended June 30, 2008 and 2007

Net income for the three-month period ended June 30, 2008 amounted to $607,000, or $0.16 basic and diluted earnings per share, compared to net income of $1,599,000 or $0.40 basic and diluted earnings per share for the same three-month period in 2007, a decrease of $992,000, or 62.0%.  Results of operations for 2007 did not include Bank of Chickamauga as the Company’s acquisition of Chickamauga did not take place until July 1, 2007.  Net income for the six-month period ended June 30, 2008 amounted to $2,012,000, or $0.51 basic and diluted earnings per share, compared to net income of $3,204,000 or $0.81 basic and diluted earnings per share for the same six-month period in 2007, a decrease of $1,192,000, or 37.2%.

16

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, 2008 decreased $206,000 or 3.8% over the same period in 2007.  Excluding the impact of the Bank of Chickamauga acquisition, net interest income would have declined $786,000.

The change in net interest income attributable to changes in the general level of interest rates totaled $767,000.  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 June 30, 2008 was approximately 300 basis points lower than the same period in 2007.  These reductions have contributed to a reduction in the average yield on earning assets from 7.35% during the three month period ending June 30, 2007 to 6.31% in the same period in 2008.  The average cost of funds declined from 3.43% in 2007 to 2.93% in 2008.  The net yield on earning assets declined 76 basis points from 4.63% for the quarter ended June 30, 2007 to 3.87% for the current year period.  The net interest spread decreased from 3.92% in 2007 to 3.38% in 2008.   The decline attributable to changes in interest rates was offset by an increase of $561,000 attributable to increases in the average balances of interest earning assets and interest bearing liabilities.

Total interest income decreased $99,000 to $8,585,000 for the quarter ended June 30, 2008.  Interest income earned on loans decreased $183,000 composed of a $1,151,000 reduction in interest due to the reduction in the average yield of the loan portfolio from 8.49% to 7.17%, offset by a $968,000 increase that relates to a $47.8 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 increased $107,000 to $3,324,000 for the quarter ended June 30, 2008.  The main component of the increase in interest expense was a $199,000 increase in interest paid on certificates of deposits.  Since 2005, the Company has generally funded the growth in its loan portfolio with borrowed funds, primarily Federal Home Loan Bank advances, and with certificates of deposit.  These sources of funds typically carry higher rates of interest than other sources of funds such as checking and money market accounts.  The average rate on certificates of deposits typically 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 June 30, 2008 and 2007, the main components of interest earning assets and interest bearing liabilities and related interest income and expense and effective yields and cost of funds.

17

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
	2008			2007			2008			2007			2008		2007		(Decrease)			Rate			Volume
Assets
Loans, including fee income	$	381,479		$	333,674			7.17	%		8.49	%	$	6,802	$	6,985	$	(183	)	$	(1,151	)	$	968
Taxable securities		113,626			114,207			4.77	%		4.71	%		1,348		1,325		23			26			(3	)
Nontaxable securities		23,157			18,194			3.98	%		3.90	%		229		175		54			4			50
Federal funds sold		15,018			8,019			2.14	%		5.51	%		80		109		(29	)		(92	)		63
Interest bearing deposits in banks		14,010			5,282			3.62	%		6.91	%		126		90		36			(59	)		95
Total earning assets		547,290			479,376			6.31	%		7.35	%		8,585		8,684		(99	)		(1,272	)		1,173
Cash and due from banks		14,949			12,554
Allowance for loan losses		(5,312	)		(4,668	)
Other assets		61,906			48,806
Total	$	618,833		$	536,068
Liabilities and Equity
Interest bearing demand (2)	$	150,092		$	127,651			1.37	%		1.92	%	$	513	$	605	$	(92	)	$	(191	)	$	99
Savings		44,491			36,035			0.71	%		0.70	%		78		62		16			1			15
Certificates of deposit		254,338			210,396			4.20	%		4.74	%		2,659		2,460		199			(297	)		496
Total interest bearing deposits		448,921			374,082			2.91	%		3.39	%		3,250		3,127		123			(487	)		610
Borrowed funds		6,610			6,457			4.50	%		5.65	%		74		90		(16	)		(18	)		2
Total interest bearing liabilities		455,531			380,539			2.93	%		3.43	%		3,324		3,217		107			(505	)		612
Noninterest bearing demand deposits		79,533			78,128
Other liabilities		10,332			7,324
Redeemable common stock held by ESOP		895			996
Shareholders' equity		72,542			69,081
Total	$	618,833		$	536,068
Net interest income													$	5,261	$	5,467	$	(206	)	$	(767	)	$	561
Net interest yield on earning assets								3.87	%		4.63	%
Net interest spread								3.38	%		3.92	%

