SouthCrest Financial Group, Inc. (SCSG) 10-K 2006 FY Annual report

Exhibit 13.2

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2006 and 2005

(Dollars in thousands, except share and per share data)

	2006			2005
Assets
Cash and due from banks	$	16,926		$	15,930
Interest-bearing deposits at other financial institutions		4,881			4,039
Federal funds sold		12,504			4,297
Securities available for sale		61,519			45,190
Securities held to maturity (fair value $66,036 and $76,894)		67,268			78,321
Restricted equity securities, at cost		2,029			2,270
Loans held for sale		446			305
Loans, net of unearned income		335,006			276,475
Less allowance for loan losses		4,480			3,477
Loans, net		330,526			272,998
Premises and equipment, net		15,324			11,255
Goodwill		9,057			2,665
Intangibles assets, net		4,493			4,248
Other assets		19,044			9,330
Total assets	$	544,017		$	450,848
Liabilities, Redeemable Common Stock, and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	80,581		$	60,157
Interest-bearing		382,041			317,743
Total deposits		462,622			377,900
Federal Home Loan Bank advances		5,165			15,275
Note payable		780			—
Other liabilities		6,907			3,233
Total liabilities		475,474			396,408
Commitments and contingencies
Redeemable common stock held by ESOP		988			984
Stockholders’ equity
Common stock, par value $1; 10,000,000 shares authorized,
3,952,328 and 3,581,193 issued		3,952			3,581
Additional paid in capital		50,034			40,846
Retained earnings		13,740			9,528
Accumulated other comprehensive loss		(171	)		(499	)
Total stockholders’ equity		67,555			53,456
Total liabilities, redeemable common stock, and stockholders’ equity	$	544,017		$	450,848

See Notes to Consolidated Financial Statements.

F-1

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income

December 31, 2006, 2005 and 2004

(Dollars in thousands, except share and per share data)

	2006		2005			2004
Interest income:
Loans	$	23,314	$	17,943		$	10,550
Securities - taxable		4,859		5,041			4,043
Securities - nontaxable		551		557			445
Federal funds sold		509		195			87
Interest-bearing deposits at other banks		191		157			120
Total interest income		29,424		23,893			15,245
Interest expense:
Deposits		9,608		6,209			3,756
Other borrowings		625		215			29
Total interest expense		10,233		6,424			3,785
Net interest income		19,191		17,469			11,460
Provision for loan losses		839		751			375
Net interest income after provision for loan losses		18,352		16,718			11,085
Other income:
Service charges on deposit accounts		3,304		3,264			2,289
Other service charges and fees		1,104		930			495
Net gain on sale of securities available for sale		—		320			—
Impairment charge on investments		—		(600	)		—
Loss on disposal of assets		—		(184	)		—
Net gain on sale of loans		159		148			215
Other operating income		797		600			358
Total other income		5,364		4,478			3,357
Other expenses:
Salaries and employee benefits		8,073		7,297			4,537
Equipment and occupancy expenses		1,643		1,559			879
Amortization of intangibles		807		963			758
Other operating expenses		4,644		4,377			2,751
Total other expenses		15,167		14,196			8,925
Income before income taxes		8,549		7,000			5,517
Income tax expense		2,775		2,156			1,660
Net income	$	5,774	$	4,844		$	3,857
Basic and diluted earnings per share	$	1.58	$	1.36		$	1.52

See Notes to Consolidated Financial Statements.

F-2

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2006, 2005 and 2004

(Dollars in thousands)

	2006		2005			2004
Net income	$	5,774	$	4,844		$	3,857
Other comprehensive income (loss):
Unrealized holding gain (loss) on securities
available for sale arising during period, net of
taxes of $144, $179 and $99		328		(263	)		(185	)
Reclassification adjustment for gains
included in net income, net of tax of $-0-,
$146 and $-0-		—		174			—
Comprehensive income	$	6,102	$	4,755		$	3,672

See Notes to Consolidated Financial Statements.

F-3

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2006, 2005 and 2004

(Dollars in thousands, except share and per share data)

	Common Stock															Treasury Stock
	Shares			Par Value			Additional Paid In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Shares			Amount			Total Stockholders’ Equity
Balance, December 31, 2003		2,187,753		$	2,188		$	19,167		$	4,990		$	(225	)		7,168		$	(75	)	$	26,045
Net income		—			—			—			3,857			—			—			—			3,857
Cash dividends declared,
$.46 per share		—			—			—			(1,166	)		—			—			—			(1,166	)
Shares issued in business
combination		1,484,029			1,484			22,260			—			—			—			—			23,744
Shares redeemed		(93,058	)		(93	)		(1,396	)		—			—			—			—			(1,489	)
Transfer to surplus		—			—			684			(684	)		—			—			—			—
Adjustment for shares
owned by ESOP		—			—			—			(66	)		—			—			—			(66	)
Unrealized loss on securities
available for sale		—			—			—			—			(185	)		—			—			(185	)
Balance, December 31, 2004		3,578,724			3,579			40,715			6,931			(410	)		7,168			(75	)		50,740
Net income		—			—			—			4,844			—			—			—			4,844
Cash dividends declared,
$.48 per share		—			—			—			(1,713	)		—			—			—			(1,713	)
Purchase of treasury stock		—			—			—			—			—			8,141			(192	)		(192	)
Sale of treasury stock		—			—			77			—			—			(15,309	)		267			344
Shares issued		2,469			2			54			—			—			—			—			56
Adjustment for shares
owned by ESOP		—			—			—			(534	)		—			—			—			(534	)
Unrealized loss on securities
available for sale		—			—			—			—			(89	)		—			—			(89	)
Balance, December 31, 2005		3,581,193			3,581			40,846			9,528			(499	)		—			—			53,456
Net income		—			—			—			5,774			—			—			—			5,774
Adjustment resulting from
adoption of Staff
Accounting Bulletin
Number 108		—			—			—			233			—			—			—			233
Cash dividends declared,
$.50 per share		—			—			—			(1,791	)		—			—			—			(1,791	)
Shares issued in business
combination		371,135			371			9,093			—			—			—			—			9,464
Stock options		—			—			95			—			—			—			—			95
Adjustment for shares
owned by ESOP		—			—			—			(4	)		—			—			—			(4	)
Unrealized gain on securities
available for sale		—			—			—			—			328			—			—			328
Balance, December 31, 2006		3,952,328		$	3,952		$	50,034		$	13,740		$	(171	)		—		$	—		$	67,555

See Notes to Consolidated Financial Statements.