(1)  Daily averages.  Loans includes nonaccrual loans.

(2)  Includes money market accounts.

The following presents, for the six month periods ended June 30, 2008 and 2007, the main components of interest earning assets and interest bearing liabilities and related interest income and expense and effective yields and cost of funds.

18

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
	2008			2007			2008			2007			2008		2007		(Decrease)			Rate			Volume
Assets
Loans, including fee income	$	377,609		$	333,302			7.55	%		8.36	%	$	14,173	$	13,814	$	359		$	(1,410	)	$	1,769
Taxable securities		113,990			114,432			4.84	%		4.66	%		2,742		2,642		100			109			(9	)
Nontaxable securities		23,466			18,234			3.92	%		3.90	%		458		353		105			2			103
Federal funds sold		16,504			9,273			2.63	%		5.59	%		216		257		(41	)		(180	)		139
Interest bearing deposits in banks		12,928			5,097			3.89	%		6.84	%		250		173		77			(100	)		177
Total earning assets		544,497			480,338			6.59	%		7.24	%		17,839		17,239		600			(1,579	)		2,179
Cash and due from banks		14,968			13,118
Allowance for loan losses		(5,167	)		(4,626	)
Other assets		61,317			48,441
Total	$	615,615		$	537,271
Liabilities and Equity
Interest bearing demand (2)	$	147,922		$	127,268			1.54	%		1.84	%	$	1,133	$	1,160	$	(27	)	$	(204	)	$	177
Savings		43,911			36,040			0.73	%		0.71	%		159		126		33			4			29
Certificates of deposit		253,506			212,152			4.39	%		4.69	%		5,540		4,932		608			(329	)		937
Total interest bearing deposits		445,339			375,460			3.09	%		3.34	%		6,832		6,218		614			(529	)		1,143
Borrowed funds		8,054			6,620			5.19	%		5.67	%		208		186		22			(17	)		39
Total interest bearing liabilities		453,393			382,080			3.12	%		3.38	%		7,040		6,404		636			(546	)		1,182
Noninterest bearing demand deposits		78,593			78,345
Other liabilities		10,402			7,414
Redeemable common stock held by ESOP		920			968
Shareholders' equity		72,307			68,464
Total	$	615,615		$	537,271
Net interest income													$	10,799	$	10,835	$	(36	)	$	(1,033	)	$	997
Net interest yield on earning assets								3.99	%		4.55	%
Net interest spread								3.47	%		3.86	%

(1)  Daily averages.  Loans includes nonaccrual loans.

(2)  Includes money market accounts

Net interest income for the six months ended June 30, 2008 decreased $36,000 or 0.3% over the same period in 2007.  Excluding the impact of the Bank of Chickamauga acquisition, net interest income would have declined by $1,112,000.  The $36,000 decline in net interest income is attributable to a $1,033,000 decline due to changes in interest rates offset by a $997,000 increase relating to changes in the average balances of interest earning assets and interest bearing liabilities.  As a result of Federal Reserve reductions in the discount rate, the average discount rate for the six-month period ending June 30, 2008 was approximately 314 basis points lower than the same period in 2007.  These reductions have contributed to a reduction in the average yield on earning assets from 7.24% during the six month period ending June 30, 2007 to 6.59% in the same period in 2008.  During the same period, the average cost of funds declined from 3.38% in 2007 to 3.12% in 2008.  The net yield on earning assets declined 56 basis points from 4.55% for the period ended June 30, 2007 to 3.99% for the current year period.  The net interest spread decreased from 3.86% in 2007 to 3.47% in 2008.