F-4

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2006, 2005 and 2004

(Dollars in thousands)

	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	5,774		$	4,844		$	3,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		824			772			486
Amortization of intangibles		807			963			758
Other amortization		113			253			525
Provision for loan losses		839			751			375
Stock compensation expense		95			—			—
Impairment loss on investment securities		—			600			—
Gain on sale of securities available for sale		—			(320	)		—
Deferred income taxes		(312	)		(582	)		(269	)
Income on bank-owned life insurance		(340	)		(146	)		(126	)
Increase in interest receivable		(421	)		(454	)		(20	)
Increase (decrease) in income taxes payable		(198	)		385			(198	)
Increase (decrease) in interest payable		1,069			369			(141	)
Net gain on sale of loans		(159	)		(148	)		(215	)
Originations of mortgage loans held for sale		(15,323	)		(13,092	)		(16,166	)
Proceeds from sales of mortgage loans held for sale		15,341			13,610			16,184
Loss on disposal of equipment		—			184			—
(Increase) decrease in other assets		(1,266	)		(444	)		399
Increase (decrease) in other liabilities		387			(393	)		(987	)
Net cash provided by operating activities		7,230			7,152			4,512
INVESTING ACTIVITIES
Purchases of securities held to maturity		—			(8,667	)		(13,054	)
Proceeds from maturities of securities held to maturity		10,947			18,061			22,556
Purchases of securities available for sale		(11,243	)		(14,007	)		(4,367	)
Proceeds from maturities of securities available for sale		8,725			7,530			3,051
Proceeds from sales of securities available for sale		—			1,794			—
Net (increase) decrease in restricted equity securities		362			(1,650	)		302
Net (increase) decrease in interest-bearing
deposits in banks		254			1,207			(384	)
Net decrease in federal funds sold		(5,003	)		5,633			136
Net increase in loans		(24,529	)		(47,045	)		(7,003	)
Purchase of premises and equipment		(3,393	)		(3,325	)		(907	)
Proceeds from sale of other real estate owned		630			400			215
Purchase of bank-owned life insurance		(5,495	)		—			—
Net cash acquired in business combination		940			—			3,899
Net cash provided by (used in) investing activities		(27,805	)		(40,069	)		4,444
FINANCING ACTIVITIES
Net increase (decrease) in deposits		32,692			25,648			(3,639	)
Principal repayments on Federal Home Loan
Bank advances		(10,110	)		(110	)		(110	)
Increases in Federal Home Loan Bank advances		—			15,000			—
Proceeds from other borrowings		6,280			1,500			—
Principal repayments on other borrowings		(5,500	)		(1,500	)		—
Purchase of treasury stock		—			(192	)		(1,489	)
Proceeds from sale of stock		—			400			—
Dividends paid		(1,791	)		(1,713	)		(1,166	)
Net cash provided by (used in) financing activities		21,571			39,033			(6,404	)
Net increase in cash and due from banks		996			6,116			2,552
Cash and due from banks at beginning of year		15,930			9,814			7,262
Cash and due from banks at end of period	$	16,926		$	15,930		$	9,814

See Notes to Consolidated Financial Statements.

F-5

SouthCrest Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Continued)

Years Ended December 31, 2006, 2005 and 2004

(Dollars in thousands)

	2006		2005			2004
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	9,164	$	6,055		$	3,926
Income taxes		3,156		2,576			1,812
NONCASH TRANSACTIONS
Principal balances of loans transferred to other real
estate owned	$	506	$	533		$	323
Increase in redeemable common stock held by ESOP		4		534			66
Unrealized gain (loss) on securities available for sale, net		472		(122	)		(284	)
BUSINESS COMBINATION
Cash and due from banks	$	8,497	$	—		$	3,899
Federal funds sold		3,204		—			2,166
Interest bearing deposits in other banks		1,096		—			—
Securities available for sale		13,451		—			37,861
Restricted equity securities		121		—			32
Loans, net		33,229		—			98,016
Premises and equipment		1,500		—			3,980
Goodwill		6,392		—			2,665
Core deposit intangible		1,052		—			2,396
Other assets		2,925		—			3,484
Total assets	$	71,467				$	154,499
Deposits		52,030		—			128,422
Other liabilities		2,416		—			2,333
Total liabilities assumed		54,446					130,755
Purchase price	$	17,021	$	—		$	23,744

See Notes to Consolidated Financial Statements.

F-6

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

SouthCrest Financial Group, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary banks (the “Banks”), Bank of Upson (“Upson”), First National Bank of Polk County (“FNB Polk”), and Peachtree Bank (“Peachtree”). Upson is a commercial bank located in Thomaston, Upson County, Georgia with six branches located in Thomaston, Manchester, Warm Springs, Luthersville, and Fayetteville, Georgia. Upson provides a full range of banking services in its primary market area of Upson, Meriwether, Fayette and the surrounding counties. FNB Polk is a commercial bank located in Cedartown, Polk County, Georgia with two branches in Cedartown and one in Rockmart, Georgia. FNB Polk provides a full range of banking services in its primary market area of Polk and the surrounding counties. Peachtree is a commercial bank located in Maplesville, Chilton County, Alabama and operates one branch in Maplesville and one in Clanton, Alabama. The Company considers its banking services to represent a single reporting segment.

Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and contingent assets and liabilities. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed real estate, management obtains independent appraisals for significant collateral.

Cash, Due from Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, interest-bearing deposits in other financial institutions, federal funds sold, and deposits are reported net.

The Company’s subsidiaries are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $5,613,000 and $4,191,000 at December 31, 2006 and 2005.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted equity securities, without a readily determinable fair value are recorded at cost.

F-7

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities (Continued)

The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term

prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans are reported at their outstanding principal balances less unearned income, net deferred fees, and the allowance for loan losses. Loans held for sale are reported at the lower of cost or fair value, computed using outstanding commitments to sell loans. Interest income is accrued on the outstanding principal balance. Loan fees collected and certain costs incurred related to loan originations are deferred and amortized as an adjustment to interest income over the life of the related loans using a method that approximates a constant yield. Deferred fees and costs are recorded as an adjustment to loans outstanding.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is recognized on the cash-basis or cost-recovery method, until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable, based on current information and events, that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

Upson services mortgage loans that it originates and sells to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Upson’s servicing obligations include receiving payments, maintaining escrow accounts and paying hazard insurance, mortgage insurance, and taxes from such accounts, collecting past due fees, resolving payment problems and disputes, generating coupon payment books, and reporting loan balances to the Freddie Mac each month. Upson normally receives servicing fees of one quarter of one percent (.0025) of the outstanding loan balance of the loan servicing portfolio from the Freddie Mac. Upson accounts for loan servicing revenues by booking such revenues as they are received. The Company amortizes mortgage servicing rights over the estimated life of the loans.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

F-8

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses (Continued)

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives is as follows:

Building and improvements	20–40 Years
Leasehold improvements	5–10 Years
Furniture and equipment	5–10 Years
Computer and software	3–5 Years

Other Real Estate Owned

Other real estate owned represents properties acquired through or in lieu of loan foreclosure and is initially recorded at fair value less estimated costs to sell. Any write-down to fair value at the time of transfer to other real estate owned is charged to the allowance for loan losses. Costs of improvements are capitalized, whereas costs relating to holding other real estate owned and subsequent adjustments to the value are expensed. The carrying amount of other real estate owned at December 31, 2006 and 2005 was $206,000 and $330,000.