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Total interest income increased $600,000 to $17.8 million for the six-month period ended June 30, 2008.  Interest income earned on loans increased $359,000.  Of this increase, $1,739,000 relates to a $44.3 million growth in the average balance of loans.  Offsetting this increase was a $1,410,000 reduction in interest due to the reduction in the average yield of the loan portfolio from 8.36% to 7.55%.  The reduction in the average yield on loans results from a significant portion of the loan portfolio having variable interest rates that are tied to the prime rate.

Interest expense increased $636,000 to $7.0 million for the six-month period ended June 30, 2008.  The main component of the increase in interest expense was a $608,000 increase in interest paid on certificates of deposits.  While the average rate on these funds decreased from 4.69% in 2007 to 4.39% for the 2008 period, the average balance increased $41.4 million.

Other Income. Total other income for the three-month period ended June 30, 2008 amounted to $1,841,000, compared to $1,625,000 for the same period in 2007, an increase of $216,000.  For the six-month period, total other income was $3,762,000 compared to $3,104,000 in 2007, an increase of $658,000.  The addition of Bank of Chickamauga accounted for $137,000 of the increase for the three month period and $303,000 of the increase for  the six-month period.   

Service charges (including NSF and overdraft charges) on deposit accounts increased $85,000 or 9.2% for the three-month period and $227,000 or 13.1% for the six-month period.  As a percentage of interest-bearing and non-interest bearing checking accounts, these service charges were 2.69% and 2.92% for the three-month periods ended June 30, 2008 and 2007 and 2.67% and 2.75% for the six-month periods in 2008 and 2007, respectively.  Other service charges and fees increased $63,000 for the three-month period in 2008 and $186,000 for the six month periods.  For the three month period, the increase results primarily from a $38,000 increase in debit card fees and a $47,000 increase in ATM fee income. For the six month period, debit card fees increased $64,000 and ATM fee income increased $61,000.

Gain on sale of loans was $107,000 for the three months ended June 30, 2008 compared to $82,000 in 2007 due to increased volume of loans sold.  Included in the gain on sale of loans are mortgage servicing rights of $54,000 and $73,000 for the three month periods ended June 30, 2008 and 2007, respectively.  For the six-month period, gain on sale of loans was $220,000 compared to $238,000 in 2007, including recognition of mortgage servicing rights of $104,000 and $142,000.  The following presents the activity in the Company’s mortgage servicing rights in 2008 and 2007:

	Three Months						Six Months
(dollars in thousands)	2008			2007			2008			2007
Beginning balance	$	533		$	420		$	510		$	375
Servicing rights recognized		54			73			104			142
Amortization expense		(31	)		(28	)		(58	)		(52	)
Ending balance	$	556		$	465		$	556		$	465

In 2008, the Company recorded gains from calls of securities totaling $29,000 for the three months ended June 30 and $119,000 for the six month period ended June 30.  The securities were called as the reduction in the levels of interest rates made it advantageous for the issuers of the debt securities to redeem the securities.  Income from bank-owned life insurance increased $36,000 during the three-month period, of which $32,000 relates to the insurance policies assumed in the acquisition of Chickamauga, and $89,000 for the six-month period, of which $76,000 relates to Bank of Chickamauga.

Other Expenses.  Other expenses for the three-month period ended June 30, 2008 amounted to $5,262,000 compared to $4,688,000 for the same period in 2007, an increase of $574,000 or 12.2%.  For the six-month period, total other expenses were $10,394,000 compared to $9,045,000 for the same period in 2007, an increase of $1,349,000 or 14.9%.  Excluding the impact of acquisitions, these expenses increased $6,000 for the three-month period and $269,000 or 3.0% for the six month period.