Intangible Assets

Intangible assets consist of goodwill and core deposit premiums acquired in connection with business combinations. The core deposit premium is initially recognized based on a valuation performed as of the consummation date. The core deposit premium is amortized over the average remaining life of the acquired customer deposits, normally 8 to 12 years, using an accelerated or straight-line method, depending on the results of the initial valuation of the specific intangibles. Intangible assets are tested annually for potential impairment. No impairment loss was required in 2006, 2005 or 2004.

F-9

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance may be recorded to reduce net deferred tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Such valuation allowances were not required as of December 31, 2006 or 2005.

Stock-Based Compensation

At the Company’s annual shareholders’ meeting held May 12, 2005, shareholders approved the adoption of the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”), which provides for up to 549,000 shares of the Company’s stock to be awarded in the form of stock options.

The Company adopted SFAS No. 123(R), Accounting for Stock-Based Compensation, on January 1, 2006 which requires that the estimated fair value of such equity instruments be recognized as expense as services are performed.

Prior to the adoption of SFAS No. 123(R), the Company recorded stock option expense under the intrinsic method; accordingly, no compensation expense was recognized if the exercise price of the stock option was equivalent to the market price of the Company’s common stock on the date of grant. If under SFAS 123(R), the Company determined compensation costs based on the fair value at the grant date for its stock options, net income and earnings per share for the years ended December 31, 2005 and 2004 would have been reduced to the following pro forma amounts:

	2005			2004
	(Dollars In Thousands Except Per Share Amounts)
Net income as reported	$	4,844		$	3,857
Additional expense had the Company adopted SFAS 123		(622	)		—
Related tax benefit		235			—
Proforma net income	$	4,457		$	3,857
Basic and diluted earnings per share
- As reported	$	1.36		$	1.51
- Pro Forma		1.25			1.51

Responsive to its plan of implementation of SFAS No. 123(R) and consistent with the Company’s long-term compensation strategies, the Board of Directors of the Company approved the granting of 183,500 stock options in the fourth quarter of 2005, of which 104,000 were vested in 2005. The decision to vest these options in 2005 was partially made to reduce non-cash compensation expenses that would have been otherwise recorded in future periods following the application of SFAS No. 123(R). Such non-cash compensation expense would have aggregated approximately $622,000 over a period of future years. The vesting of such options is reflected in the 2005 pro forma net income disclosure and related pro forma earnings per share data.  A tax benefit is assumed because the stock options that vested in 2005 are not tax qualifying.

Profit-Sharing Plan

Profit-sharing plan costs are based on a percentage of individual employee’s salary, not to exceed the amount that can be deducted for Federal income tax purposes.

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of shares of common stock outstanding. 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 warrants and 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. If the price at which the option may be exercised is greater than the average market price of the stock, then the option is assumed to be nondilutive and therefore is not included in the computation of diluted earnings per share. In 2005, the Company issued 183,500 options under the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”), and in 2006 issued an additional 7,900 options. The options granted were nondilutive for both 2005 and 2006. The Stock Incentive Plan is explained more fully in Note 10. The weighted average number of shares outstanding for the years ended December 31, 2006, 2005 and 2004 was 3,643,218, 3,572,720, and 2,545,724, respectively.

F-10

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The Company’s only component of comprehensive income is unrealized gains and losses on available for sale securities.

Recent Accounting Standards

In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for fiscal years beginning after December 15, 2005. Accordingly, the Company adopted effective January 1, 2006 resulting in additional compensation expense of $95,000 for the year ended December 31, 2006.

In March 2005, the SEC released Staff Accounting Bulletin (SAB) No. 107, Share- Based Payment, SAB No. 107 expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB No. 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the staff’s view regarding the valuation of share-based payment arrangements for public companies. The Company adopted SAB No. 107 effective January 1, 2006.

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 application of SFAS No. 156 is not expected to have an 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. 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. FASB Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. The application of FASB Interpretation No. 48 is not expected to have a material effect on the Company’s consolidated financial statements.

F-11

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Standards (Continued)

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 adoption of EITF Issue 06-5 is not expected to have a material effect on the Company’s financial statements.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 was issued to clarify the appropriate treatment of misstatements in audited financial statements. There are two methods for quantifying the effects of financial statement misstatements. The ‘rollover’ method focuses primarily on the impact of the misstatement on the income statement and, in some cases, considers the impact of reversing prior year misstatements. However, if the cause of the misstatement does not reverse in the following year, the rollover method would result in the accumulation of misstatements on the balance sheet. The ‘iron curtain’ method focuses on the impact of the misstatements on the balance sheet.

SAB 108 establishes an approach that requires quantification of effects of the financial statement misstatements on the company’s financial statements and related disclosures. This dual approach requires consideration of the impact of financial statement misstatements using both the iron curtain and the rollover methods. SAB 108 permits companies to either restate prior period financial statements to reflect the dual approach method or to record the cumulative effect of initially applying the dual approach by adjusting the carrying value of assets and liabilities as of January 1, 2006 with an offsetting adjustment to the opening balance of retained earings.

Prior to the adoption of SAB 108, the Company quantified the impact of misstatements using the rollover method and management determined the impact of those misstatements was not material to the consolidated financial statements. The prior misstatements resulted from not capitalizing loan servicing rights on mortgage loans sold when future servicing rights were retained. The Company adopted SAB 108 effective January 1, 2006 and elected to record the cumulative effect of the change, which resulted in the recognition of mortgage servicing rights of $375,000, a $142,000 adjustment to deferred income tax liabilities, and a $233,000 adjustment to retained earnings.

F-12

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassification of Certain Items

Certain reclassifications to the prior year’s consolidated balance sheets and statements of income have been made to conform to current classification. These reclassifications have no impact on net income, stockholders’ equity, or cash flows from operations, investing activities, or financing activities as previously reported.

NOTE 2. BUSINESS COMBINATIONS AND NAME CHANGE

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”). On September 30, 2004 the Company completed its merger with First Polk Bankshares, Inc., a bank holding company based in Cedartown, Georgia and the parent company of FNB Polk. At the completion of the merger with First Polk Bankshares, Inc., the Company changed its name from Upson Bankshares, Inc. to SouthCrest Financial Group, Inc.

In connection with the October 31, 2006 merger with Maplesville Bancorp., 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 included 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, 2005. Revenues include net 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)	2006		2005
Revenues	$	36,769	$	30,716
Net Income	$	6,220	$	5,391
Earnings per share	$	1.57	$	1.37

When the Company completed its merger with First Polk Bankshares, Inc., the Company issued 1,484,029 shares of common stock in exchange for all the outstanding common shares of First Polk Bankshares, Inc. A stipulation to the merger agreement was that shareholders of both companies could elect to redeem their shares at a price of $16.00 per share, with the provision that the maximum aggregate amount of cash that would be paid to shareholders electing cash would be $1.5 million, or 93,750 shares. As a result, the number of shares exchanged for cash totaled 93,058 for a total of $1,488,928.

The merger was accounted for using the purchase method of accounting. Accordingly, results of operations for The First National Bank of Polk County are included in the results of operations of SouthCrest prospectively from the date of merger, and the purchase price of $23.7 million was allocated to the fair values of First Polk’s assets and liabilities. A resulting core deposit intangible of $2.4 million is being amortized on an accelerated basis with $551,000 expensed in the first year following consummation of the purchase declining to $252,000 in the second year and $199,000 in future years. The Company further recorded $2.7 million in goodwill in this purchase business combination.

F-13

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. BUSINESS COMBINATIONS AND NAME CHANGE (Continued)

The following schedule presents pro forma information for revenues and net income as if the combination with First Polk Bankshares had occurred on January 1, 2004. Revenues include net 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)	2004
Revenues	$	25,717
Net Income	$	5,331
Earnings per share	$	1.45

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition including subsequent adjustments to the allocation of purchase price (dollars in thousands):

Assets Acquired and Liabilities Assumed

(Dollars in thousands)

	Maplesville		First Polk
Cash and due from banks	$	8,497	$	3,899
Federal funds sold		3,204		2,166
Interest bearing deposits in other banks		1,096		—
Securities available for sale		13,451		37,861
Restricted equity securities		121		32
Loans, net		33,229		98,016
Premises and equipment		1,500		3,980
Goodwill		6,392		2,665
Intangible assets		1,052		2,396
Other assets		2,925		3,484
Total assets acquired	$	71,467	$	154,499
Deposits	$	52,030	$	128,422
Other liabilities		2,416		2,333
Total liabilities assumed		54,446		130,755
Purchase price	$	17,021	$	23,744

The intangible assets acquired are core deposit intangibles and are being amortized over the estimated useful life of the deposit accounts with amortization expense being included in noninterest expense in the statement of income.

NOTE 3. SECURITIES

The amortized cost and fair value of securities are summarized as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale
December 31, 2006:
U.S. Government and agency
securities	$	34,762	$	34	$	(263	)	$	34,533
State and municipal securities		11,079		7		(28	)		11,058
Mortgage-backed securities		14,589		4		(395	)		14,198
Equity securities		1,363		367		—			1,730
	$	61,793	$	412	$	(686	)	$	61,519

F-14

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES (Continued)

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2005:
U.S. Government and agency
securities	$	26,017	$	—	$	(436	)	$	25,581
State and municipal securities		4,024		—		(81	)		3,943
Mortgage-backed securities		15,026		3		(434	)		14,595
Equity securities		869		202		—			1,071
	$	45,936	$	205	$	(951	)	$	45,190

Securities Held to Maturity
December 31, 2006:
U.S. Government and agency
securities	$	22,216	$	34	$	(538	)	$	21,712
State and municipal securities		7,387		175		(5	)		7,557
Mortgage-backed securities		36,665		25		(923	)		35,767
Corporate bonds		1,000		—		—			1,000
	$	67,268	$	234	$	(1,466	)	$	66,036

December 31, 2005:
U.S. Government and agency
securities	$	25,185	$	31	$	(579	)	$	24,637
State and municipal securities		7,814		223		(19	)		8,018
Mortgage-backed securities		44,322		41		(1,124	)		43,239
Corporate bonds		1,000		—		—			1,000
	$	78,321	$	295	$	(1,722	)	$	76,894

The amortized cost and fair value of securities held to maturity and securities available for sale as of December 31, 2006 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available For Sale				Securities Held To Maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	14,691	$	14,545	$	25	$	25
Due from one to five years		26,547		26,422		3,219		3,230
Due from five to ten years		4,304		4,324		10,444		10,436
Due after ten years		1,662		2,030		16,915		16,578
Mortgage-backed securities		14,589		14,198		36,665		35,767
	$	61,793	$	61,519	$	67,268	$	66,036

Securities with a carrying value of $85,567,000 and $45,247,000 at December 31, 2006 and 2005, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

F-15

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. SECURITIES (Continued)

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2006.

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
Description of Securities		Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. Government and
agency securities	$	3,979	$	(10	)	$	40,469	$	(791	)	$	44,448	$	(801	)
State and municipal securities		2,325		(2	)		4,110		(31	)		6,435		(33	)
Mortgage-backed securities		3,725		(10	)		43,652		(1,308	)		47,377		(1,318	)
Total	$	10,029	$	(22	)	$	88,231	$	(2,130	)	$	98,260	$	(2,152	)

The following table shows the gross unrealized losses and fair value of securities, aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2005.

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
Description of Securities		Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. Government and
agency securities	$	23,595	$	(287	)	$	25,632	$	(728	)	$	49,227	$	(1,015	)
State and municipal securities		1,206		(41	)		3,323		(59	)		4,529		(100	)
Mortgage-backed securities		30,857		(763	)		23,326		(795	)		54,183		(1,558	)
Total	$	55,658	$	(1,091	)	$	52,281	$	(1,582	)	$	107,939	$	(2,673	)

These unrealized losses are considered temporary because of acceptable investment grades on each security, the likelihood of the market value increasing to the initial cost basis of the security, and the intent and ability of the Company to hold these securities until recovery of the market values. During the first quarter of 2005, the Company recorded an impairment charge of $600,000 on $2.5 million of Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) perpetual preferred stock. The reclassification of an unrealized mark-to-market loss on these securities to an other-than-temporary charge was based upon a detailed impairment analysis of these securities. Previous losses on the securities were recognized in the equity section of the balance sheet. The Company’s conclusion considered the duration and severity of the unrealized loss, the financial condition and near-term prospects of the issuers, and the likelihood of the market value of these instruments increasing to our initial cost basis within a reasonable period of time. During the third quarter of 2005, the Company initiated a plan to sell a portion of these securities in which the securities would be sold slowly in small blocks. Certain portions of this investment were sold during 2005, resulting in gains of $71,000 which is included in net gains on sale of securities available for sale.