The largest component of other expenses is salaries and employee benefits, which excluding the impact of acquisitions increased $88,000, or 3.5% for the three-month period and $234,000 or 4.7% for the six month period ended June 30, 2008.  Costs associated with the implementation of EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements accounted for $25,000 of the increase for the three months and $50,000 for the six month period. Other increases are related to merit increases and branch expansion.  The compensation cost that was charged against income for our stock option plans was $27,000 for each of the three month periods ended June 30, 2008 and 2007, and $53,000 for each of the six month periods.  The total compensation cost related to nonvested awards not yet recognized at June 30, 2008 is $273,000 which will be recognized over the weighted average period of approximately 2.63 years.

For the three month period ended June 30, 2008, amortization of intangibles increased $19,000.  Amortization of the core deposit intangible recorded in conjunction with the acquisition of Bank of Chickamauga amounted to $22,000 for the quarter.  For the six month period, amortization increased $43,000 due to $45,000 in amortization of intangibles in conjunction with Bank of Chickamauga.  Equipment and occupancy expenses increased $126,000 for the quarter and $253,000 for the year to date.  Of these increases, expenses related to Bank of Chickamauga acquisition were $50,000 and $87,000 for the three and six months, respectively.  Excluding the impact of acquisitions, occupancy expenses increased $76,000 for the three-month period which includes $36,000 of higher depreciation costs and $23,000 in increased rent expense relating to branch expansion.  Other operating expenses increased $64,000 for the three months in 2008 and $263,000 for the six month period due to the acquisition of the Bank of Chickamauga.

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As a percentage of average total assets, other expenses were 3.42% and 3.58% of for the three month periods ended June 30, 2008 and 2007, and 3.40% and 3.41% for the six-month periods ended June 30, 2008 and 2007, respectively.    

Income Taxes. For the three-month periods ended June 30, 2008 and 2007, the Company recorded income taxes totaling $118,000 and $728,000, respectively.  Effective tax rates for the periods were 16.3% and 31.3%, respectively.   For the six-month periods ended June 30, 2008 and 2007, income tax expense was $685,000 and $1,464,000, respectively, with effective tax rates of 25.4% and 31.4%.  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%.  Effective tax rates are lower in 2008 than in 2007 as tax exempt income represented 54.9% of income before income taxes for the three-month period in 2008 compared to 13.9% for the same period in 2007, and 30.0% for the six-month period in 2008 compared to 13.1% for the same period in 2007.

Liquidity and Capital Resources

Liquidity is our ability to meet deposit withdrawals immediately while also providing for the credit needs of our customers.  We monitor our liquidity resources on an ongoing basis. State and Federal regulatory authorities also monitor our liquidity on a periodic basis. As of June 30, 2008, we believe our liquidity, as determined under guidelines established by regulatory authorities and internal policies, was satisfactory.

If needed, our banks have the ability on a short-term basis to borrow and purchase federal funds from other financial institutions.  At June 30, 2008, the banks had available additional federal funds lines of credit totaling $21.0 million in place with five banks and $53.3 million of available funds on their lines of credit with the Federal Home Loan Bank of Atlanta.

At June 30, 2008, our capital ratios were adequate based on regulatory minimum capital requirements. The minimum capital requirements and the actual capital ratios on a consolidated and bank-only basis are as follows:

	Tier 1			Tier 1 Risk-			Total Risk-
	Leverage			Based			Based
Minimum required		4.00	%		4.00	%		8.00	%
Minimum required to be well capitalized		5.00	%		6.00	%		10.00	%
Actual ratios at June 30, 2008
Consolidated		9.20	%		12.93	%		14.18	%
Bank of Upson		9.80	%		12.68	%		13.93	%
The First National Bank of Polk County		12.06	%		18.35	%		19.60	%
Peachtree Bank		8.80	%		10.72	%		11.96	%
Bank of Chickamauga		8.06	%		16.97	%		18.22	%

Capital ratios may decline as asset growth continues, but are expected to continue to exceed minimum regulatory requirements.  At June 30, 2008, the Banks were considered “well capitalized” by regulatory definitions.