In addition to the gain mentioned above, gain on sale of securities available for sale during 2005 also included a $249,000 gain realized on the sale of a common stock investment. The Company’s cost basis in that investment was $200,000.

F-16

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS

The composition of loans is summarized as follows:

	December 31,
(Dollars in thousands)	2006			2005
Commercial, financial, and agricultural	$	23,996		$	19,841
Real estate - construction		59,745			52,122
Real estate - mortgage		211,676			169,555
Consumer		33,690			31,567
Other		6,058			3,554
		335,165			276,639
Unearned income		(159	)		(164	)
Allowance for loan losses		(4,480	)		(3,477	)
Loans, net	$	330,526		$	272,998

At December 31, 2006, loans serviced for others totaled $79,680,000.

Changes in the allowance for loan losses are as follows:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Balance, beginning of year	$	3,477		$	3,161		$	1,825
Provision for loan losses		839			751			375
Loans charged off		(903	)		(893	)		(605	)
Recoveries of loans previously charged off		436			458			305
Allowance acquired in business combination		631			—			1,261
Balance, end of year	$	4,480		$	3,477		$	3,161

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

	As of and for the Years Ended December 31,
(Dollars in thousands)	2006		2005		2004
Impaired loans without a valuation allowance	$	—	$	—	$	—
Impaired loans with a valuation allowance		479		232		190
Total impaired loans	$	479	$	232	$	190
Valuation allowance related to impaired loans	$	38	$	35	$	29
Average investment in impaired loans	$	614	$	323	$	47

Interest income recognized on impaired loans for the years ended December 31, 2006, 2005 and 2004 was immaterial.

There were $479,000 and $232,000 loans on nonaccrual status at December 31, 2006 and 2005. Loans of $1,015,000 and $549,000 were past due ninety days or more and still accruing interest at December 31, 2006 and 2005, respectively.

F-17

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. LOANS (Continued)

In the ordinary course of business, the Company has granted loans to certain related parties, including executive officers, directors and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2006 are as follows:

(Dollars in thousands)
Balance, beginning of year	$	2,849
Advances		3,746
Repayments		(1,383	)
Increase as a result of business combination		27
Balance, end of year	$	5,239

NOTE 5. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	December 31,
(Dollars in thousands)	2006			2005
Land	$	2,241		$	1,912
Buildings		10,361			6,353
Construction in progress		1,284			1,991
Equipment		4,884			4,138
		18,770			14,394
Accumulated depreciation		(3,446	)		(3,139	)
	$	15,324		$	11,255

Construction in progress amounts relate to additions and renovations to Upson’s main office in Thomaston. The project was to be completed in two phases, with the first phase completed in the third quarter of 2006 and the second phase expected to be completed in the first quarter of 2007. The total cost of the project is expected to be approximately $5,500,000.

Leases:

In 2004 the Company leased a branch office location in Fayetteville, Georgia. The lease is for a term of five years. The Company has signed a lease for a second branch office in Fayette County, Georgia in a facility under construction. The lease is for a term of ten years.

Rental expense under all operating leases amounted to $91,000, $66,000 and $38,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Commitments for lease obligations are as follows:

(Dollars in thousands)
2007	$	104
2009		141
2009		119
2010		76
2011		77
Thereafter		453
	$	970

F-18

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.  INTANGIBLE ASSETS

Following is a summary of information related to intangible assets:

	As of December 31, 2006					As of December 31, 2005
(Dollars in thousands)	Gross Amount Carrying		Accumulated Amortization			Gross Amount Carrying		Accumulated Amortization
Goodwill	$	9,213	$	—		$	2,665	$	—
Core deposit intangible	$	8,726	$	(4,233	)	$	7,674	$	(3,426	)

Amortization expense was $807,000, $963,000 and $758,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

The estimated amortization expense in future years is as follows:

(Dollars in thousands)
2007	$	881
2008		877
2009		848
2010		610
2011		312
Thereafter		965
	$	4,493

NOTE 7.  DEPOSITS

Deposits are as follows:

	December 31,
(Dollars in thousands)	2006		2005
Noninterest bearing deposits	$	80,581	$	60,157
Interest checking		72,386		62,007
Money market		56,461		54,411
Savings		35,542		35,053
Certificates of deposit		217,652		166,272
	$	462,622	$	377,900

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2006 and 2005 was $63,708,000 and $41,599,000, respectively. The scheduled maturities of time deposits at December 31, 2006 are as follows:

(Dollars In Thousands)
2007	$	167,365
2008		24,207
2009		13,512
2010		6,520
2011		5,718
Thereafter		330
	$	217,652

Overdraft demand deposits reclassified to loans totaled $252,000 and $228,000 at December 31, 2006 and 2005, respectively.

F-19

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.  BORROWED FUNDS

Other borrowed funds consist of the following:

(Dollars in thousands)	December 31,
	2006		2005
Short-term borrowed funds
Federal Home Loan Bank advances in varying maturities
from January 2006 to December 2006. Interest is payable monthly at
rates ranging from 4.23% to 4.95%.	$	—	$	15,000
Current portion of Federal Home Loan Bank advance with a maturity of
March 5, 2008. Interest is payable monthly at a rate of 6.25%. Principal
is due in semi-annual installments of $55,000.		110		110
Line of credit maturing June 30, 2006 secured by common stock of
subsidiary banks. Interest is payable quarterly at Prime minus 0.50%.		—		—
Total short-term borrowings		110		15,110
Long-term borrowed funds
Federal Home Loan Bank advance due January 30, 2009. Interest is
payable monthly at 5.05%.		5,000		—
Federal Home Loan Bank advance with a maturity of March 5, 2008.
Interest is payable monthly at a rate of 6.25%. Principal is due in
semi-annual installments of $55,000.		55		165
Line of credit maturing October 1, 2018 secured by common stock of
subsidiary banks. Principal balance outstanding at October 16, 2008
shall be due in ten annual payments beginning October 1, 2009.
Interest is payable quarterly at Prime minus 0.50%.		780		—
Total long-term borrowings		5,835		165
Total borrowings	$	5,945	$	15,275

Contractual maturities of other borrowings as of December 31, 2006 are as follows:

(Dollars in thousands)
2007	$	110
2008		55
2009		5,078
2010		78
2011		78
Thereafter		546
	$	5,945

Advances are collateralized by a blanket floating lien on qualifying first mortgages, pledges of certain securities and the Company’s Federal Home Loan Bank stock.

The terms of the line of credit require the maintenance of certain minimum capital levels and regulatory capital ratios, allowance for loan losses, and profitability ratios. The Company believes it is in compliance with such terms at December 31, 2006.

NOTE 9. EMPLOYEE BENEFIT PLANS

The Company maintains two defined contribution retirement plans (the “Plans”) for its officers and employees: the SouthCrest Financial Group, Inc. 401(k) and Profit-Sharing Plan (the “401(k) Plan”) and the SouthCrest Financial Group, Inc. Employee Stock Ownership Plan (the “ESOP”). Annually, the Company makes a determination of the total funds it will contribute to the Plans. Once determined, funds are first contributed to the 401(k) plan with the remainder contributed to the ESOP. For the years ended December 31, 2006, 2005, and 2004 the total funds contributed approximated 8% of compensation less amounts paid as incentives and bonuses.

F-20

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.  EMPLOYEE BENEFIT PLANS (Continued)

401(k) and Profit Sharing Plan

The 401(k) Plan is available to all eligible employees, subject to certain minimum age and service requirements. For the year ended December 31, 2006, the Company contributed 6% of an employee’s compensation to the Plan without regard to an employee’s level of participation. For the years ended December 31, 2005 and 2004, the Company made a matching contribution of 75% of the first 8% of an employee’s contribution, for a maximum contribution of 6%. The contributions expensed were $391,000, $257,000 and $133,000 for the years ended December 31, 2006, 2005 and 2004, respectively. These expenses are included in salaries and employee benefits expense in the accompanying statements of income.

Employee Stock Ownership Plan

The ESOP is available to all eligible employees, subject to certain age and service requirements. For the years ended December 31, 2006, 2005 and 2004, the Company contributed $143,000, $220,000 and $135,000, respectively, to the ESOP. These expenses are included in salaries and employee benefits expense in the accompanying statements of income.

In accordance with the ESOP, the Company is expected to honor the rights of certain participants to diversify their account balances or to liquidate their ownership of the common stock in the event of termination. The purchase price of the common stock would be based on the fair market value of the Company’s common stock as of the annual valuation date, which precedes the date the put option is exercised. No participant has exercised their right to diversify their account balances since the inception of the ESOP, and no significant cash outlay is expected during 2006. However, since the redemption of common stock is outside the control of the Company, the Company’s maximum cash obligation based on the approximate market prices of common stock as of the reporting date has been presented outside stockholders’ equity. The amount presented as redeemable common stock held by the ESOP in the consolidated balance sheet represents the Company’s maximum cash obligation and has been reflected as a reduction of retained earnings.

At December 31, 2006 and 2005, the ESOP held 42,773 shares of the Company stock. Shares held by the ESOP are considered outstanding for purposes of calculating the Company’s earnings per share.

Deferred Compensation Plan

The Company has a deferred compensation plan for death and retirement benefits for certain key officers. The estimated amounts to be paid under the compensation plan have been funded through the purchase of life insurance policies on the officers. The balance of the policy cash surrender values included in other assets at December 31, 2006 and 2005 is $12,521,000 and $4,569,000, respectively. Income recognized on the policies amounted to $340,000, $146,000 and $126,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The balance of deferred compensation included in other liabilities at December 31, 2006 and 2005 is $2,765,000 and $1,031,000, respectively. Expense recognized for deferred compensation amounted to $251,000, $325,000 and $112,000 for the years ended December 31, 2006, 2005 and 2004, respectively. In connection with its October 31, 2006 merger with Maplesville, the Company acquired bank-owned life insurance contracts with a fair value of $2,117,000 and assumed $1,483,000 in deferred compensation liabilities.

NOTE 10.  STOCK COMPENSATION PLAN

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”) which was issued by the Financial Accounting Standards Board in December 2004. SFAS No. 123(R) revises SFAS No. 123 Accounting for Stock Based Compensation (“SFAS 123”),” and supersedes APB No. 25, Accounting for Stock Issued to Employees, (“APB No. 25”) and its related interpretations. SFAS No. 123(R) 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. 123(R) 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. 123(R) 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.

F-21

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10.  STOCK COMPENSATION PLAN (Continued)

The Company adopted SFAS No. 123(R) using the modified prospective application as permitted under SFAS No. 123(R) 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. 123(R), the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.

The Company maintains the SouthCrest Financial Group, Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”), which provides for up to 549,000 shares of the Company’s stock to be awarded in the form of stock options. Both incentive stock options and non-qualified options may be granted under the Plan. The exercise price of each option equals the market price of the Company’s stock on the date of grant. The incentive stock options generally vest at the rate of 20% per year over five years, and expire after ten years from the date of grant. The Company immediately vested a grant of 104,000 stock options in 2005. At December 31, 2006, 392,100 shares remained available for future grant. Compensation cost that has been charged against income was approximately $95,000 for the year ended December 31, 2006. Because all options that are subject to expensing under SFAS No. 123(R) are tax qualifying, it is not expected that recognized compensation expense relating to these stock options will result in future tax benefits.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company granted 7,900 and 183,500 stock options during the years ended December 31, 2006 and 2005, respectively, with a fair value of $6.48 and $5.98, respectively, for each option. The following table presents the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees in the December, 2006 and 2005:

	2006		2005
Dividend yield		2.16%		2.13%
Risk-free interest rate		4.58%		4.40%
Expected life		6.5 years		6.5 years
Volatility		26.34%		23.31%

A summary of activity in the Stock Incentive Plan is presented below:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2005		—
Granted		183,500	$	23.45
Exercised		—
Forfeited		—
Outstanding at December 31, 2005		183,500	$	23.45
Granted		7,900	$	23.10
Exercised		—
Forfeited		—
Outstanding at December 31, 2006		191,400	$	23.44		9 years	$	—
Options exercisable at
December 31, 2006		119,900	$	23.45		9 years	$	—

F-22

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. STOCK COMPENSATION PLAN (Continued)

Since the inception of the Stock Incentive Plan, no options have been exercised. Because the end of period stock price was less than or equal to the exercise prices of options outstanding, the options outstanding and exercisable at December 31, 2006 had no intrinsic value. As of December 31, 2006, there was $431,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, which is expected to be recognized over a weighted average life of 4.1 years.