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.

At June 30, 2008, the Company had $6,555,000 outstanding on its line of credit with Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our subsidiary banks is pledged as collateral for this loan.  The loan contains certain restrictive covenants including, among others, a requirement for each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets.  At June 30, 2008, the ratio of nonperforming assets (which includes nonaccrual loans, loans 90 days or more past due and still accruing, and other real estate) to total assets for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The Company is working with Silverton Bank to obtain a waiver of this covenant.  If the Company remains outside this covenant and is unable to obtain a waiver or amendment of the loan agreement, Silverton Bank 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 Bank 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 vigorously 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.

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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, 2008.

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	$	275,568	$	-	$	-	$	-	$	275,568
Certificates of Deposit		193,585		42,912		16,663		-		253,160
FHLB advances and other borrowed funds		-		1,311		1,311		3,933		6,555
Deferred compensation		43		125		500		3,714		4,382
Construction commitments		64		-		-		-		64
Leases		143		165		160		398		866
Total contractal obligations	$	469,403	$	44,513	$	18,634	$	8,045	$	540,595
Commitments
Commitments to extend credit	$	31,216	$	-	$	-	$	-	$	31,216
Credit card commitments		9,664		-		-		-		9,664
Commercial standby letters of credit		902		-		-		-		902
Total commitments	$	41,782	$	-	$	-	$	-	$	41,782

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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 4. Controls and Procedures

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

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

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are subject to claims and suits arising in the ordinary course of business.  In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company’s results of operations.

Item 1A. Risk

The Company may be unable to obtain a waiver or amendment to its outstanding line of credit, which could have a material adverse effect on the Company’s liquidity and ability to pay dividends.

At June 30, 2008, the Company had $6,555,000 outstanding on its line of credit with Silverton Bank, N.A. (formerly The Bankers Bank).  The stock of our subsidiary banks is pledged as collateral for this loan.  The loan contains certain restrictive covenants including, among others, a requirement for each subsidiary bank to maintain certain minimum capital levels as well as maximum ratios related to the levels of nonperforming assets.  At June 30, 2008, the ratio of nonperforming assets (which includes nonaccrual loans, loans 90 days or more past due and still accruing, and other real estate) to total assets for three of the bank subsidiaries was 2.21%, 2.40% and 2.62% which was in excess of the 1.00% allowed under the Loan and Stock Pledge Agreement.  The Company is working with Silverton Bank to obtain a waiver of this covenant.  If the Company remains outside this covenant and is unable to obtain a waiver or amendment of the loan agreement, Silverton Bank 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 Bank 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.

Actions by other financial institutions during a weakened economy could negatively impact our financial performance.

All financial institutions are subject to the same risks resulting from a weakening economy such as increased charge-offs and levels of past due loans and nonperforming assets. As financial institutions in our market area continue to dispose of problem assets, the already excess inventory of residential homes and lots will continue to negatively impact home values and increase the time it takes us or our borrowers to sell existing inventory. The perception that troubled banking institutions (financial institutions that are not “in trouble”) are risky institutions for purposes of regulatory compliance or safeguarding deposits may cause depositors nonetheless to move their funds to other financial institutions. If our depositors should move their funds based on events happening at other financial institutions, our operating results would suffer.

Other Risks.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1. Business" under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits

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

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

Exhibit No. 32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 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, 2008	BY:	/s/ Larry T. Kuglar
		Larry T. Kuglar.
		President and Chief Executive Officer
DATE:  August 14, 2008	BY:	/s/ Douglas J. Hertha
		Douglas J. Hertha
		Senior Vice President, Chief Financial Officer

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