Options outstanding at December 31, 2006 were as follows:

		Outstanding						Exercisable
Exercisable Price		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
$	23.10		7,900	$	23.10		10 years		—	$	23.10		10 years
$	23.45		183,500	$	23.45		9 years		119,900	$	23.45		9 years
	Total		191,400						119,900

The adoption of SFAS No. 123(R) and its fair value compensation cost recognition provisions are different from the nonrecognition provisions under SFAS No. 123 and the intrinsic value method for compensation cost allowed by APB No. 25. The impact of the adoption of SFAS No. 123(R) for the year ended December 31, 2006 is as follows:

(Dollars in thousands except per share amounts)

Income before income tax expense	$	(95	)
Net income	$	(95	)
Basic and diluted earnings per share	$	(0.03	)

NOTE 11.  INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Current
Federal	$	2,764		$	2,485		$	1,832
State		323			253			97
Total Current		3,087			2,738			1,929
Deferred
Federal		(281	)		(491	)		(249	)
State		(31	)		(91	)		(20	)
Total Deferred		(312	)		(582	)		(269	)
	$	2,775		$	2,156		$	1,660

F-23

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. INCOME TAXES (Continued)

The Company’s income tax expense differs from the amounts computed by applying the Federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

	Years Ended December 31,
(Dollars in thousands)	2006			2005			2004
Tax provision at statutory rate	$	2,907		$	2,380		$	1,876
State income taxes, net of Federal benefit		193			107			51
Tax-exempt income		(358	)		(254	)		(281	)
Stock option compensation		33			—			—
Other		—			(77	)		14
Income tax expense	$	2,775		$	2,156		$	1,660

The components of deferred income taxes are as follows:

	Years Ended December 31,
(Dollars in thousands)	2006		2005
Deferred tax assets:
Loan loss reserves	$	1,520	$	1,138
Deferred compensation		696		389
Securities available for sale		103		246
Security impairment		136		136
Intangibles		674		623
		3,129		2,532
Deferred tax liabilities:
Intangibles		846		671
Mortgage servicing rights		142		—
Depreciation		448		432
		1,436		1,103
Net deferred tax asset	$	1,693	$	1,429

NOTE 12.  COMMITMENTS AND CONTINGENCIES LOAN COMMITMENTS

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. A summary of the Company’s commitments is as follows:

	December 31,
(Dollars in thousands)	2006		2005
Commitments to extend credit	$	40,623	$	36,529
Credit card commitments		9,125		8,329
Commercial letters of credit		741		272
	$	50,489	$	45,130

F-24

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. COMMITMENTS AND CONTINGENCIES LOAN COMMITMENTS (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.

Credit card commitments are unsecured.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary.

Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial statements.

NOTE 13. CONCENTRATIONS OF CREDIT

The Company originates primarily commercial, residential, and consumer loans to customers in its respective markets. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy in the Company’s primary market area.

Eighty percent of the Company’s loan portfolio is concentrated in loans secured by real estate of which a substantial portion is secured by real estate in the Company’s primary market area. Accordingly, the ultimate collectibility of the loan portfolio is susceptible to changes in market conditions in the Company’s primary market area. The other significant concentrations of credit by type of loan are set forth in Note 4.

The Company, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of regulatory limits, or approximately $6,274,000 for Upson, $3,296,000 for FNB Polk, and $2,643,000 for Peachtree.

NOTE 14. REGULATORY MATTERS

The Company’s bank subsidiaries are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2006, approximately $3,417,000 of retained earnings was available for dividend declaration without regulatory approval.

The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the Company’s and Banks’ assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

F-25

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. REGULATORY MATTERS (Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2006 and 2005, the Company and the Banks met all capital adequacy requirements to which they are subject.

As of December 31, 2006, the most recent notification from the Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks’ category. Prompt corrective action provisions are not applicable to bank holding companies.

The Company and the Banks’ actual capital amounts and ratios are presented in the following table. 

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006:
Total Capital to Risk Weighted Assets:
Consolidated	$	60,069		15.97	%	$	30,089		8.00	%	$	N/A		N/A
Bank of Upson		32,120		14.68	%		17,505		8.00	%		21,881		10.00	%
FNB Polk County		21,975		20.19	%		8,705		8.00	%		10,882		10.00	%
Peachtree Bank		6,167		12.83	%		3,844		8.00	%		4,805		10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	55,555		14.77	%	$	15,044		4.00	%	$	N/A		N/A
Bank of Upson		29,560		13.51	%		8,752		4.00	%		13,129		6.00	%
FNB Polk County		20,614		18.94	%		4,353		4.00	%		6,529		6.00	%
Peachtree Bank		5,574		11.60	%		1,922		4.00	%		2,883		6.00	%
Tier I Capital to Average Assets:
Consolidated	$	55,555		10.81	%	$	20,555		4.00	%	$	N/A		N/A
Bank of Upson		29,560		9.85	%		12,004		4.00	%		15,005		5.00	%
FNB Polk County		20,614		12.04	%		6,849		4.00	%		8,561		5.00	%
Peachtree Bank		5,574		9.04	%		2,465		4.00	%		3,082		5.00	%
As of December 31, 2005:
Total Capital to Risk Weighted Assets:
Consolidated	$	51,408		17.57	%	$	23,410		8.00	%	$	N/A		N/A
Bank of Upson		29,234		15.06	%		15,532		8.00	%		19,415		10.00	%
FNB Polk County		21,306		21.74	%		7,841		8.00	%		9,801		10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	48,025		16.41	%	$	11,705		4.00	%	$	N/A		N/A
Bank of Upson		27,077		13.95	%		7,766		4.00	%		11,649		6.00	%
FNB Polk County		20,080		20.49	%		3,920		4.00	%		5,880		6.00	%
Tier I Capital to Average Assets:
Consolidated	$	48,025		10.94	%	$	17,559		4.00	%	$	N/A		N/A
Bank of Upson		27,077		9.81	%		11,036		4.00	%		13,796		5.00	%
FNB Polk County		20,080		12.29	%		6,534		4.00	%		8,167		5.00	%

F-26

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. REGULATORY MATTERS (Continued)

As a result of the business combinations with Maplesville Bancorp in 2006 and First Polk Bankshares in 2004, the Company recorded additions to its capital representing the fair value of the shares issued to Maplesville and First Polk shareholders. For regulatory capital purposes, the Company, as well as Peachtree Bank and FNB Polk County, must deduct from its regulatory capital the net book value of any intangible assets recorded in connection with the merger. The effect of the purchase accounting adjustments on the regulatory capital calculations is included above.

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No. 107, Disclosure about Fair Values of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used by the Company, in estimating the fair value of its financial instruments:

Cash, Due From Banks, Interest-Bearing Deposits at Other Financial Institutions and Federal Funds Sold: The carrying amount of cash, due from banks, interest-bearing deposits at other financial institutions and federal funds sold approximates fair value.

Securities: Fair value of securities is based on available quoted market prices. The carrying amount of equity securities, including restricted equity securities with no readily determinable fair value, approximates fair value.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable.

Deposits: The carrying amount of demand deposits, savings deposits, and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar remaining maturities.

Federal Home Loan Bank Advances: The carrying amount of variable-rate and short-term advances approximates fair value. The fair value of fixed rate advances are estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar type borrowing arrangements.

Note Payable: The carrying amount of variable rate notes payable approximates fair value.

Accrued Interest: The carrying amount of accrued interest approximates fair value.

Bank-Owned Life Insurance: The cash surrender value of bank-owned life insurance approximates its fair value.

Off-Balance Sheet Instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees charged to enter into such agreements.

F-27

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values and related carrying amounts of the Company’s financial instruments were as follows:

	2006				2005
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash, due from banks, interest
bearing deposits at other financial
institutions, and federal funds sold	$	34,311	$	34,311	$	24,266	$	24,266
Securities		128,787		127,555		123,511		122,084
Restricted equity securities		2,029		2,029		2,270		2,270
Loans and loans held for sale, net		330,972		334,514		273,303		269,948
Accrued interest receivable		3,445		3,445		2,588		2,588
Bank-owned life insurance		12,581		12,581		4,569		4,569
Financial liabilities:
Deposits		462,622		463,143		377,900		376,635
Federal Home Loan Bank advances		5,165		5,162		15,275		15,281
Other borrowed funds		780		780		—		—
Accrued interest payable		2,875		2,875		1,502		1,502

NOTE 16. SUPPLEMENTAL FINANCIAL DATA

Components of other operating expenses in excess of 1% of revenue are as follows:

	Years Ended December 31,
	2006		2005		2004
Data processing fees	$	667,000	$	636,000	$	336,000
Professional fees		439,000		477,000		333,000
Supplies		295,000		302,000		258,000
Director fees		370,000		343,000		202,000

F-28

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. PARENT COMPANY FINANCIAL INFORMATION

The following information presents the condensed balance sheets of SouthCrest Financial Group, Inc. as of December 31, 2006 and 2005 and the statements of income and cash flows for each of the three years ended December 31, 2006:

CONDENSED BALANCE SHEETS

(Dollars in thousands)	2006		2005
Assets
Cash	$	119	$	458
Investment in subsidiaries		68,642		53,516
Securities available for sale		380		314
Other assets		297		152
Total assets	$	69,438	$	54,440
Liabilities, redeemable common stock and stockholders’ equity
Note payable	$	780	$	—
Other liabilities		115	$	—
Redeemable common stock and stockholders’ equity
Redeemable common stock held by ESOP		988		984
Stockholders’ equity		67,555		53,456
Total liabilities, redeemable common stock and stockholders’ equity	$	69,438	$	54,440

CONDENSED STATEMENTS OF INCOME

(Dollars in thousands)	2006			2005			2004
Dividend income from subsidiaries	$	9,120		$	1,950		$	2,452
Gain on securities available for sale		—			249			—
Total income		9,120			2,199			2,452
Interest expense		4			—			—
Other expense		750			484			95
Total expenses		754			484			95
Income before income taxes and equity in
undistributed income of subsidiaries		8,366			1,715			2,357
Income tax benefits		(250	)		(83	)		(36	)
Income before equity in undistributed income
of subsidiaries		8,616			1,798			2,393
Equity in undistributed income (excess of
distributions over income) of subsidiaries		(2,842	)		3,046			1,464
Net income	$	5,774		$	4,844		$	3,857

F-29

SOUTHCREST FINANCIAL GROUP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

NOTE 17. PARENT COMPANY FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	5,774		$	4,844		$	3,857
Adjustments to reconcile net income to net cash
provided by operating activities:
(Undistributed income) excess distributions
over income of subsidiaries		2,842			(3,046	)		(1,464	)
Gain on sale of securities available for sale		—			(249	)		—
Stock option expense		95			—			—
Change in other assets		(167	)		(89	)		—
Change in other liabilities		115			(33	)		—
Other operating activities		—			—			29
Net cash provided by operating activities		8,659			1,427			2,422
INVESTING ACTIVITIES
Proceeds from sale of securities available for sale		—			449			—
Cash paid in business combination		(7,987	)		—			(305	)
Net cash provided (used) by investing activities		(7,987	)		449			(305	)
FINANCING ACTIVITIES
Proceeds from other borrowings		6,280			1,500			—
Repayment of other borrowings		(5,500	)		(1,500	)		—
Common stock issued to ESOP		—			400			—
Common stock redeemed in business combination		—			—			(1,489	)
Purchase of treasury stock		—			(192	)		—
Dividends paid		(1,791	)		(1,713	)		(1,166	)
Net cash used in financing activities		(1,011	)		(1,505	)		(2,655	)
Net increase (decrease) in cash		(339	)		371			(538	)
Cash at beginning of year		458			87			625
Cash at end of year	$	119		$	458		$	87
Noncash transactions:
Common stock issued in business combination	$	9,464		$	—		$	23,744
Unrealized gain on securities available for sale		66			—			—

NOTE 18. SUBSEQUENT EVENT

On February 23, 2007, the Company entered into a definitive agreement to acquire Bank of Chickamauga (Chickamauga). The shareholders of Chickamauga will receive an aggregate of $18 million cash, less certain costs related to the termination of the Chickamauga defined benefit plan. The Agreement is subject to regulatory approval as well as approval by the Chickamauga shareholders, and is anticipated to close during the third quarter of 2007. Chickamauga maintains two offices in the City of Chickamauga. Chickamauga is located in Walker County, Georgia. At December 31, 2006, Chickamauga had approximately $68.0 million in assets, $50.6 million in deposits, and capital of $13.8 million.

F-30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BOARD OF DIRECTORS AND STOCKHOLDERS

SOUTHCREST FINANCIAL GROUP, INC.

We have audited the accompanying consolidated balance sheets of SouthCrest Financial Group, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of SouthCrest Financial Group, Inc. and subsidiaries for the year ended December 31, 2004 were audited by other auditors whose report dated February 18, 2005 expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2006 and 2005 consolidated financial statements referred to above present fairly, in all material respects, the financial position of SouthCrest Financial Group, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Atlanta, Georgia

April 2, 2007

F-